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Home My WebLink About20170914Thies Exhibit 3.pdfON BEIIALE OE' AVISTA CORPORATION DAVID J. MEYER V]CE PRESIDENT AND CHIEF COUNSEL EOR REGULATORY & GOVERNMENTAL AFFAIRS P.O. BOX 3121 1417 EAST MISSION AVENUE SPOKANE, VIASHTNGTON 99220-3121 TELEPHONE: (509) 495-4376 FACSIMILE: (509) 495-8851 DAVI D. MEYERGAVI STACORP . COM ON BETIAI,E OF HYDRO ONE LIMITED EL]ZABETH THOMAS, PARTNER KAR] VANDER STOEP, PARTNER K&L GATES LLP 925 FOURTH AVENUE, SUrTE 2900 SEATTLE, WA 981014-1158 TELEPHoNE: (206) 623-1580 EACSIMILE: (206) 370-6190 LT Z . THOMASGKLGATES . COM KARI . VANDERSTOEPGKLGATES . COM BEEORE THE IDAHO PUBLIC UTILITIES COMMISSION CASE NO. CASE NO. AVU-E-11-- AVU-G-17- EXHIBIT NO. 3 MARK T. THIES EOR AVISTA CORPORATION (ELECTRIC AND NATURAL GAS) ]N THE MATTER OE THE JOINT ) APPLICATTON OE HYDRO ONE LIMITED ) (ACT]NG THROUGH ITS INDIRECT ) SUBSIDIARY, OLYMPUS EQUITY LLC) )AND ) AVISTA CORPORATION ) FOR AN ORDER AUTHORIZING PROPOSED ) TRANSACTTON ) TJNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549 Form 10-K (Mark One) E] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECI,JRITIES EXCHANGE ACT OF 1934 FoR THE FISCAL YEAR ENDEDDes,emDcr.3]-l!!L6 OR tr TRANSITION REPORT PURSUANT TO SECTION 13 OR Ts(d) OF THE SECI,ruTIES EXCHANGE ACT OF 1934 FORTHETRANSITIONPERIODFROM TO Commission fi Ie number !ll!)! AVISTA CORPORATION @xact name of Registrant as specified in its charter) Wasbington (State or other jurisdiction of incorporation or organization) 914462470 fl.RS. Employer Identilication No.) (} 1411 East Mission Avenue, Spokane, Washington 99202-2600 (Address ofprincipal executive offices) (Zip Code) Registrant's telephone number, including area code: 509{89-0500 Web site: http://rvww.avistacorp.com Securities registered pursuant to Section 12@) ofthe Act: Title of Class Name of Each Exchange on Which Registered Common Stock, no par value Nen'York Stock Exchange Securities registered pursuant to Section 12(g) ofthe Act: Title of CIass Preferred Stoclt" Cumulative, Without Par Value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes E No tr Indicate by check mark ifthe registrant is not required to file reports pursuant to Section I 3 or I 5(d) ofthe Act. Yes tr No E Indicate by check mark whether the registrant (l ) has filed all reports required to be filed by Section I 3 or I 5(d) ofthe Securities Exchange Act of I 934 during the prcccding I 2 months (or for such shorter pcriod that the Registrant was rcquircd to filc such rcports), and (2) has bccn subjcct to such filing requirements for the past 90 days: Yes EI No O Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, ifany, every Interactive Data File required to be submitted and posted pursuantto Rule405 ofRegulation S-T ($232.405 ofthischapter)during thepreceding l2 months (orforsuch shorterperiod that the registrant was required to submit and post such files). Yes E No E Indicate by check mark ifdisclosure ofdelinquent filers pursuant to Item 405 ofRegulation S-K ($ 229.405 ofthis chapter) is not contained herein, and will not be contained, to the best ofRegistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III ofthis Form I 0-K or any amendment to this Form 10-K. tr lndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of"large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule I 2b-2 ofthe Exchange Act. (Check one): Large acccleratcd filcr E Non-accelerated fi[er E (Do not check ifa smallerreporting company) Accclcratcd filcr Smaller reporting company Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 1 of 177 ,;J ,...] t tl ii,f,] IndicatebychcckmarkwhcthcrthcRegistrantisashcllcompany(asdcfincdinRulcl2b-2oftheExchangcAct): Yes tr No E The aggregate market value oftlre Registrant's outstanding Common Stock, no parvalue (the only class ofvoting stock), held by non-affiliates is $2,853,952,416 based on the last reported sale price thereofon the consolidated tape on June 30, 201 6. AsofJanuary3l,2017,64,3ll,89l sharesofRegistrant'sCommonStock,noparvalue(theonlyclassofcommonstock),wereoutstanding. Documents Incorporated Bv Reference Document Proxy Statement to be filed in connection with the annual meeting of shareholders to be held on May I I , 201 7. Prior to such liling, the Proxy Statement filed in connection with the annual meeting ofshareholders held on May 12,2016. Partof Form l0-K into Which Document is Incorporated Part III, Items 10, I l, 12,13 tnd.14 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 2oI 177 Table of Contents AVISTA CORPORATION Itcm Page No.No. INDEX Acronvms and Terms Forward-Lookins Statements Available Information Part I Business Company Overview Avista Utilities General Electric Operations Electric Requirements Electric Resources H)rdroelectric Licenses Future Resource Needs Natural Gas Operations Resulatorv Issues Fcderal Laws Rclatcd to Wholesale Comoctition Regional Transmission Organ izations Resional Transmission Plannine Reqional Enersv Markets Reliability Standards Avista Utilities Ooerating Statistics Alaska Electric Liqht and Power Comoanv Alaska Electric Light and Power Company Ooeratinq Statistics Other Businesses Risk Factors Unresolved Staff Comments Prooerties Avista Utilities Alaska Electric Light and Power Company Lesal Proceedinss Mine Safew Dsclosures Part II Market for Registrant's Common Eouity. Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Manasement's Discussion and Analysis ofFinancial Condition and Results ofOperations Business Sesments Executive Level Summarv Regulatorv Matters Results ofOoerations - Overall Results of Operations - Avista Utilities Results ofOperations - Alaska Electric Light and Power Comoanv Results of Oocrations - Ecova - Dscontinued Operations Results ofOnerations - Other Businesses Accountinq Standards to Be Adooted in 201 7 Critical Accountinq Policies and Estimates Liouiditv and Caoital Resources Overall Liouiditv Review ofConsolidated Cash Flow Statement Canital Resources Caoital Expenditures Off-Balance Sh eet Arran gements Case Nos. AVU-E-I7- lA. lB. 2 iii l_ !. 4_ 4. 4 4_ 4_ 5 5 & c 2 1l 11 n l3 l3 l3 t4 t7 l8 l9 20 26 27 27 29 29 29 29 3l )Zi2 33 40 43 55 55 55 56 56 59. 59 60 62 64 65 3 4 5 6 7 Exhibit No. 3 / AVU.G.17. M. Thies, Avista Schedule 1,Page3ol 177 Pcnsion Plan Credit Ratings Dividends Contractual Obligations 65 05 05. 66 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 4 of '177 Table of Contents AVISTA CORPORATION 7 4.. 8. * : not an applicable item in the 20 I 6 calendar year for Avista Corp. 67 68 h2 t5 80' 80 &t 82 82 84 85 u_ 89 9t 9l t00 U2 t02 104 105 109 110 ll0 il1 1t7 I 18 I l9 t2l 123 124 128 t29 130 132 136 137 139 139 141 t4t 142 142 143 143 144 145 147 9. 9A. 98. l0 ll 12. t3 14. l5 Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 5 of 177 Comoetition Economic Conditions and Utility Load Growth Environmental Issues and Other Continsencies Entemrise Risk Manasement Ouantitative and Oualitative Disclosures about Market Risk Financial Statements and Sunnlementarv Data Report oflndeoendent Registered Public Accounting Firm Financial Statcmcnts Consolidated Statements of Income Consolidated Statements of Comorehensive Income Consolidated Balance Sheets Consolidatcd Statcmcnts of Cash Flows Consolidated Statements of Equit), and Redeemable Noncontrolling lnterests Notes ro Consolidated Financial Statements Note l Summary ofSignificant Accountins Policies Note 2. New Accounting Standards Note 3. Variable Interest Entities Note 4. Business Acouisitions Note 5. Discontinued Operations Note 6. Derivatives and Risk Management Notc 7. Jointly Owned Elcctric Facilitics Nole 8. Prooerty. Plant and Equioment Note 9. Asset Retirement Oblisations Note I 0. Pension Plans and Other Postretirement Benefit Plans Notc I l. Accounting for lncomc Taxcs Note I 2. Enersv Purchase Contracts Note 13. Committed Lines of Credit Note I 4. Lone-Term Debt and Caoital Leases Note I5. Long-Term Debt to Afliliated Trusts Note 16. FairValue Note 17. Common Stock Note I 8. Eamings per Common Share Attributable to Avista Corporation Shareholders Note la. Commitrnents and Contingencies Notc 20. Rcgulatory Mattcrs Note 2l . Information by Business Segments Note 22. Selected Ouarterly Financial Data (Unaudited) Chanees in and Disasreernents with Accountants on Accountinq and Financial Disclosure Controls and Proccdurcs Other Information Part III Drectors. Executive Officers and Comorate Govemance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters Certain Relationships and Related Transactions. and Director Indeoendence Princioal Accounting Fees and Services Part IV Exhibits. Financial Stateurent Schedules Signaturcs Exhibit Index lt Table of Contents AVISTA CORPORATION Acronvm/Term aMW AEL&P AERC AFUDC AM&D ASC ASU Avista Capital Avista Corp. Avista Energy Avista Utilities BPA Capacity Cabinet Gorge CIAC Colstrip Coyotc Springs 2 CT Deadband or ERM deadband Dekatherm Ecology Ecova EIM Encrgy EPA ERM FASB FCA FERC GAAP GHG GS ACROI\TYMS AND TERMS (The following acronyms and terms are found in multiple locations within the document) Meaninq _ Average Megawatt - a measure ofthe average rate at which a pafticular generating source produces energy over a period of time Alaska Electric Light and Power Company, the primary operating subsidiary of AERC, which provides electric services in Juneau, Alaska Alaska Energy and Resources Company, the Company's wholly-owned subsidiary based in Juneau, Alaska Allowance for Funds Used During Construction; represents the cost ofboth the debt and equity funds used to finance utility plant additions during the construction period Advanced Manufacturing and Development, does business as METALIi Accounting Standards Codifi cation Accounting Standards Update Parent company to the Company's non-utility businesses Avista Corporation, the Company Avista Energy, Inc., an inactive electricity and natural gas marketing, trading and resource management business, subsidiary of Avista Capital Operating division ofAvista Corp. (not a subsidiary) comprising the regulated utility operations in the Pacific Northwest Bonneville Power Adrnin istration Thc rate at which a particular gcncrating source is capablc ofproducing energy, mcasurcd in KW or MW The Cabinet Gorge Hydroelectric Generating Project, located on the Clark Fork River in Idaho Contribution in aid of construction The coal-fired Colstrip Generating Plant in southeastem Montana The natural gas-fired combincd-cycle Coyote Springs 2 Generating PIant located ncar Boardman, Orcgon Combustion turbine The first $4.0 million in annual power supply costs above or below the amount included in base retail rates in Washington underthe ERM in the state of Washington Unit ofmeasurement for natural gas; a dekatherm is equal to approximately one thousand cubic feet (volume) or 1,000,000 BTUs (energy) The state of Washington's Department of Ecology Ecova, Inc., a provider offacility information and cost managcmcnt scrvices for multi-site customcrs and cncrgy efficiency program management for commercial enterprises and utilities throughout North America, subsidiary of Avista Capital. Ecova was sold on June 30,2014. Encrgy Imbalance Market The amount of electricity produced or consumed over a period of time, measured in KWh or MWh. AIso, refers to natural gas consumed and is measured in dekatherms. Environmental Protection Agency The Energy Recovery Mechanism, a mechanism for accounting and rate rccovery ofcertain power supply costs accepted by the utility commission in the state of Washington Financial Accounting Standards Board Fixed Cost Adjustment, the clcctric and natural gas decoupling mcchanism in Idaho. Federal Energy Regulatory Commission Generally Accepted Accounting Principles Greenhouse gas Generating station Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1,Page6of 177 iii Table of Contents AVISTA CORPORATION IPUC IRP Jackson Prairie Juneau KV KW,KWh I-ancaster Plant LNG MPSC Mw'MWh NERC Noxon Rapids OPUC PCA Idaho Public Utilities Commission Integrated Resource Plan Jackson Prairie Natural Gas Stordge Project, an underground natural gas storage field located near Chehalis, Washington The City and Borough ofJuneau, Alaska Kilovolt (l 000 volts): a measurc ofcapacity on transmission lines Kilowatt (l 000 watts): a measurc ofgenerating output or capability. Kilowatt-hour ( I 000 watt hours): a measure of encrgy produced A natural gas-fired combined cycle combustion turbine plant located in Idaho Liquefied Natural Gas Public Service Commission ofthe State of Montana Mcgawatt: 1000 KW. Mcgawatt-hour: 1000 KWh Nonh American Electricity Reliability Corporation The Noxon Rapids Hydroelectric Generating Project, located on the Clark Fork River in Montana The Public Utility Commission of Oregon The Power Cost Adjustment mechanism, a procedure for accounting and rate recovery ofcertain power supply costs accepted by the utility commission in the state ofldaho Purchased Gas Adjustment Power Purchase Agreernent Public Uti lity District The Public Utility Regulatory Policies Act of I 978, as amended The Regulatory Commission of Alaska Renewable energy credit Salix, Inc., a subsidiary of Avista Capital, launched in 2014 to explore markets that could be served with LNG, primarily in westem North America. Spokane Energy, LLC (dissolved in the third quarter of20 I 5), a special purpose limited liability company and all ofits mcmbcrship capital was owncd by Avista Corp. Unit ofmeasurement for natural gas; a therm is equal to approximately one hundred cubic feet (volume) or I 00,000 BTUs (energy) Washington Utilities and Transportation Cornmission Unit ofmeasurement for electricity; a watt is equal to the rate ofwork represented by a cunent ofone ampere under a pressure ofone volt iv PGA PPA PLTD PURPA RCA REC Salix Spokane Energy Thcrm uTc Watt Exhibit No. 3 Case Nos. AVU-E-'! 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 7 ot 177 Table of Conteots ,4VISTA CORPORATION Forward-Looking Statements From time-to-timc, we make forward-looking statements such as statcmcnts rcgarding projected or futurc: ' financial performance; . cash flows; . capital expenditures; . dividends; ' capital structure; . other financial items; . strategic goals and objectives; ' business environment; and . plans for operations. These statements are based upon underlying assumptions (many ofwhich are based, in tum, upon further assumptions). Such statements are made both in our rcports filcd undcr thc Sccurities Exchangc Act of 1934, as amcnded (including this Annual Repot on Form 10-K), and elscwhcrc. ForwardJooking statements are all statements except those ofhistorical fact including, without limitation, those that are identified by the use ofwords that include "will," ForwardJooking statements (including those made in this Annual Report on Form I 0-K) are subject to a variety ofrisks and uncertainties and other factors. Most ofthese facton are beyond our control and may have a significant effect on our operations, results ofoperations, financial condition or cash flows, which could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others: Financiql Risk . wcathcr conditions (temperaturcs, prccipitation lcvcls and wind pattcms), including those from long-term climatc changc, which affcct both cnergy demand and electric generating capability, including the effect ofprecipitation and temperature on hydroelectric resources, the effect ofwind pattems on wind-generated power. weather-sensitive customer demand, and similar effects on supply and demand in the wholesale energy markets; . our ability to obtain financing through the issuancc ofdcbt and/or cquity securities, which can bc affccted by various factors including our crcdit ratings, interest rates and other capital market conditions and the global economy; . changes in interest rates that affect borrowing costs, our ability to effectively hedge interest rates for anticipated debt issuances, variable interest rate borrowing and the extent to which we recover interest costs through retail rates collected from customers; . changes in actuarial assumptions. interest rates and the actual retum on plan assets forourpension and otherpostretirernent benefit plans, which can affect future funding obligations, pension and other postretirement benefit expense and the related liabilities; . deterioration in the creditworthiness ofour customers; . the outcome oflegal proceedings and other contingencies; . economic conditions in our service areas, including the economy's effects on customer demand forutility services; . declining energy demand related to customerenergy efficiency and/orconservation measures; UtiliE Regulatory Risk . state and federal regulatory decisions or related judicial decisions that affect our ability to recover costs and eam a reasonable retum including, but not limited to, disallowance or delay in tire recovery ofcapital investments, operating costs, financing costs and commodity costs and regulatory discretion over authorized retum on investment, . possibility that our integrated resource plans for electric and natural gas will not be acknowledged by the state commissions; . the effect on any orall ofthe foregoing, resulting from changes in general economic orpolitical factors; Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page I ot 177 Table of Contents AVISTA CORPORATION Energy Commodily Risk . volatility and iltiquidity in wholesale energy markets, including the availability ofwilling buyers and sellers, changes in wholesale energy prices that can affcct operating incomc, cash requircmcnts to purchase elcctricity and natural gas, valuc rcccived forwholcsalc sales, collatcral rcquircd of us by counterparties in wholesale energy transactions and credit risk to us from such transactions, and the market value ofderivative assets and liabilities; . default or nonperforrnance on thc part ofany partics from whom we purchase and/or sell capacity or cncrgy; . potential cnvironmental regulations affecting our ability to utilize or resulting in the obsolcsccncc of our powcr supply rcsources; Operational Risk . severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice storms, that can disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies and suppo( services; ' explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations ofany ofour generation facilitics, transmission, and clcctric and natural gas distribution systems or othcr operations and may rcquire us to purchase replaccmcnt powcr; . wildfires, including those caused by ourtransmission or electric distribution systems that may result in public injuries orproperty damage; . public injuries ordamage arising from orallegedly arising from ouroperations; . blackouts or disruptions of interconnected transmission systems (the regional power grid); . terrorist attacks, cybe r attacks or other malicious acts that may disrupt or cause damage to our util ity assets or to the national or regional economy in general, including any effects ofterrorisrn, cyber attacks or vandalisrn that darnage or disrupt information technology systems; ' work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages, the loss ofkey executives, availability of workers in a variety ofskill areas, and our ability to recruit and retain employees; . increasing costs ofinsurance, more restrictive coverage terms and our ability to obtain insurance; . delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities; . increasing health care costs and cost ofhealth insurance provided to ouremployees and retirees; ' thind party construction of buildings, billboard signs, towers or other structures within our rights of way, or placement of fuel receptacles within close proximity to our transfonners or other equipment, including overbuild atop natural gas distribution lines; . the loss ofkcy suppliers for matcrials or scrviccs or disruptions to the supply chain; ' adversc impacts to ourAlaska operations that could rcsult from an extendcd outage ofits hydroclcctric gcnerating rcsources or their inability to deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel); . changing riverregulation at hydroelectric facilities not owned by us, which could impact ourhydroelectric facilities downstream; Compliance Rtsk ' compliance with extensive federal, state and local legislation and regulation, including numerous environmental, health, safety, infrastructure protcction, rcliability and othcr laws and rcgulations that affect our operations and costs; ' the ability to comply with the terms ofthe licenses and permits forourhydroelectric orthermal generating facilities at cost-effective levels' Technology Risk . cyber attacks on us or our vendors or other potenti al lapses that result in unauthorized disclosure ofprivate information, which could result in liabilities against us, costs to investigate, remediate and defend, and damage to our reputation; 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 'l, Page I ol 177 Table of Contents AVISTA CORPORATION . disruption to or breakdowns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications and customcr scrvice; . changcs in costs that impcdc our ability to effcctivcly implement ncw information technology systcms or to opcratc and maintain our currcnt production technology; . changes in technologies, possibly making some ofthe current technology we utilize obsolete or the introduction ofnew technology that may create new cybcr sccurity risk; . insufficicnt technology skills, which could lcad to thc inability to devclop, modifu or maintain our information systcms; Strategic Risk . growth or decline ofour customer base and the extent to which new uses for our sewices may materialize or existing uses may decline, including, but not limited to, the effect ofthe trend toward distributed generation at customer sites; . potential dilficulties in integrating acquired operations and in realizing expected opportunities, diversions ofmanagement resources, loss ofkey cmployccs, challenges with rcspcct to operating ncw businesses and othcr unanticipated risks and liabilitics; . the potential effects ofnegative publicity regarding business practices, whether true or not, whiclr could result in litigation or a decline in our common stock price; . changes in our strategic business plans, which may be affected by any or all ofthe foregoing, including the entry into new businesses and/or the exit from cxisting businesses and the extent ofour busincss developmcnt cfforts where potential future business is unccrtain; . non-regulated activities may incrcase eamings volatility; External Mandates Risk . changes in environmental laws, regulations, decisions and policies, including present and potential environmental remediation costs and our compliance with these matters; . the potential effects oflegislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating resourccs ofrcstrictions on grccnhousc gas cmissions to mitigate conccms ovcr global climatc changcs; . political pressures orregulatory practices that could constrain orplace additional cost burdens on ourdistribution systems through accelerated adoption ofdistributed generation or electric-powered transportation or on our energy supply sources, such as campaigns to halt coal-fired power generation and opposition to other thermal generation, wind turbines or hydroelectric facilities; . wholcsalc and rctail compctition including altcmativc cncrgy sources, growth in customcr-owncd powe r rcsource tcchnologies that displacc utility- supplied energy or that may be sold back to the utility, and altemative energy supplien and delivery arrangements; . failure to identify changes in legislation, taxation and regulatory issues which are detrimental or beneficial to our overall business; . policy and/or legislative changes resulting from the new presidential administration in various regulated areas, including, but not limited to, potential tax reform, environmental regulation and healthcare regulations; and . the risk ofmunicipalization in any ofour scrvicc tcrritorics. Our expectations, beliefs and projections are expressed in good faith. We believe tlrey are reasonably based on, without limitation, an examination of historical operating trends, our records and other information available fiom third parties. However, there can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthennore, any forwardJooking statement speaks only as ofthe date on which such statement is made. We undertake no obligation to update any forwardJooking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurence ofunanticipated events. New risks, uncertainties and other factors emerge from time-to-time, and it is not possible for us to predict all such factors, nor can we assess the effect ofeach such factor on our business or the extent that any such factor or combination of factors may cause actual results to differ materially fiom those contained in any forwardJooking statement. j Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 10 of 177 Tabk of Contetrts AVISTA CORPORATION Available Information Our website address is www.avistacorp.com. We tnake annual, quarterly and current reports available on our website as soon as practicable after electronically filing these reports with the U.S. Securities and Exchange Commission (SEC). Information contained on our website is not part of this report. PART I ITEM I. BUSINESS COMPANYO!'ERVIEW Avista Corp., incorporated in the territory of Washington in I 8 89, i s prirrarily an electric and natural gas uti lity with certain other business ventures. As of December 3 I , 20 1 6, we employe d I ,742 people in our Pacific Northwest utility operations (Avista Utilities) and 240 people in our subsidiary businesses (including our Juneau, Alaska utility operations). Our corporate headquarters are in Spokane, Washington, the second-largest city in Washington. Spokane serves as the business, transportation, medical, industrial and cultural hub ofthe lnland Northwest region (eastem Washington and northem Idaho). Regional services include govemment and higher education, medical services, retail trade and finance. Through our subsidiary AEL&P, we also provide electric utility services in Juneau, Alaska. As of December 31,2O16, we have two reportable business segments as follows: . Avista Utilities - an operating division ofAvista Corp. (not a subsidiary) that comprises our regulated utility operations in the Pacific Northwest. Avista Utilities generates, transmits and distributes electricity and distributes natural gas, serving electric and natural gas customers in eastem Washington and northem Idaho and natural gas customers in parts of Oregon. We also supply electricity to a small number of customers in Montana, most ofwhom are our employees who operate ourNoxon Rapids generating facility. Avista Utilities also engages in wholesale purchases and sales olelectricity and natural gas as an integral part ofenergy resource management and our load-serving obligation. . AEL&P - a utility providing electnc services in Juneau, Alaska that is a wholly-owned subsidiary and the primary operating subsidiary of AERC. We acquired AERC on July I , 2014, and as of that date, AERC becarne a wholly-owned subsidiary of Avista Corp. See "Note 4 of the Notes to Consolidated Financial Statements" for funher discussion regarding this acquisition. Wc lravc othcr businesses, including shcet mctal fabrication, vcnturc fund investments, rcal cstatc invcstmcnts, a company that explorcs markcts that could be served with LNG, as well as certain other investments of Avista Capital, which is a direct, wholly owned subsidiary of Avista Corp. These activities do not represent a reportable business segment and are conducted by various direct and indirect subsidiaries ofAvista Corp., including AM&D, doing business as METALIi. Total Avista Corp. shareholders' equity was $ 1,648.7 million as of December 3 I , 2016, of which $60.7 million represented our investment in Avista Capital and $l0l.l million represented ourinvestment in AERC. See "ltem 6. Selected Financial Data" and "Note 2l ofthe Notes to Consolidated Financial Statements" for information with rcspect to the operating performance ofeach business segment (and other subsidiaries). AVISTAUTILITIES General At tlre end of20 I 6, Avista Utilities supplied retail electric service to 377 ,00O customers and retail natural gas service to 340,000 customers across its sewice territory. Avista Utilities' service territory covers 30,000 square miles with a population of 1 .6 million. See "Item 2. Properties" for further information on our utility assets. See "Item 7. Management's Discussion and Aralysis ofFinancial Condition and Results ofOperations - Economic Conditions and Utility Load Growth" for information on economic conditions in our service territory. Electric 0perations General Avista Utilities gencratcs, transmits and distributcs clcctricity, scwing electric customcrs in eastcm Washington, northcm Idaho and a small number of customers in Montana. Avista Utilities generates electricity from facilities that we own and purchases capacity, energy and fuel for generation under long-term and short{erm contracts to rneet customer load obligations. We also sell electric capacity and energy, as welI as surplus fuel in the wholesale market in connection with our resource optimization activities as described below. 4 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G- 17-_ M. Thies, Avista Schedule 1, Page 1'l o'f 177 Tabk 0f Cr)ntents AVISTA CORPORATION As part ofAvista Utilities'resource procurement and management operations in the electric business, we engage in an ongoing process ofresource optimization, which involves the econornic selection ofenergy resources frorn those available to serve our load obligations and the capture ofadditional economic value through market transactions. We engage in transactions in the wholesale markets by selling and purchasing electric capacity and energy, fuel for electric generation, and derivative instruments related to capacity, energy, fuel and fuel tnnsportation. Such transactions are part ofthe process of matching availablc rcsourccs with load obligations and hcdging the related financial risks. Thcsc transactions range from terms ofintra-hour up to multiple years. We make continuing projections of: . electric loads at various points in time (ranging from intra-hour to multiple years) based on, among other things, estimates ofcustomer usage and weather, historical data and contract tenns, and . rcsourcc availability at thcse points in time based on, among othcr things, fucl choiccs and fucl markcts, cstimates of strcamflows, availability ofgenerating units, historic and forward market information, contract terms and experience. On the basis ofthese projections, we make purchases and sales ofelectric capacity and energy, fuel for electric generation, and related derivative instruments to match expected resources to expected electric load requirements and reduce our exposure to electricity (or fuel) market price changes. Resource optimization involvcs schcduling and dispatching available resources as wcll as thc following: ' purchasing fuel forgeneration, . when economical, selling fuel and substituting wholesale electric purchases, and . otherwholesale transactions to capture the value ofgenerating resources, transmission contract rights and fuel delivery (transport) capacity contracts. This optimization process includes entenng into hedging transactions to manage risks. Transactions include both physical energy contracts and related derivativc instrumcnts. Avista Utilities'generation assets are interconnected through the regional transmission system and are operated on a coordinated basis to enhance load- serving capability and reliability. Avista acquires both long-term and short-term transmission capacity to facilitate all ofour energy and capacity transactions. We provide transmission and ancillary services in eastem Washington, northem Idaho and westem Montana. Electric Requirements AvistaUtilities'peak electric native load requirement for20l6 was 1,655 MW,which occurred on December 17,2016.In 2015, ourpeak electric native load was I ,638 MW, which occuned during the summer, and in 2014, it was I ,71 5 MW, which occurred during the winter. Electric Resources Avista Utilities has a diverse electric resource mix ofCompany-owned and contracted hydroelectric, thermal and wind generation facilities, and other contracts for powcr purchascs and exchangcs. At the end of 2016, our Company-owned facilities had a total net capability of 1,862 MW, of which 55 percent was hydroelectric and 45 percent was thermal. See "ltem 2. Properties" lordetailed information on generating facilities. Hydroelectric Resources Avista Utilitics owns and operates six hydroelectric projccts on thc Spokanc Rivcr and two hydroelectric projects on the Clark Fork River. Hydroelectric generation is typically our lowest cost source perMWh ofelectric energy and the availability ofhydroelectric genemtion has a significant effect on total power supply costs. Under normal streamflow and operating conditions, we estimate that we would be able to meet approximately one-halfofour total average electric requirements (both retail and long-term wholesale) with the combination ofour hydroelectric generation and long-term hydroelectric purchase contracts with certain PUDs in the state ofWashington. Ourestimate ofnormal annual hydroelectric generation lor2017 (including resourccs purchascd undcr Iong-tcrm hydroclcctric contracts with certain PUDs) is 53 8 aMW (or 4.7 rnillion MWhs). 5 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 12 ot 177 Table of Contcnts AVISTA CORPORATION The following thousan ds (l) Normalhydroelectricgenerationisdeterminedbyapplyinganupstreamdamregulationcalculationtomediannaturalwaterflowinformation.Natural water flow is the flow ofthe rivers without the influence ofdams, whereas regulated water flow takes into account any water flow changes from upstream dams due to releasing or holding back water. The calculation ofnormal varies annually due to the timing ofupstream dam regulation throughout the year- Thermal Resources Avista Utilities owns the following thermal generating resources: . the combined cycle CT natural gas-fired Coyote Springs 2 located nearBoardman, Oregon, I 5 percent interest in a twin-unit, coal-fired boiler generating facility, Colstri p 3 & 4, located in southeastem Montana, . a wood waste-fircd boiler gcnerating facility known as the Kettlc Falls Generating Station (Kcttle Falls GS) in northeastem Washington, . a two-unit natural gas-fired CT gcnerating facility, located in northcastem Spokane (Northeast CT), . a two-unit natural gas-fired CT generating facility in northem Idaho (Rathdrum CT), and . two small natural gas-fired generating facilities (Boulder Park GS and Kettle Falls CT). Coyote Springs 2, which is operated by Portland General Electric Company, is supplied with natural gas under a combination ofterm contracts and spot market purchases, including transportation agreements with bilateral renewal rights. Colstrip, which is operated by Talen Energy LLC, is supplied with fuel from adjacent coal reserves under coal supply and transportation agreements in effect through 20 I 9. During 20 I 6, Talen Energy LLC provided notice to the Colstrip owners that it no longer plans to operate units 3 & 4 after May 20 I 8. The Colstrip owners are searching for a replacement operator for units 3 & 4. In addition, see "Item 7. Management's Dscussion and Analysis, Environmental Issues and Contingencies" for further discussion regarding environmental issues surrounding Colstrip. 6 {.3le 5.250 4.500 3.750 3.000 2,150 t.500 750 I Noxon Rapids I Cabiner corge I Spokane River Prolects - Lonu-tennhvdroelectricI contracls lvrtlr PUDS * Nomral hy'droelectric generation ( I I 1.777 lill i o llr | ('lll li Hydroelectric Generation 5.o:{} Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 13 of 177 Table of Contents AVISTA CORPORATION The primary fuel for the Kettle Falls GS is wood waste generated as a by-product and delivered by trucks from forest industry operations within 100 miles of the plant. A combination oflong-term contracts and spot purchases has provided, and is expected to meet, fuel requirements forthe Kettle Falls GS. The Northeast CT, Rathdrum CT, Boulder Park GS and Kettle Falls CT generating units are primarily used to meet peaking electric requirements. We also operate these facilities when marginal costs are below prevailing wholesale electric prices. These generating facilities have access to natural gas supplies that are adequate to meet their respective operating needs. See "Item 2. Properties - Avista Utilities - Generation Properties" for the nameplate rating and present genenting capabilities ofthe above thermal rcsources. We have the exclusive rights to all the capacity ofthe Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in northem Idaho, owned by an unrelated third-party. All olthe output from the Lancaster Plant is contracted to us through 2026 under a PPA. Under the terms ofthe PPA, we make the dispatch decisions, provide all natural gas fuel and receive all ofthe electric energy output from the Lancaster Plant; therefore, we consider this plant in our baseload resources. See "Note 3 ofthe Notes to Consolidated Financial Statements" for further discussion ofthis PPA. The following graph shows Avista Utilities' thermal generation (in thousands of MWhs) during the year ended December 3 I : Thermal Generation 6,000 5.2S0 4.500 3.750 3.ffm 1.250 t,5m 750 0 J.,)i -'i 5.508II {..u7 I Coy'ote SJxings 3 I Colsrrip f Keule ['nlls GSt Northeast CT. Rathdnurr ('T. Boulder Park GS and Keltle Fnlls CT Llrrcasler Plant PP.\ :(,1(|:{rli lil ll Wind Resources We have exclusive rights to all the capacity of Palouse Wind, a wind generation project developed, owned and managed by an unrelated third-party and located in Whitman County, Washington. Wc havc a PPA that expires in 2042 and allows us to acquirc all of the powcr and rcnewable attributes produced by the project at a fixed price per MWh v/ith a fixed escalation ofthe price over the term ofthe agreement. The project has a nameplate capacity of 105 MW. Generation from Palouse Wind was 349,771 MWhs in 2016,293,563 MWrs in 20 | 5 and 335,291 MWhs in 2014. We have an annual option to purchase the wind project beginning in December 2022. The purchase price per the PPA is a fixed price per KW ofin-service capacity with a fixed decline in the price per KW over the remaining 20-year term ofthe agreement. Under the terms ofthe PPA, we do not have any input into the day-today opcration ofthc projcct, including maintcnance decisions. All such rights arc held by thc owner. Other Purchases. Exchanges and Sales In addition to the resources described above, we purchase and sell powerunder various long-tenn contracts, and we also enter into short-term purchases and sales. Further, pursuant to PURPA, as amended, we are required to purchase generation from qualilying facilities. This includes, among other resources, hydroelectric projects, cogeneration projects and wind generation prqects at rates approved by the UTC and the IPUC. 7 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 14 ot 177 Table of Contetrts AVISTA CORPORATION See "Avista Utilities Electric Operating Statistics - Electric Operations" for annual quantities ofpurchased power, wholesale power sales and power ffom exchanges in 20 I 6, 20 I 5 and 20 I 4. See "Electric Operations" above for additional information with respect to the use ofwholesale purchases and sales as part ofour resource optimization process and also see "Future Resource Needs" below for the magnitude ofthese power purchase and sales contracts in future periods. Hydroelectric Licenses Avista Corp. is a licensee under the Federal Power Act (FPA) as administered by the FERC, which includes regulation ofhydroelectric generation resources. Excluding the Little Falls Hydroelectric Generating Project (Little Falls), our other seven hydroelectric plants are regulated by the FERC through two project licenses. The licensed projects are subject to the provisions ofPart I ofthe FPA. These provisions include payment for headwater benefits, condemnation of licensed projects upon payment ofjust compensation, and take-over by the federal govemment ofsuch projects after the expiration ofthe license upon paymcnt ofthe lesser of"nct invcstment" or "fair valuc" ofthe project, in cithcr case, plus severance damagcs. In the unlikely event that a take-over occurs, it could lead to either the decommissioning ofthe hydroelectric project or offering the project to another party (likely through sale and transfer ofthe license). Cabinet Gorge and Noxon Rapids are under one 45-year FERC license issued in March 2001. See "Cabinet Gorge Total Dissolved Gas Abatement Plan" in "Note I 9 ofthe Notes to Consolidated Financial Statements" for discussion ofdissolved atmospheric gas levels that exceed state ofldaho and federal numcric water quality standards downstream ofCabinct Gorge during pcriods whcn wc must divert excess rivcr flows over the spillway, as wcll as our mitigation plans and efforts. Five ofour six hydroelectric projects on the Spokane River (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls) are under one 50-year FERC license issued in June 2009 and are referred to collectively as the Spokane River Project. The sixth, Little Falls, is operated under separate Congressional authority and is not licensed by the FERC. Future Resource Needs Avista Utilities has operational strategies to provide sufficient resources to meet our energy requirements under a range ofoperating conditions. These operational strategies consider the amount ofenergy needed, which varies widely because ofthe factors that influence demand over intra-hour, hourly, daily, monthly and annual durations. Our average hourly load was 1,033 aMW in 2016,1,047 aMW in 2015 and 1,062 aMW in 2014. The following graph shows our forecast ofour average annual energy requiretnents and our available resources for 20 I 7 through 2020: Forecasted Electric Energy Requirements and Resources 1.000 Rr$rirrilcnlr S,1stcm lml Cont oct* for po$er $1lst ( I ) R$.urttr I.500 I:l t..tqu I 1.0(x) <r !t I ('(sllran! lrir ocd irtrd conaroct h! dro gcBrrroo {f r r)I CmrJml <s nt{ urd contrmt tlrrmrl gc'nr.mdor t -l ) +$ ""+ ,,.- 4,.. ""$ dP dF d!(ihtr contntts ftrr prncr purthastr -*d"clnde"'!ud-*!'C-rr Addrriml ar rila$lc cncrg {.1) 8 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '15 oI 177 t.55S I (a\)I .5lJ L lJo I. t.l0 I.l]5 l.106 t E] (l ) (2) (3) (4) Irfut€sile!!! AVISTA CORPORATION The contracts for power sales decrease due to certain contracts expiring in each ofthese years. We are evaluating the future plan for the additional resources made available due to the expiration ofthese contracts. The forecast assurnes near normal hydroelectric generation. Includes the Lancaster Plant PPA. Excludes Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT, as these are considered peaking facilities and are generally not used to meet our base load requirements. The combined maximum capacity of Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT is 278 MW, \rrith estimated available energy production as indicated foreach year. In August 201 5, we filed our 201 5 Ele ctric IRP with the UTC and the IPUC. The UTC and IPUC review the IRPs and give the public the opportunity to comment. The UTC and IPUC do not approve or disapprove ofthe content in the IRPs; rather they acknowledge that the IRPs were prepared in accordance with applicablc standards ifthat is the casc. The IRP dctails projcctcd growth in demand for cncrgy and thc ncw rcsourccs llccdcd to scrvc customcrs ovcr thc next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project. Highl ights ofthe 20 I 5 IRP include the following expectations and projections: . We will have adequate resources between ourowned and contractually controlled generation, combined with conservation and market purchases, to meet customer needs through 2020. . 565 MW ofadditional generation capacity is required for the period 2020 through 2034. . We will rneet or exceed the renewable energy requirements of the Washington state Energy Independence Act through the 20-year IRP time liame with a combination of quali$ing hydroelectric upgrades, the 3O-year PPA with Palouse Wind, the Kettle Falls GS and selective REC purchases. . Load growth will be approximately 0.6 percent, a decline from the growth of I .0 percent forecasted in 2 0l 3. Th is delays the need for a n ew natural gas-fired resource by one year. The decrease in expected load growth is primarily due to energy efficiency programs (using less energy to perform activities) employed by our customers over the next 20 years and the load impacts ofincreased prices. See "Item 7. Managemcnt Discussion and Analysis - Economic Conditions and Utility Load Growth" for furthcr discussion rcgarding utility customcr growth, load growth, and the general economic conditions in our service territory. The estimates of future load growth in the IRP and at "Itern 7. Management Discussion and Analysis - Economic Conditions and Utility Load Growth" differ slightly due to the timing ofwhen the two estimates were prepared and due to the time period that each estimate is focused on. . Colstrip will remain a cost effective and reliable source of power to meet future customer needs. . Energy efficiency will offset more than half of projected load growth through the 2O-year IRP time frame. Demand response (temporarily reducing the demand for energy) was eliminated from the Preferred Resource Strategy due to higher estimated costs. We are required to fite an IRP every two years, with the next IRP expected to be filed during the third quarter of 201 7. Our resource strategy may change from thc 20 I 5 IRP bascd on markct, legislativc and rcgulatory dcvclopmcnts. We are subject to the Washington state Energy Independence Act, which requires us to obtain a portion ofour electricity from qualifying renewable resources or through purchase ofRECs and acquiring all cost effective conservation measures. Future generation resource decisions will be impacted by legislation for restrictions on GHG emissions and renewable energy requirements. See "Item 7. Management's Discussion and Analysis of Financial Condition - Environmental Issues and Contingencies" for information related to existing laws, as well as potcntial lcgislation that could influcncc our futurc clcctric rcsourcc mix. Natural Gas Operations General Avista Utilities provides natural gas distribution services to retail customers in parts ofeastem Washington, nofihem Idaho, and northeastem and southwestem Oregon. Market prices for natural gas, like other commodities, can be volatile. Our natural gas procurement strategy is to provide a reliable supply to our customers with some level of price certainty. We procure natural gas from various supply basins and over varying time periods. The resulting portfolio is a diversified mix offorward fixed price purchases, index and spot market purchases, utilizing physical and financial derivative instruments. We also use natural gas storagc to support high demand pcriods and to procurc natuml gas whcn prices may be lowcr. Sccuring priccs throughout the year and cven into subscquent years provides a level ofprice certainty and can mitigate price volatility to customers between years. 9 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 16 ol '177 Table of Contents AVISTA CORPORATION Weather is a key component ofournatural gas customer load. This load is highly variable and daily natural gas loads can diffbr significantly from the monthly forecasted load projections. We make continuing projections ofour natural gas loads and assess available natural gas resources. On the basis ofthese projections, we plan and execute a series oftransactions to hedge a portion ofour customen'projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend for multiple years into the future. We also leave a portion ofour natural gas supply Icquirements unhcdgcd for purchasc in the short-tcrm spot markets. Our purchasc of natural gas supply is govcmcd by our procurcmcnt plan and is rcvicwcd and approvcd annually by thc Risk Managcmcnt Committcc (RMC), which is comprised ofcertain officen and olher management personnel. Once approval is received, the plan is implemented and monitored by our gas supply and risk managernent groups. The plan's progress is also presented to the UTC and IPUC staffin semi-annual meetings, and updates are given to the OPUC staffquarterly. Other stakcholdcrs, such as tlrc Public Counscl Unit of thc Office of the Attomcy Gcncral or thc Citizcn Utility Board, arc invitcd to participate. Thc RMC is provided with an update on plan results and changes in their monthly meetings. These activities provide transparency for the natural gas supply procurement plan. Any material changes to the plan are documented and communicated to RMC members. As part ofthe process ofbalancing natural gas retail load requirements with resources, we engage in the wholesale purchase and sale ofnatural gas. We plan for sufficient natural gas delivery capacity to serve our retail customers for a theoretical peak day event. As such, we generally have more pipeline and storage capacity than what is needed during periods other than a peak day. We optimize our natural gas resources by using markel opportunrties to generate economic value that helps mitigate fixed costs. Wlrolesale sales are delivered through wholesale market facilities outside of our natural gas distribution system. Natural gas resource optimization activities include, but are not limited to: . wholesale market sales ofsurplus natural gas supplies, . purchases and sales ofnatural gas to optimize use ofpipeline and storage capacity, and . participation in the transportation capacity release market. We also provide distribution transportation service to qualified, large commercial and industrial natural gas customers who purchase natural gas through third-party marketers. For these customers, we receive their purchased natural gas llom such third-party marketers into our distribution system and deliver it to the customers' premise. Optimization transactions that we engage in throughout the year are included in our annual purchased gas cost adjustment filings with the various commissions and they are subject to review lor prudence during this process. Natural Gas Supply Avista Utilities purchases all of its natural gas in wholesale markets. We are connected to multiple supply basins in the westem United States and Canada through firm capacity transponation rights on six different pipeline networks. Access to this diverse portfolio ofnatural gas resources allows us to make natural gas procurement decisions that benefit our natural gas customers. These interstate pipeline transportation rights provide the capacity to serve approxi mately 25 percent ofpeak natural gas customer demands from domestic sources and 75 percent from Canadian sourced supply. Natural gas prices in the Pacific Northwest are affected by global energy markets, as well as supply and demand factors in other regions ofthe United States and Canada. Future prices and delivery constraints may cause our resource mix to vary. Natural Gas Storage Avista Utilities owns a one-third interest in Jackson Prairie, an underground aquifer natural gas storage field located near Chehalis, Washington. Jackson Prairie has a total peak day deliverability of l2 million therms, with a total working natural gas capacity of 256 million therms. As an owner, our sharc is onc+hird ofthe peak day dclivcrability and total working capacity. We also contract for additional storagc capacity and dclivcry at Jackson Prairie from Northwest Pipeline for a portion oftheir one-third share ofthe storage proJect. We optimize our natural gas storage capacity throughout the year by executing transactions that capture favorable market price spreads. Natural gas buyers identi$ opportunities to purchase lower cost natural gas in the immediate tenn to inject into storage, and then sell the gas in a forward market to be withdrawn at a later time. The reverse ofthis type oftransaction also occurs. These transactions lock in incremental value for customers. Jackson Prairie is also used as a variable peaking resource, and to protect from extreme daily price volatility during cold weather or other events affecting the market. Future Resource Needs In August 201 6, we filed our 201 6 Natural Gas IRP with the UTC, IPUC and the OPUC. The natural gas IRPs are similar in nature to the electric IRPs and the process for preparation and review by the state commissions ofboth the electric and natural gas IRPs is similar. The IRP details projected growth in demand forenergy and the new resources l0 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 17 ol 177 Table of Contcnts AVISTA CORPORATION needed to serve customers over the next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project. Highlights ofthe 20 I 6 natural gas IRP include the following expectations and projections: . We will have suflicient natural gas transportation resources well into the future with resource needs not occurring during the 20-year planning horizon in Washington, Idaho, or Oregon. . Natural gas commodity prices will continue to be relatively stable due to robust North American supplies led by shale gas development. . Futurc customer growtlr in our servicc tcrritory will incrcasc slightly compared to thc 2014 IRP. Thcrc will be increasing interest from customers to utilize natural gas due to its abundant supply and subsequent low cost. We anticipate that increased demand in the region will primarily corne from power generation as natural gas is increasingly being used to back up solar and wind technology, as well as replace retired coal plants. There is also potential for increased usage in other markets, such as transportation and as an industrial feedstock. . The availability of natural gas in North America will continue to change global LNG dynamics. Existing and new LNG facilities will look to export low cost North American natural gas to the higher priced Asian and European markets. This could alter the price ofnatural gas and/or transportation, constrain cxisting pipclinc networks, stimulate dcvclopment ofncw pipelinc rcsources, and changc flows ofrratural gas across North Amenca. Since forecasted demand is relatively flat, we will monitor actual demand for signs ofincreased growth which could accelerate resource needs. Our resource strategy in our 20 I 8 IRP may change fiom the 20 I 6 IRP based on market, legislative and regulatory developments. Regulatory Issues General As a public utility, Avista Corp. is subject to regulation by state utility commissions for prices, accounting, the issuance ofsecurities and other matters. The retail electric and natural gas operations are subject to the jurisdiction ofthe UTC, IPUC, OPUC and MPSC. Approval ofthe issuance of securities is not required from the MPSC. We are also subject to the jurisdiction ofthe FERC for licensing ofhydroelectric generation resources, and for elcctric transmission scrvices and wholcsalc sales. Since Avista Corp. is a "holding company" (in addition to being itselfan operating utility), we are also subject to thejurisdiction ofthe FERC underthe Public Utility Holding Company Act of2005,which imposes ce(ain reporting and otherrequirements. We, and all ofoursubsidiaries (whetherornot engaged in any energy related business), are required to maintain books, accounts and other records in accordance with the FERC regulations and to make them available to the FERC and the state utility commrssions. In addition, upon the request ofany jurisdictional state utitity commission, or ofAvista Corp., the FERC would have the authority to review assignment ofcosts ofnon-power goods and administrative services among us and our subsidiaries. The FERC has the authority generally to require that rates subject to itsjurisdiction bejust and reasonable and in this context would continue to be able to, among other things, review transactions of any affliated company. Our rates for retail electric and natural gas services (other than specially negotiated retail rates for industrial or large commercial customers, which are subject to regulatory review and approval) are generally detennined on a "cost ofservice" basis. Rates are designed to provide an opportunity forus to recover allowable operating expenses and eam a retum ofand a reasonable retum on "rate base." Rate base is generally determined by reference to the original cost (net ofaccumulated depreciation) ofutility plant in service, subject to various adjustrnents for deferred income taxes and other items. Over time, rate base is increased by additions to utility plant in service and reduced by depreciation and retirement of utility plant and write-offs as authorized by the utility commissions. Our operating expenses and rate base are allocated or directly assigned to five regulatory jurisdictions: electric in Washington and Idaho, and natural gas in Washington, Idaho and Oregon. In general, requests for new retail rates are made on the basis ofrevenues, operating expenses and net investment for a test year that ended prior to the date ofthe request, subject to possible adjustments, which differ among thc variousjurisdictions, dcsigncd to rcflcct the cxpcctcd rcvcnucs, opcrating cxpenses and nct investmcnt during the pcriod ncw retail rates will be in effect. The retail rates approved by the state commissions in a rate proceeding may not provide sufficient revenues to provide recovery ofcosts and a reasonable retum on investment for a number ofreasons, including, but not limited to, unexpected changes in revenues, expenses and investment following the time new retail rates are requested in the rate proceeding, the denial by the commission l1 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 18 of 177 Table of Contcnts AVISTA CORPORATION ofrecovery, or timely recovery, ofcertain expenses or investment and the limitation by the comrnission ofthe authorized retum on investment. Our rates for wholesale electric and natural gas transmission services are based on either "cost ofservice" principles or market-based rates as set forth by the FERC. See "Notes I and 2 0 olth e Notes to Consol i dated Financi al Statements" for additional informati on about regulation, depreciation and deferred income taxes. General Rate Cases Avista Utilities regularly reviews the need for electric and natural gas rate changes in each state in which we provide service. See "ltem 7. Management's Discussion and Analysis - Regulatory Matters - General Rate Cases" for information on general rate case activity. Power Cost Deferrals Avista Utilities defers the recognition in the incorne statement ofcertain power supply costs that vary from the level currently recovered from our retail customers as authonzed by the UTC and the IPUC. See "ltem 7. Management's Discussion and Aralysis - Regulatory Matters -Power Cost Deferrals and Recovery Mechanisms" and "Note 20 ofthe Notes to Consolidated Financial Statements" for information on power cost deferrals and rccovery mcchanisms in Washington and Idaho. Purchased Gas Adjustment (PGA) Under established regulatory practices in each state, Avista Utilities defers the recognition in the income statement ofthe natural gas costs that vary from the level currently recovered from ourretail customers as authorized by each ofourjurisdictions. See "Item 7. Management's Discussion and Analysis - Regulatory Matters - Purchased Gas Adjustments" and "Note 20 ofthe Notes to Consolidated Financial Statements" for information on natural gas cost defenals and recovery mechanisms in Washington, Idaho and Oregon. Decouplins and Earninss Sharins Mechanisms Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each ofAvista Utilities'jurisdictions, each month Avista Utilities'electric and natural gas revenues are adjusted so as to reflect revenues based on the number ofcustomers in certain customer rate classes, rather than kilowatt hour and therm sales. The difference between revenues based on the number of customerc and revenues based on actual usage is deferred, and either surcharged or rebated to customers beginning in the following year. In conjunction with thc dccoupling mcchanisms, Washington includes an aftcr-thc-fact camings tcst. At the cnd ofcach calcndar ycar, camings calculations are madc for thc pnor calendar year and a portion ofany eamings above a certain threshold are deferred and later retumed to customers. Oregon also has an annual eamings review, not directly associated with the decoupling rlechanisrn, where eamings above a certain threshold are deferred and later retumed to customers. See "Itern 7. Management's Discussion and Analysis - Regulatory Matters - Decoupling and Eamings Sharing Mechanisms" for further discussion of these mechanisms. Federal Laws Related to Wholesale Competition Fcdcral law promotcs practiccs that foster competition in thc electric wholesalc cncrgy markct. Thc FERC requircs clcctric utilitics to transmit powcr and energy to or for wholesale purchasers and sellers, and requires electric utilities to enhance or construct transmission facilities to create additional transmission capacity for the purpose ofproviding these services. Public utilities (through subsidiaries or afliliates) and other entities may participate in the development ofindependent electric generating plants for sales to wholesale customers. Public utilities operating under the FPA are required to provide open and non-discriminatory access to their transmission systems to third parties and establish an Open Access Same-Time Information System to provide an electronic means by which transmission customers can obtain information about available transmission capacity and purchase transmission access. The FERC also requires each public utility subject to the rules to operate its transmission and wholesale power merchant operating functions separately and to comply with standards ofconduct designed to ensure that all wholesale users, including the public utility's power merchant operations, have equal access to the public utility's transmission system. Our compliance with these standards has not had any substantive impact on the operation, maintenance and marketing ofour transmission system or our ability to provide service to customers. Scc "ltcm 7. Management's Discussion and Analysis - Competition" for furthcr information. Regional Transmission Organizations Beginning with FERC OrderNo. 888 and continuing with subsequent rulemakings and policies, the FERC has encouraged bettercoordination and opcrational consistcncy aimcd to capturc cfficicncics that might othcrwise be gaincd through the formation ofa Regional Transmission Organization or an independent system operator (lSO). t2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1,Page 19 ot 177 Table of Cqntents AVISTA CORPORATION Regional Transmission Planning Avista Utilities meets its FERC requirements to coordinate transmission planning activities with other regional entities through ColumbiaGrid. ColumbiaGrid is a Washington nonprofit membership corporation with an independent board formed to improve the operational efficiency, reliability, and planned expansion of the transmission grid in the Pacific Northwest. We became a member of ColumbiaGrid in 2006 during its formation. ColumbiaGnd is not an ISO, but pcrforms thosc functions that its mcmbers rcqucst from timc to timc. Currcntly, ColumbiaGrid fills thc rolc of facilitating our rcgional transmission planning as required in FERC Order No. I 000 and other clarifoing FERC Orders. Columb iaGrid and its members also work with oth er westem organizations to address transmission planning, including Westconnect and the Northem Tier Transmission Group (NTTG). In 201 I , we becarne a registered Planning Panicipant of the NTTG. We will continue to assess the benefits of entering into other functional agreements with ColumbraGrid and/or participating in other forums to attain operational efficiencies and to meet FERC policy objectives. Regional Energy Markets The Califomia Independent System Operator (CAISO) recently implemented an EIM in the westem United States. Most investor-owned utilities in the Pacific Northwest are either participants in the CAISO EIM or plan to integrate into the market in the near future, which could reduce bilateral market liquidity and opportunities forwholcsale transactions in the Pacific Northwcst. Avista Utilitics will continuc to monitorthc CAISO EIM cxpansion and thc associatcd impacts. As market fundamentals and ourbusiness needs evolve, we will weigh the advantages and disadvantages ofjoining the CAISO EIM orother organized energy markets in the future. Reliability Standards Among its other provisions, the U.S. Energy Policy Act provides for the implementation of mandatory reliability standards and authorizes the FERC to assess penalties for non-compliance with these standards and other FERC regulations. The FERC certified the NERC as the single Electric Reliability Organization authorized to establish and enforce reliability standards and delegate authority to regional entities for the purpose ofestablishing and enforcing reliability standards. The FERC approved the NERC Reliability Standards, including westem region standards, rnaking up the set oflegally enforceable standards forthe United States bulk electric system. The first ofthese reliability standards became effective in 2007. We are required to self-certifo our compliance with these standards on an annual basis and undergo regularly scheduled periodic reviews by the NERC and its regional entity, the Westem Electricity Coordinating Council (WECC). Our failure to comply with these standards could result in financial penalties ofup to $ I million per day per violation. Annual self-certification and audit processes to date have demonstrated our substantial compliance with these standards. Requirements relating to cyber security are continually evolving. Our compliance with version 5 of the NERC's Critical Infrastructure Protection standard continues to drive several physical security initiatives at our generating stations and substations. We do not expect the costs ofthese physical security initiatives to have a material impact on our financial results. l3 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l , Page 20 ot 177 Table of Contcnts AVISTA CORPORATION A!'ISTA T]TILITIES ELECTRIC OPERATING STATISTICS 20t6 Years Ended Decenrber 3 I, 201 5 2014 ELECTRIC OPERATIONS OPERATING REVENUES (Dollars in Tlrousands): Residential Commercial Industrial Public street and highway lighting Total retail Wholesale Sales of fuel Other Decoupling Provision for eamings sharing Total electric operating revenues ENERGY SALES (Thousands of MWhs): Residential Commercial Industrial Public street and highway lighting Total retail Wholesale Total electric energy sales ENERGY RESOURCES (Thousands of MWhs): Hydro generation (from Company facilities) Thermal generation (from Company facilities) Purchased power Powcr cxchangcs Total power resources Energy losses and Company use Total energy resources (net oflosses) NUMBER OF RETAIL CUSTOMERS (Average forPeriod): Residcntial Commercial Industrial Public street and highway lighting Total electric retail customers RESIDENTIAL SERMCE AVERAGES: Annual use per customer (KWh) (l ) Revenue per KWh (in cents) Annual revenue per customer A\aERAGE HOURLY LOAD (aMW) $339,210 $ 305,613 107,296 7,662 335,552 $ 308,21 0 1l|,770 '7,277 338,697 300,1 09 t 10,77 s 7,549 7 59.7 81 | 12,071 78,334 28.492 17,349 932 762,809 127 ,253 82,853 25,83 9 4,7 40 (s,621) 7 57 ,t30 l 38,1 62 83,732 27,467 (7,s03) $ 996,959 $ 997,873 $ 998,988 3,528 3,r 83 1,7 63 z3 3,57 I 3,197 1,812 23 3.694 3,1 89 1.868 25 8,497 2,998 8,603 3,145 8,77 6 3,686 t | ,495 11,748 12,462 3,836 3,626 4.597 (6) 12.053 (ss8) 3,434 3,983 4,899 (2) 4,143 1?S,) 5,6t5 (2s) 12,314 (5 66) 12,985 (s23) 11,495 fi,748 12,462 330,699 4l ,785 I,342 558 327,057 41,296 1,353 529 324,1 88 40,98 8 r,385 53t $ 374,384 3'/0.235 367,092 t1,394 9.17 I ,044.7 6 1,062 10,667 9.62 t,025.74 $ 1,033 t0,827 9.40 1,0t7.21 $ I,047 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista t4 Schedule 1 , Page 21 ot 177 Tablt of Contetrts AVISTA CORPORATION AI'ISTA UTILITIES ELECTRIC OPERATING STATISTICS Years Endcd Deccmber 3 l, 2016 20t5 20t4 Winter 1,655 1,529 |,715 COOLINGDEGREE DAYS: Actual 474 805 631 129%241%160% WA Historical 6482 6,491 6,820 (l) (2) There has been a trending decline in use per customer during the three-year period primarily due to weather fluctuations but also due in part to energy efficiency measures adopted by customerc. Cooling degree days are the measure ofthe warnness ofweather experienced, based on the extent to which the avemge ofhigh and low temperatures for a day excccds 65 dcgrccs Fahrenheit (annual degrcc days above historic indicatc warmcr than avcrage temperaturcs). In 20 I 5, we switchcd to a rolling 20-year average for calculating cooling degree days, whereas in prior years we used a 30-year rolling average. Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low temperatures for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures). In 20 1 5, we switched to a rolling 2O-year average for calculating heating degree days, whereas in prior years we used a 30-year rolling average. l5 (3) Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 1, Page 22 ot 177 Table of Contents AVISTA CORPORATION AVISTA UTILITIES NATURAL GAS OPERATING STATISTICS 20 t6 Years Ended December 3 I 201 5 2014 NATI,]RAL GAS OPERATIONS OPERATING REVENUES (Dollars in Thousands): Residential Commercial Intem.rptible Industrial Total retail Wholesale Transportation Other Decoupling Provision for eamings sharing Total natural gas operating revenues THERMS DELN'ERED (Thousands of Therms): Residential Commercial lntemrptible Industrial Total retail Wlrolesale Transpotation Interdepartmental and Company use Total therms delivered NUMBER OF RETAIL CUSTOMERS (Average forPeriod): Residential Commcrcial Intemrptible Industrial Total natural gas retail customers RESIDENTIAL SERWCE AVERAGES: AnnuaI use per customcr (therms) Revenue per therm (in dollars) Annual revenue per customer HEATING DEGREE DAYS: (I ) Spokane, WA (l) (2) s 203,373 103,17 9 2,792 4,1 58 297,150 204,289 7,988 5,5 78 6.004 (221) $ 470,894 $ 521,009 $ 556,664 195,27 5 92,978 2,179 3,348 I 93.825 96,7 5t ) 1R) 3.792 s s 293,780 1 53,446 R 11q 5.787 12,309 (2,767) 313,502 228,187 '7 715 7,461 186,565 l 12,686 5.700 5,234 l7 6,6t3 107.894 4,708 5,070 l90,t7l ll6,'748 5,033 5,648 3t0,185 684,3t7 178,377 378 294,285 809.1 32 164.679 335 317,600 545,620 162,311 411 1,173,257 I,268,431 t,025,942 300,883 34,868 37 255 296.O05 34.229 35 261 291,928 34,047 37 264 336,043 330,530 326,276 $ $ 620 1.05 649.01 593 l.l0 650.83 651 1.07 696.66 $ $ s $ Actual 5,790 5,614 6,215 Historical average (2) 6,482 6A91 6,820 7o ofaverage 89Y, 86% 9l% Medford, OR Actual 3,637 3,534 3,382 Historical average (2) 4,129 4,150 4,539 7o ofaverage 88% 85Yo 75% Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low telnperatures for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate rvarmer than average temperatures). In 20 I 5, we switched to a rolling 20-year average for calculating heating degree days, whereas in prior years we used a 30-year rolling average. l6 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 23 ol 177 Table of Contents AVISTA CORPORATION ALASKAELECTRIC LIGHT AN'D POWER COMPANY AEL&P is thc primary opcrating subsidiary ofAERC. AEL&P is thc solc utility providing clcctrical cncrgy in Juncau, Alaska. Juneau is a geographically isolated community with no electric interconnections with the transmission facilities ofother utilities and no pipeline access to natural gas or other fuels. Juneau's economy is primarily driven by govemment activities, tourism, commercial fishing, and mining, as well as activities as the commercial hub of southeast Alaska. AEL&P owns and opcratcs clectric gcncration, transmission and distribution facilities locatcd in Juncau. AEL&P opcrates fivc hydroelcctric generation facilities with I 02.7 MW of hydroelectric generation capacity as of December 3 I , 201 6. AEL&P owns four of th ese generation facilities (totaling 24.5 MW of capacity) and has a PPA for the output ofthe Snettisham hydroelectric project (totaling 78.2 MW ofcapacity). The Snettisham hydroelectric project is owned by the Alaska Industrial Development and Export Authority (AIDEA), a public corporation ofthe State of Alaska. AEL&P has a PPA and opcrating and maintenancc agreement with the AIDEA to opcrate and maintain thc facility. This PPA is a take-or-pay obligation expiring in December 2038, to purchase all ofthe output ofthe project. For accounting purposes, this PPA is treated as a capital lease and as ofDecember 3 1, 20 1 6, the capital lease obligation was $62.2 million. Snettisham Electric Company, a non-operating subsidiary ofAERC, has the option to purchase the Snettisham project at any time for a price equal to the principal amount ofthe bonds outstanding at that time. See "Note l 4 ofthe Notes to Consolidated Financial Statements" for further discussion ofthe Snettisham capital lease obligation. As of December 3 1 , 201 6, AEL&P also had I 07.5 MW of diesel generating capacity from four facilities to provide back-up service to firm customers when necessary. The following graph shows AEL&P's hydroelectric generation (in thousands of MWhs) during the time periods indicated below: Hydroelectric Generation .t50 .t00 a 35O Zrm o aSO Ef:m€ rso 5 too 50 o I snettisharn I Lake Dororhy * Salmon Creek I AnnexCreek I Cold Creek Nonnal hvdroelectric* g.e[eration ( I ) :0r6 :olI :olJ Second hirlf of l0l-l (l) Nonnal hydroelectric generation is defined as the energy output ofthe plant during a yearwith average inflows to the reservoir. Only the hydroclectric generation for the second half of 201 4 in the graph abovc was included in Avista Corp.'s ovcrall results for 2014. Thc full I 2 months of2014 in the graph above is presented forinformation purposes only. As of December 31,2016, AEL&P served approximately I 7,000 customers. Its primary customers include city, state and federal govemmental entities located in Juneau, as welI as a mine located in the Juneau area. Most of AEL&P's customers are 17 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 24 of 177 Table of Contents AVISTA CORPORATION served on a firm basis while certain of its customers, including its largest customer, are served on an intemrptible sales basis. AEL&P maintains separate nrte tariffs for each ofits customer classes, as well as seasonal rates. AEL&P's operations are subject to regulation by the RCA with respect to rates, standard ofservice, facilities, accounting and certain other matters, but not with respect to the issuance ofsecurities. Rate adjustments for AEL&P's customers require approval by the RCA pursuant to RCA regulations. AEL&P filed an electric general rate case during 201 6. See "ltem 7. Management's Dscussion and Analysis - Regulatory Matters" for further discussion of this general rate case filing, including the proposed capital structure. AEL&P is also subject to the jurisdiction ofthe FERC conceming the permits and licenses necessary to operate certain ofits hydroelectric facilities. One of these licenses (for the Salmon Creek and Annex Creek hydroelectric projects) expires in 20 I 8, but AEL&P plans to extend this license. Since AEL&P has no electric interconnection with other utilities and makes no wholesale sales, it is not subject to general FERC jurisdiction, other than the reporting and other requirements of the Public Utility Holding Company Act of 2005 as an Avista Corp. subsidiary. The Sncttisham hydroelectric project is subject to rcgulation by the State ofAlaska with respcct to dam safety and certain aspects ofits opcrations. In addition, AEL&P is subject to regulation with respect to air and water quality, land use and other environmental matters under both federal and state laws. AEL&P ELECTRIC OPERATING STATISTICS Ycars Endcd December 3 I 2016 20 t5 Sccond half of 20t4 ELECTRIC OPERATIONS OPERATING REVENUES (Dollars in Thousands): Residential Commercial and govemrnent Public street and highway lighting Total retail Other Total electric operating revenues ENERGY SALES (Thousands ofMWhs): Rcsidcntial Commercial and govemment Public street and highway lighting Total electric energy sales NUMBER OF RETAIL CUSTOMERS (Average forPeriod): Residential Commercial and govemment Public street and highway lighting Total electric retail customers RESIDENTIAL SERVICE AVERAGES : Annual usc pcr customcr (KWh) Revenue per KWh (in cents) Annual revenue per customer HEATING DEGREE DAYS: (I ) Juneau, AK Actual Historical average 7o ofaverage $$1 8,01 7 26.049 215 8,283 12,948 150 45,7 95 481 44.281 497 21,381 263 $ 46,276 $44,778 $ 2t,644 139 253 I 139 258 I 63 t25 I 393 398 189 14,121 2,148 213 14,448 2,r81 2tl 14,2 8 5 2,179 210 16,840 16.674 t6,482 $s s 9,621 t 3.10 1 ,260.17 9,7 30 12.96 |,261.25 4,461 13.15 586.57 7,301 8,35 r 87% 7,395 8,351 89% 3,381 3,721 9t% Heating degree days are the measure ofthe coldness ofweather experienced, based on the extent to which the average ofhigh and low ternperatures for a day falls below 65 degrees Fahrenheit (annual heating degree days below historical average indicate warmer than average temperatures). (l ) 18 Schedule 1, Page 25 of 177 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista 18,207 $ 27.322 266 Tablc of Contctrts AVISTA CORPORATION OTHER BUSINESSES The following table shows ourassets related to ourotherbusinesses, excluding intracompany amounts as ofDecember3 1,201 6 and 201 5 (dollars in thousands): Entity md Asset Type 2016 2015 Avista Capital Salix - wholly owned subsidiary Equity investments Othcr assets Avista Development Equity investments Real estate Notcs receivablc and othcr assets METALft - wholly owned subsidiary Alaska companies (AERC and AJT Mining) Total 3,842 $ 3,000 123 I 1,530 l 1.359 5,444 1 1,568 8,390 5,107 6,718 951 12,779 8,084 $2,500 I O1q 28 55,256 $39,206 Avista Capital . Salix is a wholly-owned subsidiary of Avista Capital that explores markets that could be served with LNG. . Equity investments are primarily in an emerging technology venture capital fund. Avista Development . Equity investments are primarily in emerging technology venture capital funds and companics, including an investment in a technology company that delivers scalable smart grid solutions to global partners and customers, and a predictive data science company. . Real estate consists primarily of mixed use commercial and retail office space. . Notes receivable and other assets are primarily long-term notes receivable made to a company focused on spuring economic development throughout Washington State. . AM&D doing business as METALft performs custom sheet metal fabrication of electronic enclosures, parts and systems for the computer, construction, telecom, renewable energy and medical industries. The asset balance above excludes an intercompany loan from METALfi to Avista Corp.Theloanbalancewas$4.0millionasofDecember3l,20l6and$1.0millionasofDecember3l,2015. Alaska companies . Includes AERC and AJT Mining, which is a wholly-owned subsidiary ofAERC and is an inactive mining company holding certain properties. Over time as opportunities arisc, we dispose ofinvestments and phase out operations that do not fit with our ovemll corporatc strategy. Hovr'ever, we may invest incremental funds to protect our existing investments and invest in new businesses that we believe fit with our overall corporate strategy. Juneau Local Distribution Company (LDC) Project We continue to evaluate opportunities to grow our presence in Alaska beyond our current AEL&P operations. We have been focused on exploring the viability ofbuilding a natural gas LDC in Juneau to bring this energy option to residents. The opportunity has been challenged by difficult economic conditions in AIaska (which are largely caused by low oil prices), relatively low heating oil prices and customer equipment conversion costs. At this time, due to a combination ofunfavorable factors, we have suspended our work on this project for the foreseeable future. Ifconditions change favorably in the future, we may proceed with the regulatory process to request authority to build and operate a gas utility in Juneau. l9 s Exhibit No. 3 Case Nos. AVU-E- 1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 26 ol 177 Table of Contents AVISTA CORPORATION Salix LNG Projecl \n ear|y 2016, Salrx was selected as the preferred respondent to a request for proposal (RFP) issued by AIDEA that sought a qualified candidate to develop a new LNG facility to serve the Fairbanks, Alaska area as part ofthe Interior Energy Project (IEP). Commercial discussions in late 20 I 6 led Salix and AIDEA to enter into an agreement that concluded Salix's involvement in the IEP. ITEM IA. RISK FACTORS RISK FACTORS The following factors could have a significant impact on our operations, results ofoperations, financial condition or cash flows. These factors could cause future results or outcomes to differ materially fiom those discussed in our reports filed with the SEC (including this Annual Report on Form I 0-K), and elsewhere. Please also see "Forward-Looking Statements" for additional factors which could have a significant impact on our operations, results of opcrations, financial condition or cash flows and could causc actual results to differ matcrially from thosc anticipatcd in such statcments. Financial Risk Factors Weather (temperatures, precipitation levels, wind patterns and storms) has a significant effect on our results of operations, financial condition and cash Ilows. Weather impacts are described in the following subtopics: . certain retail electricity and natural gas sales, ' the cost ofnatural gas supply, and . the cost ofpower supply. Certain retail electricity and naturel gas sales volumes vary directly with changes in temperatures. We normally have our highest retail (electric and natural gas) energy sales during the winter heating season in the first and fourth quarters ofthe year. We also have high electricity demand for air conditioning during thc summcr (third quartcr) in the Pacific Northwest. In gcncral, warmcr weather in thc heating scason and coolcr weather in thc cooling season will reduce our customers' energy demand and retail operating revenues. The revenue and eamings impact ofweather fluctuations is somewhat mitigated by our decoupling mechanisms; however, we could experience liquidity constraints during the period between when decoupling revenue is eamed and when it is subsequently collected from customers through retail rates. The cost ofnatural gas supply tends to increase with higher demand during periods ofcold weather. Increased costs adversely affect cash flows when we purchase natural gas for retail supply at prices above the amount then allowed for recovery in retail rates. We defer differences between actual natural gas supply costs and the amount currently recovered in retail rates and we are generally allowed to recover substantially all ofthese differences after regulatory review. However, these deferred costs require cash outflows from the time ofnatural gas purchases until the costs are later recovered through retail sales. Inter-regional natural gas pipelines and competition for supply can allow demanddriven price volatility in other regions ofNorth America to affect prices in our region, even though there may be less extreme weather conditions in our area. The cost ofpower supply can be significantly affcctcd by weathcr. Precipitation (consisting ofsnowpack, its watcr contcnt and melting pattcm plus rainfall) and other streamflow conditions (such as regional water storage operations) significantly allect hydroelectric generation capability. Variations in hydroelectric generation inversely affect our reliance on market purchases and thermal generation. To the extent that hydroelectric generation is less than normal, significantly more costly powersupply resources must be acquired and the ability to realize net benefits from surplus hydroelectric wholesale sales is reduced. Wholesale prices also vary based on wind pattems as wind generation capacity is material in our region but its contribution to supply is inconsistcnt. The price ofpower in the wholesale energy markets tends to be higher during periods ofhigh regional derrand, such as occurs with temperature extremes. We may need to purchase power in the wholesale market during peak price periods. The price ofnatural gas as fuel for natural gas-fired electric generation also tends to increase during periods ofhigh demand which are often related to temperature extremes. We may need to purchase natural gas fuel in these periods of high prices to meet electric demands. The cost ofpower supply during peak usage periods may be higher than the retail sales price or the amount allowed in retai I rates by our regulators. To the extent that power supply costs are above the amount allowed currently in retail rates, the difference is partially absorbed by the Company in current expense and it is partially defened or shared with customers through regulatory mechanisms. 20 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule I, Page 27 o'f 177 Table of Contents AVISTA CORPORATION The price ofpower tends to be lower dunng periods with excess supply, such as the spring when hydroelectric conditions are usually at their maximum and various facilities are required to operate to meet environmental mandates. Ovenupply can be exacerbated when intermittent resources such as wind generation are producing output that may be supponed by price subsidies. In extreme situations, we may be required to sell excess energy at negative prices. As a result ofthese combined factorc, our net cost ofpower supply - the difference between our costs ofgeneration and market purchases, reduced by our revenue from wholesale sales - varies significantly because ofweather. We rely on regular access to ftnancial markets but $'e cannot assure favorable or reasonable financing terms will be available when we need them. Access to capital markets is critical to our operafions and our capital structure. We have significant capital requirements that we expect to fund, in part, by accessing capital markets. As such, the state offinancial rnarkets and credit availability in the global, United States and regional economies impacts our financial condition. We could experience increased borrowing costs or limited access to capital on reasonable terms. Wc access long-tcrm capital markets to finance capital cxpcnditurcs, rcpay maturing long-tcrm dcbt and obtain additional working capital from timc{o-timc. Our ability to access capital on reasonable terms is subject to numerous factors and market conditions, many ofwhich are beyond our control. Ifwe are unable to obtain capital on reasonable terms, it may limit or prohibit our ability to finance capital expenditures and repay maturing long-tenn debt. Our liquidity needs could exceed our short-term credit availability and lead to defaults on various financing arangements. We would also likely be prohibited from paying dividends on our common stock. Perlormance ofthe financial markets could also result in significant declines in the market values ofassets held by our pension plan and/or a significant incrcase in thc pcnsion tiability (which impacts thc funded status ofthe plan) and could increase futurc funding obligations and pcnsion cxpense. We rely on credit from financial institutions for short-term borrowings. We need adequate levels of credit with financial institutions for short- term liquidity. We have a $400.0 million committed line of credit that expires in April 2021. Our subsidiary AEL&P has a $25.0 million committed line of credit that expires in November 20 I 9. There is no assurance that we will have access to credit beyond these expiration dates. The committed line ofcredit agrccmcnts contain customary covenants and default provisions. Any dcfault on thc lines ofcredit or othcr financing arrangcmcnts ofAvista Corp. or any ofour "significant subsidiarics," ifany, could rcsult in cross-dcfaults to other agreements ofsuch entity, and/or to the line ofcredit or other financing arrangements ofany other ofsuch entities. Any defaults could also induce vendors and other counterparties to demand collateral. In the event ofany such default, it would be difficult for us to obtain financing on reasonable terms to pay creditors or fund operations. We would also likely be prohibited from paying dividends on our common stock. We hedge a portion of our interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements. Ifmarket interest rates decrease below the interest rates we have locked in, this will result in a liability related to our interest rate swap derivatives, which can be significant. As ofDecernber 3 I , 20 I 6, we had a net interest rate swap derivative liability of$60.9 million, reflecting a decline in interest rates since the time we entered into the agreements. We did not have any U.S. Treasury lock agreements outstanding as of December 3 I , 201 6. We may be required to post cash or letters ofcredit as collateral depending on fluctuations in the fair value ofthe derivative instruments. Settlement ofinterest ratc swap derivative instrumcnts in a liability position could rcquire a significant amount of cash, which could ncgativcly impact our liquidity and short-term credit availability and increase interest expense over the term ofthe associated debt. Dorvngrades in our credit ratings could impede our ability to obtain financing, adversely affect the terms offinancing and impact our ability to transact for or hedge energy resources. Ifwe do not maintain our investment grade credit rating with the major credit rating agencies, we could expect increased debt service costs, limitations on our ability to access capital markets or obtain other financing on reasonable terms, and requirements to provide collateral (in the form ofcash or letters ofcredit) to lenders and counterparties. In addition, credit rating downgrades could reduce the number of countcrparties willing to do business with us or result in thc termination ofoutstanding rcgulatory authorizations for ccrtain financing activities. 2l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 28 ol 177 Table of C0rtents AVISTA CORPORATION Credit risk may be affected by industry concentration and geographic concentration. We have concentrations ofsuppliers and customers in the electric and natural gas industries including: . electric and natural gas utilities, . electric generators and transmission providers, . oil and natural gas producers and pipelines, . financial institutions rncluding commodity clearing exchanges and related parties, and . energy marketing and trading companies. We have concentrations ofcredit risk related to our geographic location in the westem United States and westem Canada energy markets. These conccntrations ofcounterparties and concentrations ofgeographic location may affect our ovcrall cxposurc to crcdit risk bccausc thc countcrpartics may bc similarly affected by changes in conditions. Utilitv Repulatorv Risk Factors Regulators may not grant rates that provide timely or sufficient recovery ofour costs or allow a reasonable rate ofreturn for our shareholders. Avista Utilities' annual operating expenses and the costs associated with incremental investments in utility assets continue to grow at a faster rate than revenue groMh. Our ability to recover these expenses and capital costs depends on the amount and timeliness ofretail rate changes allowed by regulatory agencies. We expect to periodically file for rate increases with regulatory agencies to recover our expenses and capital costs and provide an opportunity to eam a reasonable rate ofretum for shareholders. Ifregulators do not grant rate increases or grant substantially lower rate increases than our requests in the future or ifrecovery ofdeferred expenses is disallowed, it could have a negative effect on our operating revenues, net income and cash flows. During Dcccmber 20 1 6, the UTC dcnied our most rccent clcctric and natural gas gcncrzl ratc requests and granted zero rate relief. Pending before the UTC is our petition for reconsideration and altemately lor rehearing (Petition) ofour 20 I 6 general rate cases to arrive at new electric and natural gas rates. The UTC has provided notice that it expects to rule on the Petition on or before March I 6, 20 I 7. If our efforts to obtain rates that are fair, just, reasonable and sufficient are notsuccessful, ow2017 eamings are expected to decreaseby $0.20 to $0.30 perdiluted share ascompared to 2016 actual results. See furtherdiscussion in "Item 7. Management's Discussion and Analysis - Regulatory Matters." In the future, we may no longer meet the criteria for continued application ofregulatory accounting practices for all or a portion ofour regulated operations. Ifwe could no longer apply regulatory accounting, we could be: . required to write offourregulatory assets, and . precluded from the future deferral ofcosts or decoupled revenues not recovered through rates at the time such amounts are incurred, even ifwe are expected to recover these amounts from custome$ in the future. Scc further discussion at 'Notc I of the Notes to Consolidatcd Financial Statements - Regulatory Defencd Chargcs and Crcdits." Energl, Commoditv Risk Factors Energy commodity price changes affect our cash llows and results ofoperations, Energy commodity prices can be volatile. We rely on energy markets and other counterparties for energy supply, surplus and optimization transactions and commodity price hedging. A combination offactors exposcs our opcrations to commodity price risks, including: . our obligation to serve our retail customers at rates set through the regulatory process - we cannot change retail rates to reflect current energy prices unless and until we receive regulatory approval, . customer demand, which is beyond our control because ofweather, customer choices, prevailing economic conditions and other factors, . some ofour energy supply cost is fixed by the nature ofthe energy-producing assets orthrough contractual arrangements (however, a significant portion ofour energy resource costs are not fixed), and 22 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 29 ol 177 Table of Contents AVISTA CORPORATION . the potential non-performance by commodity counterparties, which could lead to replacement ofthe scheduled energy or natural gas at higher priccs. Because we must supply the amount ofenergy demanded by our customers and we must sell it at fixed rates and only a portion ofour energy supply costs are fixed, we are subject to the risk ofbuying energy at higher prices in wholesale energy markets (and the risk ofselling energy at lower prices ifwe are in a surplus position). Electricity and natural gas in wholesale markets are cornmodities with historically high price volatility. Changes in wholesale energy prices affect, among other things, the cash requirements to purchase electricity and natural gas for retail customers or wholesale obligations and the market value of derivative assets and liabilities. When we enter into fixed price energy commodity transactions for future delivery, we are subject to credit terms that may require us to provide collateral to wholesale counterparties related to the difference between current prices and the agreed upon fixed prices. These collateral requirements can place significant demands on our cash flows or borrowing arrangements. Price volatility can cause collateral requirements to change quickly and significantly. Cash flow deferrals related to energy commodities can be significant We are permitted to collect from customers only amounts approved by regulatory commissions. However, our costs to provide energy service can be much higher or lower than the amounts curently billed to customers. We are pennitted to defer income statement recognition and recovery from customers for some ofthese differences, which are recorded as deferred charges with the opportunity fot future recovery through retail rates. These defened costs are subject to review forprudence and potential disallou,ance by regulators, who have discretion as to the extent and timing offuture recovery orrefund to customers. Power and natural gas costs higher than those recovered in retail rates reduce cash flows. Amounts that are not allowed for defen-al or which are not approved to bccomc part ofcustomcr rates affect our rcsults ofopcrations. Even ifour regulators ultirnately allow us to recover deferred power and natural gas costs, our operating cash flows can be negatively affected until these costs are recovered from customers. Fluctuating energy commodity prices and volumes in relation to our energy risk management process can cause volatility in our cash flows and results ofoperations. We engage in active hedging and resource optimization practices to reduce energy cost volatility and economic exposure related to commodity price flucruations. We routincly cnter into contracts to hcdge a portion of our purchasc and salc commitmcnts for clcctricity and natural gas, as well as forecasted excess or deficit energy positions and inventories ofnatural gas. We use physical energy contracts and derivative instruments, such as forwards, futures, swaps and options traded in the over-the-counter markets or on exchanges. We do not attempt to fully hedge our energy resource assets or our forecasted net positions forvarious time horizons. To the extent we have positions that are not hedged, or ifhedging positions do not fully match the corresponding purchase or sale, fluctuating commodity prices could have a material effect on our operating revenues, resource costs, derivative assets and liabilities, and opcrating cash flows. In addition, actual loads and resources typically vary from forecasts, somctimes to a significant dcgrec, which rcquire additional transactions or dispatch decisions that impact cash flows. The hedges we enter into are reviewed forpnrdence by ourvarious regulators and any deferred costs (including those as a result ofourhedging transactions) are subject to review for prudence and potential disallowance by regulators. Generation plants may become obsolete, We rely on a variety of generation and energy commodity market sources to futfill our obligation to serve customers and mcet the demands ofour countcrparty agrccmcnts. Thcrc is thc potential that somc ofour gencration sources, such as coal, may becomc obsolete. This could result in higher commodity costs to replace the lost generation, as well as higher costs to retire the generation source before the end ofits expected life. 0oerational Risk Factors We are subject to various operational and event risks. Our operations are subject to operational and event risks that include: . severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, eafthquakes, snow and ice storms, which can disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies support services and general business operations. . blackouts or disruptions of interconnected transmission systems (the regional power grid), . unplanned outages at generating plants, 23 Exhibit No. 3 Case Nos. AVU-E-'I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 30 ol 177 Table of C'ontents AVISTA CORPORATION . fuel cost and availability, including delivery constraints, . explosions, fires, accidents, ormechanical breakdowns that may occurwhile operating and maintaining ourgeneration, transmission and distribution systcms, . damage or injuries to third parties caused by our generation, transmission and distribution systems, . natural disasters that can disrupt energy generation, transmission and distribution, and general business operations, and . terrorist attacks or other malicious acts that may disrupt or cause damage to our utility assets or the vendors we utilize. Disasters may affect the general economy, financial and capital markets, specific industries, or our ability to conduct business. As protection against operational and event risks, we maintain business continuity and disaster recovery plans, maintain insurance coverage against some, but not all, potential losscs and wc scck to negotiatc indcmnification arrangemcnts with contractors for certain cvcnt risks. Howcvcr, insurance or indcmnification agrccmcnts may not be adequate to protect us against liability, extra expenses and operating disruptions from all ofthe operational and event risks described above. In addition, we are subject to the risk that insurers and/or other parties will dispute or be unable to perlorm on their obligations to us. Damage to facilities rnay be caused by severe weather, such as snow, ice, wind storms or avalanches. The cost to irnplement rapid or any repair to such facilities can be significant. Overhead electric lines are most susceptible to damage caused by severe weather. Adverse impacts may occur at our Alaska operations that could result from an extended outage oftheir hydroelectric generating resources or its inability to deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel). AEL&P operates several hydroelectric power generation facilities and has diesel generating capacity fiorn multiple facilities to provide backup service to firm customers when necessary; however, a single hydroelectric power generation facility, the Snettisham hydroelectric project, provides approximately two- thirds ofAEL&P's hydroelectric power generation. Any issues that negatively aflect AEL&P's ability to generate or transmit power or any decrease in the dernand for the power generated by AEL&P could negatively affect our results ofopemtions, financial condition and cash flows. Comoliance Risk Factors There have been numerous changes in legislation, related administrative rulemakings, and Executive Orders, including periodic audits ofcompliance with such rules, which may adversely affect our operational and linancial performance, Wc cxpcct to continue to be affcctcd by lcgislation at thc national, statc and local level, as wcll as by administrativc rules and requircmcnts publishcd by govemment agencies, including but not limited to the FERC, the EPA and state regulators. We are also subject to NERC and WECC reliabitity standards. The FERC, the NERC and the WECC perform periodic audits of the Cornpany. Failure to comply with the FERC, the NERC, or the WECC requirerrents can result in financial penalties ofup to $ I million per day per violation. Futurc lcgislation or administrativc rulcs could have a material advcrsc cffect on our operations, rcsults ofoperations, financial condition and cash flows. Actions or limitations to address concerns over the long-term global and our utilitiesr service area climate changes may allect our operations and financial performance, Legislative, regulatory and advocacy efforts at the state, national and intemational levels conceming climate change and other environmental issues could have significant impacts on our operations. The electric and natural gas utility industries are frequently affected by proposals to curb greenhouse gas and other air emissions. Various regulatory and legislative proposals have been made to limit or further restrict byproducts ofcombustion, including that resulting from the use ofnatural gas by our customers. Such proposals, ifadopted, could restrict the operation and raise the costs ofour power generation rcsourccs as well as the distribution ofnatural gas to our customcrs. We expect continuing activity in the future and we are evaluating the extent to which potential changes to environmental laws and regulations may: ' increase the opcrating costs ofgcncrating plants, . increase the lead timc and capital costs for thc construction ofncw generating plants, . require modification ofour existing generating plants, 24 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 31 of 177 Table of Contents AVISTA CORPORATION . require existing generating plant operations to be curtailed or shut down, . reduce the amount ofenergy available from ourgenerating plants, . restrict tlre types ofgenerating plants that can be built or contracted with, . require construction ofspecific types ofgeneration plants at higher cost, and . increase the cost ofdistributing natural gas to customers. We have contingent liabilities, including certain matters related to potential environmental Iiabilities, and cannot predict the outcome of these matters. In the normal course ofourbusiness, we have matters that are the subject ofongoing litigation, mediation, investigation and/ornegotiation. We cannot predict the ultimate outcome or potential impact ofany particular issue, including the extent, ifany, ofinsurance coverage or that amounts payable by us may be recoverable through the ratemaking process. We are subject to environmental regulation by federal, state and local authorities related to our past, present and future operations. See "Note I 9 ofthe Notes to Consolidated Financial Statements" for further details ofthese matters. Technolog! Risk Factors Cyber aftacks, terrorism or other malicious acts could disrupt our businesses and have a negative impact on our results ofoperations and cash flows. In the course ofour operations, we rely on interconnected technology systems for operation ofour generating plants, electric transmission and distribution systems, natural gas distribution systems, customer billing and customer service, accounting and other adrninistrative processes and compliance with various regulations. In addition, in the ordinary course ofbusiness, we collect and retain sensitive infomation including personal information about our customers and employees. There are various risks associated with technology systems such as hardware or software failure, comrnunications failure, data distortion or destruction, unauthorized access to data, misuse ofproprietary or confidential data, unauthorized control through electronic means, programming mistakes and other deliberate or inadvertent human errors. In particular, cyber attacks, terrorism or other malicious acts could damage, destroy or disrupt these systems. Additionally, thc facilities and systcms ofclicnts, suppliers and third party scrvice providcrs could bc vulncrablc to these samc risks and, to thc cxtent of interconnection to our technology, may impact us. Any failure, unexpected, or unauthorized use oftechnology systems could result in the unavailability of suclt systems, and could result in a loss ofoperating revenues. an increase in operating expenses and costs to repairorreplace damaged assets. Any ofthe above could also result in the loss or release ofconfidential customer and/or employee information or other proprietary data that could advenely affect our reputation and competitiveness, could result in costly litigation and negatively impact our results ofoperations. As these potential cyber attacks become morc common and sophisticatcd, wc could bc rcquired to incur costs to strcngthcn our systems and rcspond to emerging conccms. Terrorist attacks could also be directed at physical electric and natural gas facilities, as well as technology systems. We may be adversely affected by our inability to successfully implement certain technology projects. Wc arc currcntly planning to rcplacc all of our electric meter infrastructurc in Washington state with two-way communication advanccd mctcring infrastructure (AMI). There is the risk that regulators will not allow the full recovery of new AMI. In addition, there are inherent risks associated with replacing and changing these types ofsystems, such as incorrect or nonfunctioning metering and/or delayed or inaccurate customer bills or unplanned outages, which could have a material adverse eflect on our results ofoperations, financial condition and cash flows. Finally, there is the risk that we ultimately do not complete the project and will incur contract cancellation or other costs, which could be significant. Stratepic Risk Factors Our strategic business plans, which may be affected by any or all ofthe foregoing, may change, including the entry into new businesses and/or the exit from existing businesses and the extent ofour business development efforts where potential future business is uncertain. Our strategic business plans could be affected by or result in any ofthe following: . disruptive innovations in the marketplace may outpace our ability to compete or manage our risk, . potential difficulties in integrating acquired operations and in realizing expected opportunities, diversions ofmanagement resources and losses of key employees, challenges with respect to operating new businesses and other unanticipated risks and liabilities, 25 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 32 ol 177 Table of Contents AVISTA CORPORATION . market or other conditions may adversely affect our operations or require changes to our business strategy, which could result in a non-cash goodwill impairment chargc that would reducc asscts and rcducc our nct incomc, and . potential reputational risk arising from repeated general rate case filings, degradation in the quality ofservice, or from failed strategic investments and opportunities, which could erode shareholdeq customer and community satisfaction with our Company. Exlernal Mandates Risk Factors Extemal mandate risk involves forces outside the Company, which rnay include significant changes in custorner expectations, disruptive technologies that result in obsolescence of our business model and govemment action that could impact our Company. See "Item 7. Management's Discussion and Analysis - Environmental Issues and Contingencies" and "Forward-Looking Statements" fordiscussion oforreference to extemal mandates which could have a material adverse effect on ourresults ofoperations, financial condition and cash flows. ITEM IB, I]}IRESOLVED STAFF COMMENTS As ofthe filing datc ofthis Annual Rcport on Form I 0-K, wc havc no unrcsolvcd commcnts from thc staffofthc SEC. 26 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 33 of 177 Table of Contents AVISTA CORPORATION ITEM 2. PROPERTIES AVISTAUTILITIES Substantially all ofAvista Utilities'properties are subject to the lien ofAvista Corp.'s mortgage indenture. Ourutility electric properties, located in the states ofWashington, Idaho, Montana and Oregon, include the following Generation Properties No. of Units Hydroelectric Generating Stations @iver) Washington: Long Lake (Spokane) Little Falls (Spokane) Nine Mile (Spokane) (3) Upper Falls (Spokanc) Monroe Street (Spokane) Idaho: Cabinet Gorge (Clark Fork) (a) Post Falls (Spokanc) Montana: Noxon Rapids (Clark Fork) Total Hydroelectric Thermal Generating Stations (cycle, fuel source) Washington: Kettle Falls GS (combined-cycle, wood waste) (5) Kettle Falls CT (combined-cycle, natural gas) (5) Northeast CT (simple-cycle, natural gas) Boulder Park GS (simple-cycle, natural gas) Idaho: Rathdrum CT (simple-cycle, natural gas) Montana: Colstrip Units 3 & 4 (simple-cycle, coal) (6) Oregon: Coyote Springs 2 (combined-cycle, natural gas) Total Thermal Total Generation Properties (l ) (2) (3) (4) Naneplate Ratin g (M\v) (l) Presnt Capabiliry (M\\') (2) 4 4 4 I I 4 6 70.0 32.0 36.8 10.0 14.8 8 8.0 35.6 29.0 10.2 15.0 5 265.0 14.8 487.8 273.0 15.4 562.4 93t.2 r,028.6 1.770.4 I,86 t .9 Nameplate rating, also referred to as "installed capacity," is the manufacturer's assigned power capability under specified conditions. Present capability is the maxirnum capacity ofthe plant under standard test conditions witlrout exceeding specified limits oftemperature, stress and environmental conditions. lnformation is provided as ofDecember 3 1,2016. The project to replace Units I and 2 was completed during 201 6. The present capability shorvn is the maximum plant generation we have seen given thc water we havc had available, bccausc we have not yct had peak water conditions sincc Units I and 2 wcnt into service. As conditions changc, wc will test plant capability and revise this number accondingly. For Cabinet Gorge, we have water rights permitting generation up to 265 MW. However, if natural stream flows will allow for generation above our water rights, we are able to generate above our water rights. If natural stream flows only allow for generation at or below 265 MW, we are limited to generation of265 MW. The present capability disclosed above represents the capability based on maximum stream flow conditions when we are allowed to generate above our water rights. 50.7 7.2 6l .8 24.6 53.5 6.9 64.8 24.6 2 2 t66.5 233.4 295.0 166.5 222.0 295.0 839.2 833.3 27 Exhibit No. 3 Case Nos. AVU-E-I 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 34 oI 177 Table of Contents ,4VISTA CORPORATION (s) (6) These generating stations can operate as separate single-cycle plants or combined-cycle with the natural gas plant providing exhaust heat to the wood boiler to increase efficiency. Jointly owned; data refers to our I 5 percent interest. Electric Distribution and Transmission PIant Avista Utilities owns and operates approximately 19,000 miles of primary and secondary electric distribution lines providing service to retail customers. We have an electric transrnission systern of 685 miles of 230 kV line and 1,565 miles of I l5 kV Iine. We also own an I I percent interest in approximately 500 miles of a 500 kV line between Colstrip, Montana and Townsend, Montana. Ourtransmission and distribution systems also include numerous substations with transformers, switches, monitoring and rnetering devices, and other equipment. The 230 kV lines are the backbone ofour transmission grid and are used to transmit power fiom generation resources, rncluding Noxon Rapids, Cabinet Gorgc and thc Mid-Columbia hydroclcctric projccts, to the major load ccntcrs in our scrvice arca, as wcll as to transfcr powcr bctwccn points of interconnection with adjoining electric transmission systems. These lines interconnect at various locations with the BPA, Grant County PUD, PacifiCorp, NorthWestem Energy and Idaho Power Company and serve as points ofdelivery for power from generating facilities outside ofour service area, including Colstrip, Coyote Springs 2 and the Lancaster Plant. These lines also provide a rneans for us to optimize resources by entering into short-term purchases and sales ofpower with entities within and outside ofthe Pacific Northwest. The I I 5 kV lines provide for transmission ofenergy and the integration ofsmaller generation facilities with our service-area load centers, including the Spokane River hydroelectric projects, the Kettle Falls projects, Rathdrum CT, Boulder Park GS and the Northeast CT. These lines interconnect with the BPA, Chelan County PUD, the Grand Coulee Project Hydroelectric Authority, Grant County PUD, NorthWestem Energy, PacifiCorp and Pend Oreille County Pl,rD. Both the I I 5 kV and 230 kV interconnections with the BPA are used to tmnsfer energy to facilitate service to each other's customers that are connected through thc othcr's transmission systcm. Wc hold a long-term transmission agrecmcnt with thc BPA tlrat allows us to scrvc our nativc load customcrs that are connected through the BPA's transmission system. Natural Gas Plant Avista Utilities has natural gas distribution mains of approximately 3,400 miles in Washington,2,000 miles in Idaho and 2,300 miles in Oregon. We have natural gas transmission mains of approximately 75 miles in Washington and 50 miles in Oregon. Ournatural gas system includes numerous regulator stations, scrvicc distribution lincs, monitoring and mctcring dcviccs, and other cquipmcnt. Wc own a one-third interest in Jackson Prairic, an undcrground natural gas storage ficld locatcd near Chchalis, Washington. See "Part I - Item 1. Busincss - Avista Utilities - Natural Gas Operations" for further discussion ofJackson Prairie. 28 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule I, Page 35 of 177 Table 0f Contents AVISTA CORPORATION ALASKA ELECTRIC LIGHT AN'D POWER COMPAI{Y Substantially all of AEL&P's utility properties are subject to the lien of the AEL&P mortgage indenture. AEL&P's utility electric properties, Iocated in Alaska include the lollowing: Generation Properties and Transmission and Distribution Lines Hydroelectric Gen erating Station s Snettisham (3) Lake Dorothy Salmon Creck Annex Creek Gold Creek Total Hydroelectric Diesel Generating Stations Lemon Creck Auke Bay Gold Creek Industrial Blvd. Plant Total Dicscl Total Generation Properties No. of Units Namcplatc Rating (Mw) (r) Prcsnt Capability (M\v) (2) 78.2 14.3 8.4 4.1 1.6 78.2 14.3 5.0 3.6 1.6 106.6 102.7 il 3 5 I 6t.4 28.4 8.2 23.5 51.8 25.2 7 23.5 121.5 107.5 228.1 210.2 (1 ) Namcplatc rating, also refcrred to as "installcd capacity," is thc manufacturcr's assigncd power capability undcr specificd conditions.(2) Present capability is the maximum capacity ofthe plant under standard test conditions without exceeding specified limits oftemperature, stress and environmental conditions. Information is provided as ofDecember 3 I , 20 I 6.(3) AEL&P does not own this generating facility but has a PPA under which it has the right to purchase, and the obligation to pay for (whether or not energy is received), all ofthe capacity and energy ofthis facility. See further information at "Part I . Item I . Business - Alaska Electric Light and Powcr Company." In addition to the generation properties above, AEL&P owns approximately 6l miles oftransmission lines, which are primarily comprised of69 kV line, and approximately 184 miles of distribution lines. ITEM 3. LEGAL PROCEEDINGS See "Note I 9 ofNotes to Consolidated Financial Statements" for information with respect to legal proceedings. ITEM 4. MINE SAFETY DISCLOST]RES Not applicable. PART II ITEM 5. MARKET FORREGISTRANT'S COMMONEOI,]ITY. RELATED STOCKHOLDERMATTERSAND ISSUERPI,]RCHASES OF EOUITY SECURITIES Avista Corp. Market Information and Dividend Policy Avista Corp.'s common stock is listed on the New York Stock Exchange under the ticker symbol "AVA." As of January 3 I , 201 7, there were 8,41 0 registered shareholders ofour common stock. Avista Corp.'s Board of Drcctors considers the level of dividends on our common stock on a regular basis, taking into account numerous factors including, without limitation: . ourresults ofoperations, cash flows and financial condition, the success ofourbusiness strategies, and general economic and competitive conditions. 29 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 36 of 177 Table 0f Cont€trts AVISTA CORPORATION Avista Corp.'s net income available for dividends is generally derived from our regulated utility operations (Avista Utilities and AEL&P). The payment of dividends on common stock could be limited by: . certain covenants applicable to the Company's outstanding long-term debt and committed line ofcredit agreements (see "Item 7. Management's Discussion and Analysis - Capital Resources" for compliance with these covenants), . the hydroelectric licensing requirements ofsection I 0(d) ofthe FPA (see "Note I ofNotes to Consolidated Financial Statements"), . certain requirementsunderthc OPUC approval ofthe AERC acquisition in2014. Thc OPUC's AERC acquisition ordcrrequiresAvista Utilities to maintain a capital structure of no less than 40 percent common equity (inclusive of short-term debt). This limitation may be revised upon request by the Company with approval from the OPUC, and . certain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as amended (currently there are no preferred shares outstanding). On February 3, 2017, Avista Corp.'s Board of Directors declared a quarterly dividend of $0.3575 per share on the Company's common stock. This was an increase of$0.0 I 50 per share, or 4.4 percent from the previous quarterly dividend of$0.3425 per share. For additional information, see "Notes I , I 7 and I 8 ofNotes to Consolidated Financial Statements." The following table presents quarterly high and low stock prices as repo(ed on the consolidated reporting system, as well as dividend information: Three Mont-hs Ended March 3l Jun e 30 September 30 December 3l 2016 Dividends paid per common share Trading price range per common share: High Low 20.15 Dividends paid per common share Trading pnce range per common share: High Low' $0.3425 $0.3425 $ 0.33 S 0.33 $ 41.12 s 34.67 $ 44.80 S 38.70 $ 44.97 S 40.43 $ $ $ $ $ $ 0.3425 S 0.33 $ 0.3425 42.63 39.11 0.33 36.06 32.86 38.30 $ 32.27 S 34.2s $ 30.41 $ 33.99 S 29.93 S For information with respect to securities authorized for issuance under equity compensation plans, see "Item I 2. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters." 30 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 'l , Page 37 ol 177 Table 0l Contents AVISTA CORPORATION ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data and ratios) Operating Revenues: Avista Utilitics AEL&P Other Intersegment eliminations Total Incomc (Loss) from Opcrations (prc-tax): Avista Utilities AEL&P Other Total Net income from continuing operations Net income fiom discontinued operations Years Ended December 3 I , 2016 20t4 2013 2012 $1,372,638 $ 46,2'16 23,569 I ,41 I ,863 $ 44,77 8 28,685 (5s0) 1,4t3,499 $ 21,644 39,219 (r,800) I,403,995 $ 1,354,185 39,549 (l,800) 38,953 ( l ,800) $ tA42A83 $ tA84,776 $ 1,472,s62 $ 1A4t,744 $ 1,391,338 s 277,070 S 15,434 (2,701) 232,572 $ 188,778 (1,483)(1,680) $ 289,803 $ 253,214 S 252,588 $ 231,089 $ 187,098 241,228 S 14,072 (2,086) 239,97 6 $ 6,221 6,391 137,316 S ll8,l70 s 5,147 l 19,866 S 72,41I 104,333 S 7,961 76,803 1,997 Net income S Net income attributable to noncontrolling interests $ Net Income (Loss) attributable to Avista Corporation shareholders: Avista Utilities $ AEL&P Ecova - Discontinued operations Otlrer 137,3t6 $ (88) S t32,490 $ 7,968 (3,230) 123,317 S (eo) $ 192,277 $ (236) $ I12,294 $ (t,2t7) $ 7,129 (4,650) 78,800 (5e0) 1,825 (5,3 l 9) 113,360 $ 6,64t 5,147 (1 ,92 1) 113,263 $ 3,152 72,390 1ri6 108.598 S 81.704 NctincomeattributablctoAvistaCorp.shareholdcrsSl3T,228$123,227$192,041 $111,077$78,210 Average common shares outstanding. basic 63,508 Average common shares outstanding, diluted 63,920 Common shares outstanding at year-end 64,1 88 Eamings per cornmon share attributable to Avista Corp. shareholders, basic: Eamings percommon sharc from continuirrg opcrations $ 2.16 S Eamings per common share from discontinued operations Total eamings per common share attributable to Avista Corp. shareholders, basic 1.90 s 0.08 1.94 1.t 8 1.74 S 0.1 I 6t,632 6l,887 62,243 59,960 5q qs7 60.077 59,028 59,201 59,81 3 1.30 0.02 s 2.t6 S 1.98 $3.12 S 1.85 $1.32 Eamings per common share attributable to Avista Corp. shareholders. diluted: Eamings per common share from continuing operations $ 2.15 Eamings per common share from discontinued operations Total eamings per common share attributable to Avista Corp. shareholders, diluted 3l 1.89 $ 0.08 r.93 $ t.17 1.74 $ 0.1 I s 1.30 0.02 $2.15 $'t.97 $3.10 $1.85 $1.32 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 38 o1 177 201 5 62,30t 62,708 62,313 @LAE!SE$ AVISTA CORPORATION (in thousands, except per share data and ratios)Years Ended December 3 I 2016 2015 20t4 2013 2012 $ 1.37 $ 1.32 $ t.27 $ 1.22 $ l.16 $ 25.69 g 24.s3 S 23.84 $ 21.61 $ 21.06 $ 4,975,555 $ 4,601,708 $ 4,3s7,760 $ 3,930,2sr $ 3,883,602 273,?70 265,735 263,070 60,430 39,206 95.63 8 $ 5,309,755 $ 4,906,649 $ 4,700,971 $ 4,01 1,533 $ 3,979,240 Long-TermDebtandCapitalLeases(includingcurrentportion)S 1,682,004 $ 1,573,278 S 1,487.126 S 1,262,036 $ 1,217,520 Nonrecourse Long-Term Debt ofSpokane Energy (including cuncntportion) $ - $ - $ 1,431 $ 17,838 $ 32,803 Long-TermDebttoAtliliatedTrusts S 51,547 $ 51,547 $ 51,547 S 51,547 $ 51,547 TotalAvistaCorp.shareholders'Equity$1,648,727$1,528,626$1,483,671 $1,298,26651,259,477 Ratio of Eamings to Fixed Charges (2) 3.32 3.I 3 3.39 3.02 2.48 (l ) The total assets at year-end forthe years 201 3 and 201 2 exclude the total assets associated with Ecova of$339.6 rrillion and $322.7 million, respectively. (2) See Exhibit I 2 lor computations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Segments As ofDecember 3 I , 20 1 6, we have two reportable business segments, Avista Utilrtres and AEL&P. We also have other businesses which do not represent a rcportablc busincss scgmcnt and arc conductcd by various dircct and indirect subsidiarics ofAvrsta Corp. Scc "Part I, Itcm l. Busincss - Company Overvicw" for funher discussion ofour business segments. The following table presents net income (loss) attributable to Avista Corp. shareholders foreach ofourbusiness segments (and the otherbusinesses) forthe year ended Decernber 3 I (dollars in thousands): 20l6 2015 2014 Dividends declared per common share Book value per common share Total Assets at Year-End: Avista Utilities AEL&P Othcr Total (l ) Avista Utilities AEL&P Ecova - Discontinued operations (l ) Net income attributable to Avista Corporation shareholders 80,141 81,282 $t32A90 $ 7,968 {3,230) l 13,360 $ 6,641 5,147 (1,921\ I t3,263 3,152 72,390 3,236Other $ 137,228 $ 123,227 S 192,041 (l) TheresultsfortheyearendedDecember3l,20l4includethenetgainonsaleofEcovaof$69.7million. Executive Level Summarv Overall Results Net income attributable to Avista Corp. shareholders was S 137.2 million for 201 6, an increase from $ 123.2 million for 2015. Avista Utilities' eamings increased primarily due to an increasc in clcctric and natural gas gross margin as a result ofgcneral rate increases and thc implcmentation ofdecoupling mechanisms in Idaho and Oregon. See "Results of Operations - Avista Utilities - Non-GAAP Financial Measures" for further discussion of gross margin. Also, there was a reduction in the electric provision foreamings sharing (whiclr is an offset to revenue). Retail electric loads decreased as compared to prioryear and retail natural gas loads increased as compared to prior year, but the impact ofchanges in load as compared to normal for electric and natural gas was mostly offset by decoupling mechanisms. In addition to the fluctuations in gross margin, there were increases in other operating expenses, depreciation, and interest expense. There was also an increase in eamings at AEL&P offset by an increase in the net loss at the other businesses. More detailed explanations ofthe fluctuations are provided in the results ofoperations and business segment discussions (Avista Utilities, AEL&P, and the other businesses) that follow this section. 32 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule '1, Page 39 of '177 Table of Contents AVISTA CORPORATION 2016 Washington General Rale Cases In December 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with the UTC in February 20 I 6. The UTC order denied the Company's proposed electric and natural gas rate increase requests totaling $43.0 million. Accordingly, our current electric and natural gas retail rates will remain unchanged in Washington State. In Deccmber 201 6, wc filcd a Petition for Rcconsideration or, in the altcmativc, Rchcaring (Pctition) with the UTC. Thc UTC providcd noticc inviting partics to respon d to our Petition, stating that it expects to rule on the Petition on or before March I 6, 2 01 7. If our efforts to obtain rates that are fair, just, reasonable and sufficient are not successful, our 20 I 7 eamings will suffer a significant adverse impact. We believe the UTC order will not allow us to eam a reasonable retum on investments that we have already made in ourinfrastructure. In addition, the orderwill provide no opportunity forus to eam the retum on equity authorized by the UTC or a fair retum for shareholders. In the order, the UTC did not specifically disal low any ofour capital projects, and we continue to believe these investments are necessary and will be recoverable in rates in the future. In 20 I 7, wc cxpcct our opcrating costs to continue to grow along the samc trend wc havc bccn cxpericncing reccntly; howcver, ifour current Washington rates remain in effect, we expect to eam below our currently authonzed retum on equity (ROE). The orderwill result in regulatory lag, and, accordingly, we expectto experience eamings contraction in 2017 of$0.20 to $0.30 perdiluted share ascompared to 2016 actual results. See "ltem 7. Management's Discussion and Analysis - Regulatory Matters" for additional discussion surrounding this general rate case and all ofour other outstanding general rate cases. Alaska Energy and Resources Company Acquisition On July I , 2014, we acquired AERC, based in Juneau, Alaska. The completion of th is transaction limits the comparabil ity of the financial resu lts lor 20 I 6 and 201 5 to those for20l4 since the fint halfof20l4 does not contain any financial results frorn AERC. This transaction resulted in the recording of$52.4 million in goodwill- For additional inlormation regarding the AERC transaction, including pro forma financial comparisons, see "Note 4 of the Notes to Consolidated Financial Statements." Ecova Disposition On June 30, 20 I 4, Avista Capital completed the sale ofits interest in Ecova for a sales price of$3 35.0 million in cash, Iess the payment ofdebt and other customary closing adjustmcnts. Thc sale ofEcova providcd total cash procccds to Avista Corp., net ofdcbt, paymcnt to option and minority holders, incomc taxes and transaction expenses, of $ 143.7 million and resulted in a net gain of $74.8 million. Most of the net gain was recogn ized in 2014 with some minor true-ups during 20 I 5. Thecomplctionofthistransactionlimitsthecomparabilityofthcfinancialresultsfor20l6and20l5tothoscfor20l4sinccthcfirsthalfof20l4contains the financial results ofEcova (in discontinued operations) and 20 I 5 and 20 I 6 do not have any material results from Ecova. For additional information regarding the Ecova disposition, see "Note 5 ofthe Notes to Consolidated Financial Statements." Resulatorv Matters General Rale Cases We regularly review the need for electric and natural gas rate changes in each state in which we provide seruice. We will continue to file for rate adjustments to: . seek recovery ofoperating costs and capital investments, and . seek the opportunity to eam reasonable retums as allowed by regulators. With rcgards to thc timing and plans for futurc filings, thc assessmcnt ofour need for rate relicfand thc dcvelopmcnt ofratc casc plans takcs into consideration short-term and long-term needs, as well as specific factors that can affect the timing ofrate filings. Such factors include, but are not limited to, in-service dates of major capital investments and tlre timing of changes in major revenue and expense items. Avista Ulilities Washington General Rate Cases 20 I 4 General Rate Cases In November 20 I 4, the UTC approved an all-party settlement agreement related to our electric and natural gas general rate cases filed in February 2014 and n ew rates became effective on January I , 20 I 5. The settlement vr'as designed to increase annual electric base revenues by $ I 2.3 million, or 2.5 percent. The settlement was designed to increase annual natural gas base 33 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G- 1 7-_ M. Thies, Avista Schedule 1, Page 40 o'f 177 Table of Contents AVISTA CORPORATION revenues by $8.5 million, or 5.6 percent. The settlement agreement also included the implementation ofdecoupling mechanisms for electric and natural gas and a related after-the-fact eamings test. See "Decoupling and Eamings Sharing Mechanisms" below for further discussion of these mechanisms. Specific capital structure ratios and the cost ofcapital components were not agreed to in the settlement agreement. The revenue increases in the settlement were not tied to the 7.32 percentrate ofretum on rate base (ROR) used in conjunction with the after-the fact eamings test discussed under "Decoupling and Eamings Sharing Mcchanisms" bclow. The clcctric and natural gas revenuc incrcases wcrc negotiatcd numbcrs, with cach party using its own sct of assumptions underlying its agreement to the revenue increases. The parties agreed that the 7 .32 percent ROR will be used to calculate the AFUDC and will be used for other purposes. 20 I 5 General Rute Cases In January 20 1 6, we rcccived an ordcr (Ordcr 05) that concluded our clcctric and natural gas gcncral rate cascs that wcrc originally filed with thc UTC in February20l5.NewelectricandnaturalgasrateswereeffectiveonJanuary 11,2016. TheUTC-approved rates are designed to provide a 1.6 percent, or$8.1 million decrease in electricbase revenue, anda7.4 percent,or$10.8 million increase in natural gas base revenue. The UTC also approved an ROR of 7.29 percent, with a common equity ratio of48.5 percent and a 9.5 percent ROE. WC Order Denf ing Industrial Customers of Northwest Utilities / Public Counsel Joint Motionfor ClariJication, WC StaJf Motion to Reconsider and UTC Staff Motion lo Reopen Record On January 19,2016, the tndustrial Customers ofNorthwest Utilities (ICNU) and the Public Counsel Unit of the Washington State Office of the Attomey General (PC) filed a Joint Motion for Clarification with the UTC. In the Motion for Clarification, ICNU and PC requested that the UTC clarifythecalculationoftheelectricattritionadjustmentandtheend-resultrevenuedecreaseof$8.1 million.ICNUandPCprovidedtheirown calculations in their Motion, and suggested that the revenue decrease should have been $ I 9.8 million based on therr reading ofthe UTC's Order. On January 19,2016, the UTC Staff, which is a separate party in the general rate case proceedings from the UTC Advisory Staff, filed a Motion to Reconsider with the UTC. ln its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue dccreasc should havc bccn a rcvenuc dccrcase of $27 .4 mi llion instead of $ 8.1 million, bascd on its rcading ofthc UTC's Order. Furthcr, on Fcbruary 4,2016, the UTC Stafffiled a Motion to Reopen Record forthe Limited Purpose of Receiving into Evidence Instruction on Use and Application of StaIIs Attrition Model, and sought to supplement the record "to incorporate all aspects of the Cornpany' Power Cost Update." Within this Motion, UTC Staffupdated its suggested electric revenue decrease to $ I 9.6 million. None of thc partics in thcir Motions raised issues with thc UTC's dccision on thc natural gas rcvcnuc increasc of $ I 0.8 million. On February 19,2016, the UTC issued an order (Order 06) denying the Motions summarized above and affirmed Order 05 including an $8.1 million decrease in electric base revenue. PC Petitionfor Judicial Review On March I 8, 2016, PC filed in Thunton County Superior Court a Pctition for Judicial Revicw of thc UTC's Ordcr 05 and Ordcr 06 dcscribed above that concluded our20l5 electric and natural gas general mte cases. In its Petition forJudicial Review, PC seeksjudicial reviewoffive aspects of Order 05 and Order 06, alleging, among other things, that ( I ) the UTC exceeded its statutory authority by setting rates for our natural gas and electric services based on amounts for utility plant and facilities that are not "used and useful" in providing utility service to customers; (2) the UTC acted arbitrarily and capriciously in granting an attrition adjustment for our electric operations after finding that the we did not meet the newly articulated standard rcgarding attrition adjustmcnts; (3) the UTC errcd in applying the "end results test" to set ratcs for our electric opcrations that are not supported by the record; (4) the UTC did not conect its calculation ofour electric rates after significant errors were brought to its attention; and (5) the UTC's calculation ofour electric rates lacks substantial evidence. PC is requesting that the Court (l ) vacate or set aside portions ofthe UTC's orders; (2) identi! the errors contained in the UTC's orders; (3) find that thc rates approvcd in Ordcr 05 and rcaffirmcd in Order 06 arc unlartrl and not fair, just and rcasonablc; (4) rcmand tlrc mattcr to the UTC for further proceedings consistent with these rulings, including a determination ofour revenue requirement for electric and natural gas services; and (5) find the customers are entitled to a refund. 34 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 4'l of '177 Table of Contcnts AVISTA CORPORATION On April I 8, 201 6, PC filed an application with the Thurston County Superior Court to certify this matter for review directly by the Court of Appeals, an intermediate appellate court rn the State ofWashington. Afterbriefing and argument, the matterwas certified on April 29,2016 and accepted by the Court ofAppeals on July 29,2016. The parties are providing briefs to the Court, afterwhich the Court will set the matter for argument. A decision from the Court is not expected until late2OlT,at the earliest. The ncw ratcs cstablishcd by Order 05 will continue in cffect while the Pctition for Judicial Rcvicw is bcing considcrcd. Wc bclicve thc UTC's Ordcr 05 and Order 06 finalizing the electnc and natural gas general rate cases provide a reasonable end result for all parties. Ifthe outcome ofthe judicial review were to result in an electric rate reduction greater than the decrease ordered by the UTC, it may not provide us with a reasonable opportunity to eam the rale ofretum authorized by the UTC. 20 I 6 General Rale Cases On December I 5, 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with the UTC in February 201 6. The UTC order denied the Company's proposed electric and natural gas rate increase requests of $3 8.6 million and $4.4 million, respectively. Accordingly, our current electric and natural gas retail rates will remain unchanged in Washington State. Our original requests were based on a proposed ROR of 7.64 percent with a common equity ratio of 48.5 percent and a 9.9 percent ROE. On December 23, 201 6 we filed a Petition for Reconsideration or, in the altemative, Rehearing (Petition) with the UTC related to our 201 6 general rate cases. The UTC's Order and Avisla Corp.'s Response The primary rcason givcn by thc UTC in rcaching its conclusion is that, in our rcqucst, wc did not follow an "appropriate mcthodology" to show thc existence ofattrition, as between historical data and current and projected data. Further, the order states that, among other things, we did not demonstrate, as a necessary condition to being allowed an attrition adjustment, that we have suffered from chronic under-eaming caused by circumstances beyond ourability to control. We disagree with the UTC as to various questions of fact and law. In support ofits decision, the UTC stated that we did not demonstrate that our current revenue is insufficient for covering costs and providing the opportunity to eam a reasonable retum during the 2017 rate period. The UTC also stated that we did not demonstrate that ourcapital expenditures and increased operating costs are both necessary and immediate. OurPetition responding to the UTC's orderpoints to evidence in the case that demonstrates, contrary to the UTC's findings, the following: . Current retail rates are not sufficient for the 20 | 7 rate period, and therefore a revenue increase is necessary. In previously filed testimony, UTC Staffagreed that current rates were not sufficient. . Thc costs associatcd with thc growth in ratc basc and operating expcnscs are growing at a fastcrpace than rcvcnuc from rctail salcs, and therefore a revenue adjustment is necessary to close this gap. The revenue adjustment to close this gap is sometimes called an attrition adjustrnent. In previously filed testimony, UTC Staffagreed that a revenue adjustment is necessary to close this gap. . All ofthc capital projccts and operating cxpcnscs wc includcd in thc casc are nccessary in the time fiamc proposed in ordcr for us to continuc to provide safe, reliable service to customers. No party in the case identified a single capital project that should not be completed in the time fiame we proposed (otherthan Public Counsel's general opposition to AMI). . We presented all ofthe studies and analyses in this case, consistent with our previous filings with the UTC, and the UTC Staffacknowledged in previously filed testimony, that we provided such studies. . We eamed close to our allowed retum on equity during each of the years 20 I 3 through 20 I 5, and into 201 6. This opportunity was possible only with the revenue increases related to attrition adjustments, and an attrition adjustment is also necessary for2017. In previously filed testimony, the UTC Staffsupported electric and natural gas revenue increases totaling $28.4 million. Commissioner Jones dissented and did not support the decision. In his dissent, Commissioner Jones supported an electric revenue increase of$26.0 million, and a natural gas incrcasc of $2.4 million, bascd on IJTC Staffs analysis. 35 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 42 ot 177 Table of Contents AVISTA CORPORATION In response to our Petition, on December 27, 20 I 6 the UTC issued a "Notice ofopportunity to File Answers to Petitton for Reconsideration or Rchearing." In its Notice thc UTC rcquested partics to thc casc to filc writtcn answcrs to our Pctition and all intercsted partics filcd writtcn answcrs to rhe Petition in January 201 7. The UTC's notice indicated that it expects to enter an order resolving the Petition no later than March I 6, 201 7. In UTC StafPs Answer to our Petition, UTC Staffessentially abandoned its previous recommendations to the UTC, and supported no electric and natural gas revenue increases. In our Motion to Respond, and Response Comments, to the Answers ofthe parties, filed January 20,2017 , we noted the inappropriateness ofUTC Staffs changed position, which was without any basis in new or changed facts or circumstances. The other parties generally supported the UTC decision in their Answers to our Petition. Future General Rate Case Filings We plan to file new electric and natural gas general rate cases in Washington in the second quarter of 201 7. We will address the issues raised by the UTC in the most recent rate order, including, but not limited to, multi-year rate plans to address the concems over frequency offilings, the necessity of an attrition adjustment for the opportunity to eam our allowed retum in a period when groMh rates in investment in plant and operating expenses outpacc groMh in encrgy salcs, and whcthcr our current spcnding levcls are both neccssary and immcdiatc to provide safc and rcl iablc scrvice to our customers. We may also seek an order from the UTC allowing for the defenal for later recovery of ongoing costs associated with AML Accounting Order to DeJbr Existing l|'ashington Eleclric Meters In March 20 I 6, the UTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value ofour existing Washington electric meters for the opportunity for later recovery. This accounting treatment is related to our plans to replace approximately 253,000 of our cxisting clcctric mcters with ncw two-way digital mctcrs and the rclated softwarc and support scrviccs through our AMI projcct in Washington Statc. Replacement ofthe meters is expected to begin in the second halfof20l 7. The prudence of the overall AMI project and ultimate recovery of the regulatory assets and the costs of the new meters will be addressed in a future regulatory proceeding. The undepreciated value estimated for the existing meters is approximately $ I 9.1 rrillion. For ratemaking purposes, the existing electric meters won't be recorded as regulatory assets until they are physically removed from service, but for GAAP purposes, they are regulatory assets upon tlre commitment by management to retire the meters. Idaho General Rale Cases 201 5 General Rale Cases In Dccember 20 I 5, the IPUC approved a settlcment agrccmcnt betwccn Avista Utilities and all interestcd partics rclatcd to our clcctric and natural gas gcneral rate cases, which were originally filed with the IPUC on June I , 20 I 5. New rates were effective on January I , 20 I 6. The settlement agreement is designed to increase annual electric base revenues by $ I .7 million or 0.7 percent and annual natural gas base revenues by $2.5 million or 3.5 percent. The settlement is based on an ROR of 7.42 percent with a common equity ratio of 50 percent and a 9.5 percent ROE. Thc settlcment agrecmcnt also reflects the following: . the discontinuation ofthe after-the-fact eamings test (provision for eamings sharing) that was originally agreed to as part ofthe settlement of orer 2012 electric and natural gas general rate cases, and . the implementation of electric and natural gas Fixed Cost Adjustment mechanisms, as discussed below. 20 I 6 General Rate Cases In December 20 I 6, the IPUC approved a settlement agreement between us and other parties in our electric general rate case, concluding our Idaho electric general rate case originally fi led in May 20 I 6. New rates took effect on January I , 201 7 under the settlemen t agreement. We did not fi le a natural gas general rate case in 20 I 6. The settlement agreement increases annual electric base rates by 2.6 percent (designed to increase annual electric revenues by $6.3 million). The settlement revenue increase is based on a ROR of7.58 percent with a common equity ratio of50 percent and a 9.5 percent ROE. 36 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 43 of 177 Table of Contcnts AVISTA CORPORATION In addition to the agreed upon increase in electric revenues to recover costs primarily driven by our increased capital investments in infrastructure to serve customcrs, the scttlcment agrccmcnt includcs the continued rccovery ofapproximatcly $4.1 million in costs rclatcd to thc Palouse Wind Project through thc PCA mechanism rather than through base rates. In ouroriginal requestwe requested an overall increase in base electric rates of6.3 percent (designed to increase annual electric revenuesby $15.4 mitlion), eflective January l, 201 7. Our original request was based on a proposed ROR of7.78 percent with a corlmon equity ratio of50 percent and a 9.9 percent ROE. Oregon Generul Rate Cases 201 3 General Rate Case In January 2014, thc OPUC approvcd a scttlcment agrccment in ournatural gas gcncral ratc case (originally filcd in August 201 3). As agreed to in the settlement, newrateswere implemented in two phases: February 1,2014 and November 1,2014. Effective February 1,2014, rates increased forOregon natural gas custoDlerson abilled basisby an overall 4.4 percent (designed to increase annual revenuesby $3.8 million). EffectiveNovember l,20l4,rates for Oregon natural gas customers were to increase on a billed basis by an overall I .6 percent (designed to increase annual revenues by S I .4 million). The billed rate increase on November I , 20 I 4 was dependent upon the completion ofProject Compass and the actual costs incurred through September 30, 2014,and the actual costs incured through June 30,2014 related to the Company's Aldyl A distribution pipeline replacement program. hoject Compass was completed in February 2015. The November l, 2014 rate increase was reduced from $ I .4 million to $0.3 million due to the delay of Project Compass. The approved settlement agreement provided an authorized ROR of7.47 percent, with a common equity ratio of48 percent and a 9.65 percent ROE. 20 I 4 General Rdte Case In March 2015, we filed an all-party settlement agreementwith the OPUC related to ournatural gasgeneral ratecase, which wasoriginally filed in September 20l4.The settlement agreement was designed to increase base natural gas revenues by $5.3 million. Included in this base rate increase is $0.3 million in base revenues that we were already receiving from customers through a separate rate adjustment. Therefore, the net increase in base revenues was $5.0 million, or 4.9 percent on a billed basis. The pa(ies requested that new retail rates become effective on April | 6,2015 . On April 9, 20 I 5, the OPUC issued an Order approving the scttlemcnt agrcement as filcd. This settlement agreement provided for an overall authorized ROR of 7.5 16 percent with a common equity ratio of 5 I percent and a 9.5 percent ROE. 201 5 General Rale Case On February 29,2016, the OPUC issued a preliminary order (and a final order on March I 5, 201 6) concluding our natural gas general rate case, which was originally filed with OPUC in May 2015. The OPUC orderapproved ratesdesigned to increase overall billed natuml gasratesby4.9 percent (designed to increase annual natural gas revenues by $4.5 million). New rates went into efect on March l, 20 1 6. The final OPUC order incorporated two partial settlement agreements which were entered into during November 20 I 5 and January 20 I 6. The OPUC order provided an authorized ROR of 7.46 percent with a common equity ratio of 50 percent and a9.4 percent ROE. The November 201 5 partial settlement agreement, approved by the OPUC, included a provision for the implementation of a decoupling mechanism, similar to the Washington and Idaho mechanisms dcscribed bclow. Scc further dcscription and a summary of the balances recorded undcr this mcchanism below. 2016 General Rute Case On November 30, 20 1 6 we filed a natunl gas general rate case with the OPUC. We have requested an overall increase in base natural gas rates of 1 4.5 percent (designed to increase annual natural gas revenues by $8.5 million). Our request is based on a proposed ROR of7.83 percent with a common equity ratio of50 pcrcent and a 9.9 pcrcent ROE. Thc OPUC has up to I 0 months to revicw ourrcqucst and issue a decision. Alaska Electric Lisht and Pob,er Compan! Alaska General Rate Case In Septcmbcr 201 6, AEL&P filed an clcctric gcneral ratc case with the RCA. AEL&P was grantcd a rcfundablc interim base ratc increase of 3.86 pcrccnt (designed to increase electric revenues by $ I .3 million), that took effect in November 20 I 6. tt Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 44 of 177 Table of Contonts AVISTA CORPORATION AEL&P has also requested a permanent base rate increase ofan additional 4.24 percent (designed to increase electric revenues by $ I .5 million), which, if approved, could take effcct in February 2018. This rcpresents a combined total ratc incrcase of8.l pcrccnt (designed to increase electric rcvenues by $2.8 million). Included in the general rate case are additional annual revenues of$2.9 million from the Greens Creek Mine, which offsets a portion ofthe rate increase to retail customers that would otherwise occur. The RCA must rule on permanent rate increasc requcsts within 450 days (approximatcly I 5 months) from the date offiling, unless othcrwisc cxtcnded by consent ofthe parties. The statutory timeline for the AEL&P GRC, with the consent ofthe parties, has been extended to February 8, 20 I 8. The rate request is based largely on the addition ofa new backup generation plant (lndustrial Blvd. Plant) to rate base. Avista Utilities Purc hased Gas Adj ustments PGAs are designed to pass through changes in natural gas costs to Avista Utilities'customers with no change in gross margin (operating revenues less resource costs) or net income. [n Oregon, we absorb (cost or benefit) I 0 percent ofthe difference between actual and projected natural gas costs included in retail ratcs for supply that is not hcdged. Total nct dcferred natural gas costs among all jurisdictions wcrc a liability of$30.8 million as ofDecember 3 l, 20 I 6 and a liability of$ I 7.9 million as ofDecember 3 I , 20 I 5, and these delerred natural gas costs balances represent amounts due to customers. The following PGAs went into effect in our variousjurisdictions durin g2014,201 5 and 20 I 6: Jurisdiction PGA Effective Datc Percentage Increase / (Decrease) in Billed Ratcs Washington Novemberl,20l4 Novemberl.20l5 Novemberl,20l6 1.2% (r5.0)% (8.0)% Idaho November l, 20 I 4 Novemberl.20l5 Novemberl,20l6 (2.1)o/o (t4.s)% (7.8)o/o Oregon Novemberl.20l4 Novemberl,20l5 Novemberl.20l6 8.3% (t4.t)% (6.0)% Power Cost Deferrals and Recovery Mechanisms The ERM is an accounting method used to track certain differences between Avista Utilities'actual power supply costs, net ofwholesale sales and sales of fuel, and the amount included in base retail rates for our Washington customers. Total net deferred power costs under the ERM were a liability of$2 1.3 millionasofDecember3l,20l6comparedtoaliability$l8.0millionasofDecember3l,20l5,andthesedefenedpowercostbalancesrepresentamounts due to customers- The difference in net power supply costs under the ERM primarily results from changes in: . short-term wholesale market prices and sales and purchase volumes, . the level and availability ofhydroelectric gencration, . the level and availability ofthermal generation (including changes in fuel prices), and . retail loads. Undcr the ERM, Avista Utilitics absorbs the cost or rcccivcs thc bcncfit from thc initial amount ofpower supply costs in cxcess ofor bclow the level in rctail rates, which is referred to as the deadband. The annual (calendar year) deadband amount is $4.0 million. 38 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 45 of 177 Table of Contents AVISTA CORPORATION The following is a summary of the ERM Annual Power Suonlv Cost Variabilitv within +/- $0 to $4 million (deadband) higherby $4 million to $10 million lower by 54 million to $ l0 million higher or lower by oler S I 0 million Dcfmcd for Futurc Surchrge or Rebate to Customers Expense or Benefit to the Compmy 0% 50,'/u 75% 90% t00% 50% 25% t0% Under the ERM, Avista Utilities makes an annual filing on or before April I of each year to provide the opportunity for the UTC staffand other interested parties to review the prudence ofand audit the ERM defened power cost transactions for the prior calendar year. We made our annual filing on March 3 I , 20 I 6. The ERM provides for a 90-day review period for the filing; however, the period may be extended by agreement ofthe parties or by UTC order. The 20 1 5 ERM deferred power costs transactions were approved by an order from the UTC. Avista Utilities has a PCA mechanism in Idaho that allows us to modiff electric rates on October I ofeach year with IPUC approval. Under the PCA mechanism, we defer 90 percent ofthe difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho customers. The October I ratc adjustmcnts rccovcr or rebate powcr supply costs dcfcrred during thc prcccdilg July-Junc twelve-month pcriod. Total nct power supply costs deferred under the PCA mechanism were a liability of $2.2 million as of Decembet 31, 2016 compared to an asset of $0.2 million as of December3l,20l5. Decoupling and Earnings Sharing Mechanisms Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each ofAvista Utilities'jurisdictions, each month Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes, rather than kilowatt hour and therm sales. The difference between revenues based on the number ofcustomers and revenues based on actual usage is defened and either surcharged or rebated to customers beginning in the following year. Washingtorr Decoupling and Earnings Sharing In Washington, the UTC approved our decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 201 5. Electric and natural gas decoupling surcharge rate adjustments to customers are limited to 3 percent on an annual basis, with any remaining surcharge balance carried forward forrecovery in a future period. There is no limit on the [eve[ ofrebate rate adjustments. The decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendar year, separate electric and natural gas eamings calculations are made for the prior calendar year. These eamings tests reflect actual decoupled revenues, normalized power supply costs and other normalizing adjustments. . IfwehaveadecouplingrebatebalancefortheprioryearandeaminexcessoftheauthorizedROR(7.32percentfor2015 and,7.29 percentfor20l6),the rebate to customers would be increased by 50 percent ofthe eamings in excess ofthe authorized ROR. . Ifwe have a decoupling rebate balance for the prior year and our eamings are equal to or less than the authorized ROR, only the base amount ofthe rebate to customers would be made. . Ifwe have a decoupling surcharge balance for the prior year and eam in excess ofthe authorized ROR, the surcharge to customers would be reduced by 50 percent ofthe eamings in excess ofthe authorized ROR (or eliminated). If50 percent ofthe eamings in excess ofthe authorized ROR exceeds the decoupling surcharge balance, the dollar amount that exceeds the surcharge balance would create a rebate balance for customers. . Ifwe have a decoupling surcharge balance for the prior year and our earnings are equal to or less than the authorized ROR, the base amount ofthe surcharge to customers would be made. See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms. Idaho FCA and Earaings Sharing Mechonisms In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling mechanisms) for an initial term of three years, beginning January I , 201 6. 39 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 46 of 177 Table of Contents AVISTA CORPORATION For the period 201 3 through 201 5, we had an after-the-fact eamings test, such that ifAvista Corp., on a consolidated basis for electric and natural gas opcrations in Idaho, eamcd morc than a 9.8 percent ROE, wc wcrc rcquircd to share with customers 50 pcrccnt of any eamings abovc thc 9.8 percent. There was no provision for a surcharge to customers ifour ROE was less than 9.8 percent. This after+he-fact eamings test was discontinued as part ofthe settlement ofour 20 I 5 Idaho electric and natural gas general rates cases (discussed in further detail above). Scc bclow for a surnmary ofcumulative balances under thc dccoupling and camings sharing mechanisms. Orego n Decoup I i ng Mechanism ln February 2016, the OPUC approved the implementation of a decoupling mechanism fornatural gas, similarto the Washington and Idaho mechanisms described above. The decoupling mechanism became effective on March I , 20 I 6. There will be an opportunity for interested parties to review the mechanism and recommend changes, ifany, by September 20 I 9. An eamings review is conducted on an annual basis, which is filed by us with the OPUC on or before June I of each year for the prior calendar year. In the annual eamings review, if we eam more than I 00 basis points above our allowed retum on equity, on e- third ofthe eamings above the I 00 basis points would be deferred and later retumed to customers. See below for a summary ofcumulative balances under the dccoupling and eamings sharing mechanisms. Cumulalive Decoupling and Earnings Sharing Mechanism Balances As ofDecember 31 ,2016 and December 3 I , 20 I 5, we had the following cumulative balances outstanding related to decoupling and eamings sharing mechanisms in our various jurisdictions (dollars in thousands): December 31, December 31, 2016 20 l 5 Washington Decoupling surcharge S 30,408 S 10,933 Provision for eamings sharing rebate (5,1 13) (3,422) Idaho Decoupling surclrarge $ 8,292 nla Provision for eamings sharing rcbatc (5,1 84) (8,8 14) Oregon Decoupling surcharge S 2,021 nla Provision for eamings sharing rebate (n/a) This mechanism did not exist during this time period. See "ResultsofOperations -Avista Utilities" forfurtherdiscussion ofthe amountsrecorded to operating revenues in 2015 and 2016 related to the decoupling and eamings sharing mechanisms. Results of Operations - Overall The following provides an ovewiew ofchanges in our Consolidated Statements oflncome- More detailed explanations are provided, parricularly for operating revenues and operating expenses, in the business segrnent discussions (Avista Utilities, AEL&P, Ecova - Discontinued Operations and the other businesses) that lollow thrs sectron. As discussed in "Executive Level Summary," Ecova was disposed of as of June 30,2014. As a result, in accordance u'ith GAAP, all of Ecova's operating results were removed from each Iine item on the Consolidated Staternents oflncome and reclassified into discontinued operations forall periods presented. The discussion ofcontinuing operations below does not include any Ecova amounts. For our discussion ofdiscontinued operations and Ecova, see "Ecova - Discontinued Operations." The balances included below for utility operations reconcile to the Consolidated Statements oflncome. Beginning on July 1 , 20 I 4, AEL&P is included in the overall utility results. 40 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1,Page47 ol 177 Table of Contents AVISTA CORPORATION 201 6 compared to 201 5 The following graph shows the total change in net income from continuing operations for the year ended December 3 I , 20 I 5 to the year ended December 3 I 201 6, as wcll as the various factors that caused such change (dollars in millions): s10s.5 s19 I s{s.1) 5{t0.6)9{7.e}9(12.5)su7.0, s3.9 S{s7.2) (Iilny Renu6 otherTotal cha4te in No{tlny t tiliv n@urce t tllivoBBtiry utilrv il6-t UlitvCosti Eipclg Dcpcdatlof,and OpratinfAmruaton €rpel6 and D.pEd.ton sdAm&atm ItroftTax ExEnENct In@a from Contnuing Opar8tlons Utility revenues decreased due to a decrease at Avista Utilities, partially offset by a slight increase in AEL&P's revenues. Avista Utilities'electric revenues decreased primarily due to lower retail electric loads caused by weather fluctuations throughout the period, a general rate decrease in Washington and lower wholcsale rcvcnucs rcsulting from lowcr volumes and lower wholesalc priccs. Thcse rcvcnuc dccreascs were partially offset by a gencral rate increasc in Idaho, the expiration ofthe ERM rebate to customers in Washington, increased decoupling revenues and a lower provision for eamings sharing. Natural gas revenues decreased primarily due to a decrease in wholesale activity ftoth a decrease in volumes and prices) and lower retail revenues due to lower prices, partially offset by highernatural gas heating volumes. The decreases in natural gas revenues were partially offset by general rate increases and higher decoupling rcvenues. Non-utility revenues decreased due to the long-term fixed rate electric capacity contract that was previousty held by Spokane Energy being transfened to Avista Corp. during the second quarter of20 I 5. The capacity revenue from this contract was included in non-utility revenues when it was held by Spokane Energy during the first quarter of20 I 5. After the transfer, the revenue is included in Avista Utilities' revenues. The contract expired during December 20 I 6. Utility resource costs decreased due to a decrease at Avista Utilities. Avista Utilities'electric resource costs decreased primarily due to a decrease in purchased powcr (from lower volumcs purchascd and lowcr wholcsale priccs) and a decrcase in fuel for generation (due in part to increased hydroelectric generation). Natural gas resource costs decreased due to a decrease in natural gas purchased resulting from lower volumes and lower prices. Utility operating expenses increased due to an increase at Avista Utilities and a slight increase at AEL&P. Avista Utilities' portion ofother operating expenses increased due to an increasc in medical costs of$3.0 million, clectric generation opcrating and maintenancc cxpenscs of$6.8 million, natural gas distribution expenses of$2.2 million and other postretirement benefit expenses of$2.0 million. Utility depreciation and amortization increased $ I 7.0 million driven by additions to utility plant. Income tax expense increased primarily due to an increase in income before income taxes, partially offset by excess tax benefits of$ 1.6 million during 201 6 relating to the settlement ofshare-based payment awards. See "Note 2 ofthe Notes to Consolidated FinanciaI Statements" for further discussion ofthe excess tax benefits. Our effective tax rate was 36.3 percent for both 20 I 6 and 20 1 5. Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 I 6 as compared to 20 1 5 and partially due to an increase in the ovcrall intcrest rate. Also, thcre werc losses on investments at our subsidiarics, mainly due to initial organization costs and management fees associated with a new investment. 4t tf)o0rl o frto| :, 0(Dr) (D o, o o mA'af Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 48 ot 177 Table of Contctrts AVISTA CORPORATION 2015 compared to 2014 The following graph shows the total change in net income from continuing operations for the year ended December 3 I , 20 I 4 to the year ended December 3 I 201 5, as wcll as thc various factors that causcd such change (dollars in millions): s21.3 s(1.7) ${1o.5)s(r0 si s(13.s1 s4.8 so.8 Tot.l Changc in lnamcTar Erpcn* Other Utility revenues increased due to an increase at AEL&P, partially oflset by a decrease at Avista Utilities. AEL&P's revenues increased $23.1 million due to a full year of AEL&P rcsults in 201 5 as compared to six months in 2014. Avista Utilitics' clcctric revcnucs dccrcased due to lower loads liom warmer wcather, which were partially offset by the decoupling mechanism in Washington, a general rate increase in Washington and a decrease in the provision lor eamings sharing (which is an offset to revenue). Avista Utilities'natural gas revenues decreased due to lower heating loads fiom significantly warmer weather that was partially offset by the decoupling mechanism in Washington and general rate increases. Other non-utility revenues decreased primarily due to the long-term fixed rate electric capacity contract that was previously held by Spokane Energy being transferred to Avista Corp. during the second quarter of20 I 5. The capacity revenue from this contract was included in non-utility revenues when it was held by Spokane Energy. After the transfer, the revenue is included in Avista Utilities' revenues. UtilityresourcecostsdecreasedduetoadecreaseatAvistaUtilities,partiallyoffsetbyanincreaseatAEL&P.AEL&P'sresourcecostsincreased$6.1 million due to a full year of AEL&P results in 20 I 5 as compared to six months in 2 014. Avista Utilities' electric resource costs decreased primarily due to a decrease in purchascd powcr (from lower volumes purchascd, partially offsct by higher wholesalc prices) and a dccreasc in othcr fuel costs. Natural gas resource costs decreased due to a decrease in natural gas purchased resulting from lower prices, partially offset by higher volumes. Utility operating expenses increased due to an increase at Avista Utilities and at AEL&P. Avista Utilities'portion ofother operating expenses increased $ I I . I million and AEL&P's other operating expcnses incrcased $5.3 million duc to a full year of AEL&P results in 2015 as comparcd to six months in 2014. Avista Utilities incurred increased generation, transmission and distribution operating expenses of$5.7 million, increased administrative and general wages of$9.8 million and increased pension and other post-retirement benefit expenses of$ I 0.0 million. In addition, Avista Utilities incurred incremental storm restoration costs associated with the November20l5 wind storm ofapproximately $2.9 million. These increases were partially offset by decreases in outside services and generation maintenance of $7.8 million. Utility depreciation and amortization increased due to additions to utility plant and the inclusion ofa full year ofAEL&P depreciation as cornpared to only six months of AEL&P in 20 14. Income tax expense decreased and our effective tax rate was 36.3 percent for 20 I 5 compared to 37.6 percent for 20 I 4. The decrease in expense was primarily due to a decrease in income before income taxes. Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 1 5 as compared to 20 I 4. Also, there were losses on investments at our subsidiaries. 42 Nd lnaomafrom Contnuing Opc6tlons 5(r6..) ttrilw Rarn6 t{d{rdllty Utill R@ure LnilltyOp.EUrE Utifity&6@r C6t! &pcnc OapEdatJo ud Amrtaat@ No{rultty Ops*angErrns rnd D.pGdrtioo 6nd Arcrtizalion o 3.:, 3.l ool o o ooo1oo, o o mql =. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 49 of 177 Table of Contcnts AVISTA CORPORATION NonCAAP Financial Measures The following discussion for Avista Utilities includes two financial measures that are considered "non-Gy'v{I' financial measures," electric gross margin and natural gas gross margin. In the AEL&P section, we include a discussion of electric gross margin, which is also a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure ofa company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. The presentation ofelectric gross margin and natural gas gross margin is intended to supplement an understanding ofoperating performance. We use these measures to determine whether the appropriate amount ofrevenue is being collected from our customers to allow for the recovery ofenergy resource costs and operating costs, as well as to analyzc how changcs in loads (due to weathcr, economic or othcr conditions), rates, supply costs and othcr factors impact our results ofoperations. In addition, we present electric and natural gas gross margin separately below for Avista Utilities since each business has different cost sources, cost recovery mechanisms and jurisdictions, such that separate analysis is beneficial. These measures are not intended to replace income fom operations as determined in accordance with GAAP as an indicator ofoperating performance. The calculations ofelectric and natural gas gross margins are presented below. Results of Ooerations - Avista Utilities 201 6 compared to 201 5 The following table presents Avista Utilities'operating revenues, resource costs and resulting gross margin for the years ended December 3 I (dollars in millions): Electric Natural Cas Intracompany Total 2016 2015 2016 201 5 20t6 201 5 2016 201 5 Operating revenues g Resource costs 996,959 $ 360,591 997 ,87 3 $ 400,91 0 470,894 $ 2'73.976 521,0t0 $ 35t,t0l (es,2ts) $ (95,2 l 5 ) (1 07,020) $ (l 07,020) 1,372.638 $ s1q 1{? 1 ,41 1 ,863 644,991 Gross margin $ 636,368 $ s96,963 $ 196,918 S 169,909 $$s 833,286 $ 766,872 The gross margin on electric sales increased $39.4 million and the gross margin on natural gas sales increased $27.0 million. The increase in electric gross margin was primarily due to general rate increases, lower resource costs, the implementation ofdecoupling in Idaho and a $6.6 million decrease in the provision for camings sharing (which is an offsct to revcnuc), partially offsct by lowcr clcctric loads. The wcather was warmcr than thc prior ycar in April and May (which decreased electric heating loads) and cooler than the prior year June through August (which decreased electric cooling loads). This was patially olfset by the effect ofweather that was cooler than the prior year in the first and fourth quarters (which increased electric heating loads). Overall, weather was warmer than normal for most ofthe year. Retail electric loads decreased as compared to prior year and the impact as compared to normal was mostly offset by decoupling mechanisms. See the table below for a comparison ofthe amounts recorded for decoupling by jurisdiction. For 20 I 6, we recognized a pre-tax bencfit of $ 5.1 million under thc ERM in Washington compared to a bencfit of $6.3 million for 20 I 5. The increase in natural gas gross margin was primarily due to general rate increases in each ofourjurisdictions, lower natural gas resources costs, the implementation ofdecoupling mechanisms in Idaho and Oregon, and higher natural gas retail loads. Weather was cooler in the first quarter (which increased natural gas heating loads), wanner in April and May (which reduced natural gas heating loads) and cooler in the fourth quarter (which increased natural gas heating loads) as compared to the prior year. The period June through September typically does not have significant natural gas retail loads. Overall, retail natural gas loads increased as compared to prior year and the irnpact as compared to normal (lower loads) was mostly offset by decoupling mechanisms. See the table below for a comparison ofthe amounts recorded for decoupling byjurisdiction. Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the condcnscd consolidated financial statcmcnts but arc includcd in thc separate results for clcctric and natural gas prcscnted bclow. 43 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 50 of 1 77 Table of Contents AVISTA CORPORATION The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the years ended December 3 I (dollars in millions and MWlrs in thousands): Electric Operating Reverues (1il)l li\i6 \ l,i i, \lrix: llr?! SlllL sr: r sl:i III II \_x i \\:',tit {tt: II:Ir BtirJctrtr$ c or.+rrcrcr'$ \rr.\r:ttr$ r(\r*.\cs''{t s.,.\,Ji oi r$c\ o'\N{ \\\ tot6 I :{}tj (l) Othcrclcctricrcvcnuesinthcgraphabovcincludespublicstrectandhighwaylighting,whichisconsidcrcdpartofrctailclcctricrcvenucs. Electric Energ-v lllWh Sales .1.SlL 3.37r R,;ls\crrrr'r\C orrrrr*rcr$\n0ot"to\frftt'\c='lt\e ::016 I :tl I -s 44 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule ', , Page 51 ot 177 il : ll{j .i" l,)7 :. r.r:l.'Ir.t t.7n.r l.xtl Table of Contents AVISTA CORPORATION The fotlowing table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility electric operating revenues for the years ended December 3 t (dollars in thousands): Elcctric Operating Revenues 201 6 201 5 Washington Decoupling surcharge $ 11,324 $ 4,740 Pmvision for eamings sharing (l ) 221 Q,423) Idaho Decoupling surcharge $ 6,025 nla Provision foreamings sharing (2) 7ll (2,198) (l ) The provision for eamings sharing in Washington in 201 6 resulted from a $2.5 mill ion reduction in the 20 I 5 provision for eamings sharing (which increased 20 I 6 revenues) offset by a $2.3 million provision for eamings sharing for 20 I 6 electric operations. (2) The provision for eamings sharing in Idaho in 20 I 6 resulted from a reduction in the 20 I 5 provision for eamings sharing (which increased 20 I 6 revenues). Beginning in 20 I 6 there is no longer an eamings sharing mechanism in Idaho. (n/a) This mechanism did not exist during this time period. Total electric revenues decreased $0.9 million for2016 as compared to 2015, affected by the following: . a $3.0 million decrease in retail electric revenues due to a decrease in total MWhs sold (decreased revenues $9.5 million), partially offset by an increase in revenue per MWh (increased revenues $6.5 million). " The increase in revenue per MWh was primarily due to a general rate increase in Idaho and the expiration of the ERM rebate to customers in Washington, partially offset by a general rate decrease in Washington. . The decrease in total retail MWhs sold was the result of weather that was cooler in the first quarter (higher electric heating loads), warmer in April and May (lower electric heating loads), cooler June tlrrough August (lower electric cooling loads) and cooler in the fourth quarter (higher electric heating loads) as compared to the prior year (which overall decreased electric loads). Compared to 20 I 5, residential electric use per customer decreased I percent and commercial use per customer decreased 1 percent. Heating degree days in Spokane were I I pcrcent below normal and 3 pcrcent above 20 1 5. The impact from increased heating loads was offset by decreased cooling loads in the summer. 20 I 6 cooling degree days were 29 percent above normal (mostly in June). However, cooling degree days were 4l percent below the prioryear. The overall decrease in use percustomerwas partially offset by growth in the numberofcustomers. . There has been a decline in residential use per customer during the last three years and is primarily due to weather fluctuations but also due in part to energy efficiency measures adopted by customers. See "Item I . Business - Avista Utilities Operating Statistics" for the three-year summary of residential use per customer. . a $ I 5.2 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $5.5 million) and a decrease in sales prices (decreased revenues $9.7 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities. . a $4.6 million decrease in sales offuel due to a decrease in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For 20 1 6, $44.0 million ofthese sales were made to our natural gas operations and are included as intracompany revenues and resource costs. For 20 I 5, $50.0 million ofthese sales were made to ournatural gas operations. . a $ I 2.6 million increase in electric revenue due to decoupling, which reflected the implementation ofa decoupling mechanism in Idaho effective January 1,201 6 and lowerretail revenues in 2016 as compared to 2015. . a $6.6 million decrease in the electric provision for eamings sharing (which increases revenues) due to a $2.5 million reduction in the 201 5 provision for eamings sharing in Washington and a $0.7 million reduction in the 201 5 provision for eamings sharing in ldaho recorded in 2016. For 2016 electric operations, we recorded a $2.3 million provision for eamings sharing. 45 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule '1, Page 52 ot 177 Table of Contetrts AVISTA CORPORATION The following graphs present Avista Utilities' natural gas operating revenues and therms delivered for the years ended December 3 1 (dollars in millions and therms in thousands): Natural Cas Operntirg Rel'enues il.,!.j f,1.)"i l{$:{il.i lit Jl.+ trl{r S'r..8r ;:.I.: $:6. IIT Bg$!N\tl$\( cr*srct$$rt$o\ei'o\e Odltt \\\ :0lrl l0l -i (1) Othernatural gas revenues in the graph above includes intemrptible and industrial revenues, which are considered part ofretail natural gas revenues. Therms Delivrred ilff.J. l:l .itr,l.i I 7 ll{(t.561 l7t}.(,lj lltu.f{t, l7{.7r1: I l:.,na, lpT,llt { E*t'0*ttt*\C$rr$e{cr$\\b(Nr''{B 0th*\ t :fi!{r I :015 46 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 't, Page 53 of 177 Table of Contcnts AVISTA CORPORATION The following table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility natural gas operating revenues for the years ended December 3 I (dollars in thousands): Natural Gas Operating Revenues 20t6 2015 Washington Decoupling surcharge $ 8,191 S 6,004 Provision for eamings sharing (2,7 67) Idaho Decoupf ing surcharge $ 2,206 n/a Provision for eamings sharing nla Oregon Decoupling surcharge 1,912 nla Provision for eamings sharing (n/a) This mechanism did not exist during this time penod. Total natural gas revenues decreased $ 5 0.1 rnillion for 20 I 6 as compared to 20 I 5 due to the following: . a $3.4 million decrease in retail natural gas revenues due to lower retail rates (decreased revenues $ I 8.4 million), partially offset by an increase in volumes (increased revenues $15.0 million). . Lower retail rates were due to PGAs, which passed through lower costs ofnatural gas, partially offset by general rate increases. . We sold more retail natural gas in 20 I 6 as compared to 201 5 primarily due to cooler weather in the first and fourth quarters, as well as customcr groMh. Comparcd to 20 I 5, rcsidcntial usc pcr customcr incrcascd 5 pcrccnt and commcrcial usc pcr customcr incrcased 3 pcrccnt Heating degree days in Spokane were I I percent below h i storical average for 20 I 6, and 3 percent above 20 I 5. Heating degree days i n Medford were I 2 percent below historical average for 20 I 6, and 3 percent above 20 I 5. . a $50.8 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues S22.8 rnillion) and a decrease in volumes (decreased revenues $28.0 million). In 2016,$51.2 million ofthese saleswere made to ourelectric generation operationsand are included as intracolnpany revenues and resource costs. In 20 I 5, $57.0 million ofthese sales were rnade to our electric generation operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirements and liom resource optimization afe accounted for through the PGA mechanisms. . a 56.3 millron increase fornatural gas decoupling revenues due primarily to the implementation ofdecoupling mechanisms in ldaho and Oregon, as wcll as an incrcasc in the dccoupling surchargc in Washington. . a $2.8 million increase in the provision for eamings sharing (which decreases revenues) representing the 20 I 6 provision for Washington natural gas operati ons. The following table presents Avista Utilities'average number ofelectric and natural gas retail customers for the years ended December 3 I : Electric Customcrs Narural Gas Customers 2016 201 5 201 6 201 5 Residential Commercial htemrptible Industnal Public street and highway lighting Total retail customers 3 30,699 41,785 32',7,057 4t,296 l ,353 529 370,235 300,883 34,868 37 255 296,005 34,229 35 261t,342 558 374,384 336,043 330,530 47 Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 54 ot 177 Ir&f-es$sE AVISTA CORPORATION Thc following graphs prcscnt Avista Utilities'rcsourcc costs for the years endcd Dcccmber 3 I (dollars in millions): Electric Resource Costs $lu, {' t'l-llI I 'litlil t{!llr' tl l('{ ')t7:.{rI t+,,:${r rIr tNt" lrtsc\rosco .;C$t(la$iil1 irr$ ctt*u !){\c{ \trt"\ i$t Ot\rct I t{}to I :{.rti Naturnl Gas Resource (lo$t$ s.i.l I 5 1'l{ I 1 tl.r (t Nalurll sas purcltilsrd Otlrcr :0t6 :{Jl5 Total resource costs in the graphs above include intracompany resource costs of$95.2 million and $ I 07.0 million for 20 I 6 and 20 I 5, respectively. Total electric resource costs decreased $40.3 million for 20 I 6 as compared to 20 I 5 due to the following: . a $26.1 million dccrcase in powerpurchascd duc to a decrease in thc volume ofpowerpurchases (decreased costs $9.3 million) and a decrease in wholesale prices (decreased costs $l 6.8 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities. . a $14.8 million decrease in fuel forgeneration primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation) and a decrcasc in natural gas fuel prices. . a $7.5 million decrease in other fuel costs. . a $3.0 million decrease from amortizations and deferrals ofpower costs. . a $5.6 million increase in other electric resource costs primarily due to a benefit that was recorded during 20 I 5 related Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-I7-_ M. Thies, Avista 48 Schedule 1, Page 55 of 177 tr Table of Contents AVISTA CORPORATION to a capacity contract ofSpokane Energy. This benefit was mostly deferred for probable future benefit to customers through the ERM and PCA. . a S5.4 million increase in otherregulatory amortizations. Total natural gas resource costs decrcased $ 77.1 million for 201 6 as comparcd to 201 5 due to following: . an $80.1 million decrease in natural gas purchased due to a decrease in the price ofnatural gas (decreased costs $52.6 million) and a decrease in total therms purchased (decreased costs $27.5 million). Total therms purchased decreased due to a decrease in wholesale sales, partially offset by an increase in retail sales. . a $ 1.6 million decrease from amortizations and deferrals ofnatural gas costs. This reflects lower natural gas prices and the deferral oflower costs for future rebate to customers, as well as current rebates to customers through PGAs. . a $4.6 million increase in otherregulatory amortizations. 2015 compared to 2014 ThefollowinggraphspresentsAvistaUtilities'operatingrevenues,resourcecostsandresultinggrossmarginfortheyearsendedDecember3l (dollarsin millions): Electric Natural (ias Intracompany Total 20t5 20t4 201 5 2014 201 5 2014 201 5 2014 Opcrating revenucs $ 997,873 $ Resource costs 400,910 998,988 $ ,11 8,541 52t,0t0 351 l0l 0 07,020) $ (r 07,020) (t42,ts3) $ (l 42,r 53) I ,41 I ,863 S 644,991 1,413,499 672,344 $ 556,664 $ 1q5 q56 Grossmargin j___M!]_s 580,447 $ 169,909 $ | 60,708 $$$ 766,872 $ 741 ,l 55 The gross margin on electric sales increased $ 1 6.5 million and the gross margin on natural gas sales increased $9.2 million. The increase in electric gross margin was primarily due to a general rate increase in Washington, lower net power supply costs and a S I .9 million decrease in the provision for eamings sharing (which is an offset to revenue). We experienced weatherthat was significantly wamerthan normal and warmerthan the prioryear, which decreased heating loads in the first quarter and increased cooling loads in the second quarter. Loads in the third quarter were slightly higher than the prior year. Loads for the fourth quarter were lower than the prior year, particularly for residential and industrial customers. For 20 I 5, the decoupling rnechanism in Washington had a positive effect on each ofelectric revenues and gross margin as did the decrease in the overall provision for eamings sharing (see the details by jurisdiction in the table below). For20l5,we recognized apre-tax benefit of $6.3 million underthe ERM inWashington compared to abenefit of $5.4 million for 20 I 4. This change represents a decrease in net power supply costs primarily due to lower natural gas fuel and purchased power prices in 20 I 5, partially offset by lower hydroelectric generation (due to warm and dry conditions in the second and third quarters). The increase in natural gas gross margin was primarily due to a decrease in natural gas resource costs and a decrease in the provision for eamings sharing, partially offset by a decrease in natural gas rcvenues. The decrease in natural gas revenues resulted from lower heating loads primarily from significantly warmer wcather that was partially offsct by gencral ratc incrcascs. Thc eamings impact ofthc decreasc in heating loads was partially offset by the decoupling mechanism in Washington, which had a positive effect on natural gas revenues and gross margin (see the details by jurisdiction in the table below). Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric gcncration operations (as fucl for our gcneration plants). Thesc transactions arc eliminated in the prescntation oftotal results for Avista Utilitics and in thc consolidated financial statements but are reflected in the presentation ofthe separate results for electric and natural gas below. 49 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 56 ot 177 Table of Contents AVISTA CORPORATION The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the years ended December 3 I (dollars in millions and MWrs in thousands): Electric Operatin g Reven ues t:ii6 \iiX1 \: \l \ii..l \llll{ \il1'x st:? r $lix:Ir II ii tr: I s:r s I- Bc+Jc\+t'$ c rrrrrrrrr;rc\$ \.rirr:rti'i rttro\to''& \.,.\cr n\ f $t\ o$1c{ \\\ lot-s I :(rl{ (1) Otherelectricrevenuesinthegraphaboveincludespublicstreetandhighwaylighting,whichisconsideredpartofretailelectricrevenues. Electric Energy l\l\!h Sales 1. !7r i.n1r{3.cMr tcstnPtt\d C ostrrrcrcl$frtlttt\d f1l\ro\es'lrF I Itlt 5 I :t)lJ 50 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 57 of 177 -i 19?.i. I ll').i. t.tI t.!{tl Lli6tt Table of Contents AVISTA CORPORATION The following table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility electric operating revenues for the years ended December 3 I (dollars in thousands): Electric Operating Revcnues 201 5 2014 Washington Decoupling $ 4,740 nla Provision for eamings sharing (3,423) nla Idaho Decoupling n/a nla Provision for eamings sharing (2,198) (7,503) (n/a) This rnechanism did not exist during this time period. Total clcctric rcvenucs decrcascd $ I . I million for 20 I 5 as comparcd to 2014, aflectcd by thc following: . a S5.7 million increase in retail electric revenues due to an in crease in revenue per MWh (increased revenues $2 I .0 million), panially offset by a decrease in total MWhs sold (decreased revenues $15.3 million). The increase in revenue perMWh wasprimarily due to a general rate increase in Wash ington. Thc dccrcasc in total MWhs sold was primarily thc rcsult of wcathcr that was significantly warmcr than normal and warmcr than thc pnor year, which decreased the electric heatrng load in the tlrst quarter. Compared to 20 I 4, residentral electric use per customer decreased 5 percent and cornmercial use per customer decreased 2 percent. Heating degree days in Spokane were I 4 percent below normal and 1 0 percent below 20 I 4. The impact from reduced heating loads was partially offset by increased cooling loads in the summer. Year-to-date cooling degree days were I 4 I percent above normal and 28 percent above the prior year. . a $ I 0.9 million decrease in wholesale electric revenues due to a decrease in sales volumes (decreased revenues $2 I .9 million), partially offset by an increase in sales prices (increased revenues $ I I .0 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities. . a $0.9 million decrease in sales offuel due to a decrease in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For 20 I 5, $50.0 million ofthcsc sales wcrc madc to our natural gas opcrations and arc includcd as intracompany rcvcnucs and rcsourcc costs. For 20 I 4, $67.4 million ofthese sales were made to our natural gas operations. . a $4.7 million increase in electric revenue due to decoupling, which reflected decreased heating loads in the first and founh quarters, partially offset by incrcascd cooling loads in thc sccond and third quaftcrs. . a $ 1.9 million decrease in the provision for eamings sharing, primarily due to a decrease of$5.3 million for our Idaho electric operations, partially offsetby an increase of $3.4 million forourWashington electric operations. In 20l4,we recorded a provrsion foreamings sharing of$7.5 million for Idaho clcctric customcrswith $5.6 million rcprcscnting ourcstimatc for20l4 and $1.9 million reprcscnting an adjustmcnt to our20l3 cstimate. 5l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 58 of 177 Table of Contents AVISTA CORPORATION The following graphs present Avista Utilities'natural gas operating revenues and therms delivered for the years ended December 3 I (dollars in millions and therms in thousands): Natural Gas Operating Revenues $::8: ll')-i *1l{,i l !ito{: srx,.1(1'lr,-1 lI $l(' I II gcs\0cttlt{\C ot*$lctcrtt\rittt'\cr'lttr Otlrt \\\ :0t 5 Itll{ (i) Othernatural gas revenues in the graph above includes intemrptible and industrial revenues, which are considered part ofretail natural gas revenues. Therms Delivered rl(|l. I il J{:.{':(r l76r,li lrtt.|71 t?{,}rt t7.i.{{ril(|7.$ir{ I l('.?{x Bg*Senrr''i Conrrrretcrt\\,,1$t{ess\E {.)$\iJl I lot 5 I :01{ 52 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 59 of 177 I Table of Contents AVISTA CORPORATION The following table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are included in utility natural gas operating revenues for the years ended December 3 I (dollars in thousands): Natural Gas Operating Revenues 201 5 2014 Washington Decoupling $ 6,004 nla Provision for eamings sharing nla Idaho Decoupling nla Provision for eamings sharing (221) (n/a) This urechanism drd not exist during this time period. Total natural gas rcvcnucs dccrcascd 535.7 million for20l 5 as comparcd to 2014 duc to thc following: . a $ I 6.4 million decrease in retail natural gas revenues due to a decrease in volumes (decreased revenues $23.6 million), partially offset by higher retail rates (increased revenues$7.2 million). I{igherretail rateswere due to PGAs implemented in November20l4, which passed through higher costs ofnatural gas, and gcncral ratc cascs. This was parlially offsct by PGA ratc decrcases implcmcnted in Novcmbcr 20 I 5, u'hich passcd through lower costs. We sold less retail natural gas in 201 5 as compared to 2014 primarily due to weather that was warmer than normal and warmer than the prioryear. Compared to 2014, residential use per customerdecreased 9 percent and con.rmercial use per custollrer decreased 9 percent. Heating degree days in Spokane were l4 percent below historical average for20 1 5, and I 0 percent betow 2014. Heating degree days in Medford were I 5 percent below historical average for 20 I 5, and 4 percent above 20 I 4. . a 523.9 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues S90.4 rrillion), partially offset by an increase in volumes (increased revenues $66.5 million). In 2015, 557.0 million ofthese sales were made to our electric generation operations and are included as intracompany revenues and resource costs. In 2014,$74.7 million ofthese sales were made to our electric generation operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirements and from resource optirnization are accounted for through the PGA mechanisms. . a $6.0 mi llion increase for natural gas decoupling revenues due pn marily to significantly warmer than normal weath er and the impact on h eat ing loads. The following table presents Avista Utilities' average number ofelectric and natural gas retail customers for the years ended December 3 I : Electric Customers Narural Gas Customcrs 201 5 20t4 20r5 20 t4 Residential Commercial Interruptible Industri al Public street and highway lighting Total retail customers 327,057 4t,296 1,353 529 324, I 88 40,988 1,385 531 296,005 34,229 35 261 291,928 34,047 37 264 370,235 367,092 330,530 326,276 53 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 60 of 1 77 Table of Contents AVISTA CORPORATION ThefollowinggraphspresentAvistaUtilities'resourcecostsfortheyearsendedDecember3l (dollarsinrnillions): Electric Resource (losts $l*5 lr $l('.' ri tll(l$ '| 16.t \7t +$8: { ilt I fi.r 7IT lrot*S.* lrSc\rcss" gc$€lt$\'1'lr'c\ "ors L)$\cI trrre\ tor O*t'$ r0r5 r l0td Natural Gas Resource Costs i.lr7 7 t'ji r ! Sl" (' - -tr ? Naturrl gas purchirsctl ()thcr I :ol5 :{il{ Total resource costs in the graphs above include intracompany resource costs of$ I 07.0 million and $ I 42.2 million for 20 I 5 and 20 I 4, respectively. Total electric resource costs decreased $ I 7.6 million for 20 I 5 as compared to 20 I 4 due to the following: . an $ 1 8.3 million decrease in power purchascd due to a de crease in the volume of powcr purchases (decreascd costs $23.6 mi llion), partially offset by an increase in wholesale prices (increased costs $5.3 million). The fluctuation in volumes and prices was primarily the result ofour overall optimization activities. . a $4.4 million incrcase in fuel forgcneration primarily due to an incrcase in thermal generation (due in part to decrcased hydroelectric generation), partially offset by a decrease in natural gas fuel prices. . a $ 10.0 million decrease in other fuel costs. a $ | 4.2 million increase from amortizations and deferrals ofpower costs. a $7.7 million decrease in other electric resource costs primarily due to the benefit fiom a capacity contract ofSpokane Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista 54 Schedule 1, Page 61 ol '177 Table 0f Contcnts AVISTA CORPORATION Energy, which was mostly deferred for probable future benefit to customers through the ERM and PCA. Total natural gas resource costs decreased $44.9 rnillion for 20 I 5 as compared to 20 I 4 due to the following: . a $66.1 mill ion dccrcasc in natural gas purchascd due to a decrcase in thc pricc of natural gas (decrcased costs $ I 3 8.3 million). patially offsct by an increase in total therms purchased (increased costs $72.2 million). Total therms purchased increased due to an increase in wholesale sales, partially offset by a decrease in retail sales. . a $21.8 rnillion increase from arnortizations and deferrals ofnatural gas costs. This reflects lowernatural gas prices and the deferral oflowercosts for future rebate to customers. Results ofOperations - AIaska Electric Liqht and Power Comoany AEL&P was acquired on July | , 2014 and only the results for the second halfof20 I 4 are included in the actual overall results ofAvista Corp. The discussion below is only for AEL&P's eamings that were included in Avista Corp.'s overall eamings. 2016 compared to 201 5 Net income for AEL&P was $8.0 million for thc ycar endcd Deccmber 3 l, 201 6, comparcd to $6.6 million for 2015. The incrcase in camings for 2016 was primarily due to an increase in gross margin and an increase in equity-related AFUDC (increased eamings) due to the construction ofan additional back-up generation plant which was cornpleted during the fourth quarter of20 I 6. The increase in gross margin was primarily relatcd to a dccrcase in costs associatcd with thc Sncttisham hydroclectric projcct (due to a refinancing transaction during the second halfof20 I 5 which lowered interest costs under the take-or-pay power purchase agreement), as well as an interim rate increase effective in November 20 I 6. These were partially offset by a slight decrease in sales volumes to commercial and govemment customers and an increase in other resource costs. AEL&P has a relatively stable load profile as it does not have a large population ofcustomem in its service territory with electric heating and cooling requirements; therefore, its revenues are not as sensitive 10 weather fluctuations as Avista Utilities. However, AEL&P does have higher winter rates for its customers during the peak period ofNovember through May ofeach year, which drives higher revenues during those periods. 2015 compared to 2014 Net income for AEL&P was $6.6 million for the year ended December 31,2015, compared to $3.2 million for the second half of 2014. Since AEL&P was acquiredonJulyl,20l4,theresultsfor20l5arenotcomparableto20l4as20l4onlyincludesresultsforthesecondhalfoftheyear. Results ofOoerations - Ecova - Discontinued Operations Ecova was disposed ofas ofJune 30, 20 I 4. As a result, in accordance with GAAP, all ofEcova's operating results were removed from each line itern on the Consolidated Statements oflncome and reclassified into discontinued operations for all periods presented. In addition, since Ecova was a subsidiary of Avista Capital, the net gain recognized on the sale ofEcova was attributable to our other businesses. However, in accordance with GAAP, this gain is includcd in discontinucd opcrations; thcreforc, we includcd thc analysis ofthe gain in thc Ecova discontinucd opcrations scction rathcr than in the othcr businesses section. 2016 compared to 2015 and 2014 There was zero net income or loss for 20 I 6. Ecova's net income was $5.1 million fbr 20 I 5, compared to net income of $7 2.4 million for 20 I 4. The net incorne for 20 I 5 was primarily related to a tax benefit during 20 I 5 that resulted from the reversal ofa valuation allowance against net operating losses at Ecova because the net operating losses were deemed realizable under the current tax code. Additionally, there were some minor true-ups to the gain recognized on the sale due to the settlement ofthe working capital and indemnification escrow accounts during 20 I 5. The results for 20 1 4 included $69.7 million ofthe net gain recognized on the sale ofEcova. Results of Operations - Other Businesses 201 6 compared to 201 5 The net loss from these operations was $3.2 rnillion for 201 6 compared to a net loss of $ I .9 million for 201 5. Net losses for 201 6 were primarily related an increase in losses on investments due to initial organization costs and management fees associated with a new investment, as well as an impairment recorded on a building we ov/n. This was partially offset by a slight decrease in corporate costs (including costs associated with exploring strategic opportunities) and a slight increase in net income at METALi* for the year-to-date. 55 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 62 ot 177 AVISTA CORPORATION 20 I 5 compared to 20 I 4 Thenet lossfrom these operationswas $1.9 million for20l5 compared to net income of $3.2 million for20l4.The decrease in net income cornpared to 2014 was primarily due to the settlement of the Califomia power markets litigation in 2014, where Avista Energy received settlement proceeds from a litigation with various Califomia parties related to the prices paid for power in the Califomia spot markets during the years 2000 and 2001 . This settlement resulted in arr incrcase in prc-tax camings of approximatcly $ I 5.0 million. This was partially offsct by a prc-tax contribution of $6.4 million of the procccds to the Avista Foundation. In addition, the decrease in eamings for 201 5 related to an increase in net losses on investments, partially offset by an increase in net income at METALI} and a slight dccrease in corporatc costs, including costs associatcd with cxploring strategic opportunitics. Accounting Standards to be Adooted in 2017 At this time, we are not expecting the adoption ofaccounting standards to have a material impact on our financial condition, results ofoperations and cash flows in 201 7. However, we will be adopting ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" in 201 8 upon its effective date. This is a significant ncw accounting standard that rcquircs an cxtensive amount oftimc and cffort to implemcnt. Wc currcntly cxpcct to usc a modificd retrospcctivc method of adoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospective application. The Company is not far enough along in tlte adoption process to determine the amount, ifany, ofcurnulative adjustment necessary. Since the vast majority ofAvista Corp.'s revenue is from rate regulated sales ofelectricity and natural gas to retail customers and revenue is recognized as energy rs delivered to these customers, we do not expect a significant change in operating revenues or net income due to adopting this standard. The Company is in the process ofreviewing and analyzing certain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural gas) but has not yet identified any significant differences in revenue recognition between current GAAP and the new revenue recognition standard. There are unresolved issues associated with irnplementing this standard, including the presentation ofCIACs, the presentation ofutility taxes on a gross basis and determining collectibility of sales to low income customers. We are monitoring utility industry implementation guidance as it relates to unresolved issues to determine ifthere will be an industry consensus regarding accounting and presentation olthese items. For information on accounting standards adopted in 20 I 6 and accounting standards expected to be adopted in future periods, see "Note 2 ofthe Notes to Consolidated Financial Statements." Critical Accounting Policies and Estimates The preparation ofour consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effcct on our consolidatcd financial statcmcnts and thus actual rcsults could diffcr fiom thc amounts rcportcd and discloscd lrcrcin. The following accounting policies represent those that our management believes are particularly important to the consolidated financial statements and require the use ofestimates and assumptions: Regulatory occounting, which requires that certain costs and/or obligations be reflected as deferred charges on our Consolidated Balance Sheets and are not reflected in our Consolidated Statements oflncome until the period during w'hich matching revenues are recognized. We also have decoupling revenue deferrals. As opposed to cost deferrals which are not recognized in the Consolidated Statements oflncome until they are included in rates, decoupling revenue is recognized in the Consolidated Statements oflncome during the period in which it occurs (i.e. during the period ofrevenue shortfall or excess due to fluctuations in customerusage), subject to certain limitations, and a regulatory asset/liabrlity is established which will be surcharged or rebated to customers in future periods. GAAP requires that for any altemative regulatory revenue program, likc dccoupling, rhc revcltue must be expectcd to be collccted from customcrs urithin 24 months ofthc dcfcrral to qualifu for rccognition in thc current period Consolidated Statement oflncome. Any amounts included in the Company's decoupling program that are not expected to be collected from customers within 24 rnonths are not recorded in the financial statements until the period in which revenue recognition criteria are met. This could ultimately result in more decoupling revenue being collected from customers over the life ofthe decoupling program than what is defened and recognized in the current period financial statements. We make estimates regarding the amount ofrevenue that will be collected within 24 months of dcfcnal. Wc also makc thc assumption that thcrc arc regulatory prcccdcnts for many of our rcgulatory itcms and that wc will bc 56 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 63 of 177 Table of Contents IrE!.e.-st-@t! AVISTA CORPORATION allowed recovery ofthese costs via retail rates in future periods. Ifwe were no longer allowed to apply regulatory accounting or no longer allowed recovery oftlrese costs, we could be required to recognize significant write-offs ofregulatory assets and liabilities in the Consolidated Statements of Income. See "Notes I and 20 ofth e Notes to Consol idated Financial Statements" for futher discussion of our regulatory accounti ng pol icy. Utility energy commodity derivative asset and liahility accounting, where we estimate the fair value of outstanding commodity derivatives and we offset energy commodity derivative assets or liabil ities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and losses on energy commodity transactions until the period ofdelivery. This accounting treatrnent is supported by accounting orders issued by the UTC and IPUC. Ifwe were no longer allowed to apply regulatory accounting or no longer allowed recovery ofthese costs, we could be required to recognize significant changes in fair value ofthese energy commodity derivatives on a regular basis in the Consolidated Statements oflncome, which could lead to significant fluctuations in net income. See "Notes I and 6 ofthe Notes to Consolidated Financial Statements" for further discussion ofour energy derivative accounting policy. . Interest tate swap derivative asset and liability accounting, where we estimate the fairvalue ofoutstanding interest rate swap derivatives, and U.S. Treasury lock agreements and offset the derivative asset or liability with a regulatory asset or liability. This is similar to the treatlnent ofenergy commodity derivatives described above. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest expense over the term ofthe associated debt. Ifwe no longer applied regulatory accounting or were no longer allowed rccovery ofthcsc costs, wc could bc rcquircd to rccognizc significant changes in fair valuc ofthcsc intcrcst ratc swap dcrivativcs on a rcgular basis in the Consolidated Statements oflncome, which could lead to significant fluctuations in net. income. . Pension Plans and Othcr Postretirement Benefit Plans, discussed in fu(her detail below. . Contingencie.s, related to unresolved regulatory, legal and tax issues for which there is inherent uncenainty for the ultimate outcome ofthe respective matter. We accrue a loss contingency if it is probable that an asset is impaired or a liability has been incured and the amount of the loss or impairment can be reasonably cstimatcd. Wc also disclosc losscs that do not mcct thcsc conditions for accrual, ifthcrc is a rcasonablc possibility that a potentral loss may be incurred. For all material contingencies, we have made a judgment as to the probability ofa loss occurring and as to whether or not the amount ofthe loss can be reasonably estimated. Ifthe loss recognition criteria are met, liabilities are accrued or assets are reduced. However, no assurance can be given to the ultimate outcome ofany particular contingency. See "Notes I and I 9 ofthe Notes to Consolidated Financial Statements" for further discussion ofour commitments and contingencies. Pension Plans and Aher Postrelirement Benefit Plans - Avista Utilities Wehaveadefinedbenefitpensionplancoveringsubstantiallyallregularfull+imeemployeesatAvistaUtilitiesthatv,/erehiredpriortoJanuary l,20l4.For substantially all regular non-union full-time cmployccs at Avista Utilitics who wcre hircd on or aftcr January I ,2O14, a dcfincd contribution 401 (k) plan replaced the defined benefit pension plan. The Finance Committee ofthe Board ofDirectors approves investment policies, objectives and strategies that seek an appropriate retum for the pension plan and it reviews and approves changes to the investment and funding policies. We have contracted with an independent investment consultant who is responsible for managing/monitoring the individual investment managers. The investment managers' performance and related individual fund performance is reviewed at least quarterly by an intemal benefits committee and by the Finance Committee to monitor compliance with our established investment policy objectives and strategies. Our pension plan assets are invested in debt securities and mutual funds, trusts and partnerships that hold marketable debt and equity securities, real estate and absolute retum funds. In seeking to obtain the desired retum to fund the pension plan, the investment consultant recommends allocation percentages by asset classes. These recommendations are reviewed by the intemal 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 invcstment allocation pcrccntagcs arc typically thc midpoint ofthc establishcd range. During 20 I 6, wc reviscd thc targct investmcnt allocation pcrccntagcs. See "Note I 0 ofthe Notes to Consolidated Financial Statements" for the target investment allocation percentages and further discussion ofthe revision. 57 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 64 ot 177 Trble of Contents AVISTA CORPORATION We also have a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to our executive officers and others whose benefits under the pension plan are reduced due to the application ofSection 4 I 5 ofthe Intemal Revenue Code of I 986 and the defenal ofsalary under deferred compensation plans. Pension costs (including the SERP)were $26.8 million for20l6, $27.1 million for20l5 and $14.6 million for2014. Ofourpension costs, approximately 60 percent are expensed and 40 percent are capitalized consistent with labor charges. The costs related to the SERP are expensed. Our costs for the pension plan arc detcrmined in part by actuarial formulas that are dependent upon numerous factors rcsulting from actual plan expcrience and assumptions offuturc experience. Pension costs are affected by among other things: . employee demographics (including age, compensation and length ofservice by employees), . the amount ofcash contributions we make to the pension plan, . the actual retum on pension plan assets, ' expected retum on pension plan assets, . discount rate used in determining the projected benefit obligation and pension costs, . assumed rate ofincrease in employee compensation, . life expectancy ofparticipants and otherbeneficiaries, and . expected method ofpayment (ump sum or annuity) ofpension benefits. Any changes in pension plan obligations associated with these factors may not be immediately recognized as pension costs in our Consolidated Statement of lncome, but we generally recognize the change in future years over the remaining average service period ofpension plan participants. .ds such, our costs recorded in any period may not reflect the actual level olcash benefits provided to pension plan participants. We revise the key assumption ofthe discount rate each year. In selecting a discount rate, we consider yield rates at the end ofthe year for highly rated corporate bond portfolios with cash flows from interest and maturities similar to that ofthe expected payout ofpension benefits. In 20 I 6, the pension plan discount rate (exclusive ofthe SERP) was 4.26 percent compared to 4.58 percent in 2O'l 5 and 4.21 percent in 20 I 4. These changes in the discount rate increased the projected benefit obligation (exclusive ofthe SERP) by approximately $27.7 mitlion in 201 6 and decreased the obligation by $3 1.0 million in 2015. The expected long-term rate ofretum on plan assets is reset or confirmed annually based on past performance and economic forecasts for the types of investmentsheld by ourplan. Weused an expected long-term rate ofretum of5.40 percent in2016,5.30 percent in 2015 and 6.60 percent in 2014.This change decreased pension costs by approximately $0.5 million in 2O16. The actual retum on plan assets, net of fees, was a gain of $43.2 rnillion (or 8. I percent)for2016, a loss of$4.3 million (or0.8 percent) for20l5 and a gain of$56.0 million (or I 1.6 percent) for2014. The following chart rcflects thc sensitivitics associated with a changc in certain actuarial assumptions by the indicatcd perccntagc (dollars in thousands): Change in Assumption Effect on Projected Benefit Obligation Effect on Pension CostActuarial Assumption Expected long-term retum on plan assets Expcctcd long-tcrm rctum on plan asscts Discount rate Discount rate (0.s)% 0.5 o/n (0.s)% 0.5 % 4',1 ,738 (42,462) $*$2,551 (2,ssl) 3,842 (3,441) + Changes in the expected retum on plan assets would not affect our projected benefit obligation. We provide certain health care and life insurance benefits for substantially all of our retired employees. We accrue the estimated cost of postretirement benefit obligations during the years that employees provide service. Assumed health care cost trend rates have a significant effect on the amounts reported for our postretiremcnt plans. A onc-percentage-point incrcase in the assumed health care cost trcnd ratc for cach ycar would increase our accumulated postretirement benefit obligation as ofDecember 3l ,2016 by $8.6 million and the service and interest cost by $ I .0 million. A one-percentage-point decrease in the assumed health 58 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 65 of 177 Table of Contetrts ,4VISTA CORPORATION care cost trend rate lor each year would decrease our accumulated postretirement benefit obligation as ofDecember 3 I , 20 I 6 by $6.7 million and the service and inlerest cost by S0.7 million. Liouidi(v and Caoital Resources Overall Liouiditv Avista Corp.'s consolidated operating cash flows are primarily derived from the operations ofAvista Utilities. The primary source ofoperating cash flows for Avista Utilitics is revcnues from salcs ofclcctricity and natural gas. Significant uscs ofcash flows from Avista Utilities includc the purchasc ofpowcr, fucl and natural gas, and payment ofother operating expenses, taxes and interest, with any excess being available for other corporate uses such as capital expenditures and dividends. We design operating and capital budgets to control operating costs and to direct capital expenditures to choices that support imfirediate and long{erm strategies, particularly for our regulated utility operations. In addition to operating expenses, we have continuing commitments for capital expenditures for construction and improvement of utility facilities. Our annual net cash flows from operating activities usually do not fully support the amount required for annual utility capital expenditures. As such, from time-to-time, we need to access long-term capital markets in order to fund these needs as well as fund maturing debt. See further discussion at "Capital Resources." We periodically file for rate adjustments for recovery ofoperating costs and capital investments and to seek the opportunity to eam reasonable retums as allowed by regulators. In December 20 I 6, the UTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with theUTC in February 2016. TheUTC orderdenied the Company'sproposed electric and natural gasrate increase requeststotaling $43.0 million. If this ordcr is not changcd as a rcsult ofrcconsidcration, rehearing orjudicial rcvicw, we cxpect it will lravc a ncgativc impact on our nct income in 20 I 7. Scc further details in the section "Regulatory Matters." For Avista Utilities, when power and natural gas costs exceed the levels currently recovered from retail customers, net cash flows are negatively affected. Factors that could cause purchased power and natural gas costs to exceed the levels currently recovered from our custorners include, but are not limited to, higher prices in wholesale markets when we buy energy or an increased need to purchase power in the wholesale markets, and a lack ofregulatory approval for higher authorized net power supply costs through general rate case decisions. Factors beyond our control that could result in an increased need to purchase power in the wholesale markets include, but are not limited to: . increases in demand (due to either weather or customer growth), . low availability ofstreamflows for hydroelectric generation, . unplanned outages at generating facilities, and . failure ofthird parties to deliver on energy or capacity contracts. Avista Utilities has regulatory mechanisurs in place that provide for the defen-al and recovery ofthe majority ofpower and natural gas supply costs. However, ifprices rise above the level currently allowed in retail rates in periods when we are buying energy, deferral balances would increase, negatively affecting our cash flow and liquidity until such time as these costs, with interest, are recovered from customers. In addition to the above, Avista Utilities enters into derivative instruments to hedge our exposure to certain risks, including fluctuations in commodity market prices, foreign exchange rates and interest rates (for purposes ofissuing long+erm debt in the future). These derivative instruments often require collateral (in the form ofcash or letters ofcredit) or other credit enhancements, or reductions or terminations ofa portion ofthe contract through cash scttlcment, in thc cvcnt ofa downgrade in the Company's crcdit ratings or changcs in markct priccs. In periods ofprice volatility, thc lcvel ofexposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit facilities and cash. See "Enterprise Risk Management - Demands for Collateral" below. We monitor the potential liquidity impacts of changes to energy commodity prices and other increased operating costs for our utility operations. We believe that we have adequate liquidity to meet such potential needs through our committed lines ofcredit. As of December 3 I , 201 6, we had $245.6 million of available liquidity under the Avista Corp. committed line of credit and $25.0 million under the AEL&P committed line of credit. With our $400.0 million credit faci lity that expires in April 202 I and AEL&P's $25.0 mi llion credit facility that expires in Novembcr 20 I 9, wc bclieve that we havc adcquate liquidity to mcct our nccds for the ncxt I 2 months. 59 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 66 of 177 Table of Contents AVISTA CORPORATION Review of Consolidated Cash Flow Statement Overall During 20 I 6, cash flows from operating activities were $3 5 8.3 million, proceeds from the issuance oflong+erm debt were $245.0 million (including a $70.0 million bridge loan that was repaid in December 201 6), net proceeds from our committed line of credit were $ 15.0 million and we received $67.0 million from the issuance ofcommon stock. Cash requirements included utility capital expendrtures of$406.6 million, the payment oflong-term debt of$ I 63.2 million (including the $70.0 million bridge loan), dividends of$87.2 million and cash paid forthe settlement ofinterest rate swap derivatives of$54.0 million. 201 6 compared to 201 5 Consolidated Ooeratins Activities Nct cash providcd by opcrating activiticswas 5358.3 million for20l6 comparcdto $375.6 million for2015. The dccrcasc in net cash provided by opcrating activities was primarily related to the cash settlement ofinterest rate swap derivatives in the third quarterof20l 6 totaling $54.0 million. The interest rate swap derivatives were settled in connection with the pricing offirst nrortgage bonds that were issued in Decernber 20 I 6. In addition, our accounts receivable balances increased during 20 I 6 (which reduces operating cash flow), due to higher sales during the fourth quader of20 I 6 due to colder weather as compared to the fourth quarter of20l 5 and due to the timing ofcolleclions. The cash flowdecreases were partially offsetby highernet income afternon-cash adjustments of $446.4 million in 20l6,compared to $392.3 million in 2015. There was also a decrease in collateral posted forderivative instruments in 2016 (primarily due to an increase in the fairvalue ofoutstanding energy commodity derivatives, which required less collateral) as compared to an increase in collateml posted during 20 I 5. Pension contributions were $ I 2.0 million for both 201 6 and 201 5. Net cash received from income tax refunds increased to $13.5 million for20l6 compared to $10.0 million for20l5.In addition,the incometax receivable increased S33.9 rnillion in 201 6. We are in a refund position with regards to income taxes because the Company generated a net operating loss for tax purposes in 20 I 6 primarily due to bonus depreciation on utility plant placed in service during the year and the settlement ofinterest rate swaps. The Company intends to carryback the net operating loss against prioryeartax retums and expects the net operating loss to be fully utilized through the carryback. Additionally, the Company generated $ 19.4 million of federal investment income tax credits in 2016; $9.6 million will be carried back against a priortax retum with the remaining $9.8 million to be carried forward to future federal tax periods. The provision fordeferred income taxeswas$124.5 million for20l6,compared to $51.8 million for20l5. The change in theprovision fordeferred income taxes was primarily related to deferred taxes on property, plant and equipment, investment tax credits associated with our capital projects, deferred taxes on the decoupling regulatory assets and defened taxes on interest rate swap derivatives. Consolidated Investing Activities Nct cash uscd in investing activities was $432.5 million for 2016, an incrcase comparcd to S387.8 million for 201 5. During 201 6, we paid $406.6 million for util ity capital expenditures, compared to $3 93.4 million for 20 I 5. In addition, during 20 I 6, our subsidiaries disbursed $ I 0. I mi llion for notes receivable to third parties and received $5.0 rnillion in repayments on these notes receivable. Our subsidiaries also made $7.8 million in investments and purchased buildings and otherproperty as investments for $5.3 million. During 20 I 5, wc rcceivcd cash procccds (relatcd to the scttlcmcnt ofthe escrow accounts) of$ I 3.9 million from thc sale ofEcova. Consolidated Financins Activities Net cash provided by financing activities was $72.2 million for 20 I 6 compared to net cash provided ol$0.5 rnillion for 20 I 5. In 20 I 6 we had the following signifi cant transactions: . borrowing of $70.0 million pursuant to a term loan agreement in August, which was used to repay a portion of the $90.0 million in first mortgage bonds that matured in August 20 I 6, 60 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 67 ot 177 Table of Coptcnts AVISTA CORPORATION issuancc and sale of$ I 75.0 million ofAvista Corp. first mortgage bonds in Deccmbcr 20 I 6, thc procceds ofwhich wcre uscd to repay the $70.0 million term loan, with the remainderbeing used to pay down a portion of ourcommitted line of credit, payment of $ I 63.2 million for the redemption and maturity of long{erm debt (including the $70.0 million term loan), increase in cash dividendspaid to $87.2 million (or$1.37 pershare)for20l6 from$82.4 million (or$1.32 pershare) for20l5. $ 15.0 million nct increase in the balance of our committed line of crcdit, and issuance of$67.0 million ofcommon stock (net ofissuance costs). Scc bclow for a list ofsignificant financing transactions occurring in 20 I 5 2015 compared to 2014 Consolidated Ooeratinq Activities Net cash provided by operating activities was $375.6 million for 20 I 5 compared to $267.3 million for 2O14. The increase in cash provided by operating activitieswasdue to highernet income afternon-cash adjustments of$392.3 rnillion in 20l5,compared to $348.2 million in 2014. The gross gain on tlre sale ofEcova of$0.8 million for 20 I 5 is deducted in reconciling net income to net cash provided by operating activities. The cash proceeds from the sale (which includes the gross gain) is included in investing activities. This is compared to the gross gain recognized in 20 I 4 of$ I 60.6 million. Netcashusedbyce(aincurrentassetsandliabilitieswas$4.1 millionfor20l5,comparedtonetcashusedof$50.0millionfor20l4.Thenetcashused during 20 I 5 primarily reflects cash outflows from changes in accounts payable, collateral posted for derivative instruments and accounts receivable. This was partially oflset by inflows from changes in natural gas stored and income taxes receivable. The provision for deferred income taxes rnas $5 I .8 million for 2015 compared to $ 144.3 million for 2014. The decrease in 2015 was primarily due to the combination ofimplementation by the Company ofupdated lederal tax tangible property regulations and increased deductions related to bonus depreciation in 20 14. Contributions to our defined benefit pension plan were $ 12.0 million for 201 5 cornpared to $32.0 million in 2014. Net cash received for incorne taxes was $ 10.0 million for 201 5 compared to net cash paid of $45.4 million for 2014. Consolidated Investins Activities Net cash used in investing activities was $387.8 million for20l 5, an increase compared to $l 03.7 million for2014. During 201 5, we received cash proceeds (re latcd to thc settlcmcnt of the escrow accounts) of $ I 3.9 million for the salc of Ecova. Wc rcceivcd thc majority of thc procccds ($229.9 million) from the sale ofEcova during 20 I 4. The proceeds received in 20 I 4 were used to pay offthe balance ofEcova's long-term borrowings and make payments to option holders and noncontrolling interests (included in financing activities). We also used a portion ofthese proceeds to pay our $74.8 million tax liability associated with the gain on sale and to fund common stock repurchases. Utility property capital expenditures increased by $67.9 million for20l5 as compared to 2014. During 20 I 4, we received $ I 5.0 million in cash (net ofcash paid) related to the acquisition ofAERC. Consolidated Financinq Activities Net cash provided by financing activities was $0.5 million for 201 5 compared to net cash used of $224.0 million for 2014. In 201 5 we had the following signifi cant transactions: . issuance and sale of $ I 00.0 million of Avista Corp. first mortgage bonds in December 201 5, . paymcnt of $2.9 mitlion for the redemption and maturity of longterm debt, . cashdividendspaidincreasedto$82.4million(or$l.32pershare)for20l5from$78.3million(or$l.27pershare)for20l4, . issuance of$1.6 million ofcommon stock (net ofissuance costs), and . repurchase of $2.9 million of ourcommon stock. In 20 I 4, we had the following significant transactions: 6l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 68 of '177 Table of Cont€nts AVISTA CORPORATION . issuance of $ I 50.0 million of long-term debt ($60.0 million of Avista Corp. first mortgage bonds, $75.0 rnillion of AEL&P first mortgage bonds and a $ I 5.0 million AERC unsecured note representing a term loan), . a decrease of $66.0 million in short+erm bonowings on Avista Corp.'s committed line of credit, . a decrease of $46.0 million on Ecova's committed line of credit with $6.0 million in payments throughout the year and $40.0 million related to the close ofthe Ecova sale, . payment of $40.0 million for the redemption and maturity of long+erm debt (primarily retated to AEL&P paying offits existing debt), . cash payments of$54.2 million to noncontrolling interests and $20.9 million to stock option holders and redeemable noncontrolling interests of Ecova related to the Ecova sal e in 2014, . issuance of $4.1 million of common stock (net of issuance costs) excluding issuances related to the acquisition of AERC. We issued $ I 5 0.1 million ofcommon stock to AERC shareholders, and this is reflected as a non-cash financing activity, . repurchase of$79.9 million ofourcommon stock during 2014 using the proceeds from oursale ofEcova, and . a $ I 6.2 million increasc in cash relatcd to thc fluctuation in thc balance ofcustomer fund obligations at Ecova. Canital Resources Our consolidated capital structure, including the current portion oflong-term debt and short-term borrowings, and excluding noncontrolling interests, consistedofthefollowingasofDecember3l,20l6and20l5(dollaninthousands): December 3 l. 201 6 December3l.20l5 AmouDt Pcrccnt of total Amount Perccnt of total Current portion oflong-term debt and capital leases Short-term borrowings Long-term debt to affiliated trusts Long{erm debt and capitaI leases Total debt Total Avista Corporation sh areholders' equ ity Total $3,287 120,000 5t,547 | ,67 8,7 17 0.1% $ 3.4% 1.5% 47.9% 93,167 105,000 51,547 1,480,1 l I 2.9% 3.2% t.6% 45.4% 1,853,551 I ,648,727 52.9% 47.t% 1,729,825 I,528,626 53.1% 46.9% $ 3,502,278 r 00.0% $ 3,258,451 100.0% Our shareholders' equity increased $ I 20.1 million during 20 I 6 primarily due to net income, the issuance of common stock and stock compensation net of minimum tax withholdings, partially offset by dividends. We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our indebtedness, both short-term and long-term, reduce the amount ofcash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividcnds and other rcquircmcnts. Committed Lines of Credit Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. We exercised a two-year option in May 2016 to extend the maturity of the credit facility agreement to April 2021 . As of December 3 I , 2016, we had $245.6 million of available liquidity under this line ofcredit. The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of"consolidated total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofDecember 3 I , 20 I 6, we were in compliance with this covcnant with a ratio of52.9 perccnt. AEL&P has a $25.0 million committed line of credit that expires in November 2019. As of December 3 l, 2016, there were no borrowings or letters of credit outstanding under this credit facility. The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of"consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P," (including the impact ofthe Snettisham obligation) to be greater than 67.5 percent at any time. As of December 3 l, 201 6, AEL&P was in compliance with this covenant with a ratio of 55.6 percent. 62 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 69 of 177 Table of Contents AVTSTA CORPORATION Balances outstanding and interest rates ofbonowings (excluding letters ofcredit) under Avista Corp.'s committed line ofcredit were as follows as ofand for the year ended December 3 I (dollars in thousands): 20t6 2015 2014 Balance outstanding at end ofyear $ I 20,000 $ I 05,000 $ I 05,000 Letters ofcredit outstanding at end ofyear $ 34,353 $ 44,595 $ 32.579 Maximum balance outstanding during the year $ 280,000 $ I 80,000 $ I 7l ,000 Average balance outstanding during the year S I 71,090 $ 95,573 $ 62,088 Average interest rate during the year 1.260 0.98% 1.01% Avcragc intcrcst ratc at cnd of ycar 1 .50% I .18% O.93o/o As ofDecember 3 I , 20 I 6, Avista Corp. and its subsidiaries were in compliance with all ofthe covenants oftheir financing agreements, and none ofAvista Corp.'s subsidiaries constituted a "significant subsidiary" as defined in Avista Corp-'s committed line of credit. Lo ng-Term Debt Borrowings In August 201 6, we entered into a term loan agreement with a commercial bank in the amount of $70.0 million with a maturity date of December 30, 201 6. We borrowed the entire $70.0 million available underthis agreement, which was used to repay a portion of the $90.0 rnillion of first mortgage bonds that matured in August 20 I 6. We repaid this term loan in its entirety in December using the proceeds from first mortgage bonds that were issued in December 2016. InDcccmbcr20l6,weissucdandsold$lT5.0millionof3.54pcrccntfirstmortgagcbondsducin205 lpursuanttoabondpurchascagrccmcntwith institutional investors in the private placement market. In connection with the pricing ofthe first mortgage bonds in August 20 I 6, the Company cash-settled seven interest rate swap derivatives (notional aggregate amount of$ I 25.0 rnillion) and paid a total of$54.0 million, which will be amortized as a cornponent ofinterest expense overthe life ofthe debt. The effective interest rate ofthe first mortgage bonds is 5.6 percent, including the effects ofthe settled interest rate swap derivatives and estimated issuance costs. The total net proceeds from the sale ofthe new bonds was used to repay the $70.0 million term loan and to repay a poftion ofthe borrowings outstanding undcr our 5400.0 million committcd linc of crcdit. Equity Transactions Stoc k Rep urc hase Pro groms During 20 I 4 and 20 I 5, Avista Corp.'s Board ofDirectors approved programs to repurchase shares ofour outstanding common stock. The number ofshares repurchased and the total cost ofrepurchases are disclosed in the Consolidated Statements ofEquity and Redeemable Noncontrolling Interests. The average repurchase price was $3 I .57 in 20 I 4 and $32.66 in 20 I 5. All repurchased sharcs reverted to the status ofauthorized but unissued shares. We did not repurchase any ofour outstanding common stock during 20 I 6. Equity Issuances In March 20l6,we entered into fourseparatesalesagency agreementsunderwhich Avista Corp.'ssales agentsmay o{ferandsell up to 3.8 million newshares of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29,2020.In 2016,1 .6 million shares were issucd undcrthesc agreemcnts rcsulting in total net procccds of $65.3 million, leaving2.2 million shares remaining to bc issued. In 20 I 6, we also issued $ 1 .7 million (nct ofissuance costs) ofcommon stock undcr thc cmploycc plans. 2 0 I 7 Liq aid ity Exp ectatio ns In thc sccond half of 201 7, we cxpect to issuc approximatcly $ I 10.0 million of long-term dcbt and up to $70.0 million of common stock in ordcr to fund planned capital expenditures and maintain an appropriate capital structure. After considering the expected issuances oflongterm debt and common stock during 20 I 7, we expect net cash flows from operating activities, together with cash available under our comrnitted line ofcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contructual commitments. 63 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-'I7-_ M. Thies, Avista Schedule 1, Page 70 ol 177 Table of Contcnts AVISTA CORPORATION Limitations on Issuances ofPreferred Stock and Fir$ Mortgage Bonds We are restricted under our Restated Articles oflncorporation, as amended, as to the additional preferred stock we can issue. As ofDecember 3 I , 20 I 6, we could issue $ I .5 billion ofadditional prcfcrred stock at an assumcd dividend rate of6.3 percent. We arc not planning to issue preferrsd stock. Under the Avista Corp. and the AEL&P Mortgages and Deeds of Trust securing Avista Corp.'s and AEL&P's first mortgage bonds (including Secured Medium-Term Notes), respectively, each entity may issue additional first mortgage bonds in an aggregate principal amount equal to the sum of: . 66-213 percent ofthe cost or fair value (whichever is lower) ofproperty additions ofthat entity which have not previously been made the basis of any application under that entity's Mortgage, or . an equal principal amount ofretired first mortgage bonds ofthat entity which have not previously been made the basis ofany application under that entity's Mortgage, or ' deposit ofcash. However, Avista Corp. and AEL&P may not individually issue any additional first mortgage bonds (with certain exceptions in the case ofbonds issued on the basis ofretired bonds) unless the pa(icular entity issuing the bonds has "net eamings" (as defined in the respective Mortgages) for any period of I 2 consccutivc calendar months out ofthc preceding I 8 calendar months that were at least twice the annual intcrcst requirements on that cntity's mortgagc securities at the time outstanding, including the first mortgage bonds to be issued, and on all indebtedness ofprior rank. As ofDecember 3 I , 20 I 6, property additions and retired bonds would have allowed, and the net eamings test would not have prohibited, the issuance of$ l 2 billion in aggregate principal amount of additional first mortgage bonds at Avista Corp. and $20.8 million at AEL&P. We believe that we have adequate capacity to issue first mortgage bonds to meet our financing needs over the next several years. Canital Exoenditures We are making capital investments in generation, transmission and distribution systems to preserve and enhance service reliability for our customers and replace aging infrastructure. The following table summarizes our actual and expected capital expenditures as ofand for the year ended December 3 I , 20 1 6 (in thousands): Avisra Udlities AEL&P 2016 Actual capital expenditures Capital cxpcnditures (pcr thc Consolidatsd Statcmcnt oiCash FIows) (l ) Expected total annual capital expenditures (by year) 2017 201 8 2019 390,690 405,000 405,000 405,000 15,954 6,900 6,700 12.900 (l) ActualannualcapitalexpenditurespertheConsolidatedStatementofCashFlowsmaydifferfromourexpectedannualaccrual-basiscapitalexpenditures due to the timing ofcash payments, the capital expenditure amounts accrued in accounts payable at the end ofeach period and the inclusion ofAFUDC in our expected amounts, but excluded from the cash flow amounts. Most ofthe capital expenditures at Avista Utilities are for upgrading our existing facilities and technology, and not for construction ofnew facilities. 64 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 71 ot 177 Table of Contcnts AVISTA CORPORATION The following graph shows the Avista Utilities'capital budget for2OlT (:apital Budget for..l,r'ista Utilities for 2017 (dollars in nrillions) Other Sll Enr rrtuntental $l I Ttfltrsntrssion & l)rstrrhutron Sl 37 Naturll Grs ${9 (icrrcratron $59 lnl'onrtat rorr Tec'hnolo5r' S5o Cu.stonrer Cro*th $47 These estimates ofcapital expenditures are subject to continuing review and adjustment. Actual capital expenditures may vary from our estimates due to factors such as changes in business conditions, construction schedules and environmental requirements. OII-Balance Sheet Arranpements As ofDecember 31,2016, we had $34.4 rnillion in letters of credit outstanding under our $400.0 million comrnitted line of credit, compared to $44.6 million as ofDecember 3 1,201 5. Pension Plan We contributed $ I 2.0 million to the pension plan in 20 I 6. We expect to contribute a total of $ I I 0.0 million to the pension plan in the period 201 7 through 202 1, with an annual contribution of$22.0 million over that period. The final determination ofpension plan contributions for future periods is subject to multiple variables, most ofwhich are beyond our control, including changes to the fair value ofpension plan assets, changes in actuarial assumptions (in particularthe discount rate used in determining the benefit obligation), or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed above. See "Note l 0 ofthe Notes to Consolidated Financial Statements" for additional information regarding the pension plan Credit Ratinss Our access to capital markets and our cost ofcapital are directly affected by our credit ratings. ln addition, many ofour contracts for the purchase and sale of energy commodities contain terms dependent upon our credit ratings. See "Enterprise Risk Management - Credit Risk Liquidity Considerations" and "Note 6 of the Notes to Conso lidated Financial Statements." The following table summarizes our credit ratings as of February 2l ,2017: Standard & Poor's (l)Moody's (2) C orporate/Issuer rati n g Senior secured debt Seniorunsecured debt BBB BBB A- Baal A2 Baal Standard & Poor's lowest "investment grade" credit rating is BBB-. Moody's lowest "investment grade" credit rating is Baa3. (l ) (2) 65 Schedule 'l , Page 72 ol 177 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Table of Contetrts AVISTA CORPORATION A security rating is not a recommendation to buy, sell or hold securities. Each security rating is subject to revision or withdrawal at any time by the assigning rating organization. Each security rating agency has its own methodology for assigning ratings, and, accordingly, each rating should be considered in the context ofthe applicable methodology, independent ofall other ratings. The rating agencies provide ratings at the request ofAvista Corp. and charge fees for their services. Dividends On February 3, 201 7, Avista Corp.'s Board of Drectors declared a quarterly dividend of $0.35 75 per share on the Company's common stock. This was an increase of$0.0 I 5 per share, or 4.4 percent from the previous quarterly dividend of$0.3425 per share. See "Itern 5. Market for Registrant's Cornmon Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a detailed discussion of our dividend policy and the factors which could limit the payment ofdividends. Contractual Oblisatio ns The following table provides a summary of our future contractual obligations as of December 3l , 201 6 (dottars in millions): 201't 201 8 2019 2020 202t Thereafter Avista Utilities: Long-term debt maturities Long-term debt to affiliated trusts hterest payments on long-term debt (l ) Shon+erm borrowings Energy purchase contracts (2) Operating lease obligations (3) Othcr obligations (4) Information technology contracts (5) Pension plan funding (6) Unsettled interest rate swap derivatives (7) AERC (consolidated) total contractual commitments (8) Avista Capital (consolidated) total contractual commitments (e) Total contractual obl i gations 63 $273$ 70 252 I 29 I 22 54 t6 $90$s2$1,124 52 836 't,125 2 189 $ 80 120 298 I 34 2 22 t2 228 33 3l l5r l5 126 l5 (l) 295 5658 32 27 2222 (2) 22 (3) l6 8 4487 $ s93 g 726 $ 471 $ 332 $ 247 $ 3,626 (1 ) Represents our estimate ofinterest payments on long-term debt, which is calculated based on the assumption that all debt is outstanding until maturity. [ntercst on variable ratc debt is calculatcd using the rate in effect at Dccember 3 l, 20 I 6.(2) Energy purchase contracts were entered into as part ofthe obligation to serve our retail electric and natural gas customers' energy requirements. As a result, costs are generally recovered either through base retail rates or adjustments to retail rates as part ofthe power and natural gas cost adjustment mechanisms.(3) Includes the interest component ofthe lease obligation. (4) Rcprcsents operational agrccmcnts, scttlements and other contractual obligations for our generation, transmission and distribution facilitics. Thcse costs are generally recovered through base retail rates. (5) Includes information service contracts which are recorded to other operating expenses in the Consolidated Statements oflncome.(6) Represents our estimated cash contributions to pension plans and oth er postretirement benefit plans through 202 I . We cannot reasonably estimate pension plan contributions beyond2021 at this time and have excluded them from the table above.(7) Rcptesents the nct mark-to-markct fair valuc ofoutstanding unscttled interest ratc swap derivativcs as ofDecembcr 3 I , 20 I 6. Negative values in the table above represent contractual amounts that are owed to Avista Corp. by the counterparties. The values in the table above will change each period depending on fluctuations in market interest rates and could become either assets or liabilities. Also, the amounts in the table above are not reflective ofcash collateral of$34.9 million and letters ofcredit of$3.6 million that are already posted with counterparties against the outstanding interest rate swap derivatives. 66 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 73 ot 177 Table of Contents AVISTA CORPORATION (8) Prirnarily relates to long-term debt and capital lease maturities and the related interest. AERC contractual commitnrents also include contractually required capital project funding and operating and maintenance costs associated with the Snettisham hydroelectric project. These costs are generally recovered through base retail rates.(9) Primarily relates to operating lease commitments and a commitment to fund a limited liability company in exchange for equity ownership, made by a subsidiary ofAvista Capital. The above contractual obligations do not include income tax payments. Also, asset retirement obligations are not included above and payments associated with these have historically been less than $ I million per year. There are approximately $ I 5.5 rnillion rernain ing asset retirement obligation s as of December3l,20l6. ln addition to the contractual obligations disclosed above, we will incur additional operating costs and capital expenditures in future periods for which we are not contractually obligated as part ofour normal business operations. Comoetition Our utility electric and natural gas distribution business has historically been recognized as a natural monopoly. kr each regulatory jurisdiction, our rates for retaiI electric and natural gas services (other than specially negotiated retail rates for industrial or large commercial customen, which are subject to regulatory review and approval) are generally determined on a "cost ofservice" basis. Rates are designed to provide, after recovery ofallowable operating expenses and capital investments, an opportunity for us to cam a rcasonablc rctum on investment as allowcd by our rcgulators. In retail markets, we compete with various rural electric cooperatives and public utility districts in and adjacent to our service territories in the provision of service to new electric customers. Altemative energy technologies, including customer-sited solar, wind or geothermal generation, may also compete with us for sales to existing customers. While the risk is currently small in our sewice territory given the small numbers of customers utilizing these technologies, advanccs in power gcneration, cnergy efficiency, encrgy storagc and othcr altcmative cncrgy tcchnologics could lcad to more widc-sprcad usage ofthesc technologies, thereby reducing customer demand for the energy supplied by us. This reduction in usage and demand would reduce our revenue and negatively impact our financial condition including possibly leading to our inability to fully recover our investments in generation, transmission and distribution assets. Similarly, our natural gas distribution operations compete with other energy sources including heating oil, propane and other fuels. Cenain natural gas customers could bypass our natural gas system, reducing both revenues and recovery offixed costs. To reduce the potential for such bypass, we price natural gas services, including transportation contracts, competitively and have varying degrees offlexibility to price transportation and dclivery rates by mcans ofindividual contracts. Thcse individual contracts arc subjcct to statc regulatory revicw and approval. We have long-tcrm transportation contracts with several of our largest industrial customers under which the customer acquires its own commodity while using our infrastructure for delivery. Such contracts reduce the risk of these customers bypassing our system in the foreseeable future and minimizes the impact on our eamings. Also, non-utility businesses are developing new technologies and services to help energy consumers manage energy in new ways that may improve productivity and could altcr dcmand for thc cncrgy we scll. In wholesale markets, competition for available electric supply is influenced by the: . localized and system-wide demand forenergy, . type, capacity, location and availability ofgeneration resources, and . variety and circumstances ofmarket participants. These wholesale markets are regulated by the FERC, which requires electric utilities to: . transmit power and energy to or for wholesale purchasers and sellers, . enlarge orconstruct additional transmission capacity forthe purpose ofproviding these services, and . transparently price and offer transmission services without favor to any pa(y, including the merchant functions ofthe utility. Participants in the wholesale energy markets include: . other utilities, ' federalpowermarketingagencies, ' energy marketing and trading companies, 6/ Exhibit No. 3 Case Nos. AVU-E-'l7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 74 ot 177 Table of Contents AVISTA CORPORATION independent power producers, fi nancial institutions, and commodity brokers. Economic Conditions and Utilitv Load Growth The general economic data, on both natronal and local levels, contained in this section is based, in part, on independent govemment and industry publications, reports by market research firms or other independent sources. While we believe that these publications and other sources are reliable, we ltave not independently verified such data and can make no representation as to its accuracy. Avista Utilities We track multiple economic indicators affecting the three largest metropolitan statistical areas in our Avista Utilities service area: Spokane, Washington, Coeur d'Alene, Idaho, and Medford, Oregon. Several key indicators are employment change, unemployment rates and foreclosure rates. On a year-over-year basis, December 20 I 6 showed positive job growth and lower unemployment rates in all three metropolitan areas. However, the unemployment mtes in Spokane and Medford are still above the national average. Except for Medford, foreclosure rates are in line with or below the U.S rate in all areas, and key leading indicators, initial unemployment claims and residential building pennits signal continued growth over the next I 2 months. Therefore, in 20 I 7, we expect economic growth in our service area to be somewhat stronger than the U.S. as a whole. Nonfarm employment (seasonally adjusted) in our eastem Washington, northem Idaho, and southwestem Oregon metropolitan service areas exhibited moderategrowth between December20l5 and December20l6.In Spokane, Washington employment groMh was3.6 percentwith gains in all majorsectors except manufacturing and leisure and hospitality. Employment increased by 2.5 percent in Coeur d'Alene, Idaho, reflecting gains in all major sectorc except mining and logging and professional and business services. In Medford, Oregon, employment groMh was 3.8 percent, with gains in all major sectors except mining and logging. U.S. nonfarm sector jobs grew by I .5 percent in the same I 2-month period. Scasonally adjusted uncmployment ratcs went down in Dccember 20 1 6 from the ycar carlicr in Spokane, Cocur d'Alcne, and Medford. In Spokanc thc ratc was 6.5 percent in December 20 1 5 and declined to 6.3 percent in December 20 I 6; in Coeur d'Alene the rate went from 4.9 percent to 4.5 percent; and in Medford the rate declined from 6.7 percent to 5.3 percent. The U.S. rate declined from 5.0 percent to 4.7 percent in the same period. Except for the Medford area, the housing market in our Avista Utilities service area continues to experience foreclosure rates in line with the national average. The December 20 I 6 national rate was 0.07 percent, compared to 0.07 percent in Spokane County, Washington; 0.02 percent in Kootenai County (Coeur d'Alene), ldaho; and 0. | 3 percent in Jackson County (Medford), Oregon. Alaska Electric Light and Power Company Our AEL&P service area is centered in Juneau. Although Juneau is Alaska's state capital, it is not a metropolitan statistical area. This means breadtlr and frequency ofeconomic data is more limited. Therefore, the dates ofJuneau's economic data may significantly lag the period ofthis filing. The Quarterly Census ofEmployment and Wages for Juneau shows employment declined I .2 percent between second quarter 20 I 5 and second quarter 20 I 6. The employment decline was centered in govemment; construction; manufacturing; financial activities; and professional and business services. Govemment (including active duty military pcrsonncl) accounts for approximatcly 37 pcrcent oftotal cmploymcnt. Employmcnt dcclincs also occurred in natural resources and mining; education and health services; and other services. Between December 20'l 5 and December 20 I 6 the non-seasonally adjusted unemployment rate decreased from4.7 percent to 4.5 percent. The Juncau foreclosure rate is bclow thc U.S. ratc. Thc Deccmbcr 20 I 6 rate was 0.02 pcrcent comparcd to 0.07 pcrccnt for thc U.S. Forecasted. Customer and Load Growth Based on our forecast for 2017 through 2020 for Avista Utilities' service area, we expect annual electric custorner groMh to average I .l percent, wlth in a forecast range of0.7 percent to 1.5 percent. We expect annual natural gas customer growth to average 1.3 percent, within a forecast range of0.8 percent to 1.8 percent. We anticipate retail electric load growth to average 0.6 percent, within a fbrecast range of0.3 percent and 0.9 percent. We expect natural gas load growth to average 1.2 percent, within a forecast range of0.7 percent and 1.7 percent. The forecast ranges reflect (1) the inherent uncertainty associated with the economic assumptions on which forecasts are based and (2) the historic variability ofnatural gas customer and load growth. 68 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1,Page75 ol 177 Table of Contrnts AVISTA CORPORATION In AEL&P's service area, we expect residential customer growth near 0 percent (no residential customer groMh) for 2017 through 2020. We also expect no significant growth in commercial and govemment customcrs ovcr thc samc period. Wc anticipate avcragc annual total load growth will bc in a narrow rangc around 0.3 percent, with residential load growth averaging 0.6 percent, commercial growth near 0 percent (no load growth); and govemment growth near 0 percent. The forward-looking staternents set forth above regarding retail load growth are based, in part, upon purchased economic forecasts and publicly available population and demographic studies. The expectations regarding retail load growth arc also based upon various assumptions, including: . assumptions relating to weatherand economic and competitive conditions, . intemal analysis ofcompany-specific data, such as energy consumption pattems. . intemal business plans, . an assumption that we will incurno material loss ofretail customers due to self-generation orretail wheeling, and . an assumption that demand for electricity and natural gas as a fuel for mobility will for now be immaterial. Changes in actual experience can vary significantly from our projections. See also "Competition" above for a discussion ofcompetitive factors that could affect our results ofoperations in the future. Environmental Issues and Contingencies We are subject to environmental regulation by federal, state and local authonties. The generation, transmission, distribution, service and storage facilities in which we have ownership interests are designed and operated in colnpliance with applicable environmental laws. Furthermore, we conduct periodic reviews and audits ofpertinent facilities and operations to ensure compliance and to respond to or anticipate emerging environmental issues. The Company's Board ofDirectors has established a committee to oversee environmental issues. We monitor legislative and regulatory developments at all levels of govemment for environmental issues, particularly those with the potential to impact the operation and productivity ofour generating plants and other assets. Environmental laws and regulations may: . increase the operating costs ofgenerating plants; . increase the lead time and capital costs for the construction ofnew generating plants; . require modification ofourcxisting gcncrating plants; . require cxisting gcnerating plant opcrations to bc curtailed or shut down; . reduce the amount ofenergy available from our generating plants; . restrict the types ofgenerating plants that can be built or contracted with; . require construction ofspecific types ofgeneration plants at highercost; and . increase costs ofdistributing natural gas. Compliance with environmental laws and regulations could result in increases to capital expenditures and operating expenses. We intend to seek recovery of any such costs through the ratemaking prccess. Clean Air Act (CAA) We must comply with the requirements under the CAA in operating our thermal generating plants. The CAA cunently requires a Title V operating permit for Colstrip (expires in 20 1 7), Coyote Springs 2 (expires in 201 8), the Kettle Falls GS (application has been made for a new pennit), and the Rathdrum CT (application has been made for a new permit). Boulder Park GS, Northeast CT, and other activities only require minor source operating or registration permits based on their limited operation and emissions. The Title V operating permits are renewed every five years and updated to include newly applicable CAA requirements. We actively monitor legislative, regulatory and program developments within the CAA that may impact our facilities. On March 6, 2013, the Sierra Club and Montana Environmental Information Center, filed a Complaint (Complaint) in the United States District Court for the District of Montana, Billings Division, against the owners of Colstrip. The Complaint alleged certain violations of the Clean Air Act. On July I 2, 201 6, all of the parties to this action filed a Consent Decree with the 69 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 76 of 177 Table of Contents AVISTA CORPORATION Court settling all clairns contained in the Cornplaint. See "Sierra Club and Montana Environmental Inlormation Center Litigation" in "Note l9 of the Notes to Consolidated Financial Statements" for further information on this matter. Hazardous Air Pollatants (HAPs) The EPA regulates hazardous air pollutants from a published list ofindustrial sources referred to as "source categories" which must meet control technology requirements ifthey emit one ormore ofthe pollutants in significant quantities. ln20l2,the EPA finalized the Mercury AirToxic Standards (MATS)forthe coal and oil-fircd sourcc category. At thc time of issuancc in 20l2,we examined thc existing emission control systcms ofColstrip Units 3 & 4, the only units in which we are a minority owner, and concluded that the existing emission control systems should be sufficient to meet mercury limits. For the remaining portion ofthe rule that utilized Particulate Matter as a surrogate for air toxics (including rnetals and acid gases), the Colstrip owners reviewed recent stack testing data and expected that no additional emission control systems would be needed for Units 3 & 4 MATS compliance. Regional HaTe Program The EPA set a national goal ofeliminating man-made visibility degradation in Class I areas by the year 2064. States are expected to take actions to make "reasonable progress" through I O-year plans, including application ofBest Available Retrofit Technology (BART) requirements. BART is a retrofit program applied to largc cmission sourccs, including clcctric gcncrating units built betwcen I 962 and 1977. In thc casc where a State opts out of implementing the Regional Haze program, the EPA may act directly. On September I 8, 20 I 2, the EPA finalized the Regional Haze federal implementation plan (FIP) for Montana. The FIP includes both emission limitations and pollution controls for Colstrip Units I & 2. Colstrip Un its 3 & 4, the only units ofwhich we are a minority owrer, are not curently affected, but will be evaluated for Reasonable Progress at the next review period. We do not anticipate any material impacts on Units 3 & 4 at this time. C o a I A sh M anag ement/Disp o sa I On Apnl I 7, 20 I 5, the EPA published a final rule regarding coal combustion residuals (CCRs), also termed coal combustion byproducts or coal ash in the Fedcral Registcr, and this rulc bccamc cffectivc on Octobcr '1 5,201 5. Colstrip, ofwhich we arc a I 5 pcrcent owner ofUnits 3 & 4, produces this byproduct. The rule establishes technical requirements for CCR landfills and surlace impoundments under Subtitle D ofthe Resource Conservation and Recovery Act, the nation's primary law for regulating solid waste. We, in conjunction with the other owners, are developing a multi-year compliance plan to strategically address the new CCR requirements and existing state obligations while maintaining operational stability. During 20 I 5, the operator ofColstrip provided an initial cost estimate of the expected retirement costs associated with complying with the new CCR rule and based on the initial assessments, Avista Corp. recordcd an incrcasc to its assct rctircmcnt obligations of$ I 2.5 million with a corresponding incrcasc in thc cost basis ofthc utility plant. During 20 I 6, duc to additional information and updated estimates, we increased the asset retirement obligation (ARO) to $ I 3.6 million (including accretion of $0.7 million). See "Note 9 ofthe Notes to Consolidated Financial Statements" for additional information regarding AROs. In addition to an increase to ourARO, it is expected that there will be significant compliance costs at Colstrip in the future, both operating and capital costs, due to a series of incremental infrastructure improvements which are separate from the ARO. Due to the preliminary nature of available data, we cannot reasonably estimate the future compliance costs; however, we will update our ARO and compliance cost estimates when data becomes available. The actual asset retirement costs and future compliance costs related to the CCR Rule requirements may vary substantially from the estimates used to record the increased ARO due to uncertainty about the compliance strategies that will be used and the prelirninary nature ofavailable data used to estimate costs, such as the quantity ofcoal ash present at certain sites and the volume offill that will be needed to cap and cover certain impoundments. We will coordinate with the plant operators and continue to gather additional data in future periods to make decisions about compliance strategies and the timing ofclosure activities. As additional information becomes available, we will update the ARO and future nonretirement compliance costs for these changes in estimates, which could be material. We expect to seek recovery of any increased costs related to complying with the newrule through customerrates. Climate Change Concems about long-term global climate changes could have a significant effect on our business. Our operations could also be affected by changes in laws and regulations intended to mitigate the risk of, or alter global climate changes, including restrictions on the operation ofour power generation resources and obligations imposed on the sale ofnatural gas. Changing temperatures and precipitation, including snowpack conditions, affect the availability and timing ofstreamflows, which impact hydroelectric generation. Extreme weather events could increase service intemrptions. outages and maintenance costs. Changing temperatures could also increase or decrease customer demand. 70 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 77 oI 177 Table of Contents AVISTA CORPORATION Our Climate Policy Council (an interdisciplinary team ofmanagement and other employees): . facilitates intemal and extemal communications regarding climate change issues, . analyzes policy effects, anticipates oppofiunities and evaluates strategies for Avista Corp., and . develops recommendations on climate related policy positions and action plans. Climate Change - Federal Regulatory Actions The EPAreleased the final rulesforthe Clean PowerPlan (Final CPP)and the Carbon Pollution Standards(Final CPS) on August 3,2015. The Final CPP and the Final CPS are both intended to reduce the carbon dioxide (CO2) emissions fiom certain coal-fired and natural gas electric generating units (EGUs). These rules were published in the Federal Register on October 23, 201 5 and were immediately challenged via lawsuits by other parties. The Final CPP was promulgated pursuant to Section I I I (d) ofthe CAA and applies to CO2 emissions from existing EGUs. The Final CPP is intended to reduce national CO2 emissions by approximately 32 percent below 2005 levels by 2030. The Final CPS rule was issued pursuant to Section I I I (b) ofthe CAA and applies to the emissions of new, modified and reconstructed EGUs. The two rules are the first rules ever adopted by the U.S. federal govemment to comprehensively control and reduce CO2 emissions fiom the power sector. The EPA also issued a proposed Federal Implementation Plan (Proposed FIP) for the Final CPP. The Final FIP that the EPA adopts could be imposed on states by the EPA, should a state decide not to develop its o*,n plan. The Final CPP establishes individual state emission reduction goals based upon the assumed potential for (l ) heat rate improvements at coal-fired units, (2) increased utilization ofnatural gas-fired combined cycle plants, and (3) increased utilization oflow or zero carbon emitting generation resources. As expressed in the final rule, states had until September 20 I 6 to submit state compliance plans, with a potential for two-year extensions. A stay granted by the U.S. Supreme Court, and described below, pushed this date out pending the results ofthe case. Avista Corp. owns two EGUs that are subject to the Final CPP: its portion (l 5 percent ofUnits 3 & 4) ofColstrip in Montana and Coyote Springs 2 in Oregon. States rnay adopt rate-based or mass-based plans, and may choose to focus compliance on specific EGUs or adopt broader measures to reduce carbon emissions from this sector. The states in which Avista Utilities generates or delivers electricity, Washington, Idaho, Montana and Oregon, are at differing stages ofevaluating options for developing state plans, which will define compliance approaches and obligations. Alaska was exempted in the Final CPP. The EPA may consider rulemaking for Alaska and Hawaii, both states which lack regional grid connections in the future. ln a separate but related rulemaking, the EPA finalizedCO2 new source performance standards (NSPS) fornew, modified and reconstructed fossil fuel- fircd EGUs undcr CAA scction I I I (b). Thcsc EGUs fall into thc samc two catcgorics ofsources rcgulatcd by the Final CPP: steam gcncrating units (also known as "utility boilers and IGCC units"), which primarily bum coal, and stationary combustion turtines, which primarily bum natural gas. GHG emission standards could result in signrficant complrance costs. Such standands could also preclude us from developing, operating or contracting with certain types of generating plants. Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of clirnate change could affect us and others in the industry as transmission system modifications to improve resiliency may be needed in orderto meet those requirements. The prornulgated and proposed GHG rulemakings mentioned above have been legally challenged in multiple venues. On February 9, 201 6, the U.S. Supreme Court granted a request for stay, halting implementation ofthe CPP. Given this development and related ongoing legal challenges, we cannot fully predict the outcome or estimate the extenl to which our facilities may be impacted by these regulations at this time. We intend to seek recovery of any costs related to compliance with these requirements through the raternaking process. Climate Change - State Legislation and State Regulatory Activities Thc statcs ofWashington and Oregon havc adoptcd non-binding targcts to rcducc GHG cmissions. Both statcs cnactcd thcir targcts with an cxpcctation ofreaching the targets through a combination ofrenewable energy standards, and assorted "complementary policies," but no specific reductions are mandated. Washington and Oregon apply a GHG emissions performance standard (EPS) to electric generation facilities used to serve retail loads in their jurisdictions. Thc EPS prcvcnts utilitics from constructing orpurchasing gencration facilities, orcntering into powerpurchase agrccmcnts offive ycars or longer duration 1o purchase energy produced by p lants, that in any case, have emission levels higher th an I ,l 00 pounds of GHG per MWh. The Waslrington State Department of Commerce (Commerce) initiated a process to adopt a lower emissions perfonnance standard in 2012; any new standard will be applicable until at least 201 7. Commerce published a supplemental notice of proposed rulemaking on January 16, 71 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 78 ot 177 Table of Contetrts AVISTA CORPORATION 201 3 with a new EPS of 970 pounds of GHG per MWh. We will engage in the next process to revise the EPS, which should occur in 201 7. Washington Energy Independence Act (EIA) The EIA in Washington requires electric utilities with over 25,000 customers to acquire qualified renewable energy resources and/or renewable energy credits equal to | 5 percent ofthe utility's total retail load in Washington in 2020. I-937 also requires these utilities to meet biennial energy consewation targets bcginnin g in 2012. Thc rcncwable cncrgy standard increascd from three pcrccnt in 20 I 2 to ninc pcrcent in 20 I 6. Failurc to comply with renewable energy and efficiency standards could result in penalties of $50 per MWh or greater assessed against a utility for each MWh it is deficient in meeting a standard. We have met, and will continue to meet, the requirements of EIA through a variety of renewable energy generating means, including, but not limited to, some combination ofhydro upgrades, wind, biomass and renewable energy credits. In 20 I 2, EIA was amended in such a way that our Kettle Falls GS and certain other biomass energy facilities, which commenced operation before March 3l ,1999, are considered resources that may be used to mect thc renewablc cncrgy standards. Clean Air Rule In Septcmber 201 6, thc Washington State Dcpartmcnt of Ecology @cology) adoptcd thc Clcan Air Rule (CAR) to cap and reducc GHG cmissions across the State of Washington in pursuit of the State's GHG goals, which wete enacted in 2008 by the Washington State Legislature (Legislature). The CAR applies to sources ofannual GHG ernissions in excess of I 00,000 tons for the first compliance period of20 I 7 through 20 I 9; this threshold incrementally decreases to 70,000 metric tons beginning in 2035. The rule affects stationary sources and transportation fuel suppliers, as well as natural gas distribution companies. Ecology has identified approximately 30 entities that would be regulated under the CAR. Parties covered by the regulation must reduce emissions by 1.7 percent annually until 2035. Compliance can be demonstrated by achieving emission reductions and/or surrendering Emission Reduction Units (ERU), which are generated by parties that achieve reductions greater than required by the nrle. ERUs can also take the form of renewable energy credits from renewable resources located in Washington, carbon emission offsets, and allowances acquired from an organized cap and trade market, such as that operating in Califomia. ln addition to the CAR's applicability to ourbuming of fuel as an electric utility, the CAR applies to us as a natural gas distribution company, for the emissions associated with the use ofthe natural gas we provide our customers who are not already covered under the regulation. In Scptcmber 20 I 6, Avista Corp., Cascade Natural Gas Corp., NW Natural and Pugct Sound Energy (PSE) (collcctivcly, Pctitioncrs)jointly filed an action in the U.S. District Court for the Eastem District of Washington challenging Ecology's recently promulgated CAR. The four companies also filed litigation in Thurston County Superior Court. Petitioners believe that the reduction ofGHG emissions is a matter that needs to be addressed, but the CAR is not the solution. Each utility represented in this case provided feedback and public cornment to improve the rule, but ideas put forward were not incorporated in the final rule. They are asking the U.S District Court and the Thurston County Superior Court to find that the CAR is invalid. In their State clairn, Petitioners assert that: . Ecology lacks statutory authority to rcgulatc natural gas utilitics bccausc thc CAR holds thcm rcsponsiblc for thc indircct emissions ofthcir customers; . Ecology does not have the authority to create an emission reduction trading program (ERUs); . Ecology failed to comply with the requirements of the State Environrnental Policy Act; and . tltc CAR is arbitrary and capricious. Petitioners'Federal claim asserts that the CAR violates the dormant Commerce Clause ofthe U.S. Constitution by discriminating against interstate commerce, regulating extraterritorially and unduly burdening interstate commerce by restricting the use ofERU's (allowances) generated from outside Washington State for compliance purposes. The case in U.S. District Court has been tolled while the state court case proceeds, with oral arguments scheduled for the spring of2Ol7 . Initiative I-732 An Initiative to the Legislature (1-732)to impose a carbon tax on fossil-fueled generation and natural gas distribution, as well as on transportation fuels, was submitted to the Legislature in January 20 I 6. The Legislature failed to act upon the Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 79 ot 177 Table 0f Contents AVISTA CORPORATION measure and I-732 was referred to the November 20 I 6 General Election ballot, where it failed to gain enough votes for enactment. Colstrip 3 &4 Considerations On February 6,2O14, the UTC issued a letter finding that PSE's 201 3 Electric lntegrated Resource Plan meets the requirements of the Revised Code of Washington and the Washington Administrative Code. In its letter, however, the UTC expressed concem regarding the continued operation ofthe Colstrip plant as a rcsource to scrvc retail customcrs. Although thc UTC rccognizcd that thc rcsults ofthc analyscs prescntcd by PSE "differcd significantlybetween[Colstrip] Unitsl&2andUnits3&4,"theUTCdidnotlimititsconcernssolelytoColstripUnitsl&2.TheUTCrecommended that PSE "consult v/ith tl-fc staffto consider a Colstrip Proceeding to determine the prudency of any new investment in Colstrip before it is made or, altematively, a closure or partial-closure plan." As part of th e Siena Club litigation th at was settled in 20 I 6, Un its I & 2 are scheduled to close by July 2022. See "Note I 9 ofthe Notes to Consolidated Financial Statements" for further discussion ofthe Sierra Club litigation. As a I 5 percent owner of Colstrip Units 3 & 4, we cannot cstimatc the cffcct ofsuch procecding, should it occur, on thc future owrership, opcration and opcrating costs ofour shareofColstripUnits3&4.OurremaininginvestmentinColstripUnits3&4asofDecember3l,20l6was$l3l.0million. In Orcgon, legislation was cnactcd in 201 6 which rcquircs Portland Gcncral Elcctric and PacifiCorp to rcmovc coal-fircd gcncration liom thcir Orcgon rate base by 2030. This legislation does not directly relate to Avista Corp. because Avista Corp. is not an electric utility in Oregon. However, because these two utilities, along with Avista Corp., hold minority interests in Colstrip, the legislation could indirectly impact Avista Corp., though specific impacts cannot be identified at this time. While the legislation requires Ponland General Electric and PacifiCorp to eliminate Colstrip from their rates, they would be permitted to sell the output oftheir shares ofColstrip into the wholesale market or, as is the case with PacifiCorp, reallocate the plant to othcr statcs. Wc cannot prcdict thc cvcntual outcomc ofactions arising fiom this legislation at this tirnc or estimatc thc effcct thcrcofon Avista Corp.; however, we will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to our generation assets. Threatened and Endangered Species and Wildlile A number ofspecies offish in the Northwest are listed as threatened or endangered under the Federal Endangered Species Act (ESA). Efforts to protect these and other species lrave not significantly impacted generation levels at any ofour hydroelectric facilities, nor operations ofour thermal plants or electrical distribution and transmission system. We are implementing fish protection measures at our hydroelectric project on the Clark Fork River under a 45-year FERC operating license for Cabinet Gorge and Noxon Rapids (issued March 200 | ) that incorporates a comprehensive settlement agreement. The restoration ofnativc salmonid fish, including bull trout, is a kcy part ofthc agrccmcnt. Thc rcsult is a collaborativc nativc salmonid rcstoration program with the U.S. Fish and Wildlife Service, Native Amencan tribes and the states of Idaho and Montana on the lower Clark Fork River, consistent with requirements of the FERC license. The U.S. Fislr & Wildlife Service issued an updated Critical Habitat Designation for bull trout in 201 0 that includes the lower Clark Fork River, as well as portions ofthe Coeur d'Alene basin within our Spokane River Project area, and issued a final Bull Trout Recovery Plan under the ESA. Issues related to these activities are expected to be resolved through the ongoing collaborative effort ofourClark Fork and Spokane RiverFERC licenses. See "Fish Passagc at Cabinet Gorgc and Noxon Rapids" in "Note I 9 ofthc Notcs to Consolidated Financial Statcmcnts" for furthcr information. Various statutory authorities, including the Migratory Bird Treaty Act, have established penalties for the unauthorized take ofmigratory birds. Because we operate facilities that can pose risks to a variety ofsuch birds, we have developed and follow an avian protection plan. We are also aware ofother threatened and endangered species and issues related to them that could be impacted by our opemtions and we make every effort to comply with all laws and regulations relating to these threatened and endangered species. We expect all costs associated with these compliance efforts to bc recovcred through the futurc ratemaking process. Aher For othcr cnvironmcntal issues and othcr contingcncics scc 'Notc I 9 ofthc Notes to Consolidatcd Financial Statemcnts." Enterorise Risk Manasement The matcrial risks to our busincsses arc discussed in "Item I A. Risk Factors," "Forward-Looking Statcments," as wcll as "Environmental Issucs and Contingencies." The following discussion focuses on our mitigation processes and procedures to address these risks. 73 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 'l , Page 80 of 177 Table of Contents AVISTA CORPORATION We consider the management ofthese risks an integral part olmanaging our core businesses and a key element ofour approach to corporate govemance. Risk management includes identifting and measuring various forms of risk that may affect the Company. We have an enterprise risk management process for managing risks throughout our organization. Our Board ofDirectors and its Committees take an active role in the oversight ofrisk affecting the Company. Our risk management department faci litates the collection ofrisk information across the Company, providing senior management with a consolidated view of the Company's major risks and risk mitigation measures. Each area identifies risks and implements the related mitigation measures. The enterprise risk process supports management in identifoing, assessing, quantifying, managing and mitigating the risks. Despite all risk mitigation measures, however, risks are not eliminated. Our prirnary identified categories ofrisk exposure are: . Financial . Utility rcgulatory . Energy corrmodity . Operational Financial Risk Financial risk is any risk that could have a direct material ilnpact on the financial performance or financial viability ofthe Company. Broadly, financial risks involve variation ofeamings and liquidity. Underlying risks include, but are not limited to, those described in "Item I A. Risk Factors." We mitigate financial risk in a variety of ways including through overcight from the Finance Committee of our Board of Directors and from senior management. Our Regulatory department is also critical in risk mitigation as they have regular communications with state commission regulators and staff and they monitor and devclop rate stratcgics for thc Company. Ratc stratcgics, such as dccoupling, hclp mitigate thc impacts ofrcvenuc fluctuations due to weather, conservation or the economy. We also have a Treasury department that monitors our daily cash position and future cash flow needs, as well as monitoring rnarket conditions to determine the appropriate course ofaction forcapital financing and/orhedging strategies. lYeather Risk To partially raitigate the risk offinancial underperfonnance due to weather-related factors, we developed decoupling rate mechanisms that were approved by the Washington, Idaho and Oregon commissions. Decoupling mechanisms are designed to break the link between a utility's revenues and consumerc'energy usage and instead provide revenue based on the number ofcustomers, thus mitigating a large portion ofthe risk associated with lower customer loads. See "Rcgulatory Mattcrs" for furthcr discussion of our dccoupling mcchanisms. Access to Capital Markets Our capital requirements rely to a significant degree on regular access to capital markets. We actively engage with rating agencies, banks, investors and state public utility commissions to understand and address the factors that support access to capital markets on reasonable terms. We manage our capital structure to maintain a financial risk profile that wc bclieve thcse parties will decm prudcnt. We forecast cash rcquircmcnts to determine liquidity needs, including sources and variability ofcash flows that may arise from our spending plans or from extemal forces, such as changes in energy prices or interest rates. Our financial and operating forecasts consider various metrics that affect credit ratings. Our regulatory strategies include working with state pubtic utility commissions and filing for rate changes as appropriate to meet financial performance expectations. Interest Rate Risk Uncertainty about future interest rates causes risk related to a portion ofour existing debt, our future borrowing requirements, and our pension and other post- retirement benefit obligations. We nranage debt interest rate exposure by limiting our variable rate debt to a percentage oftotal capitalization ofthe Company. We hedge a portion of our interest rate risk on forecasted debt issuances with financial derivative instruments, which rnay include interest rate swaps and U.S. Treasury lock agreements. The Finance Committee ofour Board ofDirectors periodically reviews and discusses interest rate risk management proccsses and thc stcps managcmcnt has undcrtakcn to control intcrcst ratc risk. Our RMC also revicws our intcrest ratc risk managcment plan. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance oflong-term debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. Our interest rate swap derivatives are considered economic hedges against the future forecasted interest mte payments ofour long-term debt. Interest rates on our longterm debt are generally set based on underlying U.S. Treasury rates plus credit 74 . Compliance . Tcchnology . Strategic . Extemal Mandates Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 'l , Page 8'l of 177 Tahle 0f Contetrts AVISTA CORPORATION spreads, which are based on our credit ratings and prevailing market prices for debt. The interest rate swap derivatives hedge against changes in the U.S. Treasury rates but do not hedge the credit spread. Evcn though wc work to manage our cxposure to intcrest ratc risk by locking in certain long-term intcrest rates through interest rate swap dcrivativcs, if market interest rates decrease below the interest rates we have locked in, this will result in a liability related to our interest rate swap derivatives, which can be significant. However, through our regulatory accounting practices similar to our energy cornmodity derivatives, any interim mark-to-market gains or losses are offset by regulatory assets and tiabilities. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amonized as a component of interest expense over the term ofthe associated debt. The following table summarizes our interest rate swap derivatives outstanding as ofDecember 3 1,2016 and December 3 1,201 5 (dollars in thousands): December 3 I, December 3l, 2016 2015 Number ofagrecments Notional amount Mandatory cash settlement dates Shortterm derivative assets ( I ) Long-term derivativc assets (l ) Short{erm derivative liability (l ) (2) Long-term derivative liability (l ) (2) 33 $ 500,000 $ 2017 to 2022 $ 3,393 $ 5,357 (6,02s) (28,70s) 23 455,000 2016 to 2022 23 (r9,264) (30,679) (l) ThereareoffsettingregulatoryassetsandliabilitiesfortheseitemsontheConsolidatedBalanceSheetsinaccordancewithregulatoryaccounting practices. (2) ThebalanceasofDecember3l,2016andDecember3l,20l5reflectstheoffsettingof$34.9millionand$34.0miltion,respectively,ofcashcollateral against the net derivative positions where a legal right ofoffset exists. We estimate that a I 0-basis-point increase in forward LIBOR interest rates as of December 3 I , 201 6 would decrease the interest rate swap derivative net liability by $ I 0.4 million, while a I 0-basis-point dccrease would increase the interest rate swap dcrivativc net liability by $ I 0.7 million. Weestimatedthatal0-basis-pointincreaseinforwardLIBORinterestratesasofDecember3l,20l5wouldhavedecreasedtheinterestrateswapderivative net liability by S9.8 mi llion, while a I 0-basis-point decrease would increase the interest rate swap derivative net liabil ity by $ | 0.I million. The interest rate on $5 I .5 million oflong-term debt to affiliated trusts is adjusted quarterly, reflecting current market rates. Amounts borrowed under our committed line ofcredit agreements have variable interest rates. The following table shows our long-term debt (including current portion) and related weighted-average interest rates, by expected maturity dates as of December 3 l, 20 I 6 (dollars in thousands): 2017 201 8 20t9 2020 2021 Thcrcafter Total Fair Valuc Fixed rate long-term debt(l) $ - $ 272,500 s 105,000 $ 52,000 $ - s 1,198,500 $ 1,628,000 $ 1,723,9t2 Wcightcd-avcragc inrerest rate 6.07% 5.22% 3.89% 4.91% 5.09% Variable rate long-term dcbt to affiliatedtrusts $ 5l ,547 $ 5l ,547 $ 38,660 Weighted-average intcrcst rate l.&l%o l.8loh (l ) Thcsc balanccs include thc fixcd rate long-tcrm dcbt of Avista Corp., AEL&P and AERC. Our pension plan is exposed to interest rate risk because the value ofpension obligations and other post-retirement obligations vary directly with changes in the discount rates, which are derived from end-of-year market interest rates. In addition, the value ofpension investments and potential income on pension investments is partially affected by interest rates because a portion ofpension investments are in fixed income securities. The Finance Committee ofthe Board of Directors approves investment 75 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 82 ot 177 Table of Contents AVISTA CORPORATION policies, objectives and strategies that seek an appropriate retum lor the pension plan and it reviews and approves changes to the investment and fundrng policies. Wc manage intcrest ratc risk associatcd with our pcnsion and othcrpost-rctircmcnt bcncfit plans by invcsting a targcted amount ofpension plan assets in fixed income investments that have maturities with similar profi les to future projected benefi t obligations. See "Note I 0 of the Notes to Consolidated Financial Statements" for further discussion ofour investment policy associated with the pension assets. Credit Risk C o u n t e rp arty N o n-Pedo rman ce Ris k Counterparty non-performance risk relates to potential losses that we would incur as a result ofnon-performance ofcontractual obligations by counterparties to deliver energy or make financial settlements. Changes in market prices may dramatically alter the size ofcredit risk with counterparties, even when we establish conservative credit limits. Should a counterparty fail to perform, we may be required to honor the underlying commitment or to replace existing contracts with contracts at then-current market priccs. We enter into bilateral transactions with various counterparties. We also trade energy and related derivative instruments through clearinghouse exchanges. We seek to rritigate credit risk by: . transactingthroughclearinghouseexchanges, . cntcring into bilateral contracts that specifl, crcdit terms and protcctions against dcfault, . applying crcdit limits and duration critcria to cxisting and prospcctivc countcrpartics, . actively rnonitoring current credit exposures, . asserting our collateral rights with counterparties, and . carrying out transaction settlements timely and effectively. The extent oftransactions conducted through exchanges has increased as many market participants have shou,n a preference toward exchange trading and have reduced bilateral transactions. We actively tnonitor the collateral required by such exchanges to effectively lnanage our capital requirements. Counterparties' credit exposure to us is dynamic in normal markets and may change significantly in more volatile markets. The amount ofpotential default lisk to us from each countcrparty depends on the cxtcnt offorward contracts, unscttled transactions, interest rates and markct priccs. Thcrc is a risk that wc do not obtain sufficient additional collateral from counterparties that are unable orunwilling to provide it. Credit Risk Liquidity Considerations To address the impact on our operations ofenergy market price volatility, our hedging practices for electricity (including fuel for generation) and natural gas extend beyond the current operating year. Executing this extended hedging program may increase credit risk and demands for collateral. Our credit risk managcmcnt proccss is dcsigned to mitigate such crcdit risks through limit setting, contract protcctions and countcrparty diversification, among other practices. Credit risk affects demands on our capital. We are subject to limits and credit terms that counterparties may assert to allow us to enter into transactions with therr and maintain acceptable credit exposures. Many ofour counterparties allow unsecured credit at limits prescribed by agreements or their discretion. Capital requirements for certain transaction types involve a combination ofinitial margin and market value margins without any unsecured credit threshold. Counterparties may seek assurances ofperformance from us in the form of letters ofcredit, prepayment or cash deposits. Credit exposure can change significantly in periods ofcommodity price and interest rate volatility. As a result, sudden and significant demands may be made against our credit facilities and cash. We actively monitor the exposure to possible collateral calls and take steps to minimize capital requirements. As of Deccmber 3 I , 201 6, we had cash depositcd as collatcral of $ I 7.1 million and lettcrs of crcdit of $24.4 mill ion outstanding rclated to our cncrgy derivative contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount ofcollateral required. See "Credit Ratings" for further information. For exarnple, in addition to limiting our ability to conduct transactions, ifour credit ratings were lowered to below "investrnent grade" based on our positions outstanding at December 3 l, 20 I 6, we would potentially be required to post additional collateral ofup to $6.0 rnillion. This amount is 76 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 83 of 1 77 Table of Contents ,4VISTA CORPORATION diilerent fiom the amount disclosed in "Note 6 ofthe Notes to Consolidated Financial Statements" because, while this analysis includes contracts that are not considered derivatives in addition to the contracts considered in Note 6, this analysis also takes into account contractual threshold limits that are not considered in Note 6. Without contractual threshold limits, we would potentially be required to post additional collateral of $8.2 million. Under the terms ofinterest rate swap derivatives that we enter into periodically, we may be required to post cash or letters ofcredit as collateral depending on fluctuations in thc fair valuc of thc instrumcnt. As of Dccembcr 3 I , 2016, we had intcrcst ratc swap agrecmcnts outstanding with a notional amount totaling $500.0 miltion and we had deposited cash in the amount of$34.9 million and letters ofcredit of$3.6 million as collateral for these interest rate swap derivatives. Ifour credit ratings were lowered to below "investment grade" based on our interest rate swap derivatives outstanding at December 3 I , 20 I 6, we would have to post 52 I .l million ofadditional collateral. Foreign Currency Risk A significant portion ofour utility natural gas supply (including fuel for electric generation) is obtained from Canadian sources. Most ofthose transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion ofour short-term natural gas transactions and long-term Canadian transportation contrzcts are committed based on Canadian cunency prices. The short-term natural gas transactions are typically settled within sixty days with U.S. dollars. We economically hedge a portion ofthe foreign culrency risk by purchasing Canadian curency exchange contracts when such commodity transactions are initiated. This risk has not had a material effect on our financial condition, results ofoperations or cash flows and these differences in cost related to curency fluctuations are included with natural gas supply costs for ratemaking. Further information for derivatives and fair values is disclosed at "Note 6 ofthe Notes to Consolidated Financial Statements" and 'Note 1 6 ofthe Notes to Consolidated Financial Statements." Utilitv Regulatory Risk Because we are primarily a regulated utility, we face the risk that regulators may not grant rates that provide timely or sufficient recovery ofour costs or allow a reasonable rate ofretum for our shareholders. This includes costs associated with our investment in rate base, as well as commodity costs and other opcrating and financing expenscs. During Dccembcr 20 I 6, thc UTC dcnied our most reccnt elcctric and natural gas gcncral rate rcqussts and granted zcro rate relief. We are currently in the process ofpursuing remedies towand a reasonable end result. Ifour efforts to obtain rates that are fair,just, reasonable and sufficient are not successlul, we expect our 201 7 eamings will be adversely irnpacted. See further discussion at "Item 7. Management's Discussion and Analysis of FinanciaI Condition and Results of Operations - Regulatory Matters." We mitigate regulatory risk through overcight from our Board of Directors and from senior management. We have a separate rcgulatory group which communicates with commission regulators and staffregarding the Company's business plans and concems. The regulatory group also considers the regulator's prioritics and ratc policies and makcs rccommendations to scnior managcmcnt on rcgulatory stratcgy for the Company. Scc "Rcgulatory Matters" for further discussion of regulatory matters affecting our Company. Enersv Commoditv Risk Energy commodity risks are associated with fulfilling our obligation to serve customers, managing variability ofenergy facilities, rights and obligations and fulfilling the terms of our energy commodity agreements with counterparties. These risks include, arrong other things, those described in "Itern I A. Risk Factors." We mitigate energy commodity risk primarily through our energy resources risk policy, which includes oversight from the RMC and oversight from the Audit Committee and the Environmental, Technology and Operations Cornmittee of our Board of Directors. In conjunction with the oversight committees, our management team develops hedging stmtegies, detailed resource procurement plans, resource optimization strategies and long-term integrated resource planning to mitigate some of the risk associated with energy commodities. The various plans and strategies are monitored daily and developed with quantitativc mcthods. Our energy resources risk policy includes our wholesale energy markets credit policy and control procedures to manage energy commodity price and credit risks. Nonetheless, adverse changes in commodity prices, generating capacity, customer loads, regulation and other lactors may result in losses ofeamings, cash flows and/or fair values. We measure the volume ofmonthly, quarterly and annual energy imbalances between projected power loads and resources. The measurernent process is based on expected loads at fixed prices (including those subject to retail rates) and expected resources to the extent that costs are essentially fixed by virtue of known fuel supply costs or projected hydroelectric conditions. To the extent that expected costs are not fixed, either because ofvolume mismatches between loads and rcsourccs or becausc fucl cost is not lockcd in through fixcd price contmcts or dcrivative instrumcnts, our risk policy guides the proccss to managc this open 77 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-'17-_ M. Thies, Avista Schedule 1, Page 84 ol 177 Tabk of Contents AVISTA CORPORATION forward position over a period oftime. Normal operations result in seasonal mismatches between power loads and available resources. We are able to vary the operation ofgenerating resources to match parts ofintra-hour, hourly, daily and weekly load fluctuations. We use the wholesale power markets, including the natural gas market as it relates to power generation fuel, to sell projected rcsource surpluses and obtain resources when deficits are projected. We buy and sell fuel for thermal generation facilities based on comparative power market prices and marginal costs offueling and operating available generating facilities and the relativc economics ofsubstitute markct purchases for gcnerating plant opcration. To address the impact on our operations ofencrgy market pricc volatility, our hcdging practices for electricity (including fuel for gencration) and natural gas extend beyond the current operating year. Executing this extended hedging program may increase our credit risks. Our credit risk management process is designed to mitigate such credit risks through limit setting, contract protections and counterparty diversification, among other practices. Our projected retail natural gas loads and resources are regularly reviewed by operating management and the RMC. To manage the impacts ofvolatile natural gas prices, wc scck to procurc natural gas through a diversified mix ofspot ma*ct purchascs and forward fixcd pricc purchascs from various supply basins and time periods. We have an active hedging program that extends into future yean with the goal ofreducing price volatility in our natural gas supply costs. We use natural gas storage capacity to support high demand periods and to procure natural gas when price spreads are favorable. Securing prices throughout the year and even into subsequent years mitigates potential adverse impacts ofsignificant purchase requirements in a volati le pnce environment. The following table presents energy commodity derivative fairvalues as a net asset or(liability) as ofDecember31,2016 that are expected to settle in each respective year (dollars in thousands): Purchases Sales Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives Year 2017 201 8 2019 2020 2021 Thcrcafter Physical ( I ) s 9,274\ (s,5 98) (3,123) $ 1,939 $(4,00s) $ (2,t70) (3,732) (370) Financial (l) Physical (l) Financial (l) Physical (l) Financial (l) Physical (l) Financial (l) 97$(22s) $ (3 3) (40) s76 $ 854 975 (2,036) $ (el0) (e27) (1,288) (86e) (3.440) 709 103(23s ) (266) The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 3 I , 20 I 5 that were expected to settle in each respective year (dollars in thousands): Purchascs Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives Year 2016 2017 201 8 2019 2020 Thereafter Physical(1) Financial(l) Physical(l) Financial(l) Physical(l) Financial(l) Physical(l) Ftrancial(l) $28,857 $ 173 $ 3,97 t (l ,125) (t,172') (1,220) (1,1 30) (67e) (l ) Physical transactions represent commodity transactions where we will take delivery ofeither electricity or natural gas and financial transactions represent derivative instruments with no physical delivery, such as futures, swaps, options, or forward contracts. The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they are delivered and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually be collected through rctail mtes from customers. See "Itcm I . Business - Electric Operations," "ltem I . Business - Natural Gas Operations," and "Item 1A. Risk Factors" for additional discussion ofthe risks associated with Energy Commodities. 78 (6,928) S (6,403 ) (s,614) (3,072\ 82$ (23) (s0) (44\ (r4,988) $ (s,8es) $ 36 (r,050) (22',) 35 (41 ,006) $ (e,473) (3,s54) (1,964) (18) 22,445 313 (162) Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 85 of 177 Salcs Table of Contents AVISTA CORPORATION Onerational Risk Operational risk involves potential disruption, losses, or excess costs arising from extemal events or inadequate or failed intemal processes, people and systems. Our operations are subject to operational and event risks that include, but are not limited to, those described in "Item I A. Risk Factors." To rnanage operational and event risks, we maintain ernergency operating plans, business continuity and disaster recovery plans, maintain insurance coverage against some, but not all, potential [osses and seek to negotiate indemnification ariangements with contractors for certain event risks. In addition, we design and follow detailed vegetation management and asset management inspection plans, which help mitigate wildfire and storm event risks, as well as identiff utility assets which may bc failing and in nced ofrepair or rcplaccment. We also havc an Emcrgcncy Operating Ccntcr, which is a tcam ofemployecs that plan for and train to deal with potential emergencies or unplanned outages at our facilities, resulting from natural disasters or other events. To prevent unauthorized access to our facilities, we have both physical and cyber security in place. To address the risk related to fuel cost, availability and delivery restraints, we have an energy resources risk policy, which includes our wholesale energy markets credit policy and control procedures to manage energy commodity price and credit risks. Development ofthe energy resources risk policy includes planning for sufficient capacity to meet our customer and wholesale energy delivery obligations. See further discussion ofthe energy resources risk policy above- Oversight ofthe operational risk management process is perfonned by the Environmental, Technology and Operations Committee ofour Board ofDirectors and from senior management with input from each operating department. Comoliance Risk Compliance risk is the potential consequences oflegal or regulatory sanctions or penalties arising from the failure ofthe Company to comply with requirements ofapplicable laws, rules and regulations. We have extensive compliance obligations. Our primary compliance risks and obligations include, among othcrs, those dcscribcd in "Itcm I A. Risk Factors." We mitigate compliance risk through oversight from the Environmental, Technology and Operations Committee and the Audit Committee of our Board of Directors and liom senior management. We also have separate Regulatory and Environmental Compliance departments that monitor legislation, regulatory orders and actions to detennine the overall potential impact to our Company and develop strategies for complying with the various rules and regulations. We also engage outside attomeys, and consultants, when necessary, to help ensure compliance with laws and regulations. See "ltem I . Business, Regulatory Issues" through "ltem I . Business, Reliability Standards" and "Environmental Issues and Contingencies" for further discussion ofcorrpliance issues that impact our Company. Technolosv Risk Our prirnary technology risks are described in "Item I A. Risk Factors." We mitigatc technology risk through trainings and cxerciscs at all lcve ls of thc Company. Thc Environmcntal, Technology and Opcrations Committcc of our Board ofDirectors along with senior management are regularly briefed on security policy, programs and incidents. Annual cyber and physical training and testing ofemployees are included in ourenterprise security program as are business continuity testing and data breach response exercises. Technology govemance is led by senior management, which includes new technology strategy, risk planning and major project planning and approval. The technology project management office and enterprise capital planning group provide project cost, timeline and schedule oversight. In addition, there are independent third party audits ofour critical infrastructure security program and our business risk security controls. We have a Technology depanment dedicated to securing, maintaining, evaluating and developing our information technology systems. There are regular training sessions for the technology and security team. This group also evaluates the Company's technology for obsolescence and makes recommendations for upgrading or rcplacing systems as nccessary. Additionally, this group monitors for intrusion and security cvcnts that may include a data breach. Strrtepic Risk Stratcgic risk relates to the potential impacts rcsulting from incorrcct assumptions about extcmal and intemal factors, inappropriate busincss plans, ineffective business strategy execution, or the failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments. Our prirnary strategic risks include, among others, those described in "Item I A. Risk Factors." 79 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 86 of 1 77 Table 0f Contents AVISTA CORPORATION We mitigate strategic risk through detailed oversight from the Board of Directors and from senior management. We also have a Chief Strategy Officer that lcads stratcgic initiativcs, to scarch for and evaluatc opportunities for thc Company and makcs rccommcndations to scnior managcmcnt. We not only focus on whether opportunities are financially viable, but also consider whether these opportunitres fall within our core policies and our core business strategies. We mitigate our reputational risk primarily through a focus on adherence to our core policies, including our Code ofConduct, rnaintaining an appropriate Company culture and tone at the top, and through communication and engagement ofour extemal stakeholders. External Mandates Risk Extemal mandate risk involves forces outside the Company, which may include significant changes in customer expectations, disruptive technologies that result in obsolescence ofour business model and govemment action that could impact the Company. See "Environmental Issues and Contingencies" and "Forward-Looking Statements" for a discussion ofor reference to our extemal mandates risks. We mitigate extemal mandate risk through detailed oversight from the Environmenta[, Technology and Operations Committee of our Board of Directors and fiom senior management. We have a Climate Council which meets intemally to assess the potential impacts of climate policy to our business and to identiry stratcgies to plan for changc. Wc also have cmployccs dcdicatcd to activcly engagc and monitor fcdcral, statc and local govcmmcnt positions and lcgislativc actions that may affect us or our customers. To prevent the threat ofmunicipalization, we work to build strong relationships with the communities we serve through, among other things: . communication and involvement with local business leaders and community organizations, . providing customers with a multitude of limited income initiatives, including energy fairs, senioroutreach and low income workshops, mobile outreach stratcgy and a Low Incomc Ratc Assistancc Plan, . tailoring our internal company initiativcs to focus on choiccs for our customcrs, to incrcase thcir ovcrall satisfaction with the Company, and . engaging in tlre legislative process in a manner that fosters the interests ofour customers and the communities we serve. ITEM 7A. OUANTITATI\,'E AND OUALITATIVE DISCLOST]RES ABOUT MARKET RISK The information required by this item is set forth in the Enterprise Risk Management section of "ltem 7. Management's Discussion and Analysis" and is incorporated herein by relerence. ITEM E. FINANCIAL STATEMENTS AND SI.]PPLEMENTARY DATA The Report oflndependent Registered Public Accounting Firm and Financial Statements begin on the next page. 80 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 87 of '177 Table of Contents REPORT OF INDEPENDENT REGISTERED PLBLIC ACCOUNTING FIRM To the Board ofDirectors and Shareholden of Avista Corporation Spokane, Washington We have audited the accompanying consolidated balance sheets ofAvista Corporation and subsidiaries (the "Company") as ofDecember 31,2016 and 20 1 5, and the related consolidated statements ofincome, comprehensive income, equity and redeemable noncontrolling interests, and cash flows for each ofthe thrcc ycars in the pcriod cndcd Deccmber 3l ,2O16. Thcsc financial statcmcnts arc thc rcsponsibility ofthe Company's managcment. Our rcsponsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes exarnining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In ouropinion, such consolidated financial statementspresent fairly, in all material respects, the financial position ofAvista Corporation and subsidiaries at December 3 1,201 6 and 201 5, and the results oftheir operations and theircash flows for each ofthe three years in the period ended December3 I,201 6, in conformity with accounting principles generally accepted in the United States ofAmerica. Wc havc also auditcd, in accordancc with thc standards of thc Public Company Accounting Oversight Board (Unitcd Statcs), thc Company's intemal control over financial reporting as ofDecember 3 I , 20 I 6, based on the criteria established in hternal Conlrol - Inlegrated Framev'ork (2013/ issued by the Cornmittee ofSponsoring Organizations ofthe Treadway Comrnission, and our report, dated February 2l ,2017 expressed an unqualified opinion on the Company's intemal control over fi nancial reporting. /s/ Delortte & Touche LLP Seattle, Washington February 2l ,2017 8l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 88 of 177 Trble of Contcnts CONSOLIDATED STATEMENTS OF INCOME Avisla Corporation For the Ycars Ended Dccembcr 3 I Dollars in thousands, except per share amounts 20t 6 201 5 2014 rcvenues s 1,418,914 $ 1,456,091 S 1,433,343 Total operating revenues Utility Other 286,832 Taxes other than income taxes 94,300 Other 29,526 30,418 Total operating expenses I,t52.680 1,23t Interest 86,496 interest (2.651) Income from continuing operations before income taxes I 85,619 Net income from continuing operations Nct incomc 137,3t6 137,316 lt8,l70 123,317 192,277 Net income attributable to Avista Corp. shareholders $ 137,228 S 123,227 S 192,041 The Accompanying Notes are an Integral Part ofThese Slatements. 82 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 89 of 177 1,442,483 t,484,776 1,472,562 551,366 3t 5,795 | 60.5 l4 9 8,73 5 25,501 769 656,964 303,221 t43,499 97,657 I ,2t9,97 4 1\7 ltA 79,968 473 (3,546) (9,300) 252,588 75,302 450 \3,924) ( l l ,346) 192,106 72,240 215,402 78,086 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (continued) Avista Corporation For thc Years Ended Dccembcr 3 I Dollars in thousands, except per share amounts 2016 201 5 2014 Net income from $ 137,228 $ r s lr Net income attributable to Avista Corp. shareholders $ 137 ,228 S 123,227 $ t92,O4t common sharcs dilutcd 63,920 62,708 6l ,887 Eamings share from 2.16 $1.90 $ Total eamings per common share attributable to Avista Corp. shareholden, basic $2.16 $1.98 s 3.12 common share from 2.ts $1.89 S 1.93 Total eamings per common share attributable to Avista Corp. shareholders, diluted S 2.15 $1.97 $3.10 The Accompanying Notes are an Integral Port ofThese Statements. 83 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 90 of 1 77 s 1.94 l.t8 $ 0.08 S 1.37 $1.32 $1.27 Trble of Contenti CONSOLIDATED STATEMENTS OF COMPREIIENSTVE INCOME Avista Corporatiott For the Years Ended December 3 I Dollan in thousands 2016 201 5 20 14 Reclassification adjustment for realized gains on investment securities included in net incomc - net oftaxcs of$0, $0 and ), respcctively Change in unfunded benefit obligation for pension and other postretirement benefit plans - net oftaxes of$(495), $667 and $(l,967), respectively Comprehensive income 136.398 124,555 190.208 Comprehensive income attributable to Avista Corporation shareholders $ 136,310 $ 124,465 $ 189,972 The Accompanying Notes are an Inlegral Part ofThese Slalements, 84 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 't, Page 91 ot 177 Nct income Other Comprehensive Income (Loss): Unrealized investment gains - net oftaxes of$0, $0 and $664, respectively s 137,316 $ 123,3 l7 $192,277 (el8)1,238 1,126 (2) 462 (3,6s s ) 8)(91 1,238 \2,069) Tabl€ of Contents CONSOLIDATED BALANCE SHEETS Avisla Corporatiotr As ofDecember 3 I Dollars in thousands 2016 2015 Current Assets: Accounts and notes receivable-less allowances of$5,026 and $4,530,180,265 Materials and Other current assets fuel stock and stored natural 51,3 t4 49,625 54,1 48 30,620 Net Utility Construction work in 150,47 4 Less: Accurnulated Other Non-current Assets: and arrortization I,509,473 Goodwill 57,6'72 57,672 and investments-net and other non-current assets 12,224 59,733 assets for and othcr bcn cfits asset for interest rate Othcr defcrrcd Total assets $ s,309,7ss $ 4,906,649 The Accompanying Notes are an Integral Part ofThese Statements. tt5 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 92 oI 177 $ 351 ,341 306,046 5,129,192 202,683 5,331,875 1.433,286 4,t47,500 3,898,589 141,443 143,646 I 09,853 240,114 135,75 I I 6l ,508 16,919 51)6 101,240 23 5,009 99,798 83,973 32,420 5,928 669,471 558,368 Tabl€ of Contents CONSOLIDATED BALANCE SHEETS (continued) Avista Corporation As ofDecember 3 I Dollars in thousands 2016 201 5 Current Liabilities: Current debt and leases 93,167 derivative liabilities Accrued taxes other than income taxes 407,528 14,268 10,233 474,680 and other postretirement benefits Total current liabilitics debt to affiliated trusts 51,547 51,54'7 Pcnsions and other bcncfits 201,453 Non-current interest rate derivative liabilities 28,'705 30,679 Total liabilities Equity: Common stock, no par value; 200,000,000 shares authorized;.64,187,934 and 62,312,651 shares issued and as of December 3 l, 201 6 and December 3 l, 2015,1,075,281 1,004,336 Retained 58 I ,014 Interests Total liabilities and equity $ s,309,75s $ 4,906,649 The Accompanying Notes are an Integral Part ofThese Statemenls, 86 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 93 of 177 $r 15,545 $ 3,287 120,000 7,03 5 15,869 11 1'14 30,820 10,994 '70,604 3,661,279 I,648,727 (2sl) 1,s28,626 (33e) | ,648,47 6 1,528,287 Teble of CoItetrts CONSOLIDATED STATEMENTS OF CASH FLOWS Avisla Corporation For the Years Ended December 3 I Dollan in thousands Operating Activities: Net income Non-cash items included in net income: Depreciation and amonization Provision for deferred income taxes Power and natural gas cost amortizations (deferrals), net Amonization of debt expense Amortization ofinvestment in exchange power Stock-based cornpensation expense Equity-relatcd AFLIDC Pension and other postretirement benefit expense Amortization of Spokane Energy contract Gain on sale ofEcova Other rcgulatory assets and liabilitics and dcfcrred dcbits and credits Change in decoupling regulatory deferral Other Contributions to defined benefit pension plan Cash paid for settlement ofinterest rate swap derivatives Changes in certain current assets and liabilities: Accounts and notes receivable Materials and supplies, fuel stock and stored natural gas Collateral posted for derivative instruments Income taxes receivable Other current assets Accounts payable Other current liabilities Net cash providcd by operating activities Investing Activities: Utility property capital expenditures (excluding equity-related AfLlDC) Other capital expenditures Cash received (paidl in acquisition, net Issuancc ofnotcs rcccivablc at subsidiarics Repayments from notes receivable at subsidiaries Investments made by subsidiaries Increase in funds held for clients Purchase ofsecuritics available for salc Sale and maturity ofsecurities available for sale Proceeds from sale ofEcova, net ofcash sold Other Nel cash used in investing activities 2016 201 5 2014 s 137,316 $ 123,317 $ 192,277 164,925 124,543 16,835 3,47'.7 2,450 7.891 (8,47 s) 38,786 14,694 147,835 5 r ,801 21,358 3,526 2,450 6,914 (8,3 3 1) 3 7,050 13,508 (777) 4,569 (10,e33) (sl7) ( I 2,000) (10,538) t2,208 (13,30r) t9,772 2,338 (8,1 38) (6.471) 138,337 144,269 (14,82 l ) 3,692 2,450 8,t r4 (8,8 0 8) 22,943 12,417 (160,612) 7,906 1,103 (3 2,000) | 6,425 (l 9,394) (23,30 l ) (36,1 l 0) (7 ,t t7) (t2,s62) 32,060 (26,245) (29.789) 5 557 (1 2,000) (s 3,e 66) (r 7,1 70) 834 10.712 (3 3,923 ) (3,907) 5,t7 6 10.546 358.267 375,640 267,268 (10,094) 5,000 (13,097) (406,644) (3s3) (393,425) (88s) (e5) (2,307) (t,e44) 13,856 (3,027) (325,s r 6) (6,427) 15,007 (1,200) (1,072) (r 8,931) (12,267) t 4,612 229,903 2,t55(7.278) $ (432,466)$ (387,827) $ (l 03,736) The Accompanying Notes are an Integral Part ofThese Statements. 87 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 94 of 1 77 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Avista Corporation For the Years Ended December 3 I Dollars in thousands 2016 201 5 2014 Net increase committed line of credit from issuance of 245.000 100.000 150,000 ofnonrecourse (1 ,43 1) Repurchase of common stock Increase in client fund obligations (2,e20) 16,216 to option holders and for sale ofEcova (20,871 ) Net cash providcd by (uscd in) financing activities Cash and cash equivalents at ofyear SupplementaI Cash Flow Information: 10,484 22,143 82,574 lnterest 19 $ activities: Valuation adjustment for rcdccmablc Non-cash stock issuance for acquisition ofAERC intcrcsts 150,1 l9 The Accompauying Notes are an Integral Part ofThese Statements 88 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 95 of 1 77 s 8,507 $ 10,484 $ 22,t43 s 15,000 $ 66,953 (87, I 54) (4.410)(l r,379) $ 11 111 528 (223,963) s 30,252 79,673 S (9,961) 35,248 73,526 45,416 Tebl€ of Contents CONSOLIDATED STATEMENTS OF EQIITIY AND REDEEMABLE NONCONTROLLING INTERESTS Avisla Corporatiotr For the Years Ended December 3 I Dollars in thousands Common Stock, Shares: Shares outstanding at beginning ofyear Shares issued through equity compensation plans Shares issued through Employee Investment Plan (40 I -K) Shares issued through Dividend Reinvestment Plan Shares issued through sales agency agreements Shares issucd for acquisition Shares repurchased Shares outstanding at end ofyear Common Stock, Amount: Balance at beginning ofyear Equity compensation cxpcnse Issuance ofcornrnon stock through equity compensation plans Issuance of common stock through Employee Investment Plan (401-K) Issuance of common stock through Dividend Reinvestment Plan Issuance ofcommon stock through sales agency agreements, net ofissuance costs Issuance ofcomrnon stock for acquisition, net ofissuance costs Payment of minimum tax withholdings for share-based payment awards Repurchase of common stock Equity transactions of consolidated subsidiaries Payment to option holders and redcemablc noncontrolling interests for sale ofEcova Excess tax benefits Balance at end ofyear Accumulated Other Comprehensive Loss: Balance at beginning ofyear Other comprehensive income (loss) Balance at end ofyear Retained Eamings: Balance at beginning ofyear Nct incomc attributablc to Avista Corporation sharcholdcrs Cash dividends paid (common stock) Repurchase of common stock Valuation adjustments and other noncontrolling interests activity Balance at end ofyear Total Avista Corporation sharcholders' equity The Accompanying Notes are an Integral Pafi of These Statements- 581,0r4 530,940 491,599 $ 1,648,727 $ t,528,626 S 1,483,671 62,312,651 203,727 26,556 62,243,374 125,620 3 3,05 7 2016 201 5 2014 60,076,752 51,127 33,1 68 I10,50r l.645,000 (89,400) 4.501,441 (2.s29,61s) 64,187,934 62,312,651 62,243,374 s 1,004,336 $ 7,065 624 1,06 t 65,267 (3,072) 999,960 $ 6,035 462 I,099 (l,832) (r,431) 43 896,993 7,676 108 1,005 3,441 149,625 (40,486) (1,062) (20,871 ) 3,53 1 I ,075,281 1,004,336 999,960 (6,6s0) (el8) (7,888) 1,238 (5,8 r 9) (2,06e) (7,568)(6,6s0)(7,888) 530,940 137,228 (87.1 s4) 491,599 I )7 1)1 (82,397) (l,48e) 407,092 192,041 (78,314) (39,370) I 0,t 50 89 Exhibit No. 3 Case Nos. AVU-E-'l7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 96 of 1 77 Table of Contents CONSOLIDATED STATEMENTS OF EQUTTY AND REDEEMABLE NONCONTROLLING INTERESTS (continued) Avisla Corporatiort For the Years Ended December 3 I Dollan in thousands 2016 2015 2014 Balance at $ 20,001 Deconsolidation ofnoncontrolling interests related to sale ofEcova Balance at end ofyear Redeemable Noncontrolling Interests: (251)(33e) Nct income attributable to intcrests Valuation and other interests The Accompanying Notes are an Integral Parl ofThese Statements. 90 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 97 oI '177 $(33e) $ 9088 (42e) $l $ t,528,287 $ 1,483,242 $ s $$t5,889 (4) (r2) (l s,873) $$ Table of Contetrts AVISTA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SI]MMARY OF SIGNIFICANT ACCOT]NTING POLICIES Nature ofBusiness Avista Corp. is primarily an electric and natural gas utility with certain other business ventures. Avista Utilities is an operating division ofAvista Corp., comprising thc regulatcd utility operations in thc Pacific Northwcst. Avista Utilitics providcs elcctric distribution and transrnission, and natural gas distribution services in parts ofeastem Washington and northem Idaho. Avista Utilities also provides natural gas distribution service in parts ofnortheastem and southwestem Oregon. Avista Utilities has electric generating facilities in Washington, Idaho, Oregon and Montana. Avista Utilities also supplies electricity to a small number of customers in Montana, most of whom are employees who operate Avista Utilities'Noxon Rapids generating facility. AERC is a wholly-owned subsidiary of Avista Corp. The primary subsidiary of AERC is AEL&P, which comprises Avista Corp.'s regulated utility operations in Alaska. AERC was acquired by Avista Corp. on July I , 20 l4 and there are no AERC eam ings included in the overall results of Av ista Corp. prior to that date. See Note 4 for information regarding the acquisition of AERC. Avista Capital, a wholly oumed non-regulated subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, with the exception of AJT Mining Properties, which is a subsidiary of AERC. During the first half of 2014 and prior, Avista Capital's subsidiaries included Ecova, which was an 80.2 percent owned subsidiary priorto its disposition on June 30,2014. See Note 5 for information regarding the disposition ofEcova and Note 2 I forbusiness segment information. Basis ofReporting The consolidated financial statements include the assets, liabilities, revenues and expenses ofthe Company and its subsidiaries and other majority owned subsidiaries and variablc intercst cntitics forwhich the Company or its subsidiarics are thc primary beneficiaries. Ecova's rcvcnues and cxpcnscs are included in the Consolidated Statements oflncome in discontinued operations; however, as ofJune 30,2014 and forall subsequent reporting periods there are no balance sheet amounts included for Ecova. All tables throughout the Notes to Consolidated Financial Statements that present information related to the Consolidated Statements of Ilcome were revised to include only the amounts from continuing operations. Intercompany balances were eliminated in consolidation. The accompanying consolidated financial statements include the Company's proportionate share ofutility plant and related operations resulting from its intercsts in jointly owncd plants (see Notc 7). Use of Estimales The prcparation ofthe consolidated financial statements in conformity with GAAP requires managcment to make cstimatcs and assumptions that affcct thc amounts reported for assets and liabilities and the disclosure ofcontingent assets and liabilities at the date ofthe financial statements and the reported amounts ofrevenues and expenses during the reporting period. Significant estimates include: . determining the market value ofenergy commodity derivative assets and liabilities, . pension and otherpostrctircmcnt bcncfit plan obligations, . contingent liabilities, . goodwill impairment testing, . recoverability ofregulatory assets, 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 flom the amounts reported and disclosed herein. System ofAccounts The accounting records ofthe Company's utility operations are maintained in accordance with the uniform system ofaccounts prescribed by the FERC and adoptcd by the statc regulatory commissions in Washington, Idaho, Montana, Orcgon and Alaska. 9l Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 98 of 1 77 Table of Contcnts AVISTA CORPORATION Regulation The Company is subject to state regulation in Washington, Idaho, Montana, Oregon and Alaska. The Company is also subject to federal regulation primarily by thc FERC, as well as various other federal agencics with rcgulatory ovcnight ofparticular aspccts ofits operations. Utilily Revenues Utility revenucs related to the sale ofcnergy are recorded when service is rendered or energy is delivcred to customcrs. Revenues and rcsource costs from Avista Utilities' settled energy contracts that are "booked out" (not physically delivered) are reported on a net basis as part ofutility revenues. AEL&P does not have booked out transactions. The determination ofthe energy sales to individual customers is based on the reading oftheir meters, which occurs on a systematic basis throughout the month. At the end ofeach calendar month, the amount ofenergy delivered to customers since the date ofthe last meter reading is estimated and the corresponding unbilled revenue is estimated and recorded. Our estimate ofunbilled revenue is based on: . the number ofcustomers, . current rates, . meterreading dates, ' actual nativc load forelectricity, . actual throughput fornatural gas, and . electric line losses and natural gas system losses. Any difference betwecn actual and estimatcd revenue is automatically conected in the following month whcn the actual metcr reading and customer billing occurs. Accounts receivable includes unbilled energy rcvenues ofthe following amounts as ofDecember 3 I (dollars in thousands): 201 6 201 5 Unbilled accounts receivable $ '12,377 $ 62,003 (hher Non-Utility Revenues Revenues from the other businesses are primarily derived from the operations of AM&D, doing business as METALft, and are recognized when the risk of loss transfers to the custorner, which occurs when products are shipped. In addition, prior to Spokane Energy's dissolution in 20 I 5, there were revenues at Spokane Energy related to a long-term fixed rate electric capacity contract. This contract was transferred to Avista Corp. during the second quarter of20 I 5 and the revenues from this contract subsequent to the transfer are included in utility revenues. Depreciation For utility operations, depreciation expense is estimated by a method ofdepreciation accounting utilizing composite rates for utility plant. Such rates are designed to provide for retirements ofpropefiies at the expiration oftheir service lives. For utility operations, the ratio ofdepreciation provisions to average depreciable property was as follows for the years ended December 3 I : 2016 2015 2014 Avista Utilities Ratio ofdepreciation to average depreciable property AIaska Electric Light and Power Company Ratio ofdepreciation to average depreciable property 92 3.1 lo/o 2.39% 3.09yo 2.97% 2.430/0 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 99 ot 177 Table of Contents AVISTA CORPORATION The average service lives for the following broad categories ofutility plant in service are (in yean): Electnc thermal/other production Hydroelectric production Electnc transmission Electnc distribution Natural gas distribution properry Other shorterlived general plant $ Avista Utilities Alaska Electric Light and Powcr Company 4t 78 57 35 45 9 41 42 4l 40 N/A l5 Taxes Aher 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 income. These taxes are generally based on revenues or the value ofproperty. Utility related taxes collected from customers (primarily state excise taxes and city utility taxes) are recorded as operating revenue and expense. Taxes other than income taxes consisted ofthe following items for the years ended December 3 I (dollan in thousands): 2016 2015 2014 Utility related taxes Propcrty taxcs Other taxes Total 57,745 $ 3 8,5 05 2,485 59,t7 3 35,948 2,536 58,250 11q1) 2,1 18 $ s 98,735 $97,657 S 94,300 Allowancefor Funds Used During Conslruclion AFUDC represents the cost ofboth 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 ofthe cost ofutitity plant. The debt component ofAFUDC is credited against total interest expense in the Consolidated Statemcnts oflncome in thc line itcm "capitalized intcrest." Thc cquity componcnt ofAFUDC is includcd in the Consolidated Statcmcnt of Income in the line item "other income-net." The Company is permitted, under established regulatory rate practices, to recover the capitalized AFUDC, and a reasonable retum 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 occuruntil 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 3 I : 201 6 201 5 2014 Avista Utilities Effective AFUDC rate Alaska Electric Light and Power Company Effective AFUDC rate 't.29%7.32%7.64% 9.40%9.31%;o 10.37% Income Taxes Deferred income tax assets represent future income tax deductions the Company expects to utilize in future tax retums to reduce taxable income. Deferred income tax liabilities represent future taxable income the Company expects to recognize in future tax retums. Deferred tax assets and liabilities arise when thcre are temporary diffcrences resulting from differing treatment ofitcms fortax and accounting purposes (such as dcpreciation). A dcferred income tax assct or liability is determined based on the enacted tax rates that will be in effect when the temporary differences between the financial statement carrying amounts and tax basis ofexisting assets and liabilities are expected to be reported in the Company's consolidated income tax retums. The deferred income tax expense for the period is equal to the net change in the defered income tax asset and liability accounts from the beginning to the end ofthe period. The effect on deferred income taxes llom a change in tax rates is recognized in income in the period that includes the enactment date unless a regulatory order specifies dcfcrral ofthc effect ofthc change in tax ratcs ovcr a longer pcriod oftime. Thc Company establishes a valuation allowance when it is morc likely than not that all, or a portion, ofa deferred tax asset will not be realized. Deferred income tax liabilities and regulatory assets are established for income tax benefits flowed through to customers. The Company did not incur any penalties on income tax 93 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule '1, Page 100 ot 177 Table of Contents AVISTA CORPORATION positions in 2016,2015 or2014. The Company would recognize interest accrued related to income tax positions as interest expense and any penalties incurred as other operating expense. Stock-Based Co mpensation The Company curently issues three types ofstock-based compensation awards - restricted shares, market-based awards and performance-based awards. Historically, these stock compensation awards have not been material to the Company's overall financial results. Compensation cost relating to share-based payment transactions is recognized in the Company's financial statemcnts based on the fair value ofthe equity or liability instruments issued and recorded over the requisite service period. The Company recorded stock-based compensation expense (included in other operating expenses) and income tax benefits in the Consolidated Statements of Income ofthe following amounts for the years ended December 3 1 (dollars in thousands): 2016 20t5 2014 Stock-basedcompensation expense $ 7,891 $ 6,914 $ 6,007 lncome tax benefits (l) 4,359 2,420 2,102 (1 ) Income tax benefits for 201 6 include $ I .6 million associated with excess tax benefits on settled share-based employee payments. The excess tax benefits were recognized in the Statement oflncome for 20 I 6 due to the adoption ofASU 20 I 6-09, effective January I ,2016. See Note 2 for further discussion. Restricted share awards vest in equal thirds each year over a three-year period and are payable in Avista Corp. common stock at the end ofeach year ifthe scrvicc condition is met. In addition to the scrvicc condition, thc Company must mcct a rctum on equity targct in order for the Chief Exccutive Officer's restricted shares to vest. Restricted stock is valued at the close ofmarket ofthe Company's common stock on the grant date. Total Shareholder Retum (TSR) awards are market-based awards and Cumulative Eamings Per Share (CEPS) awards are performance awards. CEPS awands were first granted in 2014. Both types ofawards vest after a period ofthree years and are payable in cash or Avista Corp. common stock at the end ofthe three-yearperiod. The method oflsettlement is at the discretion ofthe Company and historically the Company has settled these awards through issuance of Avista Corp. common stock and intends to continue this practice. Both types oflawards entitle the recipients to dividend equivalent rights, are subject to forfciturc undcr certain circumstances, and arc subjcct to meeting specific market or performancc conditions. Based on thc level ofattainmcnt ofthc markct or performance conditions, the amount ofcash paid or common stock issued will range from 0 to 200 percent ofthe initial awards granted. Dividend equivalent rights are accumulated and paid out only on shares that eventually vest and have met the market and performance conditions. For both the TSR awards and thc CEPS awards, the Company accounts for thcm as cquity awards and compcnsation cost for thcse awards is rccognized ovcr the requisite service period, provided that the requisite service period is rendered. For TSR awands, ifthe market condition is not met at the end ofthe three- year service period, there will be no change in the curnulative amount ofcompensation cost recognized, since the awards are still considered vested even though the market metric was not met. For CEPS awards, at the end of the three-year service period, if the intemal performance metric of cumulative eamings per share is not met, all compensation cost for these awards is reversed as these awards are not considered vested- The fairvalue ofeach TSR award is estimated on the date ofgrant using a statistical model that incorporates the probability ofmeeting the market targets based on historical rctums relativc to a peer group. The cstimatcd fair value ofthe cquity component ofCEPS awards was cstimatcd on thc datc ofgrant as thc share pnce ofAvista Corp. common stock on the date ofgrant, less the net present value ofthe estimated dividends over the three-year period. 94 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page '101 oI '177 Table of Contents AVISTA CORPORATION The following table summarizes the number ofgrants, vested and unvested shares, eamed shares (based on market metrics), and other pertinent information rclated to thc Company's stock compensation awards for the ycars endcd Dcccmbcr 3 I : 2016 201 5 2014 Restricted Shares Shares granted during the year Shares vested during the year Unvested shares at end ofyear Unrccognized compcnsation expcnse at cnd ofyear (in thousands) TSR Awards TSR shares granted during the year TSR shares vested during the year TSR shares eamed based on market metrics Unvested TSR shares at end ofyear Unrecognized compensation expense (in thousands) CEPS Awards CEPS shares granted during the year CEPS shares vested during the year CEPS shares eamed based on market metrics Unvested CEPS shares at end ofyear Unrecognized compensation expense (in thousands) 58,610 (52,385) 109,806 1,853 $ I16,435 (il 1,665) I 32.887 1)) ?)9. 3,409 $ 57,521 (55,835) 90460 I1o,452 |,671 $ 58,302 (60,379) I 06,091 1,705 s 58,259 62,075 (s2,899) | 12,042 1,349 59,025 58,01 7 I ,577 s $ $ I16,435 (17 | ,334) 222,734 223,697 3,219 $ I 17,550 (l 67,s84) 97,199 287,834 2,833 I11,887 l,840 $ Outstanding TSR and CEPS share awands include a dividend component that is paid in cash. This component ofthe share grants is accounted for as a liability award. These liability awards arc revalucd on a quartcrly basis taking into account the numbcr ofawards outstanding, historical dividcnd ratc, the changc in the value of the Company's common stock relative to an extemal benchmark (TSR awards only) and the amount of CEPS eamed to date compared to estimated CEPS over the performance period (CEPS awards only). Over the life ofthese awards, the cumulative arnount ofcompensation expense recognized willmatchtheactualcashpaid.AsofDecember3l,20l6and20l5,theCompanyhadrecognizedcumulativecompensationexpenseandaliabilityof$1.5 million, respectively, related to the dividend component on the outstanding and unvested share grants. Aher Income - Net Other Income - net consisted ofthe following items for the years ended December 3 I (dollan in thousands): 20t6 2014 Interest income Intcrest on rcgulatory defcrrals Equity-related AFUDC Net gain (loss) on investments Other income Total 10.078 $9,300 $t 1 ,346 Earnings per Common Share Attibutuble to Avista Corporation Shareholders Basic eamings per common share attributable to Avista Corp. shareholders is computed by dividing net income attributable to Avista Corp. shareholders by the weighted-average number of common shares outstanding for the period. Diluted eamings per common share attributable to Avista Corp. shareholders is calculated by dividing net income attributable to Avista Corp. shareholders (adjusted for the effect ofpotentially dilutive securities issued to noncontrolling interests by the Company's 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 ofstock options and contingent stock awards. See Note I 8 for eamings per common share calculations. 95 5 $1.823 $ 1,308 8,475 (2,1s2) 624 6s3 $ 48 8,331 (637) 905 987 220 8,808 276 I,055 $ Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, AViSta Schedule 1, Page 102 of 177 Table of Contents AVISTA CORPORATION Cash and Cash Equivalents For the purposes ofthe Consolidated Statements ofCash Flows, the Company considers all temporary investments with a maturity ofthree months or less when purchased to be cash equivalents. A ll owanc e fo r Do ubtful Ac c o unts Thc Company maintains an allowancc for doubtful accounts to providc for estimated and potcntial losses on accounts rcccivable. The Company detcrmines 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 3 I (dollars in thousands): 2016 2015 2014 Allowance as ofthe beginning ofthe year Additions expensed dunng the year Net deductions (l ) Allowance as ofthc cnd ofthc year Fuel stock Stored natural gas Total $4,530 $ 6,053 (s,ss7) 4,888 $ 5,802 (6,1 60) 44,309 5,296 (44,717) $5,026 $4,530 $4,888 (l) During20l4,theCompanyreceived$l5.0millioningrossproceedsrelatedtothesettlementofitsCalifomiawholesalepowermarketslitigation.The gross proceeds cffectively settled all outstanding receivables and payablcs at Avista Encrgy (which had been fully reserved against sincc 2001). As a result ofthe settlement, the Company reversed $l 5.0 million ofthe allowance, which was recorded as a reduction to non-utility other operating expenses on the Consolidated Statements oflncome, and the remainder ofthe receivables, payables and allowance of$24.5 million were removed from the Consolidated Balance Sheets (and had no effect on net income). Materials and Supplies, Fuel Stock and Stored Noturul Gas Inventories ofmaterials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower ofcost or marketforournon-regulatedoperationsandconsistedofthefollowingasofDecember3l (dollarsinthousands): 2016 20 I 5 Materials and supplies $40,700 $ 4,585 8,029 37.1 0 I 4,27 3 12.77 4 s 51,3t4 $ 54,148 Utility Plant in Service The cost ofadditions to utility plant in service, including an allowance for funds used during construction and replacements ofunits ofproperty and improvements, is capitalized. The cost ofdepreciable units ofproperty retired plus the cost ofremoval less salvage is charged to accumulated depreciation. A sset R etirerrrent Ob I ig atio ns The Company records the fair value of a liability for an ARO in the period in which it is incuned. Wren the liability is initially recorded, the associated costs ofthe ARO are capitalized as part ofthe carrying amount ofthe related longJived asset. The liability is accreted to its present value each period and the related capitalized costs are depreciated over the useful life ofthe related asset. In addition, ifthere are changes in the estimated timing or estimated costs of the AROs, adjustments are recorded during the period new information becomes available as an increase or decrease to the liability, with the offset recorded to the related longJived asset. Upon retirement ofthe asset, the Company either settles the ARO for its recorded amount or incurs a gain or loss. The Company records regulatory assets and liabilities for the difference between asset retirement costs currently recovered in rates and AROs recorded since asset retirement costs are recovered through rates charged to customers (see Note 9 for further discussion ofthe Company's asset retirement obligations). 96 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 103 of 177 Table of Contents AVISTA CORPORATION The Company recovers certain asset retirement costs through rates charged to customers as a portion ofits depreciation expense for which the Company has not recorded asset retirement obligations. The Company has recorded the amount ofestimated retirement costs collected from customers (that do not represent legal or contractual obligations) and included them as a regulatory liability on the Consolidated Balance Sheets in the following amounts as of December 3 I (dollars in thousands): 2016 2015 Regulatory liability forutility plant rctiremcnt costs $ 273,983 $ 261,594 Goodwill Goodwill arising fiorn acquisitions represents the future econorric benefit arising frorn other assets acquired in a business combination that are not individually identified and separately recognized. The Company evaluates goodwill for impairment using a qualitative analysis (Step 0) for AEL&P and a cornbination ofdiscounted cash flowmodels and amarketapproach forthe othersubsidiaries on at least an annual basis ormore frequently ifimpairment indicators arise. The Company completed its annual evaluation ofgoodwill for potential impairment as ofNovember 30, 20 I 6 and detennined that goodwill was not impaired at that time. The changes in the carrying amount ofgoodwill are as follows (dollars in thousands): Aocumulatcd AEL&P other '*ff'JJr""t Totar Balance as ofJanuary l, 20 I 5 Adjustmcnts Balance as ofthe December 3 I , 20 I 5 Balance as ofthe December 3 I , 20 I 6 $52,730 $ (304) 12,979 $(7,733) s 57 .97 6 (3 04) 52,426 12.979 (7,733)57.672 $52,426 $12,979 $(7,733) $57,672 Accumulated impairment losses are attributable to the other busincsses. The goodwill adjustmcnts rccorded during 20 I 5 rclate to thc final truc-up ofincome taxes associated with the acquisition of AERC, which occurred on July I , 201 4. See Note 4 for information regarding this business acquisition and Note 2 I regarding the Company's reportable segments. Derivative Assets and Liabilities Derivatives are recorded as either assets or liabilities on the Consolidated Balance Sheets measured at estimated fair value. The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and losses on energy commodity transactions until the period of delivery. Realized benefits and costs result in adjustrnents to retail rates through PGAs, the ERM in Washington, the PCA rnechanism in Idaho, and periodic general rates cases. The resulting regulatory assets have been concluded to be probable ofrecovery through future rates. Substantially all forward contracts to purchase or sell power and natural gas are rccorded as derivativc assets or liabilitics at estimatcd 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 ofthe contract that is determined to be other+han-temporary. For interest rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities, as well as offsetting regulatory assets and liabilities, such that there is no income statement impact. The interest rate swap derivatives are risk management tools similar to energy commodity derivatives. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest expense over the term ofthe associated debt. The Company records an offset ofinterest rate swap derivative assets and liabilities with regulatory assets and liabilities, based on the prior practice ofthe commissions to provide recovery through the ratemaking process. As of December 3 I , 201 6, the Company has multiple master netting agreements with a variety of entities that allow for cross-commodity netting of derivative agreements with the same counterparty (i.e. power derivatives can be netted with natural gas derivatives). In addition, some master netting agreements allow for the netting ofcommodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for prescntation in thc Consolidated Balance Shccts. 97 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 'l , Page 104 ol '177 Table of Contents AVISTA CORPORATION Fair Volue Measurcmenls Fair value represents the price that would be received when selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at thc measurement date. Energy commodity dcrivativc assets and liabilities, dcfcred compensation assets, as well as derivatives related to interest rate swap derivatives and foreign curency exchange derivatives, are reported at estimated fairvalue on the Consolidated Balance Sheets. See Note I 6 for the Company's fair value disclosures. Regulatory Deferred Charges aad Credils The Cornpany prepares its consolidated financial statements in accordance with regulatory accounting practices because: . rates for regulated seryices are established by or subject to approval by independent third-party regulators, . the regulatcd rates are designcd to recoverthe cost ofproviding the regulated scrvices, and . in view ofdemand for the rcgulated services and the levcl ofcompetition, it is reasonablc to assumc that ratcs can bc charged to and collected from customers at levels that will recover costs. Regulatory accounting practices require that certain costs and/or obligations (such as incuned 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 oflncome until the period during which matching revenues are recognized. The Company also has decoupling revenue deferrals. Decoupling revenue deferrals are recognized in the Consolidated Statements oflncome during the period they occur(i.e. during thc period ofrevenue shortfall orexccss due to fluctuations in customerusage), subjcct to ccrtain limitations, and a regulatory assct/liability is established which will be surcharged or rebated to customers in future periods. GAAP requires that for any altemative regulatory revenue program, like decoupling, the revenue must be expected to be collected from customers within 24 months ofthe deferral to qualifo for recognition in the current period Consolidated Statement oflncome. Any amounts included in the Company's decoupling program that are not expected to be collected from customers within 24 months are not recorded in the financial statements until the period in which revenue recognition criteria are met. This could ultimately result in decoupling revenue being rccognizcd in a future pcriod. Ifat some point in the future the Company determines that it no longer meets the criteria for continued application ofregulatory accounting practices for all or a portion ofits regulated operations, the Company could be: . required to write offits regulatory assets, and . precluded fiom the future deferral ofcosts or decoupled revenues not recovered through rates at the time such amounts are incurred, even if the Company expected to recover these amounts from customers in the future. See Note 20 for further details ofregulatory assets and liabilities. Unamortized Debt Expense Unamortized debt expense includes debt issuance costs that are amortized over the life ofthe related debt. These costs are recorded as an offset to Long-Term Debt and Capital Leases on the Consolidated Balance Sheets. Unamortized Debt Repurchase Costs Forthe Company's Washington regulatoryjurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt are amortized over the remaining life ofthe original debt that was repurchased or, ifnew debt is issued in connection with the repurchase, these costs are amortizcd over thc life ofthc new dcbt. In thc Company's other rcgulatory jurisdictions, prcmiurns paid to rcpurchase dcbt prior to 2007 are being amortizcd overthe average remaining maturity ofoutstanding debt when no newdebt was issued in connection with the debt repurchase. These costs are recovered through retail rates as a colnponent ofinterest expense. A ccumalatud Aher C o mp re hensive Lo ss Accumulated other comprehensive loss, net oftax, consisted ofthe following as ofDecember 3 l (dollars in thousands): 2016 20t5 Unfunded benefit obligation forpensions and otherpostretirenrent benefit plans - net oftaxes of$4,075 and $3,580,respectively $'7,568 $6,650 98 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 1 05 of 1 77 Table of Contents AVISTA CORPORATION The following table details the reclassifications out ofaccumulated other comprehensive loss by component for the years ended December 3 I (dollars in thousands): Amouns Rectrcified from Accumulated Other Comprehensive Loss Details about Accumulated Other Comprehensive Loss Components 20t6 20t5 2014 Affected Line Itcm in Statcment of Income Realized gains on investrnent securities Real ized losses on investrnent securities Amortization ofdefined benefit pension items Arnortization ofnet prior service cost Amortization of net Ioss Adjustment due to effects ofregulation (r,r7l) s (7,602) 7,360 3l $ 2,623 (7 4e) $$$(3) 735 (a) (a) Total before tax Tax expense (a) Net oltax 732 (27 2) $$$460 (1,0e4) (b) (83.301) (b) 78,773 (b) (l ,41 3) 495 1,905 rc67) (5,622) Total before tax 1,967 Tax benefit (expense) (el8) $t,238 $(3,655) Net oftax (a) Thcse amounts wcrc includcd as part ofnet income from discontinued operations for all pcriods presentcd (sec Note 5 for additional dctails). (b) Thcsc accumulatcd other comprchensivc loss components arc included in thc computation ofnct periodic pension cost (sce Notc 1 0 for additional details). Ap p ropriale d R etai ned E arning s In accordance with the hydroelectric licensing requirements ofsection I 0(d) ofthe Federal Power Act (FPA), the Company maintains an appropriated retained eamings account for any eamings in excess ofthe specified rate ofretum on the Company's investment in the licenses for its various hydroelectric projects. Per section I 0(d) of the FPA, the Company must maintain these excess eamings in an appropriated retained eamings account until the termination of the licensing agreements or apply them to reduce the net investment in the licenses ofthe hydroelectric projects at the discretion ofthe FERC. The Company typically calculates the eamings in excess ofthe specified rate ofretum on an annual basis, usually during the second quarter. In addition to thc hydroclectric projcct licenscs identificd abovc for Avista Utilitics, thc requircments ofscction I 0(d) ofthc FPA also apply to thc AEL&P licenses for Lake Dorothy and Annex Creek/Salmon Creek (combined). The appropriated retained eamings amounts included in retained eamings were as follows as ofDecember 3 I (dollars in thousands): 2016 201 5 Appropriated retained eamings $ 25,564 $ 2l ,030 Operating Leases The Company has multiple lease arrangements involving various assets, uith minimum terms ranging lrom I to 45 yean. Future minimum lease payments required under operating leases having initial or remaining noncancelable lease terms in excess ofone year were not material as ofDecernber 3 I , 20 I 6. Capital Leases The Company has two capital leases, one at Avista Corp. and one at AEL&P. The capital lease at Avista Corp. expires in 20 I 8 and is not material to the financial statements as ofDcccmber 3 l, 20 I 6. The capital lcase at AEL&P is a PPA (trcatcd as a lcasc for accounting purposcs) relatcd to thc Sncttisham Hydroelectric Project that exprres in 2034. Wlile the two leases are treated as capital leases for accounting purposes, for ratemaking purposes these agreements are treated as operating leases with a constant level ofannual rental expense (straight line expense). Because ofthis regulatory treatment, any difference between the operating lease expense for ratemaking purposes and the expenses recognized under capital lease treatment (interest and depreciation ofthe capital lease asset) is recorded as a regulatory asset and amortized during the later years ofthe lease when 99 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1 , Page 106 of 177 Table of Contents AVISTA CORPORATION the capital lease expense is lessthan the operating lease expense included in base rates. See Note 14 forfurtherdiscussion ofthe Snettisham capital lease. Contingencies The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency ifit is probable that a liability has bcen incurred and thc amount ofthe loss or impairmcnt can bc rcasonably cstimatcd. Thc Company also discloscs losscs that do not meet these conditions for accrual, ifthere is a reasonable possibility that a material loss may be incurred. As ofDecember 3 1,201 6, the Company has not recorded any significant amounts related to unresolved contingencies. See Note I 9 for further discussion ofthe Company's commitments and contingencies. NOTE 2. NEWACCOTJNTING STANDARDS ASU No. 20 1 4-09, "Revenue Jrom Contracts with Customers (Topic 606)" In May 20 I 4, the FASB issucd ASU No. 20 I 4-09, which outlincs a single comprehcnsive modcl for cntitics to usc in accounting for rcvcnuc arising from contracts v/ith customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle ofthe revenue model is that an entity should identi! the various performance obligations in a contract, allocate the transaction price among the perfonnance obligations and recognize revenue when (or as) the entity satisfies each performance obligation. This ASU was originally effective for periods beginning after December | 5,2016 and early adoption was not permitted. In August 201 5, the FASB issued ASU No. Z0l5-14, "Revenue from Contracts with Customers (Topic 606): Defcnal ofthc Effectivc Datc," which dcfencd the effcctivc datc ofASU No. 20 I 4-09 for onc year, with adoption as oftlrc original datc permittcd. The Cornpany has fonned a revenue recognition standard irnplementation team that is working through several implementation issues described below. The Company has evaluated this standard and is planning to adopt this standard in 201 8 upon its eflective date. The Company is currently expecting to use a modified retrospective method of adoption, which would require a cumulative adjustment to opening retained eamings, as opposed to a full retrospectrve application. Thc Company is not far cnough along in tlrc adoption proccss to dcterminc thc amount, ifany, ofcumulative adjustmcnt ncccssary. Sincc the vast majority ofAvista Corp.'s rcvcnue is from ratc-rcgulatcd sales ofelectricity and natural gas to rctail customcrs and rcvcnuc is rccognizcd as energy is delivered to these customers, the Company does not expect a significant change in operating revenues or net income. The Company is in the process ofreviewing and analyzing certain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural gas), but has not yet identified any significant differences in revenue recognition between current GAAP and ASU 2014-09. During the implementation process, the Company has identified several unresolved issues, the most significant ofwhich are as follows based on our current assessment: Conlributions in Aid ol Construction - There is the potential that CIACs could be recognized as revenue upon the adoption ofASU 20 I 4-09. Under current GAAP, CIACs are accounted for as an offset to the cost ofutility plant in service. Utili\, Related Taxes Collected lrom Customers - There are questions on the presentation ofutility related taxes collected from customers (primarily state excisc taxcs and city utility taxes) on a gross basis. Under cuncnt GAAP, thc Company is allowcd to rccord thcsc utility relatcd taxes on a gross basis in revenue when billed to customers with an offset included in taxes other than income taxes in operating expenses. The Company is evaluating whether this presentation is appropriate under ASU 20 I 4-09 or whether they should be presented on a net basis. To qualify for gross presentation under the new guidance, the Company must perform an analysis to determine ifit is the principal or the agent in regards to utility related taxes. Colle(tibilitv -Therc are qucstions rcgarding the requircment that collcction ofa salc be probablc and how, or if, utilitics should consider bad dcbt collcction mechanisms (riders, base rate adjustments, etc.) in assessing probability of collection on sales to low income customers. Within the utility industry, there is support for and against considering these recovery mechanisms when assessing collectibility ofa sale. Ifthe bad debt recovery mechanisms cannot be considered, there is the potential that certain sales to low income customerc cannot be recognized as revenue until payment is received from the customers, which could result in revenues being recognized in periods other than when the energy was delivered to customers or not recognized at all. The Company is monitonng utility industry implementation guidance as it relates to unresolved issues to determine if there will be an industry consensus regarding accounting and prcscntation ofthcsc items. 100 Exhibit No. 3 Case Nos. AVU-E- t 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 107 of '177 Table of Contents AVISTA CORPORATION ASU No. 201 5-02, "Consolidation (Topic 8 I 0): Amendments to the Consolidation AnalS'sis" In February 201 5, the FASB issued ASU No. 2015-02. This ASU changes the consolidation analysis required underGAAP, including the identification of variable interest entities (VIE). The ASU also removes the defen-al of the VIE analysis related to investments in certain investment funds, which results in a different consolidation evaluation for these types of investments. The Company adopted this standard effective January I , 201 6. The adoption of th.is standard resulted in the identification ofseveral Avista Corp. investments in limited partnerships (or a functional equivalent) that are now considered VIEs undcr thc ncw standard. Consol idation ofthcsc VIEs by Avista Corp. is not rcquircd bccause thc Company docs not havc majority owncrship in any ofthe entities, it does not have the power to direct any activities ofthe entities and it does not have the power to appoint executive leadership (including the board of directors). Avista Corp.'s total investment in these entities is not rnaterial and it does not have any additional commitments to these VIEs beyond the initial investment. See Note 3 for additional discussion of MEs. ASU No. 20 1 6-02 "Leases (Topic 84 2)." In Fcbruary 20 I 6, the FASB issucd ASU No. 2016-02. This ASU introduccs a ncw lcsscc modcl that rcquires most lcases to be capitalizcd and shown on the balance sheet with corresponding lease assets and liabilities. The standard also aligns certain ofthe underlying principles ofthe new lessor model with those in Topic 606, the FASB's new revenue recognition standard. Furthermore, this ASU addresses other issues that arise under the current lease model; for exarnple, eliminating the required use ofbright-line tests in current GAAP for determining lease classification (operating leases versus capital leases). This ASU also includes enhanced disclosures surrounding leases. This ASU is eflective for periods beginning on or after December I 5, 20 I 8; however, early adoption is permittcd. Upon adoption, this ASU must be applied using a modificd rctrospcctivc approach to thc earlicst pcriod prcscnted, which will likcly require restatements ofpreviously issued financial statements. The modified retrospective approach includes a number ofoptional practical expedients that entities may elect to apply. The Company evaluated this standard and determined that it will most likely not early adopt this standard before its eilective date in 2019. The Company has formed a lease standard implementation team that is working through the implementation process. The most significant implementation challenge identified thus far relates to identifting a complete population ofleases and potential leases under the new lease standard. Also, thc Company is monitoring utility industry implcmcntation guidancc as it rclatcs to scvcral unrcsolvcd issucs to dctcrminc ifthcrc will bc an industry consensus, including whether rightof-ways are considered leases. The Company cannot, at this time, estimate the potential impact on its future financial condition, results oloperations and cash flows. ASU No. 2016-09 "Compensation-Stock Compensatio,l (Topic 718): Improt'ements to Employee Share-Based Payment Accotmting." In March 20 I 6, the FASB issued ASU No. 20 I 6-09. This ASU simplifies several aspects ofthe accounting for employee share-based payment transactions including: . allowing excess tax benefits or tax deficiencies to be recognized as income tax benefits or expenses in the Consolidated Statements oflncome rather than in Additional Paid in Capital (APIC), . excess tax benefits no longer represent a financing cash inflow on the Consolidated Statements ofCash Flows and instead will be included as an operating activity, . excess tax benefits and tax deficiencies will be excluded from the calculation ofdiluted eamings per share, whereas under current accounting guidance, these amounts must be estimated and included in the calculation, . allowing forfeitures to be accounted for as they occur, instead ofestirnating forfeitures, and . changing the statutory tax withholding requirements forshare-based payments. This ASU is effective for periods beginning after December I 5, 20 I 6 and early adoption is permitted. The Company early adopted this standard during the second quarter of20 I 6, with a retrospective effective date ofJanuary I , 20 I 6. The adoption ofthis standard resulted in a recognized income tax benefit of $ I .6 million in 20 1 6 associatcd with cxcess tax bcncfits on scttlcd sharc-based cmploycc paymcnts. In addition, thc Consolidatcd Statcment ofCash Flows for 20 I 6 included the excess tax benefits as an operating activity rather than as a financing activity. Periods prior to 20 I 6 were not restated for the adoption ofthisaccountingstandardastheCompanyhasadoptedthisstandardonaprospectivebasisbeginningJanuary 1,2016. 101 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 1, Page 108 of 177 Table of Contents AVISTA CORPORATION NOTE 3. VARIABLE INTEREST ENTITIES Lancaster Pow e r Purc ha se A greeme nt The Company has a PPA for the purchase ofall the output ofthe Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in Kootenai County, Idaho, owned by an unrelated third-party (Rathdrum Power LLC), through 2026. Avista Corp. lras a variable intcrcst in the PPA. Accordingly, Avista Corp. madc an cvaluation ofwhich intcrcst holdcrs havc the power to dircct thc activities that most significantly impact the economic performance ofthe entity and which interest holders have the obligation to absorb losses or receive benefits that could be significant to the entity. Avista Corp. pays a fixed capacity and operations and maintenance payment and certain rnonthly variable costs under the PPA. Under the terms ofthe PPA, Avista Corp. makes the dispatch decisions, provides all natural gas fuel and receives all ofthe electric energy output from the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation ofthe Lancaster Plant and makes operating and maintenance dccisions. Rathdrum Powcr LLC controls all ofthe rights and obligations ofthc Lancastcr Plant aftcr the cxpiration ofthc PPA in 2026 and Avista Corp. docs not have any further obligations after the expiration. It is estimated that the plant will have 1 5 to 25 years of useful life after that time. Rathdrum Power LLC bears the maintenance risk ofthe plant and will receive the residual value ofthe Lancaster Plant. Avista Corp. has no debt or equity investments in the Lancaster Plant and does not provide financial suppoft through I iquidity arangements or other commitments (other than the PPA). Based on its analysis, Avista Corp. does not consider itselfto be the primary beneficiary ofthe Lancaster Plant. Accordingly, neither the Lancaster Plant nor Rathdrum Power LLC is includcd in Avista Corp.'s consolidatcd financial statemcnts. Thc Company has a futurc contractual obligation of approximatcly $283.6 million undcrthc PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates. Limited Partnerships and Similar Entities The Company adopted ASU No. 2015-02 effective January I , 2 0 I 6. As a result of the adoption of this ASU, the Company evaluated all of its exi sting invcstments to dcterminc ifany cntitics would be considercd VIEs undcr thc ncw guidance and whethcr consolidation would bc rcquircd. Undcr the ASU, a limited partnership or similar legal entity that is the functional equivalent of a limited partnership would be considered a ME regardless of whether it otherwise qualifies as a voting interest entity unless a simple majority or lower threshold ofthe "unrelated" lirnited partners (i.e., parties other than the general panner, entities under common control with the general partner, and other parties acting on behalfofthe general partner) have substantive kick-out rights (including liquidation ri ghts) or participating rights. The Company has six investments in limited partnerships (or the functional equivalent) where Avista Corp. is a limited partner rnvestor in an investment fund where the general partner rnakes all ofthe investment and operating decisions with regards to the partnership and fund. To remove the general partner from any ofthe funds, approval from greater than a simple majonty ofthe limited partners is required. As such, the limited partners do not have substantive kick- out rights and these investments are considered \4Es. Consolidation ofthese VIEs by Avista Corp. is not required because the Company does not have majority ownership in any ofthe funds, it does not have the power to direct any activities ofthe funds, and it does not have the power to appoint executive leadership, including the board ofdirectors. Avista Corp. participates in profits and losses ofthe investment funds based on its ownership percentage and its losses are capped at its total initial investment in the funds. For five of the six VIEs, Avista Corp. does not have any additional commitrrents beyond its initial investment. For the sixth VIE, AvistaCorp.hasuptoa$25.0milliontotalcommitment,andasofDecember3l,20l6,hasinvested$2.1 million, leaving$22.9millionremainingtobe invested. In addition, the Company is not allowed to withdraw any capital contributions from the investment funds until after the funds' expiration dates and all liabilitics ofthc funds arc scttled. Thc expimtion dates range fiom 20 I 7 to 2032, with onc invcstmcnt having no tennination date (as it is pcrpctual). As of December 3 I , 201 6, the Company has a total carrying amount in these investment funds of $7.0 million. NOTE 4. BUSTNESS ACQUSITTONS Alaska Energy and Resources Company On July 1,2014, the Company acquired AERC, based in Juneau, Alaska, and as ofthat date, AERC became a wholly-owned subsidiary ofAvista Corp. The primary subsidiary of AERC is AEL&P, a regulated utility which provides electric services to approximately 17,000 customers in Juneau, Alaska. In addition to the regulated utitity, AERC owns AJT Mining, whiclr is an inactive mining cornpany holding certain properties. r02 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule '1, Page 109 of 177 Table of Contents AVISTA CORPORATION The purpose ofthe acquisition was to expand and diversifr Avista Corp.'s energy assets and deliver long-term value to its customers, communities and investors. ln connection with the closing, Avista Corp. issued 4,50 1 ,44 I new shares ofcommon stock to the shareholders ofAERC based on a contractual formula that resulted in a price of$32.46 per share, reflecting a purchase price of$ I 70.0 million, plus acquired cash, less outstanding debt and other closing adjustments. Avista Corp. also paid $4.8 million in cash. The total fair value of all consideration transferred was $ I 54.9 million and rcsulted in goodwill of $52.4 million, which is not deductible fortax purposes. The fair value of assets acquired and liabilities assumed as of July I , 20 I 4 (after consideration of a working capital adjustment and income tax tme-ups during the second quarter of20 I 5) were as follows (in thousands): July l, 2014 Assets acquired: Current Assets: Cash Accounts receivable - gross totals $3,928 Materials and supplies Other current asscts Total current assets Utility Property: Utility plant in service Utility property under long-term capital lease Construction work in progress Total utility property Other Non-current Assets: Non-utility property Electric plant he ld for futurc use Goodwill (l) Other deferred charges and non-current assets Total other non-current assets Total assets 26,571 188,41 I 283,147 $19,704 3,85 1 2,017 999 t t3,964 7 t,007 3,440 6,660 3,711 52,426 5,368 68, l 65 $ Liabilities Assumed: Cunent Liabilities: Accounts payable Current portion oflong-term debt and capital lease obligations Other current liabilities ( I ) Total current liabilities Long-term debt Capital lease obligations Other non-current liabilities and defened credits (l ) Total liabilities $700 1771 2,807 7,280 7,1 ) 11 68,840 14,889 $128,236 Total net assets acquired 154,91 I (l) Duringthesecondquarterof20l5,theCompanyrecordedareductiontogoodwillofapproximately$0.3millionduetoincometaxrelatedadjustments. The majority ofAERC's operations are subject to the rate-setting authority ofthe RCA and are accounted for pursuant to GAAP, including the accounting guidance for rcgulated operations. Thc rate-sctting and cost rccovcry provisions curently in place for AERC's regulated opcrations providc revcnues dcrivcd from costs, including a retum on investment, ofassets and $ 103 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, AViSta Schedule 1, Page '110 of 177 Table of Contetrts AVISTA CORPORATION liabilities included in rate base. Due to this regulation, the fair values ofAERC's assets and liabilities subject to these rate-setting provisions were assumed to approximatc their carrying valucs. Thcrc wcrc not any idcntifiablc intangiblc assets associated with this acquisition. Thc exccss ofthe purchasc considcration over the estimated fairvalues ofthe assets acquired and liabilities assumed was recognized as goodwill at the acquisition date. The goodwill reflects the value paid for the expected continued groMh ofa rate-regulated business located in a defined service area with a constructive regulatory environment, the attractiveness ofstable, growing cash flows, as well as providing a platform for potential future growth outside ofthe rate-regulated electric utility in Alaska and potential additional utility investment. The following table summarizes the supplemental pro forma information for the yean ended December 3l related to the acquisition of AERC as if the acquisition had occurred on January I , 20 I 3 (dollars in thousands - unaudited): 201 6 20t 5 2014 Actual Avista Corp. revenues from continuing operations (excluding AERC) Supplcmental pro forma AERC rcvenucs (l ) Total pro forma revenues Actual AERC revenues included in Avista Corp. revenues (l ) Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders (excluding AERC) Actual Avista Corp. net income from discontinued operations attributable to Avista Corp. shareholders Adjustrnent to Avista Corp.'s net income for acquisition costs (net of tax) (2) Supplemental pro forma AERC net income (l) Total pro forma net income Actual AERC net incomc includcd in Avista Corp. nct incomc (l) $ 1 ,484,77 6 1,497 ,385 44,969 2t,644 129,505 tll,772 I16,665 123,249 198.565 s (2) This adjustmcnt is to treat all transaction costs as ifthcy occurred on January 1,2013 and to rcmovc thcm from the pcriods in which thcy actually occurred. The transaction costs were expensed and presented in the Consolidated Statements oflncome in other operating expenses within utility operating expenses. Since the start ofthe transaction through Decernber 3 I , 20 I 6, Avista Corp. has expensed $3.0 million (pre-tax) in total transaction fees. ln addition to the amounts expensed, through December 3 l, 20 I 6, Avista Corp. has included $0.4 mitlion in fees associated with the issuance of common stock for the transaction as a reduction to common stock. These fees do not impact the supplemental pro forma information above. NOTE 5. DISCONTINT]ED OPERATIONS On June 30, 20 I 4, Avista Capital, completed the sale ofits interest in Ecova to Cofely USA Inc., an unrelated party to Avista Corp. The sales price was $335.0 million in cash, less the payment ofdebt and othercustomary closing adjustments. At the closing ofthe transaction on June 30,2014, Ecova became a wholly-owned subsidiary ofCofely USA Inc. and the Company has not had and will not have any further involvement with Ecova after such date. The purchase price of$335.0 million, as adjusted, was divided among all the security holders ofEcova pro rata based on ownership. After consideration ofall escrow amounts received, the sales transaction provided cash proceeds to Avista Corp., net ofdebt, payment to option and minority holders, income taxes and transaction expenses, of $ 143.7 million, and resulted in a net gain of $74.8 million. Almost all of the net gain was recognized in 2014 with some true-ups during 2015. 104 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '111 ot 177 l .3 95,989 $ 46,494 t,439,807 S 44,969 l .450,91 8 46,467 1,442,483 46,494 723 5,147 22 6,3 08 72.224 870 8,8067 t37.228 7,723$6,308$3,1s2 ( l ) AERC was acquired on July 1 , 20 1 4; therefore, all the revenues and net income for the second half of 20l4 through 201 6 are actual amounts that are included in Avista Corp.'s overall results. All revenue and net income amounts prior to July I , 20 l4 are supplemental pro forma amounts and are excluded from Avista Corp.'s overall results. Table ol C'ontents AVISTA CORPORATION Prior to the completion ofthe sales transaction, Ecova was a reportable business segment. The following table presents amounts that were included in discontinued operations forthe ycars cnded Dccember3 1,201 5 and 2014 (dollars in thousands): 201 5 20t4 $$Revenues Gain on salc ofEcova (1 ) Transaction expenses and accelerated employee benefits (2) Cain on sale ofEcova, net oftransaction expenses Incomc beforc incomc taxcs Income tax expense (benefit) (3) Net income from discontinued operations Net income attributable to noncontrolling interests Net income fiorn discontinued operations attributable to Avista Corp. shareholders 777 7l 87,534 160,6t2 9,062 706 706 (4,441\ 15 r,550 t56,025 83,6 r 4 5,147 72,411 (l 87) $5,147 $ 72,224 (l) This represents the gross gain recorded to discontinued operations. The total gain net oftaxes and transactions expenses was $74.8 rnillion, ofwhich $69.7 million was recognized during 2014. (2) Avista Corp.'s portion of the total transaction expenses was $9.1 million (including amounts which were withheld from the transaction net proceeds). All transaction expenses paid on the Ecova sale (including Avista Corp.'s portion and the portion attributable to the minority interest holders ofEcova) were $ I l I million, of which $5.5 million was withh cld from thc nct procceds and thc remainder was paid during 20 14. The transaction expcnses wcre for legal, accounting and other consulting fees, and the accelerated employee benefits related to employee stock options which were settled in accordance with the Ecova equity plan. (3) Thetaxbenefitduring20l5primarilyresultedfromthereversalofavaluationallowanceagainstnetoperatinglossesatEcovabecausethenetoperating losses were deemed realizable after further evaluation. NOTE 6. DERIVATT!'ES AND RISK MANAGEMENT E ne rgy C o mmo dity Derivatives Avista Utilities is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in gcneral, the risk offluctuation in the market price ofthe commodity bcing traded and is influenccd primarily by supply and dcmand. Markct risk includcs thc fluctuation in the market price of associated derivative commodity instruments. Avista Utilities utilizes derivative instruments, such as forwards, futures, swaps and options in order to manage the various risks relating to these comrnodity price exposures. The Company has an energy resources risk policy and control procedures to manage these risks. As part ofthe Company's resource procurcment and management operations in the electric business, the Company engages in an ongoing process ofresource optimization, which involves the economic selection from available energy resources to serve the Company's load obligations and the use ofthese resources to capture available economic value. The Company transacts in wholesale markets by selling and purchasing electric capacity and energy, fuel for electric generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part ofthe process ofmatching resources with load obligations and hedging the related financial risks. These transactions range from terms ofintra-hour up to rnultiple years. As part ofits resource procurement and management ofits natural gas business, the Company makes continuing projections ofits natural gas loads and assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low and average monthly requirements and delivery constraints from natural gas supply locations to the Company's distribution system. However, daily variations in natural gas dcmand can bc significantly diffcrcnt than monthly dcmand projcctions. On the basis ofthcse projections, thc Company plans and executes a series oftransactions to hedge a portion ofits projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend as much as four natural gas operating years (Novernber through October) into the future. Avista Corp. also leaves a significant portion ofits natural gas supply requirements unhedged for purchase in short-term and spot markets. The Company is required to plan for sufficient natural gas delivery capacity to sewe its retail customers for a theoretical peak day event. The Company generally has more pipeline and storage capacity than what is needed during periods other than a peak 105 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1,Page 112 of 177 Table of Contents AVISTA CORPORATION day. The Company optimizes its natural gas rcsources by using market opportunities to genemte economic value that helps mitigate fixed costs. Avista Utilities also optimizes its natural gas storage capacity by purchasing and storing natural gas wlren prices are traditionally lowel typically in the summer, and withdrawing during higher priced months, typically during the winter. However, ifmarket conditions and prices indicate that the Company should buy or sell natural gas during other times in the year, the Company engages in optimization trdnsactions to capture value in the marketplace. Natural gas optimization activities includc, but are not limited to, wholcsale markct sales ofsurplus natural gas supplies, purchascs and sales ofnatural gas to optimize usc ofpipeline and storage capacity, and participation in the transportation capacity release market. The following table presents the underlying energy commodity derivative volumes as ofDecember 3 I , 20 I 6 that are expected to be settled in each respective year (in thousands of MWhs and mrnBTUs): Purchaws Sales Elcctric Dcrivativcs Gas Derivatives Electric Dcrivativcs Gas Dcrivativcs Physical ( I ) MWh Financial ( | ) MWh Physical ( I ) mmBTUs Financial(l) Physical(l) Financial(l) Physical(l) Financial(l) mmBTUs MWh MWh mmBTUs mmBTUsYear 20t7 201 8 2019 2020 2021 Thereafter 510 397 235 907 t 5,47 5 I 10,380 29,47 5 ) 1)< 316 286 158 73.1 I 0 l5,ll3 4,020 1,552 1,244 982 4.t65 1,360 t,345 1,430 l,060 610 910 The following table presents the underlying energy commodity derivative volumes as ofDecember 3 I , 20 I 5 that were expected to be settled in each respective year (in thousands of MWhs and mmBTUs): Purchmes Sales Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives Physical (l) Financial (l) Physical (1) Financial (l) Physical (1) Financial (l) Physical (1) Financial (1) MWh MWh mmBTUS mmBTUs MWh MWh mmBTUs mmBTUsYear 2016 2017 20r8 201 9 2020 Thereafter 407 39',l 397 235 1,954 17,252 280 255 286 t 58 3,182 1,360 1,360 1,345 1,430 t,060 97 675 142,693 49,200 l5,l l8 6 S1S 905 2,656 483 t 12,233 76,965 2,738 305 455 (l) Physical transactions represent commodity transactions in which Avista Utilities will take ormake delivery ofeitherelectricity ornatural gas; financial transactions represent derivative instruments with delivery ofcash in the amount ofbenefit or cost but with no physical delivery ofthe commodity, such as futures, swaps, options, or forward contracts. The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are settled and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to be collected through retail rates from customen. Any transactions that result in gains will be used to reduce retail rates charged to customers in the future. Foreign Currency Excharrge Derivatives A significant portion ofAvista Utilities'natural gas supply (including fuel forpowergeneration) is obtained from Canadian sources. Most ofthose transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion ofAvista Utilities' short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian curency prices and settled u/ithin 60 days with U.S. dollars. Avista Utilities hedges a portion ofthe foreign currency risk by purchasing Canadian curency exchange derivatives when such comrnodity transactions are initiated. The foreign curency exchange derivatives and the unhedged foreign currency risk have not had a material effect on the Company's financial condition, results of operations or cash flows and these diflerences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking. t06 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 113 ot 177 Table 0f Contents AVISTA CORPORATION ThefollowingtablesummarizestheforeigncurencyhedgesthattheCompanyhasenteredintoasofDecember3l (dollarsinthousands): 20t6 Number ofcontracts Notional amount (in Unitcd Statcs dollars) Notional amount (in Canadian dollars) 201 5 s Interest Rate Swap Derivatives Avista Corp. is affected by fluctuating interest rates related to a poftion ofits existing debt, and future borrowing requirements. The Company hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements. Thcse interest rate swap derivatives and U.S. Treasury lock agrccments arc considcrcd economic hedgcs against fluctuations in futurc cash flows associatcd with anticipated debt issuances. The following table summarizes the unsettled interest rate swap derivatives that the Company has outstanding as ofthe balance sheet date indicated below (dollan in thousands): Balancc Shcct Date Numbcr of Contracts Notional Atnount Mandatory Cash Settlcment Date 2l 2,819 $ 3,7 54 24 1,463 2,002 December31,2016 75,000 2'75,000 70,000 20,000 60,000 2017 201 8 2019 2020 2022 December3l,20l5 6 J il 2 I I 15,000 45,000 245,000 30,000 20,000 2016 2017 2018 20t9 2022 During the third quarter 20 I 6, in connection with the execution ofa purchase agreement for bonds that the Company issued in December 20 I 6, the Company cash-settled seven interest rate swap derivatives (notional aqgregate amount of $ I 2 5.0 mi llion) and paid a total of $ 54.0 million. The interest rate swap derivatives were settled in connection with the pricing of $ 175.0 million of Avista Corp. first mortgage bonds that were issued in December 2016 (see Note I 4). Upon settlement ofinterest rate swap derivatives, the cash payments made or received are recorded as a regulatory asset or liability and are subsequently amotized as a component ofinterest expense over the life ofthe associated debt. The settled interest rate swap derivatives are also included as a part ofthe Company's cost ofdcbt calculation for ratemaking purposes. Thc fair valuc ofoutstanding intcrest ratc swap dcrivativcs can vary significantly from period to period depcnding on thc tolal notional amount ofswaps outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. The Company would be required to make cash payments to settle the interest rate swap derivatives ifthe fixed rates are higher than prevailing market rates at the date ofsettlement. Conversely, the Company receives cash to settle its interest rate swap derivatives when prevailing market rates at the time ofsettlement exceed the fixed swap rates. Sammary of Oulstanding Derivolive Inslrumenls The amounts recorded on the Consolidated Balance Sheet as ofDecember3 1,2016 and December3 1,201 5 reflect the offsetting ofderivative assets and liabilities where a legal right ofoffset exists. 107 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1,Page 114 ot 177 6 t4 6 2 5 Table of Contents AVISTA CORPORATION The following table presents the fair values and locations ofderivative instruments recorded on the Consolidated Balance Sheet as ofDecember 3 I , 20 I 6 (in thousands): Fair Value l)erivative ud Balance Sheet Location Liability Net Asset (Liability) in Balance Sheet Gros Asst Gross Collarcral Netting Foreign currency exchange derivatives Other current liabilities Interest rate swap derivatives Other current assets Other property and investments-net and other non-current assets Other cunent liabilities Non-current interest rate swap derivative liabilities Energy commodity derivatives Other current assets Current energy commodity derivative liabilities Other non-current liabilities, regulatory liabilities and deferred credits Total dcrivative instrumcnts rccordcd on thc balancc shcct f)erivative md Balance Sheet Location s 1 101 5,7 54 3,95 l 18,682 16,335 13,07 t (28) $ (3e7) (l s,7s6) (5 7,825) (16,787 ) (29,s98) (29,990) 9;731 25,t69 6,228 1 630 (23) 11q1 ),J) / (6,025 ) (28,705) r,895 (7,03 5 ) (l 3,289) s$$ $ 6l,19l $ (1s0,381) $ 44,758 $ (44,432) The following table presents the fair values and locations of derivative instruments recorded on the Consolidated Balance Sheet as of December 3 I , 201 5 (in thousands): Fair Value Gros Asst Gross Liability Collateral Nefting Net Asset (Liabiliry) in Balmce Sheet Foreign currency exchange derivatives Other current liabilities Interest rate swap derivatives Other property and investments-net and other non-current assets Other current liabilities Non-current interest rate swap derivative liabilities Energy commodity derivatives Othcr currcnt asscts Current energy commodity derivative liabilities Other non-current liabi lities, regulatory I iabilities and defered credits Total derivative instruments recorded on the balance sheet $2$(le) $ (23,262) (62,236) (s s3) (8s,409) (3e,033) 3,67 5 r 0,85 r (l 7) 23 (19,264) (3 0,679) 683 (14,268) (21,s69) $ 23 ll8 1,407 3,880 -10.150 1,236 67,466 6,61 3 $ 76,865 $ (21 0,5 l 2)$ 48.5s6 $ (8s,oe l ) Exposure to Demands for Collateral The Company's derivative contracts often require collateral (in the form ofcash or Ietters ofcredit) or other credit enhancements, or reductions or terminations ofa portion ofthc contract through cash scttlcment, in the cvent ofa downgrade in thc Company's credit ratings or changcs in markct priccs. In pcriods of price volatility, the level ofexposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit facilities and cash. The Company actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements. 108 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 1'15 ol 177 Tablc of Contcnts AVISTA CORPORATION The following table presents the Company's collateral outstanding related to its derivative instruments as of as of December 3l (in thousands): 201 6 Energy commodity derivatives Cash collateral posted Lettcrs of crcdit outstandin g Balance sheet offsetting (cash collateral against net derivative positions.l $ Interest rate swap derivatives Cash collateral posted Letters of credit outstanding Balance sheet offsetting (cash collateral against net derivative positions) 34,900 3,600 34,900 Utility plant in service Accumulated depreciation 201 5 t7,'134 $ 24,400 9,858 28,716 28,200 14,526 34,030 9,600 34,030 Certain of the Company's derivative instruments contain provisions that require the Company to maintain an "investment grade" credit rating from the major credit rating agencies. Ifthe Company's credit ratings wcrc to fall below "investment grade," it would bc in violation ofthcse provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions. The following table prcsents the aggregate fair valuc ofall derivative instruments with credit-risk-rclatcd contingent fcaturos that are in a liability position and the amount ofadditional collateral the Company could be required to post as ofDecember 3 I (in thousands): 20t6 201 5 Energy commodity derivatives Liabilities with credrt-risk-related contingent features Additional collateral to post t,124 $ 1,046 Interest rate swap derivatives Liabilities with credit-risk-related contingent features 73,978 85,498 Additional collateral to post 2 I ,l 00 | 8,750 NOTE 7. JOINTLY OWNED ELECTRIC FACILITIES The Company has a I 5 percent ownership interest in a twin-unit coal-fired generating facility, Colstrip, located in southeastem Montana, and provides financing for its ownership interest in the project. The Company's share ofrelated fuel costs as well as operating expenses forplant in service are included in the conesponding accounts in the Consolidated Statements oflncome. The Company's share ofutility plant in service for Colstrip and accumulated depreciation (inclusive ofthe ARO assets and accumulated amortization) were as follows as ofDecember 3 I (dollars in thousands): 2016 2015 $ 380,406 $ (249,359) 7,O90 6,980 362,199 (243,363) $ See Note 9 for further discussion of AROs. 109 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 116 ot 177 Table of Contents AVISTA CORPORATION NOTE 8. PROPERTY, PLANT AND EQUIPMENT The balances oftlre major classifications ofproperty, plant and equipment are detailed in the fol lowing table as ofDecember 3 I (dol lars in thousands): 20t6 201 5 Avista Utilities: Electric production Electric transmission Electric distribution Electric construction work-in-progress (CWIP) and other Electric total Natural gas underground storage Natural gas distribution Natural gas CWIP and other Natural gas total Common plant (including CMP) Total Avista Utilities AEL&P: Electric production Electric transmission Electric distribution Electric production held under long-term capital lease Electric CWIP and other Electric total Common plant Total AEL&P Other ( l ) Total $1,346,332 $ 682,529 1 ,525,17 5 296,9t2 t,217,t79 640,586 I ,468,157 358,846 3,850,948 3,684,768 44.672 o5/. roc 5 7,60 I 43,080 878,982 62,024 I ,056,571 984,086 527,458 456.796 5,434,977 94,839 20,252 )o o<7 '71,007 7,t90 5.125,650 1) )q') I 8,81 7 19,005 7l ,007 16,97 I 213,345 8,651 t98,092 8,1 33 221.996 30,764 206.225 25 ,7 09 $ 5,687,737 S 5,357,584 (t )Included in other property and investments-net and other non-current assets on the Consolidated Balance Sheets. Accumulated depreciation was $ I 1.2 million as of December 31,2016 and $10.6 million as of December3l,20l5 forthe otherbusinesses. NOTE 9. ASSET RETIREMENT OBLIGATIONS The Company has recorded liabilities for future AROs to: . restore coal ash containment ponds at Colstrip, . cap a landfill at the Kettle Falls Plant, . remove plant and restore the land at the Coyote Springs 2 site at the termination ofthe land lease, and . dispose ofPCBs in certain transfonners. Due to an inability to estimate a range of settlement dates, the Company cannot estimate a liability for the: . removal and disposal ofcertain transmission and distribution assets, and . abandonment and decommissioning ofcertain hydroelectric generation and natural gas storage facilities. On April I 7, 201 5, the EPA published a final rule regarding coal combustion residuals (CCR), also termed coal combustion byproducts or coal ash, in the FederalRegister,andthisrulebecameeffectiveonOctoberl5,20l5.Colstrip,ofwhichAvistaCorp.isal5percentownerofunits3&4,producesthis byproduct. The rule established technical requirements for CCR landfills and surface impoundments under Subtitle D ofthe Resource Conservation and Recovery Act, the nation's primary law for regulating solid waste . The Company, in conjunction with the other Colstrip owners, developed a rnulti-year compliance plan to strategically address the CCR requirements and existing state obligations while maintaining operational stability. During 201 5, the operatorofColstrip provided an initial cost estimate ofthe expected retirement costs associated witlr complying with I l0 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 117 ol 177 Table of Contents AVISTA CORPORATION the new CCR rule. Based on the initial assessments, Avista Corp. recorded an increase to its ARO of $ 12.5 million during 201 5 with a coresponding increase in the cost basis ofthc utility plant. During 20 1 6, duc to additional information and updatcd cstimatcs, the ARO incrcased to $ I 3.6 million (including accretion of $0.7 million). The actual asset retirement costs related to the CCR rule requirements may vary substantially from the estimates used to record the increased ARO due to uncertainty about the compliance strategies that will be used and the preliminary nature ofavailable data used to estimate costs, such as tlre quantity ofcoal ash present at certain sites and the volume offill that will be needed to cap and cover certain impoundments. Avista Corp. will coordinate with the plant operator and continue to gather additional data in future periods to make decisions about compliance strategies and the timing ofclosure activities. As additional information bccomes availablc, Avista Corp. will updatc the ARO for thesc changcs in cstimatcs, which could be material. Thc Company cxpects to seek recovery ofany increased costs related to complying with the new rule through customer rates. The following table documents the changes in the Company's asset retirement obligation during the years ended December 3 I (dollars in thousands): 2016 2015 2014 Asset retirement obligation at beginning ofyear Liabilities incurred Liabilities settled Accretion expense Asset retirement obligation at end ofyear $t 5,997 $ 430 (1.529) 617 3,028 $ t2,539 (2e) 459 2,859 (41) 2t0 $ 15,515 $ 15,997 S 3,02 8 NOTE IO. PENSION PLANS AND OTHER POSTRE,TIREMENT BEI\EFIT 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 multiemploycr plan for its union workcrs and a defincd contribution moncy purchase pcnsion plan for its nonunion workcrs. METAL6( (not discussed below) has a defined contribution 40 I (k) savings plan. None ofthe 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+ime employees at Avista Utilities that were hired prior to January l, 20 I 4. Individual benefits under this plan are based upon the employee's years ofservice, date ofhire and average compensation as specified in the plan. Non- union employees hircd on or aftcr January I , 20 I 4 participatc in a dcfined contribution 40 I (k) plan in lieu ofa defincd bencfit 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 tlre maximum amounts that are currently deductible for income tax purposes. The Company contributed $ 12.0 million in cash to tlre 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 201 7. The Company also has a SERP that provides additional pension benefits to cxecutive officers and ccrtain kcy employees ofthe Company. The SERP is intended to provide benefits to individuals whose benefits under the defined benefit pension plan are reduced due to the application ofSection 4 I 5 ofthe Intemal Revenue Code of I 986 and the deferral ofsalary 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): 20t7 2018 20t9 2020 2021 Total 2022-2026 Expected benefi t payments $ 30,971 $ 32,014 $ 33,047 $ 34,s4s $ 35,892 $ 196,322 The expected long-term rate ofretum on plan assets is based on past performance and economic forecasts for the types ofinvestments 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 ofthe expected term of pension benefits. The Company provides certain health care and life insurance benefits for eligible retired employees th at were hired pnor to January I , 2014. The Company accrucs the cstimatcd cost ofpostrctircment bcncfit obligations during tlre ycan that cmployccs provide scrvices. Thc liability and expense ofthis plan are included as other postretirement benefits. Non-union employees hired on or after January I , 20 I 4, wi I I have access to the retiree medical pl an upon retirement; however, Avista Corp. will no longer provide a contribution toward their rnedical premium. il1 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page '118 ol '177 Table of Contents AVISTA CORPORATION 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 eamed by the ernployee is fixed on the retirement date based on the employee's years ofservice and the ending salary. The liability and expense ofthe HRA are included as otherpostretirement benefits. The Company provides death benefits to beneficiaries ofexecutive officers who die during their term ofoffice 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 ofdeath (or ifdeath occurs aftcr retirement, a paymcnt equal to twice thc cxecutivc officcr's total annual pcnsion benefit). Thc liability and cxpensc for this plan are included as other postretirement benefi ts. The Company expects that benefit payments under other postretirement benefit plans will total (dollars in thousands): 201'7 2018 2019 2020 2021 Total2o22-2026 Expected benefi t payments 34,704$ 6,991 $ 7,302 $ 7,580 S 6,479 $ 6,675 $ The Company expects to contribute $7.0 million to other postretirement benefit plans in 20 I 7, representing expected benefit payments to be paid during the year excluding the Medicare Part D subsidy. The Company uses a December 3 I measurement date for its pension and other postretirement benefit plans. ThefollowingtablesetsforththepensionandotherpostretirernentbenefitplandisclosuresasofDecember3l,20l6and20l5andthecomponentsofnet periodic benefit costs for the years ended December 3 l, 20 16,2015 and2014 (dollars in thousands): Pension Benefits Other Post- retirement Benefi(s 2016 2015 2016 2015 Change in benefit obligation: Bcncfit obligation as ofbcginning ofycar Service cost Interest cost Actuarial (gain)iloss Plan change Cumulative adjustment to reclassif, liability Benefits paid Benefit obligation as ofend ofyear Change in plan assets: Fair value ofplan assets as ofbeginning ofyear Actual retum on plan assets Employer contributions Benefits paid Fair value ofplan assets as ofend ofyear Fundcd status Unrecognized net actuarial loss Unrecognized prior service cost Prepaid (accrued) benefit cost Additional liability Accrued benefi t liability Accumulated pension benefit obligation Accumulated postretirement benefi t obligation: For retirees (32,87 4)(3l,06r) $ (125,ss8) $ (96,269) $ (103,088) $ (t0't,e27) $6 1 3,503 $ 18,302 27,544 tg qq7 634 .67 4 S 19,7 9 | 26,117 (3 s,7e0) (228) l 3 8,795 $ 1,205 6,1 l0 (3,648) t27.989 ? ols 5,r 58 12,668 (1.000) (l.s2 1) (7,424) (1,042) (6,967\ $ 666,472 $ 613,503 $ 136,453 $ 138,795 $517,234 $ 43,2t2 12,000 (3 r,532) 539,31 I $ (4,30s) 12,000 (29,772) 30,868 $ 2,497 31,312 (444) $ 540,9 14 $ 517 .234 $33,365 $30,868 $(125,558) $ 178,783 23 (96,26e) $ 162,96t 25 (103,088) s 81,979 (8,e8 r) (t07,927) 92,433 (l 0,1 80) 53,248 (l 78,806) 66,717 (r 62,e86) (30,090) (72,998) (25,67 4) (82,2s3) $ 583,498 S s42,209 For fully eligible employees For other participants $ $ s 60,670 s 34A2e S 41,354 S 65,652 34,498 3 8,645 lt2 Exhibit No. 3 Case Nos. AVU-E- l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 'l, Page 119 ot 177 Table 0f Cont€nts AVISTA CORPORATION Pension Bcncfits Other Post- retirement Benefits 2016 201 5 201 6 2015 Included in accumulated other comprehensive loss (income) (net oftax): Unrecognized prior service cost Unrecognized net actuarial loss Total Lcss regulatory assct Accumulated other comprehensive loss for unfunded benetlt obligation for pensions and other postretirement benefit plans Weighted-average assumptions as of December 3l: Discount ratc for bcncfit obligation Discount rate forannual expense Expected long-term retum on plan assets Rate of compensation increase Mcdical cost trend prc-agc 65 - initial Medical cost trend pre-age 65 - ultimate Ultimate medical cost trend year pre-age 65 Medical cost trend post-age 65 - initial Medical cost trend post-age 65 - ultimate Ultimate medical cost trend year post-age 65 Pension Benefils s 15 S 116,209 16 S 105,925 (-s,8s4) 51 101 (6,617) 60,081 $ 1 t 6,224 (r 08,903) I 05.941 (99,414) 47,449 (47,202) 53,464 (s 3.34 1 ) $7,321 $6,527 $247 $123 Pension Benefits Other Post- retirement Benefits 20t6 20r5 2016 2015 4.26% 4.57% 5.40% 4.78o/o 4.57% 4.21% 5.30% 437% 4.23% 4.57% 6.03'A 7.00% 5.00% 2023 7.00% 5.0004 2024 Other Post-retirement Benefi ts 4.57o/o 4.1 60/o 6.36% 7.00% 5.00% 2022 7.00% 5.00% 2023 2016 201 5 2014 2016 20r5 2014 Components of net periodic benefit cost: Scrvice cost Interest cost Expected relum on plan assets Amortization of prior sewice cost Net loss recognition Net periodic benefit cost s 18,302 $ 2',1,544 (27,s47) 2 8,5 ll 19,791 $ 26,t t7 (28,2e9) 2 9,451 3,205 $ 6,1l0 (l ,861 ) (1,208) 5,728 2,925 S 5,1 58 (l,e9 r) (1,199) 5,095 1,844 5,226 (1,903) (l.l l 6) 4,289 $ 26,812 $ 27,062 $ 14,603 $ Ii,974 $ 9,988 $ 8,340 Plan Assets Thc Finance Committec ofthc Company's Board ofDircctors approvcs invcstmcnt policies, objcctivcs and stratcgies that seck an appropriatc retum 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 intemal benefits committee and by the Finance Committee to monitor compliance with investmcnt policy objectives and stratcgies. Pension plan assets arc invcsted in mutual funds, trusts and partncrships that hold marketable dcbt and equity socurities, real cstate, absolute rctum and commodity funds. In seeking to obtain the desired retum to fund the pension plan, the investment consultant recommends allocation percentages by asset classes. These recommendations are reviewed by the intemal benefits committee, which then recommends their adoption by the Finance Committee. The Finance Committee has established target lt3 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 120 ot 177 15,7 57 $ 26,224 (32,r31) 22 4,731 Table of Contcnts AVISTA CORPORATION investment allocation percentages by asset classes and also investment ranges for each asset class. The target investment allocation percentages are typically the midpoint ofthe established range. The target investment allocation percentages by asset classes are indicated in the table below: 2016 2015 Equity securitics Debt securities Real estate Absolute retum 37% 45% 8% t0% 27% 58% 6% 9% The 201 6 target investment allocation percentages were revised in the fourth quarter of20 I 6 and the pension plan assets were subsequently reinvested during the fourth quarter of20 I 6 and first quarter of20 I 7 to move towarrd the new target investment allocation percentages. The target asset allocation percentages were modified to better align the asset allocations with the funded status ofthe pension plan. Future contributions to the plan will also be increased to improve the funded status ofthe plan. The fairvalue ofpension plan assets invested in debt and equity securities was based primarily on fairvalue (market prices). The fairvalue ofinvestment securities traded on a national securities exchange is determined based on the reported last sales price; securities traded in the over-the-counter matket 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 ofpricing, the investment manager estimates fair value based upon other inputs (including valuations ofsecurities that are comparable in coupon, tating, maturity and industry). lnvestments 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 Cornpany's investments in common/collective trusts have redemption limitations that permit quarterly redemptions following notice requirements of45 to 60 days. The fair values ofthe closely held investments and partnership interests are based upon the allocated share ofthe fair value ofthe underlying assets as well as the allocated share ofthe 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 of60 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 ofpension plan assets invested in real estate was determined by the investment rnanager based on three basic approaches: . properties are extemally 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 qua(erly and adjusted as necessary, and . loans are reflected at fairvalue. The fair value ofpension plan assets was determined as ofDecember 3 I , 20 I 6 and 20 I 5. 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. lt4 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 121 ol 177 Ietself-@ AVISTA CORPORATION The fotlowing table discloses by level wtthin the fair value hierarchy (see Note 1 6 for a description of the fair value hierarchy) of the pension plan's assets measured and reported as ofDecember3l,20l6 al fairvalue (dollars in thousands): Level I Level 2 Level 3 Total Cash equivalcnts Fixed income securities: U.S. govemment issues Corporate issues Intemational issues Municipal issucs Mutual funds: U.S. equity securities Intemational equity securities Absolutc retum (l) Plan assets measured at NAV (not subject to hierarchy disclosure) Common/col lective trusts: Real estate Intemational equity securities Partnership/closely held investments: Absolute retum (1 ) Private equity funds (2) Real estate Total 10,179 $ $ 1s7,s03 $ 287.694 $$ 540,9 14 The following table discloses by level within the fair value hierarchy (see Note I 6 for a description ofthe lair value hierarchy) ofthe pension plan's assets measured and reported as ofDecember 3 I , 20 I 5 at fair value (dollars in thousands): Level I Levcl 2 Lcvel 3 Total Cash equivalents Fixed income securities: U.S. govemment issues Corporate issues lntemational issues Municipal issues Mutual funds: U.S. equity securities lntemational equity securities Absolute retum (l ) Plan assets measured at NAV (not subject to hierarchy disclosure) Common/collective trusts: Rcal estate Partnership/closely held investments: Absolute retum (l ) Private equity funds (2) Real estate Total 86$I 0,641 $ (l)This category invests in multiple strategies to divenifo risk and reduce volatility. The strategies include: (a) event driven, relative value, convertible, and fixed income arbitrage, (b) distressed investments, (c) long/short equity and fixed income, and (d) market neutral strategies. This category includes private equity funds that invest primarily in U.S. companies. $$ 10,179 30,9 r 9 193,563 34,145 18.888 30,9 r9 r 93,563 34.145 18,888 l 20,856 30,025 6,622 t9,779 29.t40 39,077 72 7,649 120,8-56 30.025 6,622 $$ 10,727 47,845 187,308 34.458 22,416 47,845 187,308 34,458 22,416 87,678 40,343 13,996 24,147 3 8,3 02 73 9,941 87,678 40,343 13,996 $ 142,103 $ 302,668 $$ 517,234 (2) ll5 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 122 oI 177 Table of C-ontents AVISTA CORPORATION The fair value ofother postretirement plan assets invested in debt and equity securities was based primarily on market prices. The fair value ofinvestment securities traded on a national securities exchange is detennined 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 forwhich market prices are not readily available are fair-valued by the investment managerbased upon other inputs (including valuations ofsecurities that are comparable in coupon, rating, maturity and industry). The target asset allocation was 60 percent equity sccurities and 40 percent dcbt securities in both 20 I 6 and 20 1 5. Thc fair value ofother postretirement plan asscts was determined as ofDecembcr 3 1 ,2016 and,201 5. The following table discloses by level within the fair value hierarchy (see Note I 6 for a description ofthe fair value hierarchy) ofother postretirement plan assets measured and reported as ofDecember 3 | ,2O16 at fair value (dollan in thousands): Levcll Level2 Level3 Total Cash equivalents Mutual funds: Balanced index fund (l ) Total $s 6$$6 33,35933.3 5 9 $ 33,359 $6$$ 33,365 (1 ) The balanced index fund is a single mutual fund that includes a percentage ofU.S. equity securities, fixed income securities and Intemational securities. The following table discloses by level within the fair value hiemrchy (see Note I 6 for a description ofthe fair value hierarchy) ofother postretirement plan assets mcasured and reported as ofDecember 3 I , 20 I 5 at fair valuc (dollars in thousands): Levcll Levcl2 Lcvel3 Totat Cash equivalents Mutual funds: Fixed income securities U.S. equity securities Intcmational equity sccuritics Total s $e$$9 r 2,000 t 3,224 5,63 5 12,000 13,224 5,63 5 $ 30,859 $9$$3 0,86 8 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 ofDecember 3 1 , 20 I 6 by $8.6 million and the service and interest cost by $ I .0 million. A one-percentage-point decrease in the assumed health care cost trend rate for each year would decrease the accumulated postrctiremcnt bcncfit obligation as ofDecember3l,20l6 by $6.7 million and thc service and interest cost by $0.7 million. 401 ft) Plans and Executive Defenal Plan Avista Utilities and METALft have salary deferral 40 I (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 ofthe salary deferred by each participant according to the schedule in the respective plan. EmployermatchingcontributionswereasfollowsfortheyearsendedDecember3l (dollarsinthousands): 2016 20 t5 2014 Employer 40 I (k) matching contributions $8,710 $8,0r r $6,862 The Company has an Executive Deferral Plan. This plan allows executive officers and other key employees the opportunity to deferuntil the earlier oftheir retirement, termination, disability or death, up to 75 percent oftheir base salary and/or up to I 00 percent oftheir incentive payments. Defened compensation funds are held by the Company in a Rabbi Trust. 116 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 123 ot 177 Table of Contetrts AVISTA CORPORATION There were deferred compensation assets included in other property and investments-net and conesponding deferred compensation liabilities included in othernon-currentliabilitiesanddeferredcreditsontheConsolidatedBalanceSheetsofthefollowingamountsasofDecember3l (dollaninthousands): 2016 2015 Dcfcned compensation assets and liabilities 7,679 $8,093 NOTE I I. ACCOT]NTING FOR INCOME TA)(ES Income tax expense consi sted of the fol lowing for the years ended December 3 I (dollars in thousands): 201 6 20t5 2014 $ Current income tax expense (benefit) Deferred income tax expense Total income tax expense $(46,4s7) $ 124,543 12,212 $ 55,237 (67,0s9) 139,299 $78,086 $67.449 $ 72,240 State income taxes do not represent a significant portion oftotal income tax expense on the Consolidated Statements oflncome for any periods presented. A reconciliation offederal income taxes derived from statutory federal tax rates (35 percent in 2016,20 I 5 and 20 I 4) applied to income before income taxes as set forth in the accompanying Consolidated Statements oflncome is as follows for the years ended December 3 I (dollars in thousands): 2016 2015 2014 Federal income taxes at statutory rates Increase (decrease) in tax resulting from: Tax effect ofregulatory treatment ofutility plant differcnces State income tax expense Settlement ofprior year tax retums and adjustment oftax reserves Manufacturin g dedu ction Settlement of equity awards Other Total incorne tax expense 4.008 13 (6e8)(446) (0.2) s 75,391 35.0 % $ 64,967 35.0 % $ 67.237 35.0% 3,297 1,316 (1,5e7) (334) 1.5 0.6 (0.7) (0.1 ) (ee2) (1 ,1 98) 2.3 0.5 (0.s) (0 6) (0.4) 506 2.1 0.2 l,l 04 (l 6e) 0.6 (0 1) $ 78,086 36.3 %$ 67.449 36.3 0h lt7 s 72,240 37.6% Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 124 oI 177 4,358 1,012 Table of Contents AVISTA CORPORATION Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts ofassets and liabilities for financral repofting purposes and the amounts used for income tax purposes and tax credit carryforwards. Tlre total net deferred income tax liability consisted oftlre following as ofDecember 3 I (dollars in thousands): 2016 201 5 Deferred income tax assets: Unfu nded benefi t obligation Derivatives Rcgulatory dcfcrred tax crcdits Tax credits Power and natural gas deferrals Deferred compensation Other Total gross deferred income tax assets Valuation allowances for deferred tax assets Total defened income tax assets aftervaluation al]owances Deferred income tax liabilities: Differences between book and tax basis ofutility plant Regulatory asset on utility, property plant and equiptnent Regulatory asset for pensions and other postretrrement benefits Uti I ity energy commodity denvalives Long-term debt and borrowing costs Scttlemcnt with Cocur d'Alcnc Tribc Other regulatory assets Other Total deferred income tax liabilities Net long-term deferred income tax liability Regulatory assets for deferred income taxes Regulatory liabilities for deferred income taxes $80,230 $ 31,872 t 5,192 27,931 t9,415 I I,l4l 29,512 7 5,716 47.009 15,01I 12,866 10,354 29,47 I ,r<r01 (7,946) t90,427 (2.862) 207,347 187,565 8 12,91 6 37,301 84,040 3 I ,871 31,955 1t,7tl 30,t 83 8,298 7 23,661 36,91'7 82,253 47,0t0 t4,027 12,084 r I,691 7,399 1,048,275 935,042 The realization ofdeferred income tax assets is dependent upon the ability to generate taxable income in future periods. The Company evaluated available cvidencc supporting the rcalization ofits defcncd incomc tax assets and detcrmined it is more likcly than not that dcfcrrcd incomc tax asscts will be realized. As of December 3 I , 20 I 6, th e Company had $ I 7.1 million of state tax credit carryforwards of wlr ich it is expected $7.9 mill ion may expire unused; the Company has reflected the net amount of $9.2 million as an asset at December 3 I , 20'l 6. State tax credits expire from 201 9 to 2O28. The Company and its eligible subsidiaries file consolidated federal income tax retums. The Company also files state income tax retums in certain jurisdictions, including Idaho, Oregon and Montana. Subsidiaries are charged or credited with the tax effects oftheir operations on a stand-alone basis. The Intemal Revcnuc Scrvice (IRS) has completcd its cxamination ofall tax years through 20 I I and all i ssues wcre resolvcd relatcd to thcse ycars. The statutc of limitations forthe IRSto reviewthe 2012trx yearhasexpired, leaving the 2013 through 2015 tax yearsstill open forreview. The Companybelieves thatany open tax years for federal or state income taxes will not result in adjustments that would be significant to the consolidated financial statements. The Company had net regulatory assets related to the probable recovery ofcertain deferred income tax liabilities from customers through future rdtes as of December 3 I (dollars in thousands): 2016 201 5 $ 840,928 $ 747,477 $109,853 $ 28,966 101,240 17,609 NOTE T2. ENERGY PURCHASE CONTRACTS The below discussion only relates to Avista Utilities. The sole energy purchase contract at AEL&P is a PPA for the Snettisham hydroelectric project and it is accounted for as a capital lease. AEL&P does not have any other signi fi cant operating agreements or contractual obligati ons. See Note I 4 for further discussion ofthe Snettisham PPA. Avista Utilities has contracts for the purchase offuel for thermal generation, natural gas for resale and various agreements for the purchase or exchange of electric energy with other entities. The remaining term ofthe contracts range from one month to twenty-five years. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista ll8 Schedule '1, Page 125 ol 177 Table of Contents AVISTA CORPORATION Total expenses for power purchased, natural gas purchased, fuel for generation and other fuel costs, which are included in utility resource costs in the Consolidated Statements oflncome, were as follows for the years ended December 3 I (dollars in thousands): 2016 201 5 2014 Utilitypowerresources $ 402,575 $ 511,937 $ 556,915 Thc following tablc details Avista Utilitics' firturc contractual commitmcnts for powcr rcsourccs (including transmission contracts) and natural gas rcsourccs (including transpo(ation contracts) (dollars in thousands): 201'7 20t8 2019 2020 2021 Thereafter Total Power resources Natural gas resources Total 202,494 $ 95.549 187,080 s 65.230 174,285 $ 53.8 60 109,878 S 41,340 96,485 $ 29,306 77 5,548 $ 349,468 s I ,545,770 634.7 53 $ 29E,043 $ 252,310 $ 228,145 $ l5r,2l8 $ 125,'791 $ 1,125,016 $ 2,180,523 These energy purchase contracts were entered into as part ofAvista Utilities' obligation to serve its retail electric and natural gas customers' energy requircmcnts, including contracts entercd into for rcsourcc optimization. As a rcsult, thesc costs are rccovercd eithcr through base rctail ratcs or adjustmcnts to retail rates as part ofthe power and natural gas cost deferral and recovery mechanisms. The above future contractual commitments for power resources include fixed contractual amounts related to the Company's contracts with certain PUDs to purchase portions ofthe output ofcertain generating facilities. Although Avista Utilities has no investment in the PUD generating facilities, the fixed contracts obligate Avista Utilities to pay certain minimum amounts whether or not the facilities are operating. The cost ofpower obtained under the contracts, including payments made when a facility is not operating, is included in utility r€source costs in the Consolidated Statements oflncome. The contractual amounts included above consist ofAvista Utilities' slrare ofexisting debt service cost and its proportionate share ofthe variable operating expenses ofthese projects. The minimum amounts payable under these contracts are based in part on the proportionate share ofthe debt service requirements ofthe PUD's revenue bonds for which the Company is indirectly responsible. The Company's total future debt service obligation associated with the revenue bonds outstanding at December 3 I , 201 6 (principal and interest) was $65.2 million. In addition, Avista Utilitics has opcrating agrccments, settlcments and other contractuaI obligations rclated to its gcnerating facilities and transmission and distribution services. The expenses associated with these agreements are reflected as other operating expenses in the Consolidated Statements oflncome. The following table details future contractual cornmitments under these agreements (dollars in thousands): 2017 201 8 2019 2020 z02l Thereafter Total Contractualobligations S 33,922 $ 28,783 $ 32,549 $ 32,160 $ 27,019 $ 189,000 $ 343y'33 NOTE 13. COMMITTED LII\ES OF CREDIT Avista Corp. Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. A two-year option was exercised by the Company in 2016 to extend the maturity of the facility agreement to April 2021. The committed line ofcredit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the ratio of"consolidatcd total debt" to "consolidated total capitalization" ofAvista Corp. to be greater than 65 percent at any timc. As ofDeccmber 3 l, 20 I 6, the Company was in compliance with this covenant. Balances outstanding and interest rates ofborrowings (excluding letters ofcredit) under the Company's revolving committed lines ofcredit were as follows as ofDecember 3 I (dollars in thousands): 2016 2015 Balance outstanding at end ofperiod S I 20,000 $ 105,000 Lctters ofcredit outstanding at cnd ofpcriod S 34,353 $ 44,595 Average interest rate at end ofperiod 1.50% 1.18% As of December 3l ,2016 and 201 5, the borrowings outstanding under Avista Corp.'s committed line of credrt were classified as short-term borrowings on the Consolidated Balance Sheet. I t9 Exhibit No. 3 Case Nos. AVU-E-'l7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '126 of '177 Table of Contents AVISTA CORPORATION AEL&P AEL&P has a committed line of credit in the amount of $25.0 million that expires in Novernber 2019. As of December 3 I . 201 6 and 201 5, there were no borrowings or letters ofcredit outstanding underthis committed line ofcredit. The committed line ofcredit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the ratio of"consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P," including the impact ofthe Snettisham bonds to be greaterthan 67.5 percent at any time. As ofDecember 3l ,2016, AEL&P was in compliance with this covenant. 120 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 127 ol 177 Table of Contents AVISTA CORPORATION NOTE I4. LONG-TERM DEBT AND CAPITAL LEASES The following details long-term debt outstanding as ofDecember 3 | (dollars in thousands): MailrityYcar Dcrcription Inter€st Ratc 2016 201 5 Avista Corp. Secured Long-Term Debt 2016 First Mortgage Bonds (l ) 2018 First Mortgage Bonds 201 8 Secured Medium-Tenn Notes 201 9 First Mortgage Bonds 2020 First Mortgage Bonds 2022 First Mortgage Bonds 2023 Secured Medium-Tenn Notes 2028 Secured Medium-Term Notes 2032 Secured Pollution Control Bonds (2) 2034 Secured Pollution Control Bonds (2) 2035 First Mortgage Bonds 2037 First Mortgage Bonds 2040 First Mortgage Bonds 2041 First Mortgage Bonds 2044 First Mortgage Bonds 2045 First Mortgage Bonds 2047 First Mortgage Bonds 2051 First Mortgage Bonds (3) Total Avista Corp. secured long{erm debt Alaska Electric Light and Power Company Secured Long-Term Debt 2044 First Mortgage Bonds Total secured long-term debt Alaska Energy and Resources Company Unsecured Long-Term Debt 2019 Unsecured Term Loan Total secured and unsecured long-term debt Other Long-Term Debt Components Capital lease obli gations Settled interest rate swap derivatives (4) Unamortized debt discount Unamortized long-term dcbt issuance costs Total Secured Pollution Control Bonds held by Avista Corporation (2) Current portion oflong-term debt and capital leases Total long-term debt and capital leases (l ) 0.84% 5.95o/o 7.39%-7.45% 5.45o/o 339% 5.t3% 7.18%-7.54% 6.37o/o (2) (2) 6.25o/o 5.70% 5.55% 4.45% 4.11% 4.37% 4.23% 3.54% s $ 250.000 22,500 90,000 52,000 250,000 13,500 25,000 66,700 17,000 150,000 150,000 35,000 85,000 60,000 100,000 80,000 r75,000 90,000 250,000 22,500 90,000 52,000 250,000 r3,500 25,000 66,700 r 7,000 150,000 150,000 3 5,000 85,000 60,000 100,000 80.000 I ,621,700 75,000 1,536,700 75,000 I ,61 I ,700 15,000 4.54% 3.85% 1,696,700 15,000 I,7tI,700 65,435 t,626,700 (7e2) (10,639) 68,601 (26,5 r5) (e56) (l 0,8s2) t ,7 65,704 (83,700) (3,287) 1,656,978 (83,700) (93,167) $ t,678,7t7 $ 1,480,1l l In August 2016, Avista Corp. entered into a term loan agreement with a commercial bank in the amount of $70.0 miltion with a maturity date of December 30, 20 I 6. Loans under this agreement were unsecured and had a variable annual interest rate. The Company borrowed the entire $70.0 million available under this agreement, which was used to repay a portion of the $90.0 million in first mortgage bonds that matured in August 201 6. This term loan was subsequently repaid in full in December using the proceeds from the first mortgage bonds issued in December 20 I 6 (discussed below). Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista t2t Schedule '1, Page 128 ot 177 (2) Tabk of Contents AVISTA CORPORATION (3) In Decernber 201 0, $66.7 rnillion and $ I 7.0 rnillion of the City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) due in 2032 and 2034, respectively, which had been held by Avista Corp. since 2008 and 2009, respectively, were refunded by new bond issues (Series 20 I 0A and Series 20 I 0B). The new bonds were not offered to the public and were purchased by Avista Corp. due to markct conditions. Thc Company expccts that at a latcr datc, subjcct to markct conditions, thcsc bonds may be rcmarkctcd to unaffiliatcd investors. So long as Avista Corp. is the holder ofthese bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s Consolidated Balance Sheets. In Deccmbcr 20 I 6, Avista Corp. issucd and sold $ I 75.0 million of3.54 percent first mortgagc bonds duc in 205 I punuant to a bond purchase agreement with institutional investors in the private placement market. The total net proceeds from the sale ofthe bonds were used to repay the $70.0 million tenn loan discussed above and to repay a portion of the borrowings outstanding underthe Company's $400.0 million committed line ofcredit. ln connection with the execution ofthe bond purchase agreement, the Company cash-settled seven interest rate swap derivatives (notional aggregate amount of $ I 25.0 million) and paid a total of $54.0 million. Prior to Decernber 3 I , 20 I 6, settled interest rate swap derivatives were included as part oflong-term debt on the Consolidated Balance Sheets because they were considered similar to a debt discount or premium. During 20 I 6, the Company reevaluated the presentation ofsettled interest rate swap derivatives and determined that since they are regulatory assets and liabilities that are being recovered through the ratemaking process, the morc appropriate classification is as regulatory asscts and liabilitics rathcr than as a componcnt oflong-tcrm dcbt. As such, as ofDcccmber 3 I , 20 I 6, the Company has included unamortized settled interest rate swap derivatives of$91.9 million in regulatory assets and $12.4 million in regulatory liabilities. The Company did not reclassifo any amounts as ofDecember 3 I , 20 I 5 and prior because the arnounts are not material to the financial statements. The increase in settled interest rate swap derivatives during 2016 is due to the cash settlement ofinterest rate swap derivatives discussed in detail above. There is no impact to the Consolidated Statements oflncome and the Consolidated Statements ofcash Flows for any periods as a rcsult ofthc balance sheet rcclassification. (4) The following table details future long-term debt maturities including long-term debt to affiliated trusts (see Note l5) (dollars in thousands): 2011 20 I 8 2019 2020 2021 Thereafter Total Debt maturities $ 272,500 $ 105,000 $ 52,000 $$ r,250,047 $1 ,679,547 Substantially all ofAvista Utilities' and AEL&P's owned prope(ies are subject to the lien oftheir respective mortgage indentures. Under the Mortgages and Decds of Trust (Mortgages) sccuring thcir first mortgagc bonds (including securcd mcdium-term notcs), Avista Utilities and AEL&P may each issuc additional first mortgage bonds under their specific mortgage in an aggregate principal amount equal to the sum of: 66-213 percent ofthe cost or fair value (whichever is lower) ofproperty additions ofthat entity which have not previously been made the basis of any application under that entity's Mortgage, or an equal principal amount ofretired first mortgage bonds ofthat entity which have not previously been made the basis ofany application under that entity's Mofigage, or deposit ofcash. Howeveq Avista Utilities and AEL&P rnay not individually issue any additional first rnortgage bonds (with certain exceptions in the case ofbonds issued on the basis ofretired bonds) unless the particular entity issuing the bonds has "net eamings" (as defined in that entity's Mortgage) for any period of I 2 consecutive calendar months out ofthe preceding I 8 calendar months that were at least twice the annual interest requirements on all mortgage securities at the time outstanding, including thc first mortgage bonds to be issucd, and on all indebtedness ofprior rank. As ofDccember 3 I , 20 I 6, propcrty additions and retired bonds would have allowed, and the net eamings test would not have prohibited, the issuance of$ I .2 billion in aggregate principal amount of additional first rnortgage bonds at Avista Utilities and $20.8 million at AEL&P. Snettisham Capital Lease Obligation Included in long-term capital leases above is a power purchase agreement between AEL&P and AIDEA, an agency ofthe State ofAlaska, under which AEL&P has a take-or-pay obligation, expiring in Deccmber2038, to purchase all the output ofthe 78 MW Snettisham Hydroclcctric Project. For accounting purposes, this power purchase agreement is treated as a capital lease. 122 $ Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 129 ot 177 Table of Contcnts AVISTA CORPORATTON The balances related to the Snettisham capital lease obligation as ofDecember 3 I were as follows (dollars in thousands): Capital lease obligation (l ) Capital lcasc assct (2) Accurnulated amortization ofcapital lease asset (2) (l ) The capital lease obligation amount is equal to the amount ofAIDEA's revenue bonds outstanding. (2) These amounts are included in utility plant in service on the Consolidated Balance Sheets. $ 2,415 $ 3,042 2016 201 5 62.160 $ 7 t .00'7 9,1 04 64,455 71.007 5.462 Interest on the capital lease obligation and amortization ofthe capital lease asset are included in utility resource costs in the Consolidated Statements of Income and totaled the following amounts for the years ended December 3 I (dollars in thousands): 20],6 20r5 lnterest on capital lease obligation Amortization of capital lcasc assct $3.157 $ 3,642 AIDEA issued $ I 00.0 million ofrevenue bonds in I 998 to finance its acquisition ofthe project and the payrnents by AEL&P were designed to be sufficient to enable the AIDEA to pay the principal ofand interest on its revenue bonds, which bore interest at rates ranging ffom 4.9 percent to 6.0 percent and were set to mature in January 2034. In August 20 I 5, AIDEA issued $65.7 million ofnew revenue bonds for the purpose ofrefunding all ofthe remaining outstanding revenue bonds for the Snettisham Hydroelectric Project. The new revenue bonds have interest rates ranging from 4.0 percant to 5.0 percent and mature in January 2034. The capital lease obligation on Avista Corp.'s Consolidated Ba'lance Sheet at any given time is equal to the amount of revenue bonds outstanding at that time. AEL&P is scheduled to make its last capital lease payment to AIDEA in Decernber 2033. The payments by AEL&P under the PPA between AEL&P and AIDEA are unconditional, notwithstanding any suspension, reduction or curtailment ofthe operation ofthe project. The bonds are payable solely out ofAIDEA's receipts under the power purchase agreement. AEL&P is also obligated to operate, maintain and insure the project. The PPA did not change as a result ofthe refunding, other than lower capital lease payments, and the lower capital lease payments that resulted from the refunding will be passed through to AEL&P's customers. AEL&P's payments for power under the agreement are between $ I 0.0 million and $ I 0.5 million per year, including the capital lease principal and interest of approximately $5.5 million per year. Snettisham Electric Company, a non-operating subsidiary ofAERC, has the option to purchase the Snettisham project with certain conditions at any time for the principal amount ofthc bonds outstanding at that timc. While the power purchase agreement is treated as a capital lease for accounting purposes, for ratemaking purposes this agreement is treated as an operating lease with a constant level ofannual rental expense (straight line expense). Because ofthis regulatory treatment, any difference between the operating lease expense for ratemaking purposes and the expenses recognized under capital lease treatment (interest and depreciation ofthe capital lease asset) is recorded as a regulatory asset and amortized during the later years ofthe lease when the capital lease expense is less than the operating lease expense included in base rates. The Company evaluated this agreement to determine ifit has a variable interest which must be consolidated. Based on this evaluation, AIDEA will not be consolidated underASC 810 "Consolidation" because AIDEA is a govemment agency and ASC 810 has a specific scope exception which does not allow for the consolidation of govemmenl organizations. The following table details future capital lease obligations, including interest, under tlle Snettisham PPA (dollars in thousands): 2017 201 8 2019 2020 2021 Thercafter Total Principal In tere st Total $2,s3s $ 2,921 2,660 $ 2,795 2,800 s 2,662 2,935 $ ? <11 48,8 l5 $ 16,67 4 3,s87 3,641 62,160 30,61 6 $5,457 $5,456$s,4ss$s,462$s,4s7S6s,489 $ 92,716 NOTE I5. LONG.TERM DEBT TO AFFILIATED TRUSTS In 1997, the Company issued Floating Rate Junior Subordrnated Deferrable Interest Debentures, Series B, with a principal amount of $5 I .5 million to Avista Capital II, an affiliated business trust formed by the Company. Avista Capital II issued $50.0 million of Preferred Trust Securities with a floating distribution rate ofLIBOR plus 0.875 percent, calculated and reset quarterly. 123 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '130 of 177 Table of Contents AVISTA CORPORATION The distribution rates paid were as follows during the years ended December 3 I Low distribution rate High distnbution ratc Distribution rate at the end ofthe year 20t6 20 r5 2014 1.29o/o l.8lo/o l.8lo/o I .l lo/o 1.29% 1.29% 1.100/o t.tt% t.l1% Concurrcnt with the issuancc of thc Prefened Trust Sccuritics, Avista Capital II issued $ 1.5 million of Common Trust Sccurities to thc Company. These dcbt securities may be redeemed at the option ofAvista Capital II at any time and mature on June 1,2037. In December2000, the Company purchased $10.0 million of these Preferred Trust Securities. The Company owns I 00 percent ofAvista Capital II and has solely and unconditionally guaranteed the payrnent ofdistributions on, and redemption price and liquidation amount for, the Preferred Trust Securities to the extent that Avista Capital II has funds available for such payments from the respective debt securities. Upon maturity or prior redemption ofsuch debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not include these capital trusts in its consolidated financial statcments as Avista Corp. is not thc primary bencficiary. As such, the sole asscts of the capital trusts are $5 I .5 million ofjunior subordinated deferrable interest debentures ofAvista Corp., which are reflected on the Consolidated Balance Sheets. Interest expense to affiliated trusts in the Consolidated Staternents ofhcorne represents interest expense on these debentures. NOTE 16.FAIRVALUE The carrying values ofcash 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 Consolidated Balance Sheets. The fair value hierarchy prioritizcs thc inputs uscd to mcasurc fair value. Thc hicrarchy gives the highcst priority to unadjusted quotcd priccs in activc markets for identical assets or liabilities (Level I measurements) and the lowest priority to fair values derived from unobsewable inputs (Level 3 measurements). The three levels ofthe lair value hierarchy are defined as follows: Level 1 - Quoted prices are available in active rrarkets for identical assets or liabilities. Active markets are those in whiclr 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 I , 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 considervarious assumptions, including quoted forward prices forcommodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as otherrelevant economic measures. Substantially all ofthese assumptions are observable in the markctplace throughout the full term ofthc instrument, can be derivcd from obscrvablc data or are supportcd by obscrvable levcls at which transactions are executed in the marftetplace. Level 3 - Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with intemally dcvclopcd methodologies that rcsult in managcment's best cstimatc offair valuc. Financial assets and liabilities are classified in their entirety based on the lowest level ofinput that is significant to the fair value measurement. The Company's assessment ofthe significance ofa particularinput to the fairvalue measurement requiresjudgment, and may affect the valuation offairvalue assets and liabilities and their placement within the fair value hierarchy levels. The determination ofthe fair values incorporates various factors that not only includc the credit standing ofthe counterpartics involvcd and the impact ofcredit enhancemcnts (such as cash dcposits and lctters ofcredit), but also tlrc impact of Avista Corp.'s nonperformance risk on its liabilities. 124 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 131 oI '177 Table of Contents AVTSTA CORPORATION 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 Consolidated Balance Sheets as ofDecernber 3 I (dollars in thousands): 2016 20t5 Carrying Value Estirnatcd Fair Value Carrying Value Estimatcd Fair Value Long-term debt (Level 2) Long{erm debt (Level 3) Snettisham capital lease obligation (Level 3) Long-term debt to afiliated trusts (Level 3) December 31,2016 Assets: Energy commodity derivatives Level 3 energy commodity derivatives: Natural gas exchange agreements Powcr cxchan gc agrccment Foreign cunency exchan ge derivatives Interest rate swap derivatives Deferred cornpen sati on assets: Fixcd income sccuritics (2) Equity securities (2) Total Liabilities: Energy commodity derivatives Lcvel 3 energy commodity derivatives: Natural gas exchange agreement Power exchange agreemenl Power option agreement Interest rate swap derivatives Foreign currency exchange derivatives Total l ,048,661 $ 67 5,251 62,800 3 8,660 951,000 $ 5 92,000 64,455 51,547 Level I Level2 Level 3 Counterparty and Cash Collateral Netting (l)Total $ Thcse cstimatcs of fair value of long+cnn debt and long-tcrm dcbt to affiliated trusts were primarily based on availablc markct information, which gencrally consists ofestimated market prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers consisted ofparvalues of75.00 to l22.59,where a parvalue of I 00.00 represents the carrying value recorded on the 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 using comparable debt with similar risk and terms ifthere is no trading activity near a period end. Lcvcl 3 long+crm dcbt consists ofprivate placcmcnt bonds and debt to affiliated trusts, which typically havc no sccondary trading activity. Fair values in Level 3 are estimated based on market prices from third party brokers using secondary market quotes for debt u'ith similar risk and terms to generate quotes for Avista Corp. bonds. Due to the unique nature ofthe Snettisham capital lease obligation, the estimated fair value ofthese items was determined based on a discounted cash flow model using available market information. Prior to December 3 1, 20 I 6, the Snettisham capital lease obligation was discounted to present value using the Moody's Aaa Corporate discount rate as published by the Federal Reserve. This rate was discontinued during the fourth quarter of 2016, as such going forward, thc Company is using thc Morgan Markcts A Ex-Fin discount ratc, which is thc closcst approximation to the ratc prcviously used. The following table discloses by level within the fairvalue hierarchy the Company's assets and liabilities measurcd and reported on the Consolidated BalanceSheetsasofDecember3l,20l6and20l5atfairvalueonarecurringbasis(dollarsinthousands): $s 47,994 $ 5 13,098 $ (46,099) $1,895 69 25 (6e) (2s) (s) (4,348) 1,789 5,48 I 8,750 1,789 5,481 $1,270 $61,097 $94$(s0,546) S 17,915 $$56.871 $ 73,978 28 $(ss,e57) s (6e) (2s) (3 9,24 8 ) (s) 914 5,885 13,449 16 34.730 23 5,954 t3,47 4 76 s s l 30.877 $r 9,s04 $ (9s,304) $ 125 55,077 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 132 ot 177 951,000 s 677,000 62,t60 5t,547 1,055,797 595.0 t 8 63,1 50 3 6,08 3 Ie&t-&!!cEs AVISTA CORPORATION Level I Level 2 Level 3 Counterparty and Cash Collateral Netting (l )Total December3l,20ts Assets: Energy commodity derivatives Level 3 energy commodity derivatives: Natural gas exchange agreement Forcign currcncy exclrangc dcrivativcs lnterest rate swap derivatives Delerred compensation assets: Fixed income securities (2) Equity securities (2) Total Liabilities: Energy commodity derivatives Level 3 energy commodity derivatives: Natural gas exchange agreement Power exchange agreement Power option agreem€nt Foreign currency ex chan ge derivatives Interest rate swap derivatives Total $$74,637 $ 2 1,548 $(73,9s4\ S 678 (678) (2) 683 1,548 1,727 5,7 6t 1,727 5,76t $7,488 $7 6,187 S 678 $ (74,634) $9.719 $$97.193 $ 5.7 t7 21.961 124 $ (88,480) $8,713 (678)5 0tq 2t,961 124 t'l 8 5,49 8 (2) $$ 1 82,710 S 27,802 $(89,r60) S 121,352 (l) TheCornpanyispennittedtonetderivativeassetsandderivativeliabilitieswiththesamecounterpartywhenalegallyenforceablernasternetting agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held orplaced with these same counterparties. (2) These assets are trading securities and are included in otherproperty and investments-net and othernon-current assets on the Consolidated Balance Sheets. The difference between the amount ofderivative assets and liabilities disclosed in respective levels in the table above and the amount ofderivative assets and liabilities disclosed on the Consolidated Balance Sheets is due to netting arrangements with certain counterparties. See Note 6 for additional discussion ofderivative netting. To establish fair value for energy commodity derivatives, the Company uses quoted market prices and forward price curves to estimate the fair value ofutility derivative commodity 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 (NYMEX) pricing for similar instruments, adjusted forbasin differences, using marftet quotes. Where observable inputs are available for substantially the full term ofthe 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 ofthe 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 ofthe swap derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash flows ofthe intercst rate swap dcrivatives arc equal to the fixcd intcrcst ratc in the swap comparcd to the floating markct intcrcst rate multiplicd by thc 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 tlre market price by the notional amount ofthe derivative. Forward foreign curency market curves are provided by thind party brokers. The Company's credit spread is factored into the locked-in price ofthe 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 126 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 133 oI 177 l9 85,498 Iau!-qt.es!!e$! AVISTA CORPORATION inthetableaboveexcludescashandcashequivalentsof$0.4millionasofDecember3l,20l6and$0.6millionasofDecember3l,20l5 Level 3 Fair Value Under the power exchange agreement the Company purchases power at a price that is based on the average operating and maintenance (O&M) charges from three surrogate nuclear power plants around the country. To estimate the fair value ofthis agreement the Company estirnates the diflerence between the purchase price based on the future O&M charges and forward prices for energy. The Company compares the Level 2 brokered quotes and forward price curves described above to an intemally developed forward price which is based on the average O&M charges from the three surrogate nuclearpowerplants forthe current year. Becausc the nuclcar powcr plant O&M chargcs arc only known for onc year, all forward ycars arc cstimatcd assuming an annual cscalation. In addition to the forward price being estimated using unobservable inputs, the Company also estimates the volumes ofthe trdnsactions that will take place in the future based on historical average transaction volumes per delivery year (November to April). Significant increases or decreases in any ofthese inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the cunent year O&M charges for the surrogate plants is accompanied by a directionally similar change in O&M charges in future years. There is generally not a correlation between extemal market prices and the O&M chargcs used to devclop the intcmal forward price. For the power cornmodity option agreement, the Company uses the Black-Scholes-Merton valuation model to estimate the fair value, and this model includes significant inputs not observable or corroborated in the ma*et. These inputs include: I ) the strike price (which is an intemally derived price based on a combination olgeneration plant heat rate factors, natural gas market pricing, detivery and other O&M charges), 2) estimated delivery volumes, and 3) volatility rates. Significant increases or decreases in any ofthese inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, changes in overall commodity market prices and volatility rates are accompanied by directionally similar changes in the strike price and volatility assumptions used in the calculation. For the natural gas commodity exchange agreement, the Company uses the same Level 2 brokered quotes described above; however, the Company also estimates the purchase and sales volumes (within contractual limits) as well as the timing of those transactions. Changing the timing of volume estimates changes the timing ofpurchases and sales, impacting which brokered quote is used. Because the brokered quotes can vary signrficantly from period to period, the unobservable estimatcs ofthc timing and volumc oftransactions can havc a significant impact on the calculatcd fair valuc. Thc Company curcntly estimates volumes and timing oftransactions based on a most likely scenario using historical data. Historically, the timing and volume oftransactions have not been highly correlated with market prices and market volatility. The following table presents the quantitative information which was used to estimate the fair values ofthe Level 3 assets and liabilities above as of December 3 1,201 6 (dollars in thousands): Fair Value (Net) at December3l,20l6 ValuationTechnique Unobservable lnput Range Power exchange agreement $(13,449) Surrogate facility pnclng O&M charges Escalation factor Transaction volumes $33.s9-$49.rslMwh (1) 3%-2017 to2019 241,558 - 396,984 MWhs Power option agrecment (7 6)Black-Scholcs- Merton Strikc pricc Delivery volumes Volatility rates $37.83/MWh -2019 $54.40/MWh -2018 157,517 - 285,979 MWhs 0.20 (2) Natural gas exchange agreement (s,885)Intemally derived weighted-average cost ofgas Forward purchase prices Forward sales prices Purchase volumes Sales volumes $1.83 -53.06/mmBTU $1.90 - $5.14lmmBTU I 15,000 - 310,000 mmBTUs 60,000 - 310,000 rnmBTUs ( I ) The average O&M charges for the delivery year beginning in November 2016 were $39.22 per MWh. For ratemaking purposes the average O&M charges to bc includcd for recovery in rctail rates vary slightly betwccn regulatory jurisdictions. Thc avemge O&M charges for tlre dclivery year bcginning in 2016 were $44.33 forWashington and $39.22 forldaho. (2) The estimated volatility rate of 0.20 is compared to actual quoted volatility rates of 0.3 5 for 2017 to 0.26 in December 20 I 8. t27 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1 , Page 134 ot 177 Table of Contents AVISTA CORPORATION The valuation methods, significant inputs and resulting fairvalues described above were developed by the Company's management and are reviewed on at lcast a quarterly basis to cnsurc they provide a rcasonablc cstimate offairvalue each reporting period. The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the years ended December 3 I (dollars in thousands): Natural Gas Exchangc Agreement Power Exchangc Agreement Powcr 0ption Agreement Total Year ended December 31,2016: Balance as ofJanuary l. 20 I 6 Total gains or(losses) (rcalizcd/unrealized): Included in regulatory assets/liabilities (l ) Settlements Ending balance as of December 3l,20'16 (2) Year ended December 31,2015: Balancc as ofJanuary l. 20 I 5 Total gains or(losses) (realizedlunrealized): Included in regulatory assets/liabilities (l ) Settlernents Ending balance as ofDecember 3 I ,201 5 (2) Year ended December 31,2014: Balance as ofJanuary 1,2014 Total gains or (losses) (realized/unrealized): Included in regulatory assets/liabilities (l ) Settlements Ending balance as ofDecember 3 1,2014 (2) Dvidends paid per common share $ s (s,039) $ (21 ,e6l ) $ 259 400 l 05)8,1 l2 (124) $ (27,124) 48 707 7,007 (5,88s) $ (r 3,44e) $(76\ $ (le,4lo) $(3s) $ (23,2ee) $(424) S (23,7s8) ( r l ,906) 8.540 (6,008) 1,004 (6,1 98 ) 7,536 300 $(s,039) $ (2l,e6l) $(t24) $ (27,124) s (l,2le) $ (14,44r) $(77s) $ (16,435) 3513,873 (2,689) ( r 0,002 ) 1,144 (5,77 8) (1,545) $(3s) $ (23,2ee) $(424) $ (23,7s8) (l) Allgainsandlosscsareincludedinotherrcgulatoryassetsandliabilitics.Thercwerenogainsandlosscsincludedineithcrnetincomeorother comprehensive income during any ofthe periods presented in the table above.(2) There were no purchases, issuances or transfers from other categories ofany derivatives instruments during the periods presented in the table above. NOTE IT.COMMONSTOCK The payment of dividends on common stock could be limited by: . certain covenants applicable to preferred stock (when outstanding) contained in the Company's Restated Articles oflncorporation, as amendcd (currently there are no preferred shares outstanding), . certain covenants applicable to the Company's outstanding long-term debt and committed line ofcredit agreements, . the hydroelectric licensing requirements ofsection I 0(d) ofthe FPA (see Note 1 ), and . certain requirements under the OPUC approval of the AERC acquisition in 2014. Th e OPUC's AERC acquisition order requires Avista Utilities to maintain a capital structure ofno less than 40 percent comnon equity (inclusive of short-term debt). This limitation may be revised upon request by the Company with approval from the OPUC. The Company declared the following dividends for the ycar endcd Deccmber 3 I : 20t6 201 5 2014 $t.37 $1.32 $|.27 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista 128 Schedule 1, Page 135 ol 177 Table of Contetrts AVISTA CORPORATION Under the most restrictive ofthe dividend limitations discussed above, which are the requirements ofthe OPUC approval ofthe AERC acquisition, the amount available for dividends at Decernber 3 I . 201 6 was limited to $263.4 rnillion. The Company has l0 million authodzed shares ofpreferred stock. The Company did not have any preferred stock outstanding as ofDecember3l,20l6 and 20r5. Stock Repurchase Programs During 2014 and 201 5, Avista Corp.'s Board of Directors approved programs to repurchase shares of the Company's outstanding common stock. The number ofshares repurchased and the total cost ofrepurchases are disclosed in the Consolidated Statements ofEquity and Redeemable Noncontrolling Interests. The average repurchase price was $3 I .57 in 20 I 4 and $32.66 in 20 I 5. AII repurchased shares reverted to the status ofauthorized but unissued shares. Equity Issuances In March 201 6, the Company entered into four separate sales agency agreements underwhich Avista Corp.'s sales agents may offer and sell up to 3.8 million new shares of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29,2020.|n 2016,1.6 million shares were issued under these agreements resulting in total net proceeds of $65.3 million, leaving 2.2 million shares remaining to be issued. In 20 I 6, thc Company also issued $ I .7 million (net ofissuancc costs) ofcommon stock under the cmployee plans. NOTE I8, EARNINGS PER COMMON SIIARE ATTRIBUTABLE TO AVISTA CORPORATION SHAREIIOLDERS The following table presents the computation ofbasic and diluted eamings per common share attributable to Avista Corp. shareholders for the years ended December 3 I (in thousands, except per share amounts): 2016 20t5 2014 Numerator: Net income fiom continuing operations attributable to Avista Corp. shareholders Net income fiom discontinued operations attributable to Avista Corp. shareholders Subsidiary eamings adjustment for dilutive securities (discontinued operations) Adjusted net income from discontrnued operations attributable to Avista Corp. shareholders for cornputation of diluted eamings per cornmon share Denominator: Weighted-average nurnber of common shares outstanding-basic Effect of dilutive securities: Performance and restricted stock awards Weighted-average number of common shares outstanding-diluted Earnings per common share attributable to Avista Corp. shareholders, basic: Eamings per common share from continuing operations Eamings per common share from discontinued operations Total eamings per common share attributable to Avista Corp. shareholders, basic Earnings per common share attributable to Avista Corp, shareholders, diluted: Eamings per cornmon share from continuing opemtions Eamings per common share from discontinued operations Total eamings per common share attributable to Avista Corp. shareholders, diluted There were no shares excluded from the calculation because they were anlidilutive. 129 g 137,228 $ 118,080 S lr9,8l7 5,147 72,224 5 $$s,t47 $ 72,229 63,508 412 62,301 407 61,632 25s 63.920 62,708 6l,887 s $ 2.16 $ $ 1.90 $ 0.08 $ t.94 l.l8 s 2.16 $r.98 S 3.12 $ $ $ $ 2.15 r.89 s 0.08 $ 1.93 t.t7 s z.ts $'t.97 $3.1 0 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 136 of 177 Table 0f Contcnts AVISTA CORPORATION NOTE 19. COMMITMENTS AND CONTINGENCIES In the course ofits business, the Company becomes involved in various claims, controversies, disputes and other contingent matters, including the items describcd in this Notc. Some ofthesc claims, controvcrsics, disputcs and othcr contingcnt mattcrs involve litigation or other contestcd procccdings. For all such matters, the Company intends to vigorously protect and defend its interests and pursue its rights. However, no assurance can be given as to the ultimate outcome ofany particular matter because litigation and other contested proceedings are inherently subject to numerous uncertainties. For matters that affect Avista Utilities' or AEL&P's operations, the Company intends to seek, to the extent appropriate, recovery ofincurred costs through the ratemaking process. C a I ifo rnia R efund Pro c ee di ng ln February 2016, APX, a market maker in the Califomia Refund Proceedings in whose markets Avista Energy participated in the summer of 2000, asserted that Avista Energy and its other customer/participants may be responsible for a share ofthe disgorgement penalty APX may be found to owe to Pacific Gas & Electric @G&E), Southem Califomia Edison, San Diego Gas & Electric, the Califomia Attomey General (AG), the Califomia Departrnent of Water Resources (CERS), and the Califomia Public Utilities Commission (together, the "Califomia Parties"). The penalty arises as a result of the FERC's finding that APX cornmitted violations in the Califlomia market in the summer of 2000. APX is making these assertions despite Avista Energy having been disrnissed in FERC Opinion No. 536 from the on-going administrative proceeding at the FERC regarding potential wrongdoing in the Califomia markets in the summerof 2000. APX has identified Avista Energy's share ofAPX's exposure to be as much as $ I 6.0 million even though no wrongdoing allegations are specifically attributable to Avista Energy. Avista Energy believes its settlernent with the Califomia Parties in 20 I 4 insulates it fiom any such liability and that as a dismissed party it cannot be drawn back into the litigation. Avista Energy intends to vigorously dispute APX's assertions ofindirect liability, but cannot at this time predict the eventual outcome. PaciJi c Nort hw e st R efund Pro c eeding In July 200 I , the FERC initiated a preliminary evidentiary hearing to develop a factual record as to whether prices for spot market sales ofwholesale energy in the Pacific Northwest between December 2 5, 2000 and June 20, 200 I were just and reasonable. In June 2003, the FERC terminated the Pacific Northwest refund proceedings, after finding that the equities do notjustifu the imposition ofrefunds. In August 2007, the Ninth Circuit found that the FERC had failed to take into account new evidence ofmarket manipulation and that such failure was arbitrary and capricious and, accordingly, remanded the case to the FERC, stating that the FERC's findings must be reevaluated in light ofthe new evidence. The Ninth Circuit expressly declined to direct the FERC to grant refunds. On October 3,201 I, the FERC issued an Order on Remand and on April 5, 201 3 expanded the temporal scope ofthe proceeding to permit parties to submit evidcncc on transactions during the pcriod from January I , 2000 through and including Junc 20, 200 I . On July 1 l, 2012 and March 28, 2013, Avista Energy and Avista Corp. filed settlements of all issues in this docket with regard to the claims made by the City of Tacoma and the California AG (on behalf of the Califomia Department ofWater Resources). The FERC approved the settlements and they are final. The remaining direct claimant against Avista Corp. and Avista Energy in this proceeding was the City of Seattle, Washington (Seattle). An evidentiary, trial typc hcaring bcfore an Administrativc Law Judgc (ALJ) to pcrmit parties to prcscnt cvidcncc of unlawful markct activity was conductcd in 201 3. WithrcgardtothcSeattleclaims,onMarch28,20l4,thePrcsidingALJissucdanlnitialDccisionfindingthat: l)Scattlefailcdtodcmonstratethatcither Avista Corp. or Avista Energy engaged in unlawful market activity and also failed to identifu any specific contracts at issue; 2) Seattle failed to demonstrate that contracts with either Avista Corp. or Avista Energy imposed an excessive burden on consumers or seriously harmed the public interest; and that 3) Seattle failed to demonstrate that either Avista Corp. or Avista Energy engaged in any specific violations ofsubstantive provisions ofthe FPA or any filed tariffs orrate schedules. Accordingly, the ALJ denied all ofSeattle's claims underboth section 206 and section 309 ofthe FPA. On May 22,2Ol5,the FERC issued its Order on Initial Decision in which it upheld the ALJ's Initial Decision denying all ofSeattle's claims against Avista Corp. and Avista Energy. Seattle filed a Request for Rehearing ofthe FERC's Order on Initial Decision which was denied on December 3 I , 20 I 5. Seattle appealed the FERC's decision to thc Ninth Circuit. In Octobcr 2016, Seattlc scttled all of thc mattcrs with thc remaining partics and withdrcw its appcal at thc Ninth Circuit. All thc remaining parties signed the settlement agreement and a petition to dismiss the case was filed with the Ninth Circuit on October 27, 201 6. There are no remaining claims outstanding under this proceeding. The settlement did not have a material adverse effbct on the Company's financial condition, results of operations or caslr flows. 130 Exhibit No. 3 Case Nos. AVU-E-'I7-_ / AVU-G-17-_ M. Thies, Avista Schedule', , Page 137 ot 177 Tabl€ of C0ntents AVISTA CORPORATION Sierra Club and Montana Environmenlal Informalion Center Litigation In 2013, the Sierra CIub and Montana Environmental Information Center (MEIC) (collectively "Plaintiffs"), filed a Complaint in the United States District Court for the District of Montana, Billings Division, against the Owners of the Colstrip Generating Project ("Colstrip"); Avista Corp. owns a I 5 percent interest in Units 3 & 4 of Colstrip. The other Colstrip co-Oumers are Talen Montana, LLC (formerly PPL Montana, LLC, an rndirect subsidiary of Talen Energy Corporation), Puget Sound Energy, Portland General Electric Company, NorthWestem Energy and PacifiCorp. The Complaint alleged certain violations of the Clean Air Act, including the New Source Review, Title V and opacity requirements with respect to post-January I , 200 I Colstrip proj ects. The Plaintiffs requested that the Court grant injunctive and declaratory relief, order remediation ofalleged environmental damages, impose civil penalties, require a beneficial environmental project in the areas affected by the alleged air pollution and require payment ofPlaintiffs' costs oflitigation and attomey f'ees. The liability trial was scheduled to start on May 3 I , 20 I 6. The parties engaged in settlement discussions with the Plaintiffs to resolve the claims raised in the litigation.OnJuly l2,20l6,thepartiesfiledaproposedConsentDecreewiththecourtwhichcontainedtlretermsofthesettlementofthematterwithrespect to all fourunits at Colstrip. The settlement does not include any monetary payments by any party, dismisses all claims against all fourunits, and provides for the shut-down ofunits I & 2 (which are owned solely by Talen Montana, LLC and Puget Sound Energy) no later than Iily,2022. The Consent Decree was cntered on Scptcmbcr 6, 20 I 6. Thc parties havc pctitioncd thc Court for costs and attomcys' fccs. Thc Court denied thc defcndant's claim for fccs and rcduccd theplaintiffsclaimed fees from approximately $3.0 million to $l-6 million. On February 15,2017 the Court issued an Orderadopting this resolution in full and closing tlre case. The Cornpany does not expect that this rnatterwill have a material adverse effect on its financial condition, results ofoperations or cash flows. Cabinet Gorge Total Dissolved Gas Abalement Plan Dissolved atrnospheric gas levels (refened to as "Total Dissolved Gas" or "TDG") in the Clark Fork River exceed state ofIdaho and federal water quality numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of the Clark Fork Settlement Agreement (CFSA) as incorporated in Avista Corp.'s FERC license forthe Clark Fork Project, Avista Corp. has worked in consultation with agcncics, tribcs and othcr stakcholdcrs to addrcss this issuc. Undcr thc tcrms ofa gas supcrsaturation mitigation plan, Avista is rcducing TDG by constructing spill crest modifications on spill gates at the dam, and the Company expects to continue spill crest modifications over the next several years, in ongoing consultation with key stakeholders. Avista Corp. cannot at this time predict the outcome or estirnate a range ofcosts associated with this contingency; howeveq the Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to this i ssue. Fish Passage at Cabinet Gorge and Noxon Rapids In 1999, the United States Fish and Wildlife Service (USFWS) listed bull trout as threatened under the Endangered Species Act. ln 2010, the USFWS issued a rcviscd dcsignation ofcritical habitat forbull trout, which includes the lowcrClark Fork River. Thc USFWS issucd a final rccovcry plan in Octobcr20l 5. Thc CFSA dcscribcs prognrms intcndcd to hclp restorc bull trout populations in thc projcct arca. Using thc conccpt ofadaptivc managemcnt and working closely with the USFWS, the Company evaluated the feasibility offish passage at Cabinet Gorge and Noxon Rapids. The results ofthese studies led, in part, to the decision to move forward with development ofpermanent facilities, among other bull trout enhancement efforts. Parties to the CFSA are working to resolve several issues. The Company believes its ongoing efforts through the CFSA continue to effectively address issues related to bull trout. Avista Corp. cannot at this time predict the outcome or estimale a range ofcosts associated with this contingency; however, the Company will continue to seek recovery, through thc ratcmaking process, ofall operating and capitalizcd costs relatcd to fish passagc at Cabinct Gorgc and Noxon Rapids. C o I lective B a rg a i ni ng A g re e me nts The Company's collcctivc bargaining agrecmcnts with the IBEW rcprcsent approximatcly 45 pcrccnt ofall ofAvista Utilitics' employccs. A ncw tlrrcc-ycar agreement with the local union in Washington and Idaho rcpresenting the majority (approximately 90 percent) of the Avista Utilities'bargaining unit employees was approved in March 201 6 and expires in March 201 9. A threc-year agrecmcnt in Oregon, which covers approximately 50 cmployces was set to expirc in March 20 I 7. A ncw threc-year agreemcnt has been approved by the IBEW membership that will expire in March 2020. It is still awaiting approval from the National IBEW. l3l Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1,Page 138 ot 177 Table of Contents AVISTA CORPORATION A collective bargaining agreement with the local union of the IBEW in Alaska expires in March 2017. The collective bargaining agreement with the IBEW in Alaska reprcsents approximatcly 50 pcrccnt ofall AERC cmployecs. Thc rcmainder ofAERC's cmployccs arc non-union. There is a risk that ifcollective bargaining agreements expire and new agreements are not reached in each ofourjurisdictions, employees could strike. Given the magnitude ofemployees that are covered by collective bargaining agreements, this could result in disruptions ofour operations. However, the Company belicves that thc possibility ofthis occurring is rcmote. Other Contingencies In thc normal course ofbusincss, the Company has various othcr lcgal claims and contingcnt mattcrs outstanding. The Company bclievcs that any ultimatc liability arising from these actions will not have a material impact on its financial condition, results ofoperations or cash flows. It is possible that a change could occur in the Cornpany's estimates ofthe probability or amount ofa liability being incuned. Such a change, should it occur, could be significant. The Cornpany routinely assesses, based on studies, expert analyses and legal reviews, its contingencies, obligations and cotnmitments for remediation of contaminated sites, including assessments ofranges and probabilities ofrecoveries from other responsible parties who either have or have not agreed to a settlement as well as recoveries fiom insurance carriers. The Company's policy is to accrue and charge to current expense identified exposures related to cnvironmental rcmediation sitcs based on cstimatcs ofinvcstigation, cleanup and monitoring costs to bc incurrcd. For mattcrs that affect Avista Utilitics' or AEL&P's operations, the Company seeks, to the extent appropnate, recovery ofincurred costs through the ratemaking process. The Company has potential liabilities under the Endangered Species Act for species offish, plants and wildlife that have either already been added to the endangered species list, listed as "threatened" or petitioned for listing. Thus far, measures adopted and implemented have had minimal impact on the Company. Howcvcr, thc Company will continuc to scck rccovcry, through thc ratcmaking proccss, ofall opcrating and capitalized costs rclatcd to thcsc issues. Under the federal licenses for its hydroelectric projects, the Company is obligated to protect its property rights, including water rights. In addition, the cornpany holds additional nonJrydro water rights. The state ofMontana is examining the status ofall water right claims within state boundaries through a general adjudication. Claims within the Clark Fork River basin could adversely affect the energy production ofthe Company's Cabinet Gorge and Noxon Rapids hydroelectric facilities. The state ofldaho has initiated adjudication in northem Idaho, which will ultimately include the lower Clark Fork River, the Spokane River and the Coeur d'Alene basin. The Company is and will continue to be a participant in these and any other relevant adjudication processes. The complexity ofsuch adjudications makes each unlikely to be concluded in the foreseeable future. As such, it is not possible forthe Company to estimate the impact ofany outcome at this time. The Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to this issue. t32 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 139 of '177 Table of Contents AVISTA CORPORATION NOTf,, 20. REGI]LATORY MATTERS Regulatory Assets and Liabilities The following table presents the Company's regulatory assets and liabilities as ofDecember 3 I , 20 I 6 (dollan in thousands): Receiving Regulatory Treatment (2) Expectcd Recovery or Refund Regulatory Assets: Investment in exchange power-net Regulatory assets fordeferred income tax Regulatory assets for pensions and other postretirement benefi t plans Current regulatory asset for energy cornmodity derivatives Unamortizcd dcbt rcpurchasc costs Regulatory asset for settlement with Coeur d'Alene Tribe Demand side management prograrns Deferred maintenance costs Decoupling surcharge Regulatory asset for utility plant to be abandoncd Regulatory asset for interest rate swaps Non-current regulatory asset for energy commodity derivatives Othcr rcgulatory asscts Total regulatory assets Regulatory Liabilities: Natural gas deferrals Power deferrals Rcgulatory liability for utility plant retirement costs Income tax related liabilities Regulatory Iiability for interest rate swaps Provision for eamings sharing rebate Decoupling rebate Other regulatory liabi lities Total regulatory liabilities (3) (4) 43,126 4,585 s 270,64 I S 30 I ,006 S 128,181 s 699.828 $ $$ 30,820 $ 23,528 273,983 Rcmaining Amortization Period (l) Eaming A Retum Not Eaming A Return Total 2016 Total 2015 2019 S 6,533 $ 101,372 13,700 45,265 I 9,1 00 37,9t2 3,633 6,533 S I 09,853 240,114 8,983 I0t,240 235,009 17.260 15,520 S $ (s) (6) 8,481 240,114 1 l,365 15,700 2,672 16,9t9 5 755 I 1,365 13,700 2059 (3) 201 8 201 8 4s,26s t5,700 2.672 43,126 r 9,l 00 I 6l .508 t6,919 t3,97 3 46,576 3,1 68 4,823 t3,312 (1\ (8) (s) (3) 123,596 83,973 32,420 17,348 579.632 (3) S (3) 30,820 S 23,528 12,442 2,405 2,505 t 7,880 t8,7 47 (e) (3 ) (8) (3) 2017 (3) 28,966 3,697 3,257 8,749 6,600 273,983 28,966 21,191 10,297 2,405 5,762 261,594 17,609 23 12,237 2,373 3,420 $ 345,683 $ 35,920 $ 15,349 $ 396,952 $333,883 (l ) Eaming a retum includes either interest on the regulatory asset/liability or a retum on the investment as a component ofrate base at the allowed rate ofretum. (2) Expected recovery is pending regulatory treatment including regulatory assets and liabilities with prior regulatory precedence. (3) Remaining amortization period varies depending on timing ofunderlying transactions. (4) As the Company has historically recovered and cunently recovers its pension and other postretirement benefit costs related to its regulated operations in retail rates, tlre Company records a regulatory asset for that portion ofits pension and other postretirement benefit funding deficiency. 133 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 140 ot 177 Table of Cqntents AVISTA CORPORATION (5) The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy comrnodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and losses on energy commodity transactions until the period ofsettlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory approval, rcsult in adjustmcnts to retail ratcs through purchascd gas cost adjustmcnts, thc ERM in Washington, the PCA mechanism in Idaho, and periodic general rates cases. (6) For the Company's Washington jurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt arc amortized ovcr thc rcmaining lifc ofthc original dcbt that was rcpurchascd or, ifncw dcbt is issucd in conncction with thc repurchasc, thcse costs are amoftized over the life ofthe new debt. In the Company's other regulatory jurisdictions, premiums paid to repurchase debt prior to 2O07 are being arnortized over the average remaining maturity ofoutstanding debt when no new debt was issued in connection with the debt repurchase. These costs are included in the Company's cost ofdebt calculation for ratemaking purposes and are recovered through retail rates. (7 ) In March 201 6, the UTC granted the Company's Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value of its existing Washington electric meters for the opportunity for later recovery. This accounting treatment is related to the Company's plan to replace approximately 253,000 ofits existing electric meters with new two-way digital meters and the related software and support services through its AMI project in Washington State. Replacement of the meters is expected to begin in the second half of 2017. Forratemaking purposes, the existing clectric mctcrs won't bc recorded as regulatory assets until thcy arc physically rcmovcd from scrvicc, but for GAAP purposcs, they arc regulatory assets upon the commitment by management to retire the meters. (8) For interest rate swap derivatives, each period Avista Utilities records all ma*-to-market gains and losses in each accounting period as assets and liabilitics and records offsctting rcgulatory asscts and liabilitics, such that thcrc is no incomc statcmcnt impact. This is similar to thc trcatmcnt of energy commodity derivatives described above. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest expense over the term ofthe associated debt and are also included as a part ofthe Company's cost ofdebt calculation for ratemaking purposes. See Note I 4 regarding a reclassification ofsettled interest rate swap derivatives during 20 I 6. Settled interest rate swap derivatives which have been through a general rate case proceeding are classified as eaming a retum in the table above, whereas all unsettled interest mtc swap dcrivatives and scttlcd intcrcst rate swap dcrivatives which have not bccn includcd in a gcncral ratc case arc classificd as cxpcctcd recovery. (9) This amount is dependent upon the cost ofremoval ofunderlying utitity plant assets and the life ofutility plant. Power Cost Deferrals and Recovery Mechanisms Deferred power supply costs are recorded as a deferred charge on the Consolidated Balance Sheets for future prudence review and recovery through retail rates. The power supply costs deferred include certain differences between actual net power supply costs incurred by Avista Utilities and the costs included in base retail rates. This difference in net power supply costs primarily results from changes in: . short-term wholesale market prices and sales and purchase volumes, . the level and availability ofhydroelectric generation, . the level and availability ofthermal generation (including changes in fuel prices), and . retail loads. In Washington, the ERM allows Avista Utilities to periodically increase or decrease electric rates with UTC approval to reflect changes in power supply costs. The ERM is an accounting method used to track certain differences between actual power supply costs, net ofwholesale sales and sales offuel, and the amount included in base retail rates for Washington customers. The Washington ERM calculation is subject to certain deadbands and sharing bands. For 20 I 6, the Company recognized a pre-tax benefit of $5.1 million under the ERM in Washington compared to a benefit of $6.3 mil lion for 20 I 5. Total net deferred powercosts underthe ERM were a liability of $21.3 million as of December3l,20l6 compared to a liability of $18.0 million as of December3l, 20 I 5, and these deferred power cost balances represent amounts due to custorners. Avista Utilities has a PCA mechanism in Idaho that allows it to modify electric rates on October I of each year with IPUC approval. Under the PCA mcchanism, Avista Utilities dcfcrs 90 perccnt ofthc diffcrencc between certain actual net powcr supply cxpcnscs and thc amount includcd in base rctail ratcs for its Idaho customers. The October I rate adjustments recover or rebate power costs deferred during the preceding July-June twelve-month period. Total net power supply costs deferred under the PCA mechanisrn were a liability of $2.2 million as of December 3 | , 201 6 compared to an asset of $0.2 nrillion as of December3l,20l5. t34 Exhibit No. 3 Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1,Page 141 of 177 Table of Coptcnts AVISTA CORPORATION Natural Gas Cost Deleruals and Recovery Mechanisms Avista Utilities files a PGA in all three states it serves to adjust natural gas rates for: I ) estimated commodity and pipeline transportation costs to serve natural gas customcrs for thc coming year, and 2) the diffcrcnce bctwccn actual and cstimatcd commodity and transportation costs for thc prior year. Total nct deferrednaturalgascoststoberefundedtocustomerswerealiabilityof$30.8millionasofDecember3l,20l6comparedtoaliabilityof$lT.9millionasof December 3 l, 20 I 5. Decoupling and Earnings Sharing Mechanisms Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each ofAvista Utilities'jurisdictions, each month Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes, rather than KWh and therm sales. The diflerence between revenues based on the number ofcustomers and revenues based on actual usage is deferred and either surcharged or rebated to customers beginning in thc following ycar. llashinglon Decoupling and Earnings Sharing In Washington, the UTC approved the Company's decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 20 I 5. Electric and natural gas decoupling surcharge rate adjustments to customers are limited to 3 percent on an annual basis, with any remaining surcharge balance carried forward for recovery in a future period. There is no limit on the level ofrebate rate adjustments. The electric and natural gas decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendaryear, separate electric and natural gas eamings calculations will be made for the prior calendaryear. These eamings tests will reflect actual decoupled revenues, nornalized power supply costs and other normalizing adjustments. See below lor a summary ofcumulative balances under the decoupling and eamings sharing mechanisms. ldaho Fixed Cost Adjustment (FCA) and Earnings Sharing Mechanisms In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling mechanisms) for an initial term ofthree years, beginning January l, 20 I 6. For the period 20 I 3 through 20 I 5 the Company had an after-the-fact eamings test, such that ifAvista Corp., on a consolidated basis for electric and natural gas operations in Idaho, eamed more than a 9.8 percent ROE, the Company was required to share with customers 50 percent of any eamings above the 9.8 percent. There was no provision for a surcharge to customers if the Company's ROE was less than 9.8 percent. This after+he-fact eamings test was discontinued as part ofthe settlement ofthe Company's 20 I 5 Idaho electric and natural gas general rates cases. See below for a summary ofcumulative balances under the decoupling and eamings sharing mechanisms. Oregon Decoup I ing M ech an ism In February 201 6, the OPUC approved the implementation of a decoupling mechanism for natural gas, similar to the Washington and ldaho mechanisms described above. The dccoupl ing mcchanism bccamc cffcctivc on March I , 20 16 and thcre will bc an opportun ity for intcrcstcd partics to rcview the mechanism and recommend changes, ifany, by September 20 I 9. An eamings review is conducted on an annual basis, which is filed by the Company with the OPUC on or before June I ofeach year for the prior calendar year. In the annual eamings review, ifthe Company eams more than I 00 basis points above its allowed retum on equity, one-third of the eam ings above the I 00 basis points would be deferred and later retum ed to customers. The eam ings review is separate from the decoupling mechanism and was in place prior to decoupling. See below for a summary ofcumulative balances under the decoupling and camings sharing mechanisrns. 135 Exhibit No. 3 Case Nos. AVU-E- 1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 142 ol 177 Table of Contents AVISTA CORPORATION Cumulative Decoupling and Earnings Sharing Mechanism Balances As ofDecember 3 1,201 6 and December 3 1,20 15, the Company had the following cumulative balances outstanding related to decoupling and eamings sharing mechanisms in its variousjurisdictions (dollars in thousands): December 3 l, December 3 l, 20t6 2015 Washlngton Decouplingsurcharge $ 30,408 $ 10,933 Provision for eamings sharing rebate (5,1 13) (3,422) Idaho Decoupling surcharge $ 8,292 nla Provision foreamingssharingrebate (5,184) (8,814) Oregon Dccoupling surchargc $ 2,021 nla Provision for eamings sharing rebate (n/a) Thismechanism did not exist during this timepenod. NOTE 2I.INFORMATION BY BUSINESS SEGMENTS The business segment presentation reflects the basis used by the Company's management to analyze performance and determine the allocation ofresources. The Company's management evaluates performance based on incotne (loss) from operations before incorne taxes as well as net income (loss) attributable to Avista Corp. shareholders. The accounting policies ofthe segments are the same as those descnbed in the summary ofsignificant accounting policies. Avista Utilities'business is managed based on the total regulated utility operation; therefore, it is considered one segment. AEL&P is a separate reportable business scgmcnt as it has scparatc financial rcports that are rcviewcd in dctail by the ChiefOpemting Dccision Makcr and its operations and risks are sufficicntly different from Avista Utilities and the other businesses at AERC that it cannot be aggregated with any other operating segments. The Other category, which is not a reportable segment, includes other investments and operations ofvarious subsidiaries, as well as certain other operations ofAvista Capital. The following table presents infonnation for each ofthe Company's bttsiness seglnents (dollars in thousands): Avisra iJ"r',*;,1!:T:, 'ffi[:[:iJ Utilitics Company Total Utiliry Othcr (l) Total For the year ended December 3 1,2016: Operating revenues Resource costs Other operating expenses Depreciation and amortization lncome (loss) from operations Interest expense (2) Income taxes Net income (loss) ilom continuing operations attributable to Avista Corp. shareholders Capital expenditures (3 ) $ 23,569 $$ (r 32) 136 $I,3'.72,638 $ {10 1{' 304,644 155,162 277,070 83,070 7 4,t2t 132,490 390,690 46,276 S 12,014 l l,l5l 5,352 15,434 3,584 5,321 25,501 769 (2,701) 608 (r,356) 1,418,914 551,366 3t 5,795 160,5t4 292,s04 86,654 7 9,442 140,458 406,644 (3,23 0) 353 1,442,483 551,366 341,296 l6l ,283 289,803 87,1 30 78,086 t37,228 406,997 7,968 | 5,954 Exhibit No. 3 Case Nos. AVU-E- 1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '143 of 177 Table of Contents AVISTA CORPORATION For the year ended December 3 l, 201 5: Operating revenues Resource costs Other operating expenses Depreciation and amortization Income (loss) lrom operations Intercst expensc (2) Income taxes Net income (loss) from continuing operations attributable to Avista Corp. shareholders Capital expenditures (3) For the year ended December 3l,2Ol4: Operating revenues Resource costs Otltcr operating cxpcnscs Depreciati on and amortization Income from operations Interest expense (2) Incomc taxcs Net income from continuing operations attributable to Avista Corp. shareholders Capital expenditures (3 ) Total Assets: AsofDecember3l,20l6 AsofDecember3l,20l5 As ofDecernber 31,2014 44,778 $ 11,973 I1,125 5,263 14,o72 3,558 4,202 30,076 695 (2,086) 610 (t,242) Intersegment Eliminations (t) 28,685 $ (s50) $ (ss0) (1 32) (r,92r) 885 39,219 $ (l,8oo) $ (r,800) Av ista Utilities $ 1,411,863 $ 644,991 292,096 138,236 241,228 76,405 64,489 r 13,360 38t,17 4 I ,4'13,499 $ 672.344 280,964 126,987 239,976 73,7 50 67,634 I13,263 323.931 $ 4,97s,555 $ $ 4,601 ,708 $ $ 4,357,760 $ Alaska Electric Light and Power Company 6,64t 12,25t Total Utility Other Total s 21,644 $ 5,900 5,86 8 2,583 6,22t I,382 1,816 1,456,64t $ 656,964 303,221 t43,499 255,300 79,963 68,691 I 20,001 393,425 1,435,t43 $ 678,244 286,832 t29,570 246,197 7 5,t32 69,450 I I 6,415 325.5 l6 5,249,325 $ 4,86'7,443 $ 4,620,830 $ (3 84) 166 I ,484,7 7 6 656,964 332,7 47 144,194 253,2t4 80,441 6'.7,449 I 18,080 394.3t0 1,472,562 678,244 317,250 l 30,1 80 252,588 7 5,7 52 72,240 I 19,817 325,922 32.218 610 6,391 I,004 2.790 3,t 52 1,585 273,770 $ 265,'/35 $ 263,070 $ 3,236 406 60,430 $ 39,206 $ 80,141 $ $ 5,309,755 s 4,906,649 s 4,700,971 (l ) Intersegment eliminations reported as operating revenues and resource costs represent intercompany purchases and sales ofelectric capacity and energy between Avista Utilities and Spokane Energy (included in other). Intersegment elirninations reported as interest expense and net income (loss) attributable to Avista Corp. shareholders represent intercompany interest. (2) Including interest expense to alfiliated trusts.(3) Thc capital expcnditures for thc othcr businesscs are includcd as othcr capital expenditurcs on thc Consolidatcd Statcmcnts ofCash Flows. The remainder ofthe balance included in other capital expenditures on the Consolidated Statements ofCash Flows for 2014 are related to Ecova. NOTE 22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The Company's energy operations are significantly affected by weather conditions. Consequently, there can be large variances in revenues, expenses and net income between quarters based on seasonal factors such as, but not limited to, telnperatures and streamflow conditions. 137 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule '1, Page 144 ot 177 Table of Contents AVISTA CORPORATION A summary ofquarterly operations (in thousands, except per share amounts) for 20 I 6 and 20 I 5 follows: March 31 2016 Operating revenues Operating expenses Income from operations Net income (l) Nct incomc attributable to noncontrolling intcrcsts Net income attributable to Avista Corporation shareholders (l ) Outstanding common stock: wei ghted-average, basic wei ghted-average, di luted Eamings per common share attributable to Avista Corp. shareholders, diluted (l ) s Three Months Ended Scprcmbcr 30 Dcccmber 3l 418,173 $ 312,088 318,838 $ 257,247 303,349 S 263,7 55 402.123 3 t9,590 $ 106,085 s 6l ,591 $39,594 S 82,533 57,665 (16) 27.287 (33) 12,261 (27\ 40.1 03 ( l2) $57,649 S 27,254 $12,234 $ 40,091 s 62,605 62,907 0.92 $ 63,3 8 6 63.783 0.43 $ Threc Months Ended 63,857 64.325 64,1 85 64,620 0.620.19 s March 3 I Junc 30 Scptcmbcr 30 Dcccmbcr I I 2075 Operati n g revenues from continui n g operations Operating expenses llom continuin g operations Income frorn continuing operations Net irrcome from continuing operations Net income fiom discontinued operations Net income Net income attributable to noncontrolling interests Net income attributable to Avista Corporation shareholders Amounts attributablc to Avista Corp. sharcholdcrs: Net income from continuing operations attributable to Avista Corp. shareholders Net income frorr discontinued operations attributable to Avista Corp. shareholders Net income attributable to Avista Corp. shareholders Outstanding common stock: wei ghted-average, basic weighted-average, di luted Eamings per common share attributable to Avista Corp. shareholders, diluted: Eamings per common share frorn continuing operations Eamings per common share from discontinucd operations Total eamings per common share attributable to Avista Corp. shareholders, diluted $89,5 75 $57,360 $ $446,490 $ 356,915 337,332 S 279,972 313,649 S 277,737 387,305 316,938 35,912 $70,367 $ 46,462 $ 25,078 $ 12,754 $ 196 289 33,876 4,662 46,462 (13) 25,274 (2 8) 13,043 (3 2) 38,53 8 (l 7) $ 46,449 S 25,246 $13,01I $ 38.521 $ 46,449 S 25,0s0 $12,722 S 289 33,859 4,662196 $ 46,449 $ 2s,246 $I 3,01 t $ 38,52 I 62,318 62,889 62,28t 62,600 99 88 62,2 62,6 o.zt $ 62,308 62,758 0.54 0.07 $0.74 $0.40 $ $0.74 $0.40 $0.21 $0.61 (l) ThcCompanyadoptedASU20l6-09duringthesccondquartcrof20l6,witharetrospectiveeffcctivedateofJanuaryl,20l6.Theadoptionofthis standarid resulted in a recognized income tax benefit of$ I .6 million in 20 I 6 associated with excess tax benefits on settled share-based employee payments. Because this standard was adopted in tlre second quarter of20 I 6, but has a retrospective effective date ofJanuary 1 , 20 I 6, the eflects from the adoption were pushed back to the first quarterof20l6 and the results forthat quafierwere recast in the presentation above. In all future reports which include the first quarter of20 I 6, the results for that quarter will be recast to include the effects ofthe excess tax benefits recognized. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page '145 ot '177 138 Junc 30 Table of Contents AVISTA CORPORATION Item 9. Chanpes in and Disagreements with Accountents on Accountins and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Conclusion Regarding the Ellectiveness ofDisclosure Controls and Procedures The Company has disclosure controls and procedures (as defined in Rules I 3a-l 5(e) and I 5d-l 5(e) under the Securities Exclrange Act of I 934, as amended (Act) that are designed to ensure that information required to be disclosed in the reports it files or submits under the Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls and procedures include, wrthout limitation, controls and procedures designed to ensure that information required to bc disclosed by thc Company in thc rcports that it filcs or submits undcr the Act is accumulatcd and communicatcd to the Company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. With the participation ofthe Cornpany's principal executive officer and principal financial officer, the Company's management evaluated its disclosure controls and procedures as ofthe end ofthe period covered by this report. There are inherent limitations to the effectiveness ofany system ofdisclosure controls and procedures, including the possibility ofhuman error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective disclosurc controls and proccdures can only providc reasonablc assurancc ofachicving their control objcctivcs. Bascd upon this evaluation, thc Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable assurance level as ofDecernber 3 I , 20 I 6. Management's Report on Internal Control Over Financial Reporting The Cornpany's management, together with its consolidated subsidiaries, is responsible for establishing and rnaintaining adequate intemal control over financial reporting (as defined in Rule I 3a-l 5(f) under the Securities Exchange Act of I 934). The Company's intemal control over financial reporting is a process designed under the supervision ofthe Company's principal executive oflicer and principal financial officer to provide reasonable assurance regarding the rcliability offinancial rcporting and thc prcparation ofthc Company's financial statcments for cxtemal rcporting purposcs in accordancc with accounting principles generally accepted in the United States ofAmerica. The Company's intemal control over financial reporting includes policies and procedures that pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect transactions and dispositions ofassets; provide reasonable assurances that transactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generally accepted in the United States ofAmerica, and that receipts and expenditures are being made only in accordance with authorizations ofmanagement and the directors ofthe Company; and provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition ofthe Company's assets that could have a rnaterial effect on the Company's fi nancial statements. Under the supervision and with the participation ofthe Company's management, including the Company's principal executive officer and principal financial oflicer, the Company conducted an assessment ofthe effectiveness ofthe Company's intemal control over financial reporting based on the framework establishcd in Intemal Control-Integratcd Framcwork (201 3) issucd by thc Committce of Sponsoring Organizations of thc Trcadway Commission. Based on this assessment, management determined that the Company's intemal control over financial reporting as ofDecember 3 I , 20 I 6 is effective at a reasonable assurance level. The Company's independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company's intemal control over financial reporting as ofDecember 3 I , 20 I 6. Changes in Internal Control Over Financial Reporting There have been no changes in the Company's intemal control over financial reporting that occurred during the Company's last fiscal quarter that lras materially affected, or is reasonably likely to materially affect, the Company's intemal control over financial reporting. 139 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 146 of 177 Table ol Contcnts AVISTA CORPORATION REPORT OF INDEPENDENT REGISTERED PIJtsLIC ACCOT]NTING FIRM To the Board ofDirectors and Shareholders of Avista Corporation Spokane, Washington We have audited the intemal control over linancial reporting ofAvista Corporation and subsidiaries (the "Company") as ofDecember 3 I , 20 1 6, based on criteria establish ed in lntental Conlrol - lntegrated Framework (20 I 3) issued by the Committee ofSponsoring Organizations ofthe Treadway Commission. The Company's management is responsible for maintaining effective intemal control over financial reporting and for its assessment ofthe effectiveness of intemal control overfinancial reporting, included in the accompanyingManagement's Reporton lntental Control Over Financial Reporting.(\sr responsibility is to express an opinion on the Company's internal control overfinancial reporting based on ouraudit. We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective intemal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding ofintemal control over financial reporting, assessing the risk that a material weakness exists. testing and evaluating the design and operating effectiveness ofintemal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opin ion. A company's intcmal control over financial rcporting is a proccss designed by, or undcr the supervision of, thc company's principal cxccutivc and principal financial officers, or persons performing similar functions, and effected by the company's board ofdirectors, management, and other personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation offinancial statelnents for extemal purposes in accordance with generally accepted accounting principles. A company's intemal control over financial reporting includes those policies and procedures that (l ) perrain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions ofthe assets ofthe company; (2) provide reasonablc assurance that transactions arc recordcd as ncccssary to pcrmit prcparation offinancial statemcnts in accordancc with gencrally acccptcd accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations ofmanagement and directors ofthe company; and (3) provide reasonable assuftrnce regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because ofthc inhcrent limitations ofintcmal control ovcr financial rcporting, including the possibility ofcollusion or impropcr managcmcnt ovcrridc of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections ofany evaluation ofthe eflectiveness ofthe intemal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective intemal control over financial reporting as ofDecember 3 I , 20 I 6, based on the criteria establish ed in Internal Control - Integrated Frantework (20l3) issued by the Committee ofSponsoring Organizations ofthe Treadway Commission We have also audited, in accordancc with the standards ofthc Public Company Accounting Oversight Board (United Statcs), thc consolidatcd financial statements as ofand for the year ended December 3l ,2016 ofthe Company and our report dated February 2l ,201'7 expressed an unqualified opinion on those fi nancial statements. /s/ Deloitte & Touche LLP Scattlc, Washington February 2l,2Ol7 140 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 147 ot 177 Tablc of Contetrts AVISTA CORPORATION Item 9B. Other Information Nonc. PART III Item 10. Directors. Executive Officers and Coroorate Governance The information required by this Item (other than the information regarding executive officers and the Company's Code ofBusiness Conduct and Ethics set forth below) is omitted pursuant to General Instruction G to Form I 0-K. Such information is incorporated herein by reference as follows: . on and after the date offiling with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting ofShareholders scheduled to be held on May I l, 201'1,from such Proxy Statement; and. prior to such date, liom the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, relating to its Annual Meeting of Shareholders held on May 12,2016. Executive Oflicers of the Rcgistrant Name Busincs Expericnce Scott L- Morris Mark T. Thies Marian M. Durkin Karen S. Feltes Dennis P. Vcrmillion Jason R. Thackston Ryan L. Krasselt Kevin J. Christie Jamcs M. Kcnsok David J. Meyer 53 63 5 9 Chairman, President and Chief Executive Omcer effective January 1 , 2008. Director since February 9, 6l 2007; President and ChiefOperating OfficerMay 2006 - December2007;, SeniorVice President February 2002 - May 2006; Vicc Prcsidcnt Novembcr 2000 - Fcbruary 2002; Prcsidcnt - Avista Utilitics August 2000 - December 2008; General Manager - Avista Utilities for the Oregon and Califomia operations October I 99 I - August 2000; various oth er rnanagement and staffpositi ons with the Company since 1981. Treasurer since January 20 I 3; Senior Vice President and ChiefFinancial Officer (Principal Financial Oflicer) since September 2008; prior to employment with the Company held the following positions with Black Hills Corporation: Executive Vice President and ChiefFinancial Officer March 2003 to January 2008; SeniorVice President and ChiefFinancial OfficerMarch 2000 to March 2003; ControllerMay 1997 to March 2000. Senior Vice President, General Counsel and ChiefCompliance Officer since November 2005; Corporate Secretary since May 20 I 6; Senior Vice President and General Counsel August 2005 - November 2005; prior to cmploymcnt with the Company: hcld scvcral lcgal positions with United Air Lincs, Inc. liom I 995 to August 2005, most recently served as Vice President Deputy General Counsel and Assistant Secretary. SeniorVice President ofHuman Resources since November2005; Corporate Secretary November2005 -April 20 I 6; Vice Prcsidcnt ofHuman Resources and Corporate Sccretary March 2003 - November 2005; Vice President ofHuman Resources and Corporate Services February 2002 - March 2003; various human resources positions with the Company April 1998 - February 2002. Scnior Vice Prcsidcnt since January 20 I 0; Vicc Presidcnt July 2007- Dcccmbcr 2009; hcsident - Avista Utilities since January 2009; Vice President ofEnergy Resources and Optimization - Avista Utilities July 2007 - December 2 008; President and Ch ief Operating Olficer of Avista Energy February 200 I - July 2007; various other management and staffpositions with the Company since 1985. Senior Vice President since January 20 I 4; Vice President ofEnergy Resources since December 20 I 2; Vice President ofCustomer Solutions - Avista Utilities June 20 I 2 - December 2012; Yice President ofEnergy Delivery April 20 I I - December 20 l2; Vice President of Finance June 2009 - April 20 I I ; various other management and staffpositions with the Company since 1996. Vice President, Controllerand Principal Accounting O{Iicersince October20l5; various other management and staffpositions with the Company since 2001 . Vice President ofCustomer Solutions since February 20 I 5; various other management and staffpositions wth the Cornpany since 2005. Vice Prcsident and Chicf Information Officcr sincc January 2007; Chicf Information Officcr Fcbruary 2001 - December 2006; various other management and staffpositions with the Company since I 996. Vice President and ChiefCounsel forRegulatory and Govemmental Affaim since February 2004; Senior Vicc Prcsidcnt and Gencral Counsel Septcmbcr I 998 - February 2004. t4t 55 47 47 49 58 63 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 148 of 177 Agc Table of Contents AVISTA CORPORATION Executive Officers of the Registrant Natnc Age 58 Busines Experience Vice President since November 2000; Vice President ofState and Federal Regulation - Avista Utilities since March 2002; Yice President and General Manager of Energy Resources - Avista Utilities August 2000 - March 2002; various other management and staffpositions with the Company since 198 [ . Vice Prcsidcnt ofEncrgy Delivcry sincc Dcccmbcr 20 I 5; various othcr managemcnt and staffpositions with the Company since 1996. Vice President and Chief Strategy Officer since September 2015; prior to employment with the Company, Executive Vice Prcsident ofCorporatc Devclopmcnt at Ecova, Inc. Kelly O. Noru'ood Hcathcr L. Roscntratcr Edward D. Schlect Jr. 39 56 All of the Company's executive o{Iicers, with the exception of James M. Kensok, David J. Meyer, Kelly O. Norwood, Kevin J. Christie and Heather L. Rosentraterwere officers ordirectors of one ormore of the Company's subsidiaries in 2016. The Company's executive officers are elected annually by the Board ofDirectors. The Company has adopted a Code ofConduct for directors, officers (including the principal executive officer, principal financial officer and princrpal accounting officer), and ernployees. The Code ofConduct is available on the Cornpany's website at w$/w.avistacorp.com and will also be provided to any shareholderwithout charge upon written request to: Avista Corp. General Counsel P.O. Box 3727 MSC-12 Spokane, Washi ngton 99220-37 27 Any changes to orwaivers for executive officers and directors ofthe Company's Code ofConduct will be posted on the Company's website. Item I l. Executive Comoensation The information required by this Item is omitted pursuant to General Instruction G to Form I 0-K. Such information is incorporated herein by reference as follows: . on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders scheduled to be held on May I 1,2017, from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 31, 2016, relating to its Annual Meeting of Shareholders held on May 12,2016. Item I 2. Securitv Ovmershio of Certain Beneficial Owners and Manasement and Related Stockholder Matters (a) Security ownership olcertain beneficial owners (owning 5 percent or more ofRegistrant's voting securities): Information regarding security ownership ofccrtain beneficial owners (owning 5 pcrcent or morc ofRcgistrant's voting securities) has bccn omitted pursuant to General Instruction G to Form I 0-K. Such information is incorporated herein by reference as follows: . on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholden schcdulcd to bc hcld on May I I , 20 I 7, from such Proxy Statcmcnt; and . prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, relating to its Annual Meeting of Shareholders held on May 12,2016; reference also berng made to Schedules l3G, as amended, in file with the SEC with respect to the Registrant's voting securities (the infonnation contained in suclr schedules I 3G, as amended, not being incorporated herein by reference). (b) Securityownershipofmanagement: The information required by this Item regarding the security ownership of management is omitted pursuant to General Instruction G to Form 1 0-K. Such information is incorporated hcrein by refcrencc as follows: . on and after the date offiling with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting ofShareholders scheduled to be held on May I I,20'|,7 ,from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 31, 2016, relating to its Annual Meeting of Shareholders held on May 12,2016. 142 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 'l, Page 149 of 177 Table of Contcnts AVISTA CORPORATION (c) (d) Changes in control: None. Securities authorized for issuance under equity compensation plans as ofDecember 3 I , 20 I 6: (a) Numbcr of sccuritics to bc isued upon exercise of outstanding options, warrants and rights (t ) Plan category Equity compensation plans approved by security holders (2)$ (b) Weightcd avcrage exercire price of outstanding options, wananls md rights (c) Number of securities remaining available for fururc isuancc undcr equity compensation plans (excluding sccuritics reflccted in column (a)) 1,7 52,979 (l ) Excludes unvested restricted shares and performance share awards granted under Avista Corp.'s Long-Term Incentive Plan. At Decernber 3 I , 20 I 6, I 09,806 Restricted Share awards were outstanding. Performance and market-based share awards may be paid out at zero shares at a minimum achievement level; 332,680 shares at target level; or 665,360 shares at a maximum level. Because there is no exercise price associated with restricted shares orperformance and market-based share awards, such sharcs are not included in the weighted-average price calculation.(2) Includes the Long-Term Incentive Plan approved by shareholders in I 998 and the Non-Employee Director Stock Plan approved by shareholders in 1996. In February 2005, the Board of Directors elected to terminate the Non-Employee Director Stock Plan. Item 13. Certain Relationshios and Related Transactions. and Director Independence The information rcquircd by this Itcm is omitted pursuant to Gencral Instruction G to Form I 0-K. Such information is incorporated herein by rcferencc as follows: . on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders scheduled to be held on May I l, 20 I 7, from such Proxy Statement; and. prior to such date, from the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, retating to its Annual Meeting of Shareholders held on May 12,2016. Item 14. Princinal Accountins Fees and Services Thc information required by this Itcm is omitted pursuant to General Instruction G to Form I 0-K. Such information is incorporated herein by rcfcrence as follows: . on and after the date of filing with the SEC the Registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders scheduled to be held on May I 1,201 7, from such Proxy Statement; and. prior to such date, fiom the Registrant's definitive Proxy Statement, dated March 3 I , 201 6, relating to its Annual Meeting of Shareholders held on May 12,2016. 143 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 150 ol 177 Table of Contcnts AVISTA CORPORATION Item 15. Exhibits. Financial Statement Schedules (a) I . Financial Statements (lncluded in Part II ofthis report): Report oflndependent Registered Public Accounting Firm Consolidated Statemcnts oflncome for the Ycars Endcd Dcccmber 31,2016,20 I 5 and 20 I 4 Consolidated Statements ofComprehensive lncome for the Years Ended December 3 I,2016,2015 and 2Ol4 Consolidated Balance Sheets as ofDecember 3 I , 20 I 6 and 20 I 5 ConsolidatedStatementsofCashFlowsfortheYearsEndedDecember3l,20l6,20l5and20l4 Consolidated Statements ofEquity and Redeemable Noncontrolling Interests for the Years Ended December 3 I , 201 6,201 5 and 201 4 Notes to Consolidated Financial Statements (a) 2. Financial Statemcnt Schedulcs: None (a) 3. Exhibits: Relerence is made to the Exhibit lndex commencing on page I 47. The Exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form I 0-K pursuant to Item I 5(b). t44 Exhibit No. 3 Case Nos. AVU-E-'! 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page '151 ol '177 PART IV Table of Contents AVISTA CORPORATION SIGNATURES Pursuant to the requirements ofSection I 3 or I 5(d) ofthe Securities Exchange Act of I 934, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized. AVISTA CORPORATION February 21 ,2017 By /s/ Scott L. Morris Date Scott L. Morris Chairman ofthe Board, President and Chief Executive Officer Pursuant to thc requircmcnts ofthc Sccuritics Exchangc Act of I 934, this report lras been signcd below by thc following pcrsons on bchalfofthe Registrant and in the capacities and on the dates indicated. Siqnaturc Titlc Datc /s/ Scott L. Morris Principal Executive Offi cer February 21,2017 Scott L. Morris Chairman ofthe Board, Presrdent and Chicf Exccutivc Offi ccr /s/ Mark T. Thies Principal Financial Oflicer February 21,2017 Mark T. Thies (Senior Vice President, Chief Financial Offi cer, and Treasurer) /s/ Ryan L. Krassclt Principal Accounting Offi cer Fcbruary 21,2017 Ryan L. Krasselt (Vice President, Controller and Principal Accounting Officer) /s/ Erik J. Anderson Direclor February 2l,2017 Erik J. Anderson /s/ Kristianne Blake Director February 2l,2Ol7 Kristianne Blake /si Donald C. Burke Director February 2l,2Ol7 Donald C. Burke /s/ John F. Kelly Director February 21,2017 John F. Kelly /s/ Rebecca A. Klein February 2l,2017 Rebecca A. KIein /s/ Marc F. Racicot February 2l,2Ol7 Marc F. Racicot t45 Director Exhibit No. 3 Case Nos. AVU-E- l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page '152 oI '177 Director Table of Contents AVISTA CORPORATION /s/ Heidi B. Stanley R. John Taylor /s/ Janet D. Widmann Director Director Director Dircctor February 2l ,2017 Fcbruary 21,2017 February 2l ,2O17 Fcbruary 21,2017 Scott H. Maw 146 Heidi B. Stanley /si R. John Taylor Janet D. Widmann /s/ Scott H. Maw Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 1, Page 153 ot 177 Table 0f Contents AVISTA CORPORATION Previously Filed (l ) EXHIBIT INDEX Restated Articles oflncorporation ofAvista Corporation, as amended and restated June 6,2012. Bylaws of Avista Corporation, as amended November I 4, 20 I 4. Mortgage and Dccd of Trust, datcd as of Junc l, 1939. First Supplemental Indenture, dated as ofOctober l,1952. Second Supplemental Indenture, dated as ofMay l, I 953. Third Supplemental Indenture, dated as ofDecember l, I 955. Fourth Supplemental Indenture, dated as ofMarch I 5, I 967. Fifth Supplemental Indenture, dated as ofJuly l, 1957 . Sixth Supplemental Indenture, dated as ofJanuary l, I 958. Seventh Supplemental Indenture, dated as ofAugust l, 1 958. Eighth Supplemental Indenture, dated as ofJanuary I, I 959. Ninth Supplcmcntal Indenturc, datcd as ofJanuary 1 , I 960. Tenth Supplemental Indenture, dated as ofApril l, 1964. Eleventh Supplemental Indenture, dated as ofMarch l, I 965. Twelfth Supplemental Indenture, dated as of May l, 1966. Thirtccnth Supplcmental lndcnturc, datcd as ofAugust l, I 966. Fourteenth Supplemental lndenture, dated as ofApril l, I 970. Fifteenth Supplemental Indenture, dated as ofMay l, I 973. Sixteenth Supplemental Indenture, dated as ofFebruary I , I 975. Seventeenth Supplemental Indenture, dated as ofNovember l, I 976. Eighteenth Supplemental lndenture, dated as ofJune l, I 980. Nineteenth Supplemental Indenture, dated as ofJanuary l, I 98 l. Twentieth Supplemental Indenture, dated as ofAugust l, I 982. Twenty-First Supplemental Indenture, dated as ofSeptember l, I 983, Twenty-Second Supplemental Indenture, dated as ofMarch l, I 984. t47 With RcgistrationExhibit Number Exh ibit 3.1 (with June 30,2012 Form l0-Q)3.1 3.2 B-3 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.1I 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 (with Form 8-K filed as of November 14,2014) 24077 2-9812 2-60728 2-13421 2-1342t 2-60728 2-60728 2-60728 2-60728 2-60728 2-60728 240728 2-60728 240728 240728 2-60728 2-60728 2-60728 2-69080 (with 1980 Form l0-K) 2-79571 (with Fonn 8-K dated September 20, 1 983) 2-94816 4(c) 2(b)-2 4(b)-3 4b)4 2(b).5 2(b>6 2(bl7 2(b18 2(b>e 2(blr 0 2(b)-1 l 2(b)-12 2(b)-1 3 2(b>14 2(bll s 2(b)-r 6 2h)-17 2(bll8 4(a\-20 4(a\-21 4(a)-22 4(a)-23 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1 , Page 154 ot 177 Table of Contents AVISTA CORPORATION Previously Filed (l) Exh ibit with Registration Number Exhibit 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 (with 1986 Form l0-K) 4(a\24 (with 1987 Form l0-K) 4(a)-25 (with 1989 Form l0-K) 4(a\26 33-51669 4(a\27 (with 1993 Form l0-K) 4(a)28 (with 2001 Form l0-K) 4(a)-29 333-82s02 4(b) (with June 30,2002 Form l0{) 4(0 333-395s l 4(b) (with September30,2003 Form 10- 4(0 a) 333-64652 4(a\33 (with Form 8-K dated as of 4.1 December 15,2004) (with Form 8-K dated as of 4.2 December I 5, 2004) (with Form 8-K dated as of 4.3 December | 5,2004) (with Form 8-K dated as of 4.4 Dccember I 5, 2004) (with Form 8-K dated as of May 12, 4.1 200s) (with Form 8-K dated as of 4.1 November I 7,2005) (with Form 8-K dated as ofApril 6, 4.1 2006) (with Form 8-K dated as of 4.1 December I 5, 2006) (with Fonn 8-K dated as of April 3, 4.1 2008) (with Form 8-K dated as of 4.1 November 26, 2008) (with Form 8-K datcd as of 4.1 December I 6, 2008) (with Form 8-K dated as of 4.3 Dccember 30, 2008) (with Form 8-K dated as of 4.1 September 15,2009) (with Fonn 8-K dated as of 4.1 November 25,2009) (with Form 8-K dated as of 4.5 Decernber I 5, 20 I 0) (with Form 8-K dated as of 4.1 December 20, 20 I 0) Twenty-Third Supplernental Indenture, dated as ofDecember I , I 986. Twcnty-Fourth Supplcmcntal lndenturc, datcd as ofJanuary I , I 988. Twenty-Fifth Supplemental Indenture, dated as ofOctober l, I 989. Twenty-Sixth Supplemental Indenture, dated as ofApril l, I 993. Twenty-Seventh Supplemental Indenture, dated as ofJanuary I ,1994. Twcnty-Eighth Supplemental Indenture, datcd as of Scptcmber I , 200 1 Twenty-Ninth Supplemental Indenture, dated as ofDecember I , 200 I . Thirtieth Supplemental Indenture, dated as of May 1,2002. Thifly-Fint Supplemental Indenture, dated as of May I , 2003. Thirty-Second Supplemental Indenture, dated as ofSeptember 1,2003. Thirty-Third Supplemental Indenture, dated as of May I , 2004. Thirty-Fourth Supplemental Indenture, dated as ofNovember 1,2004 Thirty-Fifth Supplemental Indenture, dated as ofDecember 1,2004. Thirty-Sixth Supplemental Indenture, datcd as ofDcccmber I,2004. Thirty-Seventh Supplemental Indenture, dated as ofDecember 1,2004. Thirty-Eighth Supplemental Indenture, dated as ofMay l, 2005. Thirty-Ninth Supplemental Indenture, dated as ofNovember I , 2005. Fortieth Supplemental Indenture, dated as ofApril l, 2006. Forty-First Supplemental lndenture, dated as ofDecember 1,2006. Forty-Second Supplemental Indenture, dated as ofApril l, 2008. Forty-Third Supplemental Indenture, dated as ofNovember l, 2008. Forty-Fourth Supplcmcntal Indcnturc, datcd as ofDeccmbcr l, 2008. Forty-Fifth Supplemental Indenture, dated as ofDecember 1,2008. Forty-Sixth Supplemental Indenture, dated as ofSeptember 1 ,2009. Forty-Seventh Supplernental Indenture, dated as ofNovember I ,2009. Forty-Eighth Supplemental Indenture, dated as ofDecember I , 20 I 0. Forty-Ninth Supplemental lndenture, dated as ofDecember 1,2010. 4.34 4.35 4.36 4.37 4.38 4.39 4.40 4.41 4.42 4.43 4.44 4.4s 4.46 4.47 4.48 4.49 4.50 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista 148 Schedule 1, Page 155 of 177 Table of Contents AVISTA CORPORATION PreviouslyFiled(l) With Registration Number As ExhibitExhibit 4.51 4.52 4.53 4.54 4.55 4.56 4.57 4.5 8 4.59 4.60 4.61 4.62 4.63 4.64 4.65 4.66 4.67 4.68 4.69 I0.r (with Fonn 8-K dated as of December 3 0, 20 I 0) (with Form 8-K dated as of February ll,20ll) (with Form 8-K dated as of August 16,201 l) (with Fonn 8-K dated as of Decernber 14,2011) (with Form 8-K dated as of November 30, 20 I 2) (with Form 8-K datcd as ofAugust 14,2013) (with Form 8-K dated as of April l 8,2014) (with Form 8-K dated as of December I 8, 20 I 4) (with Fonn 8-K dated as of December I 6, 201 5) (with Form 8-K dated as of Decernber I 6, 20 I 6) (with Form 8-K datcd as of December I 5, 2004) 333-82165 (with Form 8-K dated as of Decernber 1 5, 20 1 0) (with Form 8-K dated as of Decernber I 5, 20 I 0) (with Form 8-K dated as of December I 5, 20 I 0) (with Fonn 8-K dated as of December 15,2010) (with June 30,2012 Form l0-Q) (with Fonn 8-K filed as of November l4,2Ol4) (Form l0/A) (with Form 8-K datcd as of February I1,201l) 4.1 4.t 4.1 4.1 4.1 4.1 4.t 4.1 4.t 4.1 4.5 4(a) 4.1 4.3 Fiftieth Supplemental Indenture, dated as ofDecernber I , 20 I 0. Fifty-First Supplemental Indenture, dated as ofFebruary I , 20 I I Fifty-Second Supplemental Indenture, dated as ofAugust I , 20 I I Fifty-Third Supplemental Indenture, dated as ofDecember l, 201 I Fifty-Fourth Supplemental Indenture, dated as ofNovember I , 20 I 2. Fifty-Fifth Supplcmcntal Indenture, datcd as ofAugust 1,201 3. Fifty-Sixth Supplemental Indenture, dated as ofApril I , 20 I 4. Fifty-Seventh Supplemental Lrdenture, dated as ofDecember I , 20 I 4. Fifty-Eighth Supplemental Indenture, dated as ofDecember I , 20 I 5 Fifty-Ninth Supplemental Indenture, dated as ofDecember I , 20 I 6 Supplcmental lndenture No. l, datcd as ofDcccmbcr 1,20O4 to thc Indcnturc datcd as of April l, 1998 between Avista Corporation and JPMorgan Chase Bank, N.A. Indenture dated as ofApril I , I 998 between Avista Corporation and The Bank ofNew York, as Successor Trustee. Loan Agreement between City of Forsyth, Montana and Avista Corporation $66,700,000 City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 20 I 0A dated as ofDecember 1, 20 I 0. Trust Indenture between City of Forsyth, and the Bank olNew York Mellon Trust Company, N.A., as Trustee, $66,700,000 City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 201 0A, dated as ofDecember 1,2010. Loan Agreement between City of Forsyth, Montana and Avista Corporation $ 17,000,000 City ofForsyth, Montana Pollution ControI Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 20 I 0B dated as ofDecember I , 20 I 0. Trust Indenture between City of Forsyth, and the Bank of New York Mellon Trust Company, N.A., as Trustee, $ 17,000,000 City of Forsyrh, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) Series 20 I 0B, dated as ofDeccmbcr 1,2010. Restated Articles oflncorporation ofAvista Corporation, as amended and restated June 6, 20 I 2 (see Exhibit 3. I herein). Bylaws of Avista Corporation, as amended Novernber 14,2014 (see Exhibit 3.2 herein). Post-Effective Amendment No. I on Form I 0/A, filed February 26, 201 5, to Registration Statement on Fonn I 0, filed September I 952. Crcdit Agrccmcnt, datcd as ofFcbruary I I , 20 1 I , among Avista Corporation, thc Banks Party hereto, The Bank of New York Mellon, Keybank National Association, and U.S. Bank National Association, as Co-Documentation Agents, Wells Fargo Bank National Association as Syndication Agent and an Issuing Bank, and Union Bank N.A. as Administrative Agent and an Issuing Bank. 4.2 4.4 3.1 3.2 N/A l0.l t49 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 156 of 177 Table of Contents AVISTA CORPORATION Previously Filed (l) Exh ibit with Registration Number As Exh ibit 10.2 r 0.3 10.4 10.5 (with 2002 Form l0-K) 10.6 (with 2002 Form l0-K) 10.7 (with 2002 Form I 0-K) 2-60728 2-60'128 2-60?28 2-60728 (with Scptcmber30, 1985 Form l0- a) 10.13 (with l98l Form l0-K) 10.8 10.9 10.10 l0.l I 10.12 s(e) 5(e)-1 s(h) s(h)-r I Second Amendment to Credit Agreement, dated as of April I 8, 20 I 4, among Avista Corporation, Wells Fargo Bank, National Association, as an Issuing Bank, Union Bank, N.A. as Administrative Agent and an Issuing Bank, and the financial institutions identificd hercofas Continuing Lcrrders and Exiting Lendcr. BondDeliveryAgreement,datedasofApril I8,2014,betweenAvistaCorporationand Union Bank, N.A. First Amendrnent and Waiver Thereunder, dated as of Decerrber 14, 201 | , to the Credit Agreement dated as of February I I , 201 I , among Avista Corporation, the Banks Party hereto, Wells Fargo Bank National Association as an Issuing Bank, and Union Bank N.A. as Administrative Agent and an Issuing Bank. Priest Rapids Project Product Sales Contract executed by Public Utility District No. 2 of Crrant County, Washington and Avista Corporation dated December 12,2001 (effective November l, 2005 for the Priest Rapids Development and November l, 2009 for the Wanapum Development). Priest Rapids Project Reasonable'Portion Power Sales Contract executed by Public Utility District No.2 of Grant County, Washington and Avista Corporation dated December 12,2001 (effective November l, 2005 for the Pnest Rapids Development and November I , 2009 for the Wanapum Developrnent). Additional Product Sales Agreement (Priest Rapids Project) executed by Public Utility District No.2 of Grant County, Washington and Avista Corporation dated December 12, 2001 (effectiveNovenrberI,2005forthePriestRapidsDevelopmentandNovemberI, 2009 for the Wanapum Development). Power Sales Contract (Wells Project) with Public Utility District No. I of Douglas County, Washington, dated as ofSeptember I 8, I 963. Amendment to Power Sales Contract (Wells Projec, with Public Utility District No. I of Douglas County, Washington, dated as of February 9,1965. Reserved Share Power Sales Contract (Wells Project) with Public Utility District No. I of Douglas County, Washington, dated as ofSeptember 18, 1963. Amendment to Reserved Share Power Sales Contract (Wells Project) with Public Utility District No. I of Douglas County, Washington, dated as of February 9,1965. Settlement Agrcemcnt and Covcnant Not to Suc exccutcd by the United Statcs Department ofEnergy acting by and through the Bonneville Power Administration and the Company, dated as ofSeptember I 7, I 985, describing the settlement ofProject 3 I itigation. O*,nership and Operation Agreement for Colstdp Units No. 3 & 4, dated as of May 6, 1981. Avista Corpomtion Exccutive Dcferrat Plan. (3) Avista Corporation Executive Deferral Plan. (3)(8) Avista Corporation Supplemental Executive Retirement Plan. (3)(8) Avista Corporation Supplemental Executive Retirement Plan. (3)(8) The Company's Unfunded Supplemcntal Executivc Disability Plan. (3) Income Continuation Plan ofthe Company. (3) 150 (with Form 8-K dated as of April I 8, 2014) (with Form 8-K dated as of April 18,2014) (with Fonn 8-K dated as of December 14,201 l) (with 201 1 Form l0-K) (with 201 1 Form I 0-K) (with 201 1 Form l0-K) (with 201 I Form I 0-K) (with i 992 Form | 0-K) (with 2007 Form l0-K) I 0.1 10.2 I 0.1 1 0.14 10.t5 10.16 10.17 10.18 10.19 l o(b)-3 10(b)4 l 0(b)-5 l0(sI7 10.15 10.16 10.17 10.18 l0(t)-l I 1o.14 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 157 ot 177 Table 0f Contents AVISTA CORPORATION PreviouslyFiled(l) Exhibit Wirh Registration Number 10.20 10.26 10.21 10.22 10.23 10.24 10.25 10.23 10.30 t0.3 I 10.1 l0.t 99.1 (with 201 0 Definitive Proxy Statement filed March 3 I , 201 0) (with 2010 Form l0-K) (\Mith 2014 Form I 0-K) (with 201 5 Form I 0-K) (2) (with Form 8-K dated June 21, 20o5) (with Form 8-K dated August I 3, 2008) 33347290 (with 201 0 Form I 0-K) Exh ib it Appendix A Avista Corporation Long-Term Incentive Plan. (3) Avista Corporation Performance Award Plan Summary. (3) Avista Corporation Performance Award Agreement 2014. (3) Avista Corporation Perfonnance Award Agreement 20 I 5. (3) Avista Corporation Performance Award Agreement 2016. (3) Employment Agreement between the Company and Marian Durkin in the form of a Letter of Employrnent. (3) Employment Agrcemcnt bctwecn thc Cornpany and Mark T. Thics in thc form of a Letter of Employment. (3) Non-OfIicer Employee Lon g-Term Incentive Plan. Fonn ofChange ofControl Agreement between the Company and its Executive Officers. (3Xs) Form ofChange ofControl Agreement between the Company and its Executive Officers. (3X6) Form of Change of Control Agreement between the Company and its Executive Officers. (3X7) Form of Change of Control Agreement between the Company and its Executive Officers. (3X7) Avista Corporation Non-Employee Director Compensation. Statement Re: computation of ratio of eamings to fixed charges. Subsidiaries of Registrant. Conscnt of Indepcndcnt Registcred Publ ic Accounting Firm. Certification ofChiefExecutive Officer(Pursuant to l8 U.S.C. Section 1350, as Adopted Pursuant to Section 302 ofthe Sarbanes-Oxley Act of20O2). Certification ofChiefFinancial Officer (Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 302 ofthe Sarbanes-Oxley Act of2002). Certification of Corporate Officers (Pursuant to l8 U.S.C. Section I350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of2002). The following financial information from the Annual Repot on Form 10 K for the period ended December 3 I , 201 6, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Statements oflncome; (ii) Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements ofCash Flows; (v) the Consolidated Statements ofEquity and Redeemable Noncontrolling Interests; and (vi) the Notes to Consolidated Financial Statements. 10.27 10.28 10.29 (with 201 0 Form I 0-K) 10.30 (with 2010 Form l0-K) I 0.3 I (\Mith 201 0 Form I 0-K) t0.32 l2 2t 23 3l.l (2) \2) (2) (2) (2) 31.2 (2) 32 (4) 101 (2) (l) (2) (3) (4) (5) (6) (7) Incorporated herein by reference. Filed herewith. Management contracts or compensatory plans filed as exhibits to this Form I 0-K pursuant to Item I 5(b). Fumished hcrewith. Applies to James M. Kensok, David J. Meyer, Kelly O. Norwood, Jason R. Thackston and Dennis P. Vermillion. Applies to Marian M. Durkin, Karen S. Feltes, Scott L. Moris, and Mark T. Thies. Applies to executive officers appointed after October I, 20 I 0. This applies to Kevin J. Christie, Ryan L. Krasselt, Ed D. Schlect and Heather L. Rosentrater. l5t Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 158 ot 177 Table of Conlcnts AVISTA CORPORATION (8)Applies to executive officers appointed after February 4,201I . This applies to Kevin J. Christie, Ryan L. Krasselt, Ed D. Schlect and Heather L. Rosentrater. 152 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G]!7-_ M. Thies, Avista Schedule 1 , Page '159 of 177 Aivtsra AVISTA CORPORATION P E RFORMAN CE AWARD AGREEMENT This Performance Award Agreement (the "Agreement") is made by and between Avista Corporation, a Washington Corporation (the "Company") and the individual named in section 1 (the "Participant") as designated by the Avista Corporation Compensation and Organization Committee (the "Plan Administrato/'). WHEREAS, Performance Awards are granted under the January 19, 2016 amended and restated Avista Corporation Long-Term lncentive Plan (the "Plan"). The terms and conditions of the Performance Awards are set forth below and in the Plan, which is incorporated into this Agreement by reference. NOW, THEREFORE, in consideration of the premises contained herein and in the Plan, it is agreed as follows: Terms of Performance Awards. The terms of the Performance Awards are set forth as follows: (a) The "Participant" is (Participant's name) The "Grant Date" is February 4,2016. The total target numberof eligible "PerformanceAwards" shall be (# of) units. "PerformanceAwards" granted under this Agreement are units that will be reflected in a book account maintained by the Company or a third party administrator during the Performance Cycle, and that will be settled in cash or shares of Avista Corporation Common Stock ("Common Stock") to the extent provided in this Agreement and the Plan. (d) The "Performance Cycle" is the period beginning on January 1, 2016 and ending on December 3,l, 2018. 2. Conditions to Award. Pursuant to this Award, the number of Performance Awards eamed will depend upon the Company's performance against specific performance metrics. The performance metrics are (i) Relative Total Shareholder Retum, which accounts for (# of) units of the total target award as set forth in section 1(c), and (ii) Cumulative Eamings Per Share ('CEPS') which accounts for (# of) units of the total target award set forth in section 1(c). The total number of shares of Stock that will be issued in the settlement of this Award, based upon the Company's satisfaction of the metrics, will be determined by multiplying the Target Number of units allocated for each metric set forth in this section 2 by the applicable Payout Factor in accordance with the provisions of Exhibit 1 and Exhibit 2, which is attached to and forms a part of this Agreement. 3. Settlement of Performance Awards. The Company shall deliver to the Participant one share of Common Stock (or cash equal to the Fair Market Value of one share of Common Stock) for each Performance Award eamed by the Participant, as determined in accordance with the provisions of Exhibit 1 and Exhibit 2, which is attached to and forms a part of this Agreement. The eamed Performance Award payable to the Participant shall be paid in shares of Common Stock or in cash (based on the Fair Market Value of the Common Stock as of the date the Plan Administrator certifies the attainment of the Page 1 of 10 (b) (c) Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 160 ot 177 Exhibit 10.24 peformance goals), or in a combination of the two, as determined by the Plan Administrator in its sole discretion, except that cash may be distributed in lieu of any fractional share of Common Stock. All Performance Awards and any Dividend Equivalents (as described in Section 5 below) eamed by a Participant under this Agreement are subject to the Recoupment Policy adopted by the Company's Board of Directors as amended from time to time ("Recoupment Policy'). lf a Participant becomes subject to the Recoupment Policy any Performance Award and associated Dividend Equivalent may be forfeited in whole or in part and all or part of any distribution payable to a Participant or his or her beneficiary under this Agreement may be recovered by the Company pursuant to the Recoupment Policy. 4. Time of Payment. Except as otherwise provided in this Agreement, payment of Performance Awards eamed will be delivered as soon as feasible after the end of the Performance Cycle and after the Plan Administrator certifies the attainment of the performance goals. 5. Dividend Equivalent Rights. Any Performance Awards may, in the Plan Administrator's discretion, eam Dividend Equivalent Rights. ln respect of any PerformanceAward that is outstanding on the dividend record date for Common Stock, the Participant may be credited with an amount equal to the cash distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares been issued and outstanding on such dividend record date. Dividend Equivalent Rights are to be paid in cash based on the total number of Performance Awards eamed at the end of the Performance Cycle and delivered as soon as feasible after the Performance Cycle and after the Plan Administrator certifies the attainment of the performance goals. Dividend Equivalent Rights are subject to all applicable taxes, which are the responsibility of the Participant. The Dividend Equivalent Rights in respect of any Performance Awards that are not eamed as of the end of a Performance Cycle, shall be forfeited as of the end of the Performance Cycle. 6. Termination of Employment during Performance Cycle. Except as otherwise provided in section 7, this section 6 shall apply if the Participant's employment terminates during a Performance Cycle. lf the Participant's employment with the Company and/or Subsidiaries terminates during the Performance Cycle because of Retirement, Disability, or Death, the Participant shall be entitled to a prorated value of the Performance Award eamed in accordance with Exhibit 1 and Exhibit 2, determined at the end of the Performance Cycle, and based on the ratio of the number of whole months the Participant was employed during the Performance Cycle to the total number of months in the Performance Cycle (36). lf a Participant's employment or services with the Company and/or Subsidiaries terminate on or as of the last day of a Performance Cycle, such Participant will be deemed to have terminated after the end of such Performance Cycle. lf the Participant's employment with the Company and/or Subsidiaries terminates during the Performance Cycle for any reason other than Retirement, Disability, or Death, the Performance Award granted under this Agreement will be forfeited on the Date of Termination (as defined in section 9(b)); provided, however, that in such circumstances, the Plan Administrator, in its sole discretion, may determine that the Participant will be entitled to receive a prorated or other portion of the Performance Award. ln case of termination for Cause, the Performance Award granted shall automatically terminate upon first notification to the Participant of such termination, unless the Plan Administrator determines otheMise. lf a Participant's employment with the Company is suspended pending an investigation of whether the Participant shall be terminated for Cause, all the Participant's rights under any Award likewise shall be suspended during the period of investigation. The effect of a Company-approved leave of absence on the terms and conditions of an Award shall be determined by the Plan Administrator, in its sole discrelion. 7. Change in Control. lf a Change in Control occurs during the Performance Cycle, and the Participant's Date of Termination (as defined in section 9(b)) does not occur before the Change in Control date, the Participant shall be entitled to a prorated value of the Performance Award that would have been eamed by the Participant in accordance with Exhibit 1 and Exhibit 2, determined as of the date of the Change in Control, prorated based on the ratio of the number of whole months the Participant is employed during the Performance Cycle through the date of the Change in Control, to the total number of months in the Performance Cycle; provided, however, that a Payout Factor of at least 100% as set forth 04105116 Page 2 of10 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1 , Page 161 ot 177 liflrtsta in Exhibit 1 and Exhibit 2 for the Performance Cycle shall be deemed to have been achieved as of the date of the Change in Control. Notwithstanding the provisions of sections 3 (with the exception of the application of the Recoupment Policy), 4, and 5, the value of the Performance Award, and any Dividend Equivalent Right, eamed in accordance with the foregoing provisions of this section shall be delivered to the Pa(icipant in a lump sum cash payment as soon as feasible after the occurrence of a Change in Control, with the value of a Performance Award equal to the Fair Market Value of a share of Common Stock determined under the provision of section 3 as of the date of the Change in Control. Distributions to the Participant under sections 3 and 5 shall not be affected by payments under this section, except that the number of Performance Awards and Dividend Equivalent Rights eamed by and payable to the Participant shall be reduced by the number of Performance Awards and Dividend Equivalent Rights with respect to which paymenl was made to the Participant under this section. L Taxes. The Participant is liable for any and all taxes, including withholding taxes, arising out of the grant, vesting, payment or settlement of any Performance Awards and Dividend Equivalent Rights. The Company shall have the right to require the Participant to remit to the Company, or to withhold awarded shares of Common Stock, or from any Dividend Equivalent Rights or other amounts due to the Participant, as compensation or otherwise, an amount sufficient to satisfy all federal, state and local withholding tax requirements. 9. Deltnitions. For purposes of this Agreement, the terms used in this Agreement shall be subject to the following: (a)Change in Control. The term "Change in Control" is defined in section 2.4 ot lhe amended and restated Avista Corp. Long Term lncentive Plan. Date of Termination. The Participant's "Date of Termination" shall be the first day occuning on or after the Grant Date on which the Participant is not employed by the Company or any Subsidiary, regardless of the reason for the termination of employment; provided that a termination of employment shall not be deemed to occur by reason of a transfer of the Participant between the Company and a Subsidiary or between two Subsidiaries; and further provided that the Participant's employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participant's employer. lf, as a result of a sale or other transaction, the Participant's employer ceases to be a Subsidiary (and the Participant's employer is or becomes an entity that is separate from the Company), and the Participant is not, at the end of the 30day period following the transaction, employed by the Company or an entity that is then a Subsidiary, then the occurence of such transaction shall be treated as the Participant's Date of Termination caused by the Participant being discharged by the employer. (c)Disability. "Disability" means "disability" as that term is defined for purposes of the Company's Long Term Disability Plan or other similar successor plan applicable to employees. (d)Retirement. "Retirement" of the Participant shall mean retirement as of the individual's retirement date under the Retirement Plan for Employees of Avista Corporation or other similar successor plan applicable to employees. 10. Assignability. No Performance Award or Dividend Equivalent Right granted or awarded under the Plan may be assigned or transfened by the Participant other than by will or by the applicable laws of descent and distribution, and, during the Participant's lifetime, settlements of such Awards may be payable only to the Participant or a permitted assignee or transferee of the Participant (as provided below). Notwithstanding the foregoing, the Plan Administrator, in its sole discretion, may permit such assignment or transfer and may permit a Participant of such Performance Awards or Dividend Equivalent Rights to designate a beneficiary who may receive compensation settlement under the Performance 04105n6 Page 3 ofl0 (b) Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G- 17-_ M. Thies, AViSta Schedule 1, Page '162 oI '177 Attsta Award after the Participant's death; provided, however, that any amount so assigned or transfened shall be subject to all the same terms and conditions contained in this Agreement. 11 General 11.1 Award Agreements. PerformanceAwards granted underthe Plan shall be evidenced by a written agreement that shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan. 1 1.2 Continued Employment or Services; Rights in Awards. Nothing contained in this Agreement, the Plan, or any action of the Plan Administrator taken under the Plan or this Agreement shall be construed as giving any Participant or employee of the Company any right to be retained in the employ of the Company or any Subsidiary or to limit the Company's or any Subsidiary's right to terminate the employment or services of the Participant. 11 .3 Registration. At the present time, the Company has an effective registration statement with respect to the shares. The Company intends to maintain this registration but has no obligation to do so. ln the event that such registration ceases to be effective, the Participant will not receive a Performance Award settlement or payment unless exemptions from registration under federal and state securities laws are available; such exemptions from registration are very limited and might be unavailable. By accepting the Agreement, the Participant hereby acknowledges that he/she has read the section of the Plan and this Agreement entitled Registration. 11.4 No Rights as a Shareholder. No Award under this Agreement shall entitle the Participant to any dividends (except to the extent provided in an award of Dividend Equivalent Rights), voting or any other right of a shareholder unless and until the date of issuance under the Plan of the shares that are the subject of such Performance Award, are free of all applicable restrictions. 11.5 Compliancewith Laws and Regulations. Notwithstanding anything in the Plan tothe contrary, the Board of Directors, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. '1 '1.6 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity and enforceability of any other provision of this Agreement. lf any provision of theAgreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify any Performance Award under any law deemed applicable by the Plan Administrator, such provision shall be construed ordeemed amended by the PlanAdministratorto conform to applicable laws, or, if the PlanAdministratordetermines that the provision cannot be so construed or deemed amended without materially altering the intent of the Plan or the Performance Award, such provision shall be stricken as to such jurisdiction, person or Performance Award, and the remainder of the Agreement and any such Performance Award shall remain in full force and effect. 12. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Plan Administrator, and the Plan Administrator shall have all powers with respect to this Agreement as it has with respect to the Plan. Any interpretation of the Agreement by the Plan Administrator and any decision made by it with respect to the Agreement are final and binding. 13. Construction. This Agreement is subject to and shall be construed in accordance with the Plan, the terms of which are explicitly made applicable hereto. Unless otherwise defined herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan. ln the event of any conflict between the provisions hereof and those of the Plan, the provisions of the Plan shall govem. 04105116 Page 4 ofl0 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avisla Schedule 1, Page 163 oI 177 Attsta 14. Amendment. This Agreement may be amended by written agreement of the Participant and the Company, without the consent of any other person. 15. Governing Law. The validity, construction, interpretation and enforceability of this Agreement shall be determined and govemed by the laws of the State of Washington without giving effect to the principles of conflicts of laws. For the purpose of litigating any dispute that arises under this Agreement, the parties hereby consent to exclusive jurisdiction in Washington State and agree that such litigation shall be conducted in the courts of Spokane County, Washington or the federal courts of the United States for the eastem district of Washington. '16. Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company) to agree in writing to assume the Company's obligations under this Agreement and to perform such obligations in the same manner and to the same extent that the Company is required to perform them. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or assets that assumes and agrees to perform the Company's obligations under the Agreement by operation of law or otherwise. lN WITNESS WHEREOF, the Participant has executed thisAgreement, and the Company has caused these presents to be executed in its name and on its behalf, all effective as of the Grant Date. AVISTA CORPORATION By: Scott L. Monis Chairman of the Board, President and Chief Executive Officer 04105116 Page 5 of10 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule '1, Page 164 ol 177 4Ytsta EXHIBIT 1 Performance Award Plan Relative Total Shareholder Return Metric and Goals 2016 - 2018 Performance Gycle The following graph and table represent the relationship between the Company's relative three-year Total Shareholder Retum ("TSR") commencing January 1,2016 and ending December 31,2018 and the target award opportunity. The number of shares delivered at the end of the three-year Performance Cycle can range from zero to 200o/o of the target number of units allocated under this metric. The actual issuance of shares depends on Avista's three-year TSR performance compared to the retums of the peer companies reported in the S&P 400 Utilities lndex and how we rank among them. To receive 1\oYo of the Award allocated under this metric, Avista must perform at the 50th percentile among the companies in the s&P 400 Utilities lndex. To receive 200o/o of the Award, Avista must rank at the l00rhpercentile. lf Avista ranks below the 4Otnpercentile, no stock awards or cash Dividend Equivalenl Rights will be eamed. Dividend Equivalent Rights are calculated and paid out in cash when and to the extent the Performance Awards are issued. The following graph demonstrates the relationship between TSR ranking and various payout factors. Performance Awards are interpolated on a straight line for performance results between the figures shown. 3-year Relative TSR Percentile Rank 2AO% 150% 100% 50% 0o/o 40rh ,[sth 50r] 70rh 85th 100th Target N{aximum Payout Factor 200% 150% 125% 1000/0 70% 40% No Award Target Threshold TSR is calculated using S&P Research lnsight and reflects share price appreciation plus the impact of dividend distributions and the reinvestment of such dividends. To compute the TSR, an adjusted price is calculated by applying a monthly retum factor to the average closing share prices on the last trading day of November and December for the start and end of the Performance Cycle. 04/05tr6 Pagc 6 of10 z F4 od lrl axMin Relative TSR Percentile 100'h 85th 70th 50th 45th 40rh <40rh Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 165 of 177 4ststa From one year to the next, if S&P drops a company out of the index and adds another, the new company will be included in the ranking and the dropped company will be excluded. When a new company is added, they will be added to the ranking as if they had been in the ranking from the beginning - provided that there is pricing and dividend data at the beginning of the cycle. When a company is dropped everything related to that company will be excluded from the ranking as if the company was never part of the ranking. Seftlement Formula Example: Assuming that 970 Performance Award units were allocated under this metric at the beginning of the three-year Performance Cycle and Avista's TSR ranked at the 4Sr,percentile after the three-year Performance Cycle, the Participant would receive 70% of 970 or 679 shares of Avista common stock plus cash dividend equivalents. Payout Factor (%o of Target) Target Number of Performance Awards Granted Percentile Rank 100.0% 98.2% t7.8% t6.0% 1.7% 0.0o/o Final Number of Common Stocks Issued 70%x 9'70 679 shares plus cash dividends Percentile Ranking Methodology: The percentile rank is calculated using the PERCENTRANK function in MS Excel, excluding Avista from the list and rounding all results to the nearest whole percentile. The calculation can be replicated by ananging the TSR data from highest to lowest for all peers except Avista. A percentile ranking is calculated for each data point assuming 100.0th %ile for the highest data point, 0.0 %ile for the lowest data point, and the conesponding percentile for every other data point with an equal difference in percentile ranking for each data point. The TSR forAvista is calculated by determining Avista's rank in the list and interpolating between the percentile rankings for the companies immediately above and below based on the differences in TSR. An example, based on sample data is as follows: Comoanv Rankins I 2 47 (ABC Corp) 48 (XYZ Corp) 55 57 TSR 201.60/o 135.9% 20.3% 16.0% -3.3o/o -10.5% lf a company's TSR is 18.9%, the resulting percentile ranking would be 17o/o, calculated as follows: 17o/o = 16.0Yo + [(18.9% - 16.0%) I (20.30/" - 16.0%) - (17.8% - 16.0%)I Total Shareholder Return (TSR) Methodology: For purposes of this Agreement, a methodology for calculating a total retum to shareholder with dividend reinvestment was established. Retums are calculated daily based on stock price changes and dividend payments and then accumulated over the Performance Cycle. Below are additional assumptions used in Avista's calculation for TSR. General Assumptions: The starting and ending prices are determined by averaging the closing price on the last trading day of November and the last trading day of December at the beginning and the end of the Performance Cycle. An example, based on sample data is as follows: the stock price for the start of the Performance Cycle forAvista is $34.90, which is the average of $35.35 (1213112014) and $34.45 (1112812014). Dividends are reinvested on a daily basis. For this example, a fictional exdate for dividends per share is used for 04l05l t6 Page 7 ofl0 4ttsta Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page '166 of '1 77 demonstration purposes. Daily retums are calculated over the performance cycle and added together resulting in the Cumulative TSR for the performance cycle. Closing Price 3 3.90 33.80 34.06 34.29 34.29 34,45 Cumulative TSR I 1 I 2l l20l 4 to 1 I 128 1201 4 * [(34.06 +0 3t7s) 133.80] -r EXHIBIT 2 Performance Award Plan Cumulative Eamings Per Share Metric and Goals 2016 - 2018 Performance Period The following graph and table represent the relationship between the Company's Cumulative Eamings Per Share ("CEPS") commencing January 1, 20'16 and ending December 31,2018 and the target award opportunity. The number of shares delivered at the end of the three-year Performance Cycle can range from zero to 20Oo/o of the target number of units allocated under this metric. The actual issuance of shares depends on Avisla's CEPS growth performance over the three-year Performance Cycle. To receive 100% of the Performance Award allocated under this metric, Avista must achieve CEPS compounded growth of 4.50% based on earnings guidance. To receive 200oh ol the Award, Avista must achieve CEPS compounded growth of 6.00%. lf Avista's CEPS compounded growth is less than 3.00%, no stock awards or cash Dividend Equivalent Rights will be eamed. Dividend Equivalent Rights are calculated and paid out in cash when and to the extent the Performance Awards are issued. The following graph demonstrates the relationship between CEPS and various payout factors. Performance Awards are interpolated on a straight line for performance results between the figures shown. 3-year Cumulative Grorvth EPS 200Vo 150% 100% 50% 0% 3o/o Min 3.750/a 5.250/o 6To Max 04105n6 Page 8 ofl0 Date t I l2t 120t4 11 124t2014 I I12512014 1l t2612014 I I 127 t2014 I I 12812014 Dividend Daily TSR NA (0.2950"/") 1.7086%* 0.6753% 0.00% 0.4666% 2.5555% 75 0 0 .3t 0 0 0 0 FF =E Go 3 4.so/o Target Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1 , Page 167 ot 177 frststa Maximum Target 3-Year Cumulative Growth 6.O% 5.625% 5.25V" 4.875% 45% 4.t25% 3.75% 3.375% 3% <3Y" Payout Factor 200o/o | 7 50/o I 50o/o t25% 100% 85% 7 0o/o 55% 40% No Award Number of Common Stocks Issued Threshold Performance is tracked over a three-year Performance Cycle thereby focusing on sustainability The performance metric CEPS provides for Performance Awards if the Company's cumulative EPS grows at a certain rate on a compounded annual basis. Cumulative EPS is fully diluted eamings per share determined in accordance with generally accepted accounting principles, and may be adjusted to remove the effects of such items as regulatory charges, income tax legislative changes andior items of a non- routine or items of an extraordinary nature as determined by the Plan Administrator. Settlement Formula Example: Assuming that 485 Performance Award units were allocated under this metric at the beginning of the Performance Cycle and Avista's cumulative EPS grew 4.875% over three years, the Pa(icipant would receive 125o/o of 485 or 607 shares of Avista common stock plus dividend equivalents in cash. Payout Factor (oh of T arget) Target Number of Performance Awards Granted 12504 x 607 shares plus cash dividends Using the example formulas in Exhibit'l and Exhibit 2, the Participant would receive in total 88% ot 1,455 (total target # of PerformanceAwards granted) or 1,286 Shares of Common Stock plus cash dividend equivalents. 485 Payout Factor (% ofTarget) Target Number of Performance Awards Granted Number of Common Stocks Issued TSR CEPS Total 7 0o/o t25% 88"/" x x x 970 485 1,455 Page9ofl0 679 607 1,286 04/05,I6 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 168 of 177 Aststa ACCEPTANCE AND ACKNOWLEDGMENT l, a resident of the state of_, accept the Performance Award described in this Agreement and in the Plan, and acknowledge that I have received a copy of this Agreement and the Plan. I have read and understand the Plan, and I hereby make the representations, warranties and acknowledgments, and undertake the indemnity and other obligations, therein specified. Dated: Social Security Number Signature of Employee Printed Name 041051t6 Page l0 ofl0 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-I7-_ M. Thies, Avista Schedule 1, Page 169 of 177 Avtsra Avista Corporation Non-Employee Director Compensation - 201 6 Prior to August l'7 ,2016, directors who were not employees of th e Company received an annual retainer of $ I 40,000 with $65,000 of the total retainer to be paid in stock each year. Directors had the option oftaking the remaining $75,000 in cash, stock or a combination ofboth cash and stock. The cash portion of the retainer is paid quarterly. Directors were also paid $ I ,500 for each meeting ofthe Board or any Comrnittee meeting ofthe Board. Directors who served as Board Committee Chairs received an additional $7,500 annual retainer, with the exception of the Audit Committee Chair, who received an additional $13,000 annual retaincrand thc Compcnsation Committcc Chair,who rcccivcd an additional $10,000 annual rctaincr. Thc Lcad Dircctorreccived an additional annual retainer of $20,000. Each year, the Govemance Committee reviews all components of director compensation. During 2016, the Govemance Committee engaged Meridian Compensation Partners LLC ("Meridian") to assist in this review. The information provided by Meridian was used to compare the Company's current director compensation with peer companies in the utility industry and general industry companies of similar size (the "Director Peer Group"). The companies comprising the Director Peer Group are those companies in the S&P 400 Utilities Index. At its August 17,2016 meeting, the Board reviewed survey results from Meridian regarding current pay practices for director compensation. The Board approvcd an incrcasc in thc annual rctaincrofan additional $5,000, cffectivc Scptcmbcr 1,2016. Thc total annual retaincr is now $145,000 with $70,000 of the total retainer to be paid in stock each year. Directors will have the option oftaking the remaining $75,000 in cash, stock or a combination ofboth cash and stock. The Committee chairretainers were also increased to the following amounts: Compensation & Organization Corrmittee Chair is now $12,500, Audit Committee Chair is now $15,000, Govemance,4.,lominating Committee Chair is now $10,000, Environmental, Technology & Operations Committee Chair is now $ I 0,000 and the Finance Committee Chair Retainer is now $ I 0,000. Each director is entitled to reimbursement ofreasonable out-oflpocket expenses incurred in connection with meetings ofthe Board or its Committees and related activities, including director education courses and materials. These expenses include travel to and from the meetings, as well as any expenses they incur while attending the meetings. The Company has a minimum stock ownership expectation for all Board members. Outside directors are expected to achieve a minimum investment of five timcs thc minimum portion of their cquity rctaincr payable in Company common stock within fivc ycars of bccoming a Board mcmbcr, and retain at lcast that level of investment during his/her tenure as a Board member. Shares previously deferred under the former Non- Employee Director Stock Plan count for purposes of determining whether a director has achieved the ownership expectation. Directors are prohibited frorn engaging in shon-sales, pledging, or hedging the economic interest in their Company shares. The ownership expectation illustrates the Board's philosophy ofthe importance ofstock ownership for directors to further strengthen the commonality of interest between the Board and shareholders. The Govemance Committee annually reviews director holdings to determine whether they meet ownership expectations. All dircctors currcntly comply bascd on thcirycars ofscrvicc complctcd on thc Board. There were no annual stock option grants or non-stock incenlive plan compensation payments to directors for services in 2016 and none are curently contemplated underthe current compensation structure. The Company also does not provide a retirement plan ordeferred compensation plan to its directors. Listed below is compensation paid to each non-employee directorwho served during any part ofthe 201 6 fiscal year. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 170 ot 177 Exhibit 10.32 A\{STA CORPORATION Computation of Ratio of Eamings to Fixed Charges Consolidated (Thousands ofDollars) 2016 Years Ended December 3 I 20t5 20t4 2013 Exhibit l2 2012 $ 86,897 $ 80,613 $ 74,025 $ '13,172 $ 71,843 1,324 1,287 r,187 Total fixed $ 91,612 $85,315 $ 78,847 $ 78,731 $ 76,940 $ 215,402 $ 185,619 $ r92,r06 $ 162,347 $ 1r6,567 (2,6s Ratio of eamings to fixed charges 3.32 3.13 3.39 3.02 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 1, Page 17'l ot 177 2.48 Fixed charges, as defined: Interest charges Amortization ofdebt expense and premium - net Interest portion of rentals Eamings, as defined: Pre-tax income from continuing operations Add (deduct): Capitalized interest Total fixed charges above Total eamings (3,s46) 85,315 (3.924) 7 8,847 (3,67 6) 78,73t (2,401 ) 76,940 $ 3 04,3 63 $ 267.388 $ 267.029 $ 237.402 $ l9l,l06 Subsidiarv Exhibit 2l AVISTA CORPORATION SUBSIDIARIES OF REGISTRANT State or Country oflncorporation Avista Capital, Inc. Avista Development, Inc. Avista Energy, Inc. Avista Northwcst Resourccs, LLC Pentzer Corporation Pentzer Venture Holding II, Inc. Bay Area Manufacturing, Inc. Advanccd Manufacturing and Dcveloprncnt, Inc. Avista Capital II Steam Plant Square, LLC Steam Plant Brew Pub, LLC Courtyard Office Center, LLC AIaska Energy and Resources Company Alaska Electric Light and Power Company AJT Mining Properties, Inc. Snettisham Electric Company Salix, Inc. Washington Washington Washington Washington Washington Washington Washington Califomia Delaware Washington Washington Washington Alaska Alaska Alaska Alaska Washington Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G- 1 7-_ M. Thies, Avista Schedule 1, Page 172 of '177 Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PIJBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-33790,333-126577,333-179042 and 333-208986 on Form S-8 and in Registration Statement Nos. 333-l 87306 and333-2O97 l4 on Form S-3, relating to the consolidated financial statements ofAvista Corporation and subsidiaries, and the effectiveness ofAvista Corporation's intemal control over financial reporting, appearing in this Annual Report on Forn I 0-K ofAvista Corporation for the year ended December 3 I , 20 I 6. /s/ Deloitte & Touche LLP Seattle, Washington February 21,2017 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 173 oI 177 Exhibit 3l .l CERTIFICATION I, Scott L. Morris, certify that: i. I have revicwcd this rcport on Form I 0-K ofAvista Corporation; 2.Based on my knowlcdge, this rcport docs not contain any untrue statcmcnt ofa matcrial fact or omit to statc a matcrial fact nccessary to makc the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, rcsults ofoperations and cash flows ofthc registrant as of, and for, thc pcriods prescntcd in this rcport; , Thc rcgistrant's othcr certifuing officcr and I are rcsponsiblc for establishing and maintaining disclosure controls and proccdures (as defined in Exchange Act Rules I 3a-l 5(e) and I 5d-l 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and I 5d-l 5(0) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knorm to us by others within those entities, particularly during the period in which this report is being prepared; b.Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's intemal control over financial reporting; and 5 The registrant's other certifring oflicer and I have disclosed, based on our most recent evaluation oftntemal control over financial reporttng, to the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (or persons performing the equivalent functions): a. All significant deficiencies and rnaterial weaknesses in the design oroperation ofintemal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial reporting. Datc: Fcbruary 21,2017 /s/ Scott L. Morris Scott L. Morris Chairman ofthe Board, President and ChielExecutive Offi cer (Principal Executive Offi cer) Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule I,Page 174 ot 177 Exhibit 3l.2 CERTIFICATION I, Mark T. Thies, certify that: L I have rcvicwcd this report on Form I 0-K ofAvista Corporation; Bascd on my knowledgc, this report docs not contain any untrue statcment ofa material fact or omit to statc a matcrial fact neccssary to make the statements made, in light ofthe circumstances underwhich such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thc financial condition, rcsults ofoperations and cash flows ofthe rcgistrant as of, and for, the periods prescntcd in this report; The rcgistrant's other ccrtif,ing officer and I arc rcsponsible for establishing and maintaining disclosurc controls and proccdurcs (as dcfincd in Exchange Act Rules I 3a-l 5(e) and I 5d-l 5(e)) and intemal control over financial repoting (as defined in Exchange Act Rules I 3a-l 5(f) and I 5d-l 5(0) for the registrant and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's intemal control over financial reporting; and The registrant's other certifying officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to the registrant's auditors and the audit cornmittee ofthe registrant's board ofdirectors (or persons performing the equivalent functions): a. All significant deficiencies and rnaterial weaknesses in the design or operation ofintemal control over financial reporting which are reasonably likely to adversely aflect the registrant's ability to record, process, summarize and report financial information; and Any fiaud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial reporting. Date: Fcbruary 21,2017 /s/ Mark T. Thics Mark T. Thics Senior Vice President Chief Financial Offi cer, and r."urrr". @rincipal Financial Offi cer) Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 1, Page 175 of 177 2 J a- b c. d 5. b. Exhibit 32 AVISTA CORPORATION CERTIFICATION OF CORPORATE OFFICERS (Furnished Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002) Each of the undersigned, Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avrsta Corporation (the "Company"), and Mark T. Thies, Scnior Vicc Prcsident and Chicf Financi al Officcr ofthc Company, hcrcby ccrtifics, pursuant to I 8 U.S.C. Scction I 3 50, as adoptcd pursuant to Section 906 ofthe Sarbanes-Oxley Act of2002, that the Company's Annual Report on Form I 0-K for the year ended December 3 I , 20 I 6 fully complies with the requirernents ofSection I 3(a) ofthe Securities Exchange Act of I 934, as amended, and that the information contained therein fairly presents, in all material respects, the financial condition and results ofoperations ofthe Company. Date: February 21,2017 /s/ Scott L. Moms Scott L. Morris Chairman ofthe Board, President and Chief Executive Officer /si Mark T. Thics Mark T. Thies Senior Vice President, Chief Financial Officer, and Treasurer Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 176 ot 177 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 1, Page 177 ol 177 UNITED STATES SECURITIES AI\D EXCHANGE COMMISSION Washington, D,C,20549 Form 10-Q (Mark One) EI QUARTERLYREPORTPURSUANT TOSECTIONI3 OR t5(d)OFTHE SECURITIESEXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD EN'DED fue-].QJ.Q.!] OR tr TRANSTTIONREPORTPURSUANTTOSECTIONI3 OR r5(d)OFTHE SECURTTTESEXCHANGE ACT OF r934 FOR THE TRANSITION PERIOD FROM TO Commission file number l-3701 AVISTA CORPORATION -,*l (Exact name ofRegistrant as specified in its charter) Washington (State or other jurisdiction of incorporation or organization) I 4l I East Mission Avenue, Spokane, Washington (Address of principal executive ollices) Registrant's telephone number, including area code: 509{89-0500 Web site: http:/irrrw.avistacorp.com 9t-0462470 (I.RS. Employer Identification No.) 99202-2600 (Zip Code) None (Former name, former address and former fiscal year, ifchanged since last report) Indicate by check mark whether the registrant (l ) has filed all reports required to be filed by Section I 3 or I 5(d) ofthe Securities Exchange Act of I 934 duringthepreceding I2months(orforsuchshorterperiodthattheRegistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfiling requirementsforthepastg0days: Yes E No E Indicate by check mark whetherthe registrant has subr:ritted electronically and posted on its corporate Web site, ifany, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ($ 23 2.405 of this chapter) during the preceding I 2 months (or for such shorter period that the registrant was required to submit and post such files). Yes E No E Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an cmcrging growth company. See thc dcfinitions of "largc accelerated filcr," "acceleratcd fi1cr," "smaller rcporting company,'r and "emcrging growth company" in Rule I 2b-2 ofthe Exchange Act. Large accelerated filer E Accelerated filer tr Non-accelerated filer [1 (Do not check ifa smallerreporting company) Smallerrepo(ing company tr Emerging growth company tr Ifan emerging growth company, indicate by check mark ifthe registrant has elected not to use the extended transition period for complying with any new or revisedfinancialaccountingstandardsprovidedpursuanttoSection l3(a)ofthe Exchange Act D Indicate by check mark whether the Registrant is a shell company (as defined in Rule I 2b-2 ofthe Exchange Act): Yes tr No E As of July 3l ,2017 ,64,41I ,244 shares of Registrant's Common Stock, no par value (the only class of common stock), were outstanding. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2,Page 1 of71 Tablt of Contetrts AVISTA CORPORATION AVISTA CORPORATION INDEX Itcrn No. Forward-Look in g Statements Available lnformation Part I. Financial Information Item l. Condensed Consolidated Financial Statements Condcnsed Consolidatcd Statements oflncomc - Three and Six Months Ended June 30.201 7 and 201 6 Condensed Consolidated Statements of Comorehensive Income - Three and Six Months Ended June 30- 20 I 7 and 20 I 6 Condensed Consolidated Balance Sheets - June 30. 201 7 and December3 l. 201 6 Condensed Consolidated Staternents ofCash Flows - Six Months Ended June 30. 20 I 7 and 20 I 6 Condensed Consolidated Statements ofEouitv - Six Months Ended June 30. 20 I 7 and 20 I 6 Notes to Condensed Consolidated Financial Statements Note l. Summarv ofSienificant Accounting Policies Note 2. New Accountins Standards Note 3. Derivatives and Risk Management Note 4. Pension Plans and Other Postretirement Benefit Plans Note 5. Committed Lines of Credit Note 6. Lons-Term Debt and Caoital Leases Note 7. Long-Term Debt to Amliated Trusts Note S. Fair Valuc Note 9. Common Stock Note I 0. Eaminqs oer Common Share Attributable to Avista Corporation Shareholders Note I l. Commitments and Continsencies Notc 12. Information blr Busincss Scgmcnts Note 1 3. Subsequent Events Repon oflndependent Resistered Public Accounting Firm Item 2.Manaeement's Discussion and Analvsis of Financial Condition and Results of Operations Business Seqments Executive Level Summarv Rcgulatory Mattcrs Results ofOperations - Overall Non-GAAP Financial Measures Results of Ooerations - Avista Utiliues Results of Ooerations - Alaska Electric Light and Power Comoany Results of Onerations - Other Businesses Critical Accountins Policies and Estimates Liouiditv and Capital Resources Overall Liouidit), Review ofCash Flow Statement Canital Resources Caoital Exocnditurcs Off-Balance Sh eet Arran gements Pension Plan Contractual Oblisations Page No. I 4. s 5 6. 1 9 ll t2 12 t4 15' 20 2l 22 21 23 27 28 28 ,o 31 32 33 JJx )4. 40 42 42 54- 54 54 55 55 55 s6 57 57 57 57 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule2, Page2o'f 71 Table of Contents AVISTA CORPORATION Environmental Issues and Other Continqencies Enterprise Risk Manaeement Item 3. Ouantitative and Oualitative Disclosures about Market Risk Item 4. Controls and Procedures Part II. Other Information Item l. Leeal Proceedinss Item I A. Risk Factors Item 2. Item 4. Item 6. Unreeistered Sales ofEouity Securities and Use ofProceeds Mine Safetv Disclosures Exhibits Signature 5'7 5E 59 59 59 59 60 60 6l 62 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 3 ot 71 ll Table of Contents AVISTA CORPORATION Forward-Looking Statements From time to timc, wc make forward-looking statcmcnts such as statcmcnts regarding projcctcd or future: ' financial performance; . cash flows; . capital expenditures; . dividends; . capital structure; . other financial items; . strategic goals and objectives; . business environment; and ' plans for operations. These statements are based upon underlying assumptions (many of which are based, in tum, upon further assumptions). Such statements are made both in our reports filed undcr the Securitics Exchangc Act of 1 934, as amcndcd (including this Quarterly Report on Form 1 0-Q), and clsewhcrc. ForwardJooking statements are all statements except those ofhistorical fact including, without limitation, those that are identified by the use ofwords that include "will," Forward-looking statements (including those made in this Quarterly Report on Form I 0-Q) are subject to a variety ofrisks, uncertainties and other factors. Most ofthese factors are beyond our control and may have a significant effect on our operations, results ofoperations, financial condition or cash flows, which could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others: Financial Risk . wcathcrconditions (tcrnpcraturcs, prccipitation lcvcls and wind pattems), which affcct both energy demand and clcctric gcncrating capability, including the eflect ofprecipitation and temperature on hydroelectric resources, the effect ofwind pattems on wind-generated power, weather- sensitive customer delnand, and similar effects on supply and demand in the wholesale energy markets; ' our ability to obtain financing through thc issuance ofdebt and/or equity securities, which can be affected by various factors including our crcdit ratings, interest rates and other capital market conditions and the global economy; . changes in interest rates that aflect borrowing costs, ourability to effectively hedge interest rates foranticipated debt issuances, variable interest rate borrowing and the extent to which we recover interest costs through retail rates collected from customers; ' changes in actuarial assumptions, interest rates and the actual retum on plan assets forourpension and otherpostretirement benefit plans, which can affect future funding obligations, pension and other postretirement benefit expense and the related liabilities' . deterioration in the creditworthiness ofour customers; . the outcome oflegal proceedings and othercontingencies; . economic conditions in our service areas, including the economy's effects on customer demand for utility services; . declining energy demand related to customerengrgy efficiency and/orconservation measures; . changes in the long-term global and our utilities' service area climates, which can affect, among other things, customer demand pattems and the volume and timing of strcamflows to our hydroclcctric re sources; Utility Regulatory Risk . state and federal regulatory decisions or related judicial decisions that affect our ability to recover costs and eam a reasonable retum including, but not limited to, disallowance ordelay in the recovery ofcapital investments, operating costs and commodity costs and discretion overallowed retum on invcstment; . possibility that our intcgratcd rcsourcc plans for electric and natural gas will not be acknowledged by the statc commissions; Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 4 ol 71 Ieuellgsllc$! AVISTA CORPORATION Energy Commodily Risk . volatility and illiquidity in wholesale energy markets, including the availability ofwilling buyers and sellers, changes in wholesale energy prices that can affcct operating income, cash requircmcnts to purchasc clectricity and natural gas, valuc rcccived forwholcsalc salcs, collateral requircd of us by counterparties in wholesale energy transactions and credit risk to us from such transactions, and the market value ofderivative assets and liabilities; . default or nonperformance on the part ofany parties from whom we purchase and/or sell capacity or energy; . potential cnvironmental regulations affecting our ability to utilize or rcsulting in thc obsolesccncc ofour powcr supply rcsources; Operational Risk . severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice storms, that can disrupt energy generation, transmission and distribution, as well as the availability and costs ofmaterials, equipment, supplies and support services; . explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations ofany ofour generation facilitics, transmission, and elcctric and natural gas distribution systems or other opcrations and may require us to purchasc rcplacement powcr; . wildfires caused by our electric transmission or distribution systems that may result in public injuries or property damage; . public injuries or damage arising from or allegedly arising from our operations; . blackouts ordisruptions ofinterconnected transmission systems (the regional powergrid); . terrorist attacks, cyber attacks or other mal icious acts that may disrupt or cause damage to our util ity assets or to the national or regional economy in general, including any effects ofterrorism, cyber attacks or vandalism that damage or disrupt information technology systelns; . work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages, the loss ofkey executives, availability of workers in a variety ofskill areas, and our ability to recruit and retain employees; . increasing costs ofinsurance, more restrictive coverage terms and ourability to obtain insurance; . delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities; . increasing health care costs and cost ofhealth insurance provided to ouremployees and retirees; . third party construction of buildings, billboand signs, towers or other structures v/ithin our rights of way, or placement of fuel receptacles within close proximity to our transfonners or other equiprrent, including overbuild atop natural gas distribution lines; . the loss ofkey supplicrs for matcrials or scrvices or disruptions to thc supply chain; . adversc impacts to our Alaska opcrations that could rcsult from an cxtcndcd outagc of its hydroclcctric gencrating rcsourccs or thcir inability to deliver energy, due to their lack ofinterconnectivity to any other electrical grids and the extensive cost ofreplacement power (diesel); . changing river regulation at hydroelectric facilities not owned by us, which could impact our hydroelectric facilities downstream; Compliance Risk . compliance with extensive federal, state and local legislation and regulation, including numerous environmental, health, safety, infrastructure protcction, reliability and othcr laws and rcgulations that affcct our opcrations and costs; . the ability to comply with the terms ofthe licenses and permits for our hydroelectric or thermal generating facilities at cost-effective levels: Technology Risk . cyber attacks on us or our vendors or other potential lapses that result in unauthorized disclosure ofprivate information, which could result in liabilities against us, costs to investigate, remediate and defend, and damage to our reputation; 2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2, Page 5 ot 7'l Table 0f Contetrts AVISTA CORPORATION . disruption to or breakdowns ofinformation systems, automated controls and other technologies that we rely on for our operations, communications and customer scrvicc; . changes in costs that impcdc our ability to effcctivcly implement ncw information tcchnology systcms or to opcratc and maintain currcnt production technology; . changes in technologies, possibly making some ofthe current technology we utilize obsolete or the introduction ofnew technology that may create new cyber security risk; . insufficicnt technology skills, which could lcad to the inability to dcvelop, modifu or maintain our information systems; Sttategic Risk . growth or decline ofour customer base and the extent to which new uses for our services may materialize or existing uses may decline, including, but not limited to, the efFect ofthe trend toward distributed generation at customer sites; . the potential effects ofnegative publicity regarding business practices, whether true or not, which could result in litigation or a decline in our common stock pricc: . changes in our strategic business plans, which may be affected by any or all ofthe foregoing, including the entry into new businesses and/or the exit from existing businesses and the extent ofour business development efforts where potential future business is uncertain; . non-regulated activities may increase eamings volatility; . failure to complete the proposed merger transaction could negatively impact the market price of Avista Corp.'s common stock or result in tcrmination fces that could have a matcrial advcrse effect on our rcsults ofoperations, financial condition, and cash flows; . the announced mergertransaction could result in shareholderclass action lawsuits against the Company, its management team and board of directors; Extenal Mandates Risk . changes in environmental laws, regulations, decisions and policies, including present and potential environmental remediation costs and our compliancc with thcsc mattcrs; . the potential effects oflegislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating resources ofrestrictions on greenhouse gas emissions to mitigate concems over global climate changes; . political pressures or regulatory practices that could constrain or place additional cost burdens on our distribution systems through accelerated adoption ofdistributed gcncration or clectric-powered transportation or on our energy supply sources, such as campaigns to halt coal-fircd powcr generation and opposition to other thermal generation, wind turbines or hydroelectric facilities; . wholesale and retail competition including altemative energy sources, groMh in customer-oumed powerresource technologies that displace utility- supplied energy or that may be sold back to tlre utility, and altemative energy suppliers and delivery arrangements; . failure to identifo changes in legislation, taxation and regulatory issues which are detrimental or beneficial to our overall business; . policy and/or legislativc changes resulting from thc new prcsidential administration in various regulatcd arcas, including, but not limitcd to, potential tax reform, environmental regulation and healthcare regulations; and . the risk ofmunicipalization in any ofour service territories. Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonable based on, without limitation, an examination of historical operating trends, our records and other infonnation available from third parties. There can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forwardJooking statement speaks only as ofthe date on which such statement is made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is madc or to reflcct the occurrence ofunanticipatcd evcnts. New risks, unccrtaintics and othcr factors cmcrge from time to time, and it is not possible for us to predict all such factors, nor can we assess the effect ofeach such factor on our business or the J Exhibit No. 3 Case Nos. AVU-E- 1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 6 of 71 Table of Contents AVISTA CORPORATION extent that any such factor or combination offactors may cause actual resuhs to differ materially from those contained in any fonvardJooking statement. Available Information Our website address is www.avistacorp.com. We make annual, quarterly and cunent reports available at our website as soon as practicable after electronically filing these reports with the U.S. Securities and Exchange Commission. Information contained on our website is not part of this report. 4 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2,Page7 o171 Table of Contctrts Item 1. Condensed Consolidated Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF INCOME Avislo Corporation PART I. Financial Information Dollan in thousands, except per share amounts (Unaudited) Operating Revenues: Utility revenues Non-utility revcnues Total operating revenues Operating Expenses: Utility operating expenses: Resource costs Othcr operating cxpcnscs Depreciation and amortization Taxes other than income taxes Non-uti lity operating expenses: Othcr opcrating cxpcnses Depreciation and amortization Total operating expenses Income from operations Interest expense Interest cxpensc to affiliatcd trusts Capitalized interest Other income-net Income before income taxes Income tax expense Net income Net loss (income) attributable to noncontrolling interests Net income attributable to Avista Corp. shareholders Weighted-average common shares outstanding (thousands), basic Weighted-average common shares outstanding (thousands), diluted Eamings per common share attributable to Avista Corp. shareholders: Basic Diluted Dividends declared per common share Thrcc months cndcd Junc 30,Six months cnded June 30, 2017 2016 201',l 2016 $308,729 S < 111 312,888 $ 5,950 739.266 $ t | ,705 125,68t I 1,330 3 14,501 3 18,838 7 50,971 737,011 102,7 5t 81,965 42,643 23,802 7,086 157 I 09,81 5 78,666 39,678 22,615 6,281 192 268.337 t56.449 84,628 56,464 13.265 345 271 ,534 t54,445 78,870 5 2,000 12,106 380 2s8,404 2s7,247 s19,488 569,335 56,097 23,610 200 (8e0) (l,656) 6l ,591 21,3t8 154 (83 7) (3,04 l ) 171,483 47 .215 385 (l ,61 4) (4,7 s7) t67,676 42,591 292 (1,751) (s,463) 34,77 3 l 3,05 l 43,997 16,710 130.254 46,395 132,007 47,055 84,952 !___lJ1t_ !__21_2s4._ L _83,88?_ j___ i1291_ 64,401 63,386 64,382 62,995 64,553 63,783 64.5 I 1 63,368 2t,722 49 27,287 (33) 83,8 59 28 (4e) s 0.34 $o.43 $1.30 s 1.35 s 0.34 $0.43 $1.30 $t.34 $ 0.3575 $ 0.3425 $ 0.71 50 $ 0.6850 The Accompanying Noles are an Integral Parl ofThese Slatemenls. 5 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 8 o171 Teble of Contents CONDENSED CONSOLIDATED STATEMENTS OF COMPRETIENSTVE INCOME Avista Corporation Dollars in thousands (Unaudited) Three months ended June 30,Six months ended June 30, 2017 2016 201'7 201 6 Other Comprehcnsive Income (Loss): Total other comprehensive income (loss)366 loss (income) attributable to interests The Accompanying Noles are an Integral Part ofThese Statements. 6 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page I oI7'l $ 21,722 $ 27,287 S 83.859 $ 84,9s2 183 140 366 (r,089) 183 140 21,905 49 27,427 84,225 $ 2t,954 S 27,394 $ 84,253 $ 83,8 14 28(33) ( 1.08e) 8 3.8 63 (4e) Teble of Contents CONDENSED CONSOLIDATED BALANCE SMETS Avisla Corporation Dollan in thousands (Unaudited) June 30, 20t7 December 31, 2016 Currcnt Asscts: Accounts and notes receivable-less allowances ofS5,607 and $5,026,133,946 180,265 Materials and Other current assets fucl stock and stored natural 6t,187 62,403 ,314 49,625 Net Utility Property: Construction work in Less: Accumulated Other Non-current Assets: and amortization 1,558,7'73 1,509,473 Goodwill 57,672 Total othcr non-culrcnt asscts Regulatory assets for deferred income tax I 18,984 t4t,443 109,853 Other regulatory assets 134,533 Non-cunent Total deferred charges asset for enefgy derivatives 15,023 6'76,102 I 6,91 9 669,47 t The Accompanying Noles are an Integral Pan o;fThese Statements. 7 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 10 of 71 $ 320,736 351,34t 5,617,233 t69,000 5 S06 4qq 150,47 4 4,227,460 4,147,500 I I ,547 5'1,672 72,224 148,'706 $ 5,373,004 $ 5,309,755 Table of Contents CONDENSED CONSOLIDATED BALANCE SHEETS (continued) Avista Corporation Dollars in thousands [Unaudited) Liabilities and Equity: Current Liabilities: Accounts payable Currcnt porion oflong-tcrm dcbt and capital lcascs Short+erm borrowings Energy commodity derivative liabilities Accrued interest Accrued taxes other than income taxes Deferred natural gas costs Current portion of pensions and other postretirement benefi ts Current interest rate swap derivative liabilities Other current liabilities Total current liabilities Long-Ierm debt and capital leases Long-term debt to affiliated trusts Regulatory liability for utility plant retirement costs Pensions and other postretirement bencfits Deferred income taxes Non-current interest rate swap derivative liabilities Other non-current liabilities, regulatory liabilities and deferred credits Total liabilities Commitments and Contingencies (See Notes to Condensed Consolidated FinanciaI Statements) Equity: Avista Corporation Shareholders' Equity: Cornmon stock, no par value; 200,000,000 shares autltorized; 64,408,98 3 and, 64,187 ,934 shares issued and outstanding as ofJune 30,2017 and December 3 I , 20 I 6, respectively Accumulated other comprehensive loss Retained eamings Total Avista Corporation shareholders' equity Noncontro I I in g lnterests Total equity Total liabilities and equity The Accompanying Noles are an Inlegml Parl of These Statements. June 30, 2017 Dccembcr 3 1 2016 $69,1 65 $ 277,814 136,398 8,308 I 6,128 33,1 69 28,9',73 I I ,235 36,507 64,4t7 I t5,545 3,287 120,000 7,035 t5,869 33,37 4 30,820 10,994 6,025 64,57 9 682,1 14 t,403,064 51,547 280,5 80 2t9,584 886,727 336 I 62,1 58 407,528 1,678,7 t1 5t,547 27 3,983 226,552 840,92 8 28,705 153,3 l9 3,686,1 l0 3,661,279 I ,07 5,667 (7,202\ 6l 8.708 1,075,281 (7,s68) 581,014 I ,687 ,t7 3 (27e) I,648,727 (2st) 1,686,894 1,648,476 $ 5,373,004 $ 5,309,755 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 1'l ot 71 8 Trble of Contents CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Avisla Corporation Forthe Six Months Ended June 30 Dollars in thousands ([Jnaudited) 2017 2016 Net income 83,8s9 $ 84,9s2 and amortization 86,790 8l,07r Power and natuml cost 6,366 9,958 Amortization of investment in 1,225 1,225 Allowancc for Funds Used Construction (AIUDC) Amortization conlract 7,t92 deferral Contributions to defined benefit Accounts and notes receivablE 45 175 50,062 Collateral lor derivative instruments Other current assets Other current liabilities 3,197 The Accompanying Notes are an Integral Part ofThese Statements. 9 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-'|7-_ M. Thies, Avista Schedule 2, Page '12 ol71 Investing Activities: Utility property capital cxpenditurcs (excluding equity-rclatcd AFUDC) Issuance ofnotes receivable at subsidiaries Equity and property investments made by subsidiaries Distributions received from investments Other Net cash used in investing activities $ (8,83 r ) 10,365 420 (l 4,800) 228,526 155,95 r (177 ,714) (2,s00) ( l 0,347) 1,915 (e43) (l 82,8 l s) (e,668) (6,e88) (7,1 s3) (1 89,589)(206,624) Table of Contents CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Avisla Corporation For the Six Months Ended June 30 Dollars in thousands (Unaudited) 2017 2016 Net increase in short-term borrowings $ 16,000 s 55,000 Issuance ofcommon stock, net ofissuance costs t,24',7 47,173 Other (3,44s)(3,6t2) The Accompanying Noles are on Integral Parl ofThese Stalements. t0 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 13 of 71 Net increase in cash and cash equivalents Cash and cash equivalents at beginning oflperiod Cash and cash equivalents at end ofperiod (34,034)53,7 t t 4,903 3,038 8,507 t 0,484 $ 13,410 s 13,522 Table of Contetrts CONDENSED CONSOLIDATED STATEMENTS OF EQUTTY Avisla Corporation Forthe Six Months Ended June 30 Dollars in thousands (Unaudited) 2017 20t6 62,312,651 l$ 1,247 (7,s68)(6,6s0) 581,014 530,940 (27e) The Accompanying Notes are an Integral Part ofThese Slatements. t1 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 14 ot 71 Common Stock, Shares: Shares outstanding at beginning ofperiod Shares issued Shares outstanding at end ofperiod Common Stock. Amount: Balancc at beginning ofpcriod Equity compensation expense Issuance ofcommon stock, net ofissuance costs Payment of minimum tax withholdings for share-based payment awards Balance at end ofperiod Accumulatcd Other Comprehensive Loss: Balance at beginning ofperiod Other comprehensive income (loss) Balance at end ofperiod Retained Eamings: Balance at beginning ofperiod Net income attributable to Avista Corporation shareholders Cash dividends paid on common stock Balance at end ofperiod Total Avista Corporation sharcholdcrs' cquity Noncontrolling Interests: Balance at beginning ofperiod Net income (loss) attributable to noncontrolling interests Balance at end ofperiod Total equity 64,187.934 221 ,049 64,408,983 63,704,295 $1,004,336 3,708 47,173 (3,02'7) t,075,667 1,052,190 (7.202) 6l 8,708 57 2,57 6 I ,687 ,173 1,617 ,02'7 (2s1) (28) (33e) (2e0) $ 1,686,894 $ 1,61 6,737 49 Table of Contents AVISTA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements ofAvista Corporation (Avista Corp. or the Company) as ofand for the interim periods ended June 30, 20 I 7 and June 30, 20 I 6 are unaudited; however, in the opinion ofmanagement, the statements rcflect all adjustments necessary for a fair statement ofthe rcsults for the interim periods. All such adjustments are ofa normal rccurring naturc. The condcnscd consolidated financial statcments havc bcen prepared in accordance with accounting principles generally accepted in the United States ofAmerica (GAAP) for interim financial information and with the instructionsto Form l0-Qand Rule l0-01 ofRegulation S-X. The Condensed Consolidated Statements oflncome forthe interirnperiodsare not necessarily indicative ofthe results to be expected for the full year. These condensed consolidated financial statements do not contain the detail or footnote disclosure conceming accounting policies and othermatters which would be included in full fiscal yearconsolidated financial statements; therefore, they should be rcad in conjunction with thc Company's audited consolidated financial statemcnts includcd in the Company's Annual Rcport on Form l 0-K for thc year ended December 3 | ,2Ol6 (20 I 6 Form I 0-K). Please refer to the section "Acronyms and Terms" in the 2O16 Form I 0-K for definitions of certain terms not defined herein. The acronyms and terms are an integral part ofthese condensed consolidated financial statements. NOTE I. SI.]MMARY OF SIG}TIFICANT ACCOI,]NTING POLICIES Naturc ofBusiness Avista Corp. is primarily an electric and natural gas utility with certain otherbusiness ventures. Avista Utilities is an operating division ofAvista Corp., comprising the regulated utility operations in the Pacific Northwest. Avista Utilities provides electric distribution and transmission, and natural gas distribution services in parts ofeastem Washington and northem Idaho. Avista Utilities also provides natural gas distribution sewice in parts ofnofiheastem and southwestem Oregon. Avista Utilities has electric generating lacilities in Washington, Idaho, Oregon and Montana. Avista Utilities also supplies electricity to a small number of customers in Montana, most of whom are employees who operate Avista Utilities'Noxon Rapids generating facility. Alaska Energy and Rcsources Company (AERC) is a wholly-owned subsidiary of Avista Corp. Thc primary subsidiary of AERC is Alaska Elcctric Light and Power Company (AEL&P), which comprises Avista Corp.'s regulated utility operations in Alaska. Avista Capital, Inc. (Avista Capital), a wholly owned non- regulated subsidiary ofAvista Corp., is the parent company ofall ofthe subsidiary companies in the non-utility businesses, with the exception ofAJT Mining Properties, Inc., which is a subsidiary of AERC. Basis olReporting The condensed consolidated financial statements include the assets, liabilities, revenues and expenses ofthe Company and its subsidiaries and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the pimary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company's proportionate share ofutility plant and related operations resulting from its interests in jointly owned plants. Taxes Other Than Income Taxes Taxes other than income taxes include state excise taxes, city occupational and fi-anchise taxes, real and personal property taxes and certain other taxes not based on income. These taxes arc generally based on revcnues or the value ofproperty. Utility rclated taxes collectcd from customers (primarily state excise taxes and city utility taxes) are rrcorded as operating revenue and expense. Taxes other than income taxes consisted ofthe following items for the three and six months ended June 30 (dollars in thousands): Three months ended June 30, Six months ended June 30, 2017 20't6 2017 2016 Utility related taxes Property taxes Other taxes Total $ 52,000 t2 13,552 $ 9,432 818 12,573 S 9,290 752 35,r 36 $ 19,838 1,490 30,93 8 19,710 1,352 $ 23,802 $22,615 $ 56,464 S Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2, Page 15 ot 71 Table of Contcnts AVISTA CORPORATION Materials and Supplies, Fuel Stock and Stored Nataral Gas Inventories ofmaterials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower ofcost or net rcalizable value for our non-regulated operations and consisted ofthe following as ofJune 30,2017 and Decembcr 3 I , 20 I 6 (dollars in thousands): Junc 30, Deccmber 3 l, 2017 2016 Materials and supplies Fuel stock Stored natural gas Total $41,492 $ 5,921 t3,774 40,700 4,585 8.029 $61,r87 $53,314 Deivative Assets and Liabilities Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value The Washington Utilities and Transportation Commission GITC) and the Idaho Public Utilities Commission (IPUC) issued accounting orders authorizing Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition ofmark-to-market gains and losses on energy commodity transactions until the period ofdelivery. Realized benefits and costs result in adjustrnents 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 rate cases. The resulting regulatory assets have been concluded to be probable ofrecovery 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 rcgulatory asset or liability. Contracts that are not considercd derivatives are accountcd for on thc accrual basis until they arc settlcd or rcalizcd unless there is a decline in the fair value ofthe contract that is determined to be other-than-temporary. For interest rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities, as well as offsetting regulatory assets and liabilities, such that there is no income statement impact. Tlre interest rate swap derivatives are risk management tools similar to energy commodity derivatives. Upon settlement ofinterest rate swap derivatives, the regulatory asset or liability is amortized as a component ofinterest expense over the term ofthe associated debt. The Company records an offset ofinterest rate swap derivative assets and liabilities with regulatory assets and liabilitics, bascd on thc priorpractice ofthc commissions to provide rccovery through the ratemaking process. As of June 30, 201 7, the Company has multiple master nctting agreements with a variety of entities that allow for cross<ommodity nctting of dcrivativc agreements with the same counterparty (i.e. power derivatives can be netted with natural gas derivatives). In addition, some master netting agreements allow for the netting ofcommodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for presentation in the Condensed Consolidated Balance Sheets. Fab Value Measurements Fair value represents the price that would be received when selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the mcasurement datc. Energy commodity dcrivative assets and liabilities, defencd compensation asscts, as wcll as dcrivativcs relatcd to interest rate swaps and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 8 for the Company's fair value disclosures. l3 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 16 of 71 Table of Contents AVISTA CORPORATION A c cumulaled Other C o mp rchensive Lo ss Accumulated other comprehensive loss, net oftax, consisted ofthe following as ofJune 30,2017 and December 3 I , 20 1 6 (dollars in thousands): June 30, 2011 Unfunded bencfit obligation for pcnsions and othcr postrctirement benefit plans - net oftaxcs of$3,878 and $4,075, respectively $7,202 $ The following table details the reclassifications out ofaccumulated other comprehensive loss by component for the three and six months ended June 30 (dollars in thousands). Amounts Reclassificd from Accumulatcd Othcr Comprehcnsive Los Thrcc months cndcd June 30, Six months cnded June 30, December 3 I , 20t6 Dctails about Accumulated Other Comprchensivc Loss Components 201'1 20t6 2017 2016 7,568 Affected Line Item in Slatement of Income Amortization ofdefined benefit pension items Amorlization olnet prior service cost Amortization of net loss Adjustrnent due to effects ofregulation $ (2e9) $ (3ll) $ (seS) $ (622) (a) 3,638 3,642 $ 7,276 $ 7,284 (a) (3,0s7) (3,1 I s) (6,1 I 5) (8,338) (a) (b) 282 216 563 (1,676) Total before tax (99) (76) (197) 587 Tax benefit (expense) i---iL98'I Net oftax (a) These accumulated other comprehensive loss components are included in the computation ofnet periodic pension cost (see Note 4 for additional detaits).(b) TheadjustmentfortheeffectsofregulationduringthesixmonthsendedJune30,2016includesapproximately$2.1 millionrelatedtothe reclassification ofa pension regulatory asset associated with one ofourjurisdictions into accumulated other comprehensive loss. Contingencies The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency ifit is probable that a liability has been incurred and the amount ofthe loss or impairment can be reasonably estimated. The Company also discloses loss contingencies that do not meet these conditions for accrual ifthere is a reasonable possibility that a material loss may be incurred. As ofJune 30, 20 I 7, the Company has not recorded any significant amounts related to unresolved contingencies. See Note I I for further discussion ofthe Company's commitrnents and contingencies. NOTE 2. I{EW ACCOI,JNTING STANTDARDS ASU No. 20 1 4-09, "Revenue from Contracts with Customers (Topic 606) " In May 20 I 4, the FASB issued ASU No. 20 I 4-09, which outlincs a singlc comprchensive modcl for entities to usc in accounting for rcvcnue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle ofthe revenue model is that an entity should identifr the various performance obligations in a contract, allocate the transaction price among the performance obligations and recognize revenue when (or as) the entity satisfies each performance obligation. This ASU is eflective for periods beginning after December l5,2017 . The Company has a revenue recognition standard implementation team that is working through implementation issues. The Company has evaluated this standard and is planning to adopt this standard in 201 8 upon its effective date. The Company is expecting to use a modified retrospective method of adoption, which would rcquirc a cumulative adjustmcnt to opening rctaincd eamings, as opposcd to a full retrospective application. Based on work performed to date, the Company has not identified any material cumulative adjustments necessary. t4 $ 183 $ 140 $ 366 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 17 ol71 Table of Contcnts AVISTA CORPORATION Since the majority ofAvista Corp.'s revenue is from rate-regulated sales ofelectricity and natural gas to retail customers and revenue is recognized as energy is delivered to these custolners, the Company does not expect a significant change in operating revenues or net income. The Company is in the process of reviewing and analyzing certain contracts with customers (most ofwhich are related to wholesale sales ofpower and natural gas) and has not yet identified any significant differences in revenue recognition between current GAAP and ASU No. 2014-09. During the implementation process, the Company has identified several issues, the most significant ofwhich are as follows based on our current assessment: Contributions in Aid ol Construction - There was the potential that contributions in aid ofconstruction (CIAC) could be recognized as revenue upon the adoption ofASUNo. 2014-09. Undercurrent GAAP, CIACs are accounted foras an offset to the cost ofutility plant in service. Current preliminary implementation guidance indicates that CIACs will continue to be accounted foras an offset to utility plant in service. Utilit!-Related Taxes Collected.from Customers - There were questions on the presentation ofutility related taxes collected from customers (primarily state excise taxes and city utility taxes) on a gross basis. Under current GAAP, the Company is allowed to record these utility related taxes on a gross basis in revenue when billed to customers with an offset included in taxes other than incolne taxes in operating expenses. The Company evaluated whether this gross presentation is appropriate underASU 2014-09 and the Company's preliminary assessment indicates that there will be no material changes to current presentation. Collectibility -There were questions regarding the requirement that collection ofa sale be probable and how, or if, utilities should consider bad debt collcction mcchanisms (riders, basc rate adjustments, etc.) in assessing probability ofcollcction on sales to low income customcrs. Currcnt prcliminary implementation guidance indicates that bad debt collection mechanisms should be considered; therefore, the Company does not expect a change to its current presentation going forward. The Company is monitoring utility industry implementation guidance as it relates to certain issues to determine if there will be an industry consensus regarding accounting and presentation ofthese items. In addition to the issues dcscribed abovc, thc Company also cxpects significant changcs to its revcnue-rclatcd footnote disclosurcs. Thc Company continucs to evaluate what information would be most useful for users of the ftnancial statements, including information already provided elsewhere in the document outside the footnote disclosures. These additional disclosures could include the disaggregation ofrevenues by geographic location, type ofservice, source of revenue or customer class. Also, the Company expects enhanced disclosures regarding its revenue recognition policies and elections. ASU No. 20 1 6-02 "Leases (Topic 84 2). " In Fcbruary 20 I 6, the FASB issucd ASU No. 2016-02. This ASU introduces a new lcssec modcl that requires most leases to bc capitalized and shown on thc balance sheet with corresponding lease assets and liabilities. The standard also aligns ceftain ofthe underlying principles ofthe new lessor model with those in Topic 606, the FASB's new revenue recognition standard. Furthermore, this ASU addresses other issues that arise under the current lease model; for example, eliminating the required use ofbright-line tests in current GAAP for determining lease classification (operating leases venus capital leases). This ASU also includes enhanced disclosures surrounding leases. This ASU is effective for periods beginning on or after December I 5, 20 I 8; however, early adoption is pcrmittcd. Upon adoption, this ASU must be applicd using a modified rctrospcctivc approach to thc earliest pcriod prcscntcd, which will likcly require restatements ofpreviously issued financial statements. The modified retrospective approach includes a number ofoptional prdctical expedients that entities rnay elect to apply. The Cornpany evaluated this standard and determined that it will most likely not early adopt this standard before its effective date in 2019. The Company has formed a lease standard implementation team that is working through the implementation process. The most significant implementation challenge identified thus far relates to identiffing a complete population ofleases and potential leases under the new lease standard. Also, the Company is monitoring utility industry implcmcntation guidance as it relates to sevcral unresolved issucs to dctermine iftherc will bc an industry consensus, including whether right-of-ways are considered leases. The Company has not yet estimated the potential impact on its future financial condition, results ofoperations and cash flows. ASU No. 20 1 6-09 "Compensation-Stock Compensation (Topic 7 I 8): Improvements to Employee Share-Based Paymenl Accounting. " In March 20 t 6, the FASB issued ASU No. 2016-09. This ASU simplified several aspects ofthe accounting for employee share-based payment transactions including: t5 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 18 of 71 Table of Contcnts AVISTA CORPORATION allowing excess tax benefits or tax deficiencies to be recognized as income tax benefits or expenses in the Condensed Consolidated Statements of Income rather than in Additional Paid in Capital (APIC), excess tax benefits no longer represent a financing cash inflow on the Condensed Consolidated Statements ofCash Flows and instead will be included as an operating activity. requiring cxccss tax bencfits and tax dcficicncies to be cxcludcd from the calculation ofdiluted camings pcr sharc, whcrcas undcr prcvious accounting guidance, these amounts had to be estimated and included in the calculation, allowing forfeitures to be accounted for as they occur, instead ofestimating forfeitures, and changing the statutory tax withlrolding requirements for share-based payments. The Cornpany early adopted this standard during the second quarer of20 I 6, with a retrospective effective date ofJanuary I , 2 0 I 6. The adoption ofthis standard resulted in a recognized income tax benefit of$1.6 million in 2016 associated with excess tax benefits on settled share-based employee payments. Becausethisstandardwasadoptedinthesecondquarterof20l6,buthadaretrospectiveeffectivedateofJanuary l,20l6,theeffectsfromtheadoptionwere rcflcctcd in thc first quartcr of20 I 6 and the Condenscd Consolidatcd Financial Statcmcnts for that quaficr werc rccast from those presentcd whcn thc financial statements were originally issued. ASU No. 20 I 7-07 "Compensation-Retirement BeneJits (fopic 7 I 5): Improving the Presentation oJ Net Periodic Pension Cost and Net Periodic Po stret i remenl B en e.fi t C o s t " In March 2O17 ,the FASB issued ASU No. 20 1 7-07, which amends the income statement presentation ofthe components ofnet period benefit cost for an entity's defined benefit pension and otherpostretirement plans. Under current GAAP, net benefit cost consists ofseveral components that reflect different aspects ofan employer's financial arrangements as well as the cost ofbenefits eamed by employees. These components are aggregated and reported net in the financial statcments. ASU No. 2017-07 rcquircs cntitics to (l ) disaggregatc thc currcnt servicc-cost component from thc othcr components ofnct bencfit cost (other components) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the incorne statement and outside ofincome from operations. In addition, only the service-cost component ofnet benefit cost is eligible for capitalization (e.g., as part ofutility plant). This is a change from current practicc, undcr which cntitics capitalizc the aggregatc net bcnefit cost to utility plant whcn applicable, in accordancc with Fcderal Encrgy and Regulatory Commission (FERC) accounting guidance. Avista Corp. is a rate-regulated entity and all components ofnet benefit cost are currently recovered from rate payers as a component ofutility plant and under the new ASU these costs will continue to be recovered from rate payers in the same manner over tlre depreciable lives ofutility plant. As all such costs are expected to continue to be recoverable, the components that are no longereligible to be recorded as a component ofplant for GAAP will be recorded as regulatory assets. This ASU is effective for periods beginning after December I 5, 2017 and early adoption i s permitted. Upon adoption, en tities must use a retrospective transition mcthod to adopt the rcquiremcnt for scparate prcscntation in thc income statcmcnt and a prospcctivc transition mcthod to adopt the rcquircmcnt to limit the capitalization ofbenefit costs to the service-cost component. The Company does not expect to early adopt this standard and does not expect a material impact on its future financial condition, results ofoperations or cash flows upon adoption ofthis standard. NOTE 3. DERIVATIIiES AN'D RISK MANAGEMENT The disclosures below in Note 3 apply only to Avista Corp. and its operating division Avista Utilities; AERC and its primary subsidiary AEL&P do not enter into derivative instruments. E nergy Co mmo dity De riv ati ves Avista Corp. is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in general, the risk offluctuation in the market price ofthe commodity being traded and is influenced primarity by supply and demand. Market risk includes the fluctuation in the market price of associated derivative commodity instruments. Avista Corp. utilizes derivative instruments, such as forwards, futures, swap derivatives and options in order to manage the various risks relating to these commodity price exposures. Avista Corp. has an energy resources risk policy and control procedures to manage these risks. As part ofAvista Corp.'s resource procurement and management operations in the electric business, Avista Corp. engages in an ongoing process ofresource optimization, which involves the economic selection from available energy resources to serve Avista Corp.'s load obligations and the use ofthese resources to capturc available cconomic valuc. Avista Corp. transacts in wholesalc markcts by sclling and purchasing clcctric capacity and cncrgy, fucl for clectric generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part ofthe process ofmatching resources with load obligations and hedging a portion ofthe related financial risks. These transactions range from terms ofintralrour up to multiple years. t6 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 19 ot71 Table of Contents AVISTA CORPORATION As pan ofits resource procurement and management ofits natural gas business, Avista Corp. makes continuing projections ofits natural gas loads and assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low and average monthly requirements and delivery constraints from natural gas supply locations to Avista Corp.'s distribution system. However, daily variations in natural gas demand can be significantly different than monthly demand projections. On the basis ofthese projections, Avista Corp. plans and executes a serics oftransactions to hedgc a portion ofits projccted natural gas rcquircments through fororard market transactions and dcrivative instrumcnts. Thcse transactions may extend as much as four natural gas operating years (November through October) into the future. Avista Corp. also leaves a significant portion ofits natural gas supply requirements unhedged for purchase in short-term and spot markets. Avista Corp. plans for sufficient natural gas delivery capacity to serve its retail customea for a theoretical peak day event. Avista Corp. generally has more pipeline and storage capacity than what is needed during periods other than a peak day. Avista Corp. optimizes its natural gas resources by using market opportunities to generate economic value that helps mitigate fixed costs. Avista Corp. also optimizes its natural gas storage capacity by purchasing and storing natural gas when prices are traditionally lower, typically in the summer, and withdrawing during higher priced months, typically during the winter. Howeveq ifmarket conditions and prices indicate that Avista Corp. should buy or sell natural gas at other times during the year, Avista Corp. engages in optimization transactions to capture value in the rnarketplace. Natural gas optimization activities include, but are not limited to, wholesale market sales of surplus natural gas supplies, purchases and sales ofnatural gas to optimize use ofpipeline and storage capacity, and participation in the transportation capacity release market. The following table presents the underlying energy commodity derivative volumes as ofJune 30,2017 that are expected to be delivered in each respective year (in thousands of MWrs and mmBTUs): Purchases Sales Elcctric Dcrivativcs Gas Dcrivatives Elcctric Dcrivatives Gas Dcrivativcs Physical ( I ) MWH Financial ( I ) MWH Physical ( I ) mmBTUs Financial ( I ) mmBTUs Physical ( I ) MWH Financial ( I ) MWH Physical ( I ) mmBTUs Financial ( I ) mmBTUsYear Remainder 201 7 201 8 2019 2020 2021 Thereafter 185 397 235 999 307 't37 7,418 63,423 78,488 42,77 5 3,635 154 254 158 3,3 78 1,360 1,345 1,430 |,049 1.129 1,244 982 43,940 46,805 26,590610 9t0 The following table presents the underlying energy commodity derivative volumes as ofDecember 3 I , 20 1 6 that are expected to be delivered in each respective year (in thousands ofMWhs and mmBTUs): Purchases Salcs Electric Derivatives Gas Derivatives Elcctric Derivatives Gas Derivativcs Physical (l) Financial (l)Physical (1 ) MWH MWH mmBTUs Financial (l) Physical (l) Financial (l) Physical (l) Financial (l) mmBTUs MWH MWH mmBTUs mmBTUsYear 201'7 201 8 2019 2020 2021 Thereafter 907 15,47 5 l 10,380 52,7 55 29,475 ) 1)< 3t6 286 158 1,552 1,244 982 73,1 r 0 15,il3 4,020 4,t 65 1,360 1,345 1,430 1,060 610 910 (l ) Physical transactions reptesent cornmodity transactions in which Avista Corp. will take or make delivery ofeither electricity or natural gas; financial transactions represent derivative instruments with delivery ofcash in the amount ofthe benefit or cost but with no physical delivery ofthe commodity, such as futures, swap derivatives, options, or forward contracts. The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are delivered and u/ill be included in the various recovery mechanisms (ERM, PCA, and Purchased Gas Adjustments (PGA)), or in the general rate case process, and are expected to be collected through retail rates from customers. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 20 oI 71 t7 510 397 235 Table of Contents AVTSTA CORPORATION Foreign Currency Exchange Derivatives A significant portion ofAvista Corp.'s natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most ofthose trdnsactions arc executed in U.S. dollars, which avoids foreign curency risk. A portion ofAvista Corp.'s short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices and settled within 60 days with U.S. dollars. Avista Corp. hedges a portion ofthe foreign currency risk by purchasing Canadian currency exchange derivatives when such commodity transactions are initiated. The foreign curency exchange derivatives and the unhedged foreign currency risk have not had a material effect on Avista Corp.'s financial condition, results ofoperations or cash flows and these differences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking. The following table summarizes the foreign cuffency exchange derivatives that Avista Corp. has outstanding as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands): Junc 30,December 3 I 2016201',? Number ofcontracts Notional amount (in United States dollars) Notional arnount (in Canadian dollars) $ 24 7,588 $ 10,075 2t 2,819 1 754 Intercst Rate Derivatives Avista Corp. is affected by fluctuating interest rates related to a portion ofits existing debt, and future borrowing requirements. Avista Corp. hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements. These interest rate swap derivatives and U.S. Treasury lock agreements are considered economic hedges against fluctuations in future cash flows associated with anticipated debt i ssuances. The following table summarizes the unsettled interest rate swap derivatives that Avista Corp. has outstanding as ofJune 30,2017 and December 3 1 , 20 1 6 (dollan in thousands): Balance Sheet f)ate Number of Contacts Notional Amount Mandatory Cash Settlement Date June 30,201 7 6 t4 6 3 5 s 7 5,000 275,000 70,000 30,000 60,000 2017 201 8 2019 2020 2022 December3l,20l6 6 $ 75,000 2017 t4 2'75,000 2018 6 70,000 2019 2 20.000 2020 5 60.000 2022 The fairvalue ofoutstanding interest rate swap derivatives can vary significantly from penod to period depending on the total notional amount ofswap derivatives outstanding and fluctuations in market interest rates cornpared to the interest rates fixed by the swaps. Avista Corp. is required to rnake cash payments to settle the interest rate swap derivatives when the fixed rates are higher than prevailing market rates at the date ofsettlement. Conversely, Avista Corp. receives cash to settle its interest rate swap derivatives when prevailing market rates at the time ofsettlement exceed the fixed swap rates. Upon settlement ofinterest rate swaps, the cash payments made or received are recorded as a regulatory asset or liability and are amortized as a component of interest expense over the Iife ofthe associated debt. The settled interest rate swaps are also included as a part ofthe Company's cost ofdebt calculation for ratemaking purposes. l8 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2,Page21 ol71 Table of Contents AVISTA CORPORATION Summary of Outstanding Defivalive Instrurrrents The amounts recorded on the Condensed Consolidated Balance Sheet as ofJune 30,2017 and December 3 I , 20 I 6 reflect the oflsetting ofderivative assets and liabilities wherc a lcgal right ofoffsct exists. The following table presents the fairvalues and locations ofderivative instruments recorded on the Condensed Consolidated Balance Sheet as ofJune 30, 201 7 (in thousands): Fair Value as ofJune 30, 201 7 Derivativc and Balance Shcet Location Net Asset (Liability) on Balance Shcct Gross Aset Gross Liability Collateral Ncttcd Forei gn currency exchange derivatives Other current assets lnterest rate swap derivatives Other currcnt asscts Other property and investments-net and other non-current assets Current interest rate swap derivative liabilities Non-current interest rate swap derivative liabilities Energy commodity derivatives Other curent assets Current energy commodity derivative liabilities Other non-current liabilities, regulatory liabilities and defened credits Total derivative instrulnents recorded on the balance sheet Derivative and Balance Sheet Location $187 $ 5,626 5,67 6 (208) (r,64s) (78,077) (336) 187 5,418 4,031 (36,507) (336) $s 168 22,577 12,532 (l I ) (36,716) (27,555) 41,570 5,83 l 1ql{i 157 (r,r,3 0n) (t 1,087) $ 46,766 $ (144,s48) $ s1,337 S (46,445) The following table presents the fair values and locations ofderivative instruments recorded on the Condensed Consolidated Balance Sheet as of December 3 l, 2016 (in thousands): Fair Valuc as of Dcccrnbcr 3 I . 20 I 6 Gross Asset Gros Liability Collatcral Netted Nct Ass€t (Liability) on Balance Sheet Foreign currency exchange derivatives Other current liabilities Interest rate swap derivatives Other current assets Other property and investments-net and other non-current assets Current interest rate swap derivative liabilities Non-current intcrest rate swap derivative liabilities Energy commodity derivatives Other current assets Current en ergy commodity derivative liabi li ti es Other non-currcnt liabilities, rcgulatory liabilitics and dcfcrrcd crcdits Total derivative instruments recorded on the balance sheet $5$(28) $ (3e7) (r 5,756) (s 7,82 s ) (23) 3,393 5157 (6,025) (28,705) 1,895 (7,03 s ) (r 3,289) 9,731 25,169 6,228 3,63 0 s 3,393 5,7 54 3,951 18,682 16,335 13,071 (l 6,787) (29,598) (?9,990) $ 6l,19l $ (1s0,381) S 44,7s8 $ (44A32) Exposure to Demandsfot Collateral Avista Corp.'s derivative contracts oftcn rcquire collateral (in the form ofcash or letters ofcrcdit) or other credit enhanccments, or reductions or terminations ofa po(ion ofthe contract through cash settlement. In the event ofa doungrade in Avista Corp.'s credit ratings or changes in market prices, additional collateral may be required. In periods ofprice volatility, the level ofexposure can change significantly. As a result, sudden and significant demands may be made against Avista Corp.'s credit Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista t9 Schedule 2, Page 22 ol 71 Table of Contents AVISTA CORPORATION facilities and cash. Avista Corp. actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements. The folf owing table presents Avista Corp.'s collateral outstanding related to its derivative instruments as of June 3 0, 2017 and December 3 I , 201 6 (in thousands): Junc 30, 201'7 December 3 l, 20t6 Energy commodity derivatives Cash collateral posted Letters of credit outstanding Balancc shcct offsctting (cash collatcral against nct dcrivativc posilions) Interest rate swap derivatives Cash collateral posted Letters olcredit outstanding Balance sheet offsetting (cash collateral against net derivative positions) Energy commodity derivatives Liabilities with credit-risk-related contingent features Additional collateral to post $t 5,924 S 37,250 9,7 67 41.570 13,t00 41,570 t7,134 24.400 9,858 34,900 3,600 34,900 Certain of Avista Corp.'s derivative instruments contain provisions that require Avista Corp. to maintain an "investment grade" credit rating from the major credit mting agencies. IfAvista Corp.'s credit ratings were to fall below "investment grade," it would be in violation ofthese provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions. The following table presents the aggregate fair value ofall derivative instruments with credit-risk-related contingent features that are in a liability position and the amount ofadditional collateral Avista Corp. could be required to post as ofJun e 30,2017 and December 3 I , 20 I 6 (in thousands): June 30, 2017 December 3 I 2016 $648 648 $1,124 1,046 Interest rate swap derivatives Liabilities with credit-risk-related contingent features 80,266 73,978 Additional collateral to post I 1,210 21,100 NOTE 4. PENSION PLANS AN'D OTHER POSTRETIREMENT BENEFIT PLANS Avista Ulilities Avista Utilities' pension and other postretirement plans have not changed during the six months ended June 30,2017 . 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 amountsthatare currently deductible forincometax purposes. The Company contributed S14.8 million in cash to the pension plan forthe six months ended June 30,2017 and, expects to contribute a total of$22.0 million in 2017. The Company contributed $12.0 million in cash to thepension plan in 2016. 20 Exhibit No. 3 Case Nos. AVU-E- l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 23 of 71 Table 0f Contents AVISTA CORPORATION The Company uses a December 3 I measurement date for its defined benefit pension and other postretirement benefit plans. The following table sets fonh the components ofnet periodic benefit costs for the three and six months ended June 30 (dollars in thousands): Pension Benefits Other Post-retirement Benefits 20t7 2016 20t'7 2016 Three months ended June 30: Serv ice cost Interest cost Expected retum on plan assets Amortization of prior scrv'icc cost Net loss recognition Net periodic benefit cost Six months ended June 30: Service cost Intcrcst cost Expected retum on plan assets Amortization ofprior service cost Net loss recognition Net pcriodic bcncfit cost $5,092 $ 6,976 (7,900) 2,317 4,569 $ 6,900 (6,87s) 2,201 799 $ 1,374 (47 s) (3 l2) 1,320 804 I,534 (47 s) (312) 1,494 $6,48s$6,79s$2,706$3,04s s 4,863 4,091 1,623 $ ) 111 (e50) (624) 2,593 10,134 $ t3,927 (l s,800) 9,088 $ 13,800 (l 3,625) l,583 3,093 (es0) (624) 2,859 g t3,124 $ 13,354 $ 5,415 $ 5,e6r Total net periodic benefit costs in the table above are recorded to the same accounts as labor expense. Labor and benefits expense is recorded to various projects based on whether the work is a capital project or an operating expense. Approximately 40 percent ofall labor and benefits is capitalized to utility property and 60 percent is expensed to other operating expenses. NOTE 5, COMMITTEDLINES OF CREDIT Avisto Corp, Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million that expires in April 2021. The committed line ofcredit is secured by non-transferable firct mortgage bonds ofthe Company issued to the agent bank that would only become due and payable in the event, and then only to the extent, that the Company defaults on its obligations under the committed line ofcredit. Borrowings outstanding and interest rates of borrowings (excluding letters of credit) under the Company's revolving committed line of credit were as follows as ofJune 30,2017 and December 3 1, 20 I 6 (dollan in thousands): June 30, December 3 l, 201? 20t6 Borowings outstanding at end ofperiod S 136,000 $ 120,000 Letters ofcredit outstanding at end ofperiod $ 56,703 $ 34,353 Average interest rates at end ofperiod 1.99% 1.50o/o As ofJune 30,2017 and December 3 I , 20 I 6, the bonowings outstanding under Avista Corp.'s committed line ofcredit were classified as short-term bonowings on the Condensed Consolidated Balance Sheet. The additional short-term borrowings outstanding as ofJune 30,2017 on the Condensed Consolidated Balance Sheet relate to a short-term note payable by a subsidiary for the acquisition ofland that vrill be repaid in early 20 I 8. AEL&P AEL&P has a cornmitted line of credit in the amount of $25.0 rnillion that expires in November 201 9. As of June 30,2017 and December 3 I , 201 6, there were no borrowings or letters ofcredit outstanding under this committed line ofcredit. The commirted line ofcredit is secured by non-transferable first mortgage bonds ofAEL&P issued to the agent bank that would only become due and payable in the event, and then only to the extent, that AEL&P defaults on its obligations undcr the committcd linc of credit. 2l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 24 oI 71 Table of Contetrts AVISTA CORPORATION NOTE 6. LONG.TERM DEBT AND CAPITAL LEASES The following details long-term debt outstanding as ofJune 30,2017 and December 3 I , 20 I 6 (dollan in thousands): Marurity InterestYear Dercription Rate June 30, 201'7 December 3 I, 20t6 Avista Corp, Secured Long-Term Debt 201 8 First Mortgage Bonds 201 8 Secured Medium-Term Notes 2Ol9 First Mortgage Bonds 2020 First Mortgage Bonds 2022 First Mortgage Bonds 2023 Secured Medium-Term Notes 2028 Secured Medium-Tenn Notes 2032 Securcd Pollution Control Bonds (l) 2034 Secured Pollution Control Bonds (l ) 2035 First Mortgage Bonds 2037 First Mortgage Bonds 2040 First Mortgage Bonds 2041 First Mongage Bonds 2044 First Mortgage Bonds 2045 First Mortgage Bonds 2047 First Mortgage Bonds 2051 First Mortgage Bonds Total Avista Corp. secured long-term debt Alaska Electric Light and Power Company Secured Long-Term Detrt 2044 First Mortgage Bonds Total sccurcd long-tcrm dcbt Alaska Energy and Resources Company Unsecured Long-Term Debt 2019 Unsecured Term Loan Total secured and unsecured long+erm debt Other Long-Term Debt Components Capital lease obligations Unamortized debt discount Unamortized long-tem debt issuance costs Total Sccured Pollution Control Bonds hcld by Avista Corporation (l ) Current portion oflong-term debt and capital Ieases Total long-term debt and capital leases (l) s.95% 7.39%-7.45% 545% 3.89o/o 5.13% 7.t8%-7.54% 6.37% (l) (l ) 6.25% 5.70o/o 5.55o/o 4.450A 4.tt% 4.37% 4.23% 3.54% 250,000 $ 22,500 90,000 52,000 250,000 13,500 25,000 66,700 17,000 150,000 150,000 3 5,000 85,000 60,000 100,000 80,000 175,000 250,000 22.500 90,000 52,000 250,000 13,500 25,000 66,700 17,000 r50,000 I 50,000 35,000 8 5,000 60,000 100,000 80,000 175,000 $ 1,621,700 75,000 1,621,700 75,0004.54Yo 3.85% I,696,700 15,000 1,696,700 15,000 t,7 t 1,700 63,791 (70e) (10,204) 1 ,7 t1,700 6sA3s (7e2) (10,639) I ,7 64.57 8 (83,700) (277,814) 1,7 65,704 (83,700) (3,287) $ 1y'03,064 $ 1,678,717 In Dccernbcr20l0, $66.7 million and $ 17.0 million of thc City of Forsyth, Montana Pollution Control Rcvenuc Rcfunding Bonds (Avista Corporation Colstrip Project) due in2032 and 2034, respectively, which had been held by Avista Corp. since 2008 and 2009, respectively, were refunded by new variable rate bond issues (Series 20 I 0A and Series 20 I 0B). The new bonds were not oflered to the public and were purchased by Avista Corp. due to market conditions. The Company expects that at a later date, subject to market conditions, these bonds may be remarketed to unaffiliated investors. So long as Avista Corp. is the holder ofthese bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s Consolidated Balance Shccts. 22 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 25 ol 7'l Table of Contents AVISTA CORPORATION NOTE 7. LONG,TERM DEBT TO AFFILIATED TRUSTS In I 997, the Company issued Floating Rate Junior Subordinated Deferrable lnterest Debentures, Series B, with a principal amount of$5 1.5 million to Avista Capital II, an affiliatcd busincss trust formed by the Company. Avista Capital II issucd $50.0 million ofPrcfencd Trust Sccurities with a floating distribution rate ofLIBOR plus 0.875 percent, calculated and reset quarterly. The distribution rates paid were as follows during the six months ended June 30,2017 and the year ended December 3 1,201 6: June 30, December 3 I , 2017 2016 Low distribution rate High distribution ratc Distribution rate at the end ofthe period 1.81% 2.08% 2.08% 1.29% t.8t% 1.81% Concurrent with the issuance of the Prefened Trust Securities, Avista Capital II issued $ l 5 million of Common Trust Securities to the Company. These debt securities may be redeemed at the option of Avista Capital II at any time and mature on June I , 203 7. [n December 2000, the Company purchased $ I 0.0 million ofthese Preferred Trust Securities. The Company owns I 00 percent ofAvista Capital II and has solely and unconditionally guaranteed the payrnent ofdistributions on, and redemption price and liquidation amount for, the Preferred Trust Securities to the extent that Avista Capital II has funds available for such payments from the respective debt securities. Upon maturity or prior redemption ofsuch debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not include thesc capital trusts in its consolidatcd financial statemcnts as Avista Corp. is not the primary bcncficiary. As such, thc solc asscts of thc capital trusts are $5 I .5 million ofjunior subordinated deferrable interest debentures ofAvista Corp., which are reflected on the Condensed Consolidated Balance Sheets. Interest expense to affiliated trusts in the Condensed Consolidated Statements oflncome represents interest expense on these debentures. NOTE 8. FAIRVALT]E The carrying values ofcash and cash equivalents, accounts and notes receivable, accounts payable, and short-term borrowings are reasonable estimates of their fair values. Long-tenn debt (including current portion and material capital leases) and longterm 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 I measurement) and the lowest priority to fair values derived from unobservable inputs (Level 3 measurement). The three levels ofthe fair value hierarchy are defined as follows: Levcl I - Quoted prices are available in activc markcts foridcntical assets or liabilities. Activc markcts arc thosc in which transactions forthe assct 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 ma*ets included in Level I , but which are eith er 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 ofthese assumptions are observable in the marketplace throughout the full term ofthe instrument, can be derived from obsewable data or are supported by observable levels at which transactions are executed in the ma*etplace. Level 3 - Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with intemally devcloped mcthodologies that result in managcment's best estimate offair value. Financial asscts and liabilities arc classificd in their cntircty based on thc lowcst lcvel ofinput that is significant to the fair value mcasurcment. Thc Company's assessment ofthe significance ofa particular input to the fair value measurement requires judgment, and may affect the valuation offair value assets and liabilities and their placement within the fair value hierarchy levels. The determination ofthe fair values incorporates various factors that not only include the credit standing ofthe counterparties involved and the impact ofcredit enhancements (such as cash deposits and letten ofcredit), but also the impact of Avista Corp.'s nonperformance risk on its liabililies. 23 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 26 ot 71 Table of Contents AVISTA CORPORATION The following table sets forth the carrying value and estimated fairvalue of the Company's financial instruments not reported at estimated fairvalue on the Condensed Consolidated Balance Sheets as ofJune 30, 201 7 and December 3 l, 20 I 6 (dollars in thousands): June 30,2017 December 3 l,2016 Carrying Value Estimatcd Fair Value Carrying Value Estimated Fair Value Long-term debt (Level 2) Long-term debt (Level 3) Snettisham capital lease obligation (Level 3) Long-term debt to affiliated trusts (Level 3) June 30, 201 7 Assets: Energy comrnodity derivatives Lcvcl 3 cncrgy commodity dcrivativcs: Natural gas exchange agreement Forei gn currency ex change derivatives Interest rate swap derivatives Defened cornpensation assets: Fixed income securities (2) Equity securities (2) Total Liabilities: Energy commodity derivatives Level 3 energy commodity derivatives: Natutal gas exchange agreement Power exchange agreemenl Power option agreernent Intcrest mtc swap derivativcs Total 95 r,000 $ 677,000 60,953 51,547 1,076,925 $ 70t,924 62,600 43,042 $951,000 $ 677,000 62,160 5l,547 1,048,661 67 5 ,251 62,800 3 8,660 Total 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 ofestimated market prices from third party brokers for debt wirh similar risk and terms. The price ranges obtained from the third party brokers consistcd of par values of 83 .50 to I 28.8 7, wh cre a par valuc of I 00.0 rcprescnts the carrying valuc rccordcd on thc Condcnscd Consol idatcd Balancc Sh ccts. 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 ifthere is no trading activity near a pefiod end. Level 3 long-term debt consists ofprivate 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 ofthc Sncttisham capital leasc obligation, the estimatcd fair valuc ofthesc items was dctcrmined bascd on a discountcd 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 June 30,201 7. The following table discloses by level within the fairvalue hierarchy the Company's assets and liabilities measured and reported on the Condensed Consolidatcd Balancc Shects as ofJune 30, 20 I 7 and Dccember 3 I ,2016 at fair valuc on a recurring basis (dollars in thousands): Level I Level 2 Level 3 Counterparty and Cash Collateral Netting (l) $$35,198 $ 187 tl,302 $(3s,041) $ (7e) ( l ,853) 157 187 9,449 I,716 6,067 79 1.7 t6 6,067 $ 7.783 $ $ 46,687 S 79$(36,e73) $t7 ,57 6 $46,203 $ 80,266 $(44,808) S (7e) (43,423) 1,395 a )\) r3,'784 43 4,173 t3,784 43 3 6,843 $s 126.469 $18.079 $ (88,3 l0) S 56,238 24 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2,Page27 ot71 Table of Contents AVISTA CORPORATION Level I Level 3 Counterparty and Cash Col lateml Netting (l )Total December 31,2016 Assets: Energy commodity derivatives Level 3 energy commodrty derivatives: Natural gas exchange agreement Powcr cxchange agrcemcnt Foreign currency exchange derivatives Interest rate swap derivatives Deferred compensati on assets: Fixed income securities (2) Equity securities (2) Total Liabilities: Energy commodity derivatives Level 3 energy comrnodity derivatives: Natural gas exchange agreement Power exchange agreement Power option agreement Foreign currency exchange derivatives Intercst ratc swap dcrivativcs Total $7,270 $61,097 $ s $47.994 $ 5 r 3,098 $(46,099) $ (6e) (25) (s) (4,348) 1,895 8,750 1.789 5,481 69 25 1,789 5,481 94$(so,s46) $17,915 S $56,87 t $ 28 '7 3,97I 5,954 13,47 4 76 (6e) (2s) 9t4 5,885 13,449 76 23 34,730 $ (ss,957) $ (s) (39,248\ 19,s04 $ (9s,304) s 55,O77 (l) TheCompanyispermittedtonetderivativeassetsandderivativeliabilitieswiththesamecounterpadywhenalegallyenforceablemasternetting agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held or placcd with thcsc samc countcrparties. (2) These assets are trading securities and are included in other property and investments-net and other non-current assets on the Condensed Consolidated Balance Sheets. The difference between the amount ofderivative assets and liabilities disclosed in respective levels in the table above and the amount ofderivative assets and liabilitics discloscd on the Condcnscd Consolidated Balancc Shects is due to netting arrangements with ccrtain counterpartics. Sce Notc 3 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 Yort Mercantile Exchange (NYMEX) pricing for similar instruments, adjusted for basin differences, using market quotes. Where observable inputs are available for substantially the full term ofthe contract, the derivativc assct or liability is included in Levcl 2. To establish fair values for interest rate swap dcrivativcs, tlre Company uses forward market curves for intcrest rates for thc term ofthc swaps and discounts thc cash flows back to present value using an appropriate discount rate. The discount rate is calculated by third party brokers according to the terms ofthe swap derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash flows ofthe 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 cutrency derivatives, the Company uses forwand market curves for Canadian dollars against the US dollar and multiplies the differcnce bctwecn the locked-in price and thc markct pricc by thc notional amount ofthe dcrivative. Forward forcign currcncy markct curvcs are provided by thind party brokers. The Company's credit spread is factored into the locked-in price ofthe foreign exchange contracts. $$ 130,877 S Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista 25 Schedule 2, Page 28 ol 71 Level2 Table of Contents AVISTA CORPORATION Deferred compensation assets and liabilities represent funds held by the Company in a Rabbi Trust for an executive deferral plan. These firnds 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 $0.2 million as of June 30,2017 and $0.4 million as of December 3 I , 2016. Level 3 Fair Value Undcr the powcr cxchange agreemcnt thc Cornpany purchases power at a price that is based on thc avcrage opcrating and maintenancc (O&M) chargcs from three surrogate nuclear power plants around the country. To estimate the fair value ofthis agreement the Company estimates the difference between the purchase price based on the future O&M charges and forward prices for energy. The Company compares the Level 2 brokered quotes and forward price curves described above to an intem ally developed forward price which is based on the average O&M charges from the three sunogate nuclear power plants lor th e current year. Because the nuclear power plant O&M charges are only known for one year, alI forward years are estimated assuming an annual escalation. In addition to the forward pricc being cstimated using unobscrvable inputs, thc Company also cstimatcs thc volumes ofthe transactions that will take placc in the future based on historical average transaction volumes per delivery year (November to April). Significant increases or decreases in any ofthese inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the current year O&M charges for the surrogate plants is accompanied by a directionally similar change in O&M charges in future years. There is generally not a correlation between extemal market prices and the O&M charges used to develop the intemal forward price. For the power commodity option agreement, the Company uses the Black-Scholes-Merton valuation model to estimate the fair value, and this model includes significantinputsnotobservableorcorroboratedinthemarket.Theseinputsinclude: l)thestrikeprice(whichisaninternallyderivedpricebasedona combination ofgeneration plant heat rate factors, natural gas market pricing, delivery and other O&M charges) and 2) estimated delivery volumes. Significant increases or decreases in these inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, changes in overall commodity market prices are accompanied by directionally similar changes in the strike price assumptions used in the calculation. For thc natural gas commodity exchangc agrccment, the Company uscs the same Level 2 brokercd quotes dcscribcd above; lrowever, the Company also estimates the purchase and sales volumes (within contractual limits) as welI as the timing of those transactions. Changing the timing of volume estimates changes the timing ofpurchases and sales, impacting which brokered quote is used. Because the brokered quotes can vary significantly from period to period, the unobservable estimates ofthe timing and volume oftransactions can have a significant impact on the calculated fair value. The Company currently estimates volumes and timing oftransactions based on a most likely scenario using historical data. Historically, the timing and volume oftransactions have not bcen highly corrclated with markct prices and market votatility. The following table presents the quantitative information which was used to estimate the fair values ofthe Level 3 assets and liabilities above as ofJune 30, 20 I 7 (dollars in thousands): Fair Value (Net) at June 30, 20 I 7 Valuation Technique Unobservable Input Range Power exchange agreement $(l 3,784) Surrogate facility pnclng O&M charges Escalation factor Transaction volumes $33.59-$4e.lsA4Wh (l) 3%-2017 to2019 396,984 MWhs Power option agreement $(43)Black-Scholes- Merton Strike price Delivery volumes $35.92lMWh - 20t 9 s48.39/MWh - 201 8 128,611 -254,363 MWhs Natural gas exchange agreement s (4,173)Intemally derived weighted average cost ofgas Forward purchase pri ces Forward sales prices Purchasc volumcs Sales volumes $1.66 - $2.38/mmBTU $1.67 - $3.29lmmBTU I 15,000 - 310.000 mmBTUs 60,000 - 310,000 mmBTUs (l ) The average O&M charges for the delivery year beginning in November 20 I 6 are $39.22 per MWh. For ratemaking purposes the average O&M charges to be included for recovery in retail rates vary slightly between regulatory jurisdictions. The average O&M charges for the delivery year beginning in 20 I 6 are $44.33 for Washington ad $39.22 for Idaho. 26 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 29 ot 7'l Table of Cont€nts AVISTA CORPORATION The valuation methods, significant inputs and resulting fair values described above were developed by the Company's management and are reviewed on at least a quarterly basis to ensure they provide a reasonablc estimate offairvalue each reporting period. The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30 (dollars in thousands): Natural GasExchange PowerExchange PowerOptionAgreement Agreement Agrcement Total Three months ended June 30, 201 7: Balance as ofApril l, 20 I 7 Total gains or (losses) (realizedlunrealized): Included in regulatory assetsiliabilities (l ) Settlements Ending balance as ofJune 30,2011 (2) Three months ended June 30,2016: Balance as ofApril l, 20 I 6 Total gains or (losses) (realized/unrealized): Includcd in rcgulatory asscts/liabilitics (l ) Settlements Ending balance as ofJune 3 0, 20 I 6 (2) Six months ended June 30, 201 7: Balance as ofJanuary l. 20 I 7 Total gains or (losses) (rcalized/unrcalized): Included in regulatory assets/liabilities (l ) Settlements Ending balance as ofJune 30,2017 (Z) (4,278) $ (14,419) $(l 8,963) (43) $ (l 8,000) s (r e5) 300 (672) 1,307 (266) S 223 (644) I,607 $(4,t73) $ (r 3,784) $ $(6,006) $ (l,s5l ) 700 (20,1 93) $ 4,400 1,179 (97) $ (26,2e6) (8)2,841 1,879 s (6,8s7) $ (14,614) s (105) $ (21 ,576) S (s,885) $ (13,449) S ('16) s (re,4lo) 1,817 (l 05) (s,l 65) 4,830 (3,3 l s) 4,725 33 s (4,173) $ (13,784) S (43) $ (l 8,000) Six months ended June 30,201 6: Balance as ofJanuary | . 20 I 6 Total gains or (losses) (realized/unrealized): Included in regulatory assets/liabilities (l ) Settlements Ending balance as ofJune 30,2016 (2) s (s.039) s (2r,96r) $(124) S (27,t24) l9 (l,30e) 6,857 (3.2e6) 1,418 1,968 5,37 9 s (6,857) $ (r4,614) S (r05)$ (21,576) (l) Allgainsandlossesareincludedinotherregulatoryassetsandliabilities.Therewerenogainsandlossesincludedineithernetincomeorother comprehensive income during any ofthe periods presented in the table above. (2) Therewerenopurchases,issuancesortransfersfromothercategoriesofanyderivativesinstrumentsduringtheperiodspresentedinthetableabove, NOTE 9. COMMON STOCK In March 201 6, the Company entered into four separate sales agency agreements under which Avista Corp.'s sales agents may offer and sell up to 3.8 million new shares of Avista Corp.'s common stock, no par value, Aom time to time. The sales agency agreements expire on February 29,2020. As of June 30,2017 , 1 .6 million shares have bccn issucd under thcsc agrecmcnts, leaving2.2 million shares rcmaining to be issucd. No shares were issued under thesc agreemcnts in the six months ended June 30,2017 . In the six months ended June 30, 201 7, Avista Corp. issued 0.2 million shares of common stock, most of which were under employee incentive plans. The Company also issued a small number ofsharcs undcr the 401 (k) cmployee invcstment plan. Total net proceeds for all issuances were $ I .2 million. 27 Exhibit No. 3 Case Nos. AVU-E- l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 30 of 71 Table of Contents AVISTA CORPORATION NOTE I O. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO A\TISTA CORP. SHAREHOLDERS The following table presents the computation ofbasic and diluted eamings per common share attributable to Avista Corp. shareholders for the three and six months ended June 30 (in thousands, except per share amounts): Thrcc months cndcd June 30, Six months cnded Junc 30, 2017 201 6 201'7 20t6 Numerator: Net income attributable to Avista Corp. shareholders Denominator: Wcightcd-averagc numbcr of cornrnon shares outstanding-basic Effect of dilutive securities: Performance and restricted stock awards Weighted-average number of common shares outstanding-diluted Earnings per common share attributable to Avista Corp. shareholders: Basic Diluted s 2t.771 $ 27,254 $ 83,887 $ 84,903 64,40t 152 63,386 397 64.382 129 62,995 3'.73 64,553 63,783 64,511 63,368 s 0.34 $ 0.43 $r.30 $1.35 1.30 $1.34 Thcre wcrc no sharcs cxcludcd from thc calculation bccausc thcy wcre antidilutivc. NOTE I I. COMMITMENTS AND CONTINGENCIES In the course ofits business, the Company becomes involved in various claims, controversies, disputes and other contingent matters, including the items described in this Note. Some ofthese claims, controversies, disputes and other contingent matters involve litigation or other contested proceedings. For all such matters, the Company intends to vigorously protect and defend its interests and pursue its rights. However, no assurance can be given as to the ultimate outcome ofany particular matter because litigation and other contested proceedings are inherently subject to numerous uncertainties. For matters that affect Avista Utilities' or AEL&P's operations, the Company intends to seek, to the extent appropriate, recovery ofincurred costs through the ratemaking process. C alifo rnia Refund Pro c e e d i ng In February 2016, APX, a market makcr in the Califomia Refund Proceedings in whose markcts Avista Encrgy participatcd in the surnmcr of 2000, asscrted that Avista Energy and its other customer/participants may be responsible for a share of the disgorgement penalty APX may be found to owe to the Califomia Parties (as defined in the 20 I 6 Form I 0-K). The penalty arises as a result ofthe Federal Energy and Regulatory Commission's (FERC) finding that APX committed violations in the Califomia market in the summer of 2000. APX is making these assertions despite Avista Energy having been dismissed in FERC Opinion No. 536 fiom the on-going administrative proceeding at the FERC regarding potential wrongdoing in the Califomia markets in the summer of 2000. APX has idcntified Avista Energy's share ofAPX's exposure to bc as much as $ I 6.0 million cvcn though no wrongdoing allegations are specifically attributable to Avista Energy. Avista Energy believes its 2014 settlement with the Califomia Parties insulates it from any such liability and that as a dismissed party it cannot be drawn back into the litigation. Avista Energy intends to vigorously dispute APX's assertions ofindirect liability, but cannot at this time predict the eventual outcome. Cabinet Gorge Total Dissolved Gas Abatement Plan Dissolved atmospheric gas levels (referred to as "Total Dissolved Gas" or "TDG") in the Clark Fork River exceed state ofldaho and federal water quality numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of the Clark Fork Settlement Agreement (CFSA) as incorporatcd in Avista Corp.'s FERC licensc for the Clark Fork Project, Avista Corp. has workcd in consultation with agencies, tribes and other stakeholders to address this issue. Under the terms ofa gas supersaturation mitigation plan, Avista is reducing TDG by constructing spill crest modifications on spill gates at the dam, and the Company expects to continue spill crest modifications over the next several years, in ongoing consultation with key stakeholders. Avista Corp. cannot at this time predict the outcome or estimate a range ofcosts associated with this contingency; however, the Company will continue to seek recovery, through the ratemaking process, ofall operating and capitalized costs related to this i ssu e. 28 $0.34 S 0.43 S Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 31 ol71 Table of Contents AVISTA CORPORATION Fish Passage at Cabinet Gorge and Noxon Rapids In 1999, the United States Fish and Witdlife Service (USFWS) listed bull trout as threatened under the Endangered Species Act. In 201 0, the USFWS issued a revised designation ofcritical habitat forbull trout, which includes the lower Clark Fork River. The USFWS issued a final recovery plan in October 201 5. The CFSA dcscribcs programs intendcd to hclp rcstorc bull trout populations in the project arca. Using the conccpt ofadaptivc managcmcnt and working closely with the USFWS, the Company evaluated the feasibility of fish passage at Cabinet Gorge and Noxon Rapids. The results of these studies led, in part, to the decision to move forward with development ofpermanent facilities, among other bull trout enhancement effotts. Parties to the CFSA are working to resolve several issues. The Company believes its ongoing efforts through the CFSA continue to effectively address issues related to bull trout. Avista Corp. cannot at this time predict the outcome or estimate a range ofcosts associated with this contingency; however, the Company will continue to seek recovery, through thc ratcmaking proccss, ofall operating and capitalizcd costs related to fish passagc at Cabinct Gorgc and Noxon Rapids. Aher Contingencies In the normal course ofbusincss, thc Company has various other lcgal claims and contingcnt matters outstanding. Thc Company bclieves that any ultimate liability arising from these actions wilI not have a material impact on its financial condition, results ofoperations or cash flows. It is possible that a change could occur in the Cornpany's estimates ofthe probability or amount ofa liability being incuned. Such a change, should it occur, could be significant. See "Note I 9 ofthe Notes to Consolidated Financial Statements" in the 20 I 6 Form I 0-K for additional discussion regarding other contingencies. NOTE T2. INFORMATION BY BUSINESS SEGMENTS The business segment presentation reflects the basis used by the Company's management to analyze performance and determine the allocation ofresources. The Company's management evaluates performance based on income (loss) from operations before income taxes as well as net income (loss) attributable to Avista Corp. shareholders. The accounting policies ofthe segments arc the same as those described in the summary ofsignificant accounting policies. Avista Utilities'business is managed based on the total regulated utility operation; therefore, it is considered one segment. AEL&P is a separate reportable business segment as it has separate financial reports that are reviewed in detail by the ChiefOperating Decision Maker and its operations and risks are sufficiently different from Avista Utilities and the other businesses at AERC that it cannot be aggregated with any other operating segments. The Other category, which is not a reportable segment, includes other investments and operations ofvarious subsidiaries, as well as certain other operations ofAvista Capital. The following table presents information for each of the Company's business segments (dollars in thousands): Avisra iJfA:!:T:. ';ffi:::l[Ti Utilities Company Total Utility Other ( I ) Total For the three months ended June 30,2017: Opcrating rcvcnucs Resource costs Other operating expenses Depreciation and amortization Income (loss) from operations Interest expense (2) Income taxes Net income (loss) attributable to Avista Corp. shareholders Capital expenditures (3 ) s 296,7 47 S 9946t 78,970 4l ,195 53,971 22,826 12,892 2t ,'165 88,61 2 308,7 29 $ 102,7 5t 8l ,965 42,643 5 7,568 23,721 13,967 23,446 90,95 I 5,772 S (1,67s) 134 11 ,982 $ 3,290 2,995 I,448 ? 5q7 895 1,075 7,086 t57 (1 ,47 t) 176 (e16) s 3 I 4,501 t02,7 51 89,051 42,800 56,097 23,8'70 13,051 21 ,771 9 r,085 (27) 1,681 2,339 29 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2,Page32of 71 Table of Contents AVISTA CORPORATION Avista Utilities Alaska Electric Light and Powcr Company Total Utility Other Intersegment Eliminations(r)Total For the three months ended June 30, 201 6: Operating revenues Resource costs Other operating expenses Depreciation and amortization Income (loss) from operations hterest cxpcnse (2) Income taxes Net income (loss) attributable to Avista Corp. shareholders Capital expenditures (3) For the six months ended June 30,201 7: Operating revenues Resource costs Othcr opcrating cxpcnscs Depreciation and amortization Income (loss) from operations Interest expense (2) ]ncomc taxcs Net income (loss) attributable to Avista Corp. sharehol ders Capital expenditures (3) For the six months ended June 30,2016: Operating revenues Resource costs Other operating expenses Depreciation and amortization Income (loss) from operations Interest expense (2) Income taxes Net income (loss) attributable to Avista Corp. shareholders Capital expenditures (3) Total Assets: As ofJunc 30,2017: As ofDecember 3l,2Ol6: 10,247 $ 3,208 2,876 1,327 ) )<) 895 676 6,281 t92 (s23) 149 (3ls) S 302,641 $ 106,607 7 5,790 38,35 r 59,862 20,462 16,349 26,771 88,048 80,204 t74,ot5 702,788 S 265,685 149,046 76,2t7 t6t,l07 40,880 45,021 8l,758 17 2,483 s 5,034,778 S $ 4,97s,555 $ 1,058 5,8 89 27,138 $ 6,263 5,7 67 2,895 10,782 t,789 3,53 8 5,534 3,699 4,01 I 10,332 278,470 $ 273,770 $ 27,829 93,937 739,266 $ 268,337 156,449 84,628 173,388 47,298 47,447 85,73 8 t77 ,714 85,777 I 82,81 5 5,3t3,248 $ 5,249,325 $ (874) 165 59,7 56 S 60,43 0 $ 312,888 $ 109,815 7 8,666 39,678 62,114 2r,357 t7,025 5,95 0 $ (5 7s) 46 I 1,705 $ (l,8sl) 169 l 1,330 $ 318,838 109,815 84.947 39,870 6 I ,591 21,472 I 6,71 0 27,254 93,983 s 83,887 I 77,883 s 731 ,011 271,534 166,551 79,250 t67,676 42,883 47,055 84,903 182,980 s 5,3 73,004 $ 5,309,755 $ s '712,t28 $ 262,O'74 1 50,682 8l ,733 162,606 45,509 43,909 t3,265 345 (r,905) 343 (1,052) 7 50.91 | 268,337 169,7 t4 84,973 t'7 | ,483 47,600 46,395 (34) (41) $22,893 $ 5,849 5,399 2,653 7,725 t,790 2,57 | 725,68t $ 27 | ,534 154,445 78,870 I 68,832 42,6'10 47,592 12.106 380 (l,l s6) 310 (537) (e7) (l ) Intersegment eliminations reported as interest expense rcpresent intercompany interest.(2\ Including interest expense to affiliated trusts.(3) The capital expenditures forthe otherbusinesses are included in otherinvesting activities on the Condensed Consolidated Statements ofCash Flows. 30 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 33 of 71 Table of Contents AVISTA CORPORATION NOTE t3. SUBSEQT'ENT EVENT On July I 9, 20 I 7, Avista Corp. entered into an Agreement and Plan of Merger (Merger Agreement), by and among Hydro One Limited (Hydro One), Olympus Holding Corp., a wholly owncd subsidiary of Hydro One (US parent), and Olympus Corp., a wholly owned subsidiary of US parcnt (Mcrger Sub). Hydro Onc, based in Toronto, is Ontario's largest electricity transmission and distribution provider with more than I .3 mt llion customers, CS2 5.0 billion in assets and annual revenues ofover CS6.5 billion. Thc Mcrgcr Agrcemcnt providcs for Avista Corp. to bccomc an indircct, wholly-owncd subsidiary of Hydro One. At thc effcctive timc of thc mcrger, cach share ofAvista Corp. Common Stock issued and outstanding, other than Dissenting Shareholder Shares (as defined in the Merger Agreement) and shares of Avista Corp. Corrmon Stock that are owned by Hydro One, US Parent or Merger Sub or any oftheir respective subsidiaries, will be converted autornatically into the right to receive an amount in cash equal to $53.00, without interest. Consummation ofthe merger is subject to the satisfaction or waiver of specified closing conditions, including, but not limited to, (i) the approval ofthe merger by the holders ofa majority ofthe outstanding shares ofAvista Corp. Common Stock, (ii) the receipt ofregulatory approvals required to consummate the Mcrger, including approval ftom thc FERC, thc Committcc on Forcign Invcstmcnt in thc Unitcd Statcs (CFIUS), the Fcdcral Communications Commission (FCC), the IITC, IPUC, Public Service Commission of the State of Montana O4PSC), OPUC, and the RCA, and (iii) the expiration or termination ofthe applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of I 976, as amended. Avista Corp. expects to file for all necessary approvals within 45 to 60 days from the date ofthe Merger Agreement and the merger is expected to close during the second halfof2O 1 8. The Merger Agreement also contains customary representations, warranties and covenants ofAvista Corp., Hydro One, US Parent and Merger Sub. These covenants include, among others, an obligation on behalfofAvista Corp. to operate its business in the ordinary course until the Merger is consummated, subjcct to certain exccptions. ln addition, thc partics are rcquircd to usc rcasonable bcst cfforts to obtain any rcquired rcgulatory approvals. Avista Corp. has made cetain additional customary covenants, including, among others, and subject to certain exceptions, (a) causing a meeting ofAvista Corp.'s shareholders to be held to consider approval ofthe Merger Agreement and (b) a customary non-solicitation covenant prohibiting Avista Corp. from soliciting, providing non-public information or entering into discussions or negotiations conceming proposals relating to altemative business conrbination transactions, except as and to the extent permitted under the Merger Agreement with respect to an unsolicited written Takeover Proposal (as defined in the Merger Agreement) made prior to the approval of the Merger by Avista Corp.'s shareholders if, among other things, Avista Corp.'s board of directors determines in good faith that such TakeoverProposal is orcould be reasonably expected to lead to a SuperiorProposal (as defined in the MergerAgreelnent) and that failure to take such actions would reasonably be expected to be inconsistent with its fiduciary duties under applicable law. The Merger Agreement may be terminated by Avista Corp. and Hydro One by mutual consent and by either Avista Corp. or Hydro One under certain circumstanccs, including ifthc Mcrgcr is not consummated by Septcmbcr 30, 20 I 8 (subjcct to an cxtcnsion ofup to six months by cithcr party ifal I ofthc conditions to closing, other than the conditions related to obtaining required regulatory approvals, the absence ofa law or injunction preventing the consummation ofthe Merger and the absence ofa Burdensome Condition (as defined in the Merger Agreement) in any required regulatory approval, have been satisfied). The Merger Agreement also provides for certain additional termination rights for each of Avista Corp. and Hydro One. Upon termination of the Merger Agreement under certain specified circumstances, including (i) termination by Avista Corp. in order to enter into a definitive agreement with rcspcct to a Superior Proposal, or (ii) tcrmination by Hydro Onc following a withdrawal by Avista Corp.'s board or dircctors of its re commcndation of thc MergerAgreement, Avista Corp.will be required to pay Hydro One a termination fee of$103.0 million (Company Termination Fee). Avista Corp.will alsobe required to pay Hydro One the Company Tennination Fee in the event Avista Corp. signs orconsummates any specified altemative transaction within twelve months following the termination of the Merger Agreement under certain circumstances. ln addition, if the Merger Agreement is terminated under certain circumstances due to the failure to obtain required regulatory approvals, the imposition ofa Burdensome Condition with respect to a required regulatory approval, or the breach by Hydro One, US Parent or Merger Sub oftheir obligations in respect ofobtaining regulatory approvals, Hydro One will be required to pay Avista Corp. a termination fee of $ 103.0 million. 3l Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule2, Page3/.olTl Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOTINTING FIRM To the Board ofDirectors and Shareholders of Avista Corporation Spokane, Washington We have reviewed the accompanying condensed consolidated balance sheet ofAvista Corporation and subsidiaries (the "Company") as ofJune 30,201 7, and the related condensed consolidated statements ofincome and comprehensive income for the three-month and six-month periods ended June 30, 201 7 and20l6 andthc rclated condenscd consolidatcd statcmcntsofcquity and cash flowsforthc six-month pcriods cndcd Junc 30,2017 and 2016. Thcsc intcrim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards ofthe Public Company Accounting Overcight Board (United States). A review ofinterim financial information consists principally ofapplying analytical procedures and making inquiries ofpersons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards ofthe Public Cornpany Accounting Oversight Board (United States), the objective ofwhich is the expression ofan opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware ofany material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States ofAmerica. We have previously audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the consolidated balance shcct ofAvista Corporation and subsidiarics as ofDecember 3 I , 20 I 6, and the relatcd consolidated statcments ofincomc, comprchcnsive income, equity and redeemable noncontrolling interests, and cash flows for the year then ended (not presented herein); and in our report dated February 2l ,2017 ,we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as ofDecember 3 I , 20 I 6 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Seattle, Washington August 1,2017 32 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 35 of 71 Table of Contents AVISTA CORPORATION Item 2. Management's Discussion and Analvsis of Financial Condition and Results of Operations Management's Discussion and Analysis ofFinancial Condition and Results ofOperations has been prepared in accordance with GAAP for interim financial information and with the instructions to Form l0-Q. The interim Management's Discussion and Analysis of Financial Condition and Results of Operations does not contain the full detail or analysis which would be included in a full fiscal year Form I 0-K; therefore, it should be read in conjunction with the Company's 201 6 Fonn I 0-K. Business Sesments Our business scgments have not changcd during thc six months cndcd June 30, 20 1 7. Scc the 20 I 6 Form 1 0-K as wcll as "Note 1 2 ofthe Notes to Condensed Consolidated Financial Statements" for further information regarding our business segments. The following table presents net income (loss) attributable to Avista Corp. shareholders foreach ofourbusiness segments (and the otherbusinesses) forthe three and six months ended June 30 (dollars in thousands): Three rnonths ended June 30,Six rnonths ended June 30, 20t7 2016 201'7 2016 Avista Utilities AEL&P Other Net income attributable to Avista Corp. shareholders $ 83,887 $84,903 2t,765 $ I,68t (r,675) 26,771 $ 1,058 (57s) 80,204 $ 5,534 (1,85r) 81,758 4,01 9 (874) $2t .771 $ 27 .254 $ Executive Level Summarv Overull Results Net income attributable to Avista Corp. shareholders was $21 .8 million for the three months ended June 30, 2017, a decrease fiom $27.3 million for the three months ended June 30, 20 I 6. Net income attributable to Avista Corp. shareholden was $83.9 million for the six months ended June 30, 20 I 7, a decrease from $84.9 million for the six months ended June 30, 201 6. The decrease in eamings for both the second quarter and fint halfof20 I 7 was due to a decrease in eamings at Avista Utilities and an increase in losses at our othcr businesscs, partially offsct by an increase in eamings at AEL&P. Avista Utilities' eamings decreased for both the second quarter and year-to-date 20 I 7 due to an increase in other operating expenses, primarily due to an increase in generation, transmission and distribution maintenance costs, and increased depreciation and amortization and interest expense. As previously discusscd, our 20 I 6 requcsts for gencral rate increases in Washington were denicd; thercforc, we arc not recciving rcgulatory rccovery oftlrc increase in expenses. ln addition, there were also merger transaction costs incurred during the second quarter of20 I 7, which are not being passed through to customers. The increase in costs was partially offset by an increase in gross margin (openting revenues less resource costs) as a result ofgeneral rate increases in Idaho and Oregon, customer growth and lower electric resource costs. See "Results ofOperations - Overall - Non-GAAP Financial Measures" for further discussion of gross margin. AEL&P eamings increased for the second quarter and year-to-date 20 I 7 primarily as a result ofan increase in electric gross margin (operating revenues less resource costs), due to an intcrim general ratc increase and higher loads duc to coldcr weathcr in thc first quartcr, partially offsct by an increasc in operating expenses and a decrease in AFUDC and capitalized interest due to the construction ofan additional back-up generation plant in 20 I 6. The increase in losses at our other businesses for both the second quarter and year-to-date 20 I 7 was primarily related to renovation expenses and increased compliance costs at onc ofour subsidiaries and additional losses on investments as comparcd to 20 I 6. More detailed explanations ofthe fluctuations are provided in the results ofoperations and business segment discussions (Avista Utilities, AEL&P, and the other businesses) that follow this section. Recent Development On July I 9, 201 7, Avista Corp. entered into a Merger Agreement that provides for Avista Corp. to become an indirect, whol ly-owned subsidiary of Hydro One. Subject to the satisfaction or waivcr ofspccified closing conditions, the merger is expccted to close during thc second halfof20 I 8. At the effcctive time ofthe merger, each share ofAvista Corp. Common Stock issued and outstanding other than Dissenting Shareholder Shares (as defined in the Merger Agreement) and shares ofAvista Corp. Common Stock that are owned by Hydro One, US Parent or Merger Sub or any oftheir respective subsidiaries, will be converted automatically into th e right to receive an amount in cash equal to $53.00, without interest. For further information, see "Note I 3 of th e Notes to Condensed Consolidated Financial Statements" and Avista Corp.'s Current Report on Form 8-K filed with the SEC on July I 9, 20 I 7. 33 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 36 of 71 Table of Contrnts AVISTA CORPORATION Resulatory Matters General Rate Cases Wc rcgularly rcview thc nced for clcctric and natural gas ratc changcs in cach statc in which wc providc scrvicc. Wc expect to continue to file for ratc adjustments to: . seek recovery ofoperating costs and capital investments, and . seek the opportunity to eam reasonable retums as allowed by regulators. With regards to the tirning and plans for future filings, the assessment ofour need for rate reliefand tlre development ofrate case plans takes into consideration short-term and long-term needs, as well as specific factors that can affect the timing ofrate filings. Such factors include, but are not limited to, in-service dates ofmajor capital investments and the timing ofchanges in major revenue and expense items. Avista Urilities ll/ashington General Rate Cases 20 I 5 General Rate Cases In January 20 I 6, we received an order (Order 05) that concluded our electric and natural gas general rate cases that were originally filed with the UTC in Fcbruary 201 5. New clcctric and natural gas ratcs wcrc cffcctive on January 11,2016. Thc UTC-approved ratcs were designcd to providc a 1 .6 pcrccnt, or $8.1 million dccreasc in clcctric base revcnuc, and a 7 .4 pcrcent, or S 1 0.8 million incrcase in natural gas base revenue. The UTC also approved a rate ofretum (ROR) on rate base of7.29 percent, with a common equity ratio of48.5 percent and a 9.5 percent retum on equity (ROE). UTC Order Denying Industrial Customers of Northwest Utilities / Public Counsel Joint Motion.for Clarification, UTC StaffMotion to Reconsider and WC Staff Motion to Reopen Record On January 19,2O16, thc Industrial Customers ofNorthwcst Utilitics (lCNtI) and thc Public Counscl Unit of thc Washington Statc Officc of thc Attomey General (PC) filed a Joint Motion for Clarification with the UTC. In the Motion for Clarification, ICNU and PC requested that the UTC clarifo the calculation ofthe electric attrition adjustment and the end-result revenue decrease ofS8.l rnillion. ICNU and PC provided theirown calculations in their Motion, and suggested that the revenue decrease should have been $ 1 9.8 million based on their reading ofthe UTC's Order. On January i 9, 201 6, thc UTC Staff, which is a sepamte party in the gcncral ratc casc procccdings from thc UTC Advisory Staff, filcd a Motion to Reconsider with the UTC. In its Motion to Reconsider, the Staffprovided calculations and explanations that suggested that the electric revenue decrease should have been a revenue decrease of$27.4 rnillion instead of$8.1 million, based on its reading ofthe UTC's Order. Further, on February 4,2016,the UTC Stafffiled a Motion to Reopen Record forthe Limited Purpose of Receiving into Evidence Instruction on Use and Application of Stails Attrition Model, and sought to supplement the record "to incorporate all aspects of the Company's Power Cost Update." Within this Motion, UTC Staffupdatcd its suggcstcd electric rcvcnuc dccrease to $ I 9.6 million. None of the parties in their Motions raised issues with the UTC's decision on the natural gas revenue increase of $ 10.8 million. On February I 9, 20 I 6, the UTC issued an order (Order 06) denying the Motions summarized above and aflirming Order 05, including an $ 8.1 rnillion decrease in electric base revenue. PC Petitionfor Judicial Review On March I 8, 201 6, PC filed in Thurston County Superior Court a Petition for Judicial Review of the UTC's Order 05 and Order 06 described above that concluded our 20 I 5 electric and natural gas general rate cases. In its Petition for Judicial Review, PC seeks judicial review offive aspects of Order 05 and Order 06, alleging, among other things, that (l ) the UTC exceeded its statutory authority by setting rates for our natural gas and electric services based on amounts for utility plant and facilities that are not "used and useful" in providing utility service to customers; (2) the UTC acted arbitrarily and capriciously in granting an attrition adjustment for our electric operations after finding that the we did not meet the newly articulated standard regarding attrition adjustments; (3) the UTC ened in applying the "end results test" to set rates for our electric operations that are not supported by the record; (4) the UTC did not correct its calculation ofour electric rates after significant enors were brought to its attention; and (5) the UTC's calculation ofour electric rates lacks substantial evidence. 34 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2,Page37 ot71 Table 0f Contents AVISTA CORPORATION PC is requesting that the Court (l ) vacate or set aside portions ofthe UTC's orders; (2) identifu the errors contained in the UTC's orders; (3) find that the rates approved in Order 05 and reaffirmed in Order 06 are unlaufrrl and not fair, just and reasonable; (4) remand the matter to the UTC for further proceedings consistent with these rulings, including a determination ofour revenue requirernent for electric and natural gas services; and (5) find the customers are entitled to a refund. On April I 8, 20 I 6, PC filed an application with the Thurston County Supcrior Court to certify this matter for review directly by the Court ofAppeals, an intermediate appellate court in the State ofWashington. The matterwas certified on April 29,2016 and accepted by the Court ofAppeals on July 29,2016.The parties provide briefs to the Court, after which the Court will set the matter for argument. On July 7, 201 7, ICNU filed a brief in support ofPC. The UTC and Avista Corp. will respond on or before August 7, 20 I 7. Oral argument has been set for September 12,2017 before the court. A decision from the Court is not expected until late 20 I 7, at the earliest. In its briefto the Court, the UTC, while defending the use ofits attrition adjustment nevertheless requested a pa(ial remand back to the UTC to reevaluate the implementation ofour power cost update as part ofthe general rate case on appeal, doing so by means ofa supplemental evidentiary hearing. The power cost update at issue represents approx i mately $ I 2.0 million ofcosts. The new rates established by Order 05 will continue in effect while the Petition for Judicial Review is being considered. We believe the UTC's Order 05 and Order06 finalizing the electric and natural gasgeneral ratecasesprovide a reasonableend result forall parties. Ifthe outcome ofthejudicial review were to result in an electric rate reduction greater than the decrease ordered by the UTC, it may result in a refund liability to customers ofup to $9.5 million, which is net of an approximately $2.5 million refund for Washington electric customers related to the 201 6 provision for eamings sharing that we have already accrued. 2016 General Rate Cases On December 15,2016, the UTC issued an orderrelated to ourWashington electric and natural gas general rate cases that were originally filed with the UTC in February 201 6. The UTC order denied the Company's proposed electric and natural gas rate increase requests of $3 8.6 million and $4.4 million, respectively. Accordingly, our current clcctric and natural gas rctail rates rcmained unchanged in Washington Statc, following thc order. Our original requests were based on a proposed ROR of 7.64 percent with a common equity ratio of 48.5 percent and a 9.9 percent ROE. On December 23, 201 6 we filed a Petition for Reconsideration or, in the altemative, Rehearing (Petition) with the UTC related to our 2016 general rate cases. On February 27,2017,we received an order from the UTC denying our Petition and confirming its previous order in the case. In its order denying the Petition, the UTC generally referred back to its prior findings and conclusions. See the 20 I 6 Form I 0-K for a detailed discussion surrounding UTC's prior findings and the information included in our Petition. We determined that an appeal ofthe UTC's decision to the courts would involve a significant amount ofuncertainty regarding the level ofsuccess ofsuch an appeal, as well as the timing ofany value that might come following a process that would take between one and two years. The Company believes greater long-tcrm valuc can bc achievcd through focusing on new gcncral ratc cascs than through appealing the UTC'S dccision in the courts. Following the conclusion ofthc 20 1 6 case, wc mct with thc Commissioncrs to bctter undcrstand thcir conccms and thcir expcctations going forward. Thc Company also met with members of the Commission Staffand other parties to discuss needs and expectations prior to filing the next general rate case. While these meetings with the Commissioners and Staffwere constructive, there can be no assurance as to the outcome of any future general rate case. 2017 General Rate Cases On May 26,2017 ,we filcd two rcqucsts with the UTC to rccover costs relatcd to power supply and system maintcnance as wcll as capital invcstments made since the last determination ofour rate base in the 20 I 5 Washington general rate cases. The two filings are summarized as follows: Power Cost Rale Adjustmenl The first filing is an electric only power cost rate adjustment that would update and reset power supply costs, effective September l, 201 7. We requcstcd an ovcrall increase in billcd clcctric rates of2.9 pcrccnt (dcsigncd to incrcase annual elcctric revcnues by $ I 5.0 million). The key drivers behind this request are related to the expiration ofa capacity sales 35 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 38 of 71 Table of Contents AVISTA CORPORATION agreement with another utility and an increase in the price ofnatural gas to fuel our generating plants. Any new rates resulting from the power cost rate adjustment would expirc upon thc conclusion ofthc electric gcneral ratc case (discusscd in further detail bclow), ifapprovcd. On June 16, 201 7, ICNU filcd a Motion with the UTC to dismiss thc powcr cost ratc adjustmcnt filing, or in thc altemative, consolidate thc filing with the pending general rate case filing. The UTC Staffand PC filed rcsponses supporting ICNU's Motion. We expect the UTC to address the power cost rate adjustment by August 10,2017 , at which time they will either approve or deny the request or indicate additional steps that may be necessary. General Rate Requests Thc second request relates to electric and natural gas gcneral ratc cases. We filcd thrcc-year ratc plans for electric and natural gas and have rcquestcd the following for each year (dollars in millions): Electric Natural Gas Effective Date Proposed Revenue Increase Proposed Base Rate Increase Proposed Revenue Proposed Base Increase Rate Increase May 1.2018 (l ) May 1,2019(2) May 1,2020 (2) $ $ $ 61.4 14.0 t4.4 t2.s% $ 2.s% s 2.s% $ 8.3 +.1 4.4 9.3% 4.4% 4.4% (l) Thc$6l.4millionelcctricrcvcnueincrcaseincludesthc$l5.0millionpowercostratcadjustmcntdiscusscdabovc. (2) As a part ofthe electric rate plan, we have proposed to update power supply costs through a Power Supply Update, the effects ofwhich would also go into effect on May 1,2019 and May 1,2020. The requested revenue increases for20l9 and2020 do not include any powersupply adjustments. Our requcst is based on a proposed ROR of 7.76 perccnt with a common equity ratio of 50.0 percent and a 9.9 percent ROE. As a part ofthe thrcc-year ratc plan, ifapprovcd, we would not file anothcr gcneral rate casc until Junc I , 2020, with ncw rates cffcctive no earlier than May 1,2021. The major drivers ofthese general rate case requests is to recover the costs associated with our capital investments to replace infrastructure that has reaclred the end of its useful life, as well as respond to the need for reliability and technology investments required to maintain our integrated energy services grid. Among the capital investments included in the filings are: . Major hydroelectric investments at the Little Falls and Nine Mile hydroelectric plants. . Generator maintenance at the Kettle Falls biornass plant that wil I ensure efficient generation and operations. . The ongoing proj ect to systematically rcplace portions ofnatural gas distribution pipc i n our scrvice arca that wcrc installcd prior to I 98 7, as well as replacement ofother natural gas service equipment. . Transmission and distribution system and asset maintenance, such as wood pole replacements, feeder upgrades, and substation and transmission line rcbuilds to maintain rcliability for our customcrs. . Technology upgrades that support necessary business processes and operational efficiencies that allow us to effectively manage the utility and serve customers. . A refresh ofthe customer-facing website, providing relevant information, greater accessibility on mobile devices, easier navigation, and a streamlined payment experience. The UTC has up to I I months to review the general rate case filings and issue a decision. AMI Project in ll'ashington State In March 20 1 6, the UTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value ofour existing Washington electric meters for the opportunity for later recovery. This accounting treatment is related to our plans to replace approximately 253,000 of our existing electric meters with new two-way digital meters and the related software and support services through our AMI project in Washington State. Replacement of the meters is expected to 36 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2, Page 39 of 71 Teble of Contents AVISTA CORPORATION begin in the second halfof2O I 8. As ofJune 30, 20 I 7, the estimated undepreciated value for the existing meten is $ I 9.8 million. In April 20 I 7, we identified approximately 70,000 natural gas encoder receiver transmitters (ERTs) that will need to be replaced as part ofthe AMI project. In May 201 7, we filcd a Pctition with thc UTC requesting defcncd accounting treatmcnt for thc invcstmcnt costs associated with thc Washington AMI project. including components such as meter communication networks, information management systems and the natural gas ERTs. The Petition requests the deferral and inclusion in a regulatory asset ofall AMI investment costs overthe rnulti-yearimplementation period, until the costs can be reviewed forprudence in a future regulatory proceeding and recovered in retail rates. The undepreciated value ofthe natural gas ERTS is approximately $3.7 million. Idaho General Rale Cases 20 I 6 General Rate Case In December 20 I 6, the IPUC approved a settlement agreement between us and other parties in our electric general rate case, concluding our Idaho electric general rate case originally fited in May 20 I 6. New rates took effect on January I , 201 7 under the settlement agreement. We di d not fi le a natural gas general ratc case in 20 I 6. Thc settlcment agrcement incrcased annual clcctric basc rates by 2.6 pcrccnt (dcsigncd to incrcase annual clcctric rcvenues by $6.3 million). Thc settlcment revenue increase is based on a ROR of7.58 percent with a common equity ratio of50 percent and a 9.5 percent ROE. In addition to the agreed upon increase in electric revenues to recover costs primarily driven by our increased capital investments in infrastructure to serve customers, the settlement agreernent includes the continued recovery ofapproximately $4.1 million in costs related to the Palouse Wind Project through the Power Cost Adjustment (PCA) mechanism rather than through base rates. ln our original request we requested an overall increase in base electric rates of6.3 percent (designed to increase annual electric revenues by $ I 5.4 million), effective January 1,2017 . Our original request was based on a proposed ROR of7.78 percent with a common equity ratio of50 percent and a 9.9 percent ROE. 20 I 7 General Rale Cases On June 9, 201'l,we filed electric and natural gas general rate requests with the IPUC to recover increased power supply costs and capital investments made since the last determination ofourrate base in the 2016 Idaho electric general rate case and the 2015 Idaho natural gas general rate case. We filed two-year rate plans for electric and natural gas and have requested the following for each year (dollars in millions): Electric Natural Gas Effective Date Proposcd Revcnue Increase Proposcd Basc Rate Increase Proposcd Revcnue Increase Proposcd Basc Rate Increase January 1,2018 $ 18.6 7.5% S 3.5 8.801" January 1,2019 (l) $ 9.9 3.7% $ 2.1 5.0% (l) Wearenotproposingtoupdatebasepowersupplycostsforyeartwooftherateplan,butratherhaveanydi{ferencesflowthroughthePCAmechanism. Our requests are based on a proposed ROR of 7.81 percent with a common equity ratio of 50.0 percent and a 9.9 percent ROE. As a part ofthe two-year rate plan, ifapproved, we would not file a new general rate case for a new rate plan to be effective prior to January l, 2020. The major drivers ofthese general rate case rcquests is to recover thc costs associated with our capital investments to replace infrastructure that has reached the end ofits useful life, as well as respond to the need for reliability and technology investments required to maintain our integrated energy services grid. Arnong the capital inveshnents included in the filings are: . Generator maintcnance at the Kettle Falls biomass plant that will ensure efficient gcncration and operations. . The ongoing proj ect to systematically replace portions ofnatural gas distribution pipe in our service area that were installed prior to I 9 8 7, as well as replacement of other natural gas service equipment. 37 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 40 of 71 Table of Con(ents AVISTA CORPORATION . Transmission and distribution system and asset maintenance, such as wood pole replacements, ibederupgrades, and substation and transmission line rebuilds to maintain reliability for our customers. . Technology upgrades that support necessary business processes and operational efficiencies that allowus to effectively manage the utility and serve customers. . A rcfresh ofthc customer-facing websitc, providing rclcvant information, grcater accessibility on mobilc dcviccs, casicr navigation, and a streamlined payment experience. A procedural schedule has been agreed to by the parties in the case, and recommended to the IPUC, which would result in an IPUC decision on orbefore January l, 201 8. Oregon General Rate Cases 20 I 5 General Rale Case On Fcbruary 29,2016, thc OPUC issued a preliminary order (and a final ordcr on March 15, 2016) concluding our natural gas gencral ratc case, which was originally filed with the OPUC in May 20 I 5. The OPUC order approved rates designed to increase overall billed natural gas rates by 4.9 percent (designed to increase annual natural gas revenues by $4.5 million). New rates went into effect on March I , 20 I 6. The final OPUC order incorporated two partial settlement agreements which were entered into during November 20 I 5 and Janu ary 2016. The OPUC order provides for an overall authorized ROR of 7.46 percent with a common equity ratio of 50 percent and a 9.4 percent ROE. The November 201 5 partial settlement agreement, approved by the OPUC, included a provision for the implementation of a decoupling mechanism, similar to the Washington and Idaho mechanisms described below. See further description and a summary of the balances recorded under this mechanism below. 20 I 6 General Rate Case On May 16,2017, an all-party settlement agreement was filed with the OPUC, which, if approved by the OPUC, would resolve all issues in the case and new rates would take effect on October I , 20 I 7. The settlement proposes that, effective October I , 20 I 7, we would receive an increase in rates designed to increase annual base revenues by 5.9 percent or $3.5 million. In addition, in the settlement agreement, we agreed to non-recovery ofcertain utility plant expenditures, which resulted in a write-offof approximately $0.8 million in the second quarterof20l 7. The proposed settlement agreement reflects a 7.35 ROR with a comrnon equity ratio of 50 percent and a9.4 percent ROE. Alaska Electric Light and Power Compan! Alaska General Rate Case In Scptember 2016, AEL&P filed an clcctric gencral ratc case with the RCA. AEL&P was granted a rcfundable intcrim basc mte incrcasc of 3.86 perccnt (designed to increase electric revenues by $ I .3 million), which took effect in November 20 I 6. AEL&P has also requested a permanent base rate increase ofan additional 4.24 percent (designed to increase electric revenues by $ I .5 million), which, ifapproved, could take effect in February 201 8. This represents a combined total rate increase of8.1 percent (designed to increase electric revenues by $2.8 million). Included in the general rate case are additional annual revenues of$2.9 million from the Greens Creek Mine, which offsets a portion ofthe rate increase to retail customers that would otherwise occur. The RCA must rule on pennanent rate increase requests within 450 days (approximately l 5 months) from the date offi[ing, unless otherwise extended by consent ofthe parties. The timeline forthe AEL&P general rate case, with the consent ofthe parties, was extended to February 8,2018. The rate request is based largely on the addition ofa new backup generation plant (Industrial Blvd. Plant) to rate base. Avista Utiliries Purchased Gas Adj ustments PGAs are designed to pass through changes in natural gas costs to Avista Utilities' customers with no change in gross margin or net income. In Oregon, we absorb (cost or benefit) I 0 percent ofthe difference between actual and projected gas costs included in retail rates for supply that is not hedged. Total net defened natural gas costs among all jurisdictions were a liability of $29.0 million as of Jun e 30,2017 and a liability of $3 0.8 million as of December 3 I , 20 I 6. These balances represent amounts due to customers. 38 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 41 ot 7'l Tablc of Contents ,4VISTA CORPORATIO,N Power Cost Deferrals and Recovery Mechanisms The ERM is an accounting method used to track certain differences between Avista Utilities'actual power supply costs, net ofwholesale sales and sales of fucl, and thc amount included in base rctail ratcs for our Washington customcrs and dcfer thcse diffcrcnccs (over thc $4.0 million deadband and sharing bands) for future surcharge or rebate to customers. See the 20 I 6 Form I 0-K for a full discussion ofthe mechanics ofthe ERM and the various sharing bands. Total net deferred powercosts underthe ERM was a liability of $23.5 million asofJune30,2OlT,compared to a liability of$21.3 million asof December3l, 20 I 6. These deferred power cost balances represent amounts due to customers. AvistaUtilitieshasaPCAmechanisminldahothatallowsustomodi$,electricratesonOctoberl ofeachyearwithIPUCapproval.UnderthePCA mechanism, we defer 90 percent ofthe difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho customers for future surcharge or rebate to customers. The October I rate adjustments recover or rebate power supply costs defened during the preceding July- June twelve-month period. Total net power supply costs deferred under the PCA mechanism were a liability of$7.4 million as ofJune 30,2017 and a liability of$2.2 rnillion as ofDecember 3 [ , 20 I 6. These deferred power cost balances represent amounts due to customers. Decoupling and Earnings Sharing Mechanisms Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers'energy usage. In each ofAvista Utilities'jurisdictions, each month Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number ofcustomers in certain customer rate classes and assumed "normal" kilouatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. The difference between revenues based on the numbcr ofcustomers and revcnues bascd on actual usage is dcfcrrcd and cither surchargcd or rcbatcd to customcrs bcginning in thc following ycar. Only the residential and commercial customerclasses are included in ourdecoupling mechanisms described below. llashington Decoupling and Earnings Shuring Mechanisms ln Washington, the UTC approved our decoupling mechanisms for electric and natural gas for a five-year period beginning January I , 20 I 5. Electric and natural gas decoupling surcharge rate adjustments to customers are limited to a 3 percent increase on an annual basis, with any remaining surcharge balance carricd forward for recovcry in a futurc pcriod. There is no limit on thc lcvel ofrcbatc ratc adjustmcnts. The decoupling mechanisms each include an after-the-fact eamings test. At the end ofeach calendar year, separate electric and natural gas eamings calculations are made for the calendar yearjust ended. These eamings tests reflect actual decoupled revenues, normalized power supply costs and other nonnalizing adjustments. The operation ofthe Washington decoupling and eamings sharing mechanisms has not changed for the six months ended June 30, 201 7. These decoupling and eamings sharing mechanisms are more fully described in the 201 6 Form I 0-K. See below for a summary of cumulative balances under the decoupling and eamings sharing mechanisms. Idaho Fixed Cost Adjustment (FCA) and Eantings Sharing Mechanisms In Idaho, the IPUC approved the implementation ofFCAs for electric and natural gas (similar in operation and effect to the Washington decoupling mechanisms) for an initial term ofthree years, beginning January I , 20 I 6. For the pcriod 20 I 3 through 20 I 5, we had an after-thc-fact camings test such that ifAvista Corp., on a consolidatcd basis for clcctric and natural gas operations in Idaho, eamed more than a 9.8 percent ROE, we were required to share with customers 50 percent of any eamings above the 9.8 percent. This after-the-fact eamings test was discontinued, effective January I , 20 I 6, as parl ofthe settlement ofour 20 I 5 Idaho electric and natural gas general rates cases. See below for a summary ofcumulative balances under the decoupling and eamings sharing mechanisms. Oregon Decoupling Mechanism In February 2016, the OPUC approved the implementation of a decoupling mechanism fornatural gas, similarto the Washington and Idaho mechanisms described above. The decoupling mechanism became effective on March I , 20 I 6. There will be an opportunity for interested parties to review the mechanism and recommend changes, ifany, by September20l9. An eamings review is conducted on an annual basis, which is filed by us with the OPUC on orbefore June I ofeach year for the prior calendar year. In the annual eamings review, ifwe eam more than I 00 basis points above our allowed retum on equity, one- third ofthe eamings above the I 00 basis points would be defened and later retumed to customers. See below for a sumlnary ofcumulative balances under the decoupling and eamings sharing mechanisms. 39 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 42 o'f 71 Table of Contents AVISTA CORPORATION Cumulative Decoupling and Earnings Sharing Mechanism Balances As ofJune 30,2017 and December 3 I , 20 I 6, we had the following cumulative balances outstanding related to decoupling and eamings sharing mechanisms in our variousjurisdictions (dollars in thousands): Junc 30, 201'7 Dccembcr 3 l, 201 6 Washington Decouplingsurcharge S 24,031 $ 30,408 Provision for eamings sharing rebate (5,860) (5,1 I 3) Idaho Decoupling surcharge $ 6,345 $ 8,292 Provision for eamings sharing rebate (3,73 I ) (5,1 84) Oregon Dccoupling surchargc (rcbate) $ (1 9) $ 2,021 Scc "Rcsults ofOpcrations - Avista Utilitics" for furthcr discussion ofthc amounts rccordcd to opcrating rcvcnucs in 20 I 7 and 20 I 6 relatcd to thc dccoupling and eamings sharing mechanisms. Results ofOoerations - Overall The following provides an overview ofchanges in our Condensed Consolidated Statements oflncome. More detailed explanations are provided, particularly for opcrating revcnucs and operating cxpcnses, in the busincss scgment discussions (Avista Utilitics, AEL&P, and thc othcr busincsscs) that follow this sect i on. The balances included below for utility operations reconcile to the Condensed Consolidated Statements oflncome. Thrce months ended June 30,201 7 comparcd to the three months ended June 30,201 6 The following graph shows the total change in net income attributable to Avista Corp. shareholders for the second quarter of20 1 6 to the second quarter of 201 7, as well as the various factors that caused such change (dollars in millions): s7.1 93.7 S{0.2) s(o.E) s13.3)s(3.o) s{4.2)s(4.8) frher s1s.5l Tot.lchangeinNd uililyR*nG costs UtalltyoFatq Uilityoqdtff h-Utlity IncmelartEn* &fnss sndAmortbdion Op.iltlq Eens6 6nd 0erela{on andAmontadlon Utility revcnues dccrcased due to a decreasc at Avista Utilitics, partially offsct by an increasc at AEL&P. Avista Utilities'rcvenucs decrcased primarily due to a decrease in electric and natural gas wholesale sales and a change in the electric provision for eamings sharing. These revenue decreases were partially offset by an electric general mte increase in ldaho, a natural gas general rate increase in Oregon and higher retail electric and natural gas heating loads due to customer growth and weather that was cooler than the prior year. There were electric decoupling surcharges during both the second quarter of20 I 7 and 20 I 6 and natural gas decoupling surcharges during the second qua(er of20 I 6, but there was a natural gas decoupling rebate during the second quarter of20 I 7. The surcharges were larger in 20 I 6 because weather was warmer than normal during that period. AEL&P's revenues increased primarily due to a general rate increase and higher retail heating loads due to weather that was cooler than the prior year. There was also a slight increase in the number ofcustomers at AEL&P. Utility resource costs decreased due to a decrease at Avista Utilities, partially offset by a slight increase at AEL&P. Avista -i0 '-.1:o:.o d6.D o omOooi.Ea6oIIO o Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista 40 Schedule 2, Page 43 ot 7'l Table of Contents AVISTA CORPORATION Utilities'electric rcsource costs decreased due to a decrease in purchased power, resulting from a decrease in volumes and a decrease in wholesale prices, as well as a decrease in fuel for generation resulting from higher hydroelectric generation and lower thermal generation. The increase in utility other operating expenses was due to an increase at Avista Utilities and a slight increase at AEL&P. The increase at Avista Utilities'was the result ofan increase in generation, transmission and distribution maintenance costs, as well as a write-offin Oregon ofutility plant associated with a gcneral rate case settlemcnt. Thcre wcrc also mcrgcr transaction costs incurred during thc sccond quartcr of20 I 7, which are not being passcd through to customers. The increased costs were partially offset by decreases in pension, other postretirement benefit and medical expenses. Utility depreciation and amortization increased due to additions to utility plant. Non-utility other operating expenses increased primarily due to renovation expenses and increased compliance costs at one ofour subsidiaries. Income taxes decreased due to a decrease in income before income taxes. Our effective tax rate was 3 7.5 percent for the second quarter of20 I 7 compared to 3 8.0 percent for the second quarter of20 I 6. Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 I 7 as compared to 20 I 6 and partially due to an increase in the overall interest rate. Also, there was an increase in utility taxes other than income taxes primarily due to revenue related taxes and property taxes. Lastly, there was an increase in losses on investments at our subsidiaries. Six months ended June j0, 201 7 compored to the six months ended June 30, 201 6 The following graph shows the total change in net income attributable to Avista Corp. shareholders for the six months ended June 30, 201 6 to the six months ended June 30,2017, as well as the various factors that caused such change (dollars in millions): s11.6 So.7 s{10.0) ohe' sr.2 S4.a s(1.r)S(1.o) s{s.8) s{2.0) TolalCh3nF in H UrilityR*enu6 Utility revenues increased due to increases at both Avista Utilities and AEL&P. Avista Utilities'revenues increased primarily due to an electric general rate increase in ldaho, a natural gas general rate increase in Oregon and higher retail electric and natural gas heating loads due to customer growh and weather that was cooler than the prior year. The increased utility revenues were parlially offset by decoupling rebates in the first halfof20 1 7 due to weather that was cooler than normal. This compares to decoupling surcharges during the first halflof2O I 6. These increases were partially offset by a change in the electric provision for camings sharing, which increascd revcnuc during 20 I 6 (due to a reduction to thc 20 I 5 provisions in Washington and Idaho rccorded in 20 I 6). AEL&P's revenues increased primarily due to a general rate increase and higher retail heating loads due to weather that was cooler than the prior year. Utility resource costs decreased due to a decrease at Avista Utilities, partially offset by a slight increase at AEL&P. Avista Utililies'electric resource costs decreased due to a decrease in purchased power, resulting liom a decrease in wholesale prices, partially offset by an increase in volumes, and a decrease in fuel forgeneration resulting from higherhydroelectric generation and lowerthermal generation. The increase in utility other operating expenses was due to an increase at Avista Utilities and a slight increase at AEL&P. The increase at Avista Utilities'was the result ofan increase in generation, transmission and distribution maintenance costs, as well 4l non-utlity &ililyR6drce WliryOF.tB uilityorydah h-Utlw tncmeT.r€rn*.i.Bres CGts ErFn$s .nd Amftffi OF.6dhg Ery$6 and OerdsfiondAMtradm mA, 55'a mo f. l0q o o0 .D o 0o oo o Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 44 oI 71 Iaus-s(.es$e!l! AVISTA CORPORATION as a write-offin Oregon ofutility plant associated with a general rate case settlement. There were also merger transaction costs incurred during the second quarter of20 I 7, which are not being passed through to customers. The increased costs \vere partially offset by decreases in pension, other postretirement benefit and medical expenses. Utility depreciation and amortization increased due to additions to utility plant. Non-utility other operdting expenses increased primarily due to renovation expenses and increased compliance costs at one ofour subsidiaries. Incomc taxes decrcased primarily due to a decrcasc in income bcfore incomc taxcs. Our cffcctive tax ratc was 3 5.6 pcrcent for thc first six months of 2017 and 2016. Other was primarily related to an increase in interest expense, due to additional debt being outstanding during 20 I 7 as compared to 20 I 6 and partially due to an increase in the overall interest rate. Also, there was an increase in utility taxes otherthan income taxes prirnarily due to revenue related taxes and property taxes. Lastly, there was an increase in losses on investments at our subsidiaries. Non4AAP Financial Measures The following discussion for Avista Utilities includes two financial measures that are considered "non-GAAP financial measures," electric gross margin and natural gas gross margin. In the AEL&P section, we include a discussion of electric gross margin, which is also a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure ofa company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. The presentation ofelectric gross margin and natural gas gross margin is intended to supplement an understanding ofoperating performance. We use these measures to determine whether the appropriate amount ofrevenue is being collected from our customers to allow for the recovery ofenergy resource costs and operating costs, as well as to analyze how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our rcsults ofopcrations. In addition, we present clectric and natural gas gross margin scparatcly bclow for Avista Utilities since each business has different cost sources, cost recovery mechanisms and jurisdictions, such that separate analysis is beneficial. These measures are not intended to replace income from operations as determined in accordance with GAAP as an indicator ofoperating perfonnance. The calculations ofelectric and natural gas gross margins are presented below. Results of Onerations - Avista Utilities Three months ended fune 30, 201 7 compared to the three months ended June 30, 201 6 The following table presents Avista Utilities'operating revenues, resource costs and resulting gross margin for the three months ended June 30 (dollars in thousands): Electric Natural Gas Intracompany Total 20t'l 2016 20t7 2016 20t7 2016 2017 2016 Operating revenues $ 230,558 69,427 $ l6l,l3l $ 234,791 $ 73,350 80,430 $ 44,27 5 80,955 $ 46,362 04.241) $ (14,241) (r 3,r os) $ (13,10s) 296,7 47 $ 99,461 302,641 106,607Resource costs Gross margin $ I 6l ,441 $ 36,1 55 S 34,593 $$s 197.286 S 196,034 The gross margin on electric sales decreased $0.3 million and the gross margin on natural gas sales increased $1.6 million in the second quarterof2017 compared to the second quarter of20 I 6. The slight decrease in electric gross margin was primarily due to a change in the provision for eamings sharing (which reduced electric grossmargin by $2.0 million for2017 ascompared to 2016),mostly offsetby ageneral rate increase in Idaho,customergroMh and lower resource costs. For the second quarter of 201 7, we had a $0.6 million pre-tax benefit under the ERM in Washington, compared to a $0.2 million pre-tax expense for the second quarter of20 I 6. For the full year of20 I 7, we expect to be in an expense position under the ERM within the $4 million deadband because power supply costs were not reset for 2017 since our 20 I 6 request for a general electric rate increase in Washington was denied. Ifpower supply costs are reset in our Power Cost Rate Adjustment request, we would expect to be in a benefit position under the ERM within the $4 million deadband for the full year of 2017 . See furtlrer discussion of the Washington order in "Item 2. Management's Discussion and Analysis - Regulatory Matters." Thc incrcase in natural gas gross margin was primarily duc to a general rate increasc in Orcgon and customcr growth. Intracompany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the condensed consolidated financial statcments but arc included in the scparatc results for electric and natural gas prcscnted bclow. 42 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 45 of 71 Table of Contents AVISTA CORPORATION The following graphs present Avista Utilities'utility electric operating revenues and megawatt-hour (MWh) sales for the three months ended June 30 (dollars in rnillions and MWhs in thousands): Electric Operating Revenues s7{ I s7j..r $71 ? so? i $:7 r 3:6 e $:? 7 $r7 0 t: l.e S:0.8 $ti s $18: Rt rr\grrrr"r\ (.rrrrrrrctgr'$ \.r.\rsrrrr\ \\h..Ni$c qrr\c;oitrrt\ n;;;ttlilit, I totT :{J l6 (1 ) This balancc includes public street and highway lighting, which is considered part ofretail electric revenues and it also includcs revenues and rebates from decoupling. Electrir Energ.v lllWh Sales r{:J *csrr\e$lt$Cotrrorergf$fttsttt$S\\r\t'\cs$'l I l0r7 I :or() 43 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 46 of 71 n 75t 7tu 75S ?t0 J.r i .r iN Table of Contcnts AVISTA CORPORATION The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms by jurisdiction that are reflected in utility electric operating revenues for the three months ended June 30 (dollan in thousands): Electric Operating Revenues 2017 2016 Washington Decoupling surcharge S 3,661 $ 4,553 Provisionforeamingssharing(l) (130) 1,119 Idaho Decoupling surcharge $ 862 $ 2,651 Provision foreamingssharing (2) nla 7ll ( | ) The provision for eamings slraring in Wash ington for the second quarter o f 2 0l 7 represents an adj ustrnent of the 20 1 6 provision for eamings sharing. We are not expecting aprovision foreamings shanng in Washington relating to 2017 eamings. Theprovision foreamings sharing in Washington in thesecondquarterof20l6resultedfroma$l.2millionreductioninthe20l5provisionforeamingssharing(whichincreased20l6revenues),partially offset by a $0.1 million provision forthe sccond quarterof20l6. (2) The provision for eamings sharing in ldaho in the second quarter of 201 6 resulted from a reduction in the 201 5 provision fbr eamings sharing (which increased 20 I 6 revenues). Beginning in 20 I 6 there is no longer an eamings sharing mechanism in Idaho. Total electric revenues decreased 54.2 rnillion for the second quarter of20 I 7 as compared to the second qua(er of20 I 6 primarily reflecting the following: . a S7.0 rnillion increase in retail electric revenue due to an increase in total MWhs sold (increased revenues $3.8 million) and an increase in revenue perMWh (increased revenues $3.2 million). . The increase in total retail MWhs sold was the result ofweather that was cooler than the prior year (which increased electric heating loads, partially offset by a decrease in cooling loads), as well as customer groMh. Compared to the second quarter of20 I 6, residential electric use per customer increased 6 percent and commercial use per customer decreased 2 percent. Heating degree days in Spokane were I 2 percent below normal, but 45 percent above the second quarter of20 I 6. Cooling degree days in Spokane were 54 percent above normal, but 1 2 pcrcent below thc sccond quartcr of20 I 6. " The increase in revenue per MWh was primarily due to a gen eral rate increase in Idaho an d a greater portion of retail revenues from residential customers in the second quarter of20 I 7. . aSl0.l milliondecreaseinwholesaleelectricrevenuesduetoadecreaseinsalesprices(decreasedrevenues$7.2rnillion)andadecreaseinsales volumes (decreased revenues $2.9 million). The fluctuation in volurnes and prices was primarily the result of our optimization activities. . a$l.l millionincreaseinsalesoffuel duetoanincreaseinsalesofnatural gasfuelaspartofthermal generationresourceoptimizatronactivities.For the second quarter of20 I 7, $5.3 million ofthese sales were made to our natural gas operations and are included as intracornpany revenues and resource costs. For the second quarter of20 I 6, $8.0 million ofthese sales were made to our natural gas operations. . a $2.7 million decrease in electric revenue due to decoupling. Weath er was gen erally warmer than n ormal in both pen ods, wh ich tesulted in decoupling surcharges for both the second quarter of 2017 and 20 | 6; however, the surcharges were larger during 20 I 6 since the weather diflered morc from normal in 20 I 6 than it did itr 2017 . Dccoup ling mcchanisms arc not impactcd by fluctuations in weathcr comparcd to prior ycar, thcy arc only impacted by weather fluctuations as compared to nomal weather. 44 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2,Page47 of71 Table of C-ontents AVISTA CORPORATION The following graphs present our utility natural gas operating rcvenues and therms delivered for the three months ended June 30 (dollars in millions and therms in thousands): Naturll Gas Operating Revenues !i{ f.i $r? (:$l') (t $15 0 sl6 7 st3 6 sl0: s.l ,l fteltNrt\l$COrts*rcrt\\i\at'\ci''{c '$'[llih'' I lolT I :016 (l ) This balance includes intemrptible and industrial revenues, which are considered part ofretail natural gas revenues and it also includes revenues and rebates from decoupling. Therms Delivered l5l.{il: ee.s8i -jl.qll {5.63{ { t.07.t ::,-ieS :0.:e7 I 5. t(}l Bcs\t\'r$rl$Col$$1€r$'$\\\1Ns''ie Otrsl :0r7 I :uro 45 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2,Page48of 71 Table of Contents AVISTA CORPORATION The following table presents Avista Utilities'decoupling and customer eamings sharing mechanisms byjurisdiction that are reflected in utility natural gas operating revenues for the three months ended June 30 (dollars in thousands): Natural Gas Opcrating Revenues 2017 2016 Washington Decoupling surcharge $ 30 S 3,595 Provision for eamings sharing (61 7) (320) Idaho Decoupling surcharge (rebate) $ (106) $ 589 0regon Dccoupling surcharge (rcbate) $ (121) $ 1,690 Total natural gas revenues decreased S0.5 million for the second quarter of20 1 7 as compared to the second quaner of20 I 6 primarily reflecting the following: . a $ I 0.3 million increase in natural gas retail revenues due an increase in volumes (increased revenues $ I 4.4 million), partially offset by lower retail rates (dccrcascd rcvcnues $4.1 million). " Wesoldmoreretail natural gasinthesecondquarterof20lTascomparedtothesecondquarterol20l6duetoweatherthatwascoolerthan the prior year. Compared to the second quarter of20 I 6, residential natural gas use per customer increased 39 percent and commercial use per customer incrcascd 3 3 pcrccnt. Heatrng dcgrcc days in Spokanc wcrc I 2 pcrccnt bclow normal, but 45 pcrccnt abovc thc sccond quartcr of20 I 6. Heating degree days in Medford were I I percent below normal, but 60 percent above the second quarter of20 I 6. . Lower retail rates were due to PGAs, partially offset by a general rate increase in Oregon. . a $4.7 mi llion decrease in wholesale n atural gas revenues due to a decrease in volumes (decreased revenues $ I 3.0 million), partially o flset by an increase in market prices (increased l€venues $8.3 mitlion). In the second quarler of20 I 7, $9.0 million ofthese sales were made to our electric generationoperationsandareincludedasintracompanyrevenuesandresourcecosts. Inthesecondquarterof20l6,$5.1 millionofthesesaleswere made to our electric generation operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirernents and from resource optimization are accounted for through the PGA mechanisms. . a $6.1 million decrease in natural gas revenue due to decoupling. Weather was generally warmer than normal during the second quarter 20 I 7; however, due to the shape ofthe normal usage curve for natural gas in the decoupling mechanism, this resulted in a small rebate during the second quafierin Idaho and Oregon and a small net surcharge in Washington. This compares to significant decoupling surcharges in the second quanerof 20 I 6. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by weather fluctuations as comparcd to normal wcathcr. The following table presents our average number ofelectnc and natural gas retail customers for the three months ended June 30: Electric Natural GasCustonrers Customers 201'7 2016 2017 201 6 Rcsidential Commercial Interruptible Industrial ( I ) Public street and highway lighting Total retail customers 1,328 558 t.346 559 333,465 42,074 329,55t 41,732 3 06,23 8 35,197 38 250 299,860 34,867 37 255 377,425 373,1 88 341,723 335,019 (l ) The decrease in electric industrial customers as compared to the second quarter of 201 6 is primarily related to a decrease in Washington irrigation customers. 46 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 49 ol71 Table of Contents AVISTA CORPORATION The following resource costs forthe three months ended June 30 ,llars in mill Total resourcecostsinthegraphsaboveincludeintracompanyr€sourcecostsof$14.2millionand$13.1 millionforthethreemonthsendedJune30,20lT and June 3 0, 20 I 6, respectively. Total electric resource costs decreased $3.9 million for the second quarter of20 1 7 as compared to the second quarter of20 I 6 reflecting the following: . a $7.3 million dccrease in purchased power due to a dccrease in the volume of powcr purchases (decrcased costs $ I .l million) and a decrease in wholesale prices (decreased costs $6.2 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities during the quarter. . a $5.5 million decrease in fuel forgeneration primarily due to a decrease in thermal gencration (due in part to incrcased hydroelcctric gcncration). . a $ I .5 million increase in other fuel costs. This represents fuel and the related derivative instruments that were purchased for generation but were latersold when conditions indicated that it was more economical to sell the fuel as Ekctric Resource Costs s3t: slsq $lo(l $n7 s:.1 0 i\\+5 L)t\gIt t'o€{ ' t*do*' {t\c\gi:rrcr+trtrrr 0t\rsl $te.5 $t8 o t.'P\ tor I lorT f :ot6 Natural (ias Resource (losts $l') I $7 :i -s0 l Nalurirl grs purchitscil tot 7 :0 to s-t i Cltlrcr 47 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 50 of 7 1 $ri 5 Table of Contents AVISTA CORPORATION part ofthe resource optimization process. When the fuel orrelated derivative instruments are sold, that revenue is included in sales offuel. . a $7.0 million increase frorn amortizations and deferrals ofpower costs. Tlris change was primarily to result oflower net power supply costs. . a $0.2 million net incrcase from othcr regulatory amortizations and othcr electric resource costs. Total natural gas resource costs decreased $2.1 million forthe second quarterof20l7 as compared to the second quarterof2016 reflecting the following: . a $5.4 million increase in natural gas purchased due to an increase in the marftet price ofnatural gas (increased costs $ I 6.0 million), partially offset by a decrease in total therms purchased (decreased costs $ I 0.6 million). Total therms purchased decreased due to a decrease in wholesale sales, partially offset by an increase in retail sales. . a $0.8 million increase in otherregulatory amortizations. . an $8.3 million decrease from amortizations and deferrals ofnatural gas costs. This reflects lowernatural gas prices compared to our authorized PGA rates and the deferral ofthese lower costs, which occurred in the current quarter for future rebate to customers. Six months ended Jane 30, 201 7 compared ,o the six monlhs ended Jane 30, 201 6 The following table presents our operating revenues, resource costs and resulting gross margin for the six months ended June 3 0 (dollars in thousands): Elcctric Natural Gas Intracompany Total 20t7 2016 20t7 2016 2017 2016 201'7 2016 Operating revenues Resource costs Gross margin g 494,27 6 160302 (32,7e0) $ (32,790) (3 1,r 70) $ (3 r ,1 70) 712,t28 $ 262.074 $ 497,593 $ 250,642 $ 236,365 167,702 t34,562 129,153 $ 329,891 $ 116,080 $ 107,212 $702,788 265,685 $ 333,97 4 $$$ 450,054 $ 437,1 03 The gross margin on electric sales increased $4.1 million and the gross margin on natural gas sales increased $8.9 million. The increase in electric gross margin was primarily due to a general rate increase in Idaho, custormer growth and lower resource costs, partially offset by a change in the provision for eamings sharing (which reduced electric gross margin by $3.0 rnillion for 201 7 as compared to 20 I 6). For the six months ended June 30, 20 I 7, we recognized a pre-tax benefit of $4.6 million under the ERM in Washington compared to a benefit of $4.2 million for the six months ended June 30, 2016. The increase in natural gas gross margin was primarily due to a general rate increase in Oregon and customer growh. Intracorrpany revenues and resource costs represent purchases and sales ofnatural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation oftotal results for Avista Utilities and in the condensed consolidated financial statements but are included in the separate results for electric and natural gas presented below. 48 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 51 ot71 Table of Contents AVISTA CORPORATION The following graphs present ourutility electric operating revenues and megawatt-hour (MWh) sales forthe six months ended June 30 (dollars in millions and MWhs in thousands): Electric Operating Revenues flq{ e sl68.o llJl.{ lt.to0 $5.r I tsl.o s58 e $Jq s $6,8 S10.0 sl{ l $18 6 s.rrduntt*\ a.*ro*i'nt \trd.rrs'ot rNho\ess\e T$cs of furEt ()r\rcr :01 7 :{t lo Electric Energy lllWh Sales l.q6.l l.?5t 1.076t.567 t ,{-i I t"tt0t"d C r*\1rrrcts$\nJtsrrot $i\rtr\est\e I :{it7 llrl(r 49 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 52 ot 71 8i)7 SJir Table of Contents AVISTA CORPORATION The following table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are reflected in utility electric operating revenues for the six months ended June 30 (dollars in thousands): Electric Operating Reveuues 2017 2016 Washington Decoupling surcharge (rebate) $ (1,461) $ 8,634 Provision for eamings sharing (l) (130) 2,169 Idaho Decoupling surcharge (rebate) $ (1,096) $ 5,031 Provision foreamings sharing (2) n/a 7ll ( I ) The provision for eamings sharing in Washington for the six months ended Ju ne 30,2017 represents an adjustment of the 201 6 provision for eam ings sharing. We are not expecting a provision for eamings sharing in Washington re lating to 201 7 eamings. The provision for eamings sharing in Washington in the six months ended June 30,2016 resulted from a $2.5 million reduction in the 2015 provision foreamings sharing (which increased 20 I 6 revenues), partially offsct by $0.3 million provision for the six months endcd Junc 30, 20 I 6. (2) The provision for eamings sharing in Idaho in the six months ended June 30, 20 I 6 resulted from a reduction in the 20 I 5 provision for eamings sharing (which increased 20 1 6 revenues). Beginning in 20 1 6 there is no longer an eamings sharing mechanism in Idaho. (n/a) This mechanism did not exist during this time period. Total electric revenues decreased $3.3 miltion for the six months ended June 30, 20 I 7 as compared to the six months ended June 30, 20 I 6 primarily refl ecting the followin g : . a $30.6 million increase in retail electric revenue due to an increase in total MWhs sold (increased r€venues $22.2 million) and an increase in revenue perMWh (increased revenues $8.4 million). . The increase in total retail MWhs sold was the result ofweather that was cooler than the prior year (which increased elcctric hcating loads, partially oflset by a decrease in cooling loads), as well as customer growh. Compared to the six months ended June 30, 201 6, residential electric use per customer increased I 0.6 percent and commercial use per customer increased 0. I percent. Heating degree days in Spokane were 6 percent above normal and 29 percent above the first six months of20 I 6. Year-to-date 20 I 6 cooling degree days were 54 percent above normal (mostly in June). However, cooling degree days were I 2 percent below the prior year. " The increase in revenue per MWh was primarily due to a general rate increase in Idaho and a greaterportion ofretail revenues from residential customers in 2017. . a Sl 9.4 million decrease in wholesale electric tevenues due to a decrease in sales volumes (decreased revenues $6.8 million) and a decrease in sales prices (decreased revenues $ I 2.6 million). The fluctuation in volumes and prices was primarily the result ofour optimization activities. . a $0.8 million increase in sales offuel due to an increase in sales ofnatural gas fuel as part ofthermal generation resource optimization activities. For the six months ended June 30, 20 I 7, $ I 3.3 million ofthese sales were made to our natural gas operations and are included as intracompany revenues and resource costs. For the six months ended June 30, 20 I 6, $ 1 6.3 million ofthese sales were made to our natural gas operations. . a $ I 6.2 million decrease in electric revenue due to decoupling. For the year-todate, weather was overall cooler than normal in 20 I 7, which resulted in decoupling rebates for the first halfof20 I 7. Weather was warmer than normal in the first halfof20 I 6, which resulted in significant decoupling surcharges. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are only impacted by weather fluctuations as compared to normal weather. 50 Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 53 ot 71 Table of Contents AVISTA CORPORATION The following graphs present our utility natural gas operating revenues and therms delivered for the six months ended June 30 (dollars in millions and therms in thousands): Natural Cts Operating Revenues tl16: $l0t J s60.6 $6t 0 $6t 6 SJq 1) 510 5 s:l Rttrt\rrrtr$Corrr+retct'a\$iho\ei"is 0il\u1 t0r7 I :r)t6 Therms Delivered il].tsi llE.,i(,5 ll8.7lq 9E.5qS 77.t21 t05.le9 s5.5e6 !e. tel Besrr\e$$$( rrrr*rreic\$$\ao\ciD\e !)t\rtt I :tt17 l0l6 5l Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 54 of 71 Table of Conterts AVISTA CORPORATION The following table presents Avista Utilities' decoupling and customer eamings sharing mechanisms by jurisdiction that are reflected in utility natural gas operating revenues for the six months ended June 30 (dollars in thousands): Natural Gas Operaling Revenues 201'7 201 6 Washington Decoupling surcharge (rebate) $ (5,221) $ 6,766 Provision foreamingssharing (617) (536) Idaho Decoupling surcharge (rebate) $ (883) $ 2,126 Oregon Dccoupling surcharge (rcbate) $ (2,050) S 1,858 Totalnaturalgasrevenuesincreased$l4.3millionforthesixmonthsendedJune30,20lTascomparedtothesixmonthsendedJune30,20l6primarily refl ecting the following: . a $33.5 million increase in natural gas retail revenues due to an increase in volumes (increased revenues $43.3 million), partially offset by lower rctail ratcs (dccrcascd rcvcnucs $9.8 million). " We sold more retail natural gas in the six months ended June 30,2017 as compared to the six months ended June 30,2016 due to cooler weather and customer growh. Compared to the first six months of20 I 6, residenlial natural gas use per customer increased 28 percent and commcrcial usc per customcr incrcascd 29 pcrccnt. Hcating dcgrcc days in Spokanc werc 6 perccnt abovc normal and 29 perccnt abovc thc first six months of20 I 6. Heating degree days in Medford were 3 percent below normal, but 24 percent above the first six months of20 I 6. . Lower retail rates were due to PGAs, partially offset by a general rate increase in Oregon. . a $ I .0 rrillion decrease in wholesale natural gas revenues due to a decrease in volumes (decreased revenues $22.6 million), mostly offset by an increase in prices (increased revenues 52 1.6 million). In the six months ended June 30, 20 I 7, $ I 9.5 million ofthese sales were made to our electric generation operations and are included as intracompany revenues and resource costs. In the six months ended June 30,2016, $14.9 million ofthese sales were made to our electric generation operations. Differences between revenues and costs from sales ofresources in excess ofretail load requirements and fiom resource optimization are accounted for through the PGA mechanisms. . an $ I 8.9 million decrease in natural gas revenue due to decoupling. For th e yearto-date, weather was overall coo ler than normal in 20 I 7, wh ich resulted in decoupling rebates forthe firsthalfof20l7. Weatherwaswarmerthan nonnal in the firsthalfof20l6, whiclr resulted in significant decoupling surcharges. Decoupling mechanisms are not impacted by fluctuations in weather compared to prior year, they are on ly impacted by weather fluctuations as compared to normal weather. The following table presents our average number ofelectnc and natural gas retail customers for the six months ended June 30: Electric Custome rs Nan:ral Gas Customers 201'7 2016 20t7 2016 Residential Commercial Intcmrptiblc Industrial (l ) Public street and highway lighting Total retail customers 333,885 42.070 I,327 562 329,81 0 4l .698 306,231 35,217 37 25t 299,966 34,87 4 38 2561,347 s55 377,844 373,4t0 34t,736 335,1 34 (l ) The decrease in electric industrial customers as compared to the first halfof20 I 6 is primarily related to a decrease in Washington inigation customers. 52 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 55 of 71 Table of Contents AVISTA CORPORATION The following graphs present ourutility resource costs forthe six months ended June 30 (dollars in millions): Electric Resource (losts s?t I s6+ I $J:i S tii: :t $13 I $t0 e $30 7 s:l .) \ro.nl .O$srrcn oord*tg' fup\totu' i\1s\s$'$5 ()il\c{ 0r\rct I :or7 I :rjlo Natural Gas Resource (lo$ts $t:s 5 $tl{8 SbI 5l-l -l Nalurirl grs gxrrelusctl 0thcr I :nt7 ll t ltr Total resource costs in the graphs above include intracompany rcsource costs of $32.8 mil lion and $3 I .2 million for the six months ended June 3 0, 2017 and June 30, 20 I 6, respectively. Total electric resource costs decreased $7.4 million for the six months ended June 30, 20 I 7 as compared to the six months ended June 30, 20 I 6 reflecting the following: . a $7.0 million decrease in purchased power due to a decrcase in wholesale prices (decreased costs $7.5 million), partially offset by an increasc in thc volume of power purchases (increased costs $0.5 million). The fluctuation in volumes and prices was primarily the result of our optimization activities during the period. . an $ I I .5 million decrease in fuel for generation primarily due to a decrease in thermal generation (due in part to increased hydroelectric generation). . a $2.3 million increase in other fuel costs. . an $ 8.2 million increase from amortizations and deferrals of power costs. This ch ange was primarily to result of lower Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 56 of71 53 Ir&f-@ AVISTA CORPORATION net power supply costs. . a S0.6 million increase in other regulatory amortizations and other electric resource costs. Total natural gas resourcc costs incrcascd $5.4 million for tlre six months cnded June 30, 20 I 7 as compared to the six months endcd Junc 30, 20 I 6 reflccting the following: . a $13.7 million increase in natural gas purchased due to an increase in the price ofnatural gas (increased costs $24.0 million), partially offset by a decrease in total therms purchased (decreased costs $ I 0.3 rnillion). Total thenrs purchased decreased due to a decrease in wholesale sales, partially offset by an increase in retail sales. . an $ I I .8 mil lion decrease from amortizations and deferrals of natural gas costs. This reflects lower natural gas prices compared to our authorized PGA rates and the defenal ofthese lower costs, which occurred in the current period for future rebate to customers. . a 53.5 million increasc in othcrregulatory amortizations. Results ofOoerations - Alaska Electric Light and Power Comoany Three months ended June 30,2017 compared to the three monlhs ended June 30,2016 and six months ended June 30,2017 compared to the six months ended June 30, 20 I 6 NetincomeforAEL&Pwas$l.TmillionforthethreemonthsendedJune30,20lTcomparedto$l.l millionforthethreemonthsendedJune30,20l6.Net income was $5.5 million for thc six months cnded June 3 0, 201 7 comparcd to $4.0 million for the six months cnded June 30, 201 6. The increase in eamings for both the second quarter and year-to-date was primarily due to an increase in electric gross margin which was $8.7 million for the second quarter of20 | 7, compared to $7.0 million for the second quarter of20 I 6. For the year-to-date, electric gross margin was 520.9 mil lion for the srx months ended June 30, 20 1 7, compared to $ I 7.0 rnillion for the six rnonths ended June 30,201 6. The increase in electric gross margin was partially offset by an increase in operating expenses and a decrease in equity-related AIUDC due to the construction ofan additional back-up generation plant in 201 6. The increase in electric gross margin was primarily related to an interim general rate increase, effective in November 201 6, and increases in electric heating loads due to weather that was cooler than the prior year. There were also slight increases in residential and commercial customers. This was partially offset by an increasc in rcsource costs primarily due to purchased power expcnse, dcferred power supply cxpenscs and fuel cxpcnse. While the coolerweather did have some effect on AEL&P revenues during 201 7, AEL&P has a relatively stable load profile as it does not have a large population ofcustomers in its service tenitory with electric heating and cooling requirements; therefore, its revenues are not as sensitive to weather fluctuations as Avista Utilities. However, AEL&P does have higher winter rates for its customers during the peak period ofNovernber through May ofeach year, which drives higher revenues during those periods. Opcrating cxpenses incrcased primarily due to supplics expcnse for the ncw back-up gcneration plant, which went into scrvice at the end of20 I 6. Results ofOnerations - Other Businesses Net losses for our other businesses were $ I .7 million for the three months ended June 30, 20 I 7 compared to $0.6 mi llion for the three months ended June 30, 20l6.Net losses were $1.9 million forthe six months ended June 30,2017 compared to $0.9 million forthe six months ended June 30,2016. Net losses for the second quarter 20 I 7 and the six months ended June 30, 20 I 7 were primarily related to renovation expenses and increased compliance costs at one ofour subsidiaries and additional losses on investments as compared to 20 I 6. These were partially offset by a decrease in corporate costs (including costs associated with exploring strategic opportunities). Critical Accountins Policies and Estimates The preparation ofour consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on our consolidated financial statements and thus actual results could differ fiom the amounts reported and disclosed herein. Our critical accounting policies that require the use ofestimates and assumptions were discussed in detail in the 20 I 6 Form I 0-K and have not changed materially from that di scussion. 54 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 57 oi 71 Table of Contcuts AVISTA CORPORATION Liquidit! and Canital Resources ()verall Liouiditv Our sources ofoverall liquidity and the requirements for liquidity have not materially changed in the six months ended June 30, 20 I 7. See the 20 I 6 Form | 0- K for further discussion. As of June 30,2017, wc had $207.3 million of available liquidity undcrtlrc Avista Corp. committcd line of crcdit and $25.0 million underthc AEL&P committed line of credit. With our $400.0 million credit facility that expires in April 2021 and AEL&P's $25.0 million credit facility that expires in November 20 I 9, we believe that we have adequate liquidity to meet our needs for the next I 2 months. Review of Cash Flow Statement Overall During the six months endcd Junc 30, 201 7, positivc cash flows from operating activities wcrc $228.5 million, which includcd contributions to our pcnsion plan of $ 14.8 million. Other cash requirements included utility capital expenditures of $ I 77.7 million, dividends of $46.2 million. Oneratins Activities Net cash provided by operating activities was $228.5 million for the six months ended June 30, 20 I 7 compared to $ I 56.0 million for the six months ended June 3 0, 20 I 6. The increase in net cash provided by operating activities v/as primarily related to the amount ofcollateral posted for derivative instruments where weposted $5.5 million in the finthalfof20l7, compared to $83.5 million posted in the firsthalfof20l6. Ourcollateral increased in 2016 due to a decrease in the fair value ofoutstanding interest rate swap derivatives at that time and also due to fewer counterparties accepting letters ofcredit as collateral. In 20 I 7, more counterparties are accepting letters ofcredit as collateral rather than cash. In addition for the first halfof20 I 7, we had increased net income (afterconsideration of non-cash items included in net income) of $235.5 million, compared to $224.0 million in 2016. We also increased our pension contributions from $8.0 million in the first half of 201 6 to $ 14.8 million in the first half of 201 7. Investing Activities Net cash used in investing activities was $ I 89.6 million for the six months ended June 30, 201 7, compared to $206.6 million for the six months ended June 30, 2016. During thc first half of 201 7, we paid $ I 77.7 million for utility capital expcnditurcs comparcd to $ I 82.8 million for the first half of 2016. Also, during the first halfof2O I 7, our subsidiaries invested $ I 0.3 million in equity and property, compared to $7.0 million invested during the first halfof20 I 6. Financins Activities Net cash used by financing activities was $34.0 million lor the six months ended June 30, 20 I 7, compared to net cash provided of$53.7 million for the six months ended June 30, 20 I 6. We had the following significant transactions: . short-term borrowings increased by $ I 6.0 million in the first half of 201 7, compared to an increase of $5 5.0 million in 20 I 6, . cash dividends paid to Avista Corp. shareholders increased to $46.2 million (or $0.7 I 5 per share) for the first half of 201 7 from $43.3 mill ion (or $0.685 per share) for the first halfof20 I 6, and issuance ofS t .2 million (net ofissuance costs) under share-based compensation plans. In 20 I 6, we issued $47.2 million ofcomrnon stock under sales agency agreements. 55 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 58 of 71 Table of Contcnts AVISTA CORPORATION Caoital Resources Our consolidated capital structure, including the cunent portion oflong-term debt and short+erm bonowings, and excluding noncontrolling interests, consisted ofthe following as ofJune 30,2017 and December 3 I , 20 I 6 (dollars in thousands): June 30,2017 Dcccmber 3 l. 201 6 Amount Perccnt of total Amount Pcrccnt of total Current portion oflong+erm debt and capital leases Short{crm borrowings Long-term debt to affiliated trusts Long-term debt and capital leases Total debt Total Avista Corporati on sh areholders' equity Total Borrowings outstanding at end ofperiod Lcttcrs ofcrcdit outstanding at end ofpcriod Maximum borrowings outstanding during the period Average borrowings outstanding during the period Average interest rate on borrowings during the period Avcragc intcrcst ratc on borrowings at cnd ofpcriod $2?7,814 136,398 5t,s47 1,403,064 7.8% $ 3.8% l.5o/o 39.50/o 3,287 120,000 51,547 | ,678,717 o.t% 3.4% t.5% 47.9% l,868,823 52.6% 47.4% r,853,551 1,648,727 s2.9% 47.1%t,687 t73 $ 3,555,996 100.0% $ 3,502,278 100.0% Our shareholdcrs' equity incrcased $3 8.4 million during thc first six months of20 I 7 primarily duc to net income, partially offset by dividcnds. We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our indebtedness, both short-term and long-term, reduce the amount ofcash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividends and other rcquiremcnts. Cornmitted Lines of Credit Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million that expires in Apil2021 . As of June 30, 20 I 7, there were $ 1 36.0 million ofcash borrowings and $56.7 million in letters ofcredit outstanding (which were primarily issued as collateral for our energy commodity and interest rate swap derivatives), leaving $207.3 million ofavailable liquidity underthis line ofcredit. The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of"consolidated total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofJune 30, 20 I 7, we were in compliance with this covenant with a ratio of52.6 pcrcent. AEL&P has a $25.0 million committed line of credit that expires in November 2019. As of June 30, 2017, there were no borrowings or letters of credit outstanding under this committed line ofcredit. The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of"consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P," (including the impact ofthe Snettisham obligation) to be greaterthan 67.5 percent at any time. As of June 30,2017, AEL&P was in compliance with this covenant with a ratio of 54.1 percent. Balances outstanding and interest rates ofborrowings (excluding letten ofcredit) under Avista Corp.'s committed line ofcredit werr as follows as ofand for the six months ended June 30 (dollars in thousands): 2017 2016 136.000 $ 56,703 $ 136,000 $ I 05,1 57 $ t.67% 1.99o/o 160,000 45,',7 95 160,000 I 18,832 1.22% 1.22% Therc were no borrowings outstanding underAEL&P's committed linc ofcredit as ofJune 30,2017 and Junc 30,2016. As ofJune 30, 20 I 7, Avista Corp. and its subsidiaries were in compliance with all ofthe covenants oftheir financing agreements, and none ofAvista Corp.'s subsidiaries constituted a "significant subsidiary" as defined in Avista Corp.'s committed line of credit. Equitlt Issuances See "Note 9 ofthe Notes to Condensed Consolidated Financial Statements" for a discussion ofour equity issuances during 2016 and 2O17 . 56 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 59 of 71 $ $ $ $ Table of Contents AVISTA CORPORATION 2 0 I 7 Liq uidity Exp ectarions In the second half of 201 7, we expect to issue up to $90.0 million of long-term debt and up to $70.0 million of common stock in order to fund planned capital expenditures and maintain an appropriate capital structure. Afterconsidering the expected issuances oflong-term debt and common stock during 2017,we expect net caslr flows from operating activities, togetherwith cash available under our committed line olcredit agreements, to provide adequate resources to fund capital expenditures, dividends, and other contractual cornmitments. Capital Exoenditures We are making capital investments in generation, transmission and distribution systems to preserve and enhance service reliability for our customers and replace aging infrastructure. Our estimated capital expenditures for 20 I 7, 20 I 8 and 20 I t have not materially changed during the six months ended June 3 0, 2017. See the 2016 Form l0-Kforfurtherinformation. OIf-Balance Sheet Arransements As ofJune 30,20l7,wehad $56.7 rnillion in lettersofcredit outstandingunderour$400.0 million comrnitted line of credit,compared to $34.4 million as of December 3 l, 201 6. The increase in outstanding letters ofcredit is partially related to negotiations with interest rate swap counterparties to accept letten of credit as collateral ratherthan cash collateral and also due to issuing additional letters ofcredit as collateral based on changes in the fairvalue ofinterest rate swap and energy commodity derivatives during the six months ended June 30,2017 . Pension Plan Avista Utilities In the six months ended June30,20l'7 we contributed $14.8 million to the pension plan and we expect to contribute a total of $22.0 million in 2017. We expectto contribute atotal of$l 10.0 million to thepension plan in theperiod 2017 through 202l,with annual contributionsof$22.0 million overthat period. The final determination ofpension plan contributions for future periods is subject to multiple variables, most ofwhich are beyond our control, including changes to the fair value ofpension plan assets, changes in actuarial assumptions (in particular the discount rate used in determining the benefit obligation), or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed above. See "Note 4 ofthe Notes to Condensed Consolidated Financial Statements" for additional infonnation regarding the pension plan. Contractual Oblisations Our future contractual obligations have not rnaterially changed during the six months ended June 30, 201 7. See the 201 6 Form I 0-K for our contmctual obligations. Environmental Issues and Contingencies Our environmental issues and contingencies disclosures have not materially changed except for the following during the six months ended June 30, 20 I 7. See the 20 I 6 Fonn I 0-K for all other environrnental issues and contingencies. Climale Change - Federal Regulatory Actions The Environrnental Protection Agency @PA) released the final rules forthe Clean PowerPlan (Final CPP) and the Carbon Pollution Standards (Final CPS) on August 3,201 5. The Final CPP and the Final CPS are both intended to reduce the carbon dioxide (CO2) emissions fiom certain coal-fired and natural gas electric generating units (EGUs). Theseruleswere published in the Federal Registeron October23,20l5 and were immediately challenged via lawsuitsby other parties. ln a separate but related rulemaking, the EPA finalized CO2 new source performance standards (NSPS) for new, modified and reconstructed fossil fue l-fired EGUs under CAA section I I I (b). These EGUs fall into the same two categones ofsources regulated by the Final CPP: steam generating units (also known as "utility boilcrs and IGCC units"), which primarily bum coal, and stationary combustion turbincs, which primarily bum natural gas. The promulgated and proposcd grccnhousc gas rulemakings mcntioncd abovc have bccn legally challcnged in multiplc venucs. On February 9, 20 1 6, the U.S. Supreme Court granted a request for stay, halting implementation of the CPP. On March 28,2017, the Department of Justice has filed a motion with the U.S. Court of Appeals for the District of Colurnbia Circuit @.C. Circuit) requesting that the Court hold the cases clrallenging the CPP in abeyance while the EPA reviews the final rules applicable to existing, as well as to new, modified, and reconstructed electric generating units pursuant to an Executive Order issued by President Trump. The Executive Order also instructed the EPA to review the CPP rule. On April 28,2017 the D.C. J/ Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 60 of 7'l Table of Contents AVISTA CORPORATION CircuitissuedorderstoholdthelitigationregardingtheCleanAirAct$lll(d)CleanPowerPlanandtheglll(b)NewSourcePerformanceStandardsfor power plants in abcyancc for a period of60 days with status rcports duc Aom the EPA cvery 3 0 days. Thc EPA has continucd to ask thc Court to hold the rules in abeyance, and, as a result of its ongoing review of the Final CPP, in June 201 7 transmitted a draft proposed rule to the Office of Management and Budget. The contents ofthat proposed rule have not been rnade public. Given these ongoing developments, we cannot fully predict the outcome or estimate the extent to which our facilities may be impacted by these regulations at this time. We intend to seek recovery ofany costs related to compliance with these requirements through the ratemaking process. Enternrise Risk Manapement The material risks to our businesses were discussed in our 20 I 6 Form I 0-K and have not materially changed during the six months ended June 30,2017 . Refer to the 20 I 6 Form I 0-K for further discussion ofour risks and the mitigation ofthose risks. Financial Risk Our financial risks have not materially changed during the six months ended June 30,2017 . Refer to the 20 I 6 Fonn I 0-K. The financial risks included below are required interim disclosures, even ifthey have not materially changed from December 3 1 ,201 6. Interest Rate Risk We use a variety oftechniques to manage our interest rate risks. We have an interest rate risk policy and have established a policy to limit our variable rate exposures to a percentage oftotal capitalization. Additionally, interest rate risk is managed by rnonitoring ma*et conditions when timing the issuance of long-term debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. See "Note 3 ofthe Notes to Condensed Consolidated Financial Statements" for a summary ofour interest rate swap derivatives outstanding as ofJune 30, 2017 and December 3 1, 20 I 6. Credit Risk Avista Utilities' contracts for the purchase and sale ofenergy commodities can require collateral in the form ofcash or letters ofcredit. As ofJune 30,2017 , we had cash deposited as collateral in the amount of$ I 5.9 million and letterc ofcredit of$37.3 million outstanding related to our energy derivative contrdcts. Price movements and/or a downgrade in our credit ratings could impact further the amount ofcollateral required. See "Credit Ratings" in the 20 1 6 Form I 0-K for further information. For cxamplc, in addition to limiting our ability to conduct transactions, ifour crcdit ratings werc lowered to below "investment grade" based on our positions outstanding at June 3 0, 201 7, we would potentially be required to post up to $4.'l mill ion of additional collateral. This amount is different from the amount disclosed in "Note 3 ofthe Notes to Condensed Consolidated Financial Statements" because, while this analysis includes contracts that are not considered derivatives in addition to the contracts considered in Note 3, this analysis takes into account contractual threshold limits that are not considered in Note 3. Without contractual threshold limits, we would potentially be required to post up to $4.7 million of additional col lateral. Under the terms ofinterest rate swap derivatives that we enter into periodically, we may be required to post cash or letters ofcredit as collateral depending on fluctuations in the fair value ofthe instrument. As ofJune 30, 20 I 7, we had interest rate swap derivatives outstanding with a notional amount totaling $5 I 0.0 millionandwehaddepositedcashintheamountof$4l.6rnillionandlettersofcreditof$13.1 rnillionascollateralfortheseinterestrateswapderivatives. If our credit ratings were lowered to below "investment grade" based on our inter€st rate swap derivatives outstanding at June 30, 20 I 7, we would be required to post up to $ I I .2 million ofadditional collateral. Enersv Commoditv Risk Our energy commodity risks have not materially changed during the six rnonths ended June 30,2017 , except as discussed below. Refer to the 20 I 6 Form I 0- K. The following table presents energy commodity derivative fairvalues as a net asset or(liability) as ofJune 30,2017 that are expected to settle in each respective year (dollan in thousands): Purchases Sales Electric Derivatives Gas Dcrivatives Electric Derivatives Gas Derivatives Ycar Remaindcr 201 7 201 8 2019 2020 2021 Thereafter Physical ( I ) $ (2,485) (6,880) (4,32t) Physical ( I ) s (70) (24) (t e) Financial (l)Physical ( I ) $ (21 3) (870) (8el) (l,256) (840) Financial ( I )Finmcial (l) Physical (1) Financial (l) $456 $ (347) (1, l 68) (732) $ (280) (357) (14,207) (9,416) (6,r 60) (48e) $1,995 4,234 4,569 $5,808 3.402 r,557 58 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 61 of 71 Trble of Contetrts AVISTA CORPORATION The following table presents energy commodity derivative fairvalues as a net asset or (liability) as ofDecember 3 I , 201 6 that are expected to be deliver€d in each respective year (dollars in thousands): Purchases Sales Elcctric Dcrivativcs Gas Dcrivativcs Elccric Derivatives Gas Derivativcs Ycar 201'7 201 8 2019 2020 202t Thereafter (4,274't $ (5,598) (3, r 23) (4,00s ) (2,17 0) (3,7 32) (370) Physical ( I ) $ (22s) (33) (40) 576 $ 854 975 (2,036) $ (el0) (e27) (1,288) (86e) (3,440) 709 103 Physical (l) Financial (l) Physical (l) Financial (l)Financial (l) Physical (l) Financial (l) b 1,939 $97$ (235) (266) $ (l ) Physical transactions represent commodity transactions v/here we will take or make delivery ofeither electricity or natural gas; financial transactions represent derivative instruments with delivery ofcash in the amount ofthe benefit or cost but with no physical delivery ofthe cornmodity, such as futures, swap derivatives, options, or forward contracts. The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they are delivered and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually bc collccted through rctail rates from customcrs. Item 3. Ouantitative and Oualitative Disclosures about Market Risk The information required by this item is set forth in the Enterprise Risk Management section of "Item 2. Management's Discussion and Analysis of Financial Condition and Results ofOperations" and is incorporated herein by reference. Item 4. Controls and Procedures Conclusion Regarding the Efrectiveness ofDisclosure Controls and Prucedures The Company has disclosure controls and procedures (as defined in Rules I 3a-l 5(e) and I 5d-l 5(e) under the Securities Exchange Act of I 934, as amended) (Act) that are designed to ensure that information required to be disclosed in the reports it files or submits under the Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information rcquired to bc discloscd by the Company in thc rcports that it files or submits under the Act is accumulated and communicatcd to the Company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. With the participation ofthe Cornpany's principal executive oflicer and principal financial officer, the Company's management evaluated its disclosure controls and procedures as ofthe end ofthe period covered by this report. There are inherent limitations to the effectiveness ofany system ofdisclosure controls and procedures, including the possibility ofhuman error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective disclosurc controls and proccdurcs can only provide reasonable assurancc ofachicving thcir control objcctives. Bascd upon this cvaluation, thc Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective at a reasonable assuftmce level as ofJune 30,2017. There have been no changes in the Company's intemal control over financial reporting that occuned during tlre second quarter of20 I 7 that have rnaterially affected, or are reasonably likely to materially affect, the Company's intemal control over financial reporting. PART II. Other Information Item l. Lepal Proceedinps See "Note I I ofNotes to Condensed Consolidated Financial Statements" in "Pa( I. Financial Information Item l. Condensed Consolidated Financial Statcments." Item I A. Risk Factors Plcase refcr to the 20 I 6 Form I 0-K for disclosurc ofrisk factors that could have a significant impact on our rcsults ofopcrations, financial condition or cash flows and could cause actual results or outcomes to differ materially fiom those discussed in our reports filed with the U.S. Securities and Exchange Cornmission (including this Quarterly Report on Form I 0-Q), and elsewhere. These risk factors have not materially changed from the disclosures provided in the 20 I 6 Form 1 0-l! except for the following: 59 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 62 ot 71 Table of Contents AVISTA CORPORATION RISKS RELATED TO THE PROPOSED MERGER WITH HYDRO ONE The Conditions to the Merger May Not Be Satisfied. The proposed Merger with Hydro One requires approval by the holders ofa majority ofAvista Corp.'s outstanding shares ofcommon stock and the receipt of regulatory approvals, including from the FERC, the CFIUS, the FCC, the UTC, IPUC, MPSC, OPUC, and the RCA. Such approvals may not be obtained or the regulatory bodies may seek to impose conditions on the completion ofthe transaction, which could cause the conditions to the Merger to not be satisfied or which could delay or increase the cost ofthe transaction. In addition, the failure to satisry other closing conditions could result in a termination ofthe Merger Agreement by Hydro One or Avista Corp. Termination Fee. Upon termination of the Merger Agreement under certain specified circumstances, we will be required to pay Hydro One a Termination Fee of $ I 03.0 million. We will also be required to pay Hydro One the Termination Fee in the event we sign or consummate any specified altemative transaction within twelve months follov/ing the termination of the Merger Agreement under certain circumstances. Any fees due as a result of termination could have a material adverse effect on ourresults ofoperations, financial condition, and cash flows. Market Value of Avista Corp. Common Stock; Access to Capital. There can be no assurance that the Merger wilI be consumrrated. Failure to consummate the Merger could (i) affect the value of Avista Corp.'s common stock, including by reducing it to a level at or below the trading range preceding the announcement ofthe Merger and (ii) negatively affect our access to and cost of both equity and debt financing. Additionally, if the Merger is not consummated, we will have incurred significant costs and diverted the time and attention of management. A failure to consummatc the Merger may also rcsult in ncgative publicity, litigation against Avista Corp. or its directors and officcrs, and a ncgativc impression of Avista Corp. in the financial markets. The occurrence ofany ofthese events individually or in combination could have a material adverse effect on our financial condition, results ofoperations and stock price. In addition to thcsc risk factors, sec also "Forward-Looking Statements" for additional factors which could havc a significant impact on our operations, results ofoperations, financial condition or cash flows and could cause actual results to differ materially fiom those anticipated in such statements. Item 2. Unregistered Sales ofEquitv Securities and Use ofProceeds (a) Not applicable (b) Not applicable (c) Not applicable Item 4. Mine Safetv Disclosures Not applicable. bt, Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 2, Page 63 of 71 Table of Contents AVISTA CORPORATION Item 6. Exhibits 2.1 Agreement and Plan of Merger, dated as of July 19,2017 .by and among Avista Corporation, Hydro One Limited, Olympus Holding Corp. and Olympus Corp. (l ) l2 Cornputation of ratio of camings to fixcd chargcs (2) l5 LetterRe: Unaudited lnterimFinancial Information (2) 3l-l CertificationofChiefExecutiveOfficer(PursuanttolSU.S.C.Sectionl350,asAdoptedPursuanttoSection302oftheSarbanes- Oxley Act of20}2)(2) 3 t .2 Ccrtification ofChiefFinancial Officcr (Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Scction 302 ofthe Sarbancs- Oxley Act of2002)(2) 32 Certification of Corporate Officers (Fumished Pursuant to l8 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of2002) (3) I 0l The following financial information from the Quarterly Report on Form l0-Q for the period ended June 30,2017 , formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Statements oflncome; (ii) Condensed Consolidated Statements ofComprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements ofCash Flows; (v) the Condensed Consolidated Statements ofEquity; and (vi) the Notes to Condensed Consolidated Financial Statements. (2) (l ) Previously fi led as exhibit 2.1 to the registrant's Current Report on Form 8-K, filed as of July l9,2017 and incorporated herein by reference. (2) Filed herewith. (3) Fumished herewith. 6l Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page il ol 71 Table ol Contents AVISTA CORPORATION SIGNATT]RE Pursuant to the requirements ofthe Securities Exchange Act of I 934, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized. AVISTA CORPORATION (Registrant) Date: August 1,2017 /s/ Mark T. Thies Mark T. Thies Senior Vice President Chief Financial Officer, and i."u.ur", (Principal Financial Oflicer) 62 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 65 of 7 1 Exhibit l2 AVISTA CORPORATION Computation of Ratio of Eamings to Fixed Charges Consolidated (Thousands ofDollars) Six months ended June 30, 201 7 Years Ended December 3 I 20t6 201 5 20t4 20r3 $ 80,613 S 74,025 $ ',13,772 $ 7 2012 s 47,538 $ $ 49,748 $ 91,612 $ 85,315 $ 78,847 $ 78,731 $ s1 $ 2ts,402 s 185,619 $ 192,106 $ 1 16,567 Ratio of eamings to fixed charges 3.59 3.32 3.13 3.39 3.O2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 66 of 71 2.48 Fixed charges, as defined: lnterest charges Amortization ofdebt expense and premium - net Interest portion of rentals Total fixed charges Eamings, as defined: Pre-tax income from continuing operations Add (deduct): Capitalized interest Total fixed charges above Total camings (1,614) 49,'748 (2,651) 91,612 (3,s46) 85,3 1s (3,924) 78,847 (3.67 6) '78,731 (2,401) 76,940 $ I 78,3 88 _t_3 04 ,3 6 3_ _t_' 6 ? ,3 8 8_ $ '6? ,lre_$ 23 7.402 S l 9l .106 Exhibit l5 August 1,2017 To the Board ofDirectors and Shareholders ofAvista Corporation l4l I East Mission Ave Spokane, Washi ngton 99202 We havc reviewcd, in accordancc with the standards ofthc Public Company Accounting Ovcrsight Board (Jnited Statcs), the unauditcd interim financial information ofAvista Corporation and subsidiaries for the periods ended June 30,2017 and 20 I 6, as indicated in our report dated August I ,2017; because we did not perform an audit, we expressed no opinion on that infonnation. We are aware that our report referred to above, which is included in your Quarterly Report on Form I 0-Q for the quarter ended June 3 0, 201 7, is incorporated by reference in Registration Statement Nos. 333-33 790, 333 -126577 ,333-179042 and 333-208986 on Form S-8 and in Registration Statement No. 333- 209714 on Form S-3. Wc also arc awarc that thc aforcmcntioncd rcport, pursuant to Rulc 436(c) undcr the Sccuritics Act of I 93 3, is not considcred a part ofthe Rcgistration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning ofSections 7 and I 1 ofthat Act. /s/ Deloitte & Touche LLP Scattlc, Washington Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 67 ol71 Exhibit 3l.l CERTIFICATION I, Scott L. Morris, cefiiE/ that: I . I havc reviewcd this report on Form I 0-Q ofAvista Corporation; Date: August 1,2017 2.Bascd on my knowledge, this rcport docs not contain any untrue statcmcnt of a matcrial fact or omit to statc a material fact ncccssary to makc the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thc financial condition, results ofopcrations and cash flows ofthc rcgistrant as of, and for, the periods prcscnted in this rcport; The registrant's othcr ccrtifling officcr and I arc rcsponsible for establishing and maintaining disclosure controls and proccdures (as dcfincd in Exchange Act Rules I 3a-l 5(e) and I 5d-l 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and I 5d-l 5(0) lor the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as ofthe end ofthe period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's intemal control over financial reporting; and The registrant's other certifying oflicer and I have disclosed, based on ourmost recent evaluation ofintemal control over financial reporting, to the registrant's auditors and the audit cornmittee ofthe registrant's board ofdirectors (or persons performing the equivalent functions): All significant deficiencies and rnaterial weaknesses in the design or operation ofintemal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and repofi financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial reporting. /s/ Scott L. Monis 3. 4. a. b Scott L. Morris Chairman ofthe Board, President and Chief Executive Officer (Principal Executive Offi cer) Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 2, Page 68 of 71 5. Exhibit 3l .2 CERTIFICATION I, Mark T. Thies, certifu that: I . I have rcvicwcd this rcport on Form I 0-Q ofAvista Corporation; Date: August 1,2017 2.Based on my knowlcdge, this rcport docs not contain any untruc statement ofa matcrial fact or omit to statc a matcrial fact ncccssary to makc the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows ofthc registrant as of, and for, the pcriods prescntcd in this rcport; Thc registrant's othcr ccrtiffing officer and I arc rcsponsiblc for cstablishing and maintaining disclosurc controls and procedurcs (as defincd in Exchange Act Rules I 3a-l 5(e) and I 5d-l 5(e)) and intemal control over financial reporting (as defined in Exchange Act Rules I 3a-l 5(f) and I 5d-l 5(0) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knou,n to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such intemal control over financial reporting, or caused such intemal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for extemal purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness ofthe registrant's disclosure controls and procedures and presented in this report ourconclusions about the effectiveness olthe disclosure controls and procedures, as ofthe end olthe period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's intemal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's intemal control over financial reporting; and The registrant's other certifying officer and I have disclosed, based on our most recent evaluation ofintemal control over financial reporting, to the registrant's auditors and the audit committee ofthe registrant's board ofdirectors (or persons performing the equivalent functions): a. All significant deficiencies and rnaterial weaknesses in the design or operation ofintemal control over financial reporting which are reasonably likely to adversely aflect the registrant's ability to record, process, summarize and report financial informationi and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's intemal control over financial reporting. 3. 4. /s/ Mark T. Thics Mark T. Thies Senior Vice President Chief Financial Officer, and ,r.uru... (Principal Financial OfIi cer) Exhibit No. 3 Case Nos. AVU-E- 17-_ / AVU-G-17-_ M. Thies, Avista Schedule 2, Page 69 of 71 5. Exhibit 32 AVISTA CORPORATION CERTIFICATION OF CORPORATE OFFICERS (Fumished Pursuant to I 8 U.S.C. Section I 350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002) Each olthe undersigned, Scott L. Morris, Chairman of the Board, President and Chief Executive Officer of Avista Corporation (the "Company"), and Mark T.Thies,SeniorViccPrcsidcntandChiefFinancialOfficcroftheCompany,hcrcbycertifies,pursuantto l8U.S.C.Section l350,asadoptcdpursuantto Section 906 ofthe Sarbanes-Oxley Act of20O2, that the Company's Quarterly Report on Form I 0-Q for the quarter ended June 30, 20 I 7 fully complies with the requirements ofSection I 3(a) ofthe Securities Exchange Act of I 934, as amended, and that the information contained therein fairly presents, in all material respects, the financial condition and results ofoperations ofthe Company. Date: August 1,2017 /s/ Scott L. Morris Scott L. Morris Chairman of the Board, President and Chief Executive Officer /s/ Mark T. Thies Mark T. Thies SeniorVice President, Chief Financial Officer, and Treasurer Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-'l7-_ M. Thies, Avista Schedule 2,Page70of 71 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 2,Page71 ol71 EXECUTION VERSION .-.., AGREEMENT AND PLAN OF MERGER Dated as of July 19, 2017 , by and among HYDRO ONE LIMITED, OLYMPUS HOLDING CORP., OLYMPUS CORP. and AVISTA CORPORATION i-:l F4 rt z tt -/-:5 '\ =m N) Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page '1 of 70 #5501 530. I 2 Article I Article II Section I .l Section 1.2 Section 1.3 Section 1.4 Section 1.5 Section 1.6 Section 1.7 TABLE OF CONTENTS The Merger .................. Page ...........2 The Merger..... Closing Effective Time ............... Effects of the Merger Articles of Incorporation and Bylaws of the Surviving Corporation Directors and Officers of the Surviving Corporation Post-Merger Operations ................. Effect of the Merger on Capital Stock....................3 .2 .2 ,2 ,2 .2 ,2 .3 7 8 8 8 Article III Representations and Warranties of the Company.. .....................8 Section 2.1 Section 2.2 Section 2.3 Section 2.4 Section 2.5 Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section .......3 ...,.,.4 .......6 .......8 .......8 ........... I 6 ........... I 6 .,,,...,...17 ...........,,9 ,,,.....,,'',9 ...........1 0 ...........I I ...........1 I ...........12 ........... I 3 ........... I 3 ........... I 3 ...,,,,'...14 ........... I 5 Effect on Capital Stock......... Exchange of Certifi cates ............... Treatment of Performance Awards Adjustments ................ Withholding Taxes...... Organization, Standing and Corporate Power ......... Capitalization .............. Authority; Non-contravention...... Governmental Approvals................ Company SEC Documents; Undisclosed Liabilities Absence of Certain Changes..... Legal Proceedings........ Compliance With Laws; Permits Tax Matters ........................ Employee Benefits Matters Environmental Matters....... Takeover Statutes...... Real Property Contracts Labor......... Opinion of Financial Advisor Brokers and Other Advisors..... Company Shareholder Approval... Organization, Standing and Corporate Power i 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.1 I 3.12 3.r3 3.14 3.1 5 3.16 3.17 3.1 8 3.19 Article IV Representations and Warranties of Parent, US Parent and Merger 8 Section 4.1 ...............1 8 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 2 of 70 #ss0l 530 I 2 Section 4.2 Section 4.3 Section 4.4 Section 4.5 Section 4.6 Section 4.7 Section 4.8 Section 4.9 Article V Covenants........ TABLE OF CONTENTS (CONT'D) Authority; Non-contravention......... Governmental Approvals ................ Brokers and Other Advisors............ Ownership and Operations of Merger Sub Sufficient Funds Share Ownership.......... LegalProce"ai,g,..................:::....:.....:.............. Non-Reliance on Company Estimates, Projections, Forecasts, Forward-Looking Statements and Business Plans .20 2t Section Section Section Section Section Section Section Section Section Section Section Section Section Section Section 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.1 I 5.12 5.13 5.14 5.t5 Conduct of Business Preparation of the Proxy Statement; Shareholders Meeting No Solicitation; Change in Recommendation.. Reasonable Best Efforts Public Announcements ........... Access to Information; Confi dentialify..... Takeover Laws.......... Indemnification and Insurance... Transaction Litigation Section I 6............... Employee Matters Merger Sub and Surviving Corporation No Control of Other Party's Business Advice of Changes Financing Cooperation ......,,.........,'...21 .....,,,,.,..,,,,,....24 ......,,..........,...26 .....,........,,,,,...29 ......................3 I ..'........,..,,,.,...32 ..,..........,........32 ..,.........,,,,..,...32 .34 .,,,,,.........34 .,,,,,,...,,,,,34 ...............36 37 ,'',,,'......'.37 .,...,,.....,,,37 Article VI Section 6.1 Section 6.2 Section 6.3 Section 6.4 Article VII Termination Section 7.1 Section 7.2 Section 7.3 Section 8.1 Section 8.2 Section 8.3 Termination Effect of Termination............. Termination Fees .......... No Survivalof Representations and Warranties Fees and Expenses Amendment or Supplement ............. ...................42 ..............,,,,.42 .44 .44 .44 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 3 of 70 Conditions Precedent. ..........38 Conditions to Each Party's Obligation to Effect the Merger Conditions to Obligations of Parent, US Parent and Merger Sub........... Conditions to Obligations of the Company Frustration of Closing Conditions. .....40 .38 .39 .40 .40 .40 Article VIII Miscellaneous............. #5501 530 I 2 ll Section Section Section Section Section Section Section Section Section Section Section Section 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.1 I 8.12 8.13 8.14 8.15 TABLE OF CONTENTS (CONT'D) Waiver....... Assignment Counterparts ................. Entire Agreement; Third-Party Beneficiaries ..... Governing Law; Jurisdiction.......... Specifi c Enforcement........... WAIVER OF JURY TRIAL Notices Severability Definitions Transfer Taxes Interpretation............... EXHIBITS EXHIBIT A - Governance Requirements EXHIBIT B - Post-Closing Matters Exhibit No. 3 Case Nos. AVU-E- 17-_ / AVU-G-I 7-_ M. Thies, Avista #5501 530. l2 lll Schedule 3, Page 4 of 70 Page \7 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of July 19,2017 (this "Agreement"), is entered into by and among Hydro One Limited, a corporation organized under the laws of the Province of Ontario ("Parent"), Olympus Holding Corp., a Delaware corporation ("US Parent"), Olympus Corp., a Washington corporation and a wholly owned Subsidiary of US Parent ("Merger Sub"), and Avista Corporation, a Washington corporation (the "Company"). Defined terms used herein have the respective meanings set forth in Section 8.13. WITNESSETH WHEREAS, the parties hereto intend that, at the Effective Time, Merger Sub will, in accordance with the Washington Business Corporation Act (the "WBCA"), merge with and into the Company, with the Company continuing as the surviving corporation (the "Merger") on the terms and subject to the conditions set forth in this Agreement; WHEREAS, the board of directors of the Company (the "eenqpany_Bogrd,") has (a) determined that it is in the best interests of the Company and its shareholders for the Company to enter into this Agreement, (b) adopted the plan of merger set forth in this Agreement and approved the Company's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (including the consummation of the Merger upon the terms and subject to the conditions set forth in this Agreement and in accordance with the relevant provisions of the WBCA) and (c) resolved to recommend that the shareholders of the Company approve this Agreement and the plan of merger set forth in this Agreement and directed that this Agreement be submitted to the shareholders of the Company for approval at a duly held meeting of such shareholders for such purpose; WHEREAS, the board of directors of each of Parent and US Parent has (a) determined that it is in the best interests ofeach ofParent and US Parent and their respective stockholders for each ofParent and US Parent to enter into this Agreement and (b) approved Parent's and US Parent's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (including the consummation of the Merger upon the terms and subject to the conditions set forth in this Agreement and in accordance with the relevant provisions of the WBCA); WHEREAS, the board of directors of Merger Sub has (a) determined that it is in the best interests of Merger Sub and its sole shareholder for Merger Sub to enter into this Agreement, (b) adopted the plan of merger set forth in this Agreement and approved Merger Sub's execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (including the consummation of the Merger upon the terms and subject to the conditions set forth in this Agreement and in accordance with the relevant provisions of the WBCA) and (c) submitted this Agreement to US Parent, in its capacity as Merger Sub's sole shareholder, and recommended that US Parent, in such capacity, approve this Agreement and the plan of merger set forth in this Agreement; WHEREAS, US Parent, in its capacity as the sole shareholder of Merger Sub, has approved this Agreement and the plan of merger set forth in this Agreement by written consent; and WHEREAS, Parent, US Parent, Merger Sub and the Company desire to make certain representations, warranties, covenants and agreements specified herein in connection with this Agreement. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement and other good and valuable consideration, the receipt and #ssol 530 l 2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 5 of 70 sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Parent, US Parent, Merger Sub and the Company hereby agree as follows: ARTICLE I THE MERGER Section l.l The Merser. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the WBCA, at the Effective Time, Merger Sub shall be merged with and into the Company, and the separate existence of Merger Sub shall thereupon cease, and the Company shall be the surviving corporation in the Merger (the "SUrvtvtng_Qqpqalipn") and shall become, as a result of the Merger, an indirect, wholly owned subsidiary of Parent. Section 1.2 Closing. The consummation of the Merger (the "Closing") shall take place at the offices of Kirkland & Ellis LLP,655 Fifteenth Street, N.W., Washington D.C. 20005 at l0:00 a.m. (local time) on the date that is three (3) Business Days following the satisfaction or waiver (to the extent permitted by applicable Law) of the conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions at such time), or on such other date and at such other time or place as is agreed to in writing by the parties hereto. The date on which the Closing occurs is referred to herein as the "e.lo!.!-ng_D4Ie." Section 1.3 Effective Time. Subject to the provisions of this Agreement, on the Closing Date, the Company shallfile with the Secretary of State of the State of Washington (the "Wgthi_09lqn_S_9Elgl4ry of State") articles of merger (the "Arttpjpq_SI_L49Ig9I") executed in accordance with, and containing such information as is required by, Section 238.11.050(l) of the WBCA and, on or after the Closing Date, shall make all other filings or recordings required under the WBCA to effectuate the Merger. The Merger shall become effective at such time as the Articles of Merger are duly filed with the Washington Secretary of State or at such later time as is permissible under the WBCA and is specified in the Articles of Merger (the time the Merger becomes effective being hereinafter referred to as the "Effective Time"). This Agreement together with the articles of incorporation of the Surviving Corporation shall be deemed the "plan of merger" under Chapter I I of the WBCA and shall be filed with the Articles of Merger pursuant to Section 23B.11.050(1) of the WBCA. Section 1.4 Effects of the Merser. The Merger shall have the effects set forth in this Agreement, the Articles of Merger and the applicable provisions of the WBCA. Section 1.5 Articles of Incornoration and Bylaws of the Survivins Corporation. At the Effective Time, the articles of incorporation and bylaws of the Company, in each case as amended to date and as in effect immediately prior to the Effective Time (collectively, the "Company Charter Documents"), shall be amended as of the Effective Time to be in the form of (except with respect to the name of the Company (which shall remain "Avista Corporation") and any changes necessary so that they shall be in compliance with Section 5.8 and the requirements set forth on Exhibit A attached hereto) the articles of incorporation and bylaws of Merger Sub as of the date hereof and as so amended shall be the articles of incorporation and bylaws of the Surviving Corporation until thereafter amended as provided therein or by applicable Law (and subject to Section 5.8). Section 1.6 Directors and Officers of the Survivins Corporation. (a) The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation immediately following the Effective Time, to serve until their Exhibit No. 3 Case Nos. AVU-E-'I 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 6 of 70 #5501530 r2 2 respective successors are duly elected or appointed and qualified (including in accordance with Section 1.7 and Exhibit B attached hereto) or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of the Surviving Corporation; provided, however, that within one (l) Business Day immediately following the Effective Time, Parent shall take, or shall cause US Parent and the Surviving Corporation to take, all such actions as are necessary to cause the board ofdirectors ofthe Surviving Corporation to consist of persons determined in accordance with the requirements set forth in Exhibit B attached hereto, to serve until their respective successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of the Surviving Corporation. (b) The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation immediately following the Effective Time, to serve until their respective successors are duly appointed and qualified or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of the Surviving Corporation. Section 1.7 Post-Merger Operations. Parent hereby confirms that, subject to the occurrence of the Effective Time, it intends to, or intends to cause US Parent or the Suruiving Corporation to. effectuate the matters set fofth or described in Exhibit B attached hereto, subject to the approval requirements set forlh therein. ARTICLE II EFFECT OF THE MERGER ON CAPITAL STOCK Section 2.1 Effect on Canital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent, US Parent or Merger Sub or any holder of any shares of common stock, no par value, of the Company ("Companv Common Std") or any shares of capital stock of Merger Sub: (a)Capital Stock of Merser Sub:of Common Stock by Surviving Corporation. Each issued and outstanding share of capital stock of Merger Sub shall be converted into and become one validly issued, fully paid and non-assessable share of common stock, no par value per share, of the Surviving Corporation. In consideration for US Parent paying, or causing to be paid the Merger Consideration as provided herein, the Surviving Corporation shall issue ten million (10,000,000) fully paid and non-assessable shares of common stock, no par value per share, of the Surviving Corporation to US Parent or as otherwise directed by US Parent. (b) Cancellation of Parent-Owned Stock. Any shares of Company Common Stock that are owned by Parent, US Parent or Merger Sub or any of their respective Subsidiaries, in each case immediately prior to the Effective Time, shall be automatically cancelled and shall cease to exist, and no consideration shall be delivered in exchange therefor. (c) Conversion of Company Common Stock. Each issued and outstanding share of Company Common Stock (other than Dissenting Shareholder Shares and shares to be cancelled in accordance with Section 2.1(b)) shall thereupon be converted automatically into and shall thereafter represent solely the right to receive an amount in cash equal to $53.00, without interest (the "Merger Consideration"). As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and the holders immediately prior to the Effective Time of shares of Company Common Stock not represented by certificates ("Boek-E4ry Shares") and the holders of certificates that immediately prior to the Effective Time represented any such 3 #ss0l 530 l 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 7 of 70 shares of Company Common Stock (each, a "Certificate") shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration to be paid in consideration therefor upon surrender of such Book-Entry Share or Certificate in accordance with Section 2.2(b) (subject to any withholding of applicable Tax in accordance with Section 2.5) and any "stub period" cash dividend declared in accordance with Section 5.1(aXiii). (d) Dissenters' Rights. Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time which are held by a shareholder who did not vote in favor of the Merger (or consent thereto in writing) and who is entitled to demand and properly demands payment of fair value of such shares pursuant to, and complies in all respects with, the provisions of Chapter 238.13 of the WBCA (the "Dissentins Shareholder Shares", and each shareholder holding Dissenting Shareholder Shares, a "Disggggilg Shareholder") shall not be converted into or be exchangeable for the right to receive the Merger Consideration, but instead such Dissenting Shareholder shall be entitled to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to Chapter 238.13 of the WBCA (and at the Effective Time, such Dissenting Shareholder Shares shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and such Dissenting Shareholder shall cease to have any rights with respect thereto, except the rights set forth in Chapter 238.13 of the WBCA), unless and until such Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost rights to demand for payment of fair value under Chapter 238.13 of the WBCA. If any Dissenting Shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right, such Dissenting Shareholder's shares of Company Common Stock shall thereupon be treated as if they had been converted into and become exchangeable for the right to receive, as of the Effective Time, the Merger Consideration for each such share of Company Common Stock, in accordance with Section 2.1(c), without any interest thereon and subject to any applicable withholding Tax. The Company shall give Parent (i) prompt notice of any written demands for payment of fair value of any shares of Company Common Stock, aftempted withdrawals of such demands and any other written instruments served pursuant to the WBCA and received by the Company relating to shareholders' rights to demand payment of fair value and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for payment of fair value under the WBCA. The Company shal I not, except with the prior written consent of Parent, make any payment with respect to any such demands for payment of fair value or settle or offer to settle any such demands. Section 2.2 Exchanee of Certificates. (a) Paying Agent: Investment by Paying Asent of Funds. Prior to the Effective Time, Parent shall designate a bank, trust company or nationally recognized financial institution or transfer services company reasonably acceptable to the Company (the "Payilg_49e4") for the purpose of exchanging shares of Company Common Stock for the Merger Consideration and enter into an agreement reasonably acceptable to the Company with the Paying Agent relating to the services to be performed by the Paying Agent. Parent shall cause US Parent to and US Parent shall irrevocably deposit, or cause to be deposited (subject to Section 2.2(e)), the aggregate Merger Consideration with respect to all shares of Company Common Stock (other than Dissenting Shareholder Shares and shares to be cancelled in accordance with Section 2.1(b)) with the Paying Agent at or prior to the Effective Time. The aggregate Merger Consideration deposited with the Paying Agent shall, pending its disbursement to holders of shares of Company Common Stock and as reasonably directed by Parent (on behalf of US Parent), be invested by the Paying Agent in (i) short-term commercial paper obligations of issuers organized under the Laws of a state of the United States of America, rated A-l or P-l or better by Moody's Investors Service, Inc. or Standard & Poor's Ratings Service, respectively, or in certificates of deposit, bank repurchase agreements or bankers' acceptances of commercial banks with capital exceeding $10,000,000,000, or in mutual funds investing in such assets or (ii) short-term obligations for which the full faith and credit of the United States 4 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista #5501530.12 Schedule 3, Page 8 of 70 of America is pledged to provide for the payment of principal and interest. Any interest and other income from such investments shall become part of the funds held by the Paying Agent for purposes of paying the Merger Consideration. No investment or investment losses resulting from such investment by the Paying Agent of the aggregate Merger Consideration shall relieve Parent, US Parent, the Surviving Corporation or the Paying Agent from making the payments required by this Article II, and Parent shall cause US Parent to and US Parent shall promptly replace any funds deposited with the Paying Agent lost through any investment made pursuant to this Section 2.2(a); provided that any interest and other income retained pursuant to the preceding sentence shall be used to replace such funds prior to determining Parent's obligation to replace or causing US Parent to replace such funds. No investment by the Paying Agent of the aggregate Merger Consideration shall have maturities that could prevent or delay payments to be made pursuant to this Agreement. Following the Effective Time, Parent agrees to make or cause to be made available to the Paying Agent, from time to time as needed, additional cash to pay the Merger Consideration as contemplated by this Article II without interest. (b) Payment Procedures. As promptly as practicable after the Effective Time (but in no event more than three (3) Business Days thereafter), the Surviving Corporation shall cause the Paying Agent to mail to each holder of record of shares of Company Common Stock (i) a letter of transmittal (which, in the case of shares of Company Common Stock represented by Certificates, shall specif that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent, and shall be in such form and have such other provisions as Parent and the Company may reasonably agree and shall be prepared prior to Closing) and (ii) instructions for use in effecting the surrender of the Certificates or Book-Entry Shares in exchange for payment of the Merger Consideration. Upon surrender of Certificates for cancellation to the Paying Agent or, in the case of Book- Entry Shares, receipt of an "agent's message" by the Paying Agent (or such other evidence, if any, of transfer as the Paying Agent may reasonably request), together with such letter of transmittal, duly completed and validly executed in accordance with the instructions (and such other customary documents as may reasonably be required by the Paying Agent), the holder of such Cenificates or Book-Entry Shares shall be entitled to receive in exchange therefor, subject to any required withholding Taxes, the Merger Consideration, for each share of Company Common Stock surrendered, and any Certificates surrendered shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a Person other than the Person in whose name the surrendered Certificate or Book-Entry Share in exchange therefor is registered, it shall be a condition of payment that (A) the Person requesting such exchange present proper evidence of transfer and (B) the Person requesting such payment shall have paid any transfer and other Taxes required by reason of the payment of the Merger Consideration to a Person other than the registered holder of such Certificate or Book-Entry Share surrendered or shall have established to the reasonable satisfaction of the Surviving Corporation that such Tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate and Book-Entry Share shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration as contemplated by this Article II. (c) Transfer Books: No Further Ownershio Rights in Companv Common Stock. The Merger Consideration paid in respect of shares of Company Common Stock upon the surrender for exchange in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock, and at the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to the Effective Time. From and after the Effective Time, the holders of Certificates or Book-Entry Shares that evidenced ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock other than the right to receive the Merger Consideration, except 5 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista #5501 530. I 2 Schedule 3, Page I of 70 as otherwise provided for herein or by applicable Law. If, at any time after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article IL (d) Lost. Stolen or Destroyed Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond, in such reasonable amount as Parent (on behalf of US Parent) or US Parent may direct, as indemnity against any claim that may be made with respect to such Certificate, the Paying Agent will pay, in exchange for such lost, stolen or destroyed Certificate, the applicable Merger Consideration to be paid in respect of the shares of Company Common Stock formerly represented by such Certificate, as contemplated by this Article II. (e) Termination of Fund. At any time following the first (lst) anniversary of the Closing Date, US Parent shall be entitled to require the Paying Agent to deliver to it or as directed by it any funds (including any interest received with respect thereto) that had been made available to the Paying Agent and which have not been disbursed in accordance with this Article II, and thereafter Persons entitled to receive payment pursuant to this Article II shall be entitled to look only to US Parent or the Surviving Corporation (subject to abandoned property, escheat or other similar Laws) as general creditors thereof with respect to the payment of any Merger Consideration that may be payable upon surrender of any Company Common Stock held by such holders, as determined pursuant to this Agreement, without any interest thereon. Any amounts remaining unclaimed by such holders at such time at which such amounts would otherwise escheat to or become property of any Governmental Authority shall become, to the extent permitted by applicable Law, the property of US Parent, free and clear of all claims or interest of any Person previously entitled thereto. (f) No Liability. Notwithstanding any other provision of this Agreement, none of Parent, US Parent, Merger Sub, the Surviving Corporation, the Company or the Paying Agent shall be liable to any Person for Merger Consideration delivered to a public official pursuant to any applicable abandoned properfy, escheat or similar Law. Section 2.3 Treatment of Performance Awards and RSUs. (a) Performance Awards. At the Effective Time, each Performance Award that is outstanding immediately prior to the Effective Time (including any Performance Award with respect to which the applicable performance period has ended, but which Performance Award has not been settled) shall be cancelled and the holder thereof shall then become entitled to receive, in full satisfaction of such holder's rights with respect thereto, a lump-sum cash payment equal to the product of (i) the Performance Award Amount, and (ii) the Merger Consideration, subject to any withholding Taxes required by Law to be withheld in accordance with Section 2.5. For purposes of this Agreement, "Perfolmgn-ge_A-lryard Amount" means (A) with respect to any outstanding Performance Award for which the performance period has ended as of immediately prior to the Effective Time, (l) in the case of a share-settled Performance Award, the number of shares of Company Common Stock that would be delivered to the holder of such Performance Award, or (2) in the case of a cash-seffled Performance Award, the number of shares of Company Common Stock that would be deemed deliverable to the holder for purposes of calculating the cash payment due under such Performance Award, in each case of the foregoing clauses (l) and (2), based on the actual achievement of the performance goals applicable to such Performance Award, as reasonably determined by the Board (or a committee thereof) prior to the Effective Time, and assuming the satisfaction of all other conditions to such delivery, and (B) with respect to any outstanding Performance Award for which the performance period has not ended as of immediately prior to the Effective Time, ( I ) in the case 6 Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 10 of 70 #ss0l 530 r 2 of a share-settled Performance Award, the number of shares of Company Common Stock subject to such Performance Award that would be delivered to the holder of such Performance Award, or (2) in the case of a cash-settled Performance Award, the number of shares of Company Common Stock that would be deemed deliverable to the holder for purposes of calculating the cash payment due under such Performance Award, in each case of the foregoing clauses (l) and (2), based on deemed satisfaction of the performance goals applicable to such Performance Award for such incomplete performance period at the target level, and in each case, assuming the satisfaction of all other conditions to such delivery. As of the Effective Time, all Accumulated Dividends, if any, accrued but unpaid with respect to Performance Awards shall, by virtue of the Merger and without any action on the part of a holder thereof, automatically become fully vested and be paid to such holder. (b) Restricted Stock Units. At the Effective Time, each RSU that is outstanding immediately prior to the Effective Time and which by its terms would vest before the calendar year or in the calendar year in which the Effective Time occurs shall be cancelled and the holder thereof shall then become entitled to receive, in full satisfaction of such holder's rights with respect thereto, a lump-sum cash payment equal to the product of (i) the number of shares of Company Common Stock subject to such cancelled RSU immediately prior to the Effective Time and (ii) the Merger Consideration. As of the Effective Time, all Accumulated Dividends, if any, accrued but unpaid with respect to such cancelled RSUs shall, by virtue of the Merger and without any action on the part of a holder thereof, automatically become fully vested and be paid to such holder. At the Effective Time, each RSU that is outstanding immediately prior to the Effective Time and which by its terms would vest in any calendar year following the calendar year in which the Effective Time occurs will be adjusted as necessary to provide that, at the Effective Time, each such RSU shall be converted into a restricted stock unit award, on the same terms and conditions as were applicable under such RSU immediately prior to the Effective Time (including with respect to vesting, treatment upon employment termination, etc.), with respect to a number of shares of common stock of Parent determined by multiplying the number of shares of Company Common Stock subject to such RSU immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole share (a "Converted RSU"), and each such Converted RSU shall not be accelerated except as provided in the original related RSU agreement issued by the Company (the "RSU Agreement"). At the Effective Time, Parent shall assume all obligations of the Company with respect to the Company Stock Plans and each outstanding Converted RSU and the RSU Agreements evidencing the grants thereof. As soon as practicable after the Effective Time, Parent shall deliver to the holders of Converted RSUs appropriate notices seffing forth such holders' rights, and the RSU Agreements evidencing the grants of such Converted RSUs shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 2.3 after giving effect to the Merger). The Converted RSUs will be settled in shares of common stock of Parent, which will not be subject to any Canadian hold period and may be resold by the holder of the Converted RSU on the TSX without any applicable U.S. restricted period having elapsed, or cash, as determined by Parent, and Parent shall take all corporate action necessary to effectuate the foregoing. Notwithstanding the foregoing, and for the purpose of clarity, it is understood by Parent, the Company and the Surviving Corporation that the Converted RSUs shall be awarded and issued under Parent's equity-based long-term incentive compensation plan (the "PArcn!!TIP"). For the avoidance of doubt, the terms and conditions applicable to such Converted RSUs shall be the same as the terms and conditions set forth in the Company Stock Plans and the RSU Agreements pursuant to which such Converted RSUs were granted, notwithstanding that the Converted RSUs will be issued under the Parent LTIP. (c) Funding. No later than the Effective Time, Parent shall provide, or shall cause to be provided, to the Surviving Corporation all funds necessary to fulfill the obligations under this Section 2.3. All payments required under this Section 2.3 shall be made through the Surviving Corporation's payroll not later than the later of (i) the first payroll date immediately following the Effective Time and (ii) five (5) Business Days following the Effective Time. 7 #s501 530 r 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 1'l of 70 Section 2.4 Adiustments. If at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of the Company (or any other securities conveftible or exchangeable therefor) shall occur as a result of any reclassification, stock split (including a reverse stock split) or combination, exchange or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, or any similar event, the Merger Consideration shall be equitably adjusted; provided. however, that nothing in this Section 2.4 shall be deemed to permit or authorize any party hereto to effect any such change that such party is not otherwise authorized or permitted to undertake pursuant to this Agreement. Section 2.5 Withholdine Taxes. Notwithstanding any provision contained herein to the contrary, Parent, US Parent, the Company, the Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold (or cause to be deducted and withheld) from the amounts otherwise payable pursuant to this Agreement, such amounts as are required to be deducted and withheld with respect to the making of such payments under the Code, or under any applicable provision of state, local or foreign Tax Law. To the extent amounts are so withheld and timely paid over to the appropriate Governmental Authority, the withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction and withholding was made (excluding any such amounts required to be withheld under Canadian federal or provincial Law as a result of Parent or any of its Subsidiaries being resident in Canada (or any province thereof) for Canadian federal or provincial Tax purposes). IfParent, US Parent, the Company, the Surviving Corporation, or the Paying Agent determine that any amounts are required to be deducted or withheld (other than any deduction or withholding with respect to any payments constituting compensation for services), Parent, US Parent, the Company, the Surviving Corporation, or the Paying Agent shall use commercially reasonable efforts to, prior to deducting or withholding any such amounts, notifu the Person in respect of which such deduction and withholding was made and shall reasonably cooperate in good faith to establish or obtain any exemption from or reduction in the amount of any withholding that otherwise would be required; provided, however, that notwithstanding anything to the contrary contained herein, Parent, US Parent, the Company, the Surviving Corporation or the Paying Agent shall be entitled to deduct and withhold (or cause to be deducted and withheld) any amounts at the time it is required to so deduct and withhold under the Code or under any applicable provision of state, local or foreign Tax Law. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except (a) as set forth in the disclosure schedule delivered by the Company to Parent simultaneously with the execution of this Agreement (the "Company Disclosure Schedule") (which schedule sets forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereofor as an exception to one or more representations or warranties contained in this Article III, or to one or more of the Company's covenants contained in Article V, except that any information set forth in one section of the Company Disclosure Schedule will be deemed to apply to all other sections or subsections thereof to the extent it is reasonably apparent on the face ofsuch disclosure that it is applicable to such other section or subsection notwithstanding the omission of a reference or cross reference thereto) or (b) as set forth in any of the Company SEC Documents publicly available prior to the date hereof (excluding any disclosures set forth in any such Company SEC Documents under the headings "Risk Factors" or "Forward Looking Statements," or any disclosures set forth in any such Company SEC Documents in any other sections that are predictive or primarily cautionary in nature other than historical facts included therein), the Company represents and warrants to Parent, US Parent and Merger Sub as follows: Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 12 ot 70 8 #5501 530 r 2 Section 3.1 Organization. Standing and Corporate Power. (a) The Company is a corporation duly organized and validly existing under the Laws of the State of Washington and has all requisite corporate power and authority necessary to own or lease all of its properties and assets and to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it orthe character or location of the properties and assets owned or leased by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Company Material Adverse Effect. The Company has made available to Parent true and complete copies of the Company Charter Documents as in effect on the date of this Agreement. (b) Section 3.1(bXi) of the Company Disclosure Schedule sets forth a list of the Subsidiaries of the Company and their jurisdictions of organization. Each Subsidiary of the Company is duly organized, validly existing and in good standing (where applicable) under the Laws of the jurisdiction of its organization, except in each case as would not reasonably be expectedto have a Company Material Adverse Effect. Each Subsidiary of the Company is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Company Material Adverse Effect. All of the outstanding shares of capital stock of, or other equity interests in, each Subsidiary of the Company have been validly issued and are fully paid and non-assessable and, except as set forth in Section 3-!_(b)0-0 of the Company Disclosure Schedule, are owned directly or indirectly by the Company, free and clear ofall liens, pledges, security interests and transfer restrictions, except for such transfer restrictions as are contained in the articles of incorporation, bylaws and limited liability company agreements (or any equivalent constituent documents) of such Subsidiary of the Company or for such transfer restrictions of general applicability as may be provided under the Securities Act of 1933 (the "Securities Act") and other applicable securities Laws. The Company has made available to Parent true and complete copies of the articles of incorporation, bylaws and limited liability agreements (or equivalent constituent documents) of each Subsidiary of the Company as in effect on the date of this Agreement. (c) Each of the Company and its Subsidiaries has all requisite entity power and authority to enable it to own, operate, lease or otherwise hold its properties and assets and to conduct its businesses as presently conducted, except where the failure to have such power or authority would not reasonably be expected to have a Company Material Adverse Effect. (d) Section 3.1(d) of the Company Disclosure Schedule sets forth a list of the Company Joint Ventures, including the name of each entity and the Company's percentage ownership interest thereof. The Company has made available to Parent true and complete copies of the articles of incorporation, bylaws and limited liability agreements (or equivalent constituent documents) of each Company Joint Venture as in effect on the date of this Agreement. Section 3.2 Capitalization. (a) The authorized capital stock of the Company consists of 200,000,000 shares of Company Common Stock and 10,000,000 shares of preferred stock ("Company Preferred Stock"). At the close of business on July 18,2017, (a) 64,411,244 shares of Company Common Stock were issued and outstanding, (b) no shares ofCompany Preferred Stock were issued and outstanding, (c) I 09,089 shares of Company Common Stock were subject to outstanding RSUs, and (d) 493,499 shares of Company Common Stock were subject to outstanding Performance Awards, based on achievement of applicable performance criteria at target levels. 9 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista #5501 530 l 2 Schedule 3, Page '13 of 70 (b) All outstanding shares of Company Common Stock are, and all shares of Company Common Stock that may be issued upon the settlement of RSUs and Performance Awards, will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to, or issued in violation of, any preemptive right. Except (i) as set forth in Section 3.2(b) of the Company Disclosure Schedule, (ii) as set forth in Section 3.2(a), or (iii) pursuant to the terms of this Agreement, as of the date hereof, there are not issued, reserved for issuance or outstanding, and there are not any outstanding obligations of the Company or any Subsidiary of the Company to issue, deliver or sell, or cause to be issued, delivered or sold, (A) any capital stock of the Company or any Subsidiary of the Company or any securities of the Company or any Subsidiary of the Company convertible into or exchangeable or exercisable for shares of capital stock or voting securities of, or other equity interests in, the Company or any Subsidiary of the Company or (B) any warrants, calls, options or other rights to acquire from the Company or any Subsidiary of the Company, or any other obligation of the Company or any Subsidiary of the Company to issue, deliver or sell, or cause to be issued, delivered or sold, any capital stock or voting securities of, or other equity interests in, the Company or any Subsidiary of the Company (the items specified in the foregoing clauses (A) and (B), collectively, "Egu!SS-gcud!9s"). Except pursuant to the Company Stock Plans, there are not any outstanding obligations of the Company or any Subsidiary of the Company to repurchase, redeem or otherwise acquire any Equity Securities. There is no outstanding Indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders ofthe Company may vote. No Subsidiary ofthe Company owns any shares of Company Common Stock. Neither the Company nor any Subsidiary of the Company is a party to any voting agreement with respect to the voting of any capital stock or voting securities of, or other equiry interests in, the Company. (c) Section 3.2(c) of the Company Disclosure Schedule sets forth a complete and accurate list of all RSUs and Performance Awards outstanding as of the date of this Agreement, including, with respect to each such award, the holder, the grant date, and the number of shares of Company Common Stock subject thereto (assuming the target level of attainment of the applicable performance conditions). Section3.3 Authoritv:Non-contravention (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and, subject to obtaining the Company Shareholder Approval, to perform its obligations hereunder and to consummate the Transactions. The Company Board, at a meeting duly called and held, unanimously adopted resolutions (i) determining that it is in the best interests of the Company and its shareholders for the Company to enter into this Agreement, (ii) adopting the plan of merger set forth in this Agreement and approving the Company's execution, delivery and performance of this Agreement and the consummation of the Transactions, and (iii) resolving to recommend that the shareholders of the Company approve this Agreement and the plan of merger set forth in this Agreement and directing that this Agreement be submitted to the shareholders of the Company for approval at a duly held meeting of such shareholders for such purpose (the "Company Board Recommendation"). As of the date of this Agreement, such resolutions have not been amended or withdrawn. Except for obtaining the Company Shareholder Approval, no other corporate action on the part of the Company is necessary to authorizethe execution and delivery of, and performance by, the Company under this Agreement and the plan of merger set forth in this Agreement and the consummation by it of the Transactions. This Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery hereof by the other parties hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that such enforceability (A) may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws of general application affecting or relating to the enforcement of creditors' rights generally and (B) is subject to general principles ofequity,whetherconsideredinaproceedingatlaworinequity(the..@,'). l0 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, AViSta Schedule 3, Page 14 of70 #5501530 I2 (b) The execution and delivery of this Agreement by the Company does not, and neither the consummation by the Company of the Transactions nor compliance by the Company with any of the terms or provisions hereof will, (i) assuming the Company Shareholder Approval is obtained, conflict with or violate any provision of the Company Charter Documents or the organizational documents of any Subsidiary of the Company, (ii) assuming that each of the consents, authorizations and approvals referred to in Section 3.4 and the Company Shareholder Approval are obtained (and any condition precedent to any such consent, authorization or approval has been satisfied) and each ofthe filings referred to in Section 3.4 are made and any applicable waiting periods referred to therein have expired or been terminated, violate any Law applicable to the Company or any of its Subsidiaries or (iii) assuming that each of the consents and notices specified in Section 3.3(b)(iii) of the Company Disclosure Schedule is obtained or given, as applicable, result in any breach of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to any right of termination, amendment, acceleration or cancellation ol or right to any payment or loss of benefit under, any Company Material Contract to which the Company or any of its Subsidiaries is a parfy or any Company Permit, or result in the creation of a Lien (other than any Permitted Lien), upon any of the properties or assets of the Company or any of its Subsidiaries, other than, in the case of clauses (ii) and (iii), as would not reasonably be expected to have a Company Material Adverse Effect. Section 3.4 Governmental Approvals. Except for (a) the filing with the SEC of a proxy statement, in preliminary and definitive form, relating to the Company Shareholders Meeting (as amended or supplemented from time to time, the "Proxy Statement"), and other filings required under, and compliance with other applicable requirements of, the Securities Exchange Act of 1934 (the "Exchange Act") and the rules of the NYSE in connection with this Agreement and the Merger, (b) the filing of the Articles of Merger with the Washington Secretary of State pursuant to the WBCA, (c) approvals or filings required under, and compliance with other applicable requirements of, the IPUC, MPSC, OPUC, RCA, and WUTC, (d) the FERC Approval, (e) the FCC Approval, (f) the CFIUS Approval, and (g) filings required under, and compliance with other applicable requirements of, the HSR Act (such approvals and filings described in clauses (c) through (f) of this Section 3.4, (the "Required Statutory Approvals"), no consents or approvals of, or filings, declarations or registrations with, any Governmental Authority are necessary for the execution and delivery of this Agreement by the Company and the consummation by the Company of the Transactions, other than as would not reasonably be expected to have a Company Material Adverse Effect. Section 3.5 Companv SEC Documents: Undisclosed Liabilities. (a) The Company has filed with or fumished to the SEC, on a timely basis, all registration statements, reports, proxy statements and other documents that the Company was required to file or furnish since January 1,2015 (collectively, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein, as such statements, reports and documents may have been amended since the date of their filing, the "Company SEC Documents"). As of their respective effective dates (in the case of Company SEC Documents that are registration statements filed pursuant to the requirements of the Securities Act) and as of their respective filing dates (in the case of all other Company SEC Documents), or in the case of amendments thereto, as of the date of the last such amendment (but only amendments prior to the date of this Agreement in the case of any Company SEC Document with a filing or effective date prior to the date of this Agreement), the Company SEC Documents complied in all material respects with the requirements of the Exchange Act, the Securities Act or the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), as the case may be, and the rules and regulations of the SEC promulgated thereunder, applicable to such Company SEC Documents, and none of the Company SEC Documents as of such respective dates (or, if amended, the date of the filing of such amendment, with respect to the disclosures that are amended) contained any untrue statement of a material fact or omitted to Exhibit No. 3 Case Nos. AVU-E-'l 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 15 of 70 #ss0l 530. I 2 ll state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Except to the extent updated, amended, restated or corrected by a subsequent Company SEC Document (but only updates, amendments, restatements or corrections prior to the date of this Agreement in the case of any Company SEC Document with a filing or effective date prior to the date of this Agreement), as of their respective dates of filing with the SEC, the consolidated financial statements of the Company included in the Company SEC Documents (i) complied as to form in all material respects with all applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto (except, in the case of unaudited statements, as permifted by Form I 0-Q of the SEC), (ii) have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (A) as may be indicated in the notes thereto or (B) as permitted by Regulation S-X under the Exchange Act) and (iii) present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries and the consolidated results of their operations and cash flows, as of each of the dates and for the periods shown, as applicable, in conformity with GAAP. (c) The Company has established and maintains disclosure controls and procedures and internal control over financial reporting (as such terms are defined in paragraphs (e) and (f), respectively, of Rule l3a-15 under the Exchange Act) as required by Rule l3a-15 under the Exchange Act. The Company's disclosure controls and procedures are reasonably designed to ensure that all material information required to be disclosed by the Company in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such material information is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure and to make the certifications required pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act. Based on its most recent evaluation of its internal control over financial reporting prior to the date hereof, the Company has disclosed to its auditors and its audit committee (A) all significant deficiencies and material weaknesses in the design or operation of intemal control over financial reporting (as such terms are defined in paragraphs (e) and (f), respectively, of Rule l3a-15 under the Exchange Act) which are reasonably likely to adversely affect its ability to record, process, summarize and report its consolidated financial information and (B) any known fraud, whether or not material, that involves management or other employees who have a significant role in its intemal control over financial reporting. (d) Neither the Company nor any of its Subsidiaries has any liabilities which would be required to be reflected or reserved against on a consolidated balance sheet ofthe Company prepared in accordance with GAAP or the notes thereto, except for liabilities (i) reflected or reserved against on the balance sheet of the Company and its Subsidiaries as of December 31,2016 (the "Balance Sheet Date") (including the notes thereto) included in the Company SEC Documents, (ii) incurred after the Balance Sheet Date in the ordinary course of business, (iii) as contemplated by this Agreement or otherwise arising in connection with the Transactions or (iv) as would not reasonably be expected to have a Company Material Adverse Effect. (e) All Regulatory Filings required to be made by the Company or any of its Subsidiaries since January 1,2015 have been filed or fumished with the applicable Govemmental Authority, and all such Regulatory Filings complied, as of their respective dates, with all applicable requirements of the applicable Laws, except, in each case, as would not reasonably be expected to have a Company Material Adverse Effect. Section 3.6 Absence of Certain Chanses. From the Balance Sheet Date to the date of this Agreement, (a) except in connection with the Transactions, the business of the Company and its t2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page '16 of 70 #5501530 12 Subsidiaries has been conducted in all material respects in the ordinary course of business consistent with past practice and (b) there has not been any circumstance, development, change, event, occurrence or effect that has had or would reasonably be expected to have a Company Material Adverse Effect. Section 3.7 Legal Proceedings. There is no pending or, to the Knowledge of the Company, threatened, Claim against the Company or any of its Subsidiaries, nor is there any Judgment imposed upon the Company or any of its Subsidiaries, in each case, by or before any Governmental Authority, that would reasonably be expected to have a Company Material Adverse Effect. Section 3.8 Comnliance With Laws: Permits. The Company and its Subsidiaries are in compliance with all laws, statutes, ordinances, codes, rules, regulations, rulings, and Judgments of Governmental Authorities (collectively, "Laws") applicable to the Company or any of its Subsidiaries, except for instances of non-compliance as would not reasonably be expected to have a Company Material Adverse Effect. The Company and each of its Subsidiaries hold, and are in compliance with, all licenses, franchises, permits, certificates, approvals, variances, orders, registrations and authorizations from Governmental Authorities required by Law for the conduct of their respective businesses as they are now being conducted (collectively, "@pA!y Permits,"), except as would not reasonably be expected to have a Company Material Adverse Effect. Section 3.9 Tax Matters. (a) Except for those matters that would not reasonably be expected to have a Company Material Adverse Effect or as specified in the Company Disclosure Schedule: (i) each of the Company and its Subsidiaries has timely filed, or has caused to be timely filed on its behalf (taking into account any extension of time within which to file), all Tax Returns required to be filed by it, and all such filed Tax Returns are true, correct and complete; (ii) all Taxes required to have been paid by the Company or its Subsidiaries (whether or not shown to be due on such Tax Returns) have been paid; (iii) no deficiency with respect to Taxes has been proposed, assefted or assessed against the Company or any of its Subsidiaries which has not been fully paid or adequately reserved against in accordance with GAAP; (iv) no audit or other administrative or court proceeding or Claim is pending before any Governmental Authority with respect to Taxes of the Company or any of its Subsidiaries, and no written notice thereof has been received (other than in respect of any such proceeding that has been resolved); (v) each of the Company and its Subsidiaries has withheld and timely remitted to the appropriate Governmental Authority all Taxes required to be withheld from amounts owing to any employee, creditor or third party and collected and paid all sales Taxes required to be withheld and paid; (vi) neither the Company nor any Subsidiary of the Company has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax which has not yet expired (excluding extensions of time to file Tax Returns obtained in the ordinary course); (vi) neither the Company nor any Subsidiary of the Company had any liabilities for unpaid Taxes as ofthe Balance Sheet Date that had not been accrued or reserved on such balance sheet in accordance with GAAP; (vii) neither the Company nor any Subsidiary of the Company has any liability for Taxes of any Person (except for the Company or any Subsidiary of the Company) arising from the application of Treasury Regulations Section 1 .1502-6 or any analogous provision of state, local or foreign Law, as a transferee or successor or by contract; (viii) neither the Company nor any Subsidiary of the Company is a party to or is otherwise bound by any Tax sharing, allocation or indemnification agreement or affangement, except for such an agreement or arrangement exclusively between or among the Company and Subsidiaries of the Company or customary Tax provisions contained in commercial agreements the principal subject matter of which is not related to Taxes; (ix) within the past three (3) years, neither the Company or any Subsidiary of the Company has been a "distributing corporation" or a "controlled corporation" in a distribution intended to qualify for tax-free treatment under Section 355 of the Code; (x) neither the Company nor any Subsidiary of the Company has participated in any "listed transaction" as l3 #5501 s30. I 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 17 ot70 defined in Treasury Regulations Section I .601 I -4 in any Tax year for which the statute of limitations has not expired, (xi) there are no Liens for Taxes on any of the assets of the Company or any or Subsidiary of the Company (except for any Liens described in clause (a) of the definition of Permitted Liens); (xii) neither the Company nor any Subsidiary of the Company has any Tax rulings, requests for rulings, closing agreements or other similar agreements in effect or filed with any Governmental Authority, and (xiii) neither the Company nor any Subsidiary of the Company has received any notice from a jurisdiction in which it does not file a Tax Retum that it is required to file any Tax Return or pay any Taxes in such jurisdiction. This Section 3.9 (and so much of Section 3.10 as it relates to Taxes) constitutes the sole and exclusive representation and warranty of the Company regarding Tax matters. (b) For purposes of this Agreement: (i) "Taxes" shall mean all federal, state, localor foreign taxes, charges, imposts, levies or other assessments, including all income, gross receipts, business and occupation, franchise, estimated, altemative minimum, add-on minimum, sales, use, transfer, value added, excise, severance, stamp, customs, duties, real property, personal property, capital stock, social security, unemployment, payroll, employee or other withholding, or other tax, including any interest, penalties or additions to tax imposed by any Govemmental Authority in connection with any of the foregoing and (ii) "Tax Retums" shall mean any return, report, claim for refund, estimate, information return or statement or other similar document filed or required to be filed with any Governmental Authority with respect to Taxes, including any schedule or attachment thereto, and any amendment thereof. Section 3.10 Emplovee Benefits Matters. (a) Section 3.10(a) of the Company Disclosure Schedule sets forlh a list, as ofthe date of this Agreement, of each material Company Plan. The Company has made available to Parent copies of (i) the current plan document for each Company Plan, (ii) the most recent annual reports on Form 5500 required to be filed with the Department of Labor with respect to each Company Plan (if any such report was required), (iii) the most recent summary plan description for each Company Plan for which such summary plan description is required and (iv) each trust agreement relating to any Company Plan. Except as would not reasonably be expected to have a Company Material Adverse Effect, each Company Plan has been maintained and is in compliance with its terms and the applicable provisions of ERISA, the Code and all other applicable Laws. There are no Claims pending or, to the Knowledge of the Company, threatened (other than claims for benefits in the ordinary course) with respect to any Company Plan that would reasonably be expected to have a Company Material Adverse Effect. All Company Plans that are "employee pension plans" (as defined in Section 3(3) of ERISA) that are intended to be tax qualified under Section 401 (a) of the Code (each, a "Company Pension Ph") have received a favorable determination or opinion letter from the IRS or has filed a timely application therefor, or is in the form of a pre-approved document that is the subject of a favorable opinion letter from the IRS. The Company has made available to Parent a correct and complete copy of the most recent determination letter received with respect to each Company Pension Plan, as well as a correct and complete copy of each pending application for a determination letter, if any. (b) With respect to each Company Pension Plan that is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code, (i) the Company, its Subsidiaries and their respective ERISA Affiliates have complied with the minimum funding requirements under Section 412,430 and 431 of the Code and Sections 302,303 and 304 of ERISA, whether or not waived, (ii) no reportable event within the meaning of Section 4043 of ERISA for which the 30-day notice requirement has not been waived has occurred, (iii) all premiums required to be paid to the PBGC under 4007 of ERISA have been timely paid, (iv) no liability under Section 4062 through 4071 of ERISA has been or is expected to be incurred by the Company, its Subsidiaries or any of their respective ERISA Affiliates (other than for premiums to the PBGC) and (v) proceedings to terminate any such Company Pension Plan have not been instituted under t4 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista #5501530 12 Schedule 3, Page '18 of 70 Sections 4041 or 4042 of ERISA except, in each case of clauses (i) - (v), as would not reasonably be expected to have a Company Material Adverse Effect. (c) Section 3.10(c) of the Company Disclosure Schedule lists each Multiemployer Plan. Neither the Company, nor any of its ERISA Affiliates: (i) has incurred a withdrawal (either complete or partial) (as defined in Section 4203 or 4205 of ERISA) from any Multiemployer Plan, or (ii) has incurred a decline in contributions to any Multiemployer Plan such that, if the current rate of contributions continues, a seventy-percent decline in contributions (as defined in Section 4205 of ERISA) will occur within the next three plan years except, in each case of clauses (i) or (ii), as would not be reasonably expected to have a Company Material Adverse Effect. To the Knowledge of the Company, (A) no event has occurred or circumstance exists that constitutes the termination or insolvency of any Multiemployer Plan (within the meanings of ERISA Sections 4041A and 4245, respectively) and (B) no Multiemployer Plan is a party to any pending merger or asset or liability transfer or is subject to any Claim brought by the PBGC, except, in each case of clauses (A) and (B), as would not reasonably be expected to have a Company Material Adverse Effect. (d) Except as set forth in Section 3.10(d) of the Company Disclosure Schedule oras otherwise required by this Agreement, the consummation of the Transactions alone, or in combination with another event (including any termination of employment before, on or following the Effective Time) will not, except as expressly provided in this Agreement, (i) entitle any employee of the Company to severance pay or any other termination payment or benefit or (ii) accelerate the time of payment or vesting, or materially increase the amount of compensation or benefits due to, any such employee. (e) Except as set forth in Section 3.10(e) of the Company Disclosure Schedule, no amounts payable under the Company Plans are reasonably expected to fail to be deductible for federal income tax purposes by virtue of Section 280G of the Code. Section 3.10(e) of the Company Disclosure Schedule lists the directors, officers, employees and service providers entitled to a gross-up, or make whole or other payment as a result of the imposition of taxes under Section 280G, Section 4999 or Section 4094 of the Code pursuant to any agreement or arrangement with the Company or any of its Subsidiaries. (f) This Section 3.10 and Section 3.16 (to the extent related to pensions and employee benefits) constitute the sole and exclusive representation and warranty of the Company regarding pension and employee benefit or liabilities or obligations, or compliance with Laws relating thereto. Section 3.11 Environmental Matters. Except as would not reasonably be expected to have a Company Material Adverse Effect, (a) each of the Company and its Subsidiaries is in compliance with all applicable Environmental Laws, which compliance includes obtaining, maintaining or complying with all Company Permits required under Environmental Laws for the operation of their respective businesses, and (i) all such Company Permits are valid and in full force and effect, and (ii) neither the Company nor any of its Subsidiaries has received any written communication from any Governmental Authority unilaterally seeking to modifu, revoke or terminate any such Environmental Permits in a manner that would be adverse to the Company; (b) there is no Claim relating to or arising under Environmental Laws (including relating to or arising from the Release, threatened Release or exposure to any Hazardous Material or alleging violation of any Company Permit) that is pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries; (c) to the Company's Knowledge, there are and have been no Releases of, or exposure to, any Hazardous Material on, at, under or from any properry currently or formerly owned, leased or operated by the Company or any of its Subsidiaries, that would reasonably be expected to form the basis of any such Claim against the Company or any of its Subsidiaries; (d) neither the Company nor any of its Subsidiaries have transported or arranged for the transportation of any Hazardous Materials generated by the Company or any of its Subsidiaries to any location which is listed on the National Priorities l5 #5501 530 l 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 19 of 70 List under CERCLA, or any similar state list, or which is the subject of federal, state or local enforcement actions or other investigations that would reasonably be expected to form the basis of any Claim against the Company or any of its Subsidiaries; and (e) neither the Company nor any of its Subsidiaries has received any written notice of, or entered into, any order, settlement, judgment, injunction or decree involving uncompleted, outstanding or unresolved liabilities or corrective or remedial obligations arising under Environmental Laws (including relating to or arising from the Release, threatened Release or exposure to any Hazardous Material). This Section 3.1 I constitutes the sole and exclusive representation and warranty of the Company regarding environmental matters, including all matters arising under Environmental Laws. Section 3.12 Intellectual Pronertv. Except as would not reasonably be expected to have a Company Material Adverse Effect, (a) (i) the conduct of the Company's and its Subsidiaries'business as currently conducted is not infringing or otherwise violating any Person's Intellectual Property and (ii) there is no Claim of such infringement or other violation pending, or to the Knowledge of the Company, being threatened in writing, against the Company, and (b) (i) to the Knowledge of the Company, no Person is infringing or otherwise violating any Intellectual Property owned by the Company or any of its Subsidiaries and (ii) no Claims of such infringement or other violation are pending or, to the Knowledge of the Company, being threatened in writing against any Person by the Company or any of its Subsidiaries. This Section 3.12 constitutes the sole and exclusive representation and warranty of the Company with respect to any Intellectual Property matters. Section 3.13 Takeover Statutes. Assuming that the representations and warranties of Parent, US Parent and Merger Sub set forth in Section 4.7 are true and correct in all respects, the Transactions are not subject to the restrictions on business combinations contained in Chapter 238.19 of the WBCA, or any other similar anti-takeover Law (each, a "Takeover Statute") or any similar provision in the Company Charter Documents. Section 3.14 Real Property. (a) Except as would not reasonably be expected to have a Company Material Adverse Effect, the Company or a Subsidiary of the Company owns and has either good and marketable title in fee or a valid leasehold interest, easement or other rights to the land, buildings, structures and other improvements thereon and fixtures thereto necessary to permit it to conduct its business as currently conducted, in each case free and clear of all Liens (except in all cases for Permitted Liens). Except as would not reasonably be expected to have a Company Material Adverse Effect and except as may be limited by the Bankruptcy and Equity Exception, all leases, Rights of Way agreements or other agreements under which the Company or any of its Subsidiaries lease, access or use any real property or real property interest are valid, binding and in full force and effect against the Company or any of its Subsidiaries and, to the Knowledge of the Company, the counterparties thereto, in accordance with their respective terms, and neither the Company nor any of its Subsidiaries are in default under any of such leases, Rights of Way or other agreements. (b) Each of the Company and its Subsidiaries has such consents, easements, rights of way, permits, licenses and other similar real property interests (collectively, "Rights of Way") from each person as are sufficient to conduct its business as currently conducted, except for such Rights of Way the absence of which have not had and would not reasonably be expected to have a Company Material Adverse Effect. Each of the Company and its Subsidiaries has fulfilled and performed all its material obligations with respect to such Rights of Way and conducts their business in a manner that does not violate any of the Rights of Way, and no event has occurred that would result in, or after notice or lapse of time would result in, revocation or termination thereof or would result in any impairment of the rights of the holder of any such Rights of Way, except for such revocations, terminations and impairments that have not had and would t6 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule3, Page20ot70 #5501 s30. I 2 not reasonably be expected to have a Company Material Adverse Effect. All pipelines owned or operated by the Company and its Subsidiaries are subject to Rights of Way, there are no encroachments or other encumbrances on the Rights of Way that materially affect the use thereof, there are no encroachments of improvements of the Company or any of its Subsidiaries outside of the boundaries of such Rights of Way other than encroachments that have not had and would not reasonably be expected to have a Company Material Adverse Effect and there are no gaps (including any gap arising as a result of any breach by the Company or any of its Subsidiaries of the terms of any Rights of Way) in the Rights of Way other than gaps that have not had and would not reasonably be expected to have a Company Material Adverse Effect. Section3.l5 Contracts. (a) For purposes of this Agreement, "Company Material Contract" means any Contract which is required to be filed or disclosed by the Company pursuant to the Securities Act or the Exchange Act as a "material contract" pursuant to Item 60 I (bX I 0) of Regulation S-K under the Securities Act. (b) Each Company Material Contract is valid and binding on the Company and any of its Subsidiaries to the extent the Company or such Subsidiary is a party thereto, as applicable, and to the Knowledge of the Company, each other party thereto, and is in full force and effect and enforceable in accordance with its terms (subject to the Bankruptcy and Equity Exception), except where the failure to be valid, binding, enforceable and in full force and effect would not reasonably be expected to have a Company Material Adverse Effect. The Company and each of its Subsidiaries, and, to the Knowledge of the Company, any other party thereto, has performed all obligations required to be performed by it under each Company Material Contract, except where such noncompliance would not reasonably be expected to have a Company Material Adverse Effect. Section 3.16 Labor. (a) Except as set forth in Section 3.16(a) of the Company Disclosure Schedule, to the Knowledge of the Company, since January 1,2015, no labor union or labor organization ("Uq!pn") has been certified as the exclusive bargaining representative of any employee of the Company or its Subsidiaries. To the Knowledge of the Company, no Union is currently seeking to organize Company Employees for the purpose of collective bargaining. Except for the CBAs as set forth in Section 3.16(a) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is, nor have been since January 1,2015, a party to, bound by, or negotiating any collective bargaining agreement or other Contract with a Union (the "CBAs") with respect to any of the respective employees of the Company or its Subsidiaries. There is not, nor has there been since January 1,2015, any labor strike, lockout or work stoppage, concerted refusal to work overtime or other labor dispute, or, to the Knowledge of the Company, threat thereof, by or with respect to, any employees of the Company or its Subsidiaries, except where such strike, lockout, work stoppage, concerted refusal to work overtime or other labor dispute would not reasonably be expected to have a Company Material Adverse Effect. (b) Except as set forth in Section 3.16(b) of the Company Disclosure Schedule, there are no Claims pending or, to the Knowledge of the Company, threatened by or on behalf of any employee or former employee of the Company or its Subsidiaries or Union alleging violations of local, state or federal Laws relating to labor or employment practices, except as would not reasonably be expected to have a Company Material Adverse Effect. (c) Since January 1,2015, neither the Company nor any of its Subsidiaries has engaged in any action that required notifications under the WARN Act. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 21 oI70 #5501 530. I 2 t7 (d) Section 3.8 and Section 3.10 (in each case, to the extent related to labor and employment matters) and this Section 3.16 constitute the sole and exclusive representation and warranty of the Company regarding labor or employment matters. Section 3.17 Opinion of Financial Advisor. The Company Board has received the opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("8_SIA_I4_9Ei_ll!y_!gh") dated as of the date of this Agreement, to the effect that, as of such date, and subject to the various assumptions and limitations set forth therein, the Merger Consideration to be received in the Merger by holders of the Company Common Stock is fair, from a financial point of view, to the holders of the Company Common Stock. Section3.l8 Brokers and Other Advisors. Except for BofA Merrill Lynch, no broker, investment banker, financial advisor or other Person is entitled to any broker's, finder's, financial advisor's or other similar fee in connection with the Transactions based upon affangements made by or on behalf of the Company or any of its Subsidiaries. Section 3.19 Company Shareholder Approval. Assuming the accuracy of the representations and warranties of Parent, US Parent and Merger Sub set forth in Section 4.7, approval of this Agreement and the plan of merger set forth herein by the affirmative vote (in person or by proxy) of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote at the Company Shareholders Meeting (the "Company Shareholder Approval") is the only vote or approval of the holders of any class or series of capital stock of the Company necessary to approve this Agreement and the plan of merger set forlh in this Agreement and the Transactions. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT. US PARENT AND MERGER SUB Except as set forth in the disclosure schedule delivered by Parent to the Company simultaneously with the execution of this Agreement (the "Parent Disclosur ") (which schedule sets forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more representations or warranties contained in this Article IV, or to one or more of Parent's, US Parent's or Merger Sub's covenants contained in Article V, except that any information set forth in one section of the Parent Disclosure Schedule will be deemed to apply to allother sections or subsections thereof to the extent it is reasonably apparent on the face of such disclosure that it is applicable to such other section or subsection notwithstanding the omission of a reference or cross reference thereto), Parent, US Parent and Merger Sub jointly and severally represent and warrant to the Company as follows: Section 4.1 Organization. Standins and Corporate Power. Parent is a corporation duly organized and validly existing under the Laws of Province of Ontario, US Parent is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, and Merger Sub is acorporation duly organized andvalidly existingunderthe Laws of the State of Washington. Each of Parent, US Parent and Merger Sub has all requisite corporate power and authority necessary to own or lease all of its properties and assets and to carry on its business as it is now being conducted. Parent is duly qualified to do business and is in good standing (where such a concept exists) in each jurisdiction in which the nature ofthe business conducted by it or the character or location ofthe properties and assets owned or leased by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Parent Material Adverse Effect. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 22of70 #5501530 l2 l8 Section4.2 Authoritv;Non-contravention. (a) Each of Parent, US Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement, to perform their respective obligations hereunder and to consummate the Transactions. The execution and delivery of and performance by Parent, US Parent and Merger Sub under this Agreement, and the consummation by Parent, US Parent and Merger Sub of the Transactions, have been duly authorized and approved by all necessary corporate action by Parent, US Parent and Merger Sub (including by the Parent Board, the board of directors of US Parent and the board of directors of Merger Sub) and approved by US Parent as the sole shareholder of Merger Sub, and no other corporate action on the part of Parent, US Parent and Merger Sub is necessary to authorize the execution and delivery oi and performance by Parent, US Parent and Merger Sub under, this Agreement and the plan of merger set forth in this Agreement and the consummation by them of the Transactions. This Agreement has been duly executed and delivered by Parent, US Parent and Merger Sub and, assuming due authorization, execution and delivery hereof by the Company, constitutes a legal, valid and binding obligation of each of Parent, US Parent and Merger Sub, enforceable against each of them in accordance with its terms, subject to the Bankruptcy and Equity Exception. No vote or approvalof the holders of any class or series of capital stock of Parent is necessary to adopt or approve this Agreement and the plan of merger set forth in this Agreement and the Transactions. (b) The execution and delivery of this Agreement by Parent, US Parent and Merger Sub do not, and neither the consummation by Parent, US Parent or Merger Sub of the Transactions, nor compliance by Parent, US Parent or Merger Sub with any of the terms or provisions hereof, will, (i) conflict with or violate any provision of the certificate of incorporation and bylaws or similar organizational documents of Parent, US Parent and Merger Sub, in each case, as in effect on the date of this Agreement or (ii) assuming that each of the consents, authorizations and approvals referred to in Section 4.3 is obtained (and any condition precedent to any such consent, authorization or approval has been satisfied), and each of the filings referred to in Section 4.3 are made and any applicable waiting periods referred to therein have expired or been terminated, violate any Law applicable to Parent, US Parent, Merger Sub or any of their respective Subsidiaries or (iii) result in any breach of, or constitute a default (with or without notice or lapse of time or both) under, or give rise to any right of termination, amendment, acceleration or cancellation of, or right to any payment or loss of benefit under, any Contract to which Parent, US Parent, Merger Sub or any of their respective Subsidiaries is a parfy, except, in the case of clauses (ii) and (iii), as would not reasonably be expected to have a Parent Material Adverse Effect. Section 4.3 Governmental Approvals. Except for (a) the filing with the SEC of the Proxy Statement, and other filings required under, and compliance with other applicable requirements of, Canadian securities laws, the Exchange Act and the rules of the NYSE and the TSX in connection with this Agreement and the Merger, (b) the filing of the Articles of Merger with the Washington Secretary of State pursuant to the WBCA, (c) filings required under, and compliance with other applicable requirements of, the HSR Act and (d) Required Statutory Approvals, no consents or approvals of, or filings, declarations or registrations with, any Govemmental Authority are necessary for the execution and delivery of this Agreement by Parent, US Parent and Merger Sub and the consummation by Parent, US Parent and Merger Sub of the Transactions, other than as would not reasonably be expected to have a Parent Material Adverse Effect. Section 4.4 Brokers and Other Advisors. Except for Moelis & Company LLC, the fees of which will be paid by Parent, no broker, investment banker, financial advisor or other Person is entitled to any broker's, finder's, financial advisor's or other similar fee in connection with the Transactions based upon arrangements made by or on behalf of Parent or any of its Subsidiaries. t9 #ssOl 530 I2 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 23o170 Section 4.5 Ownership and Operations of Merser Sub. As of the date hereof, and subject to the Restructuring, as of the Effective Time, (i) US Parent and one or more direct or indirect, wholly owned Subsidiaries of Parent will collectively own beneficially and of record all of the outstanding capital stock of Merger Sub, and (ii) a wholly owned Subsidiary of Parent owns and will own, beneficially and of record all of the outstanding capital stock of US Parent, in each case, all of which capital stock is duly authorized, validly issued, fully paid and non-assessable. US Parent, Merger Sub and any other direct or indirect, wholly owned Subsidiaries of Parent that own capital stock of Merger Sub were formed solely for the purpose of engaging in the Transactions. US Parent, Merger Sub and any other direct or indirect, wholly owned Subsidiaries of Parent that own capital stock of Merger Sub have no assets, liabilities or obligations and, since the date oftheir respective formations, have not engaged in any business activities or conducted any operations except, in each case, as arising from the execution of this Agreement and the performance of their covenants and agreements with respect to the Transactions. Section 4.6 Sufficient Funds. Parent shall have, and shall cause US Parent to have, available at or prior to the Effective Time, sufficient cash and cash equivalents and other sources of immediately available funds to deliver the aggregate Merger Consideration and make the payments required under Section 2.3, and any other amounts incurred or otherwise payable by Parent, US Parent, Merger Sub or the Surviving Corporation in connection with the Transactions, with no restriction on the use of such cash for such purposes. Parent has sufficient ability to access the capital markets such that Parent shall have, and shall cause US Parent to have, the financial resources and capabilities to fully perform their obligations under this Agreement. Parent, US Parent and Merger Sub acknowledge and agree that their obligations hereunder are not subject to any conditions regarding Parent's, Merger Sub's or any other Person's ability to obtain financing for the consummation of the Transactions. Section 4.7 Share Ownershin. None of Parent, US Parent or Merger Sub is, individually or together with their respective "affiliates" and "associates" (as such terms are defined in Rule 12b-2 of the Exchange Act), a "beneficial owner" (as such term is defined in Rule 13d-3 of the Exchange Act) of a number of shares of Company Common Stock equal to or greater than five percent (5%) of the total number of issued and outstanding shares of Company Common Stock. Section 4.8 Lesal Proceedinss. There is no pending or, to the Knowledge of Parent, threatened, Claims against Parent, US Parent, Merger Sub or any of their respective Subsidiaries, nor is there any Judgment imposed upon Parent, US Parent, Merger Sub or any of their respective Subsidiaries, in each case, by or before any Governmental Authority, that would reasonably be expected to have a Parent Material Adverse Effect. Section 4.9 Non-Reliance on Company Estimates. Proiections. Forecasts. Forward- Looking Statements and Business Plans. In connection with the due diligence investigation of the Company by Parent, US Parent, Merger Sub and their Affiliates, Parent, US Parent, Merger Sub and their Affiliates have received and may continue to receive from the Company certain estimates, projections. forecasts and other forward-looking information, as well as certain business plans and forward-looking cost-related plan information, regarding the Company, its Subsidiaries and their respective businesses and operations. Parent, US Parent and Merger Sub hereby acknowledge that there are uncertainties inherent in attempting to make such estimates, projections, forecasts and other forward-looking information, with which Parent, US Parent and Merger Sub are familiar, that Parent, US Parent and Merger Sub are making their own evaluation ofthe adequacy and accuracy of all estimates, projections, forecasts and other forward- looking information, as well as such business plans and forward-looking cost-related plans, fumished to them (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, forward-looking information, business plans or forward-looking cost-related plans), and that none of Parent, US Parent or Merger Sub has relied upon or will have any claim against the Company or any of its 20 Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-'l 7-_ M. Thies, Avista Schedule 3, Page 24 of70 #5501 530. I 2 Subsidiaries, or any of their respective shareholders, directors, officers, employees, Affiliates, advisors, agents or representatives, or any other Person, with respect thereto. Accordingly, each of Parent, US Parent and Merger Sub hereby acknowledges that neither the Company nor any of its Subsidiaries, nor any of their respective shareholders, directors, officers, employees, Affiliates, advisors, agents or representatives, nor any other Person, has made or is making any representation or warranty, express or implied, in respect of the Company, its Subsidiaries, or any of their respective assets, liabilities, businesses or operations other than the representations and warranties expressly set forth in Article III hereof or has or shall have any liability (whether pursuant to this Agreement, in tort or otherwise) with respect to such estimates, projections, forecasts, forward-looking information, business plans or cost-related plans (including the reasonableness of the assumptions underlying such estimates, projections, forecasts, forward-looking information, business plans or cost-related plans) and none of Parent, US Parent, Merger Sub nor any Affiliate of Parent, US Parent or Merger Sub has relied upon the accuracy or completeness of any express or implied representation, warranty, statement, or information of any nature made or provided by any Person (including in any data room, confidential information memorandum, management presentation or projections) on behalf of the Company, other than the representations and warranties expressly set forth in Article III (it being understood that Parent, US Parent, Merger Sub and any Affiliate of Parent, US Parent or Merger Sub have only relied on such express representations and warranties). Each of Parent, US Parent and Merger Sub, on its own behalf and on behalf of its Affiliates, waives all rights and claims it or they may have against the Company, an! of the Company's Subsidiaries or any of their respective Affiliates with respect to the accuracy of, any omission or concealment of, or any misstatement with respect to, any potentially material information regarding the Company or its Subsidiaries, or any of their respective assets, liabilities, businesses or operations, except as expressly set forth in Article III (including any certificates delivered pursuant to Section 6.2(c) with respect to same) hereof. Section 5.1 ARTICLE V COVENANTS Conduct of Business. (a) Except as contemplated or permitted by this Agreement, as required by applicable Laws, as contemplated by any of the matters set forth in Section 5.1(a) of the Company Disclosure Schedule, or with the prior written consent of Parent (which consent shall not be unreasonably withheld, delayed or conditioned), during the period from the date of this Agreement until the earlier of the Effective Time and the termination of this Agreement in accordance with Article VII, (x) the Company shall, and shall cause each of its Subsidiaries to, use its reasonable best efforts to conduct its business in all material respects in the ordinary course and to preserve intact its present lines of business, maintain its rights and franchises and preserve satisfactory relationships with Governmental Authorities, employees, customers and suppliers, and (y) the Company shall not, and shall not permit any of its Subsidiaries to: (i) issue, sell or grant any shares ofits capital stock, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for, any shares of its capital stock, or any rights, warrants or options to purchase any shares of its capital stock, or any securities or rights convertible into, exchangeable or exercisable for, or evidencing the right to subscribe for, any shares of its capital stock, except (A) for the issuance of any shares of Company Common Stock in settlement of RSUs and Performance Awards outstanding as of the date hereof or granted after the date hereof in accordance with Section 5.1(aXviii) of the Company Disclosure Schedule, in each case, which are subject to seftlement in accordance with their terms without regard to the Transactions, or (B) as set forth in Section 5.1(aXi) of the Company Disclosure Schedule; 2t Exhibit No. 3 Case Nos. AVU-E-'| 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 25 ol 70 #5501 530. l 2 (ii) redeem, purchase or otherwise acquire any of its outstanding shares of capital stock, or any rights, warrants or options to acquire any shares of its capital stock, except (A) pursuant to Company Material Contracts set forth in Section 5.1 (aXii) of the Company Disclosure Schedule in effect as of the date hereof or (B) in connection with withholding of shares of Company Common Stock to satisry Tax obligations with respect to RSUs and Performance Awards, or acquisitions in connection with the forfeiture of RSUs and Performance Awards; (iii) (A) declare, authorize, set aside for payment or pay any dividend on, or make any other distribution in respect of, any shares of its capital stock, other than (l) dividends paid by any Subsidiary of the Company to the Company or to any wholly owned Subsidiary of the Company, (2) quarterly cash dividends with respect to the Company Common Stock not to exceed the current annual per share dividend rate by more than $0.06 per year, with record dates and payment dates consistent with the Company's current dividend practice, or (3) a "stub period" dividend to holders of record of Company Common Stock as of immediately prior to the Effective Time equalto the product of (x) the number of days from the record date for payment of the last quarterly dividend paid by the Company prior to the Effective Time, multiplied by (y) a daily dividend rate determined by dividing the amount of the last quarterly dividend prior to the Effective Time by ninety-one (91) or (B) adjust, split, combine, subdivide or reclassif,, any shares of its capital stock; (iv) incur any Indebtedness in an outstanding principal amount in excess of 5250,000,000 in the aggregate, except for Indebtedness (1) incurred to replace, renew, extend, refinance or refund any existing Indebtedness in a principal amount not in excess of the principal amount of the existing Indebtedness that is the subject of such replacement, renewal, extension, refinancing or refunding, (2) for borrowed money incurred pursuant to (and up to the maximum amount permitted under) any Contract relating to Indebtedness as in effect as of the date of this Agreement or (3) among the Company and any of its wholly owned Subsidiaries or among any of such wholly owned Subsidiaries; (v) sell, pledge, dispose of, transfer, lease, license or encumber any of its propefties or assets, except (A) dispositions as to which the sales price is not in excess of $25,000,000 in the aggregate in any calendar year, (B) pursuant to a Company Material Contract in effect as of on the date of this Agreement, (C) dispositions of inventory, equipment or other assets that are no longer used or useful in the conduct ofthe business ofthe Company or any ofits Subsidiaries or (D) transfers among the Company and its wholly owned Subsidiaries; (vi) make capital expenditures, except for an aggregate amount of capital expenditures in any calendaryear equal to the aggregate amount budgeted in the Company's current long term plan that was made available to Parent prior to the date hereof for such year (plus a l0% variance), excluding any acquisition expenditures permitted pursuant to Section 5.1(aXvii); (vii) make any acquisition (including by merger) of, or investments in, the capital stock, equity securities, membership interests or a material portion of the assets of any other Person, for consideration in excess of$25,000,000 in the aggregate in any calendar year, excluding capital expenditures permitted pursuant to Section 5.1(aXvi); (viii) (l) increase the compensation or benefits of any of its directors, executive officers or Company Employees (plgytdgd that payments of bonuses and other grants and awards shall be made in the ordinary course of business consistent with past practice), (2) grant to any director or Company Employee of the Company or any of its Subsidiaries any increase in change- 22 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 26of70 #5501 530 l 2 in-control, severance, retention or termination pay, or enter into or amend any change-in-control, severance, retention or termination agreement with any Company Employee, or (3) take any action to accelerate the time of vesting, funding or payment of any compensation or benefits under any Company Plan, except, in each case, (A) as required pursuant to applicable Law, (B) pursuant to the terms of Company Plans or CBAs set forth on Section 3.16(a) of the Company Disclosure Schedule, or (C) for increases in salaries, wages and benefits of directors, executive officers or Company Employees made in the ordinary course of business consistent with past practice (including in connection with general merit-based increases and in connection with promotions in the ordinary course of business consistent with past practice); (ix) establish, adopt, amend or terminate any Company Plan (or any plan that would be a Company Plan if in existence on the date hereof) except (A) as required by Law or (B) for routine, immaterial or ministerial amendments; (x) make any material change to its methods of accounting, except as required by GAAP (or any interpretation thereof), Regulation S-X of the Exchange Act, as required by a Governmental Authority (including the Financial Accounting Standards Board or any similar organization) or as required by applicable Law; (xi) amend the Company Charler Documents or organizational documents of any Subsidiary of the Company (except for immaterial or ministerial amendments); (xii) adopt or consummate a plan or agreement of complete or partial liquidation or dissolution; (xiii) enter into, modi$, or amend in any material respect, or terminate or waive any material right under, any Company Material Contract, except for (A) entry into or modification, amendment, termination or waiver of any Company Material Contract in the ordinary course of business or (B) a termination without material penalty to the Company or any of its Subsidiaries; (xiv) settle or compromise any material Claim against the Company or any of its Subsidiaries, other than settlements or compromises that (A) with respect to the payment of monetary damages, involve only the payment of monetary damages by the Company or any of its Subsidiaries not exceeding $2,000,000 in the aggregate during any consecutive twelve-month period, and (B) except as contemplated by Section 5.9, with respect to any non-monetary terms and conditions therein, impose or require actions that would not reasonably be expected to be material and adverse to the Company and its Subsidiaries, taken as a whole; (xv) make or change any material Tax election, change any material method of Tax accounting, amend any material Tax Return, settle or compromise any material Tax liability, surrender any claim for a refund of material Taxes, enter into any closing agreements relating to material Taxes or grant any waiver of any statute of limitations with respect to, or any extension of any period of assessment of, any material Taxes; (xvi) permit any material insurance policy to terminate or lapse without replacing such policy with substantially comparable coverage; (xvii) enter into any Derivative Transactions other than in the ordinary course of business and in a manner consistent with and in compliance with hedging policies and procedures Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 27 ot70 #5501530.12 23 existing as of the date hereof, or materially change any of its energy price or interest rate risk management guidel ines; (xviii) enter into any new material line of business; (xix) take any action that would reasonably be expected to prevent or materially impede, interfere with or delay the consummation by the Company of the Transactions; or (xx) agree in writing to take any of the foregoing actions. (b) During the period from the date of this Agreement until the Effective Time, Parent, US Parent and Merger Sub shall not, and Parent shall cause its Subsidiaries not to, take any action that would reasonably be expected to prevent or materially impede, interfere with, or delay the consummation by Parent, US Parent or Merger Sub of the Transactions. (c) Notwithstanding anything to the contrary herein, the Company may, and may cause any of its Subsidiaries to, take reasonable actions in compliance with applicable Law with respect to any operational emergencies (including any restoration measures in response to any act of terrorism, hurricane, tomado, tsunami, flood, earthquake or other natural disaster or weather-related event, circumstance or development), equipment failures, outages or threat to the environment or the health or safety of natural Persons. (d) Between the date of this Agreement and the Effective Time, the Company and its Subsidiaries (i) shall continue to make Regulatory Filings in the ordinary course of business consistent with past practice, including those filings described in Section 5.1(d) of the Company Disclosure Schedule, (ii) may respond (after reasonable consultation with Parent) to Regulatory Filings made by other parties in which the Company or one or more of its Subsidiaries is an interested party, and (iii) may take any other action contemplated by or described in any such state or federal filings or other submissions filed or submitted in connection with Regulatory Filings in the ordinary course of business; plqvidgd, however, that, without in any way limiting the rights of the Company and its Subsidiaries set forth in the foregoing clauses (i), (ii) or (iii) of this Section 5.1(d), the Company shall (A) keep Parent promptly informed of any material communications or meetings with any Governmental Authorify with respect to rate cases and shall provide copies of any written communications or materials submitted to or received from any Governmental Authority in connection therewith, (B) consult with Parent and give Parent a reasonable opportunity, within the time constraints imposed in such rate cases, to comment on material written communications or materials submitted to any Govemmental Authority, in each case with respect to any rate cases, which the Company shall consider in good faith, and (C) at the request of Parent, provide Parent a reasonable opportunity to participate in any material meeting or communications related thereto. Parent shall have the opportunity to review and comment on all economic aspects of any rate case filing and shall have the right to approve (which approval shall not be unreasonably withheld, conditioned or delayed) any settlement of any rate case and rate case filing insofar as it would reasonably be expected to result in an outcome for the Surviving Corporation or any of its Subsidiaries that would be materially adverse to the Surviving Corporation or any of its Subsidiaries after the Effective Time, taking into account the requests made by the Company to the applicable Govemmental Authority in connection with such rate case and the resolution of similar recent rate cases by the Company. Section 5.2 Preparation of the Proxv Statementl Shareholders Meeting. (a) As promptly as reasonably practicable following the date of this Agreement, but in any event within sixty (60) days, the Company shall prepare and file with the SEC the preliminary Proxy Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 28ot70 #5501 530. I 2 24 Statement, and Parent shall cooperate with the Company in the preparation of the foregoing. The Company, with Parent's cooperation, shall use commercially reasonable efforts to respond as promptly as reasonably practicable to and resolve all comments received from the SEC or its staff concerning the Proxy Statement. The Company agrees that (i) except with respect to any information supplied in writing to the Company by Parent, US Parent or Merger Sub for inclusion or incorporation by reference in the Proxy Statement, the Proxy Statement will comply in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder and (ii) none of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Proxy Statement will, on the date it is first mailed to shareholders of the Company and at the time of the Company Shareholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will cause the definitive Proxy Statement to be mailed to the Company's shareholders, as promptly as reasonably practicable after the SEC confirms that it has no further comments on the Proxy Statement. No filing of, or amendment or supplement to, or correspondence with the SEC with respect to, the Proxy Statement will be made by the Company without providing Parent a reasonable opportunity to review and comment thereon; provided. however, that the foregoing shall not apply with respect to a Takeover Proposal, a Superior Proposal, a Company Adverse Recommendation Change or any matters relating thereto. Each of Parent, US Parent and Merger Sub shall cooperate with the Company in connection with the preparation and filing of the Proxy Statement, including promptly furnishing to the Company in writing upon request any and all information relating to it as may be required to be set forth in the Proxy Statement under applicable Law. Each of the Parent, US Parent and Merger Sub agrees that such information supplied by it in writing for inclusion (or incorporation by reference) in the Proxy Statement will not, on the date it is first mailed to shareholders of the Company and at the time of the Company Shareholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If, at any time prior to the Effective Time, any information relating to Parent, US Parent or Merger Sub or any of their respective Affiliates, officers or directors, should be discovered by Parent, US Parent or Merger Sub which should be set forth in an amendment or supplement to the Proxy Statement so that the Proxy Statement would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, Parent (or US Parent or Merger Sub, as the case may be) shall promptly notif the Company so that the Company may file with the SEC an appropriate amendment or supplement describing such information and, to the extent required by Law, disseminate such amendment or supplement to the shareholders of the Company. If, at any time prior to the Effective Time, any information relating to the Company or any of its respective Affiliates, officers or directors should be discovered by the Company which should be set forth in an amendment or supplement to the Proxy Statement so that the Proxy Statement would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the Company shall promptly notiff Parent and the Company shall file with the SEC an appropriate amendment or supplement describing such information and, to the extent required by Law, disseminate such amendment or supplement to the shareholders of the Company. (b) The Company shall, as promptly as reasonably practicable after the date of the mailing of the definitive Proxy Statement to the Company's shareholders, in accordance with applicable Law, the Company Chafter Documents and the NYSE rules, duly give notice of, convene and hold a meeting of its shareholders to consider the approval of this Agreement and the plan of merger set forth herein and such other matters as may then be reasonably required (including any adjoumment or postponement thereof, the "Company Shareholders Meeting"); provided. however, that the Company shall be permitted to delay or postpone convening the Company Shareholders Meeting (i) with the consent of Parent, (ii) for the absence of a quorum, (iii) to allow reasonable additionaltime for any supplemental or 25 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista #5501530 l2 Schedule 3, Page 29 ol 70 amended disclosure which the Company has determined in good faith (after consultation with outside legal counsel) is necessary under applicable Law and for such supplemental or amended disclosure to be disseminated and reviewed by the Company's shareholders prior to the Company Shareholders Meeting as necessary under applicable Law or (iv) to allow additional solicitation of votes in order to obtain the Company Shareholder Approval. Except if there has been a Company Adverse Recommendation Change in accordance with Section 5.3(d), the Company shall use its reasonable best efforts to solicit and secure the Company Shareholder Approval. (c) Unless and until there has been a Company Adverse Recommendation Change in accordance with Section 5.3, the Company shall include the Company Board Recommendation in the Proxy Statement. Section 5.3 No Solicitation: Chanse in Recommendation. (a) The Company agrees that it shall, and shall cause its Subsidiaries and its and its Subsidiaries respective directors, officers and employees to, and shall use its reasonable best efforts to cause its other Representatives to, immediately cease all existing discussions or negotiations with any Person conducted heretofore with respect to any Takeover Proposal. Except as otherwise provided in this Agreement, from the date of this Agreement until the earlier of the Effective Time or the date, if any, on which this Agreement is terminated pursuant to Section 7. 1, the Company shall not, and shall cause its Subsidiaries and its and its Subsidiaries respective directors, officers and employees not to, and shall use its reasonable best efforts to cause its other Representatives not to, directly or indirectly, (i) solicit, initiate, knowingly encourage or knowingly facilitate any Takeover Proposal or the making or consummation thereof or (ii) enter into, or otherwise participate in any discussions (except to notiff such Person of the existence of the provisions of this Section 5.3) or negotiations regarding, or furnish to any Person any material non-public information in connection with, any Takeover Proposal. (b) Notwithstanding anything to the contrary contained in this Agreement, if the Company or any of its Subsidiaries, or any of its or their respective Representatives, receives an unsolicited written Takeover Proposal made after the date of this Agreement and prior to the receipt of the Company Shareholder Approval, the Company, the Company Board (or a duly authorized committee thereof) and the Company's Representatives may engage in negotiations and discussions with, or furnish any information and other access to, any Person making such Takeover Proposal and any ofits Representatives or potential sources of financing if the Company Board determines in good faith, after consultation with the Company's outside legal and financial advisors, that such Takeover Proposal is or could reasonably be expected to lead to a Superior Proposal and that failure to take such actions would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law; provided that prior to engaging in any negotiations or discussions with, or furnishing any material non-public information to, any such Person or its Representatives, the Company and the Person making such Takeover Proposal shall have entered into an Acceptable Confidentiality Agreement. The Company will promptly (and in any event within the later of twenty-four (24) hours and 5:00 p.m. Pacific time on the next Business Day) notifu Parent in writing of the receipt of such Takeover Proposal and the material terms and conditions of such Takeover Proposal, including the identity of the Person making such Takeover Proposal. The Company will keep Parent promptly informed in all material respects (and in any event within the later of twenty-four (24) hours and 5:00 p.m. Pacific time on the next Business Day) of material communications relating to such Takeover Proposal (including any change in the price or other material terms thereof). The Company shall not terminate, amend, modifr, waive or fail to enforce any provision of any "standstill" or similar obligation of any Person unless the Company Board (or a duly authorized committee thereof) determines in good faith, after consultation with its outside legal counsel, that the failure to take such action would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law. 26 #s501 530. l 2 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 30 of 70 (c) Except as otherwise provided in this Agreement, neither the Company Board nor any committee thereof shall (i)(A) withdraw, change, qualif,, withhold or modifu in a manner adverse to Parent, or publicly propose to withdraw, change, quali$,, withhold or modi! in a manner adverse to Parent, the Company Board Recommendation, (B) adopt, approve or recommend, or publicly propose to adopt, approve or recommend, any Takeover Proposal, (C) fail to include the Company Board Recommendation in the Proxy Statement or (D) in the event a tender offer that constitutes a Takeover Proposal subject to Regulation l4D under the Exchange Act is commenced, fail to recommend against such Takeover Proposal in any solicitation or recommendation statement made on Schedule l4D-9 within ten (10) Business Days after Parent so requests reaffirmation in writing (provided that Parent shall be entitled to make such a written request for reaffirmation only once for each Takeover Proposal and once for each material amendment to such Takeover Proposal) (any action described in this clause (i) being referred to herein as a "Company Adverse Recommendation Change") or (ii) cause or permit the Company or any of its Affiliates to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, agreement or commitment (other than an Acceptable Confidentiality Agreement) constituting, or that would reasonably be expected to lead to a Takeover Proposal (a "Company Acquisition Agreement"). (d) Notwithstanding anything to the contrary in this Agreement: (i) at any time prior to obtaining the Company Shareholder Approval, if the Company has received a Superior Proposal other than as a result of a breach of this Section 5.3 (other than an immaterial breach), the Company Board (or a duly authorized committee thereof) may make a Company Adverse Recommendation Change and, solely with respect to a Superior Proposal, terminate this Agreement pursuant to Section 7.1(dXii), if (A) the Company Board (or a duly authorized committee thereof) determines in good faith, after consultation with its outside legal counsel, that the failure to make a Company Adverse Recommendation Change in response to the receipt of such Superior Proposal would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law and (B) ( I ) the Company provides Parent prior written notice of its intent to make a Company Adverse Recommendation Change and terminate this Agreement pursuant to Section 7.1(dXii) at least four (4) Business Days prior to taking such action to the effect that, absent any modification to the terms and conditions of this Agreement, the Company Board has resolved to effect a Company Adverse Recommendation Change and to terminate this Agreement pursuant to Section 7.1(d)(ii), which notice shall speciff the basis for such Company Adverse Recommendation Change and attach the most current draft of any Company Acquisition Agreement with respect to the Superior Proposal (or, if no such draft exists, a written summary of the material terms and conditions of such Superior Proposal) (a "Notice of Superior Proposal Recommendation Change") (it being understood that such Notice of Superior Proposal Recommendation Change shall not in itself be deemed a Company Adverse Recommendation Change and that any change in price or material revision or amendment to the terms of such Superior Proposal shall require a new notice to which the provisions of clauses (BXl), (2) and (3) of this Section 5.3(dXi) shall apply mutatis mutandis except that, in the case of such a new notice, all references to four (4) Business Days in this Section 5.3(d)(i) shall be deemed to be three (3) Business Days); (2) during such four (4) Business Day period following Parent's receipt of the Notice of Superior Proposal Recommendation Change, if requested by Parent, the Company shall make its Representatives reasonably available to negotiate in good faith with Parent and its Representatives regarding any modifications to the terms and conditions of this Agreement that Parent proposes to make; and (3) at the end of such four (4) Business Day period and taking into account any modifications to the terms of this Agreement proposed by Parent to the Company in a written, binding and irrevocable offer, the Company Board determines in good faith (after consultation with outside legal counsel) that the failure to make such a Company Adverse 27 #5501 530 r 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 31 of 70 Recommendation Change would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law and that such Takeover Proposal still constitutes a Superior Proposal; and (ii) at any time prior to obtaining the Company Shareholder Approval, the Company Board (or a duly authorized committee thereof) may make a Company Adverse Recommendation Change in response to the occurrence of a Company Intervening Event if (A) the Company Board (or a duly authorized committee thereof) determines in good faith, after consultation with its outside legal counsel, that the failure to make a Company Adverse Recommendation Change as a result of the occurrence of such Company Intervening Event would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law and (B) (l) the Company provides Parent prior written notice of its intent to make a Company Adverse Recommendation Change at least four (4) Business Days prior to taking such action to the effect that, absent any modification to the terms and conditions of this Agreement, the Company Board has resolved to effect a Company Adverse Recommendation Change, which notice shall describe in reasonable detail the Company Intervening Event that is the basis for such Company Adverse Recommendation Change (a "Notice of Interven ") (it being understood that such Notice of Intervening Event Recommendation Change shall not in itself be deemed a Company Adverse Recommendation Change); (2) during such four (4) Business Day period following Parent's receipt of the Notice of Intervening Event Recommendation Change, if requested by Parent, the Company shall make its Representatives reasonably available to negotiate in good faith with Parent and its Representatives regarding any modifications to the terms and conditions of this Agreement that Parent proposes to make; and (3) at the end of such four (4) Business Day period and taking into account any modifications to the terms of this Agreement proposed by Parent to the Company in a written, binding and irrevocable offer, the Company Board determines in good faith (after consultation with outside legal counsel) that the failure to make such a Company Adverse Recommendation Change would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law. (e) Nothing contained in this Agreement shall prohibit the Company or the Company Board (or a duly authorized committee thereof) from (i) taking and disclosing to the shareholders of the Company a position contemplated by Rule 14e-2(a) under the Exchange Act or making a statement contemplated by Item l0l2(a) of Regulation M-A or Rule l4d-9 under the Exchange Act, (ii) making any disclosure to the shareholders of the Company if the Company Board (or a duly authorized committee thereof) determines in good faith, after consultation with its outside legal counsel, that the failure to make such disclosure would be reasonably likely to be inconsistent with applicable Law, (iii) informing any Person of the existence of the provisions contained in this Section 5.3 or (iv) making any "stop, look and listen" communication to the shareholders of the Company pursuant to Rule l4d-9(f) under the Exchange Act (or any similar communication to the shareholders of the Company). No disclosures under this Section 5.3(e) shall be, in themselves, a breach of Section 5.3 or a basis for Parent to terminate this Agreement pursuant to Article vll. (f) As used in this Agreement, "T4keyel_ElopolAl" shall mean any bonafide inquiry, proposal or offer from any Person (other than Parent, US Parent, Merger Sub or any of their respective Affiliates) to purchase or otherwise acquire, directly or indirectly, in a single transaction or series of related transactions, (i) assets of the Company and its Subsidiaries (including securities of Subsidiaries) that account for l5Yo or more of the Company's consolidated assets or from which l5oh or more of the Company's revenues or earnings on a consolidated basis are derived or (ii) 15% or more of the outstanding Company Common Stock pursuant to a merger, consolidation or other business combination, sale or issuance of shares of capital stock, tender offer, share exchange, recapilalizalion or similar transaction involving the Company, in each case other than the Merger; 28 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 32o170 #5501530 r2 (g) As used in this Agreement, "Superior Proposal" shall mean any unsolicited written Takeover Proposal on terms which the Company Board (or a duly authorized committee thereof) determines in good faith, after consultation with the Company's outside legal counsel and independent financial advisors, to be more favorable to the holders of Company Common Stock than the Transactions (as may be revised pursuant to Section 5.3(dXi)), taking into account, to the extent applicable, the legal, financial, regulatory and other aspects of such proposal and this Agreement that the Company Board considers relevant, including the prospects for receipt of any required regulatory approvals and taking into account the agreements set forth in Section 1.6(a), Section 1.7 and Exhibit B attached hereto with respectto the Transactions; provided that for purposes ofthe definition of Superior Proposal, the references to "l 570" in the definition of Takeover Proposal shall be deemed to be references to "50oZ." Section 5.4 Reasonable Best Efforts. (a) Subject to the terms and conditions of this Agreement, each of the Company, Parent, US Parent and Merger Sub shall use its respective reasonable best efforts to (i) cause the Transactions to be consummated as soon as practicable, (ii) make promptly any required submissions and filings under applicable Antitrust Laws or to Governmental Authorities with respect to the Transactions, (iii) promptly furnish information required in connection with such submissions and filings to such Governmental Authorities or under such Antitrust Laws, (iv) keep the other parties reasonably informed with respect to the status of any such submissions and filings to such Governmental Authorities or under Antitrust Laws, including with respect to: (A) the receipt of any non-action, action, clearance, consent, approval or waiver, (B) the expiration or termination of any waiting period, (C) the commencement or proposed or threatened commencement of any investigation, litigation or administrative or judicial action or proceeding under Antitrust Laws or other applicable Laws, and (D) the nature and status of any objections raised or proposed or threatened to be raised under Antitrust Laws or other applicable Laws with respect to the Transactions and (v) obtain all actions or non-actions, clearances, approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any Governmental Authority (including the Regulatory Approvals) necessary to consummate the Transactions as soon as practicable. For purposes hereof, 'A44ry$_LAfyE" means the Sherman Act, the Clayton Act, the HSR Act, the Federal Trade Commission Act, and all applicable foreign Antitrust Laws and all other applicable Laws issued by a Govemmental Authority that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening of competition through merger or acquisition. (b) In furtherance and not in limitation of the foregoing: (i) each parfy hereto agrees to (A) make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the Transactions as promptly as reasonably practicable following the date of this Agreement, (B) furnish as soon as practicable any additional information and documentary material that may be required or requested pursuant to the HSR Act and (C) use its reasonable best efforts to take, or cause to be taken, all other actions consistent with this Section 5.4 necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act (including any extensions thereof) as soon as practicable and (ii) each party hereto agrees to (A) make or cause to be made the appropriate filings as soon as practicable with CFIUS, FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC relating to the Merger, (B) supply as soon as practicable any additional information and documentary material that may be required or requested by CFIUS, FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC, as applicable, in connection with the Regulatory Approvals and (C) use its reasonable best efforts to take or cause to be taken all other actions consistent with this Section 5.4 as necessary to obtain any necessary approvals, clearances, consents, waivers, registrations, permits, authorizations, confirmations or other actions or non-actions from CFIUS, FCC, FERC, IPUC, MPSC, OPUC, RCA, and WUTC, as applicable, in connection with the Regulatory Approvals as soon as practicable. 29 #5501 530. I 2 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 33 of 70 (c) The Company, Parent, US Parent and Merger Sub shall, subject to applicable Law relating to the exchange of information: (i) promptly notiff the other parties hereto of (and if in writing, furnish the other parties with copies of) any communication to such Person from a Governmental Authority regarding the filings and submissions described in Section 5.4(a) and permit the others to review and discuss in advance (and to consider in good faith any comments made by the others in relation to) any proposed written response to any communication from a Govemmental Authority regarding the filings and submissions described in Section 5.4(a), (ii) keep the others reasonably informed of any developments, meetings or discussions with any Governmental Authority in respect of any filings, investigations, or inquiries concerning the Transactions and (iii) not independently participate in any meeting or discussions with a Govemmental Authority in respect of any filings, investigations or inquiries concerning the Transactions without giving the other party or parties hereto prior notice of such meeting or discussions and, unless prohibited by such Govemmental Authorify, the opportunity to attend or participate; provided, that the Company, Parent, US Parent and Merger Sub shall be permitted to redact any correspondence, filing, submission or communication prior to furnishing it to the other party or parties hereto to the extent such correspondence, filing, submission or communication contains competitively or commercially sensitive information, including information relating to the valuation of the Transactions. (d) In furtherance and not in limitation of the foregoing, but subject to the other terms and conditions of this Section 5.4, Parent, US Parent and Merger Sub agree to take promptly any and all steps necessary to avoid, eliminate or resolve each and every impediment and obtain all clearances, consents, approvals and waivers under Antitrust Laws or other applicable Laws that may be required by any Governmental Authority (including any Regulatory Approvals), so as to enable the parties to close the Transactions as soon as practicable (and in any event no later than three (3) Business Days prior to the End Date), including committing to and effecting, by consent decree, hold separate orders, trust, or otherwise, (i) the sale, license, holding separate or other disposition of assets or businesses of Parent or the Company or any of their respective Subsidiaries, (ii) terminating, relinquishing, modiffing, or waiving existing relationships, ventures, contractual rights, obligations or other arrangements of Parent or the Company or their respective Subsidiaries and (iii) creating any relationships, ventures, contractual rights, obligations or other arrangements of Parent or the Company or their respective Subsidiaries (each a "Bg4_gdjAlAgli_en"); provided, however, that any Remedial Action may, at the discretion of the Company or Parent, be conditioned upon consummation of the Transactions. (e) In furtherance and not in limitation of the foregoing, but subject to the other terms and conditions of this Section 5.4, in the event that any litigation or other administrative or judicial action or proceeding is commenced, threatened or is reasonably foreseeable challenging any of the Transactions and such litigation, action or proceeding seeks, or would reasonably be expected to seek, to prevent, materially impede or materially delay the consummation of the Transactions, Parent shall take or cause to be taken any and all action, including a Remedial Action, to avoid or resolve any such litigation, action or proceeding as promptly as practicable (and in any event shall commence such action no later than three (3) Business Days prior to the End Date). In addition, each of the Company, Parent, US Parent and Merger Sub shall cooperate with each other and use its respective reasonable best efforts to contest, defend and resist any such litigation, action or proceeding and to have vacated, lifted, reversed or ovefturned any Judgment, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents, delays, interferes with or restricts consummation of the Transactions as promptly as practicable and in any event no later than three (3) Business Days prior to the End Date. (0 From the date hereof until the earlier of the Effective Time and the date this Agreement is terminated pursuant to Article VII, neither Parent, US Parent nor Merger Sub shall, nor shall they permit their respective Subsidiaries to, acquire or agree to acquire any rights, assets, business, Person or division thereof (through acquisition, license, joint venture, collaboration or otherwise), if such 30 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista #5501 530. I 2 Schedule 3, Page 34 ol70 acquisition would reasonably be expected to materially increase the risk of not obtaining any applicable clearance, consent, approval or waiver under Antitrust Laws or other applicable Laws (including any Regulatory Approvals) with respect to the Transactions, or would reasonably be expected to prevent or prohibit, or materially impede, interfere with or delay, obtaining any applicable clearance, consent, approval or waiver under Antitrust Laws or other applicable Laws (including any Regulatory Approvals) with respect to the Transactions. (g) Notwithstanding the obligations set forth in this Agreement, Parent and its Affiliates shall not be required to, in connection with obtaining any actions or non-actions, clearances, approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any Governmental Authority (including the Regulatory Approvals) in connection with this Agreement or the Transactions, offer or accept, or agree, commit to agree or consent to, any undertaking, term, condition, liability, obligation, commitment or sanction (including any Remedial Action), that constitutes a Burdensome Condition. The Company shall not, and shall not permit any of its Subsidiaries to, in connection with obtaining any actions or non-actions, clearances, approvals, consents, waivers, registrations, permits, authorizations and other confirmations from any Govemmental Authority (including the Regulatory Approvals) in connection with this Agreement or the Transactions, (x) offer to agree to any undertaking, term, condition, liability, obligation, commitment or sanction (including any Remedial Action) that would reasonably be expected to be material and adverse to Parent's ability to obtain the Regulatory Approvals on substantially the terms that Parent reasonably expects, or (y) accept, or agree, commit to agree or consent to, any undertaking, term, condition, liability, obligation, commitment or sanction (including any Remedial Action); provided, however, the Company and its Subsidiaries shall take any Remedial Action requested by Parent if such Remedial Action is conditioned upon the consummation of the Transactions, it being understood that the foregoing limitations on the Company and its Subsidiaries shall not in any manner impact the obligations of Parent, US Parent or Merger Sub pursuant to this Section 5.4. (h) Parent shall promptly notifu the Company and the Company shall noti$ Parent of any notice or other communication from any Governmental Authority alleging that such Governmental Authority's consent is or may be required in connection with or as a condition of the Merger. Section 5.5 Public Announcements. The initial press release with respect to the execution of this Agreement shall be a joint press release to be reasonably agreed upon by Parent and the Company. Following such initial press release, Parent and the Company shall consult with each other before issuing, and shall give each other the opportunity to review and comment upon, any press release or other public statement with respect to the Transactions (to the extent it contains information that is different than what is contained in the initial press release) and shall not issue any such press release or make any such public statement prior to such consultation, except as such party may reasonably conclude may be required by applicable Law, court process or by obligations pursuant to any listing agreement with, or requirement of, any applicable securities exchange or securities quotation system (which shall include the NYSE in the case of the Company and the TSX in the case of Parent in respect of the obligations of Parent to such exchange) (and then only after as much advance notice and consultation as is feasible); provided. however, that the restrictions set fofth in this Section 5.5 shall not apply to any release or public statement (a) made or proposed to be made by the Company in connection with a Takeover Proposal, a Superior Proposal or a Company Adverse Recommendation Change or any action taken pursuant thereto, (b) in connection with any dispute between the parties regarding this Agreement or the Transactions or (c) that is not inconsistent in any material respects with any prior public disclosures regarding the Transactions. 3l #5501 530. l 2 Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 35 of 70 Section 5.6 Access to Information: Confidentialitv. (a) Subject to applicable Laws relating to the exchange of information, from the date hereof until the earlier of the Effective Time or the date on which this Agreement is terminated pursuant to Section 7.1, the Company shall afford to Parent and its Representatives reasonable access (at Parent's sole cost and expense) during normal business hours and upon reasonable advance notice to the Company's properties (but excluding for the conduct of Phase II environmental assessments or testing), employees, books, Contracts and records and the Company shall furnish as promptly as reasonably practicable to Parent such information conceming its business, properties, contracts, assets and liabilities of the Company as Parent may reasonably request (other than any publicly available document filed by the Company and its Subsidiaries pursuant to the requirements of federal or state securities Laws); ptovided that Parent and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Company and its Subsidiaries or Company Joint Ventures; provided. further, (i) that the Company shall not be obligated to provide such access or information if the Company determines, in its reasonable judgment, that doing so would violate applicable Law or a Contract or obligation of confidentiality owing to a third party, jeopardize the protection of the attorney-client privilege, or expose such party to risk of liability for disclosure of sensitive or personal information and (ii) the conduct of such activities shall be subject to the rights and obligations of the Company referred to in the final proviso of the final sentence of Section 5.4(c) hereof. Until the Effective Time, the information provided will be subject to the terms of the confidentiality agreement, dated as of May 31,201'7 between Parent and the Company (as it may be amended from time to time, the "Confidentiali8 Agreement"), and, without limiting the generality of the foregoing, Parent and Company shall not, and Parent and Company shall cause their respective Representatives not to, use such information for any purpose unrelated to the consummation of the Transactions. (b) If this Agreement is terminated pursuant to Section 7.1, the Confidentiality Agreement shall automatically be deemed to be amended and restated such that (i) the "Standstill Period" for all purposes of the Confidentiality Agreement shall be the period of eighteen ( I 8) months from the date of such termination, as if the parties hereto had never entered into this Agreement, and (ii) the other provisions of the Confidentiality Agreement shallremain in force and effect for a period of two (2) years after such termination, as if the parties hereto had never entered into this Agreement. Section 5.7 Takeover Laws. If any Takeover Statute becomes applicable to the Transactions, the Company and the Company Board will use its reasonable best efforts to ensure that the Transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such statute or regulation on the Transactions. Section 5.8 Indemnification and Insurance. (a) From and after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, (i) indemnifo, defend and hold harmless each current and former director, officer and employee of the Company and any of its Subsidiaries and each person who served as a director, officer, member, trustee or fiduciary of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or enterprise if such service was at the request or for the benefit of the Company or any of its Subsidiaries (each, an "!nde!Uli!e-9" and, collectively, the "lndemnitees") against all claims, liabilities, losses, damages, judgments, fines, penalties, costs (including amounts paid in settlement or compromise) and expenses (including fees and expenses of legal counsel) in connection with any actual or threatened claim, suit, action, proceeding or investigation (whether civil, criminal, administrative or investigative) (each, a "e.!sim"), whenever asserted, arising out of, relating to or in connection with any action or omission relating to their position with the Company or its Subsidiaries occurring or alleged to 32 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 36 of 70 #5501530 l2 have occurred before or at the Effective Time (including any Claim relating in whole or in part to this Agreement or the Transactions), to the fullest extent permitted under applicable Law and (ii) assume all obligations of the Company and its Subsidiaries to the Indemnitees in respect of limitation of liability, exculpation, indemnification and advancement of expenses as provided in (A) the Company Charter Documents and the respective organizational documents of each of the Company's Subsidiaries as currently in effect and (B) any indemnification agreements with an Indemnitee (but only to the extent such indemnification agreement was made available to Parent prior to the date hereof or entered into after the date hereof in compliance with Section 5.1(a)), which shall in each case survive the Transactions and continue in full force and effect to the extent permitted by applicable Law. Without limiting the foregoing, at the Effective Time, the Surviving Corporation shall, and Parent shall, and shall cause the Surviving Corporation to, cause the articles of incorporation and bylaws of the Surviving Corporation to include provisions for limitation of liabilities of directors and officers, indemnification, advancement of expenses and exculpation of the Indemnitees no less favorable to the Indemnitees than as set forth in the Company Charter Documents in effect on the date of this Agreement, which provisions shall not be amended, repealed or otherwise modified in a manner that would adversely affect the rights thereunder of the Indemnitees except as required by applicable Law. (b) From and after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, pay and advance to an Indemnitee any expenses (including fees and expenses of legal counsel) in connection with any Claim relating to any acts or omissions covered under this Section 5.8 or the enforcement of an Indemnitee's rights under this Section 5.8 as and when incurred to the fullest extent permitted under applicable Law, provided that the Indemnitee to whom expenses are advanced provides an undertaking to repay such expenses if it is ultimately determined by a court of competent jurisdiction that such Indemnitee is not entitled to indemnification for such matter (but only to the extent such repayment is required by applicable Law, the Company Charter Documents, the applicable organizational documents of any Subsidiary of the Company or applicable indemnification agreements). (c) For a period of six (6) years from the Effective Time, Parent shall cause to be maintained in effect coverage no less favorable than the coverage provided by the policies ofdirectors' and officers' liability insurance and fiduciary liability insurance in effect as of the date hereof maintained by the Company and its Subsidiaries with respect to matters arising on or before the Effective Time either through the Company's existing insurance provider or another provider reasonably selected by Parent; provided, however, that, after the Effective Time, none of Parent, US Parent or the Surviving Corporation shallbe required to pay annualpremiums in excess of 300% of the annual premium currently paid by the Company in respect ofthe coverages required to be obtained pursuant hereto, but in such case shall purchase as much coverage as reasonably practicable for such amount; plqvid-gd, further, that in lieu of the foregoing insurance coverage, the Company may purchase "tail" insurance coverage, at a cost no greater than the aggregate amount which Parent, US Parent or the Surviving Corporation would be required to spend during the six-year period provided for in this Section 5.8(c), that provides coverage no less favorable than the coverage described above to the insured persons than the directors' and officers' liability insurance and fiduciary liabiliry insurance coverage currently maintained by the Company and its Subsidiaries as of the date hereof with respect to matters arising on or before the Effective Time. (d) The provisions of this Section 5.8 are (i) intended to be for the benefit ol and shall be enforceable by, each Indemnitee, his or her heirs and his or her representatives from and after the Effective Time, and (ii) in addition to, and not in substitution for or limitation of, any other rights to indemnification or contribution that any such Person may have by contract or otherwise. The obligations of Parent, US Parent and the Surviving Corporation under this Section 5.8 shall not be terminated or modified in such a manner as to adversely affect the rights of any Indemnitee to whom this Section 5.8 applies unless (A) such termination or modification is required by applicable Law or (B) the affected 33 Exhibit No. 3 Case Nos. AVU-E-'I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 37 ol70 #5501 530 r 2 Indemnitee shall have consented in writing to such termination or modification (it being expressly agreed that the Indemnitees to whom this Section 5.8 applies shall be third party beneficiaries of this Section 5.8). (e) In the event that Parent, US Parent, the Surviving Corporation or any of their respective successors or assigns (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all ofits properties and assets to any Person, then, and in each such case, proper provision shall be made so that the successors and assigns of Parent, US Parent and the Surviving Corporation shall assume all of the obligations thereof set forth in this Section 5.8. Section 5.9 Transaction Litisation. Each of Parent and the Company shall notif the other promptly of the commencement of any shareholder litigation relating to this Agreement or the Transactions of which it has received notice ("Transaction Litigation"), and provide the other copies of any complaints and pleadings filed in connection therewith (to the extent the other is not a named party thereto). The Company shall give Parent the opportunity to participate in, but not control, and shall reasonably consult with Parent with respect to, the defense or settlement of any Transaction Litigation, and no settlement of any Transaction Litigation shall be agreed to by the Company without Parent's prior written consent, such consent not to be unreasonably withheld, conditioned or delayed. Section 5.10 Section 16. Prior to the Effective Time, each of the Company, Parent, US Parent and Merger Sub shall take all such steps reasonably necessary to cause any dispositions of Company Common Stock (including derivative securities with respect to Company Common Stock) directly resulting from the Merger by each individual who will be subject to the reporting requirements of Section l6(a) of the Exchange Act with respect to the Company immediately prior to the Effective Time to be exempt under Rule l6b-3 promulgated under the Exchange Act. Section 5.1I Employee Matters. (a) For a period of three (3) years following the Effective Time (the "Continuation Period"), Parent or its Subsidiaries shall provide, or shall cause to be provided, to each individual who is employed by the Company or any of its Subsidiaries (including the Surviving Corporation and its Subsidiaries) immediately prior to the Effective Time (each, a "Company Employee"), annual base salary or hourly rate, as applicable, annual cash bonus and long-term incentive compensation opportunities (including target bonus amounts that are payable subject to the satisfaction of performance criteria in effect immediately prior to the Effective Time) and employee benefits, in each case, that are no less favorable than such annual base salary and base wages, annual cash bonus and long-term incentive compensation opportunities and employee benefits provided to such Company Employee, in the aggregate, immediately prior to the Effective Time, for the period of time during the Continuation Period in which each such Continuing Employee is employed by the Company or an Affiliate of the Company. Notwithstanding the foregoing, with respect to equity based long-term incentive compensation, Parent or its Subsidiaries may provide equity based long-term incentive compensation to the Company Employees in accordance with (and in a manner no less favorable than) its incentive objectives with respect to Parent's and its Subsidiaries' employees, and any such equity based long-term incentive compensation shall be included in determining whether the long-term incentive compensation opportunities set forth above have been provided as required. (b) For all purposes (including purposes of vesting, eligibility to participate and level of benefits but not for purposes of defined benefit pension accrual) under the employee benefit plans of Parent and its Subsidiaries providing benefits to any Company Employee after the Effective Time (including the Company Plans) (the "Neyi._PlAE"), each Company Employee shall be credited with his or her years of service with the Company and its Subsidiaries and their respective predecessors before the Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista #5501 530. I 2 34 Schedule 3, Page 38 of 70 Effective Time, to the same extent as such Company Employee was entitled, before the Effective Time, to credit for such service under any Company Plan which is analogous to a New Plan and in which such Company Employee participated or was eligible to participate immediately prior to the Effective Time, provided that the foregoing shall not apply to the extent that its application would result in a duplication of benefits with respect to the same period of service. Furthermore, to the extent a Company Employee or a "Company Retired Employee" (as defined below) becomes eligible to participate in Parent's or its Subsidiaries' retiree medical plan, for all purposes (including purposes of vesting, eligibility to participate and level of benefits) under the retiree medical plan of Parent and its Subsidiaries, each (i) Company Employee and (ii) former employee of the Company or any of its Subsidiaries whose employment with the Company or any of its Subsidiaries ended as a result of such former employee's retirement and who is eligible to participate in the Company's retiree medical plan as of the Effective Time (which, for the avoidance of doubt, will include any such individuals who waived participation in such retiree medical plan but are still eligible, pursuant to the terms of such retiree medical plan as in effect on the date hereof, to participate in such plan) (the "Company Retired Employees"), shall be credited with his or her years of service with the Company and its Subsidiaries and their respective predecessors before the Effective Time, to the same extent as such Company Employee or Company Retired Employee was entitled, immediately before the Effective Time, to credit for such service under the Company's retiree medical plan as of the Effective Time. Parent shall, or shall cause an Affiliate to, provide postretirement medical benefits (including the employer contribution toward the cost of such postretirement medical benefits) to Eligible Retirees (as defined below) that (A) during the Continuation Period are no less favorable than those provided under the Company's postretirement medical program in effect as of the date of the Agreement (the "Company Retiree Health Plan") and (B) following the Continuation Period are no less favorable than those provided to similarly situated, as applicable, employees and retirees who participate in the post- retirement programs of Parent or its Subsidiaries (other than the Surviving Corporation). "!ljg!!!q[9!1999" means Company Retired Employees and Company Employees who are or become eligible to participate in the Company Retiree Health Plan as in effect on January 1, 2016 during or after the Continuation Period. In addition, and without limiting the generality of the foregoing, (l) Parent shall, or cause an Affiliate to, cause each Company Employee to be immediately eligible to participate, without any waiting time, in any and all New Plans to the extent coverage under such New Plan is replacing comparable coverage under a Company Plan in which such Company Employee participated immediately before the Effective Time (such plans, collectively, the "Old Plans"), and (2) for purposes of each New Plan providing medical, dental, pharmaceutical and/or vision benefits to any Company Employee, Parent shall cause (or, in the case of a New Plan that is insured by a third party insurance company, shall use commercially reasonable efforts to cause such insurance company to cause) all pre-existing condition exclusions and actively-at-work requirements of such New Plan to be waived for such Company Employee and his or her covered dependents, to the extent such conditions were inapplicable or waived under the comparable Old Plans of the Company or its Subsidiaries in which such Company Employee participated immediately prior to the Effective Time. Parent shall, or cause an Affiliate to, cause (or, in the case of a New Plan that is insured by a third party insurance company, shall use commercially reasonable efforts to cause such insurance company to cause) any eligible expenses incurred by any Company Employee and his or her covered dependents during the portion of the plan year ofthe Old Plan ending on the date such Company Employee's participation in the corresponding New Plan begins to be taken into account under such analogous New Plan for purposes of satisfuing all deductible, coinsurance and maximum out-of-pocket requirements applicable to such Company Employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New Plan. (c) Without limiting the generality of Section 5.ll(a), from and after the Effective Time, Parent shall cause the Surviving Corporation and its Subsidiaries to assume, honor, and continue all obligations under the Company Plans and compensation and severance affangements and agreements in accordance with their terms as in effect immediately before the Effective Time (including the Executive 35 Exhibit No. 3 Case Nos. AVU-E-I 7-_ / AVU-G-I7-_ M. Thies, Avista Schedule 3, Page 39 of 70 #5501 530. l 2 Change of Control Agreements), and the Transactions shall be deemed to constitute a "change in control," "change of control," "corporate transaction" or similar words to such effect under all such Company Plans, arrangements or agreements. (d) To the extent that the Effective Time occurs (i) in 201 8 or (ii) following the end of the 2018 performance period with respect to the Company's Annual Incentive Plans or any other applicable annual bonus plan, but, in each case, prior to payment ofthe bonuses for such 2018 performance period, Parent shall cause the Surviving Corporation to pay to each Company Employee the bonus to which the Company Employee would be entitled for such 2018 performance period based on actual performance, with such payment to occur no later than March 15,2019, consistent with past practice. In addition, in the event that the Effective Time occurs in 2019, Parent shall cause the Surviving Corporation to pay to each Company Employee any bonus that such Company Employee would be entitled to receive under the Company's Annual Incentive Plans and any other applicable annual bonus plan for the 2019 performance period based on such Company Employee's actual performance for such 2019 performance period, with such payment to occur no later than March 15,2020, consistent with past practice. (e) Notwithstanding anything to the contrary in this Section 5.1l, with respect to all employment terms and conditions affecting Company Employees covered by a CBA, as applicable, Parent shall or shall cause US Parent to: (l) assume any liabilities or obligations contained in the CBAs;and(2) provide, or shall cause to be provided, to such Company Employees terms and conditions of employment, including all compensation and benefits, as required by the applicable CBAs. (0 Effective as of the Effective Time, Parent shall cause the Surviving Corporation to impl'ement the executive retention program for the executives listed on Section 5.1l(fl of the Parent Disclosure Schedule on the terms set forth therein. (g) Notwithstanding anything to the contrary herein, the provisions of this Section 5.1 I are solely for the benefit of the parties to this Agreement, and no provision of this Section 5.I I is intended to, or shall, constitute the establishment or adoption of or an amendment to any Company Plans, and no Company Employee or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement or have the right to enforce the provisions hereof including in respect of continued employment (or resumed employment). Nothing contained herein shall alter the at- will employment relationship of any Company Employee. (a) Parent and US Parent shall take or cause to be taken all actions necessary to (i) cause Merger Sub and the Surviving Corporation to perform promptly their respective obligations under this Agreement and (ii) cause Merger Sub to consummate the Merger on the terms and conditions set forth in this Agreement. Prior to the Effective Time, US Parent and Merger Sub shall not engage in any activity ofany nature except for activities related to or in fuftherance ofthe Transactions or the Restructuring. (b) In the event that Parent, US Parent and Merger Sub determine to effect the Restructuring, the Company agrees to provide reasonable cooperation to Parent, US Parent and Merger Sub, upon request, in connection with the implementation of the Restructuring; provided that any obligation to cooperate shall be limited to the same extent provided under Section 5.15(b); plgvidgd, further, that in no event shall the failure to comply with this Section 5.12(b) give rise to a failure of the condition in Section 6.2(.b\ to be satisfied. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista #ss0 1 530.1 2 36 Schedule 3, Page 40 ol 70 Section 5.12 Merger Sub and Surviving Corporation. (c) Parent shall (i) promptly reimburse the Company for all reasonable and out-of- pocket costs or expenses (including reasonable and documented costs and expenses of counsel and accountants) incurred by the Company, the Subsidiaries of the Company and any of its or their Representatives in connection with any cooperation provided for in Section 5.12(b), and (ii) indemnifr and hold harmless the Company, the Subsidiaries of the Company and any of its and their Representatives against any claim, loss, damage, injury, liability, judgment, award, penalty, fine, cost (including cost of investigation), expense (including fees and expenses of counsel and accountants) or settlement payment incurred as a result of, or in connection with, any cooperation provided for in Section 5.12(b) and any information used in connection therewith, unless the Company acted in bad faith or with gross negligence and other than in the case offraud (d) At or prior to the Effective Time, Parent shall adopt the instrument set forth in Section 5.12 of the Parent Disclosure Schedule, with regard to the matters set forth in Exhibit A and Exhibit B. Section 5.13 No Control of Other Party's Business. Nothing contained in this Agreement is intended to give Parent, US Parent or Merger Sub, directly or indirectly, the right to control or direct the Company's or its Subsidiaries' operations prior to the Effective Time. Prior to the Effective Time, the Company shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its and its Subsidiaries' respective operations. Section 5.14 Advice of Chanees. From and after the date of this Agreement until the Effective Time, each of Parent, US Parent and the Company will, to the extent not in violation of any applicable Law, promptly notiff the other of (a) any circumstance, development, change, event, occurrence or effect of which it has Knowledge that has had or that would reasonably be expected to have a Parent Material Adverse Effect or a Company Material Adverse Effect, as the case may be, or (b) any material breach of any of its representations, warranties or covenants contained in this Agreement that would reasonably be expected to give rise to a failure ofany condition to the obligations ofthe other parry or parties to effect the Merger set forth in Article VI to be satisfied, provided that (i) no such notification will affect the representations, warranties or covenants of the parties or the conditions to the obligations of the parties underthis Agreement and (ii) in no event shallthe failure to comply with this Section 5.14 give rise to a failure of any condition set forth in Article VI to be satisfied. Section5.l5 FinancinsCooperation. (a) Between the date hereof and the Effective Time, the Company shall, and shall cause its Subsidiaries to, use its commercially reasonable efforts to, and to cause the Representatives of the Company and its Subsidiaries to, provide to Parent and its Affiliates all cooperation requested by Parent and its Affiliates that is necessary, proper or advisable in connection with any financing transaction undertaken by Parent and its Affiliates in order to finance the payment of the Merger Consideration in connection with the Merger (or any other financing transaction undertaken by Parent or its Affiliates to the extent Parent or any such Affiliate is required by applicable Canadian securities laws to provide financial statement disclosure of the Company or its Subsidiaries) (the "Financing"), including: (i) participating in meetings, presentations and due diligence sessions as may be reasonably requested by Parent or its Affiliates in connection with the Financing; (ii) assisting with the preparation of any prospectuses, offering memorandums or other documentation required in connection with the Financing; (iii) furnishing Parent and its Affiliates with financial statements and related financial information for such periods as may be required in connection with the Financing, including any financial statements or other financial information that may be required to be included in any document filed under applicable Canadian securities Laws in connection therewith; (iv) furnishing Parent and its Affiliates such other information concerning the 37 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 41 o170 #5501 530.12 Company and its Subsidiaries as may be reasonably necessary in order to give effect to the Financing; (v) using commercially reasonable efforts to obtain accountants' customary comfort letters and translation opinions if and as reasonably requested by Parent or its Affiliates (or banks, lenders or underwriters involved in any such financing); and (vi) taking all actions reasonably necessary and appropriate to permit the banks, lenders or underwriters involved in any such financing to complete customary pre-closing due diligence on the Company and its Subsidiaries as is customary for transactions of a similar nature. (b) Notwithstanding anything to the contrary contained in this Section 5.15, nothing in this Section 5.15 shall require any such cooperation to the extent that it would (i) require the Company to pay any commitment or other fees, reimburse any expenses or otherwise incur any liabilities or give any indemnities prior to the Closing, (ii) unreasonably interfere with the ongoing business or operations of the Company or any of the Subsidiaries of the Company, (iii) require the Company or any of the Subsidiaries of the Company to enter into or approve any agreement or other documentation effective prior to the Closing or agree to any change or modification of any existing agreement or other documentation that would be effective prior to the Closing, (iv) require the Company or the Subsidiaries of the Company to prepare pro forma financial statements or proforma adjustments reflecting the Financing or the Transactions (plgyidgd that the Company shall otherwise cooperate with the preparation of such pro forma financial statements and pro forma adjustments prepared by Parent), (v) require the Company, any of the Subsidiaries of the Company or any of their respective boards of directors (or equivalent bodies) to approve or authorize the Financing, or (vi) require the Company or any of its Subsidiaries to cause the delivery of (l) legal opinions or reliance letters or any certificate as to solvency or any other certificate necessary for the Financing, other than accountants' customary comfort letters as contemplated by clause (v) of Section 5.15(a), (2) any audited financial information or any financial information prepared in accordance with Regulation S-K or Regulation S-X under the Securities Act of 1933, as amended, or any financial information, in each case, in a form not customarily prepared by the Company with respect to any period (provided, that for the avoidance of doubt, the foregoing clause (2) shall not be relied upon to prevent the Company or any of its Subsidiaries from delivering its year-end audited financial statements or quarterly unaudited financial statements to the extent Parent or any of its Affiliates is required by applicable Canadian securities laws to provide financial statement disclosure of the Company or its Subsidiaries) or (3) any financial information with respect to a month or fiscal period that has not yet ended or has ended less than forty-five (45) days, or sixty (60) days in the case ofan annual period, prior to the date ofsuch request. (c) Parent shall (i) promptly reimburse the Company for all reasonable and out-of- pocket costs or expenses (including reasonable and documented costs and expenses of counsel and accountants) incurred by the Company, the Subsidiaries of the Company and any of its or their Representatives in connection with any cooperation provided for in this Section 5.15, and (ii) indemnif, and hold harmless the Company, the Subsidiaries of the Company and any of its and their Representatives against any claim, loss, damage, injury, liability, judgment, award, penalty, fine, cost (including cost of investigation), expense (including fees and expenses of counsel and accountants) or settlement payment incurred as a result of, or in connection with, any cooperation provided for in this Section 5.15 or the Financing and any information used in connection therewith, unless the Company acted in bad faith or with gross negligence and other than in the case offraud. ARTICLE VI CONDITIONS PRECEDENT Section 6.1 Conditions to Each Partv's Obligation to Effect the Merser. The respective obligations of each party hereto to effect the Closing shall be subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions: 38 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 42ot70 #s501 530 I 2 (a) Company Shareholder Approval. The Company Shareholder Approval shall have been obtained. (b) Regulatory Approvals. All waiting periods (and any extensions thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired and each of the Required Statutory Approvals shall have been obtained at or prior to the Effective Time (the termination or expiration of such waiting periods and extensions thereof, together with the obtaining of the Required Statutory Approvals, the "Regulatory Approvals"), and such Regulatory Approvals shall have become Final Orders. (c) No Inltnctions. No Law enacted, promulgated, issued, entered, amended or enforced by any Governmental Authority shall be in effect enjoining, restraining, preventing or prohibiting consummation of the Merger or making the consummation of the Merger illegal. Section 6.2 Conditions to Oblieations of Parent. US Parent and Merser Sub. The obligations of Parent, US Parent and Merger Sub to effect the Closing are further subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. (i) Each of the representations and warranties of the Company set forth in this Agreement (other than the representations and warranties of the Company set forth in Section 3.2(a), Section 3.2(b), Section 3.3(a), Section 3.6(b) and Section 3.19) shall be true and correct (without giving effect to any limitation as to "materiality" or "Company Material Adverse Effect" set forth therein), except where the failure to be true and correct has not had or would not reasonably be expected to have a Company Material Adverse Effect; (ii) each of the representations and warranties of the Company set forth in Section 3.2(a) and Section 3.2(b) shall be true and correct, except where the failure of any such representation or warranty to be true and correct would be de minimis; (iii) each of the representations and warranties of the Company set forth in Section 3.3(a) and Section 3.19 shall be true and correct in all material respects; and (iv) the representations and warranties set forth in Section 3.6(b) shall be true and correct in all respects; in the case of each of clause (i), (ii), (iii) and (iv), as of the Effective Time as though made at and as of the Effective Time (except to the extent that such representation and warranty is expressly made as of a specified date, in which case such representation and warranty shall be true and correct as of such specific date). (b) Performance of Covenants and Agreements of the Company. The Company shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement at or prior to the Closing Date. (c)Officer's Cerlificate. Parent shall have received a cefiificate signed on behalf of the Company by an executive officer of the Company certi$ing the satisfaction by the Company of the conditions set forth in Section 6.2(a) and Section 6.2(b). (d) Absence of Companv Material Adverse Effect. Since the date of this Agreement, no circumstance, development, change, event, occurrence or effect that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect, shall have occurred and be continuing. (e) Absence of Burdensome Condition. The Final Orders with respect to the Regulatory Approvals shall not impose or require any undertakings, terms, conditions, liabilities, obligations, commitments or sanctions (including any Remedial Actions) that, individually or in the aggregate, constitute a Burdensome Condition. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-'I7-_ M. Thies, Avista #5501 530. l 2 39 Schedule 3, Page 43of70 Section 6.3 Conditions to Oblieations of the Comnany. The obligation of the Company to effect the Closing is further subject to the satisfaction (or waiver, if permissible under applicable Law) on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent, US Parent and Merger Sub set forth in this Agreement shall be true and correct (without giving effect to any limitation as to "materiality" or "Parent Material Adverse Effect" set forth therein) as of the Effective Time with the same effect as though made on and as of the Effective Time (except to the extent that such representation and warranty is expressly made as of a specified date, in which case such representation and warranty shall be true and correct as ofsuch specific date), except where the failure to be true and correct has not had or would not reasonably be expected to have a Parent Material Adverse Effect. (b) Performance of Covenants and Agreements of Parent. US Parent and Merger Sub. Parent, US Parent and Merger Sub shall have performed in all material respects all covenants and agreements required to be performed by them under this Agreement at or prior to the Closing Date. (c) Officer's Certificate. The Company shall have received a certificate signed on behalf of Parent by an executive officer of Parent certifuing the satisfaction by Parent and Merger Sub of the conditions set forth in Section 6.3(a) and Section 6.3(b). Section 6.4 Frustration of Closing Conditions. None of the Company, Parent, US Parent or Merger Sub may rely on the failure of any condition set forth in Section 6.1, Sec1!jon-.15.], or Section 6.3, as the case may be, to be satisfied if such failure was primarily caused by such party's breach of this Agreement. ARTICLE VII TERJT,IINATION Section 7.1 Termination. This Agreement may be terminated and the Transactions abandoned at any time prior to the Effective Time: (b) by either the Company or Parent: (i) if the Merger shall not have been consummated on or before September 30, 2018 (the "End Date"); provided that if, prior to the End Date, all of the conditions to the Closing set forth in Article VI have been satisfied or waived, as applicable, or shall then be capable ofbeing satisfied (except for any condition set forth in Section 6.1(b), Section 6.1(c). or Section 6.2(e)), either the Company or Parent may, prior to 5:00 p.m. Pacific time on the End Date, extend the End Date to a date that is not later than six (6) months after the End Date (and if so extended, such later date shall then, for all purposes under this Agreement, be the "End Date"); provided, further, that neither the Company nor Parent may terminate this Agreement or extend the End Date pursuant to this Section 7.1(bXi) if it (or, in the case of Parent, US Parent or Merger Sub) is in breach of this Agreement and such breach has primarily caused or resulted in either (l) the failure to satisff the conditions to its obligations to consummate the Closing set forth in Article VI prior to the End Date or (2) the failure of the Closing to have occurred by the End Date; or Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 44 ol70 #s501 530 I 2 40 (a) by the mutualwritten consent of the Company and Parent; or (ii) ifany Law having the effect set forth in Section 6.1(c) shall not have been reversed, stayed, enjoined, set aside, annulled or suspended and shall be in full force and effect and, in the case of any Judgment (each, a "Restraint"), shall have become final and non-appealable; provided. however, that the right to terminate this Agreement under this Section 7.1(bXii) shall not be available to the Company or Parent if the issuance of such final, non-appealable Restraint was primarily due to a breach by such parfy of any of its covenants or agreements under this Agreement, including pursuant to Section 5.4: or (iii) if the Company Shareholder Approval contemplated by this Agreement shall not have been obtained at the Company Shareholders Meeting duly convened (including any adjoumments or postponements thereof); or (c) by Parent: (i) if the Company shall have breached or failed to perform any of its representations, warranties, covenants or agreements set forth in this Agreement, which breach or failure to perform (A) would give rise to the failure of a condition set forth in Section 6.2(a) or Section 6.2(b), respectively, and (B) cannot be cured by the Company by the End Date or, if capable of being cured, shall not have been cured within thirty (30) calendar days following receipt of written notice from Parent stating Parent's intention to terminate this Agreement pursuant to this Section 7.1(c)(i) and the basis for such termination; provided that Parent shall not have the right to terminate this Agreement pursuant to this Section 7.1(cXi) if Parent, US Parent or Merger Sub is then in material breach of this Agreement; or (ii) if the Company Board (or a duly authorized committee thereof) shall have effected a Company Adverse Recommendation Change; provided, however, that Parent shall not have the right to terminate this Agreement under this Section 7.1(c)(ii) if the Company Shareholder Approval shall have been obtained; or (d) by the Company (i) if Parent, US Parent or Merger Sub shall have breached or failed to perform any of its representations, warranties, covenants or agreements set forth in this Agreement, which breach or failure to perform (A) would give rise to the failure of a condition set forth in Section 6.3(a) or Section 6.36), respectively, and (B) cannot be cured by Parent, US Parent or Merger Sub by the End Date or, if capable of being cured, shall not have been cured within thirty (30) calendar days following receipt of written notice from the Company stating the Company's intention to terminate this Agreement pursuant to this Section 7.1(dXi) and the basis for such termination; provided that, the Company shall not have the right to terminate this Agreement pursuant to this Section 7.1(dXi) if the Company is then in material breach of this Agreement; or (ii) prior to the receipt of the Company Shareholder Approval, if the Company Board (or a duly authorized committee thereof) shall have effected a Company Adverse Recommendation Change with respect to a Superior Proposal in accordance with Section 5.3 and shall have approved, and substantially concurrently with the termination hereunder, the Company shall have entered into, a Company Acquisition Agreement with respect to such Superior Proposal; provided that such termination pursuant to this Section 7.1(dXii) shall not be effective and the Company shall not enter into any such Company Acquisition Agreement, unless the Company has paid the Company Termination Fee to Parent or causes the Company Termination Fee to be paid to Parent substantially concurrently with such termination in accordance with Section 7.3; 4l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 45ot70 #5501530.12 (provided that Parent shall have provided wiring instructions for such payment or, if not, then such payment shall be paid promptly following delivery of such instructions). Section 7.2 Effect of Termination. In the event of the termination of this Agreement as provided in Section 7.1, written notice thereof shall be given to the other party or parties hereto, speciffing the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void and have no further force or effect (other than Section 5.6(b), this Section 7.2, Section 7.3 and Article VIII, all of which shall survive termination of this Agreement), and there shall be no liability on the part of Parent, US Parent, Merger Sub or the Company or their respective directors, officers, other Representatives or Affiliates, whether arising before or after such termination, based on, arising out of or relating to this Agreement or the negotiation, execution, performance or subject matter hereof (whether in contract or in tort or otherwise, or whether at law (including at common law or by statute) or in equity); provided. however, that, subject to Section 7.3 (including the limitations on liability contained therein), no party hereto shall be relieved or released from any liabilities or damages arising out of any willful and material breach of this Agreement prior to such termination that gave rise to the failure of a condition set forth in Article VI. The Confidentiality Agreement shall survive in accordance with its terms following termination of this Agreement (as modified pursuant to Section 5.6(b)). Without limiting the meaning of a willful and material breach, the parties hereto acknowledge and agree that any failure by a party hereto to consummate the Merger and the other transactions contemplated hereby after the applicable conditions to the Closing set forth in Article VI have been satisfied or waived (except for those conditions that by their nature are to be satisfied at the Closing, which conditions would be capable of being satisfied at the time of such failure to consummate the Merger) shall constitute a willful and material breach of this Agreement. Section 7.3 Termination Fees. (a) In the event that this Agreement is terminated by the Company pursuant to Section 7.1(dxii). the Company shallpay or cause to be paid as directed by Parent the Company Termination Fee substantially concurrently with the termination of this Agreement. (b) In the event that this Agreement is terminated by Parent pursuant to Section 7.1(cXii), the Company shall pay or cause to be paid as directed by Parent the Company Termination Fee within two (2) Business Days of such termination. (c) In the event that (i) this Agreement is terminated (A) by Parent or the Company pursuant to Section 7.1 (bXi) or Section 7.1(bXiii) or (B) by Parent pursuant to Section 7.1(cXi) (solely with respect to a breach or failure to perform a covenant), (ii) a Takeover Proposal shall have been publicly disclosed or made to the Company after the date hereof and not publicly withdrawn (x) in the case of termination pursuant to Section 7.1(bXi) or Section 7.1(cXi), prior to the date of such termination, or (y) in the case of termination pursuant to Section 7.1(bXiii), prior to the date of the Company Shareholders Meeting, and (iii) within twelve (12) months of the date this Agreement is terminated, the Company enters into a Company Acquisition Agreement or consummates a Takeover Proposal (provided that for purposes of clause (iii) of this Section 7.3(c), the references to "15%o" in the definition of Takeover Proposal shall be deemed to be references to "500/o"), then the Company shall pay or cause to be paid as directed by Parent the Company Termination Fee on the earlier ofthe date of entry into such Company Acquisition Agreement and the date of consummation of such transaction. (d)ForpurposesofthisAgreement,..@''shallmeanan amount equal to $103,000,000. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 46ot70 #5501 530. I 2 42 (e) Parent shall pay or cause to be paid to the Company a fee of $ 103,000,000 in cash (the "Parent Termination Fee") if: (i) this Agreement is terminated by Parent or the Company: (A) pursuant to Section 7.1(bXi) and, at the time of such termination, any ofthe conditions set forth in Section 6.1(b) or Section 6.1(c) (in the case of Section 6.1(c), if and only if the applicable Restraint giving rise to such termination arises in connection with the Regulatory Approvals), shall have not been satisfied; or (B) pursuant to Section 7.I(bXii) (if, and only if, the applicable Restraint giving rise to such termination arises in connection with the Regulatory Approvals); or (ii) this Agreement is terminated by the Company pursuant to Section 7.I (dXi) because of a failure by Parent, US Parent or Merger Sub to comply with their obligations under Section 5.4; provided that, at the time of any such termination described in clause (i) or (ii) of this Section 7.3(e), the conditions to the Closing set forth in Section 6.I (a) and Section 6.2 (other than Section 6.2(c) and Section 6.2(e)) shall have been satisfied or waived (except for any such conditions that have not been satisfied as a result of a breach by Parent, US Parent or Merger Sub of its respective obligations under this Agreement). Parent shall pay or cause to be paid the Parent Termination Fee to the Company (to an account designated in writing by the Company) no later than two (2) Business Days after the date of the applicable termination. (f) Notwithstanding the foregoing, in no event shall the Company be required to pay the Company Termination Fee on more than one occasion. Notwithstanding anything to the contrary in this Agreement, the parties hereto agree that if this Agreement is terminated under circumstances in which the Company is obligated to pay the Company Termination Fee under this Section 7.3 and the Company Termination Fee is paid, the payment of the Company Termination Fee and any costs, expenses and interest pursuant to Section 7.3(h) shall be the sole and exclusive remedy available to Parent, US Parent and Merger Sub with respect to this Agreement and the Transactions, and, upon payment of the Company Termination Fee pursuant to this Section 7.3 and any costs, expenses and interest pursuant to Section 7.3(h), the Company (and the Company's Affiliates and its and their respective directors, officers, employees, shareholders and other Representatives) shall have no further liability with respect to this Agreement or the Transactions to Parent, US Parent, Merger Sub or any of their respective Affiliates or Representatives. In no event shall Parent be required to pay or cause to be paid the Parent Termination Fee on more than one occasion. Notwithstanding anything to the contrary in this Agreement, the parties hereto agree that if this Agreement is terminated under circumstances in which Parent is obligated to pay or cause to be paid the Parent Termination Fee under this Section 7.3 and the Parent Termination Fee is paid, the payment of the Parent Termination Fee and any costs, expenses and interest pursuant to Section 7.3(h) shall be the sole and exclusive remedy available to the Company with respect to this Agreement and the Transactions, and, upon payment of the Parent Termination Fee pursuant to this Section 7.3 and any costs, expenses and interest pursuant to Section 7.3(h), Parent, US Parent and Merger Sub (and their Affiliates and their respective directors, officers, employees, shareholders and other Representatives) shall have no further liability with respect to this Agreement or the Transactions to the Company or any of their respective Affi liates or Representatives. 43 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule3, Page 47 of70 #5501 530 r 2 (g) Any amount that becomes payable pursuant to Section 7.3 shall be paid by wire transfer of immediately available funds to an account designated by Parent or the Company, as applicable, and shall be reduced by any amounts required to be deducted or withheld therefrom under applicable Law in respect ofTaxes. (h) Each ofthe parties hereto acknowledges and agrees that the agreements contained in this Section 7.3 are integral parts of the Transactions and that, without these agreements, Parent, US Parent and Merger Sub, on the one hand, and the Company, on the other hand, would not enter into this Agreement. Each of the parties hereto further acknowledges and agrees that payment of the Company Termination Fee and Parent Termination Fee, as applicable, if, as and when required pursuant to this Section 7.3, shall not constitute a penalty but rather will constitute liquidated damages, in a reasonable amount that will compensate the parfy hereto receiving such amount in the circumstances in which it is payable for the efforts and resources expended and opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the Transactions, which amount would otherwise be impossible to calculate with precision. Accordingly, (i) if Parent fails to pay the Parent Termination Fee pursuant to Section 7.3(e) when due, and, in order to obtain such payment, the Company commences a Claim that results in a judgment against Parent for the Parent Termination Fee, Parent shall pay to the Company, together with the Parent Termination Fee, the Company's costs and expenses (including reasonable attorneys' fees) in connection with such Claim, and interest on the Parent Termination Fee from the date such payment was required to be made until the date of payment at a rate per annum equal to the Prime Rate in effect on the date such payment was required to be made, or (ii) if the Company fails to pay the Company Termination Fee pursuant to Section 7.3(a), Section 7.3(b) or Section 7.3(c) when due, and, in order to obtain such payment, Parent commences a Claim that results in a judgment against the Company for the Company Termination Fee, the Company shall pay to Parent, together with the Company Termination Fee, Parent's costs and expenses (including reasonable attorneys' fees) in connection with such Claim, and interest on the Company Termination Fee from the date such payment was required to be made until the date of payment at a rate per annum equal to the Prime Rate in effect on the date such payment was required to be made. ARTICLE VIII MISCELLANEOUS Section 8.1 No Survival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time and all rights, claims and causes of action (whether in contract or in tort or otherwise, or whether at Law (including at common law or by statute) or in equity) with respect thereto shall terminate at the Effective Time. This Section 8.I shall not limit any covenant or agreement of the parties hereto that by its terms contemplates performance in whole or in part after the Effective Time. The Confidentiality Agreement shall (a) survive termination of this Agreement in accordance with its terms (as modified in Section 5.6(b)) or (b) terminate as of the Effective Time. Section 8.2 Fees and Expenses. Except as otherwise provided in Section 5.8, Section 7.3 and Section 8.14, whether or not the Transactions are consummated, all fees and expenses incurred in connection with the Transactions and this Agreement shall be paid by the party hereto incurring or required to incur such fees or expenses. Section 8.3 Amendment or Supplement. At any time prior to the Effective Time, this Agreement may be amended or supplemented in any and all respects, whether before or after receipt of the Company Shareholder Approval, by written agreement of the parties hereto and delivered by duly 44 Exhibit No. 3 Case Nos. AVU-E-'l7-_ / AVU-G-17-_ M. Thies, Avista #5501530 I2 Schedule 3, Page 48 ol 70 authorized officers of the respective parties; provided. however, that (a) following receipt of the Company Shareholder Approval, there shall be no amendment or change to the provisions hereof which by Law would require further approval by the shareholders of the Company without such approval and (b) after the Effective Time, this Agreement may not be amended or supplemented in any respect. Section 8.4 Waiver. At any time prior to the Effective Time, any party hereto may, subject to applicable Law, (a) waive any inaccuracies in the representations and warranties of any other party hereto, (b) extend the time for the performance of any of the obligations or acts of any other party hereto or (c) waive compliance by any other party hereto with any of the agreements contained herein or, except as otherwise provided herein, waive any of such party's conditions. Notwithstanding the foregoing, no failure or delay by the Company, Parent, US Parent or Merger Sub in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 8.5 Assisnment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, in whole or in part, by operation of Law or otherwise, by any of the parties hereto without the prior written consent of the other parties hereto. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors and permitted assigns. Any purported assignment not permitted under this Section 8.5 shall be null and void. Section 8.6 Counterparts. This Agreement may be executed in counterparts, including by electronic means (each of which shall be deemed to be an original but all of which taken together shall constitute one and the same agreement), and shall become effective when one or more counterparts have been signed by each of the parties and delivered (by electronic communication, facsimile or otherwise) to the other parties hereto. Section 8.7 Entire Asreement: Third-Partv Beneficiaries. This Agreement, including the Company Disclosure Schedule, and any exhibits hereto, together with the other instruments referred to herein, including the Confidentiality Agreement (a) constitute the entire agreement, and supersede all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof and (b) is not intended to and shall not confer upon any Person other than the parties hereto any rights or remedies hereunder, except for (i) the rights of the Company's shareholders and holders of RSUs and Performance Awards to receive the Merger Consideration and payments pursuant to Article II, respectively, (ii) the right of the Company, on behalf of its shareholders, to pursue damages in the event of Parent, US Parent or Merger Sub's willful and material breach of this Agreement, in which event the damages recoverable by the Company for itself and on behalf of its shareholders (without duplication) shall be determined by reference to the total amount that would have been recoverable by the holders of the Company Common Stock (including "lost premium" and time value of money) if all such holders brought an action against Parent, US Parent and Merger Sub and were recognized as intended third parry beneficiaries hereunder, which right is hereby acknowledged and agreed by Parent, US Parent and Merger Sub and (iii) the provisions of Section 5.8. Section 8.8 Governine Law: Jurisdiction. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any choice or conflict of laws provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any 45 Exhibit No. 3 Case Nos. AVU-E-I7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 49 of 70 #5501 530. I 2 jurisdiction other than the State of Delaware, except that matters related to the fiduciary obligations of the Company Board and matters that are specifically required by the WBCA in connection with the Transactions shall be governed by the laws of the State of Washinglon. (b) Each of the parties hereto (i) irrevocably submits itself to the personaljurisdiction of each state or federal court sitting in the State of Delaware, as well as to the jurisdiction of all courts to which an appeal may be taken from such courts, in any suit, action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated herein, (ii) agrees that every such suit, action or proceeding shall be brought, heard and determined exclusively in the Court of Chancery of the State of Delaware (reytded that, in the event subject matter jurisdiction is unavailable in or declined by the Court of Chancery, then all such claims shall be brought, heard and determined exclusively in any other state or federal court sitting in the State of Delaware), (iii) agrees that it shall not attempt to deny or defeat such personaljurisdiction by motion or other request for leave from such couft, (iv) agrees not to bring any suit, action or proceeding arising out of or relating to this Agreement or any of the Transactions in any other court, and (v) waives any defense of inconvenient forum to the maintenance of any suit, action or proceeding so brought. (c) Each party hereto irrevocably consents to the service of process outside the territorialjurisdiction ofthe courts referred to in this Section 8.8 in any such suit, action or proceeding by mailing copies thereof by registered or certified United States mail, postage prepaid, return receipt requested, to its address as specified in or pursuant to this Article VIIL However, the foregoing shall not limit the right of aparty hereto to effect service of process on any other parry hereto by any other legally available method. Section 8.9 Specific Enforcement. The parties hereto agree that immediate, extensive and irreparable damage would occur for which monetary damages would not be an adequate remedy in the event that any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached. Accordingly, the parties hereto agree that, if for any reason Parent, US Parent, Merger Sub or the Company shall have failed to perform its obligations under this Agreement or otherwise breached this Agreement, then the party hereto seeking to enforce this Agreement against such nonperforming party under this Agreement shall be entitled to specific performance and the issuance of immediate injunctive and other equitable relief without the necessity of proving the inadequacy of money damages as a remedy, and the pafties hereto further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such injunctive or other equitable relief, this being in addition to and not in limitation of any other remedy to which they are entitled at Law or in equiry. If any party hereto brings any Claim to enforce specifically the performance of the terms and provisions of this Agreement when expressly available to such party pursuant to the terms of this Agreement, then, notwithstanding anything to the contrary herein, the End Date shall automatically be extended by the period of time between the commencement of such Claim and ten (10) Business Days following the date on which such Claim is fully and finally resolved. Section 8.10 WAMR OF JURY TRIAL. EACH PARTY HERETO HEREBY WAMS, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SUIT OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 50 of 70 #5501 530 l 2 46 AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVER AND CERTIFICATIONS IN THIS SECTION 8.10. Section 8.11 Notices. All notices, requests and other communications to any party hereto hereunder shall be in writing and shall be deemed given if delivered personally, facsimiled (which is confirmed), e-mail (provided, that the same is sent by overnight courier for delivery on the next succeeding Business Day, with acknowledgement of receipt requested) or sent by overnight courier (providing proof of delivery) to the parties hereto at the following addresses: If to Parent, US Parent or Merger Sub, to: Hydro One Limited 483 Bay Street South Tower, 8th Floor Toronto, Ontario M5G 2P5 Attention: James Scarlett, Executive Vice President and Chief Legal Officer Facsimile: (416) 345-1366 Em ai I : jscarlett@hydroone. com with a copy (which shall not constitute notice) to: Bracewell LLP l25l Avenue of the Americas New York, New York 10020 Attention: John G. Klauberg Frederick J. Lark Elena V. Rubinov Facsimile: (800)404-3970 Email: john.klauberg@bracewell.com fr itz.l ark@brac e we I I . co m elena.rubi nov@bracewel L com If to the Company, to Avista Corporation l4l I East Mission Avenue Spokane, Washington 99220 Attention: Marian Durkin, Senior Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer Facsimile: (509) 495-4361 Email : marian.durkin@avistacorp.com Exhibit No. 3 Case Nos. AVU-E-'|7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 51 of 70 #s501 530 I 2 47 with a copy (which shall not constitute notice) to Kirkland & Ellis LLP 655 Fifteenth Street, N.W. Washington, D.C.20005 Attention: George P. Stamas Alexander D. Fine Brendan J. Reed Facsimile: (202) 879-5200 Emails: gstamas@kirkland.com alexander.fi ne@kirkland. com brendan.reed@kirkland.com or such other address, e-mail or facsimile number as such parfy may hereafter speciff by like notice to the other parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt. Section 8.12 Severabilitv. If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shallnegotiate in good faith to modi$ this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the Transactions are fulfilled to the extent possible. Section 8.13 Definitions. As used in this Agreement, the following terms shall have the meanings ascribed to them below: ..''shallmeanaconfidentialityagreement(whichneednot prohibit the making of a Takeover Proposal) that contains provisions that are not materially less favorable in the aggregate to the Company than those contained in the Confidentiality Agreement. "Accumulated Dividends" shall mean all dividends declared by the Company with respect to shares of Company Common Stock, and all dividend equivalent payments, in each case, relating to RSUs and Performance Awards that have been accumulated or retained by the Company until the vesting or settlement of such awards. ('Affillate" shall mean, as to any Person, any other Person that, directly or indirectly, controls, or is controlled by, or is under common control with, such Person. For this purpose, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a Person, whether through the ownership of securities or partnership or other ownership interests, by contract or otherwise. "Agreement" shall have the meaning set forth in the Preamble. "Annual Incentive Plans" shall mean the Company's annual cash incentive compensation plans and arrangements, whether payable annually, quarterly or otherwise. 48 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 52ot70 #ssol 530 I 2 "4nUgu$_LeU!" shall have the meaning set forth in Section 5.4(a). 'Aftlctes_Sil/felg9l" shall have the meaning set forth in Section 1.3. "Balance Sheet Date" shall have the meaning set forth in Section 3.5(d). "Bankruptcy and Eouity Exception" shall have the meaning set forth in Section 3.3(a). "BofA Merrill Lynch" shall have the meaning set forth in Section 3..l7. "B_ook-EnIry_Sharcl" shall have the meaning set forth in Section 2.1(c). 'gurdensome Condith" shall mean any undertakings, terms, conditions, liabilities, obligations, commitments or sanctions (including any Remedial Action) that, in the aggregate, would have or would be reasonably likely to have, a material adverse effect on the financial condition, businesses or results of operations of the Company and its Subsidiaries, taken as a whole, or of Parent and its Subsidiaries, taken as a whole and after giving effect to the Merger; provided that, for this purpose, Parent and its Subsidiaries (including the Surviving Corporation and its Subsidiaries) shall be deemed to be a consolidated group of entities of the size and scale of a hypothetical company that is 100% of the size and scale of the Company and its Subsidiaries, taken as a whole as of immediately prior to the Effective Time; and orovided, further, that any such undertakings, terms, conditions, liabilities, obligations, commitments or sanctions shall not constitute or be taken into account in determining whether there has been or is such a material adverse effect to the extent such undertakings, terms, conditions, liabilities, obligations, commitments or sanctions are described in Section 1.6(a), Section 1.7 or Exhibit B attached hereto. "Business Day" shall mean a day except a Saturday, a Sunday or other day on which the SEC or banks in Spokane, Washington are authorized or required by Law to be closed. "CBA" shall have the meaning set forth in Section 3.16(a). '6CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act,42 U.S.C. $ 9601 et seq., as amended. "eg{i&AIg" shall have the meaning set forth in Section 2.I (c). (ICFIIJS" means the Committee on Foreign Investment in the United States and each member agency thereofacting in such capacity. "CFIUS Approval" shall mean any of the following with respect to the Transactions: (a) the parties shall have received written notice from CFIUS that review under Section 721 of the Defense Production Act of 1950, as amended (50 U.S.C. $ 4565) ("Section 721") has been concluded and that either the Transactions do not constitute a "covered transaction" under SectionT2l orthere are no unresolved national security concems; (b) an investigation shall have been commenced after the initial 3O-day review period and CFIUS shall have determined to conclude all action under Section 721 without sending a report to the President of the United States (the "President"), and the parties shall have received notice from CFIUS that all action under Section 721 is concluded, and there are no unresolved national security concerns; or (c) CFIUS shall have sent a report to the President requesting the President's decision and the President shall have announced a decision not to take any action to suspend or prohibit the Transactions, or the time permitted by Section 721 for such action (15 days from the date the President received such report) shall have elapsed without the President taking any action to suspend or prohibit the Transactions. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 53 of 70 #5501 s30. I 2 49 "Claim" shall have the meaning set forlh in Section 5.8(a). "Clayton Act" shall mean the Clayton Act of 1914, as amended. "fuilg" shall have the meaning set forth in Section 1.2. "Closins Date" shall have the meaning set forth in Section 1.2. "Code" mean the U.S. Internal Revenue Code of 1986, as amended. "Company" shall have the meaning set forth in the Preamble "Company Acquisition Agreement" shall have the meaning set forth in Section 5.3(c). "Company Adverse Re " shall have the meaning set forth in Section 5.3(.c). "Company Board" shall have the meaning set forth in the recitals. "Company Board Recommendation" shall have the meaning set forth in Section 3.3(.a). "Company Charter Do " shall have the meaning set forth in Section 1.5. "Company Common Stock" shall have the meaning set forth in Section 2.1. "Companv Disclosure Schedule" shall have the meaning set forth in the Article III. "Company Employee" shall have the meaning set forth in Section 5.1 I (a). "ComDany Intervening Event" shall mean any circumstance, development, change, event, occurence or effect that (l) is unknown to or by the Company Board as of the date of this Agreement (or if known, the magnitude or material consequences of which are not known by the Company Board as of the date of this Agreement) and (2) becomes known to or by the Company Board prior to obtaining the Company Shareholder Approval; provided, however, that neither a Takeover Proposal nor any consequence thereof shall constitute a Company Intervening Event. "Company Joint Venture" shall mean any Person that is not a Subsidiary of the Company, in which the Company owns directly or indirectly an equity interest. "Company Material A " shall mean any circumstance, development, change, event, occurrence or effect that (a) has, individually or in the aggregate, amaterial adverse effect on the business, assets, properties, results of operations or financial condition of the Company and its Subsidiaries taken as a whole; provided that none of the following shall constitute or be taken into account in determining whether a Company Material Adverse Effect has occurred: (i) any circumstance, development, change, event, occurrence or effect in any of the industries or markets in which the Company or its Subsidiaries operates, including electric generation, transmission or distribution or natural gas distribution or transmission industries (including, in each case, any changes in the operations thereof or with respect to system-wide changes or developments in electric generation, transmission, or distribution or nafural gas distribution or transmission systems); (ii) any enactment of, change in, or change in interpretation of, any Law or GAAP or governmental policy; (iii) general economic, regulatory or political conditions (or changes therein) or conditions (or changes therein) in the financial, credit or securities markets (including changes in interest or currency exchange rates) in any country or region in which the Company or any of its Subsidiaries 50 Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 54 ol 70 #ssol 530 I 2 conducts business; (iv) any changes or developments in wholesale or retail electric power prices or any change in the price of natural gas or any other raw material, mineral or commodity used or sold by the Company or any of its Subsidiaries or in the cost of hedges relating to such prices, any change in the price of interstate electricity or natural gas transportation services or any change in customer usage patterns or customer selection of third-party suppliers for natural gas or electricity; (v) any acts of God, natural disasters, terrorism, armed hostilities, sabotage, war or any escalation or worsening of acts of terrorism, armed hostilities or war; (vi) the announcement, pendency of or performance of the Transactions, including by reason of the identity of Parent or US Parent or any communication by Parent or US Parent regarding the plans or intentions of Parent with respect to the conduct of the business of the Company or any of its Subsidiaries and including the impact of any of the foregoing on any relationships, contractual or otherwise, with customers, suppliers, distributors, collaboration partners, joint venture partners, employees or regulators; (vii) any action taken by the Company or any of its Subsidiaries that is required or permitted by the terms of this Agreement or with the consent or at the direction of Parent, US Parent or Merger Sub (or any action not taken as a result ofthe failure ofParent to consent to any action requiring Parent's consent pursuant to Section 5.1); (viii) any change in the market price, or change in trading volume, of the capital stock of the Company (it being understood that the facts or occurrences giving rise or contributing to such change shall be taken into account in determining whether there has been a Company Material Adverse Effect); (ix) any failure by the Company or its Subsidiaries to meet internal, analysts' or other earnings estimates or financial projections or forecasts for any period, or any changes in credit ratings and any changes in any analysts recommendations or ratings with respect to the Company or any of its Subsidiaries (it being understood that the underlying facts or occurrences giving rise to such failure shall be taken into account in determining whether there has been a Company Material Adverse Effect if not otherwise falling within any of the exceptions set forth in clauses (a)(i) through (a)(viii) or (a)(x) through (a)(xii) of this proviso); (x) any change or effect arising from any rate cases directly related to the Company or any of its Subsidiaries; (xi) any circumstance, development, change, event, occurrence or effect that results from any shutdown or suspension of operations at any third-party facilities (including with respect to electricity, power plants) from which the Company or any of its Subsidiaries obtains natural gas or electricity and (xii) any pending, initiated or threatened Transaction Litigation, in the case of each of clauses (i) through (v), to the extent that such circumstance, development, change, event, occurrence or effect does not affect the Company and its Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the business and industries in which the Company and its Subsidiaries operate; or (b) would, individually or in the aggregate, reasonably be expected to prevent or materially impede, interfere with or delay the consummation by the Company of the Transactions. "Company Material Contract" shall have the meaning set forth in Section 3.15(a). "Companv Pension Plan" shall have the meaning set forth in Section 3.10(a). "Company Permits" shall have the meaning set forth in Section 3.8. "Companv Plans" shall mean (a) each "employee benefit plan" (as such term is defined in section 3(3) of ERISA) that the Company or any of its Subsidiaries sponsors, participates in, is a party or contributes to, or with respect to which the Company or any of its Subsidiaries could reasonably be expected to have any material liability and (b) each other material employee benefit plan, program or arrangement, including any stock option, stock purchase, stock appreciation right or other stock or stock-based incentive plan, cash bonus or incentive compensation arrangement, retirement or deferred compensation plan, profit sharing plan, unemployment or severance compensation plan, that the Company or any of its Subsidiaries sponsors, participates in, is a parry or contributes to, or with respect to which the Company or any of its Subsidiaries could reasonably be expected to have any material liability, other than, in the case of (a) and (b), a Multiemployer Plan. 5l Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 55 of 70 #ss0l 530. I 2 "Company Preferred Stock" shall have the meaning set forth in Section 3.2(a). "Company Retired Employees" shallhave the meaning set forth in Section 5.1l(b). "Company Retiree Health Plan" shall have the meaning set forth in Section 5.1 I (b). "Company SEC Documents" shall have the meaning set forth in Section 3.5(a). ' Company Snarenota " shall have the meaning set forth in Section 3.19. "Company Shareholders Meeting" shall have the meaning set forth in Section 5.2(b). "Company Stock Plans" shall mean the Company's Long-Term Incentive Plan, as amended and restated, and any other equity compensation plan or arrangement of the Company. "Company Terminat " shall have the meaning set forth in Section 7.3(d). "Confidentiality Agreement" shall have the meaning set forth in Section 5.6(a). "Continuation Period" shallhave the meaning set forth in Section 5.1l(a). !'Contract" means any contract, subcontract, agreement, commitmento note,, bond, mortgage, indenture, lease, license, sublicense or other instrument, obligation or binding arrangement or understanding of any kind or character, whether oral or in writing. "Converted RSU" shall have the meaning set forth in Section 2.3(b). "Dissenting Shareholder" shall have the meaning set forth in Section 2.1(d). "Dissenting Share " shall have the meaning set forth in Section 2.1(d). "E-ffegL!@e" shall have the meaning set forth in Section 1.3. "Eligjlle 3s1i@" shall have the meaning set forth in Section 5.1 I (b). "Encumbrances" shall mean any mortgage, deed of trust, lease, license, restriction, hypothecation, option to purchase or lease or otherwise acquire any interest, right offirst refusal or offer, conditional sales or other title retention agreement, adverse claim of ownership or use, easement, encroachment, right of way or other title defect, or encumbrance of any kind or nature; provided that a license of, or covenant with respect to, Intellectual Property shall not constitute an Encumbrance. ('End Date" shall have the meaning set forth in Section 7.1(bXi). "Envgqnrngnla!_LAwl" shall mean all Laws relating to workplace safety or health, safety in respect of the transportation, storage and delivery of natural gas, pollution or protection of the environment, natural resources or endangered or threatened species, including Laws imposing liability for, or standards of conduct with respect to, the exposure to, or Releases or threatened Releases of, hazardous materials, substances or wastes, as the foregoing are enacted or in effect on or prior to Closing. "ESjq1$csuIiUS" shall have the meaning set forth in Section 3.2(b). Exhibit No. 3 Case Nos. AVU-E-I 7-_ / AVU-G-I 7-_ M. Thies, Avista #s501530 l2 52 Schedule 3, Page 56 of 70 ('ERISA" shallmean the Employee Retirement Income Security Actof 1974. "ERISA Affiliate" shall mean each corporation or trade or business that is treated as a single employer with the Company pursuant to Section 400 I (bX I ) of ERISA or Section 414(b), (c), (m) or (o) of the Code. "Exchange Act" shall have the meaning set forth in Section 3.4. "Exchange Ratio" means a fraction, the numerator of which is the Merger Consideration and the denominator of which is the closing price per share of common stock of Parent on the TSX on the Closing Date, converted into U.S. dollars using the reported Bank of Canada noon spot exchange rate on the Closing Date (or as reported by such other authoritative source mutually selected by the Company and Parent). "Executive Change " means those certain Change of Control Agreements, by and between the Company and certain executive officers of the Company, as set forth in Section 8.13(EC) of the Company Disclosure Schedule. "FCC" shall mean the Federal Communications Commission. "Federal Trade Comm ' shall mean the Federal Trade Commission Act of 1914, as amended. "FERC" shall mean the Federal Energy Regulatory Commission. "FERCI-ppIoval" shall mean FERC authorization of the Merger pursuant to Section 203 of the Federal Power Act of 1935, as amended. "Fina!-.,1Qrdel" shall mean a Judgment by the relevant Governmental Authority that (i) is not then reversed, stayed, enjoined, set aside, annulled or suspended and is in full force and effect, and (ii) with respect to which, if applicable, any mandatory waiting period prescribed by Law applicable to such Judgment before the Merger may be consummated has expired or been terminated, and (iii) as to which all conditions precedent to the consummation of the Merger expressly set forth in such Judgment have been satisfied. "fu!gi!g" shall have the meaning set forth in Section 5.15(a). '6GAAP" shall mean generally accepted accounting principles in the United States. "Governmental Authoritv" shall mean any U.S. or foreign federal, state or local, provincial or local governmental authority, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing, including any governmental, quasi-governmental or nongoverrlmental body administering, regulating or having general oversight over gas, electricity or financial markets or electric reliability, or any court arbitrator, arbitration panel or other similar judicial body. Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 57 ol70 #5501 530 I 2 "Eeelpproval" shall mean FCC consent pursuant to Section 310 of the Communications Act of 1934, as amended, over the transfer of control of FCC licenses that would result from the Merger. "Hazardous Materials" shall mean any materials or substances or wastes as to which liability or standards of conduct may be imposed under any Environmental Law. 53 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "lndebtedness" shall mean, with respect to any Person, without duplication, (a) all obligations of such Person for borrowed money (other than intercompany indebtedness), (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person evidenced by letters of credit, bankers' acceptances or similar facilities to the extent drawn upon by the counterparty thereto, (d) all capitalized lease obligations ofsuch Person and (e) all guarantees or other assumptions of liabiliry for any of the foregoing. 'hdemrylegQ" shall have the meaning set forth in Section 5.8(a). "Intellectual Property" shall mean, in any and all jurisdictions throughout the world, but, in each case, only to the extent protectable under applicable Laws, all (a) patents and patent applications, (b) registered and material unregistered trademarks, service marks, logos, corporate names, internet domain names, and any applications for registration of any of the foregoing, together with all goodwill associated with each of the foregoing, (c) registered and material unregistered copyrights, including copyrights in computer software, mask works and databases and (d) trade secrets and other proprietary know-how. "lP(JC" shall mean the Idaho Public Utilities Commission. "lRS" shall mean the U.S. Internal Revenue Service (lJUdglqgru" shall mean ajudgment, injunction, order, decree, ruling, writ, assessment or arbitration award of a Governmental Authority of competentjurisdiction. "Knowledge" shall mean, (a) in the case of the Company, the actual knowledge after due inquiry, as of the date of this Agreement, of the individuals listed in Section 8.13(.a) of the Company Disclosure Schedule and (b) in the case of Parent, US Parent and Merger Sub, the actual knowledge after due inquiry, as of the date of this Agreement, of the individuals listed in Section 8.13(b) of the Parent Disclosure Schedule. "LAyS" shall have the meaning set forth in Section 3.8. 'rLiens" shall mean any pledges, liens, charges, Encumbrances, options to purchase or lease or otherwise acquire any interest, and security interests of any kind or nature whatsoever. "MgIggI" shall have the meaning set forth in the recitals. "Merger Consideration" shallhave the meaning set forth in Section 2.1(c). "Merger Sub" shall have the meaning set forth in the Preamble. "MPSQ" shall mean the Public Service Commission of the State of Montana. "Multiemployer Plan" shall mean any plan defined in Sections 3(37) and a00l(a)(3) of ERISA subject to Title IV of ERISA to which Company or its ERISA Affiliates makes contributions. "Ng1llB!@S" shall have the meaning set forth in Section 5.11(b). "Notice of Interven " shall have the meaning set forth in Section s.3(dxii). 54 Exhibit No. 3 Case Nos. AVU-E-I 7-_ / AVU-G-1 7-_ M. Thies, Avista #550t 530. I 2 Schedule 3, Page 58 of 70 "Notice of Superior Proposal Recommendation Change" shall have the meaning set forth in Section s.3(dxi). "NYSE', shall mean the New York Stock Exchange. "Old Plans" shall have the meaning set forth in Section 5.I I (b). ((OP[JC" shallmean the Public Utility Commission of Oregon. '6PAI9$" shall have the meaning set forth in the Preamble. "Ealen!_Bgrd" shall mean the board of directors of Parent. "Parent Disclosure Schedule" shall have the meaning set forth in Article IV. "BAg!lTlP" shall have the meaning set forth in Section 2.3(b). "Parent Material A " shall mean any change, circumstance, development, event, occurrence or effect that, individually or in the aggregate, has had or would reasonably be expected to have a material and adverse effect on the ability of Parent, US Parent or Merger Sub to consummate, or that would reasonably be expected to prevent or materially impede, interfere with or delay the consummation by Parent, US Parent or Merger Sub, of the Transactions. "Parent Termination Fee" shall have the meaning set forth in Section 7.3(e). "Paying Agent" shall have the meaning set forth in Section 2.2(a). '(PBGC" shall mean the Pension Benefit Guaranty Corporation "Performance Award" shall mean a performance award outstanding under the Company Stock Plans that represents the right to receive a payment in cash or shares of Company Common Stock. "Performance Award " shall have the meaning set forth in Section 2.3(a). "Permitted Encumbrances" shall mean (a) zoning, building codes and other state and federal land use Laws regulating the use or occupancy of such real property or the activities conducted thereon which are imposed by any Governmental Authority having jurisdiction over such real properry and (b) easements, rights-of-way, encroachments, restrictions, covenants, conditions and other similar Encumbrances that (i) are not substantial in character, amount or extent in relation to the applicable real property and (ii) do not materially and adversely impact the Company's current or contemplated use, utility or value of the applicable real property or otherwise materially and adversely impair the Company's present or contemplated business operations at such location. "Pgrmjged_Licn!" shall mean (a) Liens for Taxes, assessments or other charges by Governmental Authorities not yet due and payable or the amount or validity of which is being contested in good faith and for which adequate reserves have been established in accordance with GAAP, (b) mechanics', materialmen's, carriers', workmen's, warehouseman's, repairmen's, landlord's and similar Liens granted or which arise in the ordinary course of business, (c) Liens reflected in the Company SEC Documents, (d) Permitted Encumbrances, (e) Liens permitted under or pursuant to any Contracts relating to Indebtedness and (f) such other Liens that would not have a Company Material Adverse Effect. Exhiblt No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista #5501 530. l 2 55 Schedule 3, Page 59 of 70 "Person" shall mean an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in the Exchange Act or the securities laws of Canada), including a Governmental Authority. "Prime Rate" shall mean, as of any determination date, the rate per annum published in the The lMall Street Journal as the prime lending rate prevailing as of such date. "Proxy Statement" shall have the meaning set forth in Section 3.4. "RCA" shall mean the Regulatory Commission of Alaska. "B-9gu.!.A[qg Applgvab" shall have the meaning specified in Section 6.1(b). "Regulatory Filings" shall mean any filings under applicable state or federal Laws specifically governing the regulation of public utilities, dam safety or pipeline safety. "Release" shall mean any spill, emission, discharge, leaking, pumping, injection, pouring, deposit, disposal, dumping, leaching or migration into or through the environment of any Hazardous Materials. "Remedial Action" shall have the meaning set forth in Section 5.4(d). "B.spre5enlAlive!" shall mean, with respect to any Person, the professional (including financial) advisors, attorneys, accountants, consultants or other representatives (acting in such capacity) retained by such Person or any of its controlled Affiliates, together with directors, officers, employees, agents and representatives ofsuch Person and its Subsidiaries. "Required Statutory Approvals" shall have the meaning set forth in Section 3.4. '6Restraint" shall have the meaning set forth in Section 7.I (bXii). "Restructuring" shall mean the transactions relating to the restructuring of the ownership of Merger Sub such that it will become an indirect, wholly owned Subsidiary of US Parent, as further described in Section 4.5 of the Parent Disclosure Schedule, and, with the written consent of the Company (not to be unreasonably withheld), such other transactions relating to the restructuring of the ownership of Merger Sub as Parent may reasonably request in order to facilitate Parent's internal financing arrangements associated with the Transactions. "Rights of Way" shall have the meaning set forth in Section 3.14(b). "RSIJ" shall mean a restricted stock unit outstanding under any Company Stock Plan that represents the right to receive a payment in cash or shares of Company Common Stock. "RSU;\greg@l" shall have the meaning set forth in Section 2.3(b). "Sarbanes-Oxley Act" shall have the meaning set forth in Section 3.5(a). "SEC" shall mean the U.S. Securities and Exchange Commission "Securities Act" shall have the meaning set forth in Section 3.1(b). Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 60 of 70 #5501 530. l 2 "S-h.grmAn_A-91" shall mean the Sherman Antitrust Act of 1890. 56 "Egbli-djAry." when used with respect to any party hereto, shall mean any corporation, limited liability company, partnership, association, trust or other entity of which securities or other ownership interests representing more than 50o/o of the equity and more than 50% of the ordinary voting power (or, in the case of a limited partnership, more than 50% of the general partnership interests) are, as of such date, owned by such party or one or more Subsidiaries of such party or by such parfy and one or more Subsidiaries of such parfy. For the avoidance of doubt, the Company Joint Ventures are not Subsidiaries of the Company. 'SUpetpf_Prcpigl" shall have the meaning set forth in Section 5.3(g). "Surviving Corporation" shall have the meaning set forth in Section L I "Takeover Proposal" shall have the meaning set forth in Section 5.3(fl. "T4keqvel!.lalule" shall have the meaning set forth in Section 3. I 3. "Tax Returns" shall have the meaning set forth in Section 3.9(b). '5Taxes" shall have the meaning set forth in Section 3.9(b). "TIAnlAg!_qn lj!.i94!pn" shall have the meaning set forth in Section 5.9. "Tlangac!-qnl" refers collectively to this Agreement and the transactions contemplated hereby, including the Merger and the Financing. '(TSX" shall mean the Toronto Stock Exchange. "fJnion" shall have the meaning set forth in Section 3.16(a) "US-!AI94'1!" shall have the meaning set forth in the Preamble "Washinston Secretary of State" shall have the meaning set forth in Section 1 .3 "\\/l\RN 4c1" shall mean the federal Worker Adjustment and Retraining Notification Act of 1988, and similar state or local laws related to plant closings or mass layoffs. "WBCA" shall have the meaning set forth in the recitals. '(\ irljrc" shall mean the Washington Utilities and Transportation Commission. Section 8.14 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees (including penalties and interest) incurred in connection with the Transactions shall be paid by Parent, US Parent and Merger Sub when due and shall not be a liability of holders of Company Common Stock. Section8.l5 Interpretation. (a) Time Periods. When calculating the period of time before which, within which or following which any act is to be done or step taken pursuant to this Agreement, (i) the date that is the reference date in calculating such period shall be excluded and (ii) ifthe last day ofsuch period is a not a Business Day, the period in question shall end on the next succeeding Business Day. 57 Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 61 of 70 #550r s30. I 2 (b) Dollars. Unless otherwise specifically indicated, any reference herein to $ means U.S. dollars (c) Gender and Number. Any reference herein to gender shall include all genders, and words imparting the singular number only shall include the plural and vice versa. (d) Articles. Sections and Headings. When a reference is made herein to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated. The table of contents and headings contained herein are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (e) Include. Whenever the words "include", "includes" or "including" are used herein, they shall be deemed to be followed by the words "without limitation." (D Hereofl Defined Terms. The words "hereof," "hereto," "hereby," "herein" and "hereunder" and words of similar import when used herein shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any document made or delivered pursuant hereto unless otherwise defined therein. G) Contracts: Laws. Any Contract or Law defined or referred to herein means such Contract or Law as from time to time amended, modified or supplemented, unless otherwise specifi cally indicated. (h) Persons. References to a Person are also to its successors and permitted assigns. (i) Exhibits and Disclosure Schedules. Any exhibits to this Agreement and the Company Disclosure Schedule are hereby incorporated and made a part hereof. The Company may include in the Company Disclosure Schedule items that are not material in order to avoid any misunderstanding, and such inclusion, or any references to dollar amounts herein or in the Company Disclosure Schedule, shall not be deemed to be an acknowledgement or representation that such items are material, to establish any standard of materiality or to define further the meaning of such terms for purposes of this Agreement or otherwise. Any capitalized term used in any exhibit or any Company Disclosure Schedule but not otherwise defined therein shall have the meaning given to such term herein. O Construction. Each of the parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as jointly drafted by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any parry hereto by virtue of the authorship of any provision of this Agreement. (k) Actions of the Surviving Corporation After the Effective Time. For the purposes of this Agreement, any covenant or agreement by Parent or US Parent to cause the Surviving Corporation to take any action, refrain from taking any action, or otherwise make any decision or determination following the Effective Time, shall mean that Parent and US Parent shall have an obligation to cause the Parent Affiliate that is the sole shareholder of the Surviving Corporation to exercise its rights as the sole shareholder of the Surviving Corporation, to the extent consistent with the organizational documents of the Surviving Corporation, to approve or otherwise support the taking of such action, the refraining from taking such action or the making of such decision or determination, but not to ultimately Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule 3, Page 62o170 #5501 530. I 2 58 cause the taking of such action, the refraining from taking such action or the making of such decision or determination. IS i gnat ur e p age fo I I ow s) Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 63 of 70 #5501 530. I 2 59 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. AVISTA CORPORATION By J Lt-- Name: Scott Morris Title: Chairman, President and Chief Executive Officer HYDRO ONE LIMITED Name: Mayo Schmidt Title: President and Chief Executive Officer OLYMPUS HOLDING CORP. By: Name:Mayo Schmidt Title: President and Chief Executive Officer OLYMPUS CORP. Name: Mayo Schmidt Title: President and Chief Executive Officer By: Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-- M. Thies, Avista Schedule 3, Page 64 of 70 lSignature Page to Merger Agreement) By: IN MTNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. AVISTA CORPORATION By: Name: Scott Moris Title: Chairman, President and Chief Executive Officer HYDRO ONE LIMITED By: Schmidt Title: President and Chief Executive Officer OLYMPUS HOLDING CORP By: Schmidt Title: President and Chief Executive Officer OLYMPUS CORP. Schmidt Title: President and Chief Executive Officer By: Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 65 of70 lSignatw'e Page to Merger Agreementl EXHIBIT A GOVERNANCE REOUIREMENTS The articles of incorporation and bylaws of the Surviving Corporation, as may be amended from time to time, shall provide for the following: 1. the board of directors of the Surviving Corporation (the "Subsidiary Board") shall consist of nine (9) members, determined as follows: (i) two (2) directors designated by the sole shareholder of the Surviving Corporation ("Sole Shareholder") who are executives of Parent or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors (other than as an independent director of the Surviving Corporation) of Parent or any of its Affiliates and who are residents of the Pacific Northwest region, to be designated by Sole Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "Sole Shareholder Desienees"); (iii) three (3) directors who as of immediately prior to the Effective Time are members of the Board of Directors of the Company, including the Chairman of the Board of Directors of the Company (if such person is different fi'om the Chief Executive Officer of the Surviving Corporation); and (iv) the Chief Executive Officer of the Surviving Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the "Company Designees"), and (x) the initial Chairman ofthe Board of Directors of the Surviving Corporation shall be the Chief Executive Officer of the Company as of the time immediately prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires or otherwise ceases to serve as a director of the Surviving Corporation for any reason, the remaining Company Designees shall have the sole right to nominate a replacement director to fill such vacancy, and such person shall thereafter become a Company Designee; 2. Sole Shareholder shall have the unfettered right to designate, remove and replace the Sole Shareholder Designees as directors of the Surviving Corporation with or without cause or notice at its sole discretion, subject to the requirement that (i) two (2) of such directors are executives of Parent or any of its Subsidiaries and (ii) three (3) of such directors are not offrcers, employees or directors (other than as an independent director of the Surviving Cotporation) of Parent or any of its Affiliates and who are residents of the Pacific Northwest region, while such requirement is in effect (subject in the case of clause (ii) hereof to Sole Shareholder determining, in good faith, that it is not able to appoint a non-employee resident of the Pacific Northwest region in a timely manner, in which case Sole Shareholder may replace any such director with an employee of Parent or any of its Subsidiaries on an interim basis, not exceeding six months, after which time Sole Shareholder shall replace such interim director with a non-employee resident of the Pacific Northwest region); 3. following the initial one year term of the Chairman of the Board of the Surviving Corporation, Sole Shareholder shall have the right to designate the Chairman of the Board of the Surviving Corporation, including electing to continue the term of the initial Chairman of the Board of the Surviving Corporation; 4. at all times, the chief executive officers of the Surviving Corporation and Parent shall be members of the Subsidiary Board, unless otherwise determined by Sole Shareholder; Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-17-_ M. Thies, Avista Schedule 3, Page 66 of 70 #5509314.6 5. not less than tlu'ee (3) business days' notice shall be required to call a meeting of the Subsidiary Board and such notice shall include an agenda of all items of business to be addressed or subject to decision at such meeting of the Subsidiary Board, unless such notice requirement or agenda requirement is expressly waived by Sole Shareholder in writing; and 6. a quorum of the Subsidiary Board shall require (i) at least five (5) directors and (ii) that the number of Sole Shareholder Designees in attendance be equal to or greater than the number of Company Designees in attendance, and shall include at least one Parcnt Designee who is an executive of Parent or any of its Subsidiaries. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 3, Page 67 ot70 #ss093t4.6 a-L- EXHIBIT B POST-CLOSING MATTERS Operational Commitments 1. Maintain (a) the Sulviving Corporation's headquafters in Spokane, Washington; (b) the Surviving Corporation's office locations in each of its other service territories, and (c) no less of a significant presence in the immediate location of each of such office locations than what the Company and its subsidiaries maintained immediately prior to the Effective Time; 2. maintain the Surviving Corporation's and its Subsidiaries' brand and establish the plan for the operation of the business of the Surviving Corporation and its Subsidiaries; 3. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels prior to the Effective Time of community involvement and support initiatives in the existing service territories of the Surviving Corporation and its Subsidiaries; 4. maintain a $4,000,000 annual budget for charitable contributions by the Surviving Corporation, make a $7,000,000 initial contribution to the Surviving Corporation's charitable foundation at or promptly following the Effective Time and make a $2,000,000 annual contribution to the Surviving Corporation's charitable foundation; 5. maintain at least the Surviving Corporation's and its Subsidiaries' existing levels of economic development as of the Effective Time, including the ability of the Surviving Corporation to spend operations and maintenance funds to support regional economic development and related strategic opportunities in a manner consistent with the past practices of the Surviving Corporation and its Subsidiaries; 6, maintain the Surviving Corporation's and its Subsidiaries'existing levels as of the Effective Time of capital allocations for capital investment in strategic and economic development items, including property acquisitions in the university district, support of local entrepreneurs and seed-stage investments; 7. continue development and funding of the Surviving Corporation's and its Subsidiaries' existing and future innovation activities; and 8. maintain the Surviving Corporation's and its Subsidiaries' safety and reliability standards and policies and seruice quality measures in a manner that is substantially comparable to, or better than, those cumently maintained as ofthe Effective Time by the Company and its Subsidiaries. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I 7-_ M. Thies, Avista Schedule 3, Page 68 of 70 #55093 13.6 Governance Matters 1. Retain the Surviving Corporation's existing executive management team to manage the Surviving Corporation' s business; 2. cause the board of directors of the Surviving Corporation (the "Subqidlafy_Eoafd") to consist of nine (9) members, determined as follows: (i) two (2) directors designated by the sole shareholder of the Surviving Corporation ("Sglg_Shal9hold9l") who are executives of Parent or any of its Subsidiaries; (ii) three (3) directors who are not officers, employees or directors (other than as an independent director of the Surviving Corporation) of Parent or any of its Affrliates and who are residents of the Pacific Northwest region, to be designated by Sole Shareholder (collectively, the directors designated in clauses (i) and (ii) hereof, the "Sole Shareholder Desisnees"); (iii) three (3) directors who as of immediately prior to the Effective Time are members of the Board of Directors of the Company, including the Chairman of the Board of Directors of the Company (if such person is different from the Chief Executive Officer of the Surviving Corporation); and (iv) the Chief Executive Officer of the Surviving Corporation (collectively, the directors designated in clauses (iii) and (iv) hereof, the "ColqpgnyDegignges"), and (x) the initial Chairman ofthe Board of Directors of the Surviving Corporation shall be the Chief Executive Officer of the Company as of the time immediately prior to the Effective Time for a one year term and (y) if any Company Designee resigns, retires or otherwise ceases to serve as a director of the Surviving Corporation for any reason, the remaining Company Designees shall have the sole right to nominate a replacement director to fill such vacancy, and such person shall thereafter become a Company Designee; and 3. maintain the composition of the Subsidiary Board (including regional representation) and the appointment of the Chairman of the Subsidiary Board in accordance with parugraph 2 immediately above. Additional Matters l. Negotiate, enter into, modiff, arnend, terminate or agree to changes in any collective bargaining agreement or any other Company Material Conh'act with any labor organizations, union employees or their representatives; 2. maintain compensation and benefits related practices consistent with the requirements of the Merger Agreement; and 3. maintain the dues paid by the Surviving Corporation to various industry trade groups and membership organizations. The authority of the Subsidiary Board to make decisions with respect to the foregoing matters includes the authority to amend the foregoing commitments if the Subsidiary Board determines by special resolution requiring the approval of 2/3 of the directors that an amendment would be in the best interest of the Surviving Corporation, taking into account relevant regulatory considerations. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 3, Page 69 of 70 #55093 13.6 "|'L- APPROVAL REOUIREMENTS Operational Matters Approval of Sole Shareholder shall be required for any decision to l. enter into any agreement with respect to, or otherwise enter into any merger, consolidation, amalgamation, share purchase or other business combination transaction, or any sale of all or substantially all of the assets of the Surviving Corporation; 2. take any action that would reasonably be expected to lead to or result in (i) a material change in the nature of the business of the Surviving Corporation or any of its Subsidiaries or (ii) the carrying out by the Surviving Corporation or any of its Subsidiaries of any business other than its current business as of the Effective Time; 3. take any steps to wind up, terminate or dissolve the corporate existence of the Surviving Corporation or any of its Subsidiaries; 4. declare, pay or withhold any distribution or dividend; 5. make any change to director, officer or employee compensation or any aspects thereof, such as amount, mix, form, timing etc., that would be inconsistent with current market standards and practices; and 6. make any commitment or enter into any agreement to do any of the foregoing. G overnance and Organiza lional Motters l. repeal, replace or amend in any respect the articles of incorporation, bylaws, or other organizational documents of the Surviving Corporation or any of its Subsidiaries; 2. increase or otherwise amend or change the authorized or issued capital of the Surviving Corporation or any of its Subsidiaries; 3. make any change to the number of directors that constitute the full board of directors of the Surviving Corporation; 4, hire, dismiss or replace the Chief Executive Officer of the Surviving Corporation; and 5. make any commitment or enter into any agreement to do any of the foregoing Exhibit No. 3 Case Nos. AVU-E-1 7-_ / AVU-G-1 7-_ M. Thies, Avista Schedule3, Page70ol70 #ss093 I 3.6 1/!:t.l.) MASTER LIST OF COMMITMENTS A. Reservation of Certain Authority to the Avista Board of Directors [See Direct Testimony of Morris/Schmidt/Ch ristie/Pu gliesel ir ,tii !$, I Z I Consistent with and subject to the terms of Exhibits A and B to the Merger Agreement (referred to as "Delegation of Authority") contained in Appendix 5 of the Joint Application, decision-making authority over commitments 2- I 5 below is reserved to the Board of Directors of Avista Corporation ("Avista") and any - , change to the policies stated in commitments 2- I 5 requires a two-thirds (213) vote ' of the Avista Board ."'J ;.-r 1:- !-i-l(JGovernance Executive Management: Avista will seek to retain all current .*".ujir" management of Avista, subject to voluntary retirements that may occur.t:Ehis commitment will not limit Avista's ability to determine its organizational structure and select and retain personnel best able to meet Avista's needs over time. The Avista board retains the ability to dismiss executive management of Avista and other Avista personnel for standard corporate reasons (subject to the approval of Hydro One Limited ("Hydro One") for any hiring, dismissal or replacement of the cEo); Board of Directors: After the closing of the Proposed Transaction, Avista's board will consist of nine (9) members, determined as follows: (i) two (2) directors designated by Hydro One who are executives of Hydro One or any of its subsidiaries; (ii) three (3) directors who are not officers, employees or directors (other than as an independent director of Avista or Olympus Equity LLC) of Hydro One or any of its affiliates and who are residents of the Pacific Northwest region, to be designated by Hydro One (collectively, the directors designated in clauses (i) and (ii) hereof the "Hydro One Designees"), subject to the provisions of Clause 2 of Exhibit A to the Merger Agreement; (iii) three (3) directors who as of immediately prior to the closing of the Proposed Transactionl are members of the Board of Directors of Avista, including the Chairman of Avista's Board of Directors (if such person is different from the Chief Executive Officer of Avista); and (iv) Avista's Chief Executive Officer (collectively, the directors designated in clauses (iii) and (iv) hereof, the "Avista Designees"). The initial Chairman of Avista's post-closing Board of Directors shall be the Chief Executive Officer of Avista as of the time immediately prior to closing for a one year term. If any Avista Designee resigns, retires or otherwise ceases to serve as a director of Avista for any reason, the remaining Avista Designees shall have the sole right to I "Proposed Transaction" means the transaction proposed in the Joint Application of Avista and Hydro One filed on September 14,2017. caseNos AVU-E-17- ,f,illB:i): ' -M. Thies, AviG Schedule 4, Page 1 of 13 Appendix 8 to Joint Application Page I of 13 2. J 4 5 6 7 8. 9 nominate a replacement director to fill such vacancy, and such person shall thereafter become an Avista Designee. The term "Pacific Northwest region" means the Pacific Northwest states in which Avista serves retail electric or natural gas customers, currently Alaska, Idaho, Montana, Oregon and Washington; Business Operations Avista's Brand and Plan for the Operation of the Business: Avista will maintain Avista's brand and Avista will establish the plan for the operation of the business and its Subsidiaries; Capital Investment for Economic Development: Avista will maintain its existing levels of capital allocations for capital investment in strategic and economic development items, including properly acquisitions in the university district, support of local entrepreneurs and seed-stage investments; Continued Innovation: Avista will continue development and funding of its and its subsidiaries' innovation activities; Union Relationships: Avista will honor its labor contracts and has the authority to negotiate, enter into, modifu, amend, terminate or agree to changes in any collective bargaining agreement or any of Avista's other material contracts with any labor organizations, union employees or their representatives; Compensation and Benefits: Avista will maintain compensation and benefits related practices consistent with the requirements of the Merger Agreement; Local Presence/Community Involvement Avista's Headquarters: Avista will maintain (a) its headquarters in Spokane, Washington; (b) Avista's office locations in each of its other service territories, and (c) no less of a significant presence in the immediate location of each of such office locations than what Avista and its subsidiaries maintained immediately prior to completion of the Proposed Transaction; 10.Local Staffine: Avista will maintain Avista Utilities' staffing and presence in the communities in which Avista operates at levels sufficient to maintain the provision of safe and reliable service and cost-effective operations and consistent with pre- acquisition levels; 11 Communitv Contributions: Avista will maintain a $4,000,000 annual budget for charitable contributions (funded by both Avista and the Avista Foundation). Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista Schedule 4, Page 2 of 13 Page 2 of l3Appendix 8 to Joint Application Additionally, a 52,000,000 annual contribution will be made to Avista's charitable foundation;2 12.Communitv Involvement: Avista will maintain at least Avista's existing levels of community involvement and support initiatives in its service territories; l3 Economic Development: Avista will maintain at least Avista's existing levels of economic development, including the ability of Avista to spend operations and maintenance funds3 to support regional economic development and related strategic opportunities in a manner consistent with Avista's past practices; t4 Membership Organizations: Avista will maintain the dues paid by it to various industry trade groups and membership organizations; and l5 Safetv and Reliabilitv Standards and Service Oualitv Measures: Avista will maintain Avista's safety and reliability standards and policies and service quality measures in a manner that is substantially comparable to, or better than, those currently maintained. B. Rate Commitments [See Direct Testimony of Thies/EhrbarfLopezl 16. Treatment of Net Cost Savinss: Any net cost savings that Avista may achieve as a result of the Proposed Transaction will be reflected in subsequent rate proceedings, as such savings materialize. To the extent the savings are reflected in base retail rates they will offset the Rate Credit to customers, up to the offsetable porlion of the Rate Credit. 17.Treatment of Transaction Costs: Avista will not recover the following costs in rates: (i) legal and financial advisory fees associated with the Proposed Transaction; (ii) the acquisition premium; (iii) any senior executive compensation tied to a change of control of Avista; and (iv) any other costs directly related to the Proposed Transaction. 2 Note that Commitment 53 contains an additional commitment relating to charitable contributions; pursuant to that commitment Hydro One will cause Avista to make a one-time contribution of $7,000,000 to Avista's charitable foundation at or promptly following closing of the Proposed Transaction. 3 Operations and maintenance funds dedicated to economic development and non-utility strategic opportunities will be recorded below-the-line to a nonoperating account. case Nos. AVU-E-17- ,f,illB:i): ' -M. Thies, Avista Schedule 4, Page 3 of 13 Appendix 8 to Joint Application Page 3 of 13 l8 Rate Credits: Avista and Hydro One are proposing to flow through to Avista's retail customers in Washington, Idaho and Oregon a Rate Credit of $31.5 million over a 1O-year period, beginning at the time the merger closes.a The Rate Credit consists of two components, and reflects an increased levelof savings in years 6- l0 as illustrated in the table below. Two-Step Rate Credit Proposal Annual Crcdit Years 1-5 Annual Credit Yean 6-10 Total Crcdit TotalCredit $2.65 Million $3.65 Million $31.50 Million Offieable Credit $1.70 Million $2.70 Million $22.00 Millbn The Total Rate Credit to customers for the first five years following the closing would be $2.65 million per year, and the credit would increase to $3.65 million per year for the last five years of the l0-year period. A portion of the annual total Rate Credit would be offsetable, as indicated in the table above. During the l0- year period the financial benefits will be flowed through to customers either through the separate Rate Credit described above or through a reduction to the underlying cost of service as these benefits are reflected in the test period numbers used for ratemaking. At the time of the close, the $2.65 million benefit will be provided to customers through a separate Rate Credit, as long as the reduction in costs has not already been reflected in base retail rates for Avista's customers. To the extent Avista demonstrates in a future rate proceeding that cost savings, or benefits, directly related to the Proposed Transaction are already being flowed through to customers through base retail rates, the separate Rate Credit to customers would be reduced by an amount up to the offsetable Rate Credit amount. The portion of the total Rate Credit that is not offsetable effectively represents acceptance by Hydro One of a lower rate of return during the l0-year period. a The AEL&P operations in the City and Borough of Juneau, Alaska, operate substantially independent ofAvista Utilities, and these costs, from which the merger-related cost savings are derived, are currently not being charged to AEL&P. Therefore, there are no financial cost savings to flow through to AEL&P customers. For Avista's retail operations in Montana, Avista has approximately 30 retail customers and total retail revenue of approximately $74,000. Due to the very limited retail operations by Avista in Montana, for administrative efficiency the past practice by the Montana Public Service Commission has been to review the final rates recently filed and approved in the State of Idaho, and approve those for Avista's Montana customers, when a request is made by Avista. The date of the last approved retail rates in Montana for Avista was April 27, 201 l. Since that time electric retail rates have increased in the State of Idaho, but Avista has not proposed similar increases for its Montana customers. Because Avista's current retail rates for its Montana customers are already below its cost of service, and for the sake of administrative efficiency, Avista and Hydro One are not proposing to flow through financial benefit to Avista's Montana customers related to the Proposed Transaction. (lf a proportionate benefit to Montana customers were to be calculated based on the level of retail revenue, the total annual Rate Credit for all customers combined would be approximately $190.) case Nos. AVU-E-17- ,^F,i,llB:l): 'l. rnies, RviG Schedule 4, Page 4 of 1 3 Appendix 8 to Joint Application Page 4 of 13 The $31.5 million represents the "floor" of benefits that will be flowed through to Avista's customers, either through the Rate Credit or through benefits otherwise included in base retail rates. To the extent the identifiable benefits exceed the annual offsetable Rate Credit amounts, these additional benefits will be flowed through to customers in base retail rates in general rate cases as they occur. The increase in total Rate Credits for years 6- 10 will provide time for Avista and Hydro One to identify and capture over time an increased level of benefits, directly related to the Proposed Transaction, that can be flowed through to customers. Avista and Hydro One believe additional efficiencies (benefits) will be realized over time from the sharing of best practices, technology and innovation between the two companies. It will take time, however, to identify and capture these benefits. The level of annual net cost savings (and/or net benefits) will be tracked and reported on an annual basis, and compared against the offsetable level of savings. C. Regulatory Commitments [See Direct Testimony of Thies/EhrbarlLopezl 19. State Resulatorv Authoritv and Jurisdiction: Olympus Holding Corp. and its subsidiaries, including Avista, as appropriate, will comply with all applicable laws, including those pertaining to transfers of property, affiliated interests, and securities and the assumption of obligations and liabilities. 20 Compliance with Existins Commission Orders: Olympus Holding Corp. and its subsidiaries, including Avista, acknowledge that all existing orders issued by the Commission with respect to Avista or its predecessor, Washington Water Power Co., will remain in effect, and are not modified or otherwise affected by the Proposed Transaction. 21. Separate Books and Xeeordsl Avista will maintain separate books and records Access to and Maintenance of Books and Records: Olympus Holding Corp. and its subsidiaries, including Avista, will provide reasonable access to Avista's books and records; access to financial information and filings; audit rights with respect to the documents supporting any costs that may be allocable to Avista; and access to Avista's board minutes, audit repons, and information provided to credit rating agencies pertaining to Avista. Olympus Holding Corp. and its subsidiaries, including Avista, will maintain the necessary books and records so as to provide an audit trail for all corporate, affiliate, or subsidiary transactions with Avista, or that result in costs that may be allocable to Avista. The Proposed Transaction will not result in reduced access to the necessary books and records that relate to transactions with Avista, or that result in costs that may be allocable to Avista. Avista will provide Commission Staff and other parties to regulatory proceedings reasonable access to books and records (including those of Olympus Holding Corp. or any affiliate or subsidiary companies) required to 22 Exhibit No. 3 Case Nos. AVU-E- l7-_ / AVU-G-17-_ M. Thies, Avista Schedule 4, Page 5 of 1 3 Page 5 of 13Appendix 8 to Joint Application verify or examine transactions with Avista, or that result in costs that may be allocable to Avista. Nothing in the Proposed Transaction will limit or affect the Commission's rights with respect to inspection of Avista's accounts, books, papers and documents in compliance with all applicable laws. Nothing in the Proposed Transaction will limit or affect the Commission's rights with respect to inspection of Olympus Holding Corp.'s accounts, books, papers and documents pursuant to all applicable laws; provided, that such right to inspection shall be limited to Olympus Holding Corp.'s accounts, books, papers and documents that pertain solely to transactions affecting Avi sta' s regulated uti I ity operati on s. Olympus Holding Corp. and its subsidiaries, including Avista, will provide the Commission with access to written information provided by and to credit rating agencies that pertains to Avista. Olympus Holding Corp. and each of its subsidiaries will also provide the Commission with access to written information provided by and to credit rating agencies that pertains to Olympus Holding Corp.'s subsidiaries to the extent such information may affect Avista. 23. Cost Allocations Related to Corpo Structure and Affiliate Interests: Avista agrees to provide cost allocation methodologies used to allocate to Avista any costs related to Olympus Holding Corp. or its other subsidiaries, and commits that there will be no cross-subsidization by Avista customers of unregulated activities. The cost-allocation methodology provided pursuant to this commitment will be a generic methodology that does not require Commission approval prior to it being proposed for specific application in a general rate case or other proceeding affecting rates. Avista will bear the burden of proof in any general rate case that any corporate and affiliate cost allocation methodology is reasonable for ratemaking purposes. Neither Avista nor Olympus Holding Corp. or its subsidiaries will contest the Commission's authority to disallow, for retail ratemaking purposes in a general rate case, unreasonable, or misallocated costs from or to Avista or Olympus Holding Corp or its other subsidiaries. With respect to the ratemaking treatment of affiliate transactions affecting Avista, Avista and Olympus Holding Corp. and its subsidiaries, as applicable, will comply with the Commission's then-existing practice; provided, however, that nothing in this commitment limits Avista from also proposing a different ratemaking treatment for the Commission's consideration, or limit the positions any other party may take with respect to ratemaking treatment. Avista will notifu the Commission of any change in corporate structure that affects Avista's corporate and affiliate cost allocation methodologies. Avista will propose revisions to such cost allocation methodologies to accommodate such changes. case Nos. our-=-, r--, frLll8:l):j M. Thies, Avista Schedule 4, Page 6 of 1 3 Appendix 8 to Joint Application Page 6 of 13 Avista will not take the position that compliance with this provision constitutes approval by the Commission of a particular methodology for corporate and affi liate cost allocation. 24 Ratemakinq Cost of Debt and Equity: Avista will not advocate for a higher cost of debt or equity capital as compared to what Avista's cost of debt or equity capital would have been absent Hydro One's ownership. For future ratemaking purposes: a. Determination of Avista's debt costs will be no higher than such costs would have been assuming Avista's credit ratings by at least one industry recognized rating agency, including, but not limited to, S&P, Moody's, Fitch or Morningstar, in effect on the day before the Proposed Transaction closes and applying those credit ratings to then-current debt, unless Avista proves that a lower credit rating is caused by circumstances or developments not the result of financial risks or other characteristics of the Proposed Transaction; b. Avista bears the burden to prove prudent in a future general rate case any pre- payment premium or increased cost of debt associated with existing Avista debt retired, repaid, or replaced as a part ofthe Proposed Transaction; and c. Determination of the allowed return on equity in future general rate cases will include selection and use of one or more proxy group(s) of companies engaged in businesses substantially similar to Avista, without any limitation related to Avista's ownership structure. 25 Avista Capital Structure: At all times following the closing of the Proposed Transaction, Avista will have a common equity ratio of not less than 44 percent, (as calculated for ratemaking purposes) except to the extent the Commission establishes a lower equity ratio for Avista for ratemaking purposes. FERC Reporting Requirements: Avista will continue to meet allthe applicable FERC reporting requirements with respect to annual and quarterly reports (e.g., FERC Forms 1 ,2, 3q) after closing of the Proposed Transaction. Participation in National and Regional Forums: Avista will continue to participate, where appropriate, in national and regional forums regarding transmission issues, pricing policies, siting requirements, and interconnection and integration policies, when necessary to protect the interest of its customers. 28.Treatment of Confidential Information: Nothing in these commitments will be interpreted as a waiver of Hydro One's, its subsidiaries', or Avista's rights to request confidential treatment of information that is the subject of any of these commitments. 29. Commission Enforcement of Commitments: Hydro One and its subsidiaries, including Avista, understand that the Commission has authority to enfgcetlposg case Nos AVU-E-1 7-_ / iYY";l lJ;; Schedule 4, Page 7 of 1 3 Appendix 8 to Joint Application Page 7 of 13 26 27 commitments in accordance with their terms. If there is a violation of the terms of these commitments, then the offending party may, at the discretion of the Commission, have a period of thirty (30) calendar days to cure such violation. The scope of this commitment includes the authority of the Commission to compel the attendance of witnesses from Olympus Holding Corp. and its subsidiaries with pertinent information on matters affecting Avista. Olympus Holding Corp. and its subsidiaries waive their rights to interpose any legal objection they might otherwise have to the Commission's jurisdiction to require the appearance of any such witnesses. Submittal to State Court Jurisdiction for Enforcement of Commission Orders: Olympus Holding Corp., on its own and its subsidiaries' behalf, including Avista's, will file with the Commission prior to closing the Proposed Transaction an affidavit affirming that it will submit to the jurisdiction of the relevant state courts for enforcement of the Commission's orders adopting these commitments and subsequent orders affecting Avista. Annual Report on Commitments: By May 1,2019 and each May I thereafter through May 1 ,2023, Avista will file a report with the Commission regarding the implementation of the commitments as of December 3l of the preceding year. The report will, at a minimum, provide a description of the performance of each of the commitments. If any commitment is not being met, relative to the specific terms of the commitment, the report must provide proposed corrective measures and target dates for completion of such measures. Avista will make publicly available at the Commission non-confidential portions of the report. Commitments Bindins: Hydro One, Olympus Holding Corp. and its subsidiaries, including Avista, acknowledge that the commitments being made by them are binding only upon them and their affiliates where noted, and their successors in interest. Hydro One and Avista are not requesting in this proceeding a determination of the prudence, just and reasonable character, rate or ratemaking treatment, or public interest of the investments, expenditures or actions referenced in the commitments, and the parties in appropriate proceedings may take such positions regarding the prudence, just and reasonable character, rate or ratemaking treatment, or public interest of the investments, expenditures or actions as they deem appropriate. D. Financial Integrity Commitments [See Direct Testimony of Thies/Lopez] Capital Structure Support: Hydro One will provide equity to support Avista's capital structure that is designed to allow Avista access to debt financing under reasonable terms and on a sustainable basis. Utilitv-Level Debt and Preferred Stock: Avista will maintain separate debt and preferred stock, if any, to support its utility operations. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-I7-_ M. Thies, Avista 30. 3l 32 33 34 Appendix 8 to Joint Application Schedule 4, Page 8 of I 3 Page 8 of 13 35 Continued Credit Ratinss: Each of Hydro One and Avista will continue to be rated by at least one nationally recognized statistical "Rating Agency." Hydro One and Avista will use reasonable best efforts to obtain and maintain a separate credit rating for Avista from at least one Rating Agency within the ninety (90) days following the closing ofthe Proposed Transaction. If Hydro One and Avista are unable to obtain or maintain the separate rating for Avista, they will make a filing with the Commission explaining the basis for their failure to obtain or maintain such separate credit rating for Avista, and parties to this proceeding will have an opportunity to participate and propose additional commitments. 36. Restrictions on Upward Dividends and Distributions: a. If either (i) Avista's corporate credit/issuer rating as determined by at least one industry recognized rating agency, including, but not limited to, S&P, Moody's, Fitch, or Morningstar is investment grade or (ii) the ratio ofAvista's EBITDA to Avista's interest expense is greater than or equal to 3.0, then distributions from Avista to Olympus Equity LLC shall not be limited so long as Avista's equity ratio is equal to or greater than 44 percent on the date of such Avista distribution after giving effect to such Avista distribution, except to the extent the Commission establishes a lower equity ratio for ratemaking purposes. Both the EBITDA and equity ratio shall be calculated on the same basis that such calculations would be made for ratemaking purposes for regulated utility operations. b. Under any other circumstances, distributions from Avista to Olympus Equity LLC are allowed only with prior Commission approval. Pension Fundins: Avista will maintain its pension funding policy in accordance with sound actuarial practice. SEC Reportins Requirements: Following the closing of the Proposed Transaction, Avista will file required reports with the SEC. Compliance with the Sarbanes-Oxley Act: Following the closing of the Proposed Transaction, Avista will comply with applicable requirements of the Sarbanes-Oxley Act. E. Ring-Fencing Commitments [See Direct Testimony of Thiesllopez] 40. Independent Directors: At least one of the nine members of the board of directors of Avista will be an independent director who is not a member, stockholder, director (except as an independent director of Avista or Olympus Equity LLC), officer, or employee of Hydro One or its affiliates. At least one of the members of the board of directors of Olympus Equity LLC will be an independent director who is not a member, stockholder, director (except as an independent director of Olympus Equity LLC or Avista), officer, or employee of Hydro One or its affiliates. The same individual may serve as an independent Case Nos. orr-.-', r--, fri!lB:l):j M. Thies, Avista Appendix g to Joint Apprication pue. B"["fi'e 4' Page e or 13 37. 38. 39. director of both Avista and Olympus Equity LLC. The organizational documents for Avista will not permit Avista, without the consent of a two-thirds majority of all its directors, including the affirmative vote of the independent director (or if at that time Avista has more than one independent director, the affirmative vote of at least one of Avista's independent directors), to consent to the institution of bankruptcy proceedings or the inclusion of Avista in bankruptcy proceedings. 41. Non-ConsolidationOpinion: a. Within ninety (90) days of the Proposed Transaction closing, Avista and Olympus Holding Corp. will file a non-consolidation opinion with the Commission which concludes, subject to customary assumptions and exceptions, that the ring-fencing provisions are sufficient that a bankruptcy court would not order the substantive consolidation of the assets and liabilities of Avista with those of Olympus Holding Corp. or its affiliates or subsidiaries (other than Avista and its subsidiaries). b. Olympus Holding Corp. must file an affidavit with the Commission stating that neither Olympus Holding Corp. nor any of its subsidiaries, will seek to include Avista in a bankruptcy without the consent of a two-thirds majority of Avista's board of directors including the affirmative vote of Avista's independent director, or, if at that time Avista has more than one independent director, the affirmative vote of at least one of Avista's independent directors. c. Ifthe ring-fencing provisions in these commitments are not sufficient to obtain a non-consolidation opinion, Olympus Holding Corp. and Avista agree to promptly undertake the following actions: (i) Notify the Commission of this inability to obtain a non-consolidation opinion. (ii) Propose and implement, upon Commission approval, such additional ring-fencing provisions around Avista as are sufficient to obtain a non- consolidation opinion subject to customary assumptions and exceptions. (iii) Obtain a non-consolidation opinion. 42 Olvmpus Equity LLC: Olympus Holding Corp. indirect subsidiaries will include Olympus Equity LLC between Avista and Olympus LLC 2. See the post- acquisition organizational chart in Appendix 1 of the Joint Application. Following closing of the Proposed Transaction, all of the common stock of Avista will be owned by Olympus Equity LLC, a new Delaware limited liability company, and a wholly-owned subsidiary of Olympus LLC 2. Olympus Equity LLC will be a bankruptcy-remote special purpose entity, and will not have debt. 43. Restriction on Pledee of Utilitv Assets: Avista will agree to prohibitions against loans or pledges of utility assets to Hydro One, Olympus Holding Corp., or any of their subsidiaries or affiliates, without Commission approval. Exhibir No. 3 case N os. AVU-E- 1 7-J.iYr":l lJ;; Schedule 4, Page 10 of 13 Appendix 8 to Joint Application Page l0 of 13 44.Hold Harmless: Notice to Lendersl Restriction on Acquisitions and Disnositions: a. Avista will generally hold Avista customers harmless from any business and financial risk exposures associated with Olympus Holding Co.p., Hydro One, and Hydro One's other affiliates. b. Pursuant to this commitment, Avista and Olympus Holding Corp. will file with the Commission, prior to closing of the Proposed Transaction, a form of notice to prospective lenders describing the ring-fencing provisions included in these commitments stating that these provisions provide no recourse to Avista assets as collateral or security for debt issued by Hydro One or any of its subsidiaries, other than Avista. c. In furtherance of this commitment: Avista commits that Avista's regulated utility customers will be held harmless from the liabilities of any unregulated activity of Avista or Hydro One and its affiliates. In any proceeding before the Commission involving rates of Avista, the fair rate of return for Avista will be determined without regard to any adverse consequences that are demonstrated to be attributable to unregulated activities. Measures providing for separate financial and accounting treatment will be established for each unregulated activity. ii. Olympus Holding Corp. and Avista will notify the Commission subsequent to Olympus Holding Corp.'s board approval and as soon as practicable following any public announcement of: (l) any acquisition by Olympus Holding Corp. of a regulated or unregulated business that is equivalent to five (5) percent or more of the capitalization of Avista; or (2) the change in effective control or acquisition of any material part of Avista by any other firm, whether by merger, combination, transfer of stock or assets. Notice pursuant to this provision is not and will not be deemed an admission or expansion of the Commission's authority or jurisdiction over any transaction or in any matter or proceeding whatsoever. Within sixty (60) days following the notice required by this subsection (c)(ii)(2), Avista and Olympus Holding Corp. or its subsidiaries, as appropriate, will seek Commission approval of any sale or transfer of any material part of Avista. The term "material part of Avista" means any sale or transfer of stock representing ten percent ( I 0%) or more of the equity ownership of Avista. Neither Avista nor Olympus Holding Corp. will assert in any future proceedings that, by virtue ofthe Proposed Transaction and the resulting Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista t. lll Appendix 8 to Joint Application Schedule 4, Page 1 1 of '13 Page ll of13 corporate structure, the Commission is without jurisdiction over any transaction that results in a change of control of Avista. d. If and when any subsidiary of Avista becomes a subsidiary of Hydro One or one of its subsidiaries other than Avista, Avista will so advise the Commission within thirty (30) days and will submit to the Commission a written document setting forth Avista's proposed corporate and affiliate cost allocation methodologies. 45.Olvmpus LLC 2 and Olvmpus Equitv LLC Sub-entities: Olympus LLC2will not operate or own any business and will limit its activities to investing in and attending to its shareholdings in Olympus Equity LLC, which, in turn, will not operate or own any business and will limit its activities to investing in and attending to its shareholdings in Avista. 46.No Amendment of Rins-Fencing Provisions: Olympus Holding Corp. and Avista commit that no material amendments, revisions or modifications will be made to the ring-fencing provisions as specified in these regulatory commitments without prior Commission approval pursuant to a limited re-opener for the sole purpose of addressing the ring-fencing provisions. F. Environmental, Renewable Energy, and Energy Efficiency Commitments [See Direct Testimony of ChristielPugliesel 47. Renewable Portfolio Standard Requirements: Hydro One acknowledges Avista's obligations under applicable renewable portfolio standards, and Avista will continue to comply with such obligations. 48 Renewable Energv Resources: Avista will acquire all renewable energy resources required by law and such other renewable energy resources as may from time to time be deemed advisable in accordance with Avista's integrated resource planning process and applicable regulations. 49 Greenhouse Gas and Carbon Initiatives: Hydro One acknowledges Avista's Greenhouse Gas and Carbon Initiatives contained in its current Integrated Resource Plan, and Avista will continue to work with interested parties on such initiatives. 50.Greenhouse Gas Inventory ReDort: Avista will report greenhouse gas emissions as required. 5l Efficiencv Goals and Obiectives: Hydro One acknowledges Avista's energy efficiency goals and objectives set forth in Avista's 2017 lntegrated Resource Plan and other plans, and Avista will continue its ongoing collaborative efforts to expand and enhance them. 52. Optional Renewable Power ram: Avista will continue to offer renewable power programs in consultation with stakeholders Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 4, Page 12 of 13 Page 12 of l3Appendix 8 to Joint Application G. Community and Low-Income Assistance Commitments [See Direct Testimony of Morris/Schmidt/Ch ristie/Pu gliesel 53. Communitv Contributions: Hydro One will cause Avista to make a one-time $7,000,000 contribution to Avista's charitable foundation at or promptly following closing.5 Low-Income Energy Efficiencv Funding: Avista will continue to work with its advisory groups on the appropriate level of funding for low income energy efficiency programs. Addressing Other Low-Income Customer Issues: Avista will continue to work with low-income agencies to address other issues of low-income customers, including funding for bill payment assistance. 5 Note that Commitment I I contains additional provisions relating to Avista's charitable contributions. Exhibit No. 3 Case Nos. AVU-E-17-_ / AVU-G-17-_ M. Thies, Avista Schedule 4, Page '13 of '1 3 Appendix 8 to Joint Application Page 13 of 13 54 55