# AVISTA CORP (AVA) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from AVISTA CORP's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/104918/000095017023003546/ava-20221231.htm Accession: 0000950170-23-003546 Filing date: 2023-02-22 Report date: 2022-12-31 Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Confidence: high Company profile: /company/AVA/ All MD&A years: /company/AVA/mda/ Previous year: /company/AVA/mda/fy2021/ (FY 2021) Next year: /company/AVA/mda/fy2023/ (FY 2023) Liquidity and Capital Resources Overall Liquidity Avista Corp.'s consolidated operating cash flows are primarily derived from the operations of Avista Utilities. The primary source of operating cash flows for Avista Utilities is revenues from sales of electricity and natural gas. Significant uses of cash flows from Avista Utilities include the purchase of power, fuel and natural gas, and payment of other 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 projects that support immediate and long-term 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 capital markets in order to fund these needs as well as fund maturing debt. See further discussion at “Capital Resources.” We regularly file for rate adjustments for recovery of operating costs and capital investments and to seek the opportunity to earn reasonable returns. We have regulatory mechanisms in place that provide for the deferral and recovery of the majority of power and natural gas supply costs. However, when power and natural gas costs exceed the levels currently recovered from customers, net cash flows 57 AVISTA CORPORATION are negatively affected. Factors that could cause purchased power and natural gas costs to exceed the levels currently recovered from customers under base rates include, but are not limited to, higher prices in wholesale markets and/or an increased need to purchase power in the wholesale markets, and a lack of regulatory approval for higher authorized net power supply costs. 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 (possibly due to climate change) or customer growth), • reduced snowpack or lower streamflows (due to weather (possibly due to climate change)) for hydroelectric generation, • unplanned outages at generating facilities, and • failure of third parties to deliver on energy or capacity contracts. In addition to the above, we enter into derivative instruments to hedge exposure to certain risks, including fluctuations in commodity prices, foreign exchange rates and interest rates (for purposes of issuing long-term debt in the future). These derivative instruments periodically require us to post collateral (in the form of cash or letters of credit) or other credit enhancements or to reduce or terminate a portion of the contract through cash settlement, in the event of a downgrade in our credit ratings or changes in market prices. In periods of price volatility, the level of exposure can change significantly. As a result, sudden and significant demands may be made against our cash on hand and credit facilities. See “Enterprise Risk Management – Credit Risk Liquidity Considerations” below. We monitor the potential liquidity impacts of changes to energy commodity prices and other increased operating costs. In December 2022, increased energy commodity market prices significantly impacted our liquidity, resulting in us entering new credit agreements. See “Executive Level Summary” for further discussion on increased commodity prices and liquidity impacts. Material contractual obligations that demand cash arise in the normal course of business including energy purchase contracts and contractual obligations related to generation facilities and transmission and distributions services. See “Note 14 of the Notes to Consolidated Financial Statements” for additional information related to these contractual obligations. Additional demands for cash include payments of borrowings and interest payments (see “Notes 15-17 of the Notes to Consolidated Financial Statements”), lease obligations (see “Note 5 of the Notes to Consolidated Financial Statements”), pension and other postretirement benefit plan contributions (see “Note 12 of the Notes to Consolidated Financial Statements”) and investment fund commitments (see “Note 6 of the Notes to Consolidated Financial Statements”). See discussion in “Capital Resources” below for available liquidity under our credit facilities. With our available liquidity under these agreements, we believe that we have adequate liquidity to meet our needs for the next 12 months. Review of Consolidated Cash Flow Statement 2022 compared to 2021 Consolidated Operating Activities Net cash provided by operating activities was $124.2 million for 2022 compared to $267.3 million for 2021. The decrease in net cash provided by operating activities primarily relates to an increase in cash collateral posted for derivative investments, which decreased cash flows by $141.0 million in 2022 compared to $17.6 million in 2021. Collateral calls increased significantly during December 2022, associated with increases in power and natural gas prices (see discussion in “Executive Level Summary”). During 2022 there was also an increase in power and natural gas cost deferrals (reflecting higher power and natural gas supply costs), which decreased cash flows by $78.4 million in 2022 compared to decreasing cash flows by $51.8 million in 2021. In addition, the provision for deferred taxes decreased operating cash flows in 2022 by $18.2 million compared to increasing operating cash flows by $11.2 million in 2021. 58 AVISTA CORPORATION These decreases in operating cash flows were partially offset by an increase in the decoupling deferrals, which increased operating cash flows by $33.5 million compared to $6.1 million in 2021. Consolidated Investing Activities Net cash used in investing activities was $460.2 million for 2022, an increase compared to $444.9 million for 2021. During 2022, we paid $452.0 million for utility capital expenditures, compared to $439.9 million for 2021. Consolidated Financing Activities Net cash provided by financing activities was $327.3 million for 2022 compared to $185.5 million for 2021. The increase in financing cash flows was primarily the result of increases in short-term borrowings of $98.0 million compared to 2021. Increased borrowing needs in 2022 were a direct result of increased power and natural gas prices experienced in December 2022, as discussed in “Executive Level Summary”. In addition, there was an increase in proceeds from issuance of common stock of $47.8 million compared to 2021. Capital Resources Capital Structure Our consolidated capital structure, including the current portion of long-term debt and short-term borrowings consisted of the following as of December 31, 2022 and 2021 (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2022","","","December 31, 2021"],["","","Amount","","","Percent of total","","","Amount","","","Percent of total"],["Current portion of long-term debt and leases","","$","21,084","","","","0.4","%","","$","257,386","","","","5.4","%"],["Short-term borrowings","","","463,000","","","","8.8","%","","","284,000","","","","6.0","%"],["Long-term debt to affiliated trusts","","","51,547","","","","1.0","%","","","51,547","","","","1.1","%"],["Long-term debt and leases","","","2,387,792","","","","45.4","%","","","2,010,168","","","","42.1","%"],["Total debt","","","2,923,423","","","","55.6","%","","","2,603,101","","","","54.7","%"],["Total Avista Corporation shareholders\u2019 equity","","","2,334,668","","","","44.4","%","","","2,154,744","","","","45.3","%"],["Total","","$","5,258,091","","","","100.0","%","","$","4,757,845","","","","100.0","%"]] [[/GREPCENT_TABLE]] Our shareholders’ equity increased $179.9 million during 2022 primarily due to net income and the issuance of common stock, 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 of cash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividends and other requirements. Short Term Borrowings Avista Corp. Avista Corp. has a committed line of credit in the total amount of $400.0 million. In June 2021, we entered into an amendment that extends the expiration date to June 2026, with the option to extend for an additional one year period (subject to customary conditions). In December 2022, we experienced increases in commodity prices that resulted in needs for additional liquidity. See “Executive Level Summary” for further discussion on this market volatility and liquidity impacts. In November 2022, we entered into a revolving credit agreement in the amount of $50 million with a maturity date in November 2023. In December 2022, the agreement was amended to add an additional $50 million, bringing the new aggregate total to $100 million. In December 2022, we entered into a term loan, in the amount of $100 million with a maturity date of March 30, 2023. The initial agreement included an option to add an additional $50 million in principal as an incremental facility, which we exercised in December 2022, bringing the total aggregate amount to $150 million. 59 AVISTA CORPORATION In December 2022, we entered into a continuing letter of credit agreement in the aggregate amount of $50 million. Either party may terminate the agreement at any time. The following table summarizes the balances outstanding and available liquidity as of December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","","Aggregate Amount","","","Amount Outstanding","","","Letters of Credit Outstanding (1)","","","Available Liquidity"],["Line of Credit expiring June 2026","","$","400,000","","","$","313,000","","","$","35,563","","","$","51,437"],["Line of Credit expiring November 2023","","","100,000","","","","\u2014","","","N/A","","","","100,000"],["Term Loan due March 2023","","","150,000","","","","150,000","","","N/A","","","","\u2014"],["Letter of Credit Facility","","","50,000","","","N/A","","","","18,500","","","","31,500"],["Total","","$","700,000","","","$","463,000","","","$","54,063","","","$","182,937"]] [[/GREPCENT_TABLE]] (1) Letters of credit are not reflected on the Consolidated Balance Sheets. If a letter of credit were drawn upon by the holder, we would have an immediate obligation to reimburse the bank that issued that letter. The Avista Corp. credit facilities contain customary covenants and default provisions, including a change in control (as defined in the agreements). The events of default under each of the credit facilities also include a cross default from other indebtedness (as defined) and in some cases other obligations. Some of these agreements also include 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 of December 31, 2022, we were in compliance with this covenant with a ratio of 55.6 percent. Balances outstanding and interest rates on borrowings (excluding letters of credit) under Avista Corp.'s lines of credit were as follows as of and for the year ended December 31 (dollars in thousands): [[GREPCENT_TABLE]] [["","","2022","","","2021"],["$400 million line of credit, expiring June 2026"],["Maximum balance outstanding during the year","","$","345,000","","","$","338,000"],["Average balance outstanding during the year","","","205,947","","","","208,629"],["Average interest rate during the year","","","3.06","%","","","1.14","%"],["Average interest rate at end of year","","","5.31","%","","","1.11","%"],["$100 million line of credit, expiring November 2023"],["Maximum balance outstanding during the period (1)","","$","77,000","","","N/A"],["Average balance outstanding during the period (1)","","","15,656","","","N/A"],["Average interest rate during the period (1)","","","7.56","%","","N/A"],["Average interest rate at end of year","","N/A","","","N/A"]] [[/GREPCENT_TABLE]] (1) The period is from the date the agreement was entered (November 30, 2022) to the end of 2022. AEL&P AEL&P has a $25.0 million committed line of credit with an expiration date in November 2024. As of December 31, 2022, there was $25.0 million of available liquidity under this line of credit. 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 of the Snettisham obligation) to be greater than 67.5 percent at any time. As of December 31, 2022, AEL&P was in compliance with this covenant with a ratio of 50.8 percent. As of December 31, 2022, Avista Corp. and its subsidiaries were in compliance with all of the covenants of their financing agreements, and none of Avista Corp.'s subsidiaries constituted a “significant subsidiary” as defined in Avista Corp.'s committed line of credit. Long-Term Debt In March 2022, we issued and sold $400.0 million of 4.00 percent first mortgage bonds due in 2052 through a public offering. The total net proceeds from the sale of the bonds were used to repay the borrowings outstanding under the Company’s $400.0 million committed line of credit in March 2022. In April 2022, the Company used the remainder of the proceeds, as well as 60 AVISTA CORPORATION borrowings on committed line of credit to pay $250.0 million of maturing debt. In connection with the pricing of the first mortgage bonds in March 2022, we cash-settled thirteen interest rate swap derivatives (notional aggregate amount of $140.0 million) and paid a net amount of $17.0 million, which will be amortized as a component of interest expense over the life of the debt. The effective interest rate of the first mortgage bonds is 4.32 percent, including the effects of the settled interest rate swap derivatives and issuance costs. Common Stock We issued common stock in 2022 for total net proceeds of $137.8 million. Most of these issuances came through our sales agency agreements under which the sales agents may offer and sell new shares of our common stock from time to time, with the balance related to compensation plans. We have board and regulatory authority to issue a maximum of 5.6 million shares, of which 2.3 million remain unissued as of December 31, 2022. In 2022, 3.3 million shares were issued under these agreements resulting in total net proceeds of $137.2 million. 2023 Liquidity Expectations During 2023, we expect to issue up to $200 million of long-term debt and $120 million of common stock to fund planned capital expenditures and decrease short-term borrowings. We also plan to increase the capacity of our $400 million credit facility to $500 million in the second quarter. After considering the expected issuances of long-term debt and common stock during 2023, we expect net cash flows from operating activities (including recovery of deferred power and natural gas costs and return of margin deposits made with counterparties), together with cash available under our credit facilities, to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments. Limitations on Issuances of Preferred Stock and First Mortgage Bonds We are restricted under our Restated Articles of Incorporation, as amended, as to the additional preferred stock we can issue. As of December 31, 2022, we could issue $1.4 billion of preferred stock at an assumed dividend rate of 7.6 percent. We are not planning to issue preferred 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: • 66-2/3 percent of the cost or fair value (whichever is lower) of property additions of that entity which have not previously been made the basis of any application under that entity's Mortgage, or • an equal principal amount of retired first mortgage bonds of that entity which have not previously been made the basis of any application under that entity's Mortgage, or • deposit of cash. However, Avista Corp. and AEL&P may not individually issue any additional first mortgage bonds (with certain exceptions in the case of bonds issued on the basis of retired bonds) unless the particular entity issuing the bonds has “net earnings” (as defined in the respective Mortgages) for any period of 12 consecutive calendar months out of the preceding 18 calendar months that were at least twice the annual interest requirements on that entity's mortgage securities at the time outstanding, including the first mortgage bonds to be issued, and on all indebtedness of prior rank. As of December 31, 2022, property additions and retired bonds would have allowed, and the net earnings test would not have prohibited, the issuance of $1.4 billion in aggregate principal amount of additional first mortgage bonds at Avista Corp. and $40.4 million at AEL&P, at an assumed interest rate of 8 percent in each case. We believe that we have adequate capacity to issue first mortgage bonds to meet our financing needs over the next several years. 61 AVISTA CORPORATION Utility Capital Expenditures We are making capital investments at our utilities to enhance service and system reliability for our customers and replace aging infrastructure. The following table summarizes our actual and expected capital expenditures as of and for the year ended December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","","Avista Utilities","","","AEL&P"],["2022 Actual capital expenditures"],["Capital expenditures (per the Consolidated Statement of Cash Flows)","","$","443,373","","","$","8,622"],["Expected total annual capital expenditures (by year)"],["2023","","$","475,000","","","$","16,000"],["2024","","","475,000","","","","14,000"],["2025","","","475,000","","","","16,000"]] [[/GREPCENT_TABLE]] The following graph shows Avista Utilities' expected capital expenditures for 2023-2025 by category (in millions): These estimates of capital expenditures are subject to continuing review and adjustment. Actual expenditures may vary from our estimates due to factors such as changes in business conditions, construction schedules and environmental requirements. Non-Regulated Investments and Capital Expenditures We are making investments and capital expenditures at our other businesses including those related to economic development projects in our service territory that demonstrate the latest energy and environmental building innovations and house several local college degree programs. In addition, we are making investments in emerging technology companies, venture capital 62 AVISTA CORPORATION funds, and other business ventures. The following table summarizes our actual and expected investments and capital expenditures at our other businesses as of and for the year ended December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","","Other"],["2022 Actual investments and capital expenditures"],["Investments and capital expenditures","","$","14,172"],["Expected total annual investments and capital expenditures (by year)"],["2023","","$","15,000"],["2024","","","13,000"],["2025","","","13,000"]] [[/GREPCENT_TABLE]] These estimates of investments and capital expenditures are subject to continuing review and adjustment. Actual expenditures may vary from our estimates due to factors such as changes in business conditions or strategic plans. See “Liquidity” for information regarding other material cash requirements for 2023 and thereafter. Pension Plan We contributed $42.0 million to the pension plan in 2022. We expect to contribute a total of $50.0 million to the pension plan in the period 2023 through 2027, with an annual contribution of $10.0 million. The final determination of pension plan contributions for future periods is subject to multiple variables, most of which are beyond our control, including changes to the fair value of pension 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 12 of the Notes to Consolidated Financial Statements” for additional information regarding the pension plan. Credit Ratings Our access to capital markets and our cost of capital are directly affected by our credit ratings. In addition, many of our 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 8 of the Notes to Consolidated Financial Statements.” The following table summarizes our credit ratings as of February 21, 2023: [[GREPCENT_TABLE]] [["","","Standard & Poor's (1)","","Moody's (2)"],["Corporate/Issuer rating","","BBB","","Baa2"],["Senior Secured Debt","","A-","","A3"],["Senior Unsecured Debt","","BBB","","Baa2"]] [[/GREPCENT_TABLE]] (1) Standard & Poor’s lowest “investment grade” credit rating is BBB-. (2) Moody’s lowest “investment grade” credit rating is Baa3. 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 of the applicable methodology, independent of all other ratings. The rating agencies provide ratings at the request of Avista Corp. and charge fees for their services. Dividends See “Item 5. Market for Registrant’s Common 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 of dividends. Competition Our electric and natural gas distribution utility business has historically been recognized as a natural monopoly. In each regulatory jurisdiction, 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 determined on a 63 AVISTA CORPORATION “cost of service” basis. Rates are designed to provide, after recovery of allowable operating expenses and capital investments, an opportunity for us to earn a reasonable return on investment as allowed by our regulators. 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. We have entered into a number of service territory agreements with certain rural electric cooperatives and public utility districts, approved in applicable jurisdictions, to set forth conditions under which one or the other utility will provide service to customers. Alternative energy technologies, including customer-sited solar, wind or geothermal generation, or energy storage may also compete with us for sales to existing customers. Advances in power generation, energy efficiency, energy storage and other alternative energy technologies could lead to more wide-spread usage of these 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. Certain natural gas customers could bypass our natural gas system, reducing both revenues and recovery of fixed costs. To reduce the potential for such bypass, we price natural gas services, including transportation contracts, competitively and have varying degrees of flexibility to price transportation and delivery rates by means of individual contracts. These individual contracts are subject to regulatory review and approval. We have long-term 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 earnings. Customers may have a choice in the future over the sources from which to receive their energy. In order to effectively compete for our customers in the future, we continue to strive to create value through product and service offerings. We are also attempting to enhance the effectiveness and ease of our customer interactions with us by tailoring our internal initiatives to focus on choices for our customers to increase their overall satisfaction with the Company. 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 alter demand for the energy we sell. In wholesale markets, competition for available electric supply is influenced by the: • localized and system-wide demand for energy, • type, capacity, location and availability of generation resources, and • variety and circumstances of market 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 or construct additional transmission capacity for the purpose of providing these services, and • transparently price and offer transmission services without favor to any party, including the merchant functions of the utility. Participants in the wholesale energy markets include: • other utilities, • federal power marketing agencies, • energy marketing and trading companies, • independent power producers, • financial institutions, and 64 AVISTA CORPORATION • commodity brokers. Economic Conditions and Utility Load Growth The general economic data, on both national and local levels, contained in this section is based, in part, on independent government and industry publications, reports by market research firms or other independent sources. While we believe that these publications and other sources are reliable, we have 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. The key indicators are employment change and unemployment rates. On an annual basis, 2022 showed positive job growth with lower unemployment rates in all three metropolitan areas. The unemployment rates in Spokane and Medford are near the national average, while Coeur d’Alene is lower. Other leading indicators, such as initial unemployment claims and residential building permits, signal slowing growth over the next 12 months. Considering all relevant indicators, we expect economic growth in our service area in 2023 to be in-line with the U.S. as a whole. Nonfarm employment (seasonally adjusted) in our service areas increased in 2022. In Spokane, Washington employment increased 4.4 percent with gains in all major sectors. Employment increased 2.8 percent in Coeur d'Alene, Idaho, reflecting gains in all major sectors except financial activities. In Medford, Oregon, employment increased 1.0 percent, with gains in all major sectors except trade, transportation, and utilities; manufacturing; information; and professional and business services. U.S. nonfarm sector employment increased 4.0 percent over the same period. In Spokane the unemployment rate was 5.5 percent in 2021 and fell to 4.6 percent in 2022; in Coeur d'Alene the rate fell from 4.3 percent in 2021 to 3.3 percent in 2022; and in Medford the rate fell from 5.4 percent in 2021 to 4.4 percent in 2022. The U.S. unemployment rate fell from 5.4 percent in 2021 percent to 3.6 percent in 2022. Data regarding local and national unemployment rates were determined by and obtained from third parties. We have made no independent determination or verification of this data or any investigation into the methodologies used to determine the data. Alaska Electric Light and Power Company Although Juneau is Alaska’s state capital, it is not a metropolitan statistical area. This means breadth and frequency of economic data is more limited. Therefore, the dates of Juneau's economic data may significantly lag the period of this filing. The Quarterly Census of Employment and Wages for Juneau shows employment increased 8.7 percent between the first half of 2021 and first half of 2022. This high growth reflects an employment recovery following the pandemic induced job losses. There were employment gains in all major sectors, except financial activities and government. Government employment declined 0.8 percent during this period; this sector accounted for 39 percent of total employment in the second half of 2022. Between 2021 and 2022, the unemployment rate fell from 4.7 percent to 3.0 percent. Forecasted Customer and Load Growth Based on our forecast for 2023 for Avista Utilities' service area, we expect annual electric customer growth to average 1.2 percent, within a forecast range of 0.8 percent to 1.6 percent. We expect annual natural gas customer growth to average 1.3 percent, within a forecast range of 0.4 percent to 2.2 percent. We anticipate retail electric load growth to average 0.4 percent, within a forecast range of 0 percent and 0.8 percent. We expect natural gas load growth to average 1.0 percent, within a forecast range of 0.4 percent and 1.6 percent. The forecast ranges reflect (1) the inherent uncertainty associated with the economic assumptions on which forecasts are based; (2) the historic variability of natural gas customer and load growth; and (3) new restrictions on natural gas connections in our Washington service area. See further discussion regarding these natural gas regulations as included in “Environmental Issues and Contingencies” below. 65 AVISTA CORPORATION In AEL&P's service area, we expect no growth in residential, commercial and government customers in 2023. We anticipate average total load growth will decrease 1.6 percent, with residential load growth decreasing 1.9 percent, commercial load decreasing 1.3 percent, and government load decreasing 1.6 percent. The forward-looking statements 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 are also based upon various assumptions, including: • assumptions relating to weather and economic and competitive conditions, • internal analysis of company-specific data, such as energy consumption patterns, • internal business plans, • an assumption that we will incur no material loss of retail customers due to self-generation or retail 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 of competitive factors that could affect our results of operations in the future. Environmental Issues and Contingencies We are subject to environmental regulation by federal, state and local authorities. The generation, transmission, distribution, service and storage facilities in which we have ownership interests or which we may need to acquire or develop are subject to environmental laws, regulations and rules relating to construction permitting, air emissions, water quality, fisheries, wildlife, endangered species, avian interactions, wastewater and stormwater discharges, waste handling, natural resource protection, historic and cultural resource protection, and other similar activities. These laws and regulations require the Company to make substantial investments in compliance activities and to acquire and comply with a wide variety of environmental licenses, permits, approvals and settlement agreements. These items are enforceable by public officials and private individuals. Some of these regulations are subject to ongoing interpretation, whether administratively or judicially, and are often in the process of being modified. We conduct periodic reviews and audits of pertinent facilities and operations to enhance compliance and to respond to or anticipate emerging environmental issues. The Company's Board of Directors has established a committee to oversee environmental issues and to assess and manage environmental risk. We monitor legislative and regulatory developments at different levels of government for environmental issues, particularly those with the potential to impact the operation of our generating plants and other assets. We continue to be subject to increasingly stringent or expanded application of environmental and related regulations from all levels of government. Environmental laws and regulations may restrict or impact our business activities in many ways, including, but not limited to, by: • increasing the operating costs of generating plants and other assets, • increasing the lead time and capital costs for the construction of new generating plants and other assets, • requiring modification of our existing generating plants, • requiring existing generating plant operations to be curtailed or shut down, • reducing the amount of energy available from our generating plants, • restricting the types of generating plants that can be built or contracted with, • requiring construction of specific types of generation plants at higher cost, and • increasing costs of distributing, or limiting our ability to distribute, electricity and/or natural gas. 66 AVISTA CORPORATION 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 process. Washington Clean Energy Transformation Act (CETA) In 2019, the Washington State Legislature passed the CETA, which requires Washington utilities to eliminate the costs and benefits associated with coal-fired resources from their retail electric sales by December 31, 2025. This requirement would effectively prohibit sales of energy produced by coal-fired generation to Washington retail customers after December 31, 2025. In addition, CETA establishes the policy of Washington State that all retail sales of electricity to Washington customers must be carbon-neutral by January 1, 2030 and requires that each electric utility demonstrate compliance with this standard by using electricity from renewable and other non-emitting resources for 100 percent of the utility’s retail electric load over consecutive multi-year compliance periods; provided, however, that through December 31, 2044 the utility may satisfy up to 20 percent of this requirement with specified payments, credits and/or investments in qualifying energy transformation projects. The law has direct, specific impacts on Colstrip, which are unique to those owners of Colstrip who serve Washington customers. See “Colstrip” section and “Note 22 of the Notes to Consolidated Financial Statements” for further details on the impacts of CETA on Colstrip and our plans to exit Colstrip through our agreement with NorthWestern. Our hydroelectric and biomass generation facilities can be used to comply with the CETA’s clean energy standards. We intend to seek recovery of any costs associated with the clean energy legislation and regulations through the regulatory process. As required under CETA, in October 2021 we filed our first Clean Energy Implementation Plan (CEIP). Our CEIP is a road map of specific actions we propose to take over the next four years (2022-2025) to show the progress being made toward clean energy goals and the equitable distribution of benefits and burdens to all customers as established by the CETA, which was passed by the Washington legislature and enacted into law in 2019. CETA requires electric supply to be greenhouse gas (GHG) neutral by 2030 and 100 percent renewable or generated from zero-carbon resources by 2045. In June 2022, our CEIP was approved by the WUTC. Some highlights of our approved plan include: • Beginning in 2022, serving 40 percent of our Washington retail customer demand with renewable (or zero carbon) energy, then increase this target to 62.5 percent by the end of 2025. • Energy efficiency targets to reduce Washington retail customer load by approximately 2 percent over the next four years through incentives and programs to lower energy use without impacting the customer. • A set of 14 Customer Benefit Indicators to ensure the equitable distribution of energy and non-energy benefits and reduction of burden to all customers and named communities. • A Named Communities Investment Fund that will invest up to $5 million annually in projects, programs and initiatives that directly benefit customers residing in historically disadvantaged and vulnerable communities. While the CEIP represents our current objectives, it is subject to change from time to time in the future as circumstances warrant including direct input from the WUTC. We are required to file a CEIP every four years. Policies Related to Climate Change Legal and policy changes responding to concerns about long-term global climate changes, and the potential impacts of such changes, could have a significant effect on our business. Our operations could be affected by changes in laws and regulations intended to mitigate the risk of, or alter, global climate changes, including restrictions on the operation of our power generation resources and obligations or limitations imposed on the sale of natural gas. Changing temperatures and precipitation, including snowpack conditions, affect the availability and timing of streamflows, which impact hydroelectric generation. Extreme weather events could increase fire risks, service interruptions, outages and maintenance costs. Changing temperatures could also change the magnitude and timing of customer demand. 67 AVISTA CORPORATION Federal Regulatory Actions In June 2019, the EPA released the final version of the Affordable Clean Energy (ACE) rule, the replacement for the Clean Power Plan (Federal CPP). The final ACE rule finalized the repeal of the Federal CPP and comprised the EPA’s determination of the Best System of Emissions Reduction (BSER) for existing coal-fired power plants as heat rate efficiency improvements based on a range of “candidate technologies”. In January 2021, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated the ACE Rule and remanded the record back to the EPA for further consideration consistent with its opinion, finding that the EPA misinterpreted the Clean Air Act when it determined that the language of Section 111 barred consideration of emissions reduction options that were not applied at the source. The Court also vacated the repeal of the Federal CPP. In February 2021, the EPA moved for a partial stay of the Court’s mandate, noting that no Section 111(d) rule should go into effect until the EPA conducted new rulemaking in response to the January 2021 decision. The Court subsequently issued an order withholding issuance of the mandate with respect to the repeal of the Federal CPP and directing issuance of the mandate “in the normal course” for the vacatur of the replacement portion of the rule. In April 2021, numerous parties requested the Supreme Court’s review of the D.C. Circuit’s January 2021 decision, and in October 2021, the Supreme Court granted such review. In June 2022, the Supreme Court reversed the D.C. Circuit and found that, under the major questions doctrine, the generation shifting approach to controlling greenhouse gas emissions used by the EPA in the Federal CPP exceeded the powers granted to the agency by Congress. The Court's decision left open the question of whether, and to what extent, the EPA can seek to curb greenhouse gas emissions through methods other than generation shifting. At this time, the EPA has not released a proposed successor rule to the Federal CPP, nor has it sought to amend the ACE Rule, which is still subject to the D.C. Circuit Court's January 2021 decision. Consequently, we cannot reasonably predict the timing, outcome or applicability of these issues with respect to any of the Company's generation resources. Washington Legislation and Regulatory Actions Clean Air Rule In September 2016, the Washington State Department of Ecology adopted the Clean Air Rule (CAR) to cap and reduce greenhouse gas (GHG) emissions across the State of Washington in pursuit of the State’s GHG goals, which were enacted in 2008 by the Washington State Legislature. In response, the Company, Cascade Natural Gas Corporation, NW Natural and Puget Sound Energy jointly filed actions in both the Eastern District of Washington and in Thurston County Superior Court, challenging the CAR. In January 2020, the Washington State Supreme Court issued a decision holding that the CAR was invalid as to non-emitters, such as natural gas distributors, but could be enforced against direct emitters, such as natural gas generation plants. The Court remanded the matter to Thurston County Superior Court, where it has been stayed by the Court. At this time, we are continuing to evaluate the potential impact of the surviving portion of the rule, if any, to our generation facilities, should their emissions exceed the rule’s compliance threshold. The rule is not intended to apply to the Kettle Falls Generating Station. We plan to seek recovery of any costs related to compliance with the surviving portion of the CAR through the ratemaking process. Emissions Performance Standard Washington also applies a GHG emissions performance standard to electric generation facilities used to serve retail loads in their jurisdictions, whether the facilities are located within its state or elsewhere. The emissions performance standard prevents utilities from constructing or purchasing generation facilities, or entering into power purchase agreements of five years or longer duration to purchase energy produced by plants that, in any case, have emission levels higher than 1,100 pounds of GHG per MWh. The Washington State Department of Commerce reviews the standard every five years. In September 2018, it adopted a new standard of 925 pounds of GHG per MWh. We intend to seek recovery of costs related to ongoing and new requirements through the ratemaking process. 68 AVISTA CORPORATION Washington Climate Commitment Act In 2021, the Washington legislature passed the Climate Commitment Act (CCA) which establishes a cap and trade program to reduce greenhouse gas emissions and achieve the greenhouse gas limits previously established under state law. The CCA directs the Washington Department of Ecology (Ecology) to develop regulations implementing the cap and trade program and related efforts. Ecology recently issued final rules that became effective November 1, 2022. These rules implement a cap on greenhouse gas emissions, provide mechanisms for the sale and tracking of tradable emissions allowances and establish additional compliance and accountability measures. Our electric and natural gas businesses will be impacted by these regulations. The CCA is intended to be consistent with CETA for electric utilities covered by both rules and is not intended to create a secondary financial burden in addition to the costs of complying with CETA. We are continuing to evaluate the impact of these rules on our operations and costs of providing service. We intend to seek recovery of costs associated with implementing the CCA through the ratemaking process. Washington State Building Codes In April 2022, the Washington State Building Code Council (SBCC) approved a revised energy code that requires most new commercial buildings and large multifamily buildings to install all-electric space heating. However, an amendment to the code does allow for natural gas to supplement electric heat pumps. Additionally, in November 2022, SBCC approved new building and energy codes for residential housing, requiring new residential buildings in Washington to use electricity as the primary heating source. The State Legislature has the opportunity to reject or alter these new codes during their Regular Session. If there is no action by the Legislature, the new codes will take effect in July 2023. Oregon Legislation and Regulatory Actions Climate Protection Plan In March 2020, Oregon Governor Kate Brown issued Executive Order No. 20-04, “Directing State Agencies to Take Actions to Reduce and Regulate Greenhouse Gas Emissions.” The Executive Order launched rulemaking proceedings for every Oregon agency with jurisdiction over greenhouse gas (GHG)-related matters, with the aim of reducing Oregon’s overall GHG emissions to 80 percent below 1990 levels by 2050. This Executive Order led to the Oregon Department of Environmental Quality developing cap and reduce rules known as the Climate Protection Program (CPP). The CPP, which became effective in January 2022, outlines GHG emissions reduction goals of 50 percent by 2035 and 90 percent by 2050 from the 1990 baseline. The first three-year compliance period is 2022 through 2024. We are subject to the CPP and, pursuant to the rule, we are required to make our first compliance filing in 2025. We intend to seek recovery of compliance costs related to the CPP through the ratemaking process. In March 2022, we, along with the utilities NW Natural and Cascade Natural Gas, filed a lawsuit requesting judicial review of the CPP. This action was subsequently consolidated with a lawsuit filed by several other parties, and remains pending. Emissions Performance Standard Like Washington, Oregon applies a GHG emissions performance standard to electric generation facilities, requiring that any new baseload natural gas plant, non-base load natural gas plant, and non-generating facility reduce its net carbon dioxide emissions 17 percent below the most efficient combustion-turbine plant in the United States. The Oregon Energy Facility Siting Council issues rules periodically to update the standard, as more efficient power plants are built in other states. The standard can be met by any combination of efficiency, cogeneration, and offsets from carbon dioxide mitigation measures. We have thermal generation located in Oregon, and as such this standard applies to that facility. We intend to seek recovery of costs related to ongoing and new requirements through the ratemaking process. Clean Electricity and Coal Transition Act 69 AVISTA CORPORATION In Oregon, legislation was enacted in 2016 which requires Portland General Electric and PacifiCorp to remove coal-fired generation from their Oregon 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 reasonably predicted at this time. While the legislation requires Portland General Electric and PacifiCorp to eliminate Colstrip from their rates, they would be permitted to sell the output of their shares of Colstrip into the wholesale market or, as is the case with PacifiCorp, reallocate generation from Colstrip to other states. We cannot predict the eventual outcome of actions arising from this legislation at this time or estimate the effect thereof on Avista Corp.; however, we intend to continue to seek recovery, through the ratemaking process, of all operating and capitalized costs related to our generation assets. Clean Air Act (CAA) The CAA creates numerous requirements for our thermal generating plants. Colstrip, Kettle Falls GS, Coyote Springs and Rathdrum CT all require CAA Title V operating permits. The Boulder Park GS, Northeast CT and a number of other operations require minor source permits or simple source registration permits. We have secured these permits and certify our compliance with Title V permits on an annual basis. These requirements can change over time as the CAA or applicable implementing regulations are amended and new permits are issued. We actively monitor legislative, regulatory and other program developments of the CAA that may impact our facilities. Threatened and Endangered Species and Wildlife A number of species of fish in the Northwest are listed as threatened or endangered under the Federal Endangered Species Act. 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 in 2001) that incorporates a comprehensive settlement agreement. The restoration of native salmonid fish, including bull trout, a threatened species, is a key part of the agreement. The result is a collaborative native salmonid restoration program with the U.S. Fish and Wildlife Service, Native American tribes and the states of Idaho and Montana on the lower Clark Fork River, consistent with requirements of the FERC license. Recent efforts in this program include the development of a permanent fish passage facility at Cabinet Gorge dam, as well as fish capture facilities on tributaries to the Clark Fork River. The U.S. Fish and Wildlife Service issued an updated Critical Habitat Designation for bull trout in 2010 that includes the lower Clark Fork River, as well as portions of the Coeur d'Alene basin within our Spokane River Project area, and issued a final Bull Trout Recovery Plan under the ESA. Regional efforts are underway evaluating the potential of re-establishing anadromous fish above previously blocked areas, including the Spokane River, which is upstream from Grand Coulee dam. Various statutory authorities, including the Migratory Bird Treaty Act, have established penalties for the unauthorized take of migratory birds. Because we operate facilities that can pose risks to a variety of such birds, we have developed and follow an avian protection plan. We are also aware of other threatened and endangered species and issues related to them that could be impacted by our operations and we make every effort to comply with all laws and regulations relating to these threatened and endangered species. We expect costs associated with these compliance efforts to be recovered through the ratemaking process. Inflation Reduction Act (IRA) The IRA was signed into law in August 2022. Among the provisions included in the act are a new corporate alternative minimum tax, which is applicable to corporations with average adjusted financial statement income over a three-year period in excess of $1 billion, as well as tax incentives for clean energy. We do not expect the corporate alternative minimum tax to impact our results. The tax incentives for clean energy could result in potential opportunities, however we cannot reasonably estimate the future impact. Cabinet Gorge Total Dissolved Gas Abatement Plan 70 AVISTA CORPORATION Dissolved atmospheric gas levels (referred to as “Total Dissolved Gas” or “TDG”) in the Clark Fork River exceed state of Idaho and federal water quality numeric standards downstream of Cabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of the Clark Fork Settlement Agreement as incorporated in the FERC license for the Clark Fork Project, we work in consultation with agencies, tribes and other stakeholders to address this issue through structural modifications to the spillgates, monitoring and analysis. After extensive testing, Clark Fork Settlement Agreement stakeholders have agreed that no further spillway modifications are justified. For the remainder of the FERC License term, we will continue to mitigate remaining impacts of TDG while periodically considering the potential for new approaches to further reduce TDG. We continue to work with stakeholders to determine the degree to which TDG abatement impacts future mitigation obligations. We have sought, and intends to continue to seek recovery, through the ratemaking process, of all operating and capitalized costs related to this issue. Other For other environmental issues and other contingencies see “Note 22 of the Notes to Consolidated Financial Statements.” Colstrip Colstrip is a coal-fired generating plant in southeastern Montana that includes four units and which is owned by six separate entities. We have a 15 percent ownership interest in Units 3 and 4. The other owners are Puget Sound Energy, Inc., Portland General Electric Company, NorthWestern, Pacificorp and Talen Montana, LLC (which is also the operator of the plant). In January 2020, the owners of Units 1 and 2, in which the Company has no ownership, closed those two units. The owners of Units 3 and 4 currently share operating and capital costs pursuant to the terms of an operating agreement among them (the Ownership and Operation Agreement). In January 2023, we entered into an agreement with NorthWestern to transfer our ownership of Colstrip. See “Note 22 of the Notes to Consolidated Financial Statements” for further discussion of the agreement. Coal Ash Management/Disposal In 2015, the EPA issued a final rule regarding coal combustion residuals (CCRs), also termed coal combustion byproducts or coal ash (Colstrip produces this byproduct). The CCR rule has been the subject of ongoing litigation. In August 2018, the D.C. Circuit struck down provisions of the rule. In December 2019, a proposed revision to the rule was published in the Federal Register to address the D.C. Circuit's decision. The rule includes technical requirements for CCR landfills and surface impoundments under Subtitle D of the Resource Conservation and Recovery Act, the nation's primary law for regulating solid waste. The Colstrip owners developed a multi-year compliance plan to address the CCR requirements along with existing state obligations expressed through the 2012 Administrative Order on Consent (AOC) with Montana Department of Environmental Quality (MDEQ). These requirements continue despite the 2018 federal court ruling. The AOC requires MDEQ to review Remedy and Closure plans for all parts of the Colstrip plant through an ongoing public process. The AOC also requires the Colstrip owners to provide financial assurance, primarily in the form of surety bonds, to secure each owner’s pro rata share of various anticipated closure and remediation obligations. We are responsible for our share of two major areas: the Plant Site Area and the Effluent Holding Pond Area. Generally, the plans include the removal of Boron, Chloride, and Sulfate from the groundwater, closure of the existing ash storage ponds, and installation of a new water treatment system to convert the facility to a dry ash storage. We recently adjusted our share of the posted surety bonds to $17.3 million. This amount will be updated annually, with expected obligations decreasing over time as remediation activities are completed. Colstrip Coal Contract Colstrip is supplied with fuel from adjacent coal reserves under coal supply and transportation agreements. Several of the co-owners of Colstrip, including us, have a coal contract that runs through December 31, 2025. Colstrip Arbitration, Litigation, and Other Contingencies See “Note 22 of the Notes to Consolidated Financial Statements” for disputes, arbitration, litigations and other contingencies related to Colstrip. We continue to assess the best options for Colstrip in conjunction with our co-owners. We intend to seek recovery of any costs associated with Colstrip through the ratemaking process. 71 AVISTA CORPORATION Enterprise Risk Management The material risks to our businesses are discussed in “Item 1A. Risk Factors,” “Forward-Looking Statements,” as well as “Environmental Issues and Contingencies.” The following discussion focuses on our mitigation processes and procedures to address these risks. We consider the management of these risks an integral part of managing our core businesses and a key element of our approach to corporate governance. Risk management includes identifying 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 of Directors and its Committees take an active role in the oversight of risk affecting the Company. Our risk management department facilitates the collection of risk 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 identifying, assessing, quantifying, managing and mitigating the risks. Despite all risk mitigation measures, however, risks are not eliminated. Our primary identified categories of risk exposure are: [[GREPCENT_TABLE]] [["\u2022 Utility regulatory","\u2022 External mandates"],["\u2022 Operational","\u2022 Financial"],["\u2022 Climate Change","\u2022 Energy commodity"],["\u2022 Cyber and Technology","\u2022 Compliance"],["\u2022 Strategic"]] [[/GREPCENT_TABLE]] Our primary categories of risks are described in “Item 1A. Risk Factors.” Utility Regulatory Risk Regulatory risk is mitigated through a separate regulatory group which communicates with commission regulators and staff regarding the Company’s business plans and concerns. The regulatory group also considers the regulator’s priorities and rate policies and makes recommendations to senior management on regulatory strategy for the Company. Oversight of our regulatory strategies and policies is performed by senior management and our Board of Directors. See “Regulatory Matters” for further discussion of regulatory matters affecting our Company. Operational Risk To manage operational and event risks, we maintain emergency operating plans, business continuity and disaster recovery plans, maintain insurance coverage against some, but not all, potential losses and seek to negotiate indemnification arrangements 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 identify utility assets which may be failing and in need of repair or replacement. We also have an Emergency Operating Center, which is a team of employees 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 of the energy resources risk policy includes planning for sufficient capacity to meet our customer and wholesale energy delivery obligations. See further discussion of the energy resources risk policy below. Oversight of the operational risk management process is performed by the Environmental, Technology and Operations Committee of our Board of Directors and from senior management with input from each operating department. 72 AVISTA CORPORATION Climate Change Risk Multiple departments at the Company work to mitigate risks related to climate change. Climate change adds uncertainty to existing risks that we have historically managed and mitigated. These efforts are reflected in electric and gas operations, investments in assets and asset reliability and resiliency across the Company’s operations. Power Supply staff, as a regular course of business, monitor items such as snowpack and broader precipitation conditions, patterns and modeled or predicted climate change. These and other assessments are incorporated into our IRP processes. Environmental Affairs, Governmental Affairs and other departments monitor policy and regulatory developments that may relate to climate change in order to engage these efforts constructively and prepare for compliance matters. The Company has created four councils that are centered around its primary focus areas: our customers, our people, perform and invent. The Perform Council is an interdisciplinary team of management and other employees of the Company which regularly meets to discuss, assess and manage current issues associated with the Company’s performance. A key area of focus for the Perform Council is potential risks and opportunities associated with long-term global climate change. Among other things, the Perform Council: • facilitates internal and external communications regarding climate change and related issues, • analyzes policy effects, anticipates opportunities and evaluates strategies for the Company, • develops recommendations on climate related policy positions and action plans, and • provides direction and oversight with respect to the Company's clean energy goals. In addition, issues concerning climate-related risk and the Company’s clean energy goals are reviewed and regularly discussed by the Board of Directors. The Board’s Environmental, Technology and Operations Committee regularly reviews and discusses environmental and climate related risks, and advises the full Board on any critical or emerging risks and/or related policies. Likewise, the Audit Committee provides oversight of the Company's climate-related disclosures. Cyber and Technology Risk We mitigate cyber and technology risk through trainings and exercises at all levels of the Company. The Environmental, Technology and Operations Committee of our Board of Directors along with senior management are regularly briefed on security policy, programs and incidents. Annual cyber and physical training and testing of employees are included in our enterprise security program. Our enterprise business continuity program facilitates business impact analysis of core functions for development of emergency operating plans, and coordinates annual testing and training exercises. Technology governance 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 of our critical infrastructure security program and our business risk security controls. We have a Technology department 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 replacing systems as necessary. Additionally, this group monitors for intrusion and security events that may include a data breach or attack on our operations. Strategic Risk Oversight of our strategic risk is performed by the Board of Directors and senior management. We have a Chief Strategy Officer who leads strategic initiatives, to search for and evaluate opportunities for the Company and makes recommendations to senior management. We not only focus on whether opportunities are financially viable, but also consider whether these opportunities 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 of Conduct, maintaining an appropriate Company culture and tone at the top, and through communication and engagement with our external stakeholders. 73 AVISTA CORPORATION External Mandates Risk Oversight of our external mandate risk mitigation strategies is performed by the Environmental, Technology and Operations Committee of our Board of Directors and senior management. We have a Perform Council which meets internally to assess the potential impacts of climate policy to our business and to identify strategies to plan for change. Our Environmental, Social and Governance program creates a framework that is intended to attract investment, enhancement of our brand, and promotion of sustainable long-term growth. We also have employees dedicated to actively engage and monitor federal, state and local government positions and legislative actions that may affect us or our customers. To prevent the threat of municipalization, 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, senior outreach, low income workshops, mobile outreach strategy and a Low Income Rate Assistance Plan, • tailoring our internal company initiatives to focus on choices for our customers, to increase their overall satisfaction with the Company, and • engaging in the legislative process in a manner that fosters the interests of our customers and the communities we serve. Financial Risk Our financial risk is impacted by many factors. Several of these risks include regulation and rates, weather, access to capital markets, interest rate risk, credit risk, and foreign exchange risk. We have a Treasury department that monitors our daily cash position and future cash flow needs, as well as monitoring market conditions to determine the appropriate course of action for capital financing and/or hedging strategies. Oversight of our financial risk mitigation strategies is performed by senior management and the Finance Committee of our Board of Directors. Regulation and Rates Our Regulatory Affairs department is critical in mitigation of financial risk as they have regular communications with state commission regulators and staff and they monitor and develop rate strategies for the Company. Rate strategies, such as decoupling, help mitigate the impacts of revenue fluctuations due to weather, conservation or the economy. Weather Risk To partially mitigate the risk of financial under-performance 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 consumers' energy usage and instead provide revenue based on the number of customers, thus mitigating a large portion of the risk associated with lower customer loads. See “Regulatory Matters” for further discussion of our decoupling mechanisms. 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 we believe these parties will deem prudent. We forecast cash requirements to determine liquidity needs, including sources and variability of cash flows that may arise from our spending plans or from external 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 public utility commissions and filing for rate changes as appropriate to meet financial performance expectations. 74 AVISTA CORPORATION Interest Rate Risk Uncertainty about future interest rates causes risk related to a portion of our existing debt, our future borrowing requirements, and our pension and other post-retirement benefit obligations. We manage debt interest rate exposure by limiting our variable rate debt to a percentage of total capitalization of the Company. We hedge a portion of our interest rate risk on forecasted debt issuances with financial derivative instruments. The Finance Committee of our Board of Directors periodically reviews and discusses interest rate risk management processes and the steps management has undertaken to control interest rate risk. Our Risk Management Committee (RMC) also reviews our interest rate risk management plan. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance of long-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 rate payments of our long-term debt. Interest rates on our long-term debt are generally set based on underlying U.S. Treasury rates plus credit 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. Even though we work to manage our exposure to interest rate risk by locking in certain long-term interest rates through interest rate swap derivatives, 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 commodity derivatives, any interim mark-to-market gains or losses are offset by regulatory assets and liabilities. Upon settlement of interest rate swap derivatives, the cash payments made or received are recorded as a regulatory asset or liability and are subsequently amortized as a component of interest expense over the life of the associated debt. The settled interest rate swap derivatives are also included as a part of Avista Corp.'s cost of debt calculation for ratemaking purposes. The following table summarizes our interest rate swap derivatives outstanding as of December 31, 2022 and December 31, 2021 (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31,","","","December 31,"],["","","2022","","","2021"],["Number of agreements","","","5","","","","16"],["Notional amount","","$","50,000","","","$","170,000"],["Mandatory cash settlement dates","","2023 to 2024","","","2022 to 2024"],["Short-term derivative assets (1)","","$","8,536","","","$","\u2014"],["Long-term derivative assets (1)","","","2,648","","","","1,149"],["Short-term derivative liability (1)","","","(52",")","","","(24,026",")"],["Long-term derivative liability (1)","","","\u2014","","","","(78",")"]] [[/GREPCENT_TABLE]] (1) There are offsetting regulatory assets and liabilities for these items on the Consolidated Balance Sheets in accordance with regulatory accounting practices. We estimate that a 10 basis point increase in forward variable interest rates as of December 31, 2022 would increase the interest rate swap derivative net liability by $1.0 million, while a 10 basis point decrease would decrease the interest rate swap derivative net liability by $0.7 million. We estimated that a 10 basis point increase in forward variable interest rates as of December 31, 2021 would have increased the interest rate swap derivative net liability by $5.3 million, while a 10 basis point decrease would decrease the interest rate swap derivative net liability by $5.4 million. The interest rate on $51.5 million of long-term debt to affiliated trusts is adjusted quarterly, reflecting current market rates. Amounts borrowed under our committed line of credit agreements have variable interest rates. 75 AVISTA CORPORATION The following table shows our long-term debt (including current portion) and related weighted-average interest rates, by expected maturity dates as of December 31, 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","","2023","","","2024","","","2025","","","2026","","","2027","","","Thereafter","","","Total","","","Fair Value"],["Fixed rate long-term debt (1)","","$","13,500","","","$","15,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","2,285,000","","","$","2,313,500","","","$","1,848,361"],["Weighted-average interest rate","","","7.35","%","","","3.44","%","","","\u2014","","","","\u2014","","","","\u2014","","","","4.21","%","","","4.22","%"],["Variable rate long-term debt to affiliated trusts","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","$","51,547","","","$","51,547","","","$","42,836"],["Weighted-average interest rate","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","5.64","%","","","5.64","%"]] [[/GREPCENT_TABLE]] (1) These balances include the fixed rate long-term debt of Avista Corp., AEL&P and AERC. Our pension plan is exposed to interest rate risk because the value of pension obligations and other post-retirement obligations varies directly with changes in the discount rates, which are derived from end-of-year market interest rates. In addition, the value of pension investments and potential income on pension investments is partially affected by interest rates because a portion of pension investments are in fixed income securities. Oversight of our pension plan investment strategies is performed by the Finance Committee of the Board of Directors, which approves investment and funding policies, objectives and strategies that seek an appropriate return for the pension plan. We manage interest rate risk associated with our pension and other post-retirement benefit plans by investing a targeted amount of pension plan assets in fixed income investments that have maturities with similar profiles to future projected benefit obligations. See “Note 12 of the Notes to Consolidated Financial Statements” for further discussion of our investment policy associated with the pension plan assets. Credit Risk Counterparty Non-Performance Risk We enter into bilateral transactions with various counterparties. We also trade energy and related derivative instruments through clearinghouse exchanges. Counterparty non-performance risk relates to potential losses that we would incur as a result of non-performance of contractual obligations by counterparties to deliver energy or make financial settlements. Changes in market prices may dramatically alter the size of credit 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 prices. We seek to mitigate credit risk by: • transacting through clearinghouse exchanges, • entering into bilateral contracts that specify credit terms and protections against default, • applying credit limits and duration criteria to existing and prospective counterparties, • actively monitoring current credit exposures, • asserting our collateral rights with counterparties, and • carrying out transaction settlements timely and effectively. The extent of transactions conducted through exchanges has increased, as many market participants have shown a preference toward exchange trading and have reduced bilateral transactions. We actively monitor the collateral required by such exchanges to effectively manage our capital requirements. Counterparties’ credit exposure to us is dynamic in normal markets and may change significantly in more volatile markets. The amount of potential default risk to us from each counterparty depends on the extent of forward contracts, unsettled transactions, interest rates and market prices. There is a risk that we do not obtain sufficient additional collateral from counterparties that are unable or unwilling to provide it. 76 AVISTA CORPORATION Credit Risk Liquidity Considerations To address the impact on our operations of energy 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 management process is designed to mitigate such credit risks through limit setting, contract protections and counterparty 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 them and maintain acceptable credit exposures. Many of our counterparties allow unsecured credit at limits prescribed by agreements or their discretion. Capital requirements for certain transaction types involve a combination of initial margin and market value margins without any unsecured credit threshold. Counterparties may seek assurances of performance from us in the form of letters of credit, prepayment or cash deposits. Credit exposure can change significantly in periods of commodity 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 December 31, 2022, we had cash deposited as collateral of $171.6 million and letters of credit of $49.4 million outstanding related to our energy contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount of collateral required. See “Credit Ratings” for further information. For example, in addition to limiting our ability to conduct transactions, if our credit ratings were lowered to below “investment grade” based on our positions outstanding at December 31, 2022 (including contracts that are considered derivatives and those that are considered non-derivatives), we would potentially be required to post the following additional collateral (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2022"],["Additional collateral taking into account contractual thresholds","","$","48,144"],["Additional collateral without contractual thresholds","","","63,340"]] [[/GREPCENT_TABLE]] Under the terms of interest rate swap derivatives that we enter into periodically, we may be required to post cash or letters of credit as collateral depending on fluctuations in the fair value of the instrument. As of December 31, 2022, we had interest rate swap agreements outstanding with a notional amount totaling $50.0 million and we had deposited no cash as collateral for these interest rate swap derivatives. If our credit ratings were lowered to below “investment grade” based on our interest rate swap derivatives outstanding at December 31, 2022, we would potentially be required to post the following additional collateral (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2022"],["Additional collateral taking into account contractual thresholds (1)","","$","\u2014"],["Additional collateral without contractual thresholds","","","52"]] [[/GREPCENT_TABLE]] (1) This amount is different from the amount disclosed in “Note 8 of the Notes to Consolidated Financial Statements” because, while this analysis includes contracts that are not considered derivatives in addition to the contracts considered in Note 8, this analysis also takes into account contractual threshold limits that are not considered in Note 8. Foreign Currency Risk A significant portion of our utility natural gas supply (including fuel for electric generation) is obtained from Canadian sources. Most of those transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion of our short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices. The short-term natural gas transactions are typically settled within sixty days with U.S. dollars. We hedge a portion of the foreign currency risk by purchasing Canadian currency exchange derivatives when such commodity transactions are initiated. This risk has not had a material effect on our financial condition, results of operations or cash flows and these differences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking. Further information for derivatives and fair values is disclosed at “Note 8 of the Notes to Consolidated Financial Statements” and “Note 18 of the Notes to Consolidated Financial Statements.” 77 AVISTA CORPORATION Energy Commodity Risk 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 Committee of our Board of Directors. In conjunction with the oversight committees, our management team develops hedging strategies, 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 quantitative methods. 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 factors may result in losses of earnings, cash flows and/or fair values. We measure the volume of monthly, quarterly and annual energy imbalances between projected power loads and resources. The measurement 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 of volume mismatches between loads and resources or because fuel cost is not locked in through fixed price contracts or derivative instruments, our risk policy guides the process to manage this open forward position over a period of time. Normal operations result in seasonal mismatches between power loads and available resources. We are able to vary the operation of generating resources to match parts of intra-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 resource 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 of fueling and operating available generating facilities and the relative economics of substitute market purchases for generating plant operation. To address the impact on our operations of energy 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 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 of volatile natural gas prices, we seek to procure natural gas through a diversified mix of spot market purchases and forward fixed price purchases from various supply basins and time periods. We have an active hedging program that extends into future years with the goal of reducing 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 of significant purchase requirements in a volatile price environment. The following table presents energy commodity derivative fair values as a net asset or (liability) as of December 31, 2022 that are expected to settle in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2025: [[GREPCENT_TABLE]] [["","","Purchases","","","Sales"],["","","Electric Derivatives","","","Gas Derivatives","","","Electric Derivatives","","","Gas Derivatives"],["Year","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)"],["2023","","$","1,120","","","$","\u2014","","","$","(33,150",")","","$","62,753","","","$","(2,374",")","","$","(20,018",")","","$","17,166","","","$","(137,585",")"],["2024","","","\u2014","","","","\u2014","","","","162","","","","(3,879",")","","","\u2014","","","","\u2014","","","","(4,968",")","","","(5,790",")"],["2025","","","\u2014","","","","\u2014","","","","135","","","","(220",")","","","\u2014","","","","\u2014","","","","(2,924",")","","","(701",")"]] [[/GREPCENT_TABLE]] 78 AVISTA CORPORATION The following table presents energy commodity derivative fair values as a net asset or (liability) as of December 31, 2021 that were expected to settle in each respective year (dollars in thousands). There were no expected deliveries of energy commodity derivatives after 2025: [[GREPCENT_TABLE]] [["","","Purchases","","","Sales"],["","","Electric Derivatives","","","Gas Derivatives","","","Electric Derivatives","","","Gas Derivatives"],["Year","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)","","","Physical (1)","","","Financial (1)"],["2022","","$","(269",")","","$","\u2014","","","$","(260",")","","$","6,198","","","$","650","","","$","1,572","","","$","(3,479",")","","$","(16,859",")"],["2023","","","\u2014","","","","\u2014","","","","(54",")","","","1,964","","","","\u2014","","","","\u2014","","","","(1,612",")","","","(757",")"],["2024","","","\u2014","","","","\u2014","","","","(34",")","","","296","","","","\u2014","","","","\u2014","","","","(1,603",")","","","5"],["2025","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(1,146",")","","","\u2014"]] [[/GREPCENT_TABLE]] (1) Physical transactions represent commodity transactions where we will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of the benefit or cost but with no physical delivery of the commodity, 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 deferral and recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually be collected through retail rates from customers. See “Item 1. Business – Electric Operations” and “Item 1. Business – Natural Gas Operations,” for additional discussion of the risks associated with Energy Commodities. Compliance Risk Compliance risk is mitigated through separate Regulatory and Environmental Compliance departments that monitor legislation, regulatory orders and actions to determine the overall potential impact to our Company and develop strategies for complying with the various rules and regulations. We also engage outside attorneys and consultants, when necessary, to help ensure compliance with laws and regulations. Oversight of our compliance risk strategy is performed by senior management, including our Chief Compliance Officer, and the Environmental, Technology and Operations Committee and the Audit Committee of our Board of Directors. See “Item 1. Business, Regulatory Issues” through “Item 1. Business, Reliability Standards” and “Environmental Issues and Contingencies” for further discussion of compliance issues that impact our Company.