AVA

Avista Corp. 10-Q Summary: Period Ended September 30, 2006

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Avista Corporation, a Washington-based energy company engaged in the generation, transmission, and distribution of electricity and natural gas, as well as energy marketing and trading. The report covers the three and nine-month periods ended September 30, 2006. The company operates through four primary segments: Avista Utilities (regulated utility), Energy Marketing and Resource Management (Avista Energy), Advantage IQ (facility management services), and Other.

Key Financial Metrics

Note: Three-month results showed Net Income of $10.1 million (2006) vs. a Net Loss of $9.0 million (2005).

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 19.8% year-over-year for the nine-month period, driven by a 16.8% increase in utility revenues and a 45.7% increase in non-utility energy marketing revenues.
• Profitability Surge: Net income more than doubled to $55.1 million, primarily due to improved performance in the Energy Marketing and Resource Management segment (turning a $16.9M loss in 2005 into a $9.2M profit in 2006) and higher gross margins in Avista Utilities.
• Utility Performance: Avista Utilities benefited from improved hydroelectric generation (forecasted at 101% of normal for 2006) and a $3.4 million benefit under the Washington Energy Recovery Mechanism (ERM), compared to a $7.5 million expense in the prior year.
• Debt Reduction: Total debt decreased by $41.2 million, reflecting operating cash flows exceeding funding requirements for capital expenditures and dividends.

Guidance, Outlook, and Risks

• Capital Structure: The company is proceeding with a statutory share exchange to form a holding company structure (AVA Formation Corp.), expected to be completed no earlier than mid-2007. This requires maintaining a utility equity component of 35% by end of 2007 and 38% by end of 2008.
• Liquidity: The company expects to issue long-term debt in the fourth quarter of 2006 to fund $170 million of debt maturing in late 2006 and early 2007. It maintains a $320 million committed line of credit and a $145 million line for Avista Energy.
• Regulatory Matters: Avista Utilities filed a Production/Transmission Update with the Washington Utilities and Transportation Commission (WUTC) seeking an 8.8% rate increase, effective potentially in April 2007. The company is also navigating the relicensing of the Spokane River Project, with potential costs estimated between $175 million and $500 million over 50 years.
• Legal Contingencies: Significant ongoing litigation includes a class action securities lawsuit (trial scheduled for November 2007) and various FERC refund proceedings regarding the 2000-2001 western energy crisis. Management does not currently expect these to have a material adverse effect.
• Environmental: New EPA and Montana regulations regarding mercury emissions from coal-fired plants (Colstrip) will require capital expenditures for emission controls starting in 2010.

Investor Verification Checklist

• Hydroelectric Forecast: Verify if the 101% of normal hydroelectric generation forecast for 2006 holds true in Q4, as deviations could significantly impact resource costs and cash flow.
• Debt Refinancing: Confirm the successful issuance of new long-term debt in Q4 2006 to replace maturing obligations at favorable rates.
• Regulatory Approvals: Monitor the status of the WUTC Production/Transmission Update filing and the FERC relicensing process for the Spokane River Project, particularly regarding cost recovery.
• Energy Trading Volatility: Assess the sustainability of the Energy Marketing segment's profitability, which is subject to significant mark-to-market volatility and accounting differences between economic management and GAAP.
• Legal Outcomes: Track developments in the class action securities litigation and FERC refund proceedings, as adverse rulings could result in significant liabilities.