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Avista Corp. 10-Q Summary: Period Ended June 30, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Avista Corporation, a regulated energy company engaged in the generation, transmission, and distribution of electricity and natural gas in Washington, Idaho, Oregon, and Montana. The report covers the three and six-month periods ended June 30, 2008. The company operates primarily through two segments: Avista Utilities (regulated operations) and Advantage IQ (facility information and cost management services). The company is currently pursuing a statutory share exchange to form a holding company structure, pending regulatory approvals.

Key Financial Metrics

Note: Three-month net income for 2008 was $23.5 million compared to $14.2 million in 2007.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 10.9% year-over-year for the six months ended June 30, driven by a 17.1% increase in utility revenues. This was primarily due to a general rate increase in Washington effective January 1, 2008, and increased natural gas and electric sales volumes due to colder weather.
• Profitability Surge: Net income increased 72.5% for the six-month period. This significant improvement is largely attributable to the absence of losses from Avista Energy (sold in June 2007) and higher earnings from Avista Utilities.
• Cost Increases: Utility resource costs rose 23.6% due to higher wholesale natural gas and power prices, as well as lower hydroelectric generation requiring increased thermal generation and purchased power.
• Debt Refinancing: The company issued $250 million in 5.95% First Mortgage Bonds in April 2008 to refinance $273 million of 9.75% Unsecured Senior Notes that matured in June 2008, reducing interest expense.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects utility capital expenditures to be approximately $200 million for 2008. A new 50 MW wind generation facility is planned with an estimated cost over $125 million to be completed by 2011.
• Rate Cases: The company filed general rate cases in Washington (March 2008) and Idaho (April 2008) seeking base rate increases. Washington rates are expected to increase in 2009 if approved; Idaho orders are expected in November 2008.
• Advantage IQ Acquisition: Effective July 2, 2008, Advantage IQ acquired Cadence Network for approximately $37 million. This will reduce Avista's ownership percentage in Advantage IQ to 75%.
• Regulatory and Environmental Risks: Key risks include the outcome of the Spokane River hydroelectric relicensing process (potential costs estimated between $175M-$500M over 50 years), compliance with new greenhouse gas and mercury emission regulations, and the resolution of the California and Pacific Northwest refund proceedings from the 2000-2001 energy crisis.
• Liquidity: The company maintains a $320 million committed line of credit and an $85 million accounts receivable sales facility. As of June 30, 2008, $46 million was outstanding on the line of credit.

Investor Verification Checklist

• Regulatory Approvals: Verify the status of the proposed holding company formation and the pending general rate cases in Washington and Idaho.
• Hydroelectric Generation: Monitor streamflow and weather conditions, as below-normal hydro generation significantly impacts resource costs and cash flow.
• Refund Proceedings: Review updates on the California and Pacific Northwest FERC refund proceedings, as these represent potential contingent liabilities.
• Spokane River Relicensing: Track the FERC licensing process for the Spokane River Project, specifically regarding the Post Falls facility and associated environmental costs.
• Advantage IQ Monetization: Assess the timeline and strategy for monetizing the Advantage IQ investment (IPO or sale) and the impact of the Cadence Network acquisition on ownership structure.