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Avista Corporation 10-Q Summary: Period Ended September 30, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, and the nine months ended September 30, 2001, for Avista Corporation, an energy company operating in the Western United States. The Company is organized into four continuing lines of business: Avista Utilities (regulated electric and natural gas), Energy Trading and Marketing, Information and Technology, and Other. The Company is in the process of divesting its telecommunications business, Avista Communications, which is reported as a discontinued operation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 51% in the third quarter and 11% for the nine months compared to the prior year, driven primarily by lower wholesale energy prices and reduced trading volumes in the Energy Trading and Marketing segment.
• Discontinued Operations Impact: A significant loss of $38.4 million in the third quarter and $44.4 million for the nine months was recorded due to the decision to dispose of Avista Communications. This includes a one-time asset impairment charge of $58.4 million.
• Continuing Operations Performance: Despite the overall net loss in the quarter, income from continuing operations improved significantly for the nine-month period ($64.2 million vs. $30.1 million in 2000). Avista Utilities turned a loss in the prior year into a profit of $26.7 million for the nine months, aided by regulatory surcharges and lower purchased power volumes.
• Balance Sheet Contraction: Total assets decreased from $12.6 billion to $4.7 billion, largely due to the reclassification of energy commodity assets and liabilities as markets settled and the divestiture of the communications segment.

Guidance, Outlook, and Risks

• Earnings Outlook: Management expects full-year 2001 diluted earnings per share between $0.45 and $0.55. For 2002, earnings are projected to improve slightly to between $0.55 and $0.75 per share.
• Liquidity and Regulatory Recovery: The Company faces significant liquidity pressure due to high wholesale power costs and low hydroelectric availability. Regulatory commissions in Washington and Idaho have approved temporary surcharges (25% in WA, 19.4% in ID) to recover approximately $183 million of deferred power costs. The Company is filing a general rate case in Washington by December 1, 2001, to address the prudence of remaining deferred costs.
• Capital Structure Changes: To manage liquidity, the Company signed a letter of intent to sell 50% of its interest in the Coyote Springs 2 power plant to Mirant Corp. and has reduced capital expenditures for 2001 and 2002. Two credit rating agencies downgraded the Company in October 2001.
• Market Risks: The Company remains exposed to volatility in wholesale energy markets, potential retroactive price caps by the FERC, and the outcome of the California power market bankruptcy proceedings (PG&E, SCE, CalPX) which affect receivables.

Investor Verification Checklist

• Deferred Cost Recovery: Verify the final approval and prudence determination of the $271.2 million in deferred power costs by the Washington Utilities and Transportation Commission (WUTC) and Idaho Public Utilities Commission (IPUC).
• Liquidity Covenants: Monitor the Company's ability to meet financial covenants on its $220 million line of credit and other debt facilities, which expire or require renewal in May 2002.
• Asset Sales: Confirm the closing of the 50% sale of the Coyote Springs 2 project and the sale of Avista Communications assets to ensure projected cash inflows materialize.
• FERC Proceedings: Track the outcome of FERC proceedings regarding retroactive price caps and refunds in the Pacific Northwest and California, which could impact Energy Trading and Marketing earnings.
• Hydroelectric Conditions: Assess the impact of continued below-normal streamflow on the need for expensive purchased power and the effectiveness of conservation programs.