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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _______

Commission file number 1-3701

AVISTA CORPORATION

Registrant’s telephone number, including area code: 509-489-0500

Web site: http://www.avistacorp.com

Securities registered pursuant to Section 12(b) of the Act:

Title of Class		Name of Each Exchange on Which Registered
Common Stock, no par value, together with Preferred Share Purchase Rights appurtenant thereto		New York Stock Exchange Pacific Stock Exchange
7 7/8% Trust Originated Preferred Securities, Series A		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

The aggregate market value of the Registrant’s outstanding Common Stock, no par value (the only class of voting stock), held by non-affiliates is $696,099,691, based on the last reported sale price thereof on the consolidated tape on February 28, 2002.

As of February 28, 2002, 47,678,061 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.

Documents Incorporated By Reference

Document		Part of Form 10-K into Which Document is Incorporated
Proxy Statement to be filed in connection with the annual meeting of shareholders to be held May 9, 2002		Part III, Items 10, 11, 12 and 13

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INDEX

Item							Page
No.							No.
			Acronyms and Terms				iv
			Part I
1.			Business					1
			Company Overview					1
			Avista Utilities					4
			General					4
			Electric Operations					4
			Electric Requirements					5
			Electric Resources					5
			Future Resource Needs					6
			Forecasted Electric Energy Requirements and Resources					7
			Hydroelectric Relicensing					7
			Natural Gas Operations					8
			Natural Gas Resources					9
			Regulatory Issues					9
			Industry Restructuring					12
			Federal Level					12
			State Level					13
			Environmental Issues					13
			Avista Utilities Operating Statistics					14
			Western Power Market Issues					16
			Energy Trading and Marketing Line of Business					17
			Avista Energy					17
			Avista Power					18
			Information and Technology Line of Business					18
			Avista Advantage					18
			Avista Labs					19
			Other Line of Business					19
			Discontinued Operations - Avista Communications					19
2.			Properties					20
			Avista Utilities					20
3.			Legal Proceedings					21
4.			Submission of Matters to a Vote of Security Holders					21
			Part II
5.			Market for Registrant's Common Equity and Related Stockholder Matters					21
6.			Selected Financial Data					22
7.			Management's Discussion and Analysis of Financial Condition and Results of Operations					23
			Avista Corp. Lines of Business					23
			Avista Utilities - Regulatory Matters					24
			Enron Exposure					27
			Western Power Market Issues					28
			Results of Operations					29
			Overall Operations					29
			Avista Utilities					31
			Energy Trading and Marketing					33
			Information and Technology					36
			Other					36
			Discontinued Operations					37
			Critical Accounting Policies					37
			Liquidity and Capital Resources					39
			Review of Cash Flow Statement					39
			Overall Liquidity					40

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Item							Page
No.							No.
			Capital Resources					40
			Off-Balance Sheet Arrangements					42
			Total Company Capitalization					42
			Credit Ratings					42
			Avista Utilities Operations					43
			Energy Trading and Marketing Operations					43
			Information and Technology Operations					44
			Other Operations					44
			Contractual Obligations					44
			Other Commercial Commitments					45
			Additional Financial Data					45
			Future Outlook					45
			Business Strategy					45
			Competition					45
			Business Risk					46
			Risk Management					48
			Economic and Load Growth					49
			Environmental Issues					49
			Other					50
			Safe Harbor for Forward-Looking Statements					50
7A.			Quantitative and Qualitative Disclosure about Market Risk					51
8.			Financial Statements and Supplementary Data					51
			Independent Auditors' Report					52
			Financial Statements					53
			Notes to Consolidated Financial Statements					60
9.			Changes in and Disagreements with Accountants on Accounting and Financial Disclosure					*
			Part III
10.			Directors and Executive Officers of the Registrant					89
11.			Executive Compensation					90
12.			Security Ownership of Certain Beneficial Owners and Management					90
13.			Certain Relationships and Related Transactions					90
			Part IV
14.			Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K					91
			Signatures					92
			Independent Auditors' Consent					93
			Exhibit Index					94

* = not an applicable item in the 2001 calendar year for the Company

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ACRONYMS AND TERMS

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PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements should be read with the cautionary statements and important factors included in this Annual Report on Form 10-K at Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Safe Harbor for Forward-Looking Statements.” Forward-looking statements are all statements other than statements of historical fact, including without limitation those that are identified by the use of words such as, but not limited to, “will,” “anticipates,” “seeks to,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar expressions. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those expressed.

Item 1. Business

Company Overview

Avista Corporation (Avista Corp. or the Company) was incorporated in the State of Washington in 1889. Avista Corp. is an energy company involved in the generation, transmission and distribution of energy as well as other energy-related businesses. As of December 31, 2001, the Company’s employees included approximately 1,435 people in its utility operations and approximately 740 people in its subsidiary businesses. The Company’s corporate headquarters are in Spokane, Washington, which serves as the Inland Northwest center for manufacturing, transportation, health care, education, communication, agricultural and service businesses.

The Company is currently organized into four lines of business — Avista Utilities, Energy Trading and Marketing, Information and Technology, and Other. Avista Utilities, an operating division of Avista Corp. and not a separate entity, represents the regulated utility operations. Avista Utilities is responsible for electric generation and transmission, and electric and natural gas distribution services. Avista Utilities also engages in wholesale purchases and sales of electric capacity and energy. Avista Capital, a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies engaged in the other non-regulated lines of business. The Energy Trading and Marketing line of business includes Avista Energy, Inc. (Avista Energy) and Avista Power, LLC (Avista Power). The Information and Technology line of business includes Avista Advantage, Inc. (Avista Advantage) and Avista Labs, Inc. (Avista Labs). The Other line of business includes Avista Ventures, Inc. (Avista Ventures), Avista Capital (parent company only amounts) and several other minor subsidiaries. In September 2001, the Company made a decision to discontinue the operations of Avista Communications, Inc. (Avista Communications), previously included in the Information and Technology line of business. As of December 31, 2001, the Company had common equity investments of $368.7 million and $351.4 million in Avista Utilities and Avista Capital, respectively.

Avista Utilities seeks to maintain a strong, low-cost and efficient electric and natural gas utility business focused on providing reliable, high quality service to its customers. The utility business is expected to grow modestly, consistent with historical trends. Expansion will primarily result from economic growth in its service territory. It is Avista Utilities’ strategy to own or control a sufficient amount of resources to meet its retail and wholesale electric requirements on an average annual basis. During 2000, Avista Energy scaled back its operations regionally to work primarily within the Western Systems Coordinating Council (WSCC) and has focused on reducing the size and the risk associated with its energy trading and marketing activities. Avista Energy’s marketing efforts are expected to be driven by its base of knowledge and experience in the operation of both electric energy and natural gas physical systems in the WSCC, as well as its relationship-focused approach to its customers. During 2001, the Company decided that Avista Power would no longer pursue the development of additional non-regulated generation plants. The Company intends to find equity partners to assist in financing the continued growth of the Information and Technology businesses, Avista Advantage and Avista Labs. The Company plans to dispose or phase out of assets and operations that are not related to its energy operations.

The Company’s operations are exposed to risks including, but not limited to, legislative and governmental regulations; the price and supply of purchased power, fuel and natural gas; recovery of purchased power and purchased natural gas costs; weather conditions; availability of generation facilities; competition; technology and availability of funding. In addition, the energy business exposes the Company to the financial, liquidity, credit and commodity price risks associated with wholesale purchases and sales.

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Following is a list of the major subsidiaries of Avista Capital:

Avista Energy -		An electricity and natural gas trading and marketing company, operating primarily in the WSCC.
Avista Power -		Originally formed to develop and own generating assets. In 2001, the Company decided that Avista Power would no longer pursue the development of additional non-regulated generating plants. Avista Power continues to manage the generation assets it currently owns.
Avista Advantage -		Provider of internet-based facility intelligence and cost management services to commercial and industrial customers in North America.
Avista Labs -		Developed a unique modular proton exchange membrane (PEM) fuel cell that delivers reliable, affordable and clean distributed power solutions. In addition to its PEM fuel cell, Avista Labs seeks to commercialize selected components to complement its fuel cell in order to deliver system solutions to industrial, commercial and residential markets.

The Company’s current lines of business, and the companies included within them, are illustrated below:

— denotes a business entity.
¡ — denotes an operating division or line of business.

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For the years ended December 31, 2001, 2000 and 1999, respectively, the four business segments of the Company contributed the following percentages of consolidated operating revenues, gross margins and income from operations (pre-tax):

n/a — not applicable

The table above only includes results from continuing operations.

Gross margin is calculated as operating revenues less resource costs and is only calculated for Avista Utilities and Energy Trading and Marketing. (See “Schedule of Information by Business Segments in the Consolidated Financial Statements” for further information).

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General

Avista Utilities generates, transmits and distributes electricity and distributes natural gas. Retail electric and natural gas customers include residential, commercial and industrial classifications. Avista Utilities also engages in wholesale purchases and sales of electric capacity and energy as part its resource management and load-serving obligations.

Avista Utilities provides electric and natural gas distribution and transmission services in a 26,000 square mile area in eastern Washington and northern Idaho with a population of approximately 830,000. It also provides natural gas distribution service in a 4,000 square mile area in northeast and southwest Oregon and in the South Lake Tahoe region of California, with the population in these areas approximating 525,000. At the end of 2001, Avista Utilities supplied retail electric service to approximately 317,000 customers in eastern Washington and northern Idaho and retail natural gas service to approximately 284,000 customers in parts of Washington, Idaho, Oregon and California.

Avista Utilities anticipates residential and commercial electric load growth to average between 2.0 and 3.0 percent annually for the next five years, primarily due to expected increases in both population and the number of businesses in its service territory. The number of electric customers is expected to increase; however, the average annual usage by residential customers is not expected to change significantly. For the next five years, Avista Utilities expects natural gas load growth, including transportation volumes, to average between 1.5 and 2.0 percent annually in Washington and Idaho and between 2.0 and 3.0 percent annually in the Oregon and South Lake Tahoe service areas. The natural gas load growth is primarily due to expected conversions from electric space and water heating to natural gas, and increases in both population and the number of businesses in Avista Utilities’ service territories. These electric and natural gas load growth projections are based on purchased economic forecasts, publicly available studies, and internal analysis of company-specific data, such as energy consumption patterns and internal business plans. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Future Outlook” for additional information.

Electric Operations

In addition to providing electric transmission and distribution services, Avista Utilities generates electricity for sales to retail customers. Avista Utilities owns and operates eight hydroelectric projects, a wood-waste fueled generating station and a two-unit natural gas-fired combustion turbine (CT) generating facility. It also owns a 15 percent share in a two-unit coal-fired generating facility and leases and operates a two-unit natural gas-fired CT generating facility. In addition, Avista Utilities has a number of long-term power purchase and exchange contracts that increase its available resources. See “Item 2. Properties” for further information with respect to generation properties. Avista Utilities plans to add new generation assets in 2002 with the planned completion of the Coyote Springs 2 project and the addition of two small generation facilities.

Historically, Avista Utilities’ electric rates to retail customers have been among the lowest of investor-owned utilities in the United States, due primarily to its large proportion of hydroelectric resources as compared to other investor-owned utilities. Retail electric rates remain low, relative to other investor-owned utilities in the United States, even after the enactment of recent temporary surcharges and rate increases. See “Regulatory Issues-Power Cost Deferrals” for further information.

Avista Utilities sells and purchases electric capacity and energy to and from utilities and other entities in the wholesale market under long-term contracts having terms of more than one year. In addition, Avista Utilities engages in an ongoing process of resource optimization which involves short-term purchases and sales in the wholesale market in pursuit of an economic selection of resources to serve retail and wholesale loads. Avista Utilities makes continuing projections of (1) future retail and wholesale loads based on, among other things, forward estimates of factors such as customer usage and weather as well as historical data and contract terms and (2) resource availability based on, among other things, estimates of streamflows, generating unit availability, historic and forward market information and experience. On the basis of these continuing projections, Avista Utilities makes purchases and sales of energy on a quarterly, monthly, daily and hourly basis to match actual resources to actual energy requirements and to sell any surplus at the best available price. This process includes hedging transactions.

Avista Utilities competes in the electric wholesale market with other utilities, federal marketing agencies and power marketers. The electric wholesale market has changed significantly over the last few years with respect to market participants involved, level of activity, variability of prices, FERC-imposed price caps and counterparty credit issues. These changes contributed to the increased volatility of the wholesale market during 2000 and the first half of 2001. During the second half of 2001 wholesale market prices and volatility both decreased to levels similar to those

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experienced before 2000. See “Western Power Market Issues” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Western Power Market Issues” for more information.

Challenges facing Avista Utilities’ electric operations include, among other things, the ability to recover deferred power supply costs and the timing of such recovery, changes in the availability of and volatility in the prices of power and fuel, generating unit availability, legislative and governmental regulations, and weather conditions. Avista Utilities believes it faces minimal risk for stranded utility assets resulting from deregulation due to its relatively low-cost generation portfolio. In a deregulated environment, however, evolving technologies that provide alternate energy supplies could affect the market price of power, and certain generating assets could have capital and operating costs above the adjusted market price. Avista Utilities may also be exposed to refunds for wholesale power sales depending on the outcome of the FERC’s retroactive price cap proceeding for the Pacific Northwest; however, Avista Utilities would have the opportunity to establish offsetting claims. See “Industry Restructuring,” “Western Power Market Issues,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Western Power Market Issues” and “Note 1 of Notes to Consolidated Financial Statements” for additional information.

Electric Requirements

Annual peak requirements for 2001 were 3,234 MW (including long-term wholesale obligations of 937 MW and short-term wholesale obligations of 797 MW). This peak occurred on January 16, 2001 at which time the maximum resource capacity available from Avista Utilities was 3,553 MW. The maximum resource capacity included 1,418 MW of company-owned electric generation, 144 MW from long-term hydroelectric contracts, 548 MW of other long-term wholesale purchases and 1,443 MW of short-term wholesale purchases. Variations in energy usage by Avista Utilities’ customers occur from year to year, from season to season and from month to month within a season, primarily as a result of weather conditions. This necessitates a continual balancing of loads and resources, and requires both purchases and sales of energy for annual, quarterly, monthly, daily and hourly periods in order to meet electric requirements and to prudently manage and optimize available resources.

Electric Resources

General Avista Utilities’ diverse electric resource mix of hydroelectric projects, thermal generating facilities, and power purchases and exchanges, combined with strategic access to regional electric transmission systems, enables it to remain a low-cost producer of electric energy. As of December 31, 2001, Avista Utilities’ total owned and leased resource capability was approximately 1,480 MW, of which 65 percent was hydroelectric and 35 percent was thermal. See “Avista Utilities Operating Statistics — Electric Operations” for energy resource statistics.

Hydroelectric Resources Hydroelectric generation is Avista Utilities’ lowest cost source per MWh of electricity and the availability of hydroelectric generation has a significant effect on its total power supply costs. Under average operating conditions, Avista Utilities projects that it would be able to meet approximately one-half of its total electric requirements (both retail and long-term wholesale) with its own hydroelectric generation and fixed long-term hydroelectric contracts with certain Public Utility Districts in Washington state. Total hydroelectric resource generation (both company-owned and purchased under long-term hydroelectric contracts) was 3.2 million MWhs in 2001, a decrease from 4.7 million MWhs in 2000 and 5.4 million MWhs in 1999.

Total hydroelectric resources (including resources purchased under long-term hydroelectric contracts) provide 550 aMW (or 4.8 million MWhs) annually under normal streamflow conditions. The streamflows to company-owned hydroelectric projects were 56 percent, 86 percent and 112 percent of normal in 2001, 2000 and 1999, respectively. In a “critical water” year (defined by the Northwest Power Pool as the worst water conditions on record), Avista Utilities would expect hydroelectric production of 400 aMW, 150 aMW below normal. Average hydroelectric production for the year 2001 was 369 aMW, which is 181 aMW below normal and the lowest level in the 73 years in which records have been kept. The combination of low hydroelectric production and other factors resulted in Avista Utilities incurring power supply costs during the second half of 2000 and the year 2001 significantly in excess of the amount of power supply costs recovered through retail rates in effect at the time. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Avista Utilities-Regulatory Matters” for more information.

Thermal Resources Avista Utilities has a 15 percent interest in a twin-unit, coal-fired generating facility, the Colstrip 3 & 4 Generating Project (Colstrip) in southeastern Montana. Avista Utilities also owns a wood-waste-fired generating facility known as the Kettle Falls Generating Station (Kettle Falls) in northeastern Washington and a two-unit natural gas-fired CT generating facility, located in northeast Spokane (Northeast CT). In addition, Avista Utilities also leases and operates a two-unit natural gas-fired CT generating facility in northern Idaho (Rathdrum CT).

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Until May 2000, Avista Utilities had a 15 percent interest in a twin-unit, coal-fired generating facility, the Centralia Power Plant (Centralia) in western Washington. In May 2000, the owners of Centralia sold the plant to TransAlta. Avista Utilities is purchasing energy from TransAlta to replace the output from Centralia for the period from July 1, 2000 through December 31, 2003. Avista Utilities receives approximately 200 megawatts per hour during the term of the contract beginning each July and continuing through March of the following year.

Colstrip, which is operated by PPL Global, Inc., is supplied with fuel under coal supply and transportation agreements in effect through December 2019 from adjacent coal reserves.

Kettle Falls’ primary fuel is wood-waste generated as a by-product from forest industry operations within 100 miles of the plant. Natural gas may be used as an alternate fuel. A combination of long-term contracts plus spot purchases provides Avista Utilities the flexibility to meet expected future fuel requirements for the plant.

The Northeast CT and Rathdrum CT are natural gas-fired generating units that were primarily used for peaking electric requirements prior to 2000. Due to the shortage of hydroelectric generation during 2000 and 2001 and the relative operating cost compared to higher wholesale market prices, these generating units were operated on a more frequent basis. The Northeast CT and the Rathdrum CT have access to natural gas supplies that are adequate to meet their respective operating needs.

The following table shows Avista Utilities’ thermal resource generation (in thousands of MWhs) during the years ended December 31:

Purchases, Exchanges and Sales Avista Utilities purchases power under various long-term purchase contracts. Avista Utilities also enters into a significant number of short-term sales and purchases with terms of up to one year.

Under the Public Utility Regulatory Policies Act of 1978 (PURPA), Avista Utilities is required to purchase generation from qualifying facilities, including small hydroelectric and cogeneration projects, at rates approved by the Washington Utilities and Transportation Commission (WUTC) and the Idaho Public Utilities Commission (IPUC). These contracts expire at various times through 2022.

See “Avista Utilities Operating Statistics — Electric Energy Resources” for more detailed information with respect to purchased power and power from exchanges in 2001, 2000 and 1999.

Future Resource Needs

In August 2000, the WUTC approved Avista Utilities’ plan to increase its power resources to serve long-term electric requirements. The Company evaluated 32 third-party supply-side and demand-side proposals submitted through the request-for-proposal process in 2000. In December 2000, Avista Utilities selected the Coyote Springs 2 project, located near Boardman, Oregon, as the supply-side option.

The Coyote Springs 2 project is a combined-cycle, natural gas-fired combustion turbine with generation output of approximately 280 MW. Engineering and procurement of required major equipment began in January 2001. In December 2001, the Company completed the sale of 50 percent of its interest in the Coyote Springs 2 project to an affiliate of Mirant Americas Development, Inc. (Mirant). The Company and Mirant are sharing equally in the costs of construction, operation and output from the plant. The total cost of the plant is expected to be approximately $190 million. Upon completion of construction, expected to be in the third quarter of 2002, the Company’s 50 percent ownership interest in the Coyote Springs 2 project will be transferred from Avista Power to Avista Corp. to be operated as an asset of Avista Utilities.

Due to the shortage of hydroelectric generation and high wholesale market prices during the first half of 2001, Avista Utilities initiated the process of placing several small diesel and natural gas-fired generators into operation at sites in its

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service territory. Due to the reduction in wholesale market prices during the second half of 2001, Avista Utilities reevaluated the cost of the small generation units and will not operate as many of the units as originally planned. The Boulder Park generation facility (Boulder Park) located in Spokane County and a small combustion generation unit in Kettle Falls, Washington (Kettle Falls CT) will be in operation by mid-2002. These projects have a combined generation capability of 32 MW.

As part of the strategy to mitigate the decrease in electric resources caused by the low hydroelectric availability and volatile energy markets, Avista Utilities implemented several buy-back and rebate programs for retail customers during 2001. The programs were designed to encourage conservation and decrease average customer usage.

Avista Utilities has operational strategies to ensure that it has available resources sufficient to meet the increased demand for energy. Under normal water conditions and loads, Avista Utilities’ hydroelectric and thermal generation and long-term contracts would have been able to provide 100 percent of its forecasted native retail load and wholesale energy requirements during 2001. Avista Utilities has made purchases to enable it to cover its electric energy requirements for 2002 and believes that it will be in a surplus power position in 2003 and 2004 under normal water conditions.

Forecasted Electric Energy Requirements and Resources
(aMW)

(1)		Assumes normal water conditions, which is the mean of the 60 years between 1928 and 1988. Preliminary forecasts indicate streamflows are expected to be 87 percent of normal in 2002 based on current snow pack conditions. Avista Utilities currently estimates that hydroelectric generation will be 534 aMW in 2002.
(2)		Includes new generation available in 2002 from the Company’s 50 percent ownership in the Coyote Springs 2 project. Forecast assumes no generation from the Northeast CT and the Rathdrum CT, which are generally only used to meet peaking electric load requirements, and/or when operating costs are lower than short-term wholesale market prices.

Significant Customer A contract with Avista Utilities’ largest customer, Potlatch Corporation (Potlatch), expired on December 31, 2001. Since 1992 Potlatch had received service under a special contract under the PURPA. Potlatch’s Lewiston, Idaho facility includes about 100 aMW of electric requirements and approximately 60 aMW of self-generation that is currently economic to operate. Avista Utilities and Potlatch are currently negotiating a new agreement. As part of the new agreement, the parties have agreed that Potlatch will receive electric service from Avista at large industrial tariff (Schedule 25) rates. Potlatch is currently using its generation for its own electric requirements, which results in a net electric requirement on Avista Utilities’ system of approximately 40 aMW. Although Potlatch would like to sell its generation output, the current market price for wholesale electricity is below the Schedule 25 rates, therefore Potlatch uses its generation to meet its electric requirements. The ultimate resolution of this contract could have an impact on Avista Utilities’ resource planning, that Avista Utilities is working to minimize through continued negotiations of the terms and conditions associated with service to Potlatch under Schedule 25 rates. Any changes in the revenue and expense associated with serving Potlatch would be reflected in the Idaho power cost adjustment mechanism (PCA).

Hydroelectric Relicensing

Avista Corp. is a licensee under the Federal Power Act, which regulates certain of its hydroelectric generation resources, and is administered by the FERC. Avista Corp.’s licensed projects are subject to the provisions of Part I of that Act. These provisions include payment for headwater benefits, condemnation of licensed projects upon payment of just compensation, and take-over of such projects after the expiration of the license upon payment of the lesser of “net

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investment” or “fair value” of the project, in either case, plus severance damages. All but one of the Company’s hydroelectric plants are regulated by the FERC through project licenses issued for 30-50 year periods.

In February 2000, Avista Utilities received a 45-year operating license from the FERC for the Cabinet Gorge and Noxon Rapids Hydroelectric Generating Developments. The Clark Fork Settlement Agreement, included as part of the FERC license procedures, preserved the projects’ economic peaking and load following operations. As part of the Clark Fork Settlement Agreement, Avista Utilities initiated implementation of protection, mitigation and enhancement measures in March 1999. Measures in the agreement, which will cost approximately $4.7 million annually, address issues related to fisheries, water quality, wildlife, recreation, land use, cultural resources and erosion. Recovery of previously deferred hydroelectric relicensing costs, as well as estimated levels of ongoing costs associated with implementation of the Settlement Agreement, were addressed by both the WUTC and IPUC and received favorable treatment. Costs of approximately $15 million deferred during the licensing phase were allowed in rate base and are being amortized over the 45-year license term. The ongoing Clark Fork Settlement Agreement costs are recorded as operating expenses. See “Item 2. Properties — Avista Utilities” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Future Outlook” for additional information.

The issue of high levels of dissolved gas which exceed Idaho water quality standards downstream of Cabinet Gorge during spill periods continues to be studied, as agreed to in the Clark Fork Settlement Agreement. To date, intensive biological studies in the lower Clark Fork River and Lake Pend Oreille have documented minimal biological effects of high dissolved gas levels on free ranging fish. An engineering feasibility study identified several possible structural alternatives at Cabinet Gorge that may reduce dissolved gas levels. Under the terms of the Clark Fork Settlement Agreement, the Company will develop an abatement and/or mitigation strategy in 2002 in conjunction with the other signatories to the agreement.

The Company operates six hydroelectric plants on the Spokane River, and five of these (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls) are under one FERC license. The sixth, Little Falls, is not licensed by the FERC. The license for the Spokane River Projects expires in August 2007; the Company will file a notice of intent to relicense before August 2002. Planning, discussions with stakeholder groups and information gathering activities are ongoing.

Natural Gas Operations

Natural gas commodity prices increased dramatically during 2000 and remained high during the first half of 2001 before declining during the second half of the year. Natural gas commodity costs in excess of the amount recovered in current rates are deferred and recovered in future periods with applicable regulatory approval through adjustments to rates. Market prices for natural gas continue to be competitive compared to alternative fuel sources for residential, commercial and industrial customers. Avista Utilities believes that natural gas should sustain its market advantage based on the levels of existing reserves and potential natural gas development in the future. Growth has occurred in the natural gas business due to increased demand for natural gas in new construction, as well as conversions from electric space and water heating to natural gas.

Avista Utilities makes sales and provides transportation service directly to large natural gas customers. The majority of Avista Utilities’ large industrial customers purchase their own natural gas requirements through natural gas marketers. For these customers, Avista Utilities provides transportation from its pipeline interconnection to the customer’s premises. Seven of Avista Utilities’ largest natural gas customers are provided natural gas transportation service under individual contracts. These negotiated contracts were entered into to retain these customers who can either by-pass Avista Utilities’ distribution system or have competitive alternative fuel capability. All individual contracts are subject to regulatory review and approval. The competitive nature of the natural gas spot market results in savings in the cost of purchased natural gas, which encourages large customers with fuel-switching capabilities to continue to utilize natural gas for their energy needs when economic. The total volume transported on behalf of transportation customers for 2001, 2000 and 1999 was 180.9, 224.8 and 232.4 million therms, which represented approximately 33 percent, 38 percent and 35 percent of Avista Utilities’ total system deliveries, respectively.

Challenges facing Avista Utilities’ natural gas operations include, among other things, volatility in the price of natural gas, changes in the availability of natural gas, legislative and governmental regulations, weather conditions, conservation and the ability to recover natural gas costs.

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Natural Gas Resources

Natural Gas Supply Natural gas supplies are available from domestic and Canadian sources through both long- and short-term, or spot market, purchases. Avista Utilities has capacity delivery rights on six pipelines and owns natural gas storage facilities. A diverse portfolio of natural gas resources allows Avista Utilities to capture market opportunities that benefit its natural gas customers.

The Company’s energy trading and marketing subsidiary, Avista Energy, is responsible for the daily management and optimization of these resources for the requirements of customers in the states of Washington, Idaho and Oregon under an agreement with Avista Utilities. Under this relationship, Avista Utilities retains ownership of its transportation, storage and long-term contracts and Avista Energy acts as an agent to optimize these important resources. The utility commissions have approved Benchmark Incentive Mechanisms that allow Avista Utilities and its customers to share the benefits of Avista Energy’s resource optimization activities. See “Regulatory Issues: Natural Gas Benchmark Mechanism” and “Note 1 of Notes to Consolidated Financial Statements” for additional information.

Firm natural gas supplies are available through negotiated agreements for terms ranging between one month and seven years. Approximately 25 percent of the natural gas supplies are obtained from domestic sources, with the remaining 75 percent from Canadian sources. Nearly all natural gas purchased from Canadian sources is contracted in U.S. dollar denominations, limiting any foreign currency exchange exposure. Canadian natural gas supplies are not considered to be at greater risk of non-delivery than supplies from the United States.

Jackson Prairie Natural Gas Storage Project (Jackson Prairie Storage Project) Avista Utilities owns a one-third interest in the Jackson Prairie Storage Project, an underground natural gas storage field located near Chehalis, Washington. The role of the Jackson Prairie Storage Project in providing flexible natural gas supplies is important to Avista Utilities’ natural gas operations. It enables Avista Utilities to place natural gas into storage when prices are low or to meet minimum natural gas purchasing requirements, as well as to withdraw natural gas from storage when spot prices are high or as needed to meet high demand periods. During 1999, the process of increasing the capacity at the Jackson Prairie Storage Project was completed. This increased capacity is being operated and managed by Avista Energy for a ten-year period. Avista Utilities has contracted to release a total of approximately 43 percent of its Jackson Prairie Storage Project capacity to two other utilities. One of these contracts requires two years notice for termination and one contract is renewed on a year to year basis.

Regulatory Issues

Avista Corp., as a regulated public utility, is currently subject to regulation by state utility commissions with respect to prices, accounting, the issuance of securities, and other matters. The retail electric and natural gas operations are subject to the jurisdiction of the WUTC, the IPUC, the Oregon Public Utility Commission (OPUC) and the California Public Utilities Commission (CPUC). The Company is also subject to the jurisdiction of the FERC for its wholesale natural gas rates charged for the release of capacity from the Jackson Prairie Storage Project, and for electric transmission service and wholesale electric sales. The FERC also issued orders with respect to a price mitigation plan applicable to certain wholesale power transactions throughout the western United States during the period June 2001 through September 2002. See “Western Power Market Issues” for additional information.

In each regulatory jurisdiction, 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 currently determined on a “cost of service” basis and are designed to provide, after recovery of allowable operating expenses, an opportunity to earn a reasonable return on “rate base.” “Rate base” is generally determined by reference to the original cost (net of accumulated depreciation) of utility plant in service, subject to various adjustments for deferred taxes and other items. Over time, rate base is increased by additions to utility plant in service and reduced by depreciation of utility plant. As the energy business is restructured, traditional “cost of service” ratemaking may evolve into some other form of ratemaking. Rates for transmission services are based on the “cost of service” principles and are set forth in tariffs on file with the FERC. See “Note 1 of Notes to Consolidated Financial Statements” for additional information about regulation, depreciation and deferred income taxes. See “Industry Restructuring” for additional information about deregulation.

Power Cost Deferrals In August 2000, the WUTC approved Avista Utilities’ request for deferred accounting treatment for certain power costs related to, among other things, increases in short-term wholesale electric prices from July 1, 2000 through June 30, 2001. Avista Utilities is permitted to defer the recognition in the income statement of the portion of power supply costs that is in excess of the level currently recovered from retail customers. Deferred power supply costs are recorded as a deferred charge on the balance sheet for future review and the opportunity for recovery through retail

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rates. The specific power costs deferred include the changes in power costs to Avista Utilities from the costs included in base retail rates, related to changes in short-term wholesale market prices, changes in the level of hydroelectric generation and changes in the level of thermal generation (including changes in fuel prices). In January 2001, the WUTC approved a modification to the deferral mechanism to recover power supply costs associated with meeting increased retail and wholesale system load requirements, effective December 1, 2000.

In May 2001, the WUTC approved a settlement agreement reached among Avista Corp., the staff of the WUTC and other parties with respect to deferred power costs. The agreement, among other things, provided for the extension of Avista Corp.’s deferred accounting mechanism through February 2003. During June and the first part of July of 2001, Avista Utilities evaluated the effect of several significant developments that changed its plans for the recovery of deferred power costs. These developments included a decline in hydroelectric availability, the increased cost of energy and capacity to meet retail and wholesale demand for 2001 and a decline in wholesale market prices. As such, Avista Utilities determined that its plan for recovery of deferred cost balances, as contemplated in the May 2001 settlement agreement with the WUTC and the existing PCA with the IPUC, was not feasible.

Accordingly, in July 2001 Avista Utilities filed requests with the WUTC and IPUC for the approval of an electric energy surcharge of 36.9 percent in Washington and a PCA surcharge of 14.7 percent in Idaho for a 27-month period beginning in September 2001.

In September 2001, the WUTC ordered a 25 percent temporary electric rate surcharge for the 15-month period from October 1, 2001 to December 31, 2002 applied uniformly across all Washington electric customer classes. As part of the surcharge order, the WUTC ordered Avista Utilities to file a general rate case by December 2001. The order by the WUTC also provided for the termination of the accounting mechanism for the deferral of power costs effective December 31, 2001. The WUTC subsequently approved the continuation of the accounting mechanism for deferred power costs for the period from January 1, 2002 through the conclusion of the general rate case.

In November 2001, Avista Utilities filed a request with the WUTC for an expedited procedural schedule to address the prudence and recoverability of deferred power costs incurred as of September 30, 2001. In March 2002, the WUTC issued an order approving the prudence and recoverability of 90 percent of deferred power supply costs incurred during the period from July 1, 2000 through December 31, 2001. This resulted in the Company expensing $21.8 million of power supply costs previously deferred.

In October 2001, the IPUC issued an order approving a 14.7 percent PCA surcharge for Idaho electric customers and granted an extension of a 4.7 percent PCA surcharge implemented earlier in 2001 that was to expire January 31, 2002. Both PCA surcharges will remain in effect until October 11, 2002. The IPUC directed Avista Utilities to file a status report 60 days before the PCA surcharge expires. If review of the status report and the actual balance of deferred power costs support continuation of the PCA surcharge, the IPUC has indicated that it anticipates the PCA surcharge would be extended for an additional period. The current PCA mechanism allows for the deferral of 90 percent of the difference between actual net power supply expenses and the authorized level of net power supply expense approved in the last Idaho general rate case.

As of December 31, 2001, total deferred power costs were $213.3 million, including $140.2 million in Washington and $73.1 million in Idaho. In 2001, revenue collected under the Washington and Idaho surcharges totaled $14.4 million and deferred power costs were further reduced $60.7 million through the amortization of a deferred non-cash credit. Based on current projections, total deferred power costs balances are expected to be approximately $150 million at the end of 2002 and fully recovered by 2007.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Avista Utilities-Regulatory Matters” for additional information.

General Rate Cases In October 1999, Avista Utilities filed with the WUTC a request for a general electric rate increase of $26.2 million, or 10.4 percent, subsequently revised to $18.2 million, and a general natural gas rate increase of $4.9 million, or 6.5 percent. In September 2000, the WUTC ordered a $3.4 million, or 1.4 percent, reduction in electric rates and a $1.7 million, or 2.1 percent, increase in natural gas rates. The WUTC also ordered that Avista Utilities’ overall rate of return for both electricity and natural gas be reduced from 10.7 percent to 9.03 percent. Avista Utilities had requested a 9.9 percent overall rate of return. Avista Utilities filed a Petition for Reconsideration with the WUTC requesting that the commission reconsider certain portions of its order. In November 2000, the Commission slightly modified the original order, reducing the electric reduction from $3.4 million to $2.9 million and increasing the natural gas increase from $1.7 million to $1.8 million.

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On December 3, 2001, the Company filed a general electric rate case with the WUTC, as ordered by the WUTC in September 2001. Issues to be addressed include, among other things, the recovery of cash outlays for increased power supply costs and expenses related to building additional generation. The rate case requested by Avista Corp. proposes a 10.39 percent overall rate of return. The WUTC may take up to 11 months to review the general rate case filing.

In the rate case filing with the WUTC, Avista Corp. requested an interim rate increase of 10 percent (or $29.3 million in annual revenues) above current rates (including the 25 percent temporary surcharge approved by the WUTC in September 2001 discussed above). In March 2002, the WUTC ordered an increase to base retail rates of 6.2 percent (or $14.7 million in annual revenues). The order also modified the temporary electric surcharge such that one-fifth of the existing 25 percent surcharge will be applied to offset the Company’s general operating costs and the remainder will continue to be applied as a recovery of deferred power costs. In the general rate case filing, the Company requested that a number of adjustments be made that would result in no net change to rates above the interim rate increase. The Company requested that once the interim rate increase ends, base electric rates would increase by 22.5 percent (or $53.2 million in annual revenues) and the electric surcharge would be reduced from 25 percent to 14.9 percent. These rate increases are necessary in order to continue the recovery of deferred power costs. The proposed rate increases also reflect, among other things, the recovery of costs associated with the addition of the Company’s 50 percent ownership in the Coyote Springs 2 power plant and the construction of two small generation projects built to serve retail customer needs.

In the general rate case, Avista Corp. requested the implementation of a temporary accounting mechanism for the deferral of power supply costs incurred in excess of the amount recovered through rates effective January 1, 2002 until the conclusion of the general rate case. The WUTC approved this request on December 21, 2001. In the general rate case, Avista Corp. requested the establishment of a permanent PCA mechanism to increase or decrease future electric rates based on actual power supply costs, similar to the Idaho PCA mechanism that allows for the deferral of 90 percent of the difference between actual net power supply costs and the authorized level of net power supply costs.

In Avista Utilities’ last general electric rate case in Idaho, the IPUC granted a rate increase of $9.3 million, or 7.6 percent, with an authorized rate of return of 8.98 percent, effective August 1999.

Purchased Gas Adjustment (PGA or Natural Gas Trackers) Natural gas trackers are supplemental tariffs filed with state regulatory commissions designed to pass through changes in purchased natural gas costs, and do not normally result in any changes in net income. In July 2001, Avista Utilities filed requests for PGAs with the WUTC and the IPUC. Both the Washington PGA increase of 12.2 percent approved by the WUTC and the Idaho PGA increase of 11.5 percent approved by the IPUC became effective in August 2001. Avista Utilities estimates these PGA rate changes will increase revenues by $24.6 million for approximately one year. Total deferred natural gas costs were $52.7 million as of December 31, 2001. Based on current PGAs in place and current natural gas prices, Avista Utilities expects that the deferred natural gas cost balance will be fully recovered by December 2002.

Natural Gas Benchmark Mechanism Avista Utilities received regulatory approval of its Natural Gas Benchmark Mechanism in 1999 from the IPUC, WUTC and OPUC. The mechanism eliminated natural gas procurement operations within Avista Utilities for these jurisdictions and consolidated gas procurement operations under Avista Energy, the Company’s non-regulated affiliate. The ownership of the natural gas assets remains with Avista Utilities; however, Avista Energy through an Agency Agreement with Avista Utilities manages the assets. Avista Utilities maintains a natural gas staff to prepare load forecasts and analyses related to long-term resource acquisitions, to manage the Agency Agreement with Avista Energy and to support state and federal regulatory activities.

Consolidation of natural gas procurement operations under Avista Energy allows the Company to gain synergies and better manage its risk by combining and operating the two portfolios as a single portfolio and to gain efficiencies by eliminating duplicate functions. Effective January 1, 2001, the WUTC and IPUC approved Avista Utilities’ modifications to the Natural Gas Benchmark Mechanism, incorporating the use of financial products (fixed-price transactions or hedging). Due to the unprecedented increase in and volatility of natural gas commodity costs, it was determined that such additional flexibility was needed in the Natural Gas Benchmark Mechanism to properly manage costs. The Natural Gas Benchmark Mechanism provides certain guaranteed benefits to retail customers and provides the Company with the opportunity to improve earnings (a performance-based mechanism).

Avista Utilities provided notice of its intent to continue the Natural Gas Benchmark Mechanism and related Agency Agreement with Avista Energy to the applicable state regulatory agencies in 2001. In early 2002, the WUTC approved the continuation of the Natural Gas Benchmark Mechanism and related Agency Agreement through March 31, 2003 and the IPUC approved the continuation through March 31, 2005. The OPUC is expected to make its ruling in late March 2002.

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Demand Side Management (DSM) and Low-Income Assistance Programs DSM programs are designed to encourage conservation of energy. In February 2001, the WUTC and the IPUC approved Avista Utilities’ implementation of a natural gas revenue surcharge of 0.5 percent to provide funding for natural gas energy-efficiency programs. Avista Utilities currently has electric revenue surcharges, or tariff riders, of approximately 1.5 percent in Washington and Idaho to fund its electric DSM programs. The tariff rider has been in place since 1995 and was the first “system benefit charge” for energy efficiency in the United States.

Effective May 2001, the WUTC approved an increase in electric and natural gas surcharges, or tariff rider, of 0.79 percent to supplement the Community Action Agency’s existing federal and state low-income heating energy assistance program and Project Share funds. The annual revenue of approximately $2.7 million funds eastern Washington agencies assistance to help in-need customers pay their energy bills.

Industry Restructuring

Federal Level

Industry restructuring to open the electric wholesale energy market to competition was initially promoted by federal legislation. The Energy Policy Act of 1992 (Energy Act) amended provisions of the Public Utility Holding Company Act of 1935 (PUHCA) and the Federal Power Act to remove certain barriers to a competitive wholesale market. The Energy Act expanded the authority of the FERC to issue orders requiring electric utilities to transmit power and energy to or for wholesale purchasers and sellers, and to require electric utilities to enlarge or construct additional transmission capacity for the purpose of providing these services. It also created “exempt wholesale generators”, a new class of independent power plant owners that are able to sell generation only at the wholesale level. This permits public utilities and other entities to participate through subsidiaries in the development of independent electric generating plants for sales to wholesale customers without being required to register under the PUHCA.

FERC Order No. 888, issued in April 1996, requires public utilities operating under the Federal Power Act to provide access to their transmission systems to third parties pursuant to the terms and conditions of the FERC’s pro-forma open access transmission tariff. FERC Order No. 889, the companion rule to Order No. 888, requires public utilities to establish an Open Access Same-Time Information System (OASIS) to provide transmission customers with information about available transmission capacity and other information by electronic means. It also requires each public utility subject to the rule to functionally separate its transmission and wholesale power merchant functions. The FERC issued its initial order accepting the non-rate terms and conditions of Avista Utilities’ open access transmission tariff in November 1996. Avista Utilities filed its “Procedures for Implementing Standards of Conduct under FERC Order No. 889” with the FERC in December 1996 and adopted these Procedures effective January 1997. FERC Orders No. 888 and No. 889 have not had a material effect on Avista Utilities’ operating results.

Avista Corp. and three other Western utilities have taken steps toward the formation of a for-profit Independent Transmission Company (ITC), TransConnect, which would serve portions of six states. TransConnect would be a member of the planned regional transmission organization, RTO West, a non-profit entity, and it would own or lease the high voltage transmission facilities currently held by Avista Corp., Portland General Electric Co., Nevada Power Co. and Sierra Pacific Power Co. A proposal was filed in October 2000 in response to the FERC’s Order No. 2000, which requires utilities subject to FERC regulation to file a proposal to form a Regional Transmission Organization (RTO), or a description of efforts to participate in an RTO, and any existing obstacles to RTO participation. In April 2001, the FERC issued the RTO West/TransConnect order granting, with modifications, the participating companies’ petition. Avista Corp. is actively evaluating this order to determine the effects of the modifications and the impact to the potential development of TransConnect. TransConnect filed its proposal with FERC in November 2001. Avista Corp. only joined in the planning protocol modified governance for this filing. The final proposal must be approved by the FERC, the boards of directors of the filing companies and regulators in various states. The companies’ decision to move forward with the formation of TransConnect or RTO West will ultimately depend on the conditions related to the formation of the entities, as well as the economics and conditions imposed in the regulatory approval process. If TransConnect were formed, it could result in Avista Utilities divesting $174 million of electric transmission assets.

The North American Electric Reliability Council and the WSCC have undertaken initiatives to establish a series of security coordinators to oversee the reliable operation of the regional transmission system. Accordingly, Avista Utilities, in cooperation with other utilities in the Pacific Northwest, established the Pacific Northwest Security Coordinator (PNSC), which oversees daily and short-term operations of the Northwest sub-regional transmission grid and has limited authority to direct certain actions of control area operators in the case of a pending transmission system emergency. Avista Utilities executed its service agreement with the PNSC in September 1998.

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State Level

Further competition may be introduced by state action. Competition for retail customers is not generally allowed in Avista Utilities’ service territory. While the Energy Act precludes the FERC from mandating retail wheeling, state regulators and legislators could open service territories to full competition at the retail level. Legislative action at the state level would be required for full retail wheeling and customer choice to occur in Washington and Idaho. For the past several years, the legislatures and public utility commissions in Washington and Idaho have conducted a series of hearings and several studies regarding electric industry restructuring. Issues such as unbundling, deregulation, reliability and consumer protection were examined. Impacts on customer service quality and system reliability (generation, transmission and distribution) were considered on a “macro” basis under various restructuring scenarios. Public policy makers in Washington and Idaho continue to examine other states’ experiences with restructuring, while cognizant that the Pacific Northwest generally benefits from the lowest electric rates in the country. Although there is currently no action surrounding deregulation in Washington or Idaho, activities related to California’s deregulation have affected wholesale power prices in the western United States, including the Company’s service territory. See “Western Power Market Issues” for information about the California energy situation.

An initiative was presented in November 2001 in Montana to create a public agency to own and operate all hydroelectric generating facilities within the state. Avista Utilities’ largest generation plant, Noxon Rapids, is located in Montana on the Clark Fork River. If this proposed initiative obtains the required signatures by June 21, 2002 and is passed into law in the November 2002 General Election, Noxon Rapids could be acquired from the Company either through a negotiated sale or at fair market value through a condemnation proceeding. This could have significant negative ramifications for the Company. As such, the Company intends to vigorously oppose this initiative and intends to legally defend itself against the acquisition of Noxon Rapids. See “Note 24 of Notes to Consolidated Financial Statements” for additional information.

Environmental Issues

The Company is subject to environmental regulation by federal, state and local authorities. The generation, transmission, distribution, service and storage facilities in which Avista Utilities has an ownership interest were designed to comply with all applicable environmental laws. Furthermore, the Company conducts periodic reviews of all its facilities and operations to respond to or anticipate emerging environmental issues. The Company’s Board of Directors has an Environmental Committee to deal specifically with these issues.

Air Quality The most significant impact on the Company related to the Clean Air Act (CAA) and the 1990 Clear Air Act Amendments (CAAA) pertains to Colstrip, which is a “Phase II” coal-fired plant under the CAAA. Colstrip is not expected to be required to implement any additional sulfur dioxide (SO2) mitigation in the foreseeable future in order to continue operations. Avista Utilities’ other thermal projects are subject to various CAAA standards. Every five years each project requires an updated operating permit (known as a Title V permit) which addresses, among other things, the compliance of the plant with the CAAA. The operating permit for the Rathdrum CT was issued in December 2000. During 2001, the Company applied to renew the operating permit for the Kettle Falls plant and applied for an upgrade to a Title V permit for the natural gas-fired CTs located in Spokane. The Company anticipates the receipt of these operating permits during the second quarter of 2002. Additionally, the Company received operating permits for several small generation projects during 2001. Due to the decline in wholesale market prices during the second half of 2001, Avista Utilities reevaluated the cost of the small generation units and will not operate as many of the units as originally planned.

During 2001, Avista Corp. extended the operating hours of the Northeast CT with an agreement with the Spokane County Air Pollution Control Authority (SCAPCA) under a special operating order called an Assurance of Discontinuance (AOD). The SCAPCA has allowed for continued operation of the Northeast CT upon the condition of a payment of $150 for each hour of operation paid into a mitigation fund for assistance to low-income customers and the payment of $10,000 for each day of operation to fund an environmental offset project. The AOD allows Avista Utilities to use the Northeast CT to temporarily bring on added generating capacity for the benefit of its customers and the region during a time of increased energy demand and limited energy resources. Extended operation of the Northeast CT was approved after the SCAPCA determined, through air emission modeling and projections, that extended operation of the turbine would not adversely impact air quality. The funding of the environmental offset project will be paid until such time as a new operating permit is issued by the SCAPCA. The Company submitted its permit application for permanent operation of the Northeast CT in November 2001.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Future Outlook” and “Note 24 of the Notes to Consolidated Financial Statements” for additional information.

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AVISTA UTILITIES OPERATING STATISTICS

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