Forward-Looking Statements

From time to time, we make forward-looking statements such as statements regarding projected or future:

• financial performance,

• capital expenditures,

• dividends,

• capital structure,

• other financial items,

• strategic goals and objectives, and

• plans for operations.

These statements have underlying assumptions (many of which are based, in turn, upon further assumptions). Such statements are made both in our reports filed under the Securities Exchange Act of 1934, as amended (including this Quarterly Report on Form 10-Q), and elsewhere. Forward-looking statements are all statements except those of historical fact including, without limitation, those that are identified by the use of words that include "will," "may," "could," "should," "intends," "plans," "seeks," "anticipates," "estimates," "expects," "forecasts," "projects," "predicts," and similar expressions.

Forward-looking statements (including those made in this Quarterly Report on Form 10-Q) are subject to a variety of risks and uncertainties and other factors. Most of these factors are beyond our control and many of them could have a significant effect on our operations, results of operations, financial condition or cash flows. This could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others:

• weather conditions and its effect on energy demand and generation, including the effect of precipitation and temperatures on the availability of hydroelectric resources and the effect of temperatures on customer demand and wholesale energy markets;

• global financial and economic conditions (including the availability of credit) and their effect on our ability to obtain funding for working capital and long-term capital requirements on acceptable terms;

• economic conditions in our service areas, including the effect on the demand for, and customers' ability to pay for, our utility services;

• our ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by various factors including our credit ratings, interest rates and other capital market conditions;

• changes in actuarial assumptions, the interest rate environment and the actual return on plan assets for our pension plan, which can affect future funding obligations, costs and pension plan liabilities;

• changes in wholesale energy prices that can affect, among other things, the cash requirements to purchase electricity and natural gas for retail customers or wholesale obligations and the market value of derivative assets and liabilities;

• volatility and illiquidity in wholesale energy markets, including the availability of willing buyers and sellers, and prices of purchased energy and demand for energy sales;

• the effect of state and federal regulatory decisions affecting our ability to recover costs and/or earn a reasonable return including, but not limited to, the disallowance of costs and investments, and delay in the recovery of ownership and operating costs;

• the potential effects of legislation or administrative rulemaking, including the possible adoption of national or state laws requiring resources to meet certain standards and placing restrictions on greenhouse gas emissions to mitigate concerns over global climate changes;

• the outcome of pending regulatory and legal proceedings arising out of the "western energy crisis" of 2000 and 2001, and including possible retroactive price caps and resulting refunds;

• the outcome of legal proceedings and other contingencies;

• changes in, and compliance with, environmental and endangered species laws, regulations, decisions and policies, including present and potential environmental remediation costs;

• wholesale and retail competition including, but not limited to, electric retail wheeling and transmission costs;

• the ability to maintain licenses for our hydroelectric generating facilities at cost-effective levels with reasonable terms and conditions;

• unplanned outages at any of our generating facilities or the inability of facilities to operate as intended;

• unanticipated delays or changes in construction costs, as well as our ability to obtain required operating permits for present or prospective facilities;

AVISTA CORPORATION

• natural disasters that can disrupt energy production or delivery, as well as the availability and costs of materials and supplies and support services;

• blackouts or disruptions of interconnected transmission systems;

• the potential for terrorist attacks or other malicious acts, particularly with respect to our utility assets;

• changes in the long-term climate of the Pacific Northwest, which can affect, among other things, customer demand patterns and the volume and timing of streamflows to our hydroelectric resources;

• changes in industrial, commercial and residential growth and demographic patterns in our service territory;

• the loss of significant customers and/or suppliers;

• default or nonperformance on the part of any parties from which we purchase and/or sell capacity or energy;

• deterioration in the creditworthiness of our customers and counterparties;

• the effect of any potential decline in our credit ratings;

• increasing health care costs and the resulting effect on health insurance provided to our employees and retirees;

• increasing costs of insurance, changes in coverage terms and our ability to obtain insurance;

• employee issues, including changes in collective bargaining unit agreements, strikes, work stoppages or the loss of key executives, as well as our ability to recruit and retain employees;

• the potential effects of negative publicity regarding business practices, whether true or not, which could result in, among other things, costly litigation and a decline in our common stock price;

• changes in technologies, possibly making some of the current technology obsolete;

• changes in tax rates and/or policies; and

• changes in our strategic business plans, which may be affected by any or all of the foregoing, including the entry into new businesses and/or the exit from existing businesses.

Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonable based on, without limitation, an examination of historical operating trends, data contained in our records and other data available from third parties. However, there can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of such factors, nor can we assess the effect of each such factor on our business or the extent to which any such factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

In this Form 10-Q, we discuss our credit ratings. 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 independently of all other ratings.

The following discussion and analysis is provided for the consolidated financial condition and results of operations of Avista Corp. and its subsidiaries and should be read along with the condensed consolidated financial statements.

Business Segments

We have two reportable business segments as follows:

• Avista Utilities - an operating division of Avista Corp. comprising our regulated utility operations. Avista Utilities generates, transmits and distributes electricity and distributes natural gas. The utility also engages in wholesale purchases and sales of electricity and natural gas.

• Advantage IQ - an indirect subsidiary of Avista Corp. (approximately 74 percent owned as of September 30, 2009) that provides sustainable utility expense management solutions, partnering with multi-site companies across North America to assess and manage utility costs and usage. Advantage IQ's primary product lines include processing, payment and auditing of energy, telecom, waste, water/sewer and lease bills as well as strategic management services.

We have other businesses, including sheet metal fabrication, venture fund investments and real estate investments, as well as certain natural gas storage facilities and a power purchase agreement held by Avista Energy. These activities do not represent a reportable business segment and are conducted by various indirect subsidiaries of Avista Corp., including Advanced Manufacturing and Development (AM&D), doing business as METALfx.

AVISTA CORPORATION

Advantage IQ, Avista Energy, and various other companies are subsidiaries of Avista Capital, Inc. (Avista Capital) which is a direct, wholly owned subsidiary of Avista Corp. Our total Avista Corporation stockholders' equity was $1,036.2 million as of September 30, 2009, of which $83.1 million represented our investment in Avista Capital.

The following table presents net income (loss) for each of our business segments (and the other businesses) for the three and nine months ended September 30 (dollars in thousands):

                                           Three months ended September 30,                Nine months ended September 30,
                                            2009                      2008                   2009                    2008
Avista Utilities                       $         7,239           $         6,451        $       63,203          $       51,791
Advantage IQ                                     1,413                     1,340                 3,855                   4,685
Other                                             (513 )                    (432 )              (2,040 )                  (341 )

Net income attributable to Avista
Corporation                            $         8,139           $         7,359        $       65,018          $       56,135

Executive Level Summary

Overall

Our operating results and cash flows are primarily from:

• regulated utility operations (Avista Utilities), and

• facility information and cost management services for multi-site customers (Advantage IQ).

Our net income was $8.1 million for the three months ended September 30, 2009, an increase from $7.4 million for the three months ended September 30, 2008. This increase was primarily due to increased earnings at Avista Utilities (primarily due to the implementation of general rate increases in Washington and Idaho) as well as a decrease in interest expense and income tax expense (due to adjustments related to Internal Revenue Service (IRS) audits and adjustments for the 2008 filed federal tax return). This change was partially offset by an increase in other operating expenses and interest income from an income tax settlement in the third quarter of 2008. Our net income was $65.0 million for the nine months ended September 30, 2009, an increase from $56.1 million for the nine months ended September 30, 2008. Consistent with the quarterly increase, this was primarily due to increased earnings at Avista Utilities as well as a decrease in interest expense and income tax expense.

In late 2007, early 2008, and early 2009, respectively, Moody's Investors Service, Standard & Poor's and Fitch Ratings, Inc. upgraded our credit ratings, which resulted in an investment grade rating for our senior unsecured debt and corporate rating from each of these rating agencies. The upgrades reflected several steps taken over the past few years to lower our business risk profile and improve financial metrics. Moody's Investors Service and Standard & Poor's changed our rating outlook to "Positive" from "Stable" in August 2009. For further discussion of our credit ratings, see pages 56-57. It is important to note that we are at the lower end of the investment grade category. We are working to continuously strengthen our credit ratings by improving earnings and operating cash flows, controlling costs and reducing our debt ratio.

Employment has declined throughout our service area due to cutbacks in the construction, forest products, mining and manufacturing sectors. Non-farm employment contraction for September 2009 as compared to September 2008 was 5.1 percent in Spokane, Washington, 4.7 percent in Medford, Oregon and 6.2 percent in Coeur d'Alene, Idaho, compared to the national average decline of 4.2 percent. Unemployment rates are much higher than a year ago in our service areas. Unemployment rates for September 2009 were 8.4 percent in Spokane, Washington, 10.4 percent in Coeur d'Alene, Idaho and 11.5 percent in Medford, Oregon, compared to the national average of 9.5 percent. The housing market in Coeur d'Alene, Idaho and Medford, Oregon has continued to deteriorate; the September 2009 monthly foreclosure rate was 0.48 percent in Kootenai County (the county that includes Coeur d'Alene, Idaho), and 0.28 percent in Jackson County (the county that includes Medford, Oregon) compared to the national foreclosure rate of 0.27 percent; the housing market in Spokane County remains stable with a foreclosure rate of 0.04 percent.

Avista Utilities

Avista Utilities is our most significant business segment. Our utility operating and financial performance is dependent upon, among other things:

• weather conditions,

• the price of natural gas in the wholesale market, including the effect on the price of fuel for generation,

• the price of electricity in the wholesale market, including the effects of weather conditions, natural gas prices and other factors affecting supply and demand,

AVISTA CORPORATION

• regulatory decisions, allowing our utility to recover costs, including purchased power and fuel costs, on a timely basis, and to earn a fair return on investment, and

• the ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by various factors including our credit ratings, interest rates and other capital market conditions.

Our utility net income was $7.2 million for the three months ended September 30, 2009, an increase from $6.5 million for the three months ended September 30, 2008. Our utility net income was $63.2 million for the nine months ended September 30, 2009, an increase from $51.8 million for the nine months ended September 30, 2008. The increase in our quarterly and year-to-date net income was due in part to an increase in gross margin (operating revenues less resource costs). The increase in gross margin was primarily due to the implementation of the general rate increases in Washington and Idaho. We recognized an expense of $2.0 million under the ERM for the third quarter of 2009 compared to a benefit of $0.1 million in the third quarter of 2008. We recognized an expense of $6.1 million under the ERM for the nine months ended September 30, 2009 compared to an expense of $7.3 million for the nine months ended September 30, 2008. The increase in net income was also due to a decrease in interest expense and income tax expense. In the third quarter of 2009, we recognized adjustments related to IRS audits and adjustments for the 2008 filed federal tax return. In total, these adjustments had a favorable impact to recorded income tax expense of $3.2 million. These positive impacts on net income were partially offset by an increase in other operating expenses, depreciation and amortization and taxes other than income taxes. In addition, in the third quarter of 2008 we recorded $5.7 million (pre-tax) of interest income, partially offset by $1.4 million (pre-tax) of interest expense, related to income tax settlements.

We plan to continue to invest in generation, transmission and distribution systems with a focus on providing reliable service to our customers. Utility capital expenditures were $141.4 million for the nine months ended September 30, 2009. We expect utility capital expenditures to be approximately $210 million for 2009. Actual capital expenditures may vary from our estimates due to factors such as changes in business conditions, construction schedules and environmental requirements.

Advantage IQ

Advantage IQ's net income attributable to Avista Corporation was $1.4 million for the three months ended September 30, 2009, an increase from $1.3 million for the three months ended September 30, 2008. Advantage IQ's net income attributable to Avista Corporation was $3.9 million for the nine months ended September 30, 2009, a decrease from $4.7 million for the nine months ended September 30, 2008. The decrease for the nine months ended September 30, 2009 as compared to 2008 was primarily due to lower short-term interest rates (which decreases interest revenue), the decrease in our ownership percentage in the business in connection with the acquisition of Cadence Network effective July 2, 2008 and increased amortization of intangible assets (related to the Cadence acquisition - refer to the Cadence discussion below). During 2009, we are experiencing slower internal growth at Advantage IQ than was originally expected, as some of its clients are experiencing bankruptcies and store closures in these difficult economic times. Additionally, interest revenue is lower in 2009 due to the historic low short-term interest rate environment that we are experiencing, which is expected to continue in the fourth quarter of 2009.

On August 31, 2009, Advantage IQ acquired substantially all of the assets and liabilities of Ecos Consulting, Inc. (Ecos), a Portland, Oregon-based energy efficiency solutions provider. The acquisition of Ecos was funded primarily through borrowings under Advantage IQ's committed credit agreement. Under the terms of the transaction, Ecos is a wholly owned subsidiary of Advantage IQ.

Effective July 2, 2008, Advantage IQ acquired Cadence Network, a Cincinnati, Ohio-based energy and expense management company. As consideration, the owners of Cadence Network received a 25 percent ownership interest in Advantage IQ. The acquisition of Cadence Network was funded with the issuance of Advantage IQ common stock, which is subject to redemption. Under the transaction agreement, the previous owners of Cadence Network can exercise a right to redeem their shares of Advantage IQ stock during July 2011 or July 2012 if Advantage IQ is not liquidated through either an initial public offering or sale of the business to a third party. Their redemption rights expire July 31, 2012. The redemption price would be determined based on the fair market value of Advantage IQ at the time of the redemption election as determined by certain independent parties.

We would like to have a market determined valuation of our investment in Advantage IQ within the next four years. The potential valuation of Advantage IQ depends on future market conditions, growth of the business and other factors. This may provide access to public market capital and provide potential liquidity to Avista Corp. and the other owners of Advantage IQ. There can be no assurance that we will be able to complete such a transaction.

AVISTA CORPORATION

Other Businesses

The net loss attributable to Avista Corporation for these operations was $0.5 million for the three months ended September 30, 2009 compared to $0.4 million for the three months ended September 30, 2008. The net loss attributable to Avista Corporation for these operations was $2.0 million for the nine months ended September 30, 2009 compared to $0.3 million for the nine months ended September 30, 2008. Contributing to the net loss attributable to Avista Corporation for the nine months ended September 30, 2009 were losses on long-term venture fund investments of $0.9 million and the accrual of a $0.3 million environmental liability for the final cleanup of a waste water treatment plant site that was decommissioned in 1993. AM&D had a net loss of $0.1 million for the nine months ended September 30, 2009 compared to net income of $0.5 million for the nine months ended September 30, 2008. Results from AM&D improved in the third quarter of 2009 as compared to the first and second quarters of 2009 with net income of $0.1 million.

Liquidity and Capital Resources

We need to access long-term capital markets from time to time to finance capital expenditures, repay maturing long-term debt and obtain additional working capital. Our ability to access capital on reasonable terms is subject to numerous factors, many of which, including market conditions, are beyond our control. If we are unable to obtain capital on reasonable terms, it may limit or prohibit our ability to finance capital expenditures and repay maturing long-term debt. Our liquidity needs could exceed our short-term credit availability and lead to defaults on various financing arrangements. We would also likely be prohibited from paying dividends on our common stock.

We have a committed line of credit in the total amount of $320.0 million with an expiration date of April 5, 2011. Under this committed line of credit, we had $25.0 million of cash borrowings and $23.9 million in letters of credit outstanding as of September 30, 2009. In November 2008, we entered into a new committed line of credit in the total amount of $200.0 million with an expiration date of November 24, 2009. We are in the process of renewing this credit facility at a reduced level (not expected to exceed $100.0 million). We entered into this line of credit to ensure we had adequate liquidity, as conditions in the financial markets resulted in limited access to capital on reasonable terms. To date, we have not borrowed any funds under this committed line of credit.

In March 2009, we amended our accounts receivable sales facility with Bank of America, N.A. to extend the termination date to March 2010. Under this facility, we can sell without recourse, on a revolving basis, up to $85.0 million of accounts receivable. Based upon calculations of our eligible accounts receivable under this agreement, we had the ability to sell up to $42.0 million as of September 30, 2009. There were not any accounts receivable sold under this facility as of September 30, 2009.

The Receivables Purchase Agreement requires a receivables report to be prepared monthly, including information related to customer account delinquency ratios. The June 30, 2009 report indicated that one measurement of the delinquency ratios was in excess of the threshold specified in the Receivables Purchase Agreement, triggering an optional liquidation event. An amendment to the Receivables Purchase Agreement was executed which waived the occurrence of the liquidation event arising from the customer account delinquency ratio increase reflected in the June 30, 2009 report. As of September 30, 2009, we were in compliance with all covenants including the delinquency ratio threshold as defined in the Receivables Purchase Agreement. See further information at Note 3 of the "Notes to Condensed Consolidated Financial Statements."

As of September 30, 2009, we had a combined $513.1 million of available liquidity under our $320.0 million committed line of credit, $200.0 million committed line of credit, and $85.0 million revolving accounts receivable sales facility.

In September 2009, we issued $250.0 million of 5.125 percent First Mortgage Bonds due in 2022. The net proceeds from the issuance of $249.4 million (net of discounts and before Avista Corp.'s expenses) were used to retire variable rate short-term borrowings outstanding under our $320.0 million committed line of credit, and for general corporate purposes. In conjunction with the issuance of long-term debt, we cash settled interest rate swap agreements and received a total of $10.8 million.

On April 1, 2009, we redeemed the total amount outstanding ($61.9 million) of our Junior Subordinated Debt Securities held by AVA Capital Trust III (Long-term Debt to Affiliated Trusts). Concurrently, AVA Capital Trust III redeemed all of the Preferred Trust Securities issued to third parties ($60.0 million) and all of the Common Trust Securities issued to us ($1.9 million). The net redemption of $60.0 million was funded by borrowings under our $320.0 million committed line of credit agreement.

We expect net cash flows from operating activities and our committed line of credit agreements to provide adequate resources to fund:

• capital expenditures,

• dividends, and

• other contractual commitments.

AVISTA CORPORATION

In December 2006, we entered into a sales agency agreement with a sales agent to issue up to 2 million shares of our common stock from time to time. We issued 750,000 shares of common stock under this sales agency agreement in 2008. We will continue to evaluate issuing common stock in future periods; however, we are not currently planning to issue common stock for the remainder of 2009, other than for compensatory plans and the direct stock purchase and dividend reinvestment plan.

Over time, our operating cash flows usually do not fully support the amount required for 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. We are planning to issue long-term debt and common stock in 2010 in order to maintain our capital structure at an appropriate level for our business.

Due to market conditions and the decline in the fair value of pension plan assets, we contributed $48 million to the pension plan in 2009 as compared to the $28 million we contributed in 2008. We expect that our contribution for 2010 will be approximately $21 million. The determination of pension plan contributions in future periods is subject to multiple variables, most of which are beyond our control, including further changes to the fair value of pension plan assets and changes in actuarial assumptions (in particular the discount rate used in determining the projected benefit obligation).

Avista Utilities - Regulatory Matters

General Rate Cases

We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We will continue to file for rate adjustments to:

• provide for recovery of operating costs and capital investments, and

• more closely align earned returns with those allowed by regulators.

With regards to the timing and plans for future filings, the assessment of our need for rate relief and the development of rate case plans takes into consideration short-term and long-term needs, as well as specific factors that can affect the timing of rate filings. Such factors include, but are not limited . . .