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Avista Corp. Reports Earnings for the Second Quarter and Year-to-Date 2006

SPOKANE, Wash., Aug. 2 // -- Avista Corp. (NYSE: AVA) today reported net income of $13.5 million, or $0.27 per diluted share, for the second quarter of 2006, a decrease as compared to net income of $18.6 million, or $0.38 per diluted share, for the second quarter of 2005. For the six months ended June 30, 2006, Avista Corp.'s net income was $45.0 million, or $0.91 per diluted share, an increase as compared to net income of $28.8 million, or $0.59 per diluted share, for the six months ended June 30, 2005.

(Logo: http://www.newscom.com/cgi-bin/prnh/20040128/SFW031LOGO )

"We are on track for a good year in 2006 due to improved year-to-date earnings from Avista Utilities and the continued trend of earnings growth from Advantage IQ," said Avista Chairman and Chief Executive Officer Gary G. Ely. "We are satisfied with Avista Energy's operations, which are on track for the year as measured on an economic basis. However, its reported results continue to differ from economic results due to the required accounting for certain contracts and assets under management," Ely added.

Results for the second quarter of 2006 and the six months ended June 30, 2006 (YTD), as compared to the respective periods of 2005:

  ($ in thousands,
   except per-
   share data)           Q2 2006      Q2 2005     YTD 2006     YTD 2005

  Operating Revenues    $287,394     $272,832     $786,596     $635,496
  Income from
   Operations            $42,578      $49,219     $113,516      $87,402
  Net Income             $13,459      $18,604      $45,031      $28,793
  Net Income (Loss)
   by Business Segment:
  Avista Utilities       $16,879      $18,407      $43,051      $37,393
  Energy Marketing &
   Resource Management   $(4,610)       $(250)        $436      $(8,608)
  Advantage IQ            $1,558         $918       $2,985       $1,726
  Other                    $(368)       $(471)     $(1,441)     $(1,718)
  Contribution to
   earnings per
   diluted share by
   Business Segment:
  Avista Utilities         $0.34        $0.38        $0.87        $0.76
  Energy Marketing &
   Resource Management    $(0.09)      $(0.01)       $0.01       $(0.18)
  Advantage IQ             $0.03        $0.02        $0.06        $0.04
  Other                   $(0.01)      $(0.01)      $(0.03)      $(0.03)
  Total earnings
   per diluted share       $0.27        $0.38        $0.91        $0.59


  Second Quarter and Year-to-Date 2006 Highlights

Avista Utilities: For the second quarter of 2006 Avista Utilities' net income decreased as compared to the same period in 2005. This decrease was primarily due to the $3.2 million pre-tax gain on the sale of Avista's South Lake Tahoe, California natural gas distribution properties during the second quarter of 2005, as well as an increase in interest expense for the second quarter of 2006. During the first half of 2005, the company carried higher levels of short-term borrowings under its committed line of credit at relatively low interest rates. During the fourth quarter of 2005, the company essentially refinanced these borrowings on a long-term basis at a fixed interest rate of 6.25 percent. A result of this prudent long-term financing decision was an increase in interest expense for 2006 as compared to 2005. Gross margin increased for the second quarter of 2006 as compared to the second quarter of 2005 primarily due to lower power supply costs, the effects of the Jan. 1, 2006, Washington general rate increase and customer growth. The increase in gross margin was partially offset by an increase in other operating expenses and taxes other than income taxes.

Net income for Avista Utilities increased for the six months ended June 30, 2006, as compared to the six months ended June 30, 2005, due to several factors. Most significantly, electric resource costs were lower than the amount included in base retail rates. These lower costs were primarily the result of improved hydroelectric generation during the first half of the year. Avista Utilities' benefit under the Energy Recovery Mechanism (ERM) was $7.2 million for the first half of 2006 as compared to $0.7 million for the first half of 2005.

In June 2006, the Washington Utilities and Transportation Commission (WUTC) approved the modification of the ERM through a settlement agreement between Avista and the other parties in the proceeding. The settlement agreement provides for the continuation of the ERM with certain agreed-upon modifications and was effective retroactive to Jan. 1, 2006. The settling parties have agreed to review the ERM after five years.

Under the modified ERM, Avista's annual deadband is reduced from $9 million to $4 million. Annual power supply cost variances between $4 million and $10 million will be shared equally between Avista and its customers. As such, 50 percent of the annual power supply cost variance in this range is deferred for future surcharge or rebate to Avista's customers, and the remaining 50 percent is an expense of, or benefit to, Avista. Once the annual power supply cost variance from the amount included in base rates exceeds $10 million, 90 percent of the cost variance will be deferred for future surcharge or rebate. The remaining 10 percent of the variance beyond $10 million is an expense of, or benefit to, Avista without affecting current or future customer rates.

Also contributing to the increase in net income for the first half of 2006 was the general rate increase implemented in Washington on Jan. 1, 2006, and the sale of claims against Enron Corporation and certain of its affiliates during the first quarter of 2006.

During the first half of 2006, Avista Utilities' power and natural gas deferrals were reduced by $37.9 million. As of June 30, 2006, deferred power costs were $80.0 million and deferred natural gas costs were $29.7 million.

Avista is forecasting hydroelectric generation to be 104 percent of normal in 2006 assuming normal precipitation for the remainder of the year. This forecast may be revised based on precipitation, temperatures and other variables during the year.

Energy Marketing and Resource Management: This business segment had a net loss for the second quarter of 2006 due to the significant difference between the economic management and the required accounting for certain contracts and physical assets under the management of Avista Energy. The operations of Avista Energy are managed on an economic basis, reflecting contracts and assets under management at estimated market value, consistent with industry practices, which is different from the required accounting for certain contracts and physical assets under management. These differences primarily relate to Avista Energy's management of natural gas inventory and its control of natural gas-fired generation through a power purchase agreement, as well as certain other agreements. These differences had an estimated $7.9 million (or $0.16 per diluted share) after-tax negative effect on results for the second quarter of 2006 compared to an estimated $2.3 million (or $0.05 per diluted share) after-tax positive effect on results for the second quarter of 2005.

This business segment had net income for the first half of 2006 as compared to a significant net loss for the first half of 2005. The improved results were primarily due to Avista Energy's asset management activities and positive results from its natural gas end-user business and natural gas trading. The estimated difference between the economic management and the required accounting for certain contracts and physical assets under management had an estimated $5.3 million (or $0.11 per diluted share) after-tax negative effect on results for the six months ended June 30, 2006, as compared to an estimated $3.9 million (or $0.08 per diluted share) after-tax negative effect on results for the six months ended June 30, 2005.

Economic results for this segment were consistent with the company's expectations for the first half of 2006. A significant portion of the estimated $5.3 million difference between the economic management and the required accounting for certain contracts and physical assets under management for the first half of 2006 is expected to reverse in the first half of 2007 when the contracts are settled or realized. This assumes stable commodity prices and no additional transactions by Avista Energy. Until the contracts are settled or realized, this difference could also increase or decrease due to changes in forward market prices.

Advantage IQ: To more effectively communicate its identity in the marketplace and to enhance the understanding of the services they provide, Avista Advantage has changed its name to Advantage IQ. The earnings improvement at Advantage IQ for the second quarter and first half of 2006 as compared to the same periods in 2005 was primarily due to an increase in operating revenues resulting from customer growth. Advantage IQ's revenues increased by 25 percent for the six months ended June 30, 2006, as compared to the six months ended June 30, 2005, while the dollar volume of bills processed increased by 19 percent for the same period. Advantage IQ has over 350 clients representing approximately 192,000 billed sites in North America.

Other Business Segment: The net loss in the Other business segment was less for the second quarter and first half of 2006 as compared to the second quarter and first half of 2005, primarily due to the improved performance of Advanced Manufacturing and Development (doing business as METALfx).

Liquidity and Capital Resources: Total debt outstanding for Avista Corp. decreased approximately $64 million in the first half of 2006 primarily due to operating cash flows in excess of utility capital expenditures, dividends and other funding requirements.

Avista Utilities plans to continue to invest in its generation, transmission and distribution systems with a focus on providing reliable service to its customers. The utility capital budget is approximately $160 million for 2006, and for the first half of the year these capital expenditures totaled approximately $70 million.

Potential Holding Company Formation: At the 2006 Annual Meeting on May 11, Avista Corp. shareholders approved a proposal to proceed with a statutory share exchange, which would change the company's organization to a holding company structure.

The holding company is expected to ultimately become the parent to Avista Utilities and Avista Capital, which is the parent to the company's non-utility subsidiaries. Avista Corp. received approval from the Federal Energy Regulatory Commission on April 18, 2006, (conditioned on approval by the state regulatory agencies) and from the Idaho Public Utilities Commission on June 30, 2006. Avista Corp. also has filed for approval from the utility regulators in Washington, Oregon and Montana. The statutory share exchange is subject to the receipt of the remaining state regulatory approvals and the satisfaction of other conditions. The company anticipates that the statutory share exchange and the holding company structure implementation will not be completed earlier than the fourth quarter of 2006.

Earnings Guidance and Outlook

For 2006, Avista Corp. is confirming its guidance for consolidated earnings to be in the range of $1.30 to $1.45 per diluted share. The company expects Avista Utilities to contribute in the range of $1.00 to $1.15 per diluted share for 2006. The outlook for the utility assumes, among other variables, near normal weather, temperatures and hydroelectric generation for the remainder of the year. The 2006 outlook for the Energy Marketing and Resource Management segment is a contribution range of $0.20 to $0.30 per diluted share, excluding any positive or negative effects related to the required accounting for certain contracts and physical assets under management. Avista Corp. expects Advantage IQ to contribute in a range of $0.10 to $0.12 per diluted share and the Other business segment to lose $0.05 per diluted share.

Avista Corp. is an energy company involved in the production, transmission and distribution of energy as well as other energy-related businesses. Avista Utilities is a company operating division that provides service to 339,000 electric and 298,000 natural gas customers in three Western states. Avista's non-regulated subsidiaries include Advantage IQ and Avista Energy. Avista Corp.'s stock is traded under the ticker symbol "AVA." For more information about Avista, please visit http://www.avistacorp.com/ .

NOTE: Avista Corp. and the Avista Corp. logo are trademarks of Avista Corporation.

NOTE: Avista Corp. will host a conference call on August 2, 2006, at 10:30 a.m. EDT to discuss this report with financial analysts. Investors, news media and other interested parties may listen to the simultaneous webcast of this conference call. To register for the webcast, please go to http://www.avistacorp.com/ .

A replay of the conference call will be available until August 9, 2006. Call 888-286-8010, passcode 44199070 to listen to the replay. The webcast will be archived at http://www.avistacorp.com/ for one year.

The attached condensed consolidated statements of income, condensed consolidated balance sheets, and financial and operating highlights are integral parts of this earnings release.

This news release contains forward-looking statements, including statements regarding the company's current expectations for future financial performance and cash flows, capital expenditures, the company's current plans or objectives for future operations, future hydroelectric generation projections and other factors, which may affect the company in the future. Such statements are subject to a variety of risks, uncertainties and other factors, most of which are beyond the company's control and many of which could have significant impact on the company's operations, results of operations, financial condition or cash flows and could cause actual results to differ materially from the those anticipated in such statements.

The following are among the important factors that could cause actual results to differ materially from the forward-looking statements: weather conditions, including the effect of precipitation and temperatures on the availability of hydroelectric resources and the effect of temperatures on customer demand; changes in wholesale energy prices that can affect, among other things, cash requirements to purchase electricity natural gas for retail customers and natural gas fuel for electric generation, as well as the market value of derivative assets and liabilities and unrealized gains and losses; volatility and illiquidity in wholesale energy markets, including the availability and prices of purchased energy and demand for energy sales; the effect of state and federal regulatory decisions affecting the ability of the Company to recover its costs and/or earn a reasonable return, including, but not limited to, the disallowance of previously deferred costs; the outcome of pending regulatory and legal proceedings arising out of the "western energy crisis" of 2001 and 2002, and including possible retroactive price caps and resulting refunds; the outcome of legal proceedings and other contingencies concerning the Company or affecting directly or indirectly its operations; the potential effects of any legislation or administrative rulemaking passed into law; the potential impact of changes to electric transmission ownership, operation and governance, such as the formation of one or more regional transmission organizations or similar entities; wholesale and retail competition including, but not limited to, electric retail wheeling and transmission costs; the ability to relicense and maintain licenses for hydroelectric generating facilities at cost-effective levels with reasonable terms and conditions; unplanned outages at any Company-owned generating facilities or the inability of generating facilities to operate as intended; unanticipated delays or changes in construction costs, as well as the ability to obtain required operating permits with respect to present or prospective facilities; natural disasters that can disrupt energy delivery as well as the availability and costs of materials and supplies and support services; blackouts or large disruptions of transmission systems, which can have an impact on the Company's ability to deliver energy to its customers; the potential for future terrorist attacks or other malicious acts, particularly with respect to utility plant 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 hydroelectric resources; changes in future economic conditions in the Company's service territory and the United States in general, including inflation or deflation and monetary policy; changes in industrial, commercial and residential growth and demographic patterns in the Company's service territory; the loss of significant customers and/or suppliers; failure to deliver on the part of any parties from which the Company purchases and/or sells capacity or energy; changes in the creditworthiness of customers and energy trading counterparties; the Company's ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by various factors including the Company's credit ratings, interest rate fluctuations and other capital market conditions; the effect of any potential change in the Company's credit ratings; changes in actuarial assumptions, the interest rate environment and the actual return on plan assets with respect to the Company's pension plan, which can affect future funding obligations, costs and pension plan liabilities; increasing health care costs and the resulting effect on health insurance premiums paid for employees and on the obligation to provide postretirement health care benefits; increasing costs of insurance, changes in coverage terms and the 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 the ability to recruit and retain employees; changes in rapidly advancing technologies, possibly making some of the current technology quickly obsolete; changes in tax rates and/or policies; changes in, and compliance with, environmental and endangered species laws, regulations, decisions and policies, including present and potential environmental remediation costs; and changes in the strategic business plans of the Company and/or any of its subsidiaries, which may be affected by any or all of the foregoing, including the entry into new businesses and/or the exit from existing businesses.

For a further discussion of these factors and other important factors, please refer to the company's Annual Report on Form 10-K for the year ended Dec. 31, 2005 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. The forward-looking statements contained in this news release speak only as of the date hereof. The company undertakes 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 management to predict all of such factors, nor can it assess the impact of each such factor on the company's 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.

                             AVISTA CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 (Dollars in Thousands except Per Share Amounts)

                                                       Six Months Ended
                                   Second Quarter          June 30,
                                   2006       2005      2006       2005

  Operating revenues             $287,394   $272,832  $786,596   $635,496

  Operating expenses:
    Resource costs                140,282    130,975   462,014    353,132
    Other operating expenses       64,787     58,683   126,825    118,013
    Depreciation and
     amortization                  21,424     21,388    43,852     44,094
    Utility taxes other than
     income taxes                  18,323     15,776    40,389     36,064
      Total operating expenses    244,816    226,822   673,080    551,303

  Gain on sale of utility
   properties                          --      3,209        --      3,209

  Income from operations           42,578     49,219   113,516     87,402

  Other income (expense):
    Interest expense, net of
     capitalized interest         (23,329)   (22,533)  (46,653)   (45,519)
    Other income - net              2,078      1,840     4,553      3,662
      Total other income
       (expense) - net            (21,251)   (20,693)  (42,100)   (41,857)

  Income before income taxes       21,327     28,526    71,416     45,545

  Income taxes                      7,868      9,922    26,385     16,752


  Net income                      $13,459    $18,604   $45,031    $28,793


  Weighted-average common shares
   outstanding (thousands),
   basic                           48,958     48,508    48,877     48,493

  Weighted-average common shares
   outstanding (thousands),
   diluted                         49,694     48,904    49,498     48,893

  Total earnings per common
   share, basic                     $0.27      $0.38     $0.92      $0.59

  Total earnings per common
   share, diluted                   $0.27      $0.38     $0.91      $0.59


  Dividends paid per common
   share                           $0.140     $0.135    $0.280     $0.270

    Issued August 2, 2006


                              AVISTA CORPORATION
                 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                              (Dollars in Thousands)

                                             June 30,        December 31,
                                               2006              2005

  Assets

    Cash and cash equivalents                 $35,849          $25,917
    Restricted cash                            40,140           25,634
    Accounts and notes receivable             211,161          502,947
    Current energy commodity derivative
     assets                                   416,906          918,609
    Other current assets                      326,128          297,261
    Total net utility property              2,156,918        2,126,417
    Non-utility properties and
     investments-net                           60,255           77,731
    Non-current energy commodity
     derivative assets                        383,883          511,280
    Other property and investments-net         61,384           61,944
    Regulatory assets for deferred
     income taxes                             108,737          114,109
    Other regulatory assets                    29,940           26,660
    Non-current utility energy commodity
     derivative assets                         61,405           46,731
    Power and natural gas deferrals           109,747          147,622
    Unamortized debt expense                   45,627           48,522
    Other deferred charges                     18,957           17,110

       Total Assets                        $4,067,037       $4,948,494

  Liabilities and Stockholders' Equity

    Accounts payable                         $230,095         $511,427
    Current energy commodity derivative
     liabilities                              398,472          906,794
    Current portion of long-term debt         201,435           39,524
    Short-term borrowings                       7,000           63,494
    Other current liabilities                 254,250          208,649
    Long-term debt                            820,400          989,990
    Long-term debt to affiliated trusts       113,403          113,403
    Preferred stock (subject to
     mandatory redemption)                     26,250           26,250
    Non-current energy commodity
     derivative liabilities                   378,549          488,644
    Regulatory liability for utility
     plant retirement costs                   191,760          186,635
    Deferred income taxes                     470,887          488,934
    Other non-current liabilities and
     deferred credits                         155,831          153,622

       Total Liabilities                    3,248,332        4,177,366

    Common stock - net (49,043,990 and
     48,593,139 outstanding shares)           630,380          620,598
    Retained earnings and accumulated
     other comprehensive loss                 188,325          150,530

       Total Stockholders' Equity             818,705          771,128

       Total Liabilities and
        Stockholders' Equity               $4,067,037       $4,948,494

    Issued August 2, 2006


                              AVISTA CORPORATION
                      FINANCIAL AND OPERATING HIGHLIGHTS
                            (Dollars in Thousands)

                                                        Six Months Ended
                                   Second Quarter            June 30,
                                 2006         2005      2006         2005

  Avista Utilities
      Retail electric revenues $126,394     $115,372  $271,788     $251,219
      Retail kWh sales (in
       millions)                  2,011        1,930     4,303        4,180
      Retail electric
       customers at end of
       period                   339,091      331,311   339,091      331,311

      Wholesale electric
       revenues                 $33,278      $32,743   $72,429      $60,477
      Wholesale kWh sales (in
       millions)                    929          864     1,404        1,362

      Sales of fuel              $8,310      $16,606   $39,247      $26,253
      Other electric revenues    $4,513       $4,025   $11,038       $7,843

      Retail natural gas
       revenues                 $63,019      $52,674  $229,980     $191,868
      Wholesale natural gas
       revenues                 $19,682      $13,676   $50,897      $13,790
      Transportation and other
       natural gas revenues      $2,880       $3,223    $5,987       $6,585
      Total therms delivered
       (in thousands)           121,150      110,244   342,774      293,337
      Retail natural gas
       customers at end of
       period                   298,490      289,688   298,490      289,688

      Income from operations
       (pre-tax)                $49,338      $48,903  $112,250     $100,509
      Net income                $16,879      $18,407   $43,051      $37,393

  Energy Marketing and
   Resource Management
      Gross margin (operating
       revenues less resource
       costs)                   $(3,881)      $3,773    $7,534      $(4,811)
      Realized gross margin     $12,197       $3,565   $17,472      $12,493
      Unrealized gross margin  $(16,078)        $208   $(9,938)    $(17,304)
      Income (loss) from
       operations (pre-tax)     $(8,906)       $(973)  $(2,586)    $(14,781)
      Net income (loss)         $(4,610)       $(250)     $436      $(8,608)
      Electric sales (millions
       of kWhs)                   6,891        6,902    13,870       13,670
      Natural gas sales
       (thousands of
       dekatherms)               46,367       31,221    96,530       86,116

  Advantage IQ
      Revenues                   $9,545       $7,703   $18,622      $14,943
      Income from operations
       (pre-tax)                 $2,563       $1,658    $4,962       $3,134
      Net income                 $1,558         $918    $2,985       $1,726

  Other
      Revenues                   $5,458       $4,784   $10,751       $8,632
      Loss from operations
       (pre-tax)                  $(417)       $(369)  $(1,110)     $(1,460)
      Net loss                    $(368)       $(471)  $(1,441)     $(1,718)

    Issued August 2, 2006
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SOURCE: Avista Corp.

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