As filed with the Securities and Exchange Commission on June 4, 2001February 11, 2002

                                                      Registration No. [333-        ]333-
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
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                                    FORM S-4

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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                               AVISTA CORPORATION
             (Exact name of registrant as specified in its charter)

WASHINGTON 4931 91-0462470 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) incorporation or organization)
1411 EAST MISSION AVENUE SPOKANE, WASHINGTON 99202 (509) 489-0500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) David J. Meyer, Esq. J. Anthony Terrell, Esq. Avista Corporation Thelen Reid & Priest LLP 1411 East Mission Avenue 40 West 57th Street Spokane, Washington 99202 New York, New York 10019 (509) 489-4316 (212) 603-2108 (Names and addresses, including zip codes, and telephone numbers, including area codes, of agents for service) ---------------- Approximate date of commencement of proposed sale of the securities to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ---------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] -------------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE AMOUNT OF SECURITIES TO BE BE PRICE OFFERING REGISTRATION REGISTERED REGISTERED PER UNIT (1) PRICE (1) FEE - -------------------------------------------------------------------------------- 9.75% Senior Notes due $400,000,000 100% $400,000,000 $100,000 June 1, 2008 - --------------------------------------------------------------------------------
- ------------------------------------------- ---------------- --------------- ------------------ ---------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED PER UNIT (1) PRICE (1) FEE - ------------------------------------------- ---------------- --------------- ------------------ ---------------- First Mortgage Bonds, 7.75% Series due 2007 $150,000,000 100% $150,000,000 $35,850 - ------------------------------------------- ---------------- --------------- ------------------ ----------------
(1) Determined solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2) promulgated under the Securities Act. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a)THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), may determine.MAY DETERMINE. ================================================================================ Subject to completion, dated June 4, 2001, 2002 PROSPECTUS AVISTA CORPORATION EXCHANGE OFFER AVISTA CORP. IS OFFERING TO ISSUE ITS 9.75% SENIOR NOTES7.75% FIRST MORTGAGE BONDS DUE JUNE 1, 20082007 (REGISTERED) IN EXCHANGE FOR ITS 9.75% SENIOR NOTES7.75% FIRST MORTGAGE BONDS DUE JUNE 1, 20082007 (UNREGISTERED) THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, , 20012002 UNLESS EXTENDED o The new notes willbonds will: o bear interest at 9.75%7.75% per annum, and o mature on JuneJanuary 1, 2008, and o be redeemable, at the option of Avista Corp., as described in this prospectus.2007. These terms are the same as the terms of the old notes.bonds. The new notesbonds will not be subject to any restrictions on transfer, except in certain circumstances relating to broker-dealers described in this prospectus. o Avista Corp. will accept all notesbonds that noteholdersbondholders properly tender and do not withdraw before the expiration of the exchange offer. o You will not recognize any income, gain or loss for U.S. federal income tax purposes as a result of the exchange. o Like the old notes,bonds, the new notesbonds will be unsecured.secured by a lien on Avista Corp.'s facilities for the generation, transmission and distribution of electric energy and for the storage and distribution of natural gas. o The exchange offer is not conditioned on the tender of any minimum principal amount of old notes.bonds. o There will likely be no public market for the new notes.bonds. ---------------- SEE "RISK FACTORS" BEGINNING ON PAGE 10 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE MAKING ANY DECISION CONCERNING THIS EXCHANGE OFFER. ---------------- The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. , 20012002 The information provided in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to exchange these securities and it is not soliciting an offer to exchange these securities in any jurisdiction in which the offer or exchange is not permitted. TABLE OF CONTENTS PAGE Summary.............................................3 Risk Factors.......................................10 Avista Corporation.................................12 Use of Proceeds....................................15 Certain Regulatory Matters.........................15 The Exchange Offer.................................17 Description of the New Bonds.......................25 Bank Credit Agreements.............................36 Certain U.S. Federal Income Tax Considerations.....37 Plan Of Distribution...............................40 Where You Can Find More Information................41 Safe Harbor for Forward-Looking Statements.........42 Legal Matters......................................43 Experts............................................43 THIS PROSPECTUS INCORPORATES BY REFERENCE IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT AVISTA CORP. THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS. SEE "WHERE YOU CAN FIND MORE INFORMATION". YOU MAY OBTAIN COPIES OF DOCUMENTS CONTAINING SUCH INFORMATION FROM US, WITHOUT CHARGE, BY EITHER CALLING OR WRITING TO US AT: AVISTA CORPORATION 1411 EAST MISSION AVENUE SPOKANE, WASHINGTON 99202-2600 ATTENTION: TREASURER TELEPHONE: (509) 489-0500 IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST DOCUMENTS FROM US NO LATER THAN ___, 2001,, 2002, WHICH IS FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE OF THE EXCHANGE OFFER ON ______, 2001. TABLE OF CONTENTS PAGE ---- Summary..............................................................3 Risk Factors.........................................................9 Avista Corporation..................................................11 Capitalization......................................................14 Use of Proceeds.....................................................14 The Exchange Offer..................................................15 Description of the New Notes........................................23 Certain U.S. Federal Income Tax Considerations......................60 Plan of distribution................................................64 Where you can find more information.................................65 Legal Matters.......................................................65 Experts.............................................................65, 2002. -------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR IN THE LETTER OF TRANSMITTAL IN CONNECTION WITH THE EXCHANGE OFFER. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OTHER THAN THIS PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR INCORPORATED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO EXCHANGE THE NEW NOTESBONDS AND IT IS NOT SOLICITING AN OFFER TO EXCHANGE THE NEW NOTESBONDS IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER IS NOT PERMITTED. 2 SUMMARY This summary, which is presented solely to furnish limited introductory information regarding Avista Corporation (Avista Corp. or the Company), the exchange offer and the new notes,bonds, has been selected from the detailed information contained elsewhere in this prospectus (including the documents incorporated by reference). This summary does not contain all of the information that you should consider before making any investment decision.a decision to participate in the exchange offer. The terms "we", "us" and "our" refer to Avista Corp. and, when applicable, its subsidiaries. You should read the entire prospectus carefully.carefully, including the detailed financial and other information incorporated by reference in this prospectus and the information contained in the section entitled RISK FACTORS. AVISTA CORPORATION GENERAL Avista Corp., which was incorporated in the State of Washington in 1889, is an energy company involved in the production, transmission and distribution of energy as well as other energy-related businesses. Avista Utilities, which is an operating division of Avista Corp. and not a separate entity, provides electric and natural gas utility company having operations locatedservice to customers in the Pacific Northwest.four western states and is subject to state and federal regulation. We also have subsidiaries involved in energy trading and marketing and information and technology businesses. As of March 31, 2001, our employees included approximately 1,460 people in our utility operations and approximately 800 people in our subsidiary businesses. Our corporate headquarters are in Spokane, Washington, which serves as the Inland Northwest's center for manufacturing, transportation, health care, education, communication, agricultural and service businesses. Our operations are organized into four linesAvista Utilities provides electricity distribution and transmission services to a total of business--Avistaapproximately 317,000 retail customers in eastern Washington and northern Idaho, and natural gas distribution service to approximately 284,000 retail customers in parts of Washington, Idaho, Oregon and California. Avista Utilities anticipates residential and commercial electric load growth to average approximately 3.0% annually for the next five years and natural gas load growth, including transportation volumes, to average for the next five years approximately 1.6% annually in the Washington and Idaho service area and approximately 2.5% annually in the Oregon and South Lake Tahoe service areas. In addition to providing electric transmission and distribution services, Avista Utilities generates electricity. It owns and operates eight hydroelectric projects, a wood-waste fueled generating station and two natural gas-fired combustion turbine generating units. Avista Utilities also owns a 15% share in a two-unit coal-fired generating facility and leases and operates two additional natural gas-fired combustion turbine generating units. These facilities have a maximum capacity of approximately 1,470 megawatts ("MW"), of which 65% is hydroelectric and 35% is thermal. We also have a 50 percent interest in the 280 MW Coyote Springs 2 project under construction near Boardman, Oregon. See "--Recent Developments -- Asset Sales". Avista Utilities also engages in wholesale sales and purchases of electric capacity and energy. Avista Corp.'s Energy Trading and Marketing Informationline of business excludes Avista Utilities' regulated utility operations, and Technology,is comprised of Avista Energy, Inc. ("Avista Energy") and Avista Ventures.Power, LLC ("Avista Power"). Avista Energy is an electricity and natural gas trading and marketing business. Avista Power has a 49% ownership interest in a 270 MW natural gas combustion turbine facility in Rathdrum, Idaho, which commenced commercial operation in September 2001. RECENT DEVELOPMENTS RECOVERY OF PURCHASED POWER COSTS Beginning in the second quarter of 2000, the price of power in western wholesale markets rose to unprecedented levels and became much more volatile. In the fourth quarter of 2000 and continuing through the third quarter of 2001, we were required to purchase above-normal amounts of electric energy in the wholesale market to meet our retail demand. This was primarily due to reduced availability of hydroelectric resources due to low streamflow levels. The combination of high prices and increased amounts purchased caused our purchased power costs to be far in excess of the levels recovered from retail customers under current rates. In August 2000 the Washington Utilities and Transportation Commission ("WUTC") issued an order permitting us to record as an expense on our income statement only that portion of our purchased power costs which was being recovered from retail customers under existing rates. Under the WUTC order, we were permitted to "defer" the recognition on our income statement of the portion of our purchased power costs which was in excess of the level then being 3 recovered from retail customers. Instead, we were allowed to record these excess costs as a "regulatory asset" on our balance sheet for possible recovery in the future. We already had similar authority in Idaho under a previously established power cost adjustment mechanism. Our deferral balances have reached levels that made it necessary for the Company to file for rate increases with the WUTC and the Idaho Public Utility Commission ("IPUC") as described below. As of December 31, 2001, the total amount of cash expended for excess purchased power costs which has been deferred on our balance sheet was $235 million, of which $162 million was attributable to Washington customers and $73 million was attributable to Idaho customers. REQUESTED ELECTRIC RATE INCREASES September WUTC Order. In September 2001, the WUTC issued an order approving a 25% temporary electric surcharge, subject to refund, for all classes of Washington customers, for a period of 15 months commencing October 2001. The order also terminated the previously approved deferred accounting mechanism, as of January 1, 2002. We had requested a 36.9% surcharge over a period of 27 months. The authorized surcharge will not be adequate to offset the entire Washington portion of our deferred cost balances. The surcharge will allow us to reduce the deferred cost balance by $125 million. Of this amount, $71 million will be additional cash revenue and $54 million was a non-cash credit taken on October 1, 2001 against the deferred cost balance. The amount so credited, which was previously being amortized to revenue over a period of years, resulted from an unrelated matter. The surcharge will have no material impact on net income since the deferred costs are amortized to offset the increase in revenues. The WUTC ordered us to file a general rate case in December 2001 to determine the prudency of our purchased power costs as well as to address other matters. October IPUC Order. In October 2001, the IPUC issued an order approving a 14.7% power cost adjustment ("PCA") surcharge, and extending an existing 4.7% PCA surcharge, for all classes of Idaho customers for 12 months commencing immediately. The surcharge will allow us to reduce the deferred cost balance by approximately $58 million. Of this amount, approximately $24 million will be additional cash revenue and approximately $35 million will be an unrelated non-cash credit for costs being amortized through the end of 2002. The IPUC indicated that it could, upon further review, authorize extensions of the surcharges. As in the case of the Washington surcharge, the Idaho PCA surcharge will have no material impact on net income. November WUTC Deferred Cost Filing. In November 2001, prior to filing our general rate case (which generally can take up to 11 months to be resolved), we filed a request with the WUTC for an expedited procedural schedule to determine the prudency and recoverability of the Washington portion of our deferred purchased power costs accrued through September 30, 2001. A procedural schedule has been set and final legal briefs in this prudence case are due March 22, 2002. This order would not result in any immediate rate changes, but will determine the definitive amount of deferred power costs that will ultimately be recovered from retail customers. Any such rate changes would be addressed in the general rate case. December WUTC General Rate Filing. On December 3, 2001, we filed a general rate case with the WUTC requesting, among other things: o an interim rate increase, subject to refund, of 10% above current electric prices (including the September 2001 surcharge) to offset increased costs that are in excess of those being recovered through existing rates; o the issuance of an order implementing a temporary deferred accounting mechanism to run from January 1, 2002 until the conclusion of the general rate case, to reflect cash spent to cover power supply-related costs to serve retail customer needs but not yet reflected in rates; o recovery of costs associated with the addition of the new Coyote Springs 2 power project and other electric generation projects built to serve retail customer needs; o establishment of a PCA mechanism to adjust electric rates up or down with changes in the market and in hydroelectric conditions, similar to the existing Idaho PCA mechanism that has been in place since 1989; and 4 o a 12.75% rate of return on common equity. The net effect of the requested increases, if granted, would be: o a permanent 22.5% increase over existing rates (excluding the September 2001 surcharge) which would have a positive impact on net income; plus o a temporary 14.9% increase over existing rates (excluding the September 2001 surcharge), designed to recover the remaining balance of deferred purchased power costs over a period of 5 years from the end of the general rate case, which would, like the surcharges currently in effect, have substantially no impact on net income. December WUTC Order Granting Accounting Petition. Effective December 28, 2001, the WUTC issued an order authorizing the Company to defer 90% of its excess power supply-related costs until the conclusion of the general rate case. Both the prudence of these costs and the ratemaking treatment are subjects of the general rate case and are subject to final review and approval by the WUTC. RECENT GAS COST ADJUSTMENTS On July 6, 2001, we filed requests for purchased gas cost adjustments ("PGA") with the WUTC and the IPUC. A PGA increase of 12.2% was authorized by the WUTC, effective on August 9, 2001. A PGA increase of 11.5% was authorized by the IPUC, effective on September 1, 2001. Total deferred purchased gas costs were approximately $53 million as of December 31, 2001. We estimate that the PGA rate changes will increase revenues by approximately $25 million per year. Based on current PGAs in place and current natural gas prices, we expect that the deferred natural gas cost balance will be fully recovered by December 2002. However, there will be no material impact on net income as natural gas costs are amortized to offset the increase in revenues. ASSET SALES Coyote Springs 2. On December 12, 2001, we sold 50% of our interest in the Coyote Springs 2 project, representing 140 MW of a 280 MW combined-cycle natural gas-fired plant currently under construction near Boardman, Oregon to Mirant Americas Development, Inc. ("Mirant"). National Energy Production Corporation ("NEPCO"), a wholly-owned subsidiary of Enron Corporation, is the contractor responsible for the engineering, procurement and construction of the Coyote Springs 2 project. The project is planned to begin commercial operation in the third quarter of 2002. Avista Corp. and Mirant will share equally in the costs of construction, operation and output from the plant. As of December 12, 2001, we had invested approximately $92.7 million in the project, which has a total expected cost of $185.4 million. Combustion Turbines. In November 2001, our subsidiary, Avista Power, announced its intention to sell three combustion turbine units being manufactured by General Electric Company. The expected proceeds will be approximately $46 million in cash over a period commencing November 2001 and continuing through July 2002. We recorded an $8.2 million pre-tax impairment charge related to these assets in September 2001. Avista Communications. In September 2001, we announced our intention to dispose of our interest in Avista Communications, our telecommunications affiliate, and thereby exit from the telecommunication service provider business. To date we have announced dispositions of assets and operations in Idaho, Montana, Washington and Wyoming. Complete divestiture is expected to be finalized in mid-2002. As a result of such divestitures, we recorded a $58.4 million pre-tax impairment charge related to these assets in September 2001. RATINGS DOWNGRADE On December 11, 2001, Fitch, Inc. downgraded our credit ratings. Among those ratings downgraded was our senior secured debt, which was downgraded from BBB with a negative outlook to BBB- with a stable outlook. In October 2001, Moody's Investor Service and Standard & Poor's downgraded our credit ratings. Among those ratings downgraded was our senior secured debt, which was downgraded from Baa1 to Baa3 with a negative outlook by Moody's Investor Service and from BBB to BBB- with a negative outlook by Standard & Poor's. Also downgraded was our overall corporate credit rating, which is now rated Ba1 with a negative outlook by Moody's Investor Service and BB+ with a negative outlook by Standard & Poor's. 5 ENRON EXPOSURE Both Avista Energy and Avista Corp. (through the Avista Utilities division) engage in physical and financial transactions for the purchase and sale of electric energy and capacity and natural gas. Both companies have done considerable business with several affiliates of Enron Corporation ("Enron"). We have both short-term and long-term contracts with the Enron affiliates. Avista Corp.'s long-term contracts with Enron affiliates have remaining terms ranging from 1 to 3 years. Avista Energy's long-term contracts with Enron affiliates have remaining terms ranging from 1 to 9 years. On December 2, 2001, Enron Corporation and certain of its affiliates (including certain entities with which is an operating divisionwe have outstanding transactions) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy filing constitutes a default under Avista Corp.'s and Avista Energy's existing contracts with Enron affiliates, and Avista Corp. and Avista Energy have terminated substantially all the contracts and have suspended all trading activities with Enron and its affiliates. As of December 31, 2001, Avista Corp. and Avista Energy had accounts receivable from Enron and its affiliates of $3.1 million and $14.1 million, respectively. Our contracts with each Enron affiliate provide that, upon termination, the net settlement of accounts receivable and accounts payable with such entity will be netted against the mark-to-market value of the terminated forward contracts with such entity. We currently estimate that, for each of Avista Corp. and not a separate entity, representsAvista Energy, our net mark-to-market liability to Enron entities in respect of terminated forward contracts substantially exceeds the regulated utility operations. Avista Capital, a wholly-owned subsidiarytotal net receivables from these entities. We further estimate that the net mark-to-market liability to Enron entities in respect of terminated forward contracts of Avista Corp., owns all and Avista Energy, taken together, exceeds total net receivables from these entities by less than $30 million. Any claims by the Enron entities for amounts which we might owe in respect of the subsidiary companies engagedterminated forward contracts would be subject to any defenses and counterclaims which we may have. Our estimates of the mark-to-market values of terminated forward contracts are based on data currently available and on assumptions as to future market prices and other information. While we believe that our assumptions are reasonable, they are subject to change and ultimately could be challenged by the Enron entities or their bankruptcy trustees. NEPCO, the contractor for the Coyote Springs 2 project, was not included in the initial bankruptcy filings made by Enron and its affiliates. However, NEPCO's obligations were guaranteed by Enron, and the bankruptcy filing by Enron is an event of default under the Coyote Springs 2 construction contract. NEPCO and Coyote Springs 2, LLC have amended the construction contract to, among other linesthings, authorize Coyote Springs 2, LLC to make immediate draws under a letter of business.credit posted to secure NEPCO's performance and to permit Coyote Springs 2, LLC to pay third-party subcontractors of NEPCO directly. Coyote Springs 2, LLC is continuing to assess the ability of NEPCO to perform its obligations under the construction contract and may need to exercise additional remedies in the event the impact of the Enron bankruptcy prevents NEPCO from performing its obligations under the construction contract. Avista Corp. is party to power exchange arrangements with a remaining life of 15 years whereby Enron Power Marketing Inc. ("EPMI") (one of the Enron affiliates which filed for bankruptcy protection) purchases and sells capacity and energy from and/or to Avista Utilities and Portland General Electric Company. We cannot predict either (1) what effect, if any, the bankruptcy proceedings will have upon EPMI's performance of its obligations under these arrangements or (2) the effect, if any, of nonperformance on our business or financial condition. THE EXCHANGE OFFER GENERAL Avista Corp. is offering to exchange $1,000 in principal amount of new notesbonds for each $1,000 in principal amount of old notesbonds that noteholdersbondholders properly tender and do not withdraw before the expiration date. Avista Corp. will issue the new notesbonds on or promptly after the expiration date. There is $400,000,000$150,000,000 in aggregate principal amount of old notesbonds outstanding. See THE EXCHANGE OFFER. EXPIRATION DATE The exchange offer will expire at 5:00 p.m., New York City time, on , 20012002 unless extended. If extended, the term "expiration date" will mean the latest date and time to which the exchange offer is extended. Avista Corp. will accept for exchange any and all old notesbonds which are properly tendered in the exchange offer and not withdrawn before 5:00 p.m., New York City time, on the expiration date. 6 RESALE OF NEW NOTESBONDS Based on interpretive letters written by the staff of the Securities and Exchange Commission to companies other than Avista Corp., Avista Corp. believes that, subject to certain exceptions, the new notesbonds may generally be offered for resale, resold and otherwise transferred by any holder thereof, without compliance with the registration and prospectus delivery provisions of the Securities Act of 1933. However, any holder who is an "affiliate" of Avista Corp. within the meaning of Rule 405 under the Securities Act would have to comply with these provisions unless an exemption was available. If Avista Corp.'s belief is inaccurate, holders of new notesbonds who offer, resell or otherwise transfer new notesbonds in violation of the Securities Act may incur liability under that Act. Avista Corp. will not assume or indemnify holders against this liability. 3 CONDITIONS TO THE Avista Corp. may terminate the exchange offer EXCHANGE OFFER before the expiration date if it determines that its ability to proceed with the exchange offer could be materially impaired due to o any legal or governmental action, o any new law, statute, rule or regulation, or o any interpretation by the staff of the SEC of any existing law, statute, rule or regulation. TENDER PROCEDURES - If you wish to tender old notesbonds that are BENEFICIAL OWNERS registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. IF YOU ARE A BENEFICIAL HOLDER, YOU SHOULD FOLLOW THE INSTRUCTIONS RECEIVED FROM YOUR BROKER OR NOMINEE WITH RESPECT TO TENDERING PROCEDURES AND CONTACT YOUR BROKER OR NOMINEE DIRECTLY. TENDER PROCEDURES - If you are a registered holder of old notesbonds and REGISTERED HOLDERS AND you wish to participate in the exchange offer, you DTC PARTICIPANTS must complete, sign and date the letter of transmittal delivered with this prospectus, or a facsimile thereof. If you are a participant in The Depository Trust Company and you wish to participate in the exchange offer, you must instruct DTC to transmit to the exchange agent a message indicating that you agree to be bound by the terms of the letter of transmittal. You should mail or otherwise transmit the letter of transmittal or facsimile (or DTC message), together with your old notesbonds (in book-entry form if you are a participant in DTC) and any other required documentation to Chase Manhattan Bank and Trust Company, National Association,Citibank, N.A., as exchange agent. GUARANTEED DELIVERY If you are a registered holder of old notesbonds and PROCEDURES you wish to tender them, but they are not immediately available or you cannot deliver them or the letter of transmittal to the exchange agent prior to the expiration date, you must tender your old notesbonds according to special guaranteed delivery procedures. See THE EXCHANGE OFFER - "Procedures for Tendering - Registered Holders and DTC Participants - Registered Holders" on page 18.22. WITHDRAWAL RIGHTS You may withdraw tenders of old notesbonds at any time before 5:00 p.m., New York City time, on the expiration date. CERTAIN FEDERAL INCOME TAX The exchange of new notesbonds for old notesbonds will not TAX CONSIDERATIONS be a taxable event for U.S. federal income tax purposes. As a result, you will not recognize any income, gain or loss with respect to the exchange. 7 EFFECT ON HOLDERS OF If you are a holder of old bonds and do not tender OLD BONDS your old bonds in the exchange offer, you will continue to hold the old bonds and you will be entitled to all the rights and limitations applicable to the old bonds in the mortgage, except for any rights under the registration rights agreement that by their terms terminate upon the consummation of the exchange offer. CONSEQUENCES OF All untendered old bonds will continue to be FAILURE TO EXCHANGE subject to the restrictions on transfer provided for in the old bonds. In general, the old bonds may not be offered or sold unless registered under the Securities Act of 1933, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act of 1933 and applicable state securities laws. Other than the new bonds being registered in connection with the exchange offer, we do not currently anticipate that we will register the old bonds under the Securities Act of 1933. EXCHANGE AGENT Chase Manhattan Bank and Trust Company, National AssociationCitibank, N.A. is the exchange agent. Its telephone number is (800) 275-2048.1-800-422-2066. Its address is 2001 Bryan111 Wall Street, 9th Floor, Dallas, Texas 75201.14th Floor/Zone 3, New York, New York 10043. THE NEW NOTESBONDS OFFERED SECURITIES $400,000,000$150,000,000 principal amount of 9.75% Senior Notes7.75% First Mortgage Bonds due June 1, 20082007 MATURITY DATE JuneJanuary 1, 20082007 INTEREST PAYMENT DATES JuneJanuary 1 and DecemberJuly 1 of each year, beginning DecemberJuly 1, 2001 4 2002 SECURITY; RANKING The new notes are unsecured notesbonds will be issued under Avista Corp.'s Mortgage and Deed of Trust, dated as of June 1, 1939, as supplemented (the "mortgage") and will be secured by a lien on Avista Corp. They's facilities for the generation, transmission and distribution of electric energy and for the storage and distribution of natural gas. The new bonds will rank pari passuequally in right of payment with all of Avista Corp.'s current and future unsecured senior indebtednessfirst mortgage bonds and senior in right of payment to all current and future unsecured senior indebtedness and subordinated indebtedness.indebtedness, which as of December 31, 2001 was $967.2 million. As of MarchDecember 31, 2001, Avista Corp. had outstanding $203.5$533.5 million of first mortgage bonds. ISSUANCE OF ADDITIONAL BONDS Additional bonds which is secured by a lienmay be issued under the mortgage on substantially allthe basis of Avista Corp.'s utility plant assets. Avista Corp. also has a credit agreement which is secured by a pledge70% of the capital stock of Avista Capital. By reason, and to the extent, of this mortgage and this pledge, the first mortgage bonds and the borrowings under this credit agreement will rank prior to the new notes. OPTIONAL REDEMPTION Each of the new notes will be redeemable in wholecost or in part at our option at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of the new notes being redeemed or (ii) the sum of the present values of the remaining scheduled payments of the principal of and interest on the new notes being redeemed discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield (as defined herein) plus 50 basis points; plus, in either case, whichever is applicable, accrued interest on the new notes being redeemed to the date of redemption. See DESCRIPTION OF THE NEW NOTES--"Optional Redemption." REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE You have the option, subject to certain OF CONTROL conditions, to require us to repurchase any new notes held by you in the event of a "Change in Control", as described in this offering circular, at a price equal to 101% of the aggregate principal amount of new notes repurchased plus accrued and unpaid interest, if any, thereon, to the date of purchase. See DESCRIPTION OF THE NEW NOTES --"Repurchase at the Option of Holders--Change of Control." REPURCHASE AT OPTION OF You also may have the option, subject to certain HOLDERS UPON CERTAIN conditions, to require us to repurchase any new ASSET SALES notes held by you in the event of certain Asset Sales. See DESCRIPTION OF THE NEW NOTES--"Repurchase at the Option of Holders--Asset Sales." BASIC COVENANTS OF We will issue the new notes under an indenture INDENTURE with Chase Manhattan Bank and Trust Company, National Association. The indenture, among other things, restricts our ability and the ability of our subsidiaries to: o sell assets; o pay dividends on stock or repurchase stock; o pay subordinated debt; o make investments; o incur debt or issue preferred stock; o use assets as security in other transactions; o restrict the ability of subsidiaries to pay dividends or make other paymentsfair value to Avista Corp.; o merge (whichever is less) of property additions or on the basis of retired bonds or cash deposited with or into other companies; o engage in certain transactions with affiliates; and o enter into sale and leaseback transactions. 5 These covenants are subject to significant exceptions. For more details, see DESCRIPTION OF THE NEW NOTES--"Certain Other Covenants."the trustee. USE OF PROCEEDS The net proceeds from the issuance and sale of the old notesbonds are being used: (a)used to payretire maturing medium-term notes and other short-term debt and maturing long-term debtindebtedness. We will not receive any proceeds from the issuance of Avista Corp. issued to fund a portion of its construction, improvement and maintenance programs, (b) to reimburse Avista Corp.'s treasury for funds previously expended for any of these purposes and (c) for other corporate purposes.the new bonds in the exchange offer. RISK FACTORS You should read DESCRIPTION OF THE NEW NOTESthe RISK FACTORS section, beginning on page 910 of this prospectus, so that you understand the risks associated with an investment in securities of Avista Corp. 68 SUMMARY CONSOLIDATED FINANCIAL DATA We have selected the historical financial data shown below for the fiscal years 1996-2000 from the audited consolidated financial statements of Avista Corp. You should read this information along with the consolidated financial statements of Avista Corp. and the notes to those financial statements.statements which are incorporated by reference into this prospectus.
YEARS ENDED DECEMBERYears Ended December 31, ------------------------------------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- (THOUSANDS OF DOLLARS EXCEPT RATIOS)---------- ------------ ------------ ------------ --------------- (Thousands of Dollars except Ratios) INCOME STATEMENT DATA:Income Statement Data: Operating Revenues: Avista Utilities................................. $ 798,994 $ 891,665 $ 1,049,212 $ 1,115,647 $ 1,512,101Utilities................ $798,994 $891,665 $1,049,212 $1,115,647 $1,512,101 Energy Trading and Marketing.....................Marketing.... -- 247,028 2,408,734 6,695,671 6,531,551 Information and Technology.......................Technology...... 813 1,030 1,995 4,851 11,645 Avista Ventures..................................792 1,318 2,266 5,732 Other........................... 145,150 163,598 231,483 122,303 32,937 Intersegment eliminations........................eliminations....... -- (1,149) (7,440) (33,488) (176,744) ----------- ----------- ----------- ----------- ----------- Total............................................ $ 944,957 $ 1,302,172 $ 3,683,984 $ 7,904,984 $ 7,911,490 Operating Income/---------- ------------ ------------ ------------ --------------- Total........................... $944,957 $1,301,934 $3,683,307 $7,902,399 $7,905,577 Income (Loss) from Operations (pre-tax): Avista Utilities................................. $ 173,658 $ 178,289 $ 143,153 $ 142,567 $ 3,177Utilities................ $173,658 $178,289 $143,153 $142,567 $3,177 Energy Trading and Marketing.....................Marketing.... (649) 6,577 22,826 (97,785) 250,196 Information and Technology.......................Technology...... (1,443) (5,364) (5,192) (13,002) (40,084) Avista Ventures..................................(5,391) (4,979) (8,966) (26,424) Other........................... 15,355 9,962 12,033 (423) (9,861) ----------- ----------- ----------- ----------- ----------- Total............................................ $ 186,921 $ 189,464 $ 172,820 $ 31,357 $ 203,428---------- ------------ ------------ ------------ --------------- Total........................... $186,921 $189,437 $173,033 $35,393 $217,088 Interest Expense .................................. $ 63,255 $ 66,275 $ 69,077 $ 65,076 $ 68,723................... $63,255 $66,275 $69,017 $64,747 $68,255 Income from Continuing Operations Before Income Taxes.........................Taxes............... 132,962 175,872 121,474 42,771 165,140175,826 121,746 45,559 178,053 Income from Continuing Operations... 83,453 114,767 78,316 28,662 101,055 Income (Loss) from Discontinued Operations........... -- 30 (177) (2,631) (9,376) Net Income.........................................Income.......................... 83,453 114,797 78,139 26,031 91,679114,767 78,316 28,622 101,055 Preferred Stock Dividend Requirements..................................... $ 7,978 $ 5,392 $ 8,399(1) $ 21,392(1) $ 23,735(1)Requirements...................... $7,978 $5,392 $8,399(1) $21,392(1) $23,735(1) Common Stock Dividend.............................. $ 69,390 $ 69,390 $ 56,898 $ 18,301 $ 22,616 BALANCE SHEET DATA:Dividend............... $69,390 $69,390 $56,898 $18,301 $22,616 Balance Sheet Data: Utility Plant in Service--Net...................... $ 1,951,664 $ 2,031,026 $ 2,095,301 $ 2,184,698 $ 2,205,230Service--Net....... $1,397,876 $1,433,123 $1,470,942 $1,500,837 $1,518,312 Total Assets: Avista Utilities................................. $ 1,921,429 $ 1,926,739 $ 2,004,935 $ 1,976,716 $ 2,129,614Utilities................ $1,921,429 $1,926,739 $2,004,935 $1,976,716 $2,129,614 Energy Trading and Marketing.....................Marketing.... 320 212,868 955,615 1,595,470 10,271,834 Information and Technology.......................Technology...... 1,517 3,475 7,461 26,379 59,632 Avista Ventures..................................2,221 2,492 6,312 13,599 Other........................... 254,032 268,703 285,625 114,929 102,844 ----------- ----------- ----------- ----------- ----------- Total............................................ $ 2,177,298 $ 2,411,785 $ 3,253,636 $ 3,713,49498,212 Discontinued Operations--Avista Communications................ -- 1,254 4,969 20,067 50,665 ---------- ------------ ------------ ------------ --------------- Total........................... $2,177,298 $2,411,785 $3,253,636 $3,713,494 $12,563,924 Total Debt......................................... $ 764,526 $ 762,185 $ 730,022 $ 714,904 $ 931,966Debt.......................... $764,526 $762,185 $730,022 $714,904 $931,966 Company-Obligated Mandatorily Redeemable Preferred Trust Securities.......................Securities.................. -- $ 110,000 $ 110,000 $ 110,000 $ 100,000 Preferred Stock Subject to Mandatory Redemption.... $Redemption........................ 65,000 $ 45,000 $ 35,000 $ 35,000 $ 35,000 Convertible Preferred Stock........................Stock......... -- -- $ 269,227(1) $ 263,309 -- Stockholders' Equity............................... $ 825,736 $ 793,812 $ 792,261 $ 691,808 $ 759,224 OTHER FINANCIAL DATA:Common Equity....................... 710,736 748,812 488,034 393,499 724,224 Other Financial Data: Earnings Before Interest, Taxes, Depreciation and Amortization .................................... $ 268,314 $ 312,040 $ 261,098 $ 184,321 $ 309,804Amortization..... $268,314 $311,952 $261,087 $185,615 $318,737 Depreciation and Amortization...................... $ 72,097 $ 69,893 $ 70,547 $ 76,474 $ 75,941Amortization....... $72,097 $69,851 $70,324 $75,309 $73,429 Capital Expenditures............................... $ 99,182 $ 91,160 $ 106,270 $ 115,609 $ 201,433Expenditures................ $99,182 $91,160 $106,270 $115,609 $201,433 Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Fixed Charges (2)................................ 4.24 4.71 3.78 2.83 4.512.87 4.67 Ratio of Consolidated Earnings to Fixed Charges (3)................................................. 2.97 3.49 2.66 1.611.66 3.45 Year to Date September 30, ---------------------------- 2000 2001 ------------ ------------- (Thousands of Dollars except Ratios) Income Statement Data: Operating Revenues: Avista Utilities................ $1,014,987 $930,955 Energy Trading and Marketing.... 4,630,646 4,235,536 Information and Technology...... 3,903 10,085 Other........................... 25,046 12,898 Intersegment eliminations....... (78,406) (197,905) ------------ ------------- Total........................... $5,596,176 $4,991,569 Income (Loss) from Operations (pre-tax): Avista Utilities................ $(30,817) $95,277 Energy Trading and Marketing.... 132,647 90,995 Information and Technology...... (18,023) (23,232) Other........................... (4,797) (7,423) ------------ ------------- Total........................... $79,010 $155,617 Interest Expense ................... $49,570 $76,689 Income from Continuing Operations Before Income Taxes............... 56,995 105,032 Income from Continuing Operations... 30,052 64,212 Income (Loss) from Discontinued Operations........... (6,479) (44,394) Net Income.......................... 23,573 19,818 Preferred Stock Dividend Requirements...................... 23,127(1) 1,824 Common Stock Dividend............... 16,956 17,057 Balance Sheet Data: Utility Plant in Service--Net....... $1,500,752 $1,563,543 Total Assets: Avista Utilities................ $1,978,135 $2,430,034 Energy Trading and Marketing.... 4,117,257 2,091,752 Information and Technology...... 32,281 34,427 Other........................... 117,479 85,765 Discontinued Operations--Avista Communications................ 39,534 25,550 ------------ ------------- Total........................... $6,284,686 $4,667,528 Total Debt.......................... $861,247 $1,266,922 Company-Obligated Mandatorily Redeemable Preferred Trust Securities.................. 110,000 100,000 Preferred Stock Subject to Mandatory Redemption........................ 35,000 35,000 Convertible Preferred Stock......... -- -- Common Equity....................... 661,197 734,147 Other Financial Data: Earnings Before Interest, Taxes, Depreciation and Amortization..... $161,739 $235,778 Depreciation and Amortization....... $55,174 $54,057 Capital Expenditures................ $113,899 $238,303 Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Fixed Charges (2) 3.26 3.07 Ratio of Consolidated Earnings to Fixed Charges (3)................. 2.07 2.30
(1) In December 1998, we converted shares of common stock for Convertible Preferred Stock, which was responsible for a number of changes in the data in 2000, 1999 and 1998 from 1997. (See Note 15 of Notes to Financial Statements in the Form 10-K.) (2) "Earnings Before Interest, Taxes, Depreciation and Amortization", or EBITDA, represents net income from continuing operations before interest expense (including related amortization), taxes based on income from continuing operations, depreciation and amortization, to interest expense (including related amortization).amortization. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. While EBITDA should not be construed as a substitute for operating income or a better measure of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, we have presented EBITDA to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. EBITDA is not a measure determined under generally accepted accounting principles. 7 Also, as calculated above, EBITDA may not be comparable to similarly titled measures reported by other companies. "Fixed Charges" include interest (whether or not capitalized) and related amortization. (3) "Earnings," as defined by Regulation S-K, represent the aggregate of (1) net income from continuing operations before the cumulative effect of an accounting change, (2) taxes based on income from continuing operations, (3) investment tax credit adjustments--net and (4) fixed charges. "Fixed Charges" include interest (whether expensed or capitalized), related amortization and estimated interest applicable to rentals. 89 RISK FACTORS You should carefully consider the following factors in addition to the other information contained or incorporated by reference in this prospectus. WE WILL NEED TO FINANCE OUR OPERATIONS AND CAPITAL EXPENDITURES. OUR LEVEL OF INDEBTEDNESS COULD AFFECT OUR ABILITY TO DEDICATE SUFFICIENT CASH FLOW TO THESE PURPOSES, WHICH WOULD ULTIMATELY AFFECT OUR ABILITY TO MEET OUR OBLIGATIONS ON THE NEW NOTES. We have incurredThe risks described in this section are those that we consider to be most significant long-term indebtedness to support capital expenditures and to maintain working capital. At April 30, 2001, after giving effect to the issuancethis exchange offer. If any of the old notes, we had, total long-term debtfollowing events occur, our business, financial condition or results of approximately $1,079.5 million. In addition, we will need to finance capital expenditures and obtain additional working capital from time to time. Theoperation could be materially harmed. WE HAVE SIGNIFICANT CASH REQUIREMENTS, SIGNIFICANT INDEBTEDNESS AND LIMITED CASH AVAILABLE. Since the fourth quarter of 2000, our cash requirements for purchased power have been greater than the related amounts paid to service the total amount of our indebtedness, both short-term and long-term, could reduce the amount of cash flow available to fund working capital, future acquisitions, the deferral accounts discussed below, other corporate requirements and capital expenditures. IF WE ARE UNABLE TO RECOVER DEFERRED PURCHASED POWER AND, TO A LESSER EXTENT, NATURAL GAS COSTS EXCEEDING AMOUNTS INCLUDED IN CURRENT RETAIL RATES, WE MAY EXPERIENCE AN ADVERSE IMPACT ON CASH FLOW AND EARNINGS. Purchased power and natural gas costs incurred to serve our retail customers are generally recovered or expected to be recovered in base rates. However, there is a lag between the time we incur any increases in these costs and the time we collect these increases from customers. As more fully described in Note 1 of Notes to Financial Statements--"Power Cost Deferrals and Power and Natural Gas Adjustment Provisions" in Avista Corp.'s Annual Report on Form 10-K for the year 2000, costs in excess of those included in base rates are deferred as an asset on our balance sheet and not shown as an expense until recovered fromus by our retail customers. In 2000addition to purchased power and operating expenses, we have continuing commitments for capital expenditures for construction, improvement and maintenance of facilities. We have incurred substantial levels of indebtedness, both short and long term, to finance these requirements and to otherwise maintain adequate levels of working capital. Debt service is another significant cash requirement. In addition, we have also made significant cash investments to finance the pricedevelopment of companies in our Information and Technology line of business. These cash outflows have substantially reduced cash available for our ordinary operating expenses. WE NEED TO MAINTAIN ADEQUATE CREDIT WITH BANKS. We also need to maintain access to adequate levels of credit with our banks. Cash held by Avista Energy, one of our subsidiaries, is restricted by that company's credit agreement and is not generally available to Avista Corp. THE EXTENT TO WHICH THE CURRENT SURCHARGES AND THE PROPOSED WASHINGTON RATE INCREASE WILL OFFSET OUR DEFERRED ENERGY COST BALANCES WILL DEPEND ON A NUMBER OF FACTORS BEYOND OUR CONTROL. The temporary electric rate surcharge approved by the WUTC in September 2001 will allow us to reduce our deferred energy cost balances by an estimated $125 million through December 31, 2002, and the PCA surcharge approved by the IPUC will allow us to reduce our deferred energy cost balances by an estimated additional $58 million through October 11, 2002. For reference, the total deferred electric energy cost balance at December 31, 2001 was approximately $235 million. Revenues collected under the Washington surcharge are subject to refund based on, among other things, whether or not the WUTC determines that the costs were "prudently" incurred and whether or not Avista Utilities' overall retail rates, as to be modified, are "just, fair, reasonable and sufficient." If we are not permitted to recover substantially all our deferred energy costs, our financial condition will be seriously impaired. The extent to which the amounts recovered under the surcharges and the proposed rate increase in westernWashington will be sufficient to offset the deferred cost balances will depend on a number of factors beyond our control, including, but not limited to, the availability of hydroelectric resources, outages of generation units, energy demand, energy prices in wholesale markets, rose to unprecedented levels, accompanied by increases in natural gas prices, in both cases far above the levels included in base rates. These market conditions are expected to continue in 2001. We have mechanisms in place to recover (subject to certain limitations) increases in gas costs in Washington, Idaho and Oregon, and we regularly make filings to recover increased costs under these mechanisms. As of March 31, 2001, we had balances of deferred gas costs totaling $79.3 million. We also have a mechanism in place to recover (subject to certain limitations) increases in purchased power costs in Idaho and had a balance of deferred purchased power costs in Idaho of $5.2 million, a power cost rebate of $0.9 million which is being flowed through to customers, and a surcharge deferral balance of $6.8 million, as of March 31, 2001. On March 23, 2001, we filed an application in Washington to establish the prudencypossible additional rate relief of the purchased power costs incurred as well as for approval of a method to recover the cost increases. As of March 31, 2001, we had a balance of deferred purchased power costs of $56 million plus accrued interest of $0.7 million in Washington. We will be able to recover these balances of deferred costs only in the amounts, and at the times, authorized by the respective state commissions. As discussed in "Recent Developments", on May 23, 2001, the Washington public utility commission approved a settlement agreement reached among Avista Corp., the staff of that commission and other parties. RECENT CHANGES IN THE ENERGY MARKETS IN THE WESTERN UNITED STATES HAVE LED TO SIGNIFICANT INCREASES IN WHOLESALE POWER PRICES. BECAUSE OF THESE HIGH PRICE LEVELS, A DECREASE IN OUR POWER RESOURCE AVAILABILITY OR AN INCREASE IN CUSTOMER DEMAND THAT REQUIRES US TO PURCHASE MORE POWER COULD HAVE AN ADVERSE IMPACT ON OUR CASH FLOW AND EARNINGS. Wholesale power prices rose dramatically starting in the second quarter of 2000 and remain significantly above historic levels in the Pacific Northwest, including our service territory, and throughout the western United States. Significant emerging factors include the gradual depletion of excess generating capacity in the West, increasing instances of transmission congestion and increased ownership of generating facilities by entities which are not traditional "public utilities." Also, wholesale power markets have been affected by the restructuring of electric utility regulation at both state and federal levels. 9 Federal and state officials, including the Federal Energy Regulatory Commission, the California Public Utility Commission and the Attorneys General of California, Oregon and Washington, have commenced reviews to determine the causes of the changes in the wholesale energy markets. Under normal water conditions and customer demand, we would be able to provide almost all of our forecasted native load energy requirements with our own generation plants and long-term contracts until the end of 2003, with the balance covered through short-term contracts. However, current forecasts show streamflow conditions for hydroelectric generation for 2001 at no better than 60% of normal. In response to the reduced hydroelectric generation, we have made additional fixed price purchases of energy to cover our retail and firm wholesale load requirements for 2001 with additional purchases from the higher cost short-term wholesale market. If hydroelectric conditions further deteriorate, or our generating plants do not operate as planned, or weather conditions cause retail loads to increase, we would incur additional costs from increased purchases in the higher cost short-term wholesale energy market. This would have an adverse impact on our cash flow and, if not ultimately recovered, on our earnings.type currently being sought. WE ARE SUBJECT TO THE RISKS INHERENT IN THE UTILITY BUSINESS INCLUDING NORMAL OPERATING RISKS, SUCH ASAND OUR CASH FLOW AND EARNINGS COULD CONTINUE TO BE ADVERSELY AFFECTED, BEYOND THE COSTTERM OF FUELANY RATE INCREASES, DUE TO POTENTIAL HIGH PRICES AND VOLATILE MARKETS FOR PURCHASED POWER, INCREASED CUSTOMER DEMAND FOR ENERGY, CONTINUED LOW AVAILABILITY OF OUR HYDROELECTRIC RESOURCES, OUTAGES OF OUR GENERATING FACILITIES OR A FAILURE TO DELIVER ON THE POSSIBILITYPART OF PLANT OUTAGES, AND, IN OUR CASE, THE SUFFICIENCY OF STREAMFLOWS. WE ARE ALSO SUBJECT TO REGULATORY RISKS, SUCH AS INCREASED ENVIRONMENTAL REGULATION AND THE CHALLENGE TO OBTAIN SATISFACTORY RATE RELIEF, AS WELL AS TO RISKS ASSOCIATED WITH DEREGULATION OF ENERGY MARKETS.SUPPLIERS. The utility business involves many operating risks. For example, there may be a breakdown or failureIf Avista Utilities' operating expenses, including the cost of electrical generating or other equipment, fuel interruption or performance below expectedpurchased power, significantly exceed the levels recovered from retail customers for an extended period of output or efficiency. Also, some of our facilities use natural gas and coal in their generation of electricity. The market prices and availability of natural gas and coal fluctuate. Increasing prices for these commodities or a lack of availability could impair ourtime, its cash flow and ifearnings would be negatively affected. Factors which could cause purchased power costs to be higher than currently anticipated include, but are not ultimately recovered, on our earnings. In addition,limited to, a return to high prices in Western wholesale markets and/or high volumes of energy purchased in wholesale markets due to: o increases in demand due, for example, either to weather or customer growth; 10 o continued diminished availability of our hydroelectric plants require continuous water flow for their operation. A droughtresources due to low streamflow conditions; o outages of any of our thermal or other water flow impairment may limit our abilitygenerating facilities; and o failure to produce and market electricityperform on the part of any party from these facilities. In addition, the utility business is subject to complex and stringent energy, environmental, and other governmental laws and regulations. The acquisition, ownership and operation of power generation facilities requires numerous permits, approvals, and certificates from appropriate federal, state, and local governmental agencies. If environmental regulations, such as emission limits, are tightened, this could increase the amount we must invest to bring our facilities into compliance. In general, the prices we are allowed to charge for our electric and natural gas services are intended to provide, after recovery of allowable operating expenses, an opportunity to earn a reasonable rate of return. The regulatory commissions of the states in which we operate may limit our ability to increase prices, and future changes in the regulatory framework may also affect our ability to earn a reasonable rate of return. More recently, wholesale power markets have been affected by the restructuring of electric utility regulation at both federal and state levels. In particular, deregulation in California, combined with increased demand and limitations on supply, has affected wholesale power prices throughout the West. In addition, although there is currently no legislativepurchase capacity or regulatory movement toward deregulation in Washington or Idaho, in a deregulated environment, evolving technologies might provide alternate energy supplies at lower costs, leading to lower adjusted market prices and reducing margins for traditional utilities that use technologies and generating assets with capital and operating costs higher than the lower adjusted market price.energy. WE ARE SUBJECT TO THE FINANCIAL, LIQUIDITY,COMMODITY PRICE RISK, CREDIT RISK AND COMMODITY PRICEOTHER RISKS ASSOCIATED WITH ENERGY TRADING AND MARKETING ACTIVITIES. Our subsidiary, Avista Energy, trades electricity and natural gas, along with derivative commodity instruments, including futures, options, swaps and other contractual arrangements. Most transactions are conducted on a largely unregulated "over-the-counter" basis, there being no central clearing mechanism (except in the case of specific instruments traded on the commodity exchanges). As a result of these trading activities, we are subject to various risks, including market risk, liquidity risk, commodity risk and credit risk. Although Avista Energy scaled back operations to focus primarily in the western United States during 2000, its trading operations continue to be affected by, among other things, volatility of prices within the electric energy and natural gas 10 markets, the demand for and availability of energy, lower unit margins on new sales contracts and deregulation of the electric utility industry. Avista Energy is renegotiating its credit agreement with its primary lending banks which expired on May 31, 2001. Avista Energy anticipates receiving an extension to June 30, 2001 of its existing credit agreement and anticipates the completion of documentation and closing of a new credit agreement by the end of June 2001. The existing agreement contains a variety of covenants and restrictions, including restrictions on dividends.MARKETS. In connection with matching loads and resources, Avista Utilities also engages in wholesale sales and purchases of electric capacity and energy, and, accordingly, is also subject to commodity price risk, credit risk and other risks associated with these activities. 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 but would also have the opportunity to establish offsetting claims. Our subsidiary, Avista Energy, trades and markets electricity and natural gas, along with derivative commodity instruments, including futures, options, swaps and other contractual arrangements. As a result of these trading and marketing activities, we are subject to various risks, including commodity price risk and credit risk, as well as possible new risks resulting from the imposition of market controls by federal and state agencies. The FERC is conducting separate proceedings related to market controls within California and within the Pacific Northwest that include proposals by certain parties to retroactively impose price caps. The retroactive application of price caps could result in liabilities for refunding revenues recognized in prior periods. Avista Energy and other parties are vigorously opposing these proposals. If retroactive price caps were imposed, Avista Energy could develop offsetting claims. Credit risk includes the risk that counterparties that owe us money or energy will breach their obligations. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements. In that event, our financial results could be adversely affected and we could incur losses. Although our models take into account the expected probability of default by counterparties, our actual exposure to a default by a particular counterparty could be greater than the models predict. THE BANKRUPTCY OF ENRON CORPORATION AND MANY OF ITS AFFILIATES COULD ADVERSELY AFFECT, IN GENERAL, THE WHOLESALE MARKETS FOR POWER AND NATURAL GAS AND, IN PARTICULAR, VARIOUS ASPECTS OF OUR BUSINESS. The bankruptcy filings by Enron and many of its affiliates could have an adverse effect generally on wholesale electricity and natural gas markets, in terms of the disruptive effect of temporary illiquidity and/or volatility, and could ultimately lead to regulatory changes. We cannot predict the nature or extent of any such changes or the effect, if any, they may have on us. The filing could also directly affect the Avista entities, in terms of the matters discussed under SUMMARY - "Recent Developments - Enron Exposure." As a result of the filing, Avista entities have been required to find, and enter into contracts with, new counterparties in the place of the terminated contracts. 11 AVISTA CORPORATION GENERAL Avista Corp., which was incorporated in the State of Washington in 1889, is an electric and gas utilityenergy company having operations locatedinvolved in the Pacific Northwest.production, transmission and distribution of energy as well as other energy-related businesses. We also have subsidiaries involved in energy, information and technology businesses. As of March 31, 2001, our employees included approximately 1,460 people in our utility operations and approximately 800 people in our subsidiary businesses. Our corporate headquarters are in Spokane, Washington, which serves as the Inland Northwest's center for manufacturing, transportation, health care, education, communication, agricultural and service businesses. Our operations are organized into four lines of business--Avista Utilities,business: o Avista Utilities; o Energy Trading and Marketing,Marketing; o Information and Technology,Technology; and Avista Ventures.o Other. Avista Utilities, which is an operating division of Avista Corp. and not a separate legal entity, represents the regulated utility operations.provides electric and natural gas service to customers in four western states and is subject to state and federal price regulation. Avista Capital, aone of our wholly owned subsidiary of Avista Corp.,subsidiaries, owns all of the subsidiary companies engaged in the other lines of business. Avista Corp.'s lines of business,BUSINESS STRATEGY Our strategy is to: o improve cashflow and continue rebuilding our financial strength by: o pursuing a general rate increase in Washington to recover increased costs and the companies included within them, are illustrated below: ------------------ AVISTA CORPORATION* ------------------ / ----------------------------------------------- / / - ---------------- -------------- AVISTA UTILITIES** AVISTA CAPITAL* - ---------------- -------------- / ----------------------------------------------------------------- / / / ----------------------- --------------- ----------------- ENERGY INFORMATION AND AVISTA VENTURES** TRADING AND MARKETING** TECHNOLOGY** ----------------- ----------------------- --------------- / / / / ------------- / ---------------- / --------------- / AVISTA ENERGY* / AVISTA ADVANTAGE*/ AVISTA VENTURES* / ------------- / ---------------- / --------------- / ------------ / ----------- / ----- / AVISTA POWER*/ AVISTA LABS* / OTHER*/ ------------/ ----------- / ----- ------------ / --------------------- / AVISTA-STEAG*/ AVISTA COMMUNICATIONS*/ ------------ --------------------- * - denotes a business entity. ** - denotes an operating division orportion of our deferred power costs not being recovered by the surcharge in Washington. o disposing of assets and operations, such as the Avista Communications line of business, 11not directly related to our energy operations. o being positioned to issue equity securities during 2002, subject to market and other conditions. o reducing our ratio of total debt to total capitalization. o maintain a strong, low-cost, efficient electric and natural gas utility business in the Northwest. o position the utility to be "long" production capacity by owning or controlling generation and natural gas resources exceeding 100% of retail load. o continue to position Avista Energy as a focused, asset-enabled energy marketing and trading business. o find strategic partners for Avista Labs and Avista Advantage. 12 ENERGY BUSINESSES Avista Utilities Avista Utilities provides electricity 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 835,000.830,000. 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 500,000.of approximately 525,000. At the end of 2000,2001, retail electric service was supplied to approximately 313,000317,000 customers in eastern Washington and northern Idaho; retail natural gas service was supplied to approximately 279,000284,000 customers in parts of Washington, Idaho, Oregon and California. Our retail customers include residential, commercial and industrial classifications, with the residential classification accounting for the most energy consumed and the greatest contribution to revenues. Avista Utilities also engages in wholesale sales and purchases of electric capacity and energy. Avista Utilities anticipates residential and commercial electric load growth to average approximately 3.0% annually for the next five years primarily due to expected increases in both population and the number of businesses in its service territory. Avista Utilities expects natural gas load growth, including transportation volumes, to average for the next five years approximately 1.6% annually in the Washington and Idaho service area and approximately 2.5% annually in the Oregon and South Lake Tahoe service areas, in each case due to expected conversions from electric space and water heating to natural gas, and increases in both population and the number of businesses in these areas. These 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. In addition to providing electric transmission and distribution services, Avista Utilities is responsible for electric generation and production.generates electricity. Avista Utilities owns and operates eight hydroelectric projects, a wood-waste fueled generating station and two natural gas-fired combustion turbine (CT) generating units. It also owns a 15% share in a two-unit coal-fired generating facility and leases and operates two additional natural gas-fired CTcombustion turbine generating units. These facilities have a total net capabilitymaximum capacity of approximately 1,470 megawatts, of which 65% is hydroelectric and 35% is thermal. In addition, Avista Utilities has a number of long-term power purchase and exchange contracts that increase its available resources. Under normal water conditions and loads,Historically, Avista Utilities' own generation plants and long-term contracts would be ableelectric rates to provide approximately 90%retail customers have been among the lowest of its forecasted native load energy requirements in 2001, and 100% thereof in 2002 and 2003. The balance would be covered through short-term contracts. Avista Utilities has covered essentially all of its electric energy requirementsinvestor-owned utilities in the forward markets for 2001. ForUnited States, due primarily to the large proportion of hydroelectric resources. Retail electric rates will remain low, on a discussion of current water conditions, see RISK FACTORS. Avista Utilities anticipates residential and commercial electric load growth to average approximately 2.6% annually forrelative basis, even after the next five years primarily due to expected increasestemporary surcharges which were recently approved in both population and the number of businesses in its service territory. The number of electric customers is expected to increase and the average annual usage by residential customers is expected to remain steady. Avista Utilities expects natural gas load growth, including transportation volumes, in its Washington and Idaho, service area to average approximately 2.7% annuallydescribed under CERTAIN REGULATORY MATTERS. In February 2000 Avista Utilities received a new 45-year operating license from the FERC for the next five years.Cabinet Gorge and Noxon Rapids Hydroelectric Generating Stations, which have a combined maximum generating capacity of 794 MW. Of Avista Utilities' remaining 191 MW of hydroelectric resources, 155 MW represents the maximum capacity of six other plants operated under a FERC license. This license will have to be renewed in 2007. On December 12, 2001, we sold 50% of our interest in the Coyote Springs 2 project, representing 140 MW, of a 280 MW combined-cycle natural gas-fired plant currently under construction near Boardman, Oregon to Mirant. NEPCO, a wholly-owned subsidiary of Enron Corporation, is the contractor responsible for the engineering, procurement and construction of the Coyote Springs 2 project. The Oregonproject is planned to begin commercial operation in the third quarter of 2002. Avista Corp. and South Lake Tahoe, California service areas are anticipated to realize 3.4% growth annually during that same period. The natural gas load growth is primarily due toMirant will share equally in the costs of construction, operation and output from the plant. As of December 12, 2001, we had invested approximately $92.7 million in the Coyote Springs 2 project, which has a total expected conversions from electric space and water heating to natural gas, andcost of $185.4 million. Dramatic increases in both populationthe price of energy in Western wholesale markets during 2000 and the numberfirst part of businesses2001, compounded by the deterioration of the availability of hydroelectric resources in its service territories. These electric2001 to the lowest level in at least 73 years, have had an adverse effect on Avista Corp.'s financial condition and natural gas load growth projections are based on purchased economic forecasts, publicly available studies,results of operations. See RISK FACTORS and internal analysis of company-specific data, such as energy consumption patterns and internal business plans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Future Outlook"Operations" in Avista Corp.'s 13 Annual Report on Form 10-K for the year ended December 31, 2000 and its Currentin Avista Corp.'s Quarterly Report on Form 10-Q for the quarterquarterly period ended March 31, 2001 for additional information.September 30, 2001. Energy Trading and Marketing Energy Trading and Marketing is comprised of Avista Energy Inc., Avista Power, Inc. and Avista STEAG, LLC.Power. Avista Energy is an electricity and natural gas trading and marketing business. Avista Power was formed to develop, purchase and own electric generation assets. Avista STEAG is a joint venture between Avista Capital and STEAG AG, a German independent power producer, to develop electric generating assets. On April 27, 2001, Avista Capital gave notice to STEAG AG, electing to terminate the Avista STEAG venture pursuant to its terms. Avista Capital and STEAG AG are now preparing for an orderly winding up and termination of Avista STEAG. Avista Energy Avista Power and Avista STEAG all operate primarilyoperates in the Western Systems Coordinating Council, ("WSCC"), which is comprised of the eleven Western states.states and parts of Western Canada and Baja California. Avista Energy is in the business of buying and selling electricity and natural gas. Avista Energy's customers include commercial and industrial end-users, electric utilities, natural gas distribution companies and other trading companies. Avista Energy also trades electricity and natural gas derivative commodity instruments. Avista Power has electric generation projects under development and constructiona 49% ownership interest in strategic locations primarily in the WSCC. Avista Power and Cogentrix Energy, Inc. have entered into an agreement to jointly build and/or buy interests in natural gas-fired electric generation plants in the states of Washington, Oregon and Idaho. A project under this agreement is thea 270 megawatt 12 natural gas combustion turbine facility located in Rathdrum, Idaho, with 100%which commenced commercial operation in September 2001. All of itsthe output is contracted to Avista Energy for 25 years. Non-recourse project financing was completed in March 2000Due to changing market conditions and as part of the facility is currently under construction, with commercial operation expected to start in late 2001. In December 2000, Avista Utilities selected the Coyote Springs 2 project, a 280-megawatt combined-cycle natural gas-fired plant near Boardman, Oregon to add generation to its portfolio. Construction commenced in January 2001 under a fixed price turnkey engineering, procurement and construction contract with project completion anticipated in mid-2002. The process is underway to transfer ownership fromCorp's overall business strategy, Avista Corp. has decided that Avista Power to Avista Utilities. Avista Corp. is currently negotiating bank financing for the construction of this project. A portion of the proceeds of the notes may be used to finance construction costs.will not develop any additional non-regulated generating projects. OTHER BUSINESSES Information and Technology is comprised of Avista Advantage, Inc., Avista Laboratories, Inc. ("Avista Labs") and Avista Communications,Advantage, Inc. ("Avista Advantage"). o Avista Labs is developing both modular Proton Exchange Membrane fuel cells for power generation at the site of the consumer or industrial user and fuel cell components including fuel processors and hydrogen sensors. Avista Labs has recently initiated commercial sales of its hydrogen-only fuel cell systems for various applications, primarily back-up power for the commercial market. o Avista Advantage is an e-commerce provider of facilities management billing and information services to commercial customers throughout the U.S. and Canada. Its primary product lines include consolidated billing, resource accounting, energy analysis, load profiling and maintenance and repair billing services. o Avista LabsCorp. reached a decision in September 2001 that it would divest substantially all of the assets of Avista Communications, which provides various telecommunications services to communities in the Northwest. In October 2001, the Company announced that minority shareholders of Avista Communications will acquire ownership of its Montana and Wyoming operations as well as its dial-up internet access operations in Spokane, Washington and Coeur d'Alene, Idaho. In November 2001 the Company announced that Avista Communications has agreed to sell the assets and customer accounts of its Yakima and Bellingham, Washington operations to Advanced Telcom Group, Inc. In December 2001, Avista Communications entered into an agreement to transfer its voice and integrated services facilities in Spokane, Washington and Coeur d' Alene, Idaho to certain subsidiaries of XO Communications, Inc. The Company is continuing to pursue divestiture of the remaining portion of the business. The Other line of business includes several other minor subsidiaries. This line of business was formed to invest in business opportunities that would have potential strategic value in Avista Corp.'s other existing lines of business. Avista Corp. is in the process of developing both modular Proton Exchange Membrane fuel cells for power generation atphasing out of this line of business. 14 USE OF PROCEEDS The net proceeds from the siteissuance and sale of the consumer or industrial userold bonds were used to retire $114 million of medium-term notes maturing between December 2001 and fuel cell components. o Avista Communications is an Integrated Communications Provider providing local dial tone, data transport, internet services, voice messagingJuly 2002, and other telecommunications services to under-served communities primarily in ten Northwest markets. Avista Communications is also involved in designing, building and managing metropolitan area fiber optic networks. Avista Ventures includes Avista Ventures, Inc. and several other minor subsidiaries. Avista Ventures was formed to align Avista Corp.'s investment and acquisition activitiesshort-term indebtedness bearing interest at a weighted average rate of 7.26% per annum. We will not receive any proceeds from the issuance of the new bonds in the strategic growth areasexchange offer. CERTAIN REGULATORY MATTERS ELECTRIC On August 9, 2000, the WUTC approved Avista Utilities' request for deferred accounting treatment for certain power costs related to increases in wholesale electric prices beginning July 1, 2000 through June 30, 2001. The specific power costs deferred include the changes in power costs to Avista Utilities from the costs included in base retail rates, resulting from changes in short-term wholesale market prices, changes in the level of energy, informationhydroelectric generation and technology. In addition,changes in the level of thermal generation (including changes in fuel prices). The deferrals each month are calculated as the difference between the actual costs to Avista Ventures hold investments in real estate and majority ownership of AM&D, a metals fabrication and manufacturing business. BUSINESS STRATEGY Avista Corp.'s general business strategy is to: o maintain a strong, low-cost utility business focused on delivering efficient, reliable and high quality service to its customers; o reduce the size and riskUtilities associated with these three power cost components, and the level of costs included in Avista Utilities' base retail rates. The power costs deferred relate solely to the operation of Avista Utilities' system resources to serve its energy trading activities; o pursue opportunitiessystem retail and wholesale load obligations. On January 24, 2001, the WUTC approved a modification to develop new generationthe deferral mechanism to supportrecover power supply costs associated with meeting increased retail and wholesale system load requirements, effective December 1, 2000. The approval of the growingmodification was conditioned on Avista Utilities filing by March 20, 2001 a proposal addressing the prudence of the incurred power requirementscosts, the optimization of Company-owned resources to the benefit of retail customers and the appropriateness of recovery of power costs through a deferral mechanism. This proposal was also to address cost of capital offsets to recognize the shift in risk from shareholders to ratepayers and Avista Utilities' plan to mitigate the Northwest; and o have access to electric and natural gas resources, both owned and under long-term contract, in excess of projected requirements. RECENT DEVELOPMENTSdeferred power costs. On May 23, 2001, the Washington Utilities and Transportation Commission (the "WUTC")WUTC approved a settlement agreement which had been reached among Avista Corp., the staff of the WUTC and other parties with respect to deferred energypower costs. The agreement, among other things, providesprovided for the extension of Avista Corp.'s deferral accounting mechanism through February 2003. Due to the planned addition of generating resources as well as the expiration of certain long-term power sale agreements, Avista Utilities, expectsat the time of the settlement agreement, expected to be in a power surplus 13 position by Julythe middle of 2002. The agreement was based, in part, on the expectation that Avista Utilities further expects theUtilities' profits from surplus power sales towould offset the power cost deferral balance, reducing the balance to zero by the end of February 2003 without any price increase to retail customers. These expectations arewere based on assumptions as to a number of variables including, but not limited to, streamflow conditions, thermal planplant performance, level of retail loads, wholesale market prices and the amount of additional generating resources. Avista Utilities has reserved the right to requestalter, amend, or terminate the settlement agreement as well as the right to seek interim rate relief. Since the issuance of the FERC price mitigation plan on June 18, 2001, wholesale market prices in the West have decreased. The wholesale market price decrease negatively affected Avista Utilities' plan for recovery of deferred power costs through future surplus power sales. During June and the first part of July 2001, Avista Utilities evaluated the effect of the recent decline in wholesale market prices and the FERC price mitigation plan on its ability to recover deferred power cost balances under the settlement agreement approved by the WUTC on May 23, 2001 and the continuing PCA mechanism for Idaho customers approved by the IPUC. The combination of low hydroelectric availability, the cost of energy and capacity under forward contracts entered during a period of high wholesale prices to meet customer demand for 2001, the decline in forward wholesale prices and the FERC price mitigation plan increased current and estimated future deferred costs to levels significantly higher than originally anticipated and significantly reduced the expected value from future surplus sales of energy. As such, Avista Utilities determined that the plan for recovery of deferred cost balances, as contemplated in the May 23, 2001 settlement agreement with the WUTC and the existing PCA with the IPUC, was not feasible. 15 Accordingly, on July 18, 2001 Avista Utilities filed requests with the WUTC and IPUC for the approval of an immediateelectric energy surcharge of 36.9% in Washington and a PCA surcharge of 14.7% in Idaho for a 27-month period beginning in September 2001. As of December 31, 2001, Avista Utilities had deferred $235 million in power costs that have not been recovered in rates. On September 24, 2001 the WUTC issued an order approving a 25% temporary electric rate surcharge for the 15-month period from October 1, 2001 to recoverDecember 31, 2002 that will be applied uniformly across all Washington electric customer classes. Revenues collected under the surcharge are subject to refund depending on the determination made in the general rate case referred to below. It is estimated the order will allow Avista Utilities to reduce the deferred power cost balance by $125 million. This will include the receipt of $71 million in additional revenue from the surcharge and the accelerated amortization of $54 million of a deferred non-cash credit on the Company's balance sheet. The deferred non-cash credit relates to funds received in December 1998 for the monetization of a contract in which the Company assigned and transferred certain rights under a long-term power sales contract with Portland General Electric to a funding trust. The deferred balance was scheduled to be amortized into revenues over the 16-year period of the long-term sales contract. There will be no direct impact on net income from either the surcharge or accelerated amortization of the deferred non-cash credit; however, the surcharge revenue will increase cash flows. Total deferred power costs for Washington customers were $162 million as of December 31, 2001. As part of the surcharge order, the WUTC ordered Avista Utilities to file a general rate case by December 2001 as discussed below. The order by the WUTC also provided for the termination of the accounting mechanism for the deferral balance if circumstances change. See RISK FACTORS.of power costs effective December 31, 2001. The WUTC has subsequently approved the implementation of a temporary accounting mechanism for deferred power supply-related costs for the period from January 1, 2002 through the conclusion of the general rate case. As requested by Avista Utilities, the deferred accounting mechanism has been modified to reflect the deferral of 90 percent of the difference between actual power supply-related costs and the amount of power supply-related costs allowed to be recovered in current rates. On May 31,November 13, 2001, Avista Utilities filed a request with the WUTC for an expedited procedural schedule to address the prudency of the $199.7 million of deferred power costs for Washington customers incurred as of September 30, 2001. This procedure will determine the definitive amount of deferred power costs that will ultimately be recovered from retail customers. The Company made this request due to the fact that uncertainty involving the recovery of deferred power costs will present financing challenges for the Company renewed itsduring the first half of 2002. The Company's $220 million committed line of credit and repaid all outstanding borrowings under that facility. The new $220 million credit facility expires on May 29, 2002. As of May 31, 2001, there were no amounts borrowed under this committed line of credit. The Company is in the process of obtaining a construction loan to finance $120 million of the construction costs for the Coyote Springs 2 project with a term that matches the construction period. A term sheet has been signed with two co-lenders to fully underwrite such construction loan. The Company currently anticipates the completion of the documentation and closing by the end of June 2001. CAPITALIZATION The following table sets forth our consolidated capitalization as of March 31, 2001, as well as our consolidated casha $125 million (subsequently reduced to $90 million) accounts receivable financing facility expire in May 2002. It will be difficult for the Company to renew financing facilities or issue equity securities without certainty of the recoverability of deferred power costs. Avista Utilities anticipates receiving a WUTC order by April 2002 with regards to the prudence and recoverability of deferred power costs incurred prior to September 30, 2001. This request does not provide for an adjustment to rates or the period over which deferred power costs will be recovered. These issues, among other things, were addressed in the general rate case that was filed on December 3, 2001 discussed below. On December 3, 2001, Avista Utilities filed its rate case and requested the recovery of additional deferred power costs and sought to demonstrate the prudence of all power costs which it has incurred. The general rate case addresses various power supply issues previously raised by the WUTC, a long-term power cost adjustment mechanism, increased capital costs as well as other issues customarily addressed in general rate cases, including whether or not the total rates are just, fair, reasonable and sufficient. General rate cases before the WUTC have historically taken from ten to twelve months to be resolved. See SUMMARY -"Recent Developments." Effective December 28, 2001, the WUTC issued a temporary deferred accounting mechanism to run from January 1, 2002 until the conclusion of the general rate case. On October 12, 2001 the IPUC issued an order approving a 14.7% PCA surcharge for Idaho electric customers. The IPUC also granted an extension of a 4.7% PCA surcharge implemented earlier in 2001 that was set 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 and short-term debt (includingof deferred power costs support continuation of the current portion of long-term debt). The following data are qualified in their entiretyPCA surcharge, the IPUC has indicated that it anticipates the PCA surcharge will be extended for an additional period. It is currently estimated the IPUC order will allow Avista Utilities to reduce the deferred power cost balance by our financial statements and other information incorporated by reference into this prospectus. The "As Adjusted" column reflects ourapproximately $58.2 million. This will include the receipt of proceeds of $388.3$23.6 million in additional revenue 16 from the issuancePCA surcharges and salethe accelerated amortization of $34.6 million of a deferred non-cash credit on the Company's balance sheet for the monetization of the Old Notes (after discounts and commissions and estimated offering and exchange offering expenses)Portland General Electric sale agreement (see description above). There will be no direct impact on net income from either the PCA surcharges or accelerated amortization of the deferred non-cash credit; however, the PCA surcharges will increase cash flows. The current PCA mechanism allows for the deferral of 90% of the difference between actual net power supply expenses and the applicationauthorized level of $278.4net power supply expense approved in the last Idaho general rate case. Total deferred power costs for Idaho customers were $73 million as of December 31, 2001. The extent to which the amounts recovered through the electric surcharge in Washington (as originally authorized or as it may be modified) and the PCA surcharge in Idaho will be sufficient to offset the deferred power cost balances will depend not only on the magnitude and duration of the net proceedsrate increases granted but also on the ongoing changes in the amount of the balances throughout the term of the rate increases. The balances will accrue a carrying charge and will continue to be affected by a variety of market factors beyond our control including, but not limited to, the paymentavailability of short-term debt (includinghydroelectric resources, energy demand and energy prices in wholesale markets. GAS On July 6, 2001, Avista Utilities filed requests for purchased gas cost adjustments ("PGA") with the WUTC and the IPUC. The Washington PGA increase of 12.2% approved by the WUTC became effective on August 9, 2001. The Idaho PGA increase of 11.5% approved by the IPUC became effective on August 28, 2001. Total deferred purchased gas costs were $53 million as of December 31, 2001. Avista Utilities estimates the PGA rate changes will increase revenues by $24.6 million per year. Based on current portion of long-term debt). AS OF MARCH 31, 2001 ----------------------------- AS ACTUAL ADJUSTED ------ -------- (UNAUDITED) (THOUSANDS OF DOLLARS) CashPGAs in place and Cash Equivalents..................... $ 205,185 $ 315,140 Short-Term Debt (including current portion of long-term debt)............................. $ 278,379 --- Long-Term Debt................................ $ 679,479 $1,079,479 Company-Obligated Mandatorily Redeemable Preferred Trust Securities.................. 100,000 100,000 Preferred Stock............................... 35,000 35,000 Total Common Equity........................... 750,344 750,344 ---------- ---------- Total Capitalization................ $1,564,823 $1,964,823 USE OF PROCEEDS The proceeds fromnatural gas prices, Avista Utilities expects that the issuance and sale ofdeferred natural gas cost balance will be fully recovered by December 2002. However, there will be no impact on net income as deferred natural gas costs are amortized to offset the old notes are being used: (a) to pay short-term debt and maturing long-term debt of Avista Corp. issued to fund a portion of its construction, improvement and maintenance programs, (b) to reimburse Avista Corp.'s treasury for funds previously expended for any of these purposes and (c) for other corporate purposes. 14 increase in revenues. THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER Avista Corp. is offering to issue its 9.75% Senior Notes Due June 1, 2008,7.75% First Mortgage Bonds due 2007, which have been registered under the Securities Act (the "New Notes"Bonds"), in exchange for its 9.75% Senior Notes Due June 1, 2008,7.75% First Mortgage Bonds due 2007, which have not been so registered (the "Old Notes"Bonds"), as described herein (the "Exchange Offer"). The Old NotesBonds were sold by Goldman, Sachs & Co., BNY Capital Markets, Inc., Fleet Securities, Inc. and TD Securities (USA) Inc. (the "Initial Purchaser"Purchasers") on April 3,December 19, 2001 to a limited number of institutional investors (the "Purchasers"). In connection with the sale of the Old Notes,Bonds, Avista Corp. and the Initial PurchaserPurchasers entered into an Exchange and Registration Rights Agreement, dated April 3,December 19, 2001 (the "Registration Rights Agreement"), which requires, among other things, Avista Corp. (a) to file with the Securities and Exchange Commission (the "SEC") a registration statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to New NotesBonds identical in all material respects to the Old Notes,Bonds, to use commercially reasonable efforts to cause such registration statement to be declared effective under the Securities Act and to make an exchange offer for the Old NotesBonds as discussed below, or (b) to register the Old NotesBonds under the Securities Act. Avista Corp. is obligated, upon the effectiveness of the exchange offer registration statement referred to in (a) above, to offer the holders of the Old NotesBonds the opportunity to exchange their Old NotesBonds for a like principal amount of New NotesBonds which will be issued without a restrictive legend and may be reoffered and resold by the holder without restrictions or limitations under the Securities Act. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this prospectus is a part. The Exchange Offer is being made pursuant to the Registration Rights Agreement to satisfy Avista Corp.'s obligations under that agreement. The term "Holder" with 17 respect to the Exchange Offer means any person in whose name Old NotesBonds are registered on Avista Corp.'s books, any other person who has obtained a properly completed assignment from the registered holder or any DTC participant whose Old NotesBonds are held of record by DTC. At the date of this prospectus, the sole Holder of Old NotesBonds is DTC. In participating in the Exchange Offer, a Holder is deemed to represent to Avista Corp., among other things, that (a) the New NotesBonds acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes,Bonds, whether or not such person is the Holder, (b) neither the Holder nor any such other person receiving such new notesNew Bonds is engaging in or intends to engage in a distribution of such New Notes,Bonds, (c) neither the Holder nor any such other person receiving such new notesNew Bonds has an arrangement or understanding with any person to participate in the distribution of such New Notes,Bonds, and (d) neither the Holder nor any such other person receiving such new notesNew Bonds is an "affiliate," as defined in Rule 405 under the Securities Act, of Avista Corp. Based on an interpretation by the staff of the SEC set forth in no-action letters issued to third-parties, Avista Corp. believes that the New NotesBonds issued pursuant to the Exchange Offer may be offered for resale and resold or otherwise transferred by any Holder of such New NotesBonds (other than any such Holder which is an "affiliate" of Avista Corp. within the meaning of Rule 405 under the Securities Act and except as otherwise discussed below with respect to Holders which are broker-dealers) without compliance with the registration and prospectus delivery requirements of the Securities Act, so long as such New NotesBonds are acquired in the ordinary course of such Holder's business and such Holder has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of such New Notes.Bonds. Any Holder who tenders in the Exchange Offer for the purpose of participating in a 15 distribution of the New NotesBonds cannot rely on such interpretation by the staff of the SEC and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Under no circumstances may this prospectus be used for any offer to resell or any resale or other transfer in connection with a distribution of the New Notes.Bonds. In the event that Avista Corp.'s belief is not correct, Holders of the New NotesBonds who transfer New NotesBonds in violation of the prospectus delivery provisions of the Securities Act and without an exemption from registration thereunder may incur liability thereunder. Avista Corp. does not assume or indemnify Holders against such liability. Each broker-dealer that receives New NotesBonds for its own account in exchange for Old NotesBonds which were acquired by such broker-dealer as a result of market-making activities or other trading activities must, and must agree to, deliver a prospectus in connection with any resale of such New Notes.Bonds. This prospectus may be used for such purpose. Any such broker-dealer may be deemed to be an "underwriter" within the meaning of the Securities Act. The foregoing interpretation of the staff of the SEC does not apply to, and this prospectus may not be used in connection with, the resale by any broker-dealer of any New NotesBonds received in exchange for an unsold allotment of Old NotesBonds purchased directly from Avista Corp. Avista Corp. has not entered into any arrangement or understanding with any person to distribute the New NotesBonds to be received in the Exchange Offer. The Exchange Offer is not being made to, nor will Avista Corp. accept tenders for exchange from, Holders of Old NotesBonds in any jurisdiction in which the Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. See PLAN OF DISTRIBUTION. 18 TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, Avista Corp. will accept any and all Old NotesBonds properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. Avista Corp. will issue $1,000 in principal amount of New NotesBonds in exchange for each $1,000 in principal amount of outstanding Old NotesBonds surrendered in the Exchange Offer. However, Old NotesBonds may be tendered only in integral multiples of $1,000. The form and terms of the New NotesBonds will be the same as the form and terms of the Old Notes.Bonds. The New NotesBonds will evidence the same debt as the Old Notes.Bonds. The New NotesBonds will be issued under and entitled to the benefits of the Indenturemortgage pursuant to which the Old NotesBonds were issued. The New NotesBonds will be registered under the Securities Act while the Old NotesBonds were not. As of the date of this prospectus, $400,000,000$150,000,000 in aggregate principal amount of the Old NotesBonds is outstanding. This prospectus, together with the letter of transmittal, is being sent to all registered Holders of the Old Notes.Bonds. Avista Corp. will be deemed to have accepted validly tendered Old NotesBonds when, as and if Avista Corp. shall have given oral (promptly confirmed in writing) or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders for the purpose of receiving the New NotesBonds from Avista Corp. Old NotesBonds that are not tendered for exchange in the Exchange Offer will remain outstanding and will be entitled to the rights and benefits such Holders have under the Indenture.mortgage. If any tendered Old NotesBonds are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Old NotesBonds will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old NotesBonds in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange pursuant to the 16 Exchange Offer. Avista Corp. will pay all charges and expenses, other than certain applicable taxes described below, in connection with the Exchange Offer. EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER The term "Expiration Date," shall mean 5:00 p.m., New York City time on , 2001,2002, unless Avista Corp., in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, Avista Corp. will notify the Exchange Agent of any extension by oral (promptly confirmed in writing) or written notice and will mail to the registered Holders an announcement thereof, prior to 9:00 a.m., New York City time, on the next business day after the then Expiration Date. Avista Corp. reserves the right, in its sole discretion, (a) to delay accepting any Old Notes,Bonds, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "--Conditions to the Exchange Offer" shall not have been satisfied by giving oral (promptly confirmed in writing) or written notice of such delay, extension or termination to the Exchange Agent or (b) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptances, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered Holders. If the Exchange Offer is amended in a manner determined by Avista Corp. to constitute a material change, Avista Corp. will promptly disclose such amendment by means of a prospectus supplement that will be 19 distributed to the registered Holders of the Old Notes,Bonds, and Avista Corp. will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the registered Holders, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which Avista Corp. may choose to make a public announcement of any delay, extension, amendment or termination of the Exchange Offer, Avista Corp. will have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. Upon satisfaction or waiver of all the conditions to the Exchange Offer, Avista Corp. will accept, promptly after the Expiration Date, all Old NotesBonds properly tendered and will issue the New NotesBonds promptly after acceptance of the Old Notes.Bonds. See "--Conditions to the Exchange Offer." For purposes of the Exchange Offer, Avista Corp. will be deemed to have accepted properly tendered Old NotesBonds for exchange when, as and if Avista Corp. shall have given oral (promptly confirmed in writing) or written notice thereof to the Exchange Agent. In all cases, issuance of the New NotesBonds for Old NotesBonds that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of a properly completed and duly executed letter of transmittal (or facsimile thereof or an Agent's message in lieu thereof) and all other required documents; provided, however, that Avista Corp. reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old NotesBonds are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old NotesBonds are submitted for a greater principal amount or a greater principal amount, respectively, than the Holder desires to exchange, then such unaccepted or non-exchanged Old NotesBonds evidencing the unaccepted portion, as appropriate, will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. 17 CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other term of the Exchange Offer, Avista Corp. will not be required to exchange any New NotesBonds for any Old NotesBonds and may terminate the Exchange Offer before the acceptance of any Old NotesBonds for exchange, if: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in Avista Corp.'s reasonable judgment, might materially impair the ability of Avista Corp. to proceed with the Exchange Offer; or (b) any law, statute, rule or regulation is proposed, adopted or enacted, or any existing law, statute, rule or regulation is interpreted by the staff of the SEC, which, in Avista Corp.'s reasonable judgment, might materially impair the ability of Avista Corp. to proceed with the Exchange Offer. If Avista Corp. determines in its sole discretion that any of these conditions are not satisfied, Avista Corp. may (c) refuse to accept any Old NotesBonds and return all tendered Old NotesBonds to the tendering Holders, (d) extend the Exchange Offer and retain all Old NotesBonds tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders who tendered such Old NotesBonds to withdraw their tendered Old Notes,Bonds, or (e) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old NotesBonds which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, Avista Corp. will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered Holders, and Avista Corp. will extend the Exchange Offer for a period of five to ten business days, depending upon the 20 significance of the waiver and the manner of disclosure to the registered Holders, if the Exchange Offer would otherwise expire during such five to ten business day period. PROCEDURES FOR TENDERING--REGISTERED HOLDERS AND DTC PARTICIPANTS REGISTERED HOLDERS OF OLD NOTES,BONDS, AS WELL AS BENEFICIAL OWNERS WHO ARE DIRECT PARTICIPANTS IN DTC, WHO DESIRE TO PARTICIPATE IN THE EXCHANGE OFFER SHOULD FOLLOW THE DIRECTIONS SET FORTH BELOW AND IN THE LETTER OF TRANSMITTAL. ALL OTHER BENEFICIAL OWNERS SHOULD FOLLOW THE INSTRUCTIONS RECEIVED FROM THEIR BROKER OR NOMINEE AND SHOULD CONTACT THEIR BROKER OR NOMINEE DIRECTLY. THE INSTRUCTIONS SET FORTH BELOW AND IN THE LETTER OF TRANSMITTAL DO NOT APPLY TO SUCH BENEFICIAL OWNERS. Registered Holders To tender in the Exchange Offer, a Holder must complete, sign and date the letter of transmittal, or facsimile thereof, have the signatures thereon guaranteed if required by the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile to the Exchange Agent prior to the Expiration Date. In addition, either (a) certificates for such Old NotesBonds must be received by the Exchange Agent along with the letter of transmittal, or (b) the Holder must comply with the guaranteed delivery procedures described below. 18 To be tendered effectively, the letter of transmittal and other required documents must be received by the Exchange Agent at the address set forth below under "--Exchange Agent" prior to the Expiration Date. The tender by a Holder which is not withdrawn prior to the Expiration Date will constitute an agreement between such Holder and Avista Corp. in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. THE METHOD OF DELIVERY OF OLD NOTES,BONDS, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTESBONDS SHOULD BE SENT TO AVISTA CORP. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Old NotesBonds tendered pursuant thereto is tendered (a) by a registered Holder who has not completed the box entitled "Special Payment Instructions" or "Special Delivery Instructions"Instruc- tions" on the letter of transmittal or (b) for the account of an Eligible Institution (as defined below). In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantor must be a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (an "Eligible Institution"). 21 If the letter of transmittal is signed by a person other than the registered Holder of any Old NotesBonds listed therein, such Old NotesBonds must be endorsed or accompanied by a properly completed bond power signed by such registered Holder as such registered Holder's name appears on such Old Notes.Bonds. If the letter of transmittal or any Old NotesBonds or bond or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by Avista Corp., evidence satisfactory to Avista Corp. of their authority to so act must be submitted with the letter of transmittal. Holders who wish to tender their Old NotesBonds and (a) whose Old NotesBonds are not immediately available, (b) who cannot deliver their Old Notes,Bonds, the letter of transmittaltrans- mittal or any other required documents to the Exchange Agent prior to the ExpirationEthe xpiration Date, or (c) who cannot complete the procedures for book-entry tender on a timely basis may effect a tender if: (1) the tender is made through an Eligible Institution; (2) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery), setting forth the name and address of the Holder, the certificate number(s) of such Old NotesBonds (unless tender is to be made 19 by book-entry transfer) and the principal amount of Old NotesBonds tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the date of delivery of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes,Bonds, in proper form for transfer, or Book-Entry Confirmation (as defined in the letter of transmittal), as the case may be, together with a properly completed and duly executed letter of transmittal (or facsimile thereof or Agent's Message in lieu thereof), with any required signature guarantees and all other documents required by the letter of transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (3) the certificates and/or other documents referred to in clause (2) above must be received by the Exchange Agent within the time specified above. Upon request to the Exchange Agent a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Old NotesBonds according to the guaranteed delivery procedures set forth above. DTC Participants Any financial institution that is a participant in DTC's systems may make book-entry delivery of Old NotesBonds by causing DTC to transfer such Old NotesBonds into the Exchange Agent's account at DTC in accordance with DTC's procedures for transfer. Such delivery must be accompanied by either (a) the letter of transmittal or facsimile thereof, with any required signature guarantees or (b) an Agent's Message (as hereinafter defined), and any other required documents, and must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "--Exchange Agent" prior to the Expiration Date or the guaranteed delivery procedures 22 described above must be complied with. The Exchange Agent will make a request to establish an account with respect to the Old NotesBonds at DTC for purposes of the Exchange Offer within two business days after the date of this prospectus. The term "Agent's Message" means a message, electronically transmitted by DTC to and received by the Exchange Agent, and forming a part of the Book-Entry Confirmation, which states that DTC has received an express acknowledgement from a Holder of Old NotesBonds stating that such Holder has received and agrees to be bound by, and makes each of the representations and warranties contained in, the Letter of Transmittal and, further, that such Holder agrees that the Company may enforce the Letter of Transmittal against such Holder. Miscellaneous All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Old NotesBonds and withdrawal of tendered Old NotesBonds will be determined by Avista Corp. in its sole discretion, which determination will be final and binding. Avista Corp. reserves the absolute right to reject any and all Old NotesBonds not properly tendered or any Old NotesBonds Avista Corp.'s acceptance of which would, in the opinion of counsel for Avista Corp., be unlawful. Avista Corp. also reserves the right to waive any defects, irregularities or conditions of tender as to particular Old Notes.Bonds. Avista Corp.'s interpretation of the terms and conditions of the Exchange Offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old NotesBonds must be cured within such time as Avista Corp. shall determine. Although Avista Corp. intends to notify Holders of defects or irregularities with respect to tenders of Old Notes,Bonds, none of Avista Corp., the Exchange Agent, or any other person shall incur any liability for failure to give such notification. Tenders of Old NotesBonds will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old NotesBonds received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be 20 returned by the Exchange Agent to the tendering Holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the Expiration Date. By tendering, each Holder or the Person receiving the New Notes,Bonds, as the case may be will be deemed to represent to Avista Corp. that, among other things, o the New NotesBonds acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the Person receiving such New Notes,Bonds, whether or not such person is the Holder, o neither the Holder nor any such other person is engaged or intends to engage in, or has an arrangement or understanding with any person to participate in, the distribution of such New Notes,Bonds, and o neither the Holder nor any such other Person is an "affiliate," as defined in Rule 405 of the Securities Act, of Avista Corp. In all cases, issuance of New NotesBonds pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for the Old NotesBonds tendered for exchange or a timely Book-Entry Confirmation of such Old NotesBonds into the Exchange Agent's account at DTC, a properly completed and duly executed letter of transmittal (or facsimile thereof or Agent's Message in lieu thereof) and all other required documents. If any tendered Old NotesBonds are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old NotesBonds are submitted for a greater principal amount than the Holder desires to exchange, such unaccepted or non-exchanged Old NotesBonds will be returned without expense to the tendering Holder thereof (or, in the case of Old NotesBonds tendered by book-entry transfer into the Exchange Agent's account at DTC pursuant to the book-entry transfer procedures described below, such non-exchanged Old NotesBonds will be credited to an account maintained with DTC) as promptly as practicable after the expiration or termination of the Exchange Offer. Avista Corp. reserves the right in its sole discretion to purchase or make offers for any Old NotesBonds that remain outstanding subsequent to the Expiration Date or, as set forth above under "--Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old NotesBonds in the open market, in privately negotiated 23 transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. WITHDRAWAL OF TENDERS OF OLD NOTESBONDS Except as otherwise provided herein, tenders of Old NotesBonds may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old NotesBonds in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (a) specify the name of the person having deposited the Old NotesBonds to be withdrawn (the "Depositor"), (b) identify the Old NotesBonds to be withdrawn (including the certificate number (unless tendered by book-entry transfer), (c) be signed by the Holder in the same manner as the original signature on the letter of transmittal by which such Old NotesBonds were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old NotesBonds register the transfer of such Old NotesBonds in the name of the person withdrawing the tender, and (d) specify the name in which any such Old NotesBonds are to be registered, if different from that of the Depositor. If Old NotesBonds have been tendered pursuant to book-entry transfer, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Old Notes,Bonds, in which case a notice of withdrawal will be effective 21 if delivered to the Exchange Agent by any method of delivery described in this paragraph. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by Avista Corp., whose determination shall be final and binding on all parties. Any Old NotesBonds so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal; and no New NotesBonds will be issued with respect thereto unless the Old NotesBonds so withdrawn are validly retendered. Properly withdrawn Old NotesBonds may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. EXCHANGE AGENT Chase Manhattan Bank and Trust Company, National AssociationCitibank, N.A. has been appointed as Exchange Agent of the Exchange Offer. Requests for additional copies of this prospectus or of the letter of transmittal and requests for Notice of Guaranteed Delivery with respect to the exchange of the Old NotesBonds should be directed to the Exchange Agent addressed as follows: Chase Manhattan Bank andCitibank, N.A. 111 Wall Street 14th Floor/Zone 3 New York, New York 10043 Attention: Global Agency & Trust Company, National Association 101 California Street, Suite 2725 San Francisco, California 94111-5830 Attention: Karen LeiServices By Telephone: (415) 954-95181-800-422-2066 By Facsimile: (415) 693-8850(212) 825-3483 24 FEES AND EXPENSES The expenses of soliciting tenders will be paid by Avista Corp. The principal solicitation is being made by mail; however, additional solicitation may be made by telecopier, telephone or in person by officers and regular employees of Avista Corp. and its affiliates. Avista Corp. has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers-dealers or others soliciting acceptances of the Exchange Offer. Avista Corp., however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by Avista Corp. and are estimated in the aggregate to be approximately $250,000.$125,000. Such expenses include registration fees, fees and expenses of the Exchange Agent, accounting and legal fees and printing costs, among others. Avista Corp. will pay all transfer taxes, if any, applicable to the exchange of the Old NotesBonds pursuant to the Exchange Offer. If, however, certificates representing New NotesBonds for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered Holder of Old NotesBonds tendered, or if tendered Old NotesBonds are registered in the name of, any person other than the person signing the letter of transmittal, or if a transfer tax is imposed for any reason other than the exchange of the Old NotesBonds pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. 22 DESCRIPTION OF THE NEW NOTES You can find the definitions of certain terms used in this description under the subheading "--Certain Definitions."BONDS In this description, the words "Avista Corp." refer only to Avista Corporation and not to any of its subsidiaries, except for purposes of financial data determined on a consolidated basis. The Old NotesBonds and the New NotesBonds are sometimes collectively called the "notes""bonds". GENERAL Avista Corp. issued the Old NotesBonds under an indenture,its Mortgage and Deed of Trust, dated as of April 3, 2001, between itself and Chase Manhattan Bank and Trust Company, National Association,June 1, 1939, as trustee,supplemented, under which Citibank, N.A., is trustee. The Old Bonds were issued in a private transaction that was not subject to the registration requirements of the Securities Act. The bonds, together with all other bonds outstanding under the mortgage, are hereinafter called, collectively, the first mortgage bonds. The statements herein concerning the bonds and the mortgage are merely a summary and do not purport to be complete. Such statements make use of terms defined in the mortgage and are qualified in their entirety by express reference to the cited sections and articles of the mortgage. Sections 125 to 150 of the mortgage appear in the first supplemental mortgage. The terms of the notesbonds include those stated in the indenturemortgage and those made part of the indenturemortgage by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").Act. The following description is a summary of the material provisions of the indenturemortgage relating to the Old Notes.Bonds. It does not restate the indenturemortgage in its entirety. We urge you to read the indenturemortgage because it, and not this description, defines your rights as holders of the Old Notes.Bonds. Some defined terms used in this description but not defined below under "--Certain Definitions" have the meanings assigned to them in the indenture.mortgage. The registered holder of a notebond will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture. RANKINGmortgage. 25 PRINCIPAL, MATURITY AND INTEREST Avista Corp. will issue bonds in denominations of $1,000 and integral multiples of $1,000. The bonds will mature on January 1, 2007. Interest on the bonds will accrue at the rate of 7.75% per annum and will be payable semi-annually in arrears on January 1 and July 1, commencing on July 1, 2002. Avista Corp. will make each interest payment to the holders of record on the immediately preceding December 15 and June 15. Interest on the bonds will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Avista Corp. may not redeem the bonds in whole or in part prior to maturity, and there is no sinking fund for the bonds. METHODS OF RECEIVING PAYMENTS ON THE NOTES The notes: o are general unsecured obligationsBONDS Interest on each bond payable on each interest payment date will be paid by check mailed to the registered holder of such bond on the record date relating to such interest payment date; provided, however, that if such holder is a securities depositary, such payment may be made by such other means in lieu of check as shall be agreed upon by Avista Corp.; o are pari passu, the trustee and such holder; and provided, further, that interest payable at maturity (whether at stated maturity, upon redemption or otherwise, hereinafter "Maturity") will be paid to the person to whom principal is paid. Principal of and premium, if any, and interest on the bonds due at Maturity will be payable upon presentation of the bonds at the principal office of the trustee which has been designated by Avista Corp. as its office or agency for such payment. Avista Corp. may change such office or agency, and may designate any additional office or agency, in rightits discretion. TRANSFER AND EXCHANGE The transfer of bonds may be registered, and bonds may be exchanged for other bonds, upon surrender thereof at the principal office of the trustee which has been designated by Avista Corp. as its office or agency for such purposes. Avista Corp. may change such office or agency, and may designate an additional office or agency, in its discretion. No service charge will be made for any registration of transfer or exchange of bonds, but Avista Corp. may require payment of a sum sufficient to cover any tax or other governmental charge incident thereto. Avista Corp. will not be required to make any transfer or exchange of any bonds for a period of 10 days next preceding any selection of bonds for redemption, nor will it be required to make transfers or exchanges of any bonds which have been selected for redemption in whole or in part or as to which Avista Corp. shall have received a notice for the redemption thereof in whole or in part at the option of the owner. SECURITY The bonds, together with all existing and future unsecured senior Indebtedness of Avista Corp.; and o are senior in right of payment to all current and future subordinated Indebtedness of Avista Corp., if any. As of April 30, 2001, Avista Corp. had outstanding $203.5 million principal amount ofother first mortgage bonds which arenow or hereafter issued under the mortgage, will be secured by the mortgage, which constitutes a first mortgage lien on Avista Corp.'s facilities for the generation, transmission and distribution of electric energy and the storage and distribution of natural gas and substantially all of Avista Corp.'s utility plant assets (currently owned or hereafter acquired)(except as stated below), and $120 millionsubject to o leases of secured short-term bank debt (secured by a pledgeminor portions of the stockCompany's property to others for uses that do not interfere with the Company's business; o leases of Avista Capital) under Credit Facilities with remaining available commitmentscertain property of $110 million. On May 31, 2001the Company not used in its utility business; o excepted encumbrances, as defined in the mortgage; and 26 o encumbrances, defects and irregularities deemed immaterial by the Company in the operation of the Company's business. There are excepted from the lien all cash and securities (including without limitation securities issued by Avista Corp. renewed's subsidiaries); merchandise, equipment, materials or supplies held for sale or consumption in the Company's operations; receivables, contracts, leases and operating agreements; electric energy, and other material or products (including gas) generated, manufactured, produced or purchased by the Company, for sale, distribution or use in the ordinary course of its committed line of credit and repaid all outstanding borrowings under that facility. By reason, andbusiness. (Mortgage, Granting Clauses.) The mortgage contains provisions for subjecting to the extent,lien thereof all property (other than property of thesethe kinds excepted from such lien) acquired by the Company after the execution and delivery thereof, subject to purchase money liens and liens existing thereon at the firsttime of acquisition, and, subject to limitations in the case of consolidation, merger or sale of substantially all of the Company's assets. (Mortgage, Granting Clauses and Art. XV.) The mortgage bonds and secured bank debt rankprovides that the trustee shall have a lien upon the mortgaged property, prior to the notes. Asbonds, for the payment of April 30, 2001, Avista Corp. also had outstanding $876 million of unsecured long-term debtits reasonable compensation and $75.4 million of current portion of unsecured long-term debt. All of such unsecured indebtedness is pari passu in right of payment with the notes. In addition, Avista Corp. had subordinated debentures in a net principal amount outstanding of $103.4 million which are held by the trusts which issued $100 million of outstanding preferred trust securities. The notes are senior in right of payment to these debentures. The amounts of indebtedness discussed in this paragraph relate to Avista Corp. onlyexpenses and not to its subsidiaries. As of the date of this prospectus, all of our subsidiaries are "Restricted Subsidiaries." However, under the circumstances described below under the subheading "--Certain Other Covenants--Designation of Restrictedfor indemnity. (Mortgage, Secs. 92 and Unrestricted Subsidiaries", we will be permitted to designate certain of our subsidiaries as "Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the indenture.97; First Supplemental, Art. XXV.) Although its utility operations are conducted directly by Avista Corp., all of the other operations of Avista Corp. are conducted through its subsidiaries. The noteslien of the mortgage does not cover the assets of the subsidiaries or the securities of the subsidiaries held by Avista Corp. In addition, the bonds will be effectively subordinated in right of payment to all Indebtednessindebtedness and other liabilities and commitments (including trade payables and lease obligations) of Avista Corp.'s subsidiaries. Any right of Avista Corp. to receive assets of any of its subsidiaries upon the subsidiary's liquidation or 23 reorganization (and the consequent right of the holders of the notesbonds to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors, except to the extent that Avista Corp. is itself recognized as a creditor of the subsidiary, in which case the claims of Avista Corp. would still be subordinate in right of payment to any security in the assets of the subsidiary and any indebtedness of the subsidiary senior to that held by Avista Corp. In addition, Avista Corp.'s ability to access the cash flow of its subsidiaries is subject to substantial restrictions. See BANK CREDIT AGREEMENTS. As of MarchDecember 31, 2001, Avista Corp.'s subsidiaries had approximately $3.7$22.9 million of Indebtedness, $639.4indebtedness, $440.4 million of payables and other liabilities, and $9.3 billion$673.8 million of energy commodity liabilities (energy commodity liabilities are held in a portfolio containing $9.5 billion$860.5 million of energy commodity assets) outstanding. PRINCIPAL, MATURITY AND INTEREST Avista Corp. has limited the aggregate principal amountAs of notes which can be issued under the indenture to $600 million, of which Avista Corp. has issued $400 million aggregate principal amount. Avista Corp. may issue additional notes (the "Additional Notes") from time to time. Any offering of Additional Notes is subject to the covenant described below under the caption "--Certain Other Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The notes and any Additional Notes subsequently issued under the indenture would be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Avista Corp. will issue notes in denominations of $1,000 and integral multiples of $1,000. The notes will mature on June 1, 2008. Interest on the notes will accrue at the rate of 9.75% per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2001. Avista Corp. will make each interest payment to the holders of record on the immediately preceding May 15 and November 15. Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basisthis prospectus, $533.5 million of a 360-day year comprisedfirst mortgage bonds are outstanding. This amount includes $220 million of twelve 30-day months. METHODS OF RECEIVING PAYMENTS ON THE NOTES If a holder has given wire transfer instructions to Avista Corp. at least ten business days priornon-transferable first mortgage bonds which were issued in September 2001 to the applicable payment date,agent bank under Avista Corp. will pay all principal, interest and premium, if any, on that holder's notes's primary credit facility in accordance with those instructions. All other payments onorder to provide the notes will be made at the office or agencybenefit of the paying agentlien of the mortgage to secure Avista Corp.'s obligations. The indebtedness under the credit facility (including the collateral bonds) are included in Avista Corp.'s short-term debt. See BANK CREDIT AGREEMENTS. MAINTENANCE AND REPLACEMENT FUND Annual Maintenance and registrar for the notes within the City and State of New York unless Avista Corp. elects to make interestReplacement Fund payments by check mailed to the holders at their addresses set forth in the register of holders. PAYING AGENT AND REGISTRAR FOR THE NOTES The trustee will initially act as paying agent and registrar. Avista Corp. may change the paying agent or registrar without prior notice to the holders, and Avista Corp. or any of its Subsidiaries may act as paying agent or registrar. TRANSFER AND EXCHANGE A holder may transfer or exchange notes in accordance with the indenture. The registrar and the trustee may require a holder to furnish appropriate endorsements and transfer documents in connection with a transfer of notes. Holders will beare required to pay all taxes due on transfer. Avista Corp. is not required to transfer or exchange any note selected for redemption. OPTIONAL REDEMPTION The notes are redeemable in whole or in part, at the option of Avista Corp. at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal of and interest on the notes being redeemed discounted to the date of redemption on a semiannual basis 24 (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Yield plus 50 basis points, plus, for (i) or (ii) above, whichever is applicable, accrued interest on such notes to the date of redemption. "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of such notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the notes. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank of New York or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, the Reference Treasury Dealer Quotation for such redemption date. "H.15(519)" means the weekly statistical release entitled "Statistical Release H.15 (519)", or any successor publication, published by the Board of Governors of the Federal Reserve System. "H.15 Daily Update" means the daily update of H.15(519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication. "Independent Investment Banker" means an independent investment banking institution of national standing appointed by Avista Corp. and reasonably acceptable to the trustee. "Reference Treasury Dealer Quotation" means, with respect to the Reference Treasury Dealer and any redemption date, the average, as determined by the trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and quoted in writingmade to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date). "Reference Treasury Dealer" means a primary U.S. Government securities dealer in New York City appointed by Avista Corp. and reasonably acceptable to the trustee. Notice of redemption shall be given not less than 15 days nor more than 60 days prior to the date fixed for redemption. Unless Avista Corp. defaults in payment of the Redemption Price (as defined below), from and after the Redemption Date, the notes or portions thereof called for redemption will cease to bear interest, and the holders thereof will have no right in respect to such notes except the right to receive the Redemption Price thereof. Under the procedures set forth above, the price (the "Redemption Price") payable upon the optional redemption at any time of notes is determined by calculating the present value (the "Present Value") at such time of each remaining payment of principal of or interest on such notes and then totaling such Present Values. If the sum of such Present Values is equal to or less than 100% of the principal amount of such notes, the Redemption Price of such notes will be 100% of its principal amount (redemption at par). If the sum of such Present Values is greater than 100% of the principal amount of such notes, the Redemption Price of such notes will be such greater amount (redemption at a premium). In no event may a note be redeemed optionally at less than 100% of its principal amount. The Present Value at any time of a payment of principal of or interest on a note is calculated by applying to such payment the discount rate (the "Discount Rate") applicable to such payment. The Discount Rate applicable at any time to a 25 payment of principal of or interest on a note equals the equivalent yield to maturity at such time of a fixed rate United States treasury security having a maturity comparable to the maturity of such payment plus 50 basis points; such yield being calculated on the basis of the interest rate borne by such United States treasury security and the price at such time of such security. The United States treasury security employed in the calculation of a Discount Rate (a "Relevant Security") as well as the price and equivalent yield to maturity of such Relevant Security will be selected or determined by an investment banker of national standing selected by Avista Corp. which is reasonably acceptable to the trustee. Whether the sum of the Present Values of the remaining payments of principal of and interest on a note to be redeemed optionally will or will not exceed 100% of its principal amount and, accordingly, whether such notes will be redeemed at par or at a premium will depend on the Discount Rate used to calculate such Present Values. Such Discount Rate, in turn, will depend upon the equivalent yield to maturity of a Relevant Security which yield will itself depend on the interest rate borne by, and the price of, the Relevant Security. While the interest rate borne by the Relevant Security is fixed, the price of the Relevant Security tends to vary with interest rate levels prevailing from time to time. In general, if at a particular time the prevailing level of interest rates for a newly issued United States treasury security having a maturity comparable to that of a Relevant Security is higher than the level of interest rates for newly issued United States treasury securities having a maturity comparable to such Relevant Security prevailing at the time the Relevant Security was issued, the price of the Relevant Security will be lower than its issue price. Conversely, if at a particular time the prevailing level of interest rates for a newly issued United States treasury security having a maturity comparable to that of a Relevant Security is lower than the level of interest rates prevailing for newly issued United States treasury securities having a maturity comparable to the Relevant Security at the time the Relevant Security was issued, the price of the Relevant Security will be higher than its issue price. Because the equivalent yield to maturity on a Relevant Security depends on the interest rate it bears and its price, an increase or a decrease in the level of interest rates for newly issued United States treasury securities with a maturity comparable to that of a Relevant Security above or below the levels of interest rates for newly issued United States treasury securities having a maturity comparable to the Relevant Security prevailing at the time of issue of the Relevant Security will generally result in an increase or a decrease, respectively, in the Discount Rate used to determine the Present Value of a payment of principal of or interest on a note. As noted above, if the sum of the Present Values of the remaining payments of principal of and interest on a note proposed to be redeemed is less than its principal amount, such note may only be redeemed at par. MANDATORY REDEMPTION Avista Corp. is not required to make any mandatory redemption or sinking fund payments with respect to the notes. SELECTION AND NOTICE If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption as follows: (1) if the notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the notes are listed; or (2) if the notes are not listed on any national securities exchange, on a pro rata basis, by lot or by such method as the trustee shall deem fair and appropriate. No portion of a note less than $1,000 will be redeemed. Notices of redemption will be mailed by first class mail at least 15 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed 26 portion of the original note will be issued in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption. REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL In the event of a Change of Control, each holder of notes will have the right to require Avista Corp. to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that holder's notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, Avista Corp. will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, if any, thereon, to the date of purchase. Within ten days following any Change of Control, Avista Corp. will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the Change of Control Payment Date specified in the notice, pursuant to the procedures required by the indenture and described in such notice. Avista Corp. will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. On the Change of Control Payment Date, Avista Corp. will, to the extent lawful: (1) accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer; (2) deposit with the paying agent an amount equal to the Changeexcess, if any, of Control Paymentthe amount which, in respectthe opinion of all notes or portions of notes properly tendered; and (3) deliver or cause to bean engineer expressed in a certificate delivered to the trustee, should have been expended during the notes so accepted together with an Officers' Certificate statingpreceding calendar year for repairs, maintenance, renewals or replacements of, or substitutions for, the aggregate principalmortgaged property over the amount actually expended for such purposes. Any annual requirement may be satisfied (a) in cash or (b) by credit for the amount of notesfirst mortgage bonds that would otherwise be issuable on the basis of either property additions or portions of notes being purchasedfirst mortgage bonds or prior lien bonds theretofore retired; provided, however, that the Company is not permitted to satisfy any Maintenance and Replacement Fund requirement by Avista Corp. The paying agent will promptly mailthe deposit of cash if, at the time such requirement is to each holderbe satisfied, it has unfunded property additions having a cost or fair value (whichever is less) equal to or greater than 110% of notes properly tendered the Change of Control Payment for such notes, andrequirement. Cash deposited with the trustee will promptly authenticatepursuant to the Maintenance and mail (or causeReplacement Fund may, among other things, be applied to be transferredthe purchase of first mortgage bonds or to the redemption of first mortgage bonds which are, by book entry) to each holder a new note equal in principal amount to any unpurchased portiontheir terms, redeemable before maturity. 27 In every year since the execution and delivery of the notes surrendered, if any; providedmortgage, the Company has made all necessary expenditures for the aforesaid purposes and an engineer has so certified, with the result that the Company has never been required to make any payment to the trustee under the Maintenance and Replacement Fund. In addition, the mortgage contains a covenant pursuant to which the Company is required for each new note will be in a principal amount of $1,000calendar year to expend or an integral multiple of $1,000. Avista Corp. will publicly announce the resultsaccrue for maintenance or to appropriate for property retirement or for property amortization 13 1/2% of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The provisions described above that require Avista Corp. to make a Change of Control Offer following a Change of Control will be applicable regardless of whether any other provisionsgross operating revenues of the indenture are applicable. ExceptCompany, as described above with respect todefined therein; provided, however, that the Company may so expend, accrue or appropriate a Change of Control,lesser amount if a regulatory authority determines that such lesser amount is adequate. Excess amounts expended, accrued or appropriated in any year may be credited against the indenturefive succeeding years' requirements. This covenant does not containrequire the deposit of cash with the trustee. The Company amended the mortgage, effective as of the Modification Effective Date referred to below, to eliminate the provisions that permitfor property maintenance and retirement described above. No consent of the holders of the notesbonds is required in order for this amendment to requirebecome effective. See "--Modification." (Mortgage, Sec. 38; First Supplemental, Article XXV; Second Supplemental, Sec. 9; Eighteenth Supplemental, Sec. 4; Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II.) SPECIAL PROVISIONS FOR RETIREMENT OF BONDS If, during any 12-month period, any of the mortgaged property is taken by eminent domain and/or sold to any governmental, authority and/or sold pursuant to an order of a governmental authority, with the result that Avista Corp. repurchasethe Company receives $15,000,000 or redeemmore in cash or in principal amount of purchase money obligations, the notesCompany is required to apply such cash and the proceeds of such obligations (subject to certain conditions and deductions, and to the extent not otherwise applied) to the redemption of first mortgage bonds which are, by their, terms, redeemable before maturity by the application of such cash and proceeds. (Mortgage, Sec. 64; Tenth Supplemental, Sec. 4.) ISSUANCE OF ADDITIONAL BONDS The present maximum principal amount of first mortgage bonds which may be outstanding under the mortgage is $10,000,000,000. However, the Company has reserved the right to amend the mortgage (without any consent of or other action of holders of any bonds now or hereafter outstanding) to remove this limitation. First mortgage bonds of any series may be issued from time to time on the basis of: (1) 60% of cost or fair value of property additions (whichever is less) after adjustments to offset retirements; (2) retirement of first mortgage bonds; and (3) deposit of cash. The Old Bonds were issued upon the basis of unfunded property additions and retired first mortgage bonds and New Bonds will only be issued in exchange for a like principal amount of Old Bonds tendered in the eventExchange Offer. The Company has amended the mortgage, effective as of a takeover, recapitalization or similar transaction. Accordingly, the indenture may not affordModification Effective Date referred to below, to (x) change 60% in the preceding sentence to 70% and (y) make correlative changes in provisions relating to, among other things, the release of property from the lien of the mortgage and the withdrawal of cash held by the trustee. No consent of the holders of notes protectionthe bonds is required in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, mergerorder for this amendment to become effective. See "--Modification." No first mortgage bonds may be issued as described in clause (1) or similar transaction. Avista Corp. will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer(3) in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by Avista Corp. and purchases all notes properly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of "all or substantially all"preceding paragraph unless net earnings for 12 consecutive months out of the properties or assetspreceding 15 calendar months (before income taxes, depreciation and amortization of Avista Corp.property, property losses and its Subsidiaries taken as a whole. Although there is a limited bodyinterest on any indebtedness and amortization of case law interpretingdebt discount and expense) are at least twice the phrase "substantially all", there is no precise established 27annual 28 definition of the phrase under applicable law. Accordingly, it may be uncertain whether a holder of notes can require Avista Corp. to repurchase those notes as a result of a sale, lease, transfer, conveyance or other disposition of less thaninterest requirements on all of the assets of Avista Corp. and its Subsidiaries taken as a whole. ASSET SALES Unless the Rating Condition is satisfied, Avista Corp. will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) Avista Corp. (or the Restricted Subsidiary, as the case may be) receives considerationfirst mortgage bonds at the time outstanding, including the additional issue, and on all indebtedness of the Asset Sale at least equalprior rank. Such net earnings test generally need not be satisfied prior to the fair market valueissuance of first mortgage bonds as described in clause (2) in the assets or Equity Interestspreceding paragraph unless (x) the annual requirements on the retired first mortgage bonds on the basis of which the bonds are to be issued or sold or otherwise disposed of, as determined by Avista Corp.'s Board of Directors and evidenced byhave been excluded from a resolution of the Board of Directors set forth in an Officers' Certificatenet earnings certificate delivered to the trustee beforesince the retirement of such first mortgage bonds or a reasonable time after such Asset Sale; and (2) at least 75%(y)(i) the retired first mortgage bonds on the basis of which the consideration received in such Asset Sale by Avista Corp. or such Restricted Subsidiary is in the form of cash or Cash Equivalents. For purposes of this provision, each of the following shall be deemedbonds are to be cash: (a) any liabilities (as shown on Avista Corp.'s or such Restricted Subsidiary's most recent balance sheet) of Avista Corp. or any Restricted Subsidiary (other than contingent liabilities and liabilities that areissued mature by their terms subordinated in rightat a date more than two years after the date for authentication and delivery of payment tosuch bonds and (ii) the notes) that are assumed bybonds bear interest at a higher rate than such retired first mortgage bonds. The Company has amended the transferee or purchaser of any such assets pursuant to an agreement that releases Avista Corp. or such Restricted Subsidiary from further liability; and (b) any securities, notes or other obligations received by Avista Corp. or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by Avista Corp. or such Restricted Subsidiary into cash (to the extentmortgage, effective as of the cash received in that conversion, sale or exchange). Within 360 days afterModification Effective Date referred to below: o to modify the receipt of any Net Proceeds from an Asset Sale that is consummated at a time when the Rating Condition is not satisfied, Avista Corp. may apply those Net Proceeds: (1) to repay Indebtedness (other than intercompany Indebtedness) of Avista Corp., or a Restricted Subsidiary of Avista Corp., and to correspondingly reduce commitments if such Indebtedness constitutes revolving credit borrowings; (2) to make capital expenditures; or (3) to acquire other long-term assets that are used or useful in a Permitted Business. Pending the final application of any Net Proceeds, Avista Corp. may temporarily reduce revolving credit borrowings or otherwise invest Net Proceeds in any manner that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that are consummated at a time when the Rating Condition is not satisfied that are not applied or invested as provided abovenet earnings test described in the preceding paragraph will constitute "Excess Proceeds." Whento, among other things: o provide that the aggregate amount of Excess Proceeds exceeds $15 million, Avista Corp. will make an Asset Sale Offer to all holders of notes (and to all holders of other Indebtedness thatperiod over which net earnings is pari passu with the notes and that contains provisions similar to those set forth in the indenture relating to the notes with respect to offers to purchase or redeem with the proceeds of sales of assets) to purchase the maximum principal amount of notes and such other pari passu 28 Indebtedness that maycomputed shall be purchased12 out of the Excess Proceeds. The offer pricepreceding 18 months; o specifically permit the inclusion in any Asset Sale Offer will be equalnet earnings of revenues collected or accrued subject to 100%possible refund; specifically permit the inclusion in net earnings of principal amount (or 100% of the accreted value thereof, in the case of Indebtedness sold at a discount) plus accrued and unpaid interest to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, Avista Corp. may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of notes and other Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, Avista Corp. will allocate the Excess Proceeds on a pro rata basis to the notes and such other Indebtedness tendered, and the trustee will select the notes to be purchased on a pro rata basis based on the principal amount of notes tendered. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. Notwithstanding the foregoing, (1) Avista Corp. may (i) dispose of all or any portion of its transmission assets in one or more RTO Transactions, or (ii) effect, or permitthe allowance for funds used during construction, and any Restricted Subsidiary to effect, an Asset Sale in which the Capital Stock of Avista Communications, Avista Advantage or Avista Labs (provided such Person is operating substantially the same business as at the dateportion of the indenture)allowance for funds used to conserve energy (or any analogous amount), which is exchanged for Capital Stocknot included in "other income" (or any analogous item) in the Company's books of account; o provide that, in calculating net earnings, no deduction from revenues or other securities of another Person if, upon completion thereof, the subject or transferee Person is no longer a Subsidiary of Avista Corp.; provided, however, that if the Rating Condition is not satisfied at the time of such transaction, Avista Corp. shall apply any Net Proceeds therefrom in accordance with the foregoing provisions; provided, further, that if Avista Corp. or any Restricted Subsidiary thereafter disposes of any Capital Stock or other securities or ownership interest in the subject or transferee Person received in, or retained subsequent to, any such transaction, any cash realized therefromincome shall be treated as Net Proceeds from an Asset Sale and applied in accordance with the foregoing provisions; and (2) thesemade for (1) expenses or provisions shall not apply to any Asset Sale which constitutes a transfer, conveyance, sale, lease or other disposition of all or substantially all of Avista Corp.'s properties or assets. See below under "--Certain Other Covenants--Merger, Consolidation or Sale of Assets." Avista Corp. will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with each repurchase of notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sales provisions of the indenture, Avista Corp. will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Asset Sale provisions of the indenture by virtue of such conflict. CERTAIN OTHER COVENANTS Set forth below are certain other covenants contained in the indenture. During any period of time that (i) Moody's and S&P have issued credit ratings of Avista Corp.'s senior unsecured debt of at least Baa2 and BBB, respectively, in each case with a stable or improving outlook and (ii) no Default has occurred and is continuing under the indenture (which we refer to collectively as the "Rating Condition"), Avista Corp. and its Restricted Subsidiaries will not be subject to the provisions of the Indenture described above under "Repurchase at the Option of Holders--Asset Sales", and the provisions described below under "--Restricted Payments", "--Incurrence of Indebtedness and Issuance of Preferred Stock", "--Dividend and Other Payment Restrictions Affecting Subsidiaries", and "--Transactions with Affiliates", and clause (4) of the "--Merger, Consolidation and Sale of Assets" covenant (collectively, the "Suspended Covenants"). If Avista Corp. and its Restricted Subsidiaries are not subject to the Suspended Covenants with respect to the notes for any periodnon-recurring charge to income of time as a result of the preceding sentence and, subsequently, onewhatever kind or both of Moody's and S&P withdraw their ratings or downgrade the ratings assigned to the notes below the specified ratings, then Avista Corp. and each of its Restricted Subsidiaries (except to the extent that any Restricted Subsidiary is not subject to any such covenant pursuant to the terms thereof) will thereafter again be subject to the Suspended Covenants for the benefit of the notes and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal or downgrade will be calculated in accordance with the terms of the covenant described below under "--Restricted Payments" as if such covenant had been in effect during the entire period of time from the date of the indenture. RESTRICTED PAYMENTS Unless the Rating Condition is satisfied, Avista Corp. will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: 29 (1) declare or pay any dividend or make any other payment or distribution on account of Avista Corp.'s Equity Interestsnature (including without limitation any payment in connection with any merger or consolidation involving Avista Corp. or anythe recognition of its Restricted Subsidiaries) orexpense due to the directnon-recoverability of investment) or indirect holders of Avista Corp.'s or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of Avista Corp. or dividends or distributions to Avista Corp. or a Restricted Subsidiary of Avista Corp.); (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving Avista Corp.) any Equity Interests of Avista Corp. or any Person that beneficially owns, directly or indirectly, a majority of the Capital Stock of Avista Corp.; (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated in right of payment to the notes, except a payment of interest or principal at or after the Stated Maturity thereof or a refinancing thereof within one year of the final maturity date thereof; or (4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default has occurred and is continuing or would occur as a consequence thereof; (2) Avista Corp. would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock"; and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by Avista Corp. and its Subsidiaries after the date of the indenture (excluding Restricted Payments permitted by clauses (2) through (7) and (9) of the next succeeding paragraph), is less than the sum, without duplication, of: (a) 50% of the Consolidated Net Income of Avista Corp. for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing prior to the date of the indenture to the end of Avista Corp.'s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by Avista Corp. since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of Avista Corp. (other than Disqualified Stock) or upon the exercise of any options, warrants or other rights to purchase Capital Stock (other than Disqualified Capital Stock) of Avista Corp. or from the issuance or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of Avista Corp. that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of Avista Corp.), plus (c) 100% of the net reduction in any Restricted Investment that was made after the date of the indenture resulting from payments of interest on Indebtedness, dividends, repayment of loans or advances, or other transfers of assets, in each case to Avista Corp. or any Restricted Subsidiary, and the cash return of capital with respect to any Restricted Investment (less the cost of disposition, if any), plus 30 (d) to the extent that any Unrestricted Subsidiary of Avista Corp. is redesignated as a Restricted Subsidiary after the date of the indenture, the fair market value of Avista Corp.'s Investment in such Subsidiary as of the date of such redesignation, plus (e) any amount which previously qualified as a Restricted Payment on account of any Guarantee entered into by Avista Corp. or any Restricted Subsidiary; provided that such Guarantee has not been called upon and the obligation arising under such Guarantee no longer exists; less (f) the after-tax amount of any power and natural gas cost deferrals for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing prior to the date of the indenture to the end of Avista Corp.'s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment; plus (g) the after-tax amount of any amortization of power and natural gas deferrals for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing prior to the date of the indenture to the end of Avista Corp.'s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment. So long as no Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of Avista Corp. or of any Equity Interests of Avista Corp. in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of Avista Corp.) of, Equity Interests of Avista Corp. (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasancerefund of revenues previously collected or other acquisition will be excluded from clause (3)(b) of the preceding paragraph; (3) the defeasance, redemption, repurchaseaccrued subject to possible refund, and o provide that, in calculating annual interest requirements, (1) if any first mortgage bonds or other acquisition of subordinated Indebtedness of Avista Corp. with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the repurchase, redemption, retirement, refinancing, acquisition for value or payment of any Disqualified Stock in exchange for, or out of the net cash proceeds of, the substantially concurrent issuance of new Disqualified Stock of Avista Corp.; provided that any such new Disqualified Stock: (a) shall have an aggregate liquidation preference that does not exceed the aggregate liquidation preference of the amount so refinanced; (b) has a Weighted Average Life to Maturity greater than the remaining Weighted Average Life to Maturity of the Disqualified Capital Stock being refinanced; and (c) has a Stated Maturity later than the Stated Maturity of the Disqualified Stock being refinanced; (5) the repurchase of any subordinated Indebtedness of Avista Corp.prior ranking indebtedness bears interest at a purchase price not greater than 101% ofvariable rate, the principal amount of such subordinated Indebtedness in the event of a Change of Control pursuant to a provision similar to "Repurchase at the Option of Holders--Change of Control"; provided that prior to consummating any such repurchase, Avista Corp. has made the Change of Control Offer required by the indenture and has repurchased all notes validly tendered for payment in connection with such Change of Control Offer; (6) the repurchase of any subordinated Indebtedness of Avista Corp. at a purchase price not greater than 100% of the principal amount of such Indebtedness in the event of an Asset Sale pursuant to a provision similar 31 to the "--Repurchase at the Option of Holders--Asset Sales" covenant; provided that prior to consummating any such repurchase, Avista Corp. has made the Asset Sale Offer required by the indenture and has repurchased all notes validly tendered for payment in connection with such Asset Sale Offer; (7) repurchases of Capital Stock (or warrants or options convertible into or exchangeable for such Capital Stock) deemed to occur upon exercise of stock options to the extent that shares of such Capital Stock (or warrants or options convertible into or exchangeable for such Capital Stock) represent a portion of the exercise price of such options; (8) the declaration and payment of regular quarterly cash dividends in respect of Avista Corp.'s common stock in a per share amount not to exceed 105% of the quarterly dividend for the immediately preceding calendar quarter, and in respect of Avista Corp.'s preferred stock in an aggregate amount not to exceed $2.5 million per calendar quarter; provided that the aggregate amount of such cash dividends will be included as Restricted Payments for purposes of determining the amount of Restricted Payments that may be made pursuant to clause (3) of the preceding paragraph; or (9) other Restricted Payments by Avista Corp. or any Restricted Subsidiary in an aggregate amount not to exceed $10 million since the date of the indenture. The amount of all Restricted Payments (other than cash) will be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued to or by Avista Corp. or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant willannual interest requirements thereon shall be determined by the Board of Directors whose resolution with respect thereto shall be deliveredreference to the trustee. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK Unless the Rating Condition is satisfied, Avista Corp. will not, and will not permit any of its Restricted Subsidiaries to, directlyrate or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt), and Avista Corp. will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that Avista Corp. may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock, and Avista Corp.'s Restricted Subsidiaries may incur Indebtedness or issue preferred stock, if the Fixed Charge Coverage Ratio for Avista Corp.'s most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the preferred stock or Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. This covenant will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of Indebtedness and letters of credit under one or more Credit Facilities in an aggregate principal amount at any one time outstanding under this clause (1) (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of Avista Corp. and its Restricted Subsidiaries thereunder) equal to $600 million outstanding at any one time, less principal repayments of term loans and permanent commitment reductions with respect to revolving loans and letters of credit under any Credit Facility (in each case, other than in connection with an amendment, refinancing, refunding, replacement, renewal or modification) made after the date of the Indenture; (2) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of the Existing Indebtedness; (3) the incurrence by Avista Corp. of Indebtedness represented by the notes; 32 (4) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace, Indebtedness (other than intercompany Indebtedness) that was permitted by the indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (8), (11) or (12) of this paragraph; (5) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of intercompany Indebtedness between or among Avista Corp. and any of its Restricted Subsidiaries; provided, however, that: (a) if Avista Corp. is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all Obligations with respect to the notes; and (b)(i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than Avista Corp. or a Restricted Subsidiary thereof and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either Avista Corp. or a Restricted Subsidiary thereof, shall be deemed, in each case, to constitute an incurrence of such Indebtedness by Avista Corp. or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (5); (6) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of: (a) Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the indenture to be outstanding; (b) Currency Hedging Obligations relating to Indebtedness of Avista Corp. or any Restricted Subsidiary and/or to obligations to purchase or sell assets or properties; provided that such Currency Hedging Obligations do not increase the Indebtedness or other obligations of Avista Corp. or any Restricted Subsidiary other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (c) Commodity Price Protection Obligations; provided that such Commodity Price Protection Obligations do not increase the amount of Indebtedness or other obligations of Avista Corp. or any Restricted Subsidiary other than as a result of fluctuations in commodity prices or by reason of fees, indemnities and compensation payable thereunder; and (d) the Guarantee by any Restricted Subsidiary of Avista Corp. of Indebtedness of Avista Corp. if such Restricted Subsidiary guarantees the notes by executing a guarantee and supplemental indenture in the forms prescribed by the indenture; (7) the Guarantee by Avista Corp. or any Subsidiary of Avista Corp. of Indebtedness of a Restricted Subsidiary of Avista Corp. that was permitted to be incurred by another provision of this covenant; (8) Indebtedness of Avista Corp. or any Restricted Subsidiary of Avista Corp., represented by Capital Lease Obligations, or preferred stock of a Restricted Subsidiary issued, or Indebtedness of Avista Corp. or a Restricted Subsidiary incurred or assumed (i) to finance capital expenditures or (ii) in connection with the acquisition or development of real property, plant or equipment or the Capital Stock of a Restricted Subsidiary that owns such property, plant or equipment in each case incurred for the purpose of financing all or any part of the purchase price of such property, plant or equipment or Capital Stock, in each case in an aggregate principal amount (or accreted value, as applicable) at any time outstanding pursuant to this clause (8), including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (8), not to exceed $275 million; (9) Indebtedness incurred to finance power and natural gas cost deferrals pursuant to, and in accordance with, state statutory or public utility commission authorization, in an amount not to exceed the amount of the deferrals so financed; 33 (10) Indebtedness of Avista Corp. or any of its Restricted Subsidiaries arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five business days of incurrence; (11) shares of preferred stock of a Restricted Subsidiary of Avista Corp. issued to Avista Corp. or another Restricted Subsidiary of Avista Corp.; provided that any subsequent transfer of any Capital Stock or any other event that results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of any such shares of preferred stock (except to Avista Corp. or another Restricted Subsidiary of Avista Corp.) shall be deemed, in each case, to be an issuance of preferred stock that was not permitted by this clause (11); and (12) the incurrence by Avista Corp. or any of its Restricted Subsidiaries of additional Indebtedness (including under a Credit Facility) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (12), not to exceed $25 million. In addition, Avista Corp. will not incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of Avista Corp. unless such Indebtedness is also contractually subordinated in right of payment to the notes pursuant to terms no less favorable to the holders of the notes; provided, however, that no Indebtedness of Avista Corp. shall be deemed to be contractually subordinated in right of payment to any other Indebtedness of Avista Corp. solely by virtue of being unsecured. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant: (1) in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (12) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, Avista Corp. will be permitted to classify such item of Indebtedness on the date of its incurrence in any manner that complies with this covenant; (2) Indebtedness under Credit Facilities outstanding on the date of the indenture shall be deemed to have been incurred on the date of the indenture in reliance on the exception provided by clause (1) of the definition of Permitted Debt; (3) the accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of Avista Corp. as accrued; and (4) for purposes of determining compliance with any dollar-denominated restriction on the incurrence of Indebtedness denominated in a foreign currency, the dollar-equivalent principal amount of such Indebtedness incurred pursuant thereto shall be calculated based on the relevant currency exchange rate in effect on the date that such Indebtedness was incurred. Notwithstanding the foregoing, Avista Corp. will not incur or suffer to exist, or permit any of its Restricted Subsidiaries or Unrestricted Subsidiaries to incur or suffer to exist, any Obligations with respect to an Unrestricted Subsidiary that would violate the provisions set forth in the definition of Unrestricted Subsidiary. Specifically, without limiting the generality of the foregoing, if an Unrestricted Subsidiary incurs Indebtedness that is not Non-Recourse Debt or any Indebtedness of an Unrestricted Subsidiary ceases to be Non-Recourse Debt, such Unrestricted Subsidiary will then cease to be an Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary will be deemed to be incurred by a Restricted Subsidiary of Avista Corp. as of such date. 34 LIENS Avista Corp. will not and will not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any consensual Lien of any kind securing Indebtedness or trade payables (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired, unless all payments due under the indenture and the notes are secured on an equal and ratable basis with the obligations so secured until such time as such obligations are no longer secured by a Lien; provided, however, that Avista Corp. and its Restricted Subsidiaries may incur other Liens to secure Indebtedness or trade payables as long as the sum of (x) the amount of outstanding Indebtedness and trade payables secured by Liens incurred pursuant to this proviso plus (y) the Attributable Debt with respect to all outstanding leases in connection with Sale/Leaseback Transactions entered into pursuant to the second paragraph of the covenant described below under the caption "--Sale and Leaseback Transactions", does not exceed $25 million. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES Unless the Rating Condition is satisfied, Avista Corp. will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to Avista Corp. or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to Avista Corp. or any of its Restricted Subsidiaries; (2) make loans or advances to Avista Corp. or any of its Restricted Subsidiaries; or (3) transfer any of its properties or assets to Avista Corp. or any of its Restricted Subsidiaries. However, thenext preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) Existing Indebtedness and Indebtedness under Credit Facilities as in effect on the date of the indenturenew issue of first mortgage bonds and any amendments, modifications, restatements, renewals, increases, supplements, refundings, restructurings (including(2) if the new issue of first mortgage bonds is to bear interest at a variable rate increases), replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, restructurings, replacementrates, the annual interest requirements thereon shall be determined by reference to the rate or refinancings are not materially more restrictive, taken as a whole, with respectrates to such dividend and other payment restrictions than those contained in such Indebtedness, as in effect on the date of the indenture; (2) the indenture and the notes; (3) applicable law or any requirement of any regulatory body; (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by Avista Corp. or any of its Restricted Subsidiaries asbe in effect at the time of the initial issuance thereof. No consent of the holders of the bonds is required in order for this amendment to become effective. See "--Modification." Property additions generally include electric, natural gas, steam or water property acquired after May 31, 1939, but may not include property used principally for the production or gathering of natural gas. Any such acquisition (exceptproperty additions may be used if their ownership and operation is within the corporate purposes of the Company regardless of whether or not the Company has all necessary permission it may need at any time from governmental authorities to operate such property additions. The holders of the bonds will be deemed to have consented to an amendment to the extent such Indebtedness was incurredprovision of the mortgage which requires that Avista Corp. deliver an opinion of counsel as to the status of the lien of the mortgage on Property Additions being certified to the Trustee. The amendment permits us to deliver to the Trustee, in connection with or in contemplationlieu of such acquisition), which encumbrance or restriction isopinion, title insurance with respect to such Property Additions in an amount not applicable to any Person, or the properties or assets of any Person, otherless than the Person, or the property or assets35% of the Person, socost or fair value to Avista Corp. (whichever is less) of such Property Additions. Such amendment could not be made without the requisite consent of the holders of outstanding bonds as described under "--Modification." No first mortgage bonds may be issued on the basis of property additions subject to prior liens, unless the prior lien bonds secured thereby have been qualified by being deducted from the first mortgage bonds otherwise 29 issuable and do not exceed 50% of such property additions, and unless the first mortgage bonds then to be outstanding which have been issued against property subject to continuing prior liens and certain other items would not exceed 15% of the first mortgage bonds outstanding. The Company has amended the mortgage, effective as of the Modification Effective Date referred to below, to change 50% in the foregoing sentence to 70%. No consent of the holders of the bonds is required in order for this amendment to become effective. See "--Modification." The amount of prior liens on mortgaged property acquired after the date of delivery of the mortgage may be increased subsequent to the acquisition of such property provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indenture to be incurred; (5) customary non-assignment provisions of (a)if any leases governing a leasehold interest, (b) any supply, license or other agreement entered into in the ordinary course of business of Avista Corp. or any of its Restricted Subsidiaries, or (c) any security agreement relating to a Lien incurred pursuant to clause (10) of the definition of Permitted Liens; 35 (6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (3) of the preceding paragraph; (7) any agreement for the sale or other disposition of a Restricted Subsidiary or assets that restricts distributions by that Subsidiary or of such assets pending such sale or other disposition; (8) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are not materially more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (9) Liens securing Indebtedness that limit the right of the debtor to dispose of the assets subject to such Lien;prior lien shall have been made the basis of any application under the mortgage, all the additional obligation are deposited with the trustee or other holder of a prior lien. (Mortgage, Secs. 4 to 8, 20 to 30 and (10)46; First Supplemental, Sec. 2; Eleventh Supplemental, Sec. 5; Twelfth Supplemental, Sec. 1; Fourteenth Supplemental, Sec. 4; Seventeenth Supplemental, Sec. 3; Eighteenth Supplemental, Secs. 1, 2 and 6; Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II.) RELEASE AND SUBSTITUTION OF PROPERTY Property may be released from the lien of the mortgage upon the basis of (1) deposit of cash or, to a limited amount, purchase money mortgages, (2) property additions and (3) waiver of the right to issue first mortgage bonds. Cash may be withdrawn upon the bases stated in clauses (2) and (3) above. When property released has not been made the basis of any application under the mortgage, the property additions used to effect the release may again, in certain cases, become available as credits under the mortgage, and the waiver of the right to issue first mortgage bonds, to effect the release made in certain cases, cease to be effective as such a waiver. Similar provisions are in effect as to cash proceeds of such property. The mortgage contains special provisions with respect to prior lien bonds pledged, and disposition of moneys received on pledged bonds secured by prior lien. (Mortgage, Secs. 5; 31, 32, 46 to 50, 59, 60, 61, 118 and 134.) MODIFICATION In general, the disposition or distribution of assets or property in asset sale agreements entered into inmortgage, the ordinary course of business. MERGER, CONSOLIDATION OR SALE OF ASSETS Avista Corp. may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not Avista Corp. is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially allrights and obligations of the propertiesCompany and the rights of the bondholders may be modified with the consent of 75% in principal amount of the first mortgage bonds outstanding, and, if less than all series of first mortgage bonds are affected, the consent also of 75% in principal amount of the first mortgage bonds of each series affected. However, no modification of the terms of payment of principal or assets of Avista Corp.interest, and its Restricted Subsidiaries taken as a whole, in oneno modification affecting the lien or more related transactions,reducing the percentage required for modification, is effective against any bondholder without his consent. The Company has the right to another Person; unless: (1) either: (a) Avista Corp. ismake certain specific amendments and amendments necessary from time to time to qualify the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is either (i) a corporation organized or existingmortgage under the lawsTrust Indenture Act of the United States, any state thereof or the District of Columbia or (ii) a partnership or limited liability company organized or existing under the laws of the United States, any state thereof or the District of Columbia,1939 as in either case, that has at least one Restricted Subsidiary that is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia which corporation becomes a co-issuer of the notes pursuant to a supplemental indenture in form reasonably satisfactory to the trustee; (2) the Person formed by or surviving any such consolidation or merger (if other than Avista Corp.) or the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of Avista Corp. under the notes and, the indenture pursuant to agreements in form reasonably satisfactory to the trustee; (3) immediately after such transaction no Default or Event of Default exists; and (4) either: (a) Avista Corp. or the Person formed by or surviving any such consolidation or merger (if other than Avista Corp.), or to which such sale, assignment, transfer, conveyance or other disposition shall have been made will,force on the date of such amendments without the consent of bondholders. (Mortgage, Art. XVIII, Secs. 120 and 149; First Supplemental, Sec. 10.) The Company has amended the mortgage, effective as of the Modification Effective Date referred to below, so as to provide that the mortgage, the rights and obligations of the Company and the rights of the bondholders may be modified with the consent of 60% in principal amount of the first mortgage bonds outstanding or, if less than all series of first mortgage bonds are affected, then the consent only, of 60% in principal amount of the first mortgage bonds outstanding of the series so affected, considered as one class. (Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II.) No consent of the holders of the bonds is required in order for these amendments to become effective. In addition to all other amendments to the mortgage described above which will become effective as of the Modification Effective Date referred to below, the Company has amended the mortgage, effective as of the Modification Effective Date referred to below, in the following respects: o to specifically provide that no reduction in the book value of property recorded in the plant account of the Company shall constitute a property retirement, otherwise than in connection with physical retirements of property abandoned, destroyed or disposed of, and otherwise than in connection with the removal of such property in its entirety from the plant account; 30 o to provide that the lien of the mortgage shall not automatically attach to the properties of another corporation which shall have consolidated or merged with the Company in a transaction after giving pro forma effect thereto and any related financing transactions asin which the Company shall be the surviving or resulting corporation; o to provide that if the same had occurred atCompany shall have appointed a successor trustee, meeting the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness, either pursuant to the Fixed Charge Coverage Ratio testrequirements therefor set forth in the first paragraphmortgage, which shall have accepted such appointment, the trustee shall be deemed to have resigned; and o to specifically provide that the mortgage may be amended without the consent of the covenant described aboveholders of the first mortgage bonds: o to evidence the succession of a successor trustee; o to add additional covenants of the Company and additional defaults, which may be applicable only to the first mortgage bonds of specified series; o to correct the description of property subject to the lien of the mortgage or to subject additional property to such lien; o to change or eliminate any provision of the mortgage or to add any new provision to the mortgage; provided, that no such change, elimination or addition shall adversely affect the interests of the holders of first mortgage bonds of any series in any material respect; o to establish the form or terms of first mortgage bonds of any series; o to provide for procedures to utilize a non-certificated system of registration for all or any series of first mortgage bonds; o to change any place or places for payment, registration of transfer or exchange, or notices to and demands upon the Company, with respect to all or any series of first mortgage bonds; o to increase or decrease the maximum principal amount of bonds issuable under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or because the Rating Condition is then satisfied; or 36 (b) on the date of such transaction after giving pro forma effect thereto and any related financing transactions, as if the same had occurred at the beginning of the applicable four-quarter period, the pro forma Fixed Charge Coverage Ratio of the surviving Person (if other than Avista Corp.) will exceed the actual Fixed Charge Coverage Ratio of Avista Corp. as of such date. In addition, Avista Corp. may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. TRANSACTIONS WITH AFFILIATES Unless the Rating Condition is satisfied, Avista Corp. will not, and will not permit any of its Restricted Subsidiariesmortgage; to make any other changes which do not adversely affect the interests of the holders of first mortgage bonds of any series in any material respect; o or to evidence any change required or permitted under the Trust Indenture Act of 1939, as amended. (Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II) No consent of the holders of the bonds is required in order for these amendments to become effective. As used herein, the term "Modification Effective Date" means the first time at which certain first mortgage bonds which mature May 29, 2002 are no longer outstanding (unless the holders of such first mortgage bonds consent to the foregoing amendments). COMPLETED DEFAULTS; REMEDIES Completed Defaults include default in payment of principal; default for 60 days in payment of interest; default in payment of interest or principal of qualified prior lien bonds continued beyond any grace period; certain events in bankruptcy, insolvency or reorganization; and default in complying with other covenants for 90 days after notice. The trustee may withhold notice of default (except in payment of principal, interest or funds for retirement of first 31 mortgage bonds) if it determines that it is in the interest of the bondholders. (Mortgage, Secs. 44, 65 and 135.) The mortgage provides that, upon the occurrence of a Completed Default, the trustee may, and upon written request of the holders of a majority in principal amount of first mortgage bonds then outstanding shall, declare the principal of and accrued interest on all outstanding bonds immediately due and payable; provided, however, that if, before any sale of the mortgaged property, all defaults have been cured, the holders of a majority in principal amount of outstanding first mortgage bonds may annul such declaration. (Mortgage, Sec. 65.) No holder of first mortgage bonds may enforce the lien of the mortgage unless such holder shall have given the trustee written notice of a default and unless the holders of 25% in principal amount of the first mortgage bonds have requested the trustee in writing to act and have offered the trustee adequate security and indemnity and a reasonable opportunity to act. Holders of a majority in principal amount of the first mortgage bonds may direct the time, method and place of conducting any proceedings for any remedy available to the trustee, or sell, lease, transferexercising any trust or power conferred upon the trustee, or may direct the trustee to take certain action. (Mortgage, Secs. 65, 68, 69, 79, 92 and 138(d) and Art. XXV.) Notwithstanding any other provision of the mortgage, the right of any holder of any bond to receive payment of the principal of and interest on such bond, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. (Mortgage, Sec. 148). The laws of the various states in which the property subject to the lien of the mortgage is located may limit or deny the ability of the trustee and/or the bondholders to enforce certain rights and remedies provided in the mortgage in accordance with their terms. CONCERNING THE TRUSTEE The Trustee has, and is subject to, all the duties and responsibilities specified with respect to an indenture trustee under the Trust Indenture Act of 1939, as amended. Subject to such provisions, the Trustee is not under any obligation to take any action in respect of any default or otherwise, disposeor toward the execution or enforcement of any of its propertiesthe trusts created by the mortgage, or assets to institute, appear in or purchasedefend any propertysuit or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or forother proceeding in connection therewith, unless requested in writing so to do by the benefitholders of any Affiliate (each, an "Affiliate Transaction"), unless: (1)a majority in principal amount of the terms of such Affiliate Transaction or series of related Affiliate Transactions are no less favorable to Avista Corp. or such Restricted Subsidiary, asbonds then outstanding. Anything in the case may be, than those that would be obtainable in a comparable transaction or series of related transactions in arm's-length dealings with an unrelated third party; and (2) Avista Corp. deliversmortgage to the trustee (i) with respectcontrary notwithstanding, the Trustee is under no obligation or duty to perform any Affiliate Transactionact thereunder (other than the delivery of notices) or series of related Affiliate Transactions involving aggregate consideration in excess of $10 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (l) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (ii) with respect to institute or defend any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $25 million, a written opinion of a nationally recognized investment banking, accounting or appraisal firm stating that such transaction or series of transactions is fair to the holders from a financial point of view. The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) any employment, compensation or indemnification arrangement entered into by Avista Corp. or any of its Restricted Subsidiaries in the ordinary course of business with employees, directors, officers or consultants; (2) loans or advances to officers, directors, consultants and employees in the ordinary course of business or guaranteessuit in respect thereof or otherwise made on their behalf (including any payments on such guarantees); (3) any redemption of Capital Stock held by employees upon death, disability or termination of employment at a price not in excess of the fair market value thereof; (4) the grant of stock options or similar rightshereof, unless properly indemnified to employees and directors of Avista Corp.; (5) payment of reasonable directors fees; (6) transactions between or among Avista Corp. and/or its Restricted Subsidiaries; and (7) Restricted Payments and Permitted Investments that are permitted by the provisions of the indenture described above under the caption "--Restricted Payments." 37 SALE AND LEASEBACK TRANSACTIONS Avista Corp. will not, and will not permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction with respect to any property owned on the date of the indenture or thereafter acquired unless: (1) Avista Corp. or such Restricted Subsidiary would be entitled to create a Lien on such property securing Indebtedness in an amount at least equal to the Attributable Debt with respect to such transaction without equally and ratably securing the notes pursuant to the covenant described above under the caption "--Liens"; (2) the Net Proceeds of the sale are at least equal to the fair market value (as determined by the Board of Directors) of the property sold and Avista Corp. or such Restricted Subsidiary applies an amount in cash equal to the net proceeds of such sale to the retirement, within 180 days of the effective date of any such arrangement, of Indebtedness of Avista Corp. or a Restricted Subsidiary or purchases other property having a fair market value at least equal to the fair market value of the assets or property sold in such transactions; or (3) such Sale/Leaseback Transaction is between Avista Corp. and any of its Restricted Subsidiaries or between any Restricted Subsidiaries of Avista Corp. In addition to the transactions permitted pursuant to the preceding paragraph, Avista Corp. or any Restricted Subsidiary may enter into any other Sale/Leaseback Transaction as long as the sum of: (a) the Attributable Debt with respect to such Sale/Leaseback Transaction and all other Sale/Leaseback Transactions entered into pursuant to this proviso, plus (b) the amount of outstanding Indebtedness secured by Liens incurred pursuant to the final proviso to the covenant described under "--Liens", does not exceed $25 million. DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIESsatisfaction. (Mortgage, Sec. 92). The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by Avista Corp. and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be an Investment made as of the time of such designation and will either reduce the amount available for Restricted Payments under the first paragraph of the covenant described above under the caption "--Restricted Payments" or reduce the amount available for future Investments under one or more clauses of the definition of Permitted Investments, or both, as Avista Corp. shall determine. That designation will be permitted only if such Investment would be permitted at that time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default. Any designation by the Board of Directors shall be evidenced to the trustee by filing with the trustee a certified copy of the board resolution giving effect to the designation and an Officer's Certificate certifying that the designation complied with these conditions and was permitted by the "Restricted Payments" covenant. If, at any time, any Unrestricted Subsidiary would fail to meet the requirements of the definition of an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of the Subsidiary will be deemed to be incurred by a Restricted Subsidiary of Avista Corp. as of that date (and, if such Indebtedness is not permitted to be incurred as of that date under the covenant describes under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", Avista Corp. will be in default of such covenant). 38 The Board of Directors of Avista Corp.Trustee may at any time designateresign and be discharged of the trusts created by the mortgage by giving written notice to the Company and thereafter publishing notice thereof, specifying a date when such resignation shall take effect, as provided in the mortgage, and such resignation shall take effect upon the day specified in such notice unless previously a successor trustee shall have been appointed by the bondholders or the Company. The Trustee may be removed at any Unrestricted Subsidiarytime by the holders of a majority in principal amount of the bonds then outstanding. (Mortgage, Secs. 100 and 101). EVIDENCE OF COMPLIANCE WITH MORTGAGE PROVISIONS Compliance with mortgage provisions is evidenced by written statements of the Company's officers or persons selected or paid by the Company. In certain major matters the accountant or engineer must be independent. Various certificates and other papers are required to be a Restricted Subsidiary; provided that such designation will be deemedfiled annually and upon the happening of certain events, including an annual certificate with reference to be an incurrence of Indebtedness by a Restricted Subsidiary of Avista Corp. of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation will be permitted only if (i) such Indebtedness is permitted undercompliance with the covenant described under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock", calculated on a pro forma basis as if the designation had occurred at the beginningterms of the four-quarter period,mortgage and (ii) no Default or Eventabsence of Default would be in existence following the designation.Defaults. 32 REPORTS Whether or not required by the rules and regulations of the SEC, so long as any notesbonds are outstanding, Avista Corp. will furnish to the holders of notes,bonds, within the time periods specified in the SEC's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by Avista Corp.'s certified independent accountants; and (2) all current reports that would be required to be filed with the SEC on Form 8-K. In addition, whether or not required by the rules and regulations of the SEC, Avista Corp. will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the SEC for public availability within the time periods specified in the SEC's rules and regulations (unless the SEC will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Avista Corp. has also agreed that, for so long as any Old Notesbonds remain outstanding, it will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES Each of the following is an Event of Default: (1) default continued for 30 days in the payment when due of interest on, the notes; (2) default in payment when due of the principal of, or premium, if any, on the notes; (3) failure by Avista Corp. or any of its Restricted Subsidiaries to comply with any of the provisions described under the captions"--Repurchase at the Option of Holders--Change of Control", "--Repurchase at the Option of Holders--Assets Sales" or "Certain Other Covenants--Merger, Consolidation or Sale of Assets;" (4) default in performance of any other agreements in the indenture or in the notes for 30 days after written notice to Avista Corp. by the trustee or to Avista Corp. and the trustee by the holders of at least 25% in principal amount on the notes then outstanding; (5) there shall have occurred either (i) a default by Avista Corp. or any Restricted Subsidiary under any instrument or instruments under which there is or may be secured or evidenced any Indebtedness of Avista Corp. or any Restricted Subsidiary of Avista Corp. (other than the notes) having an outstanding principal amount of $25 million or more that has caused the holders thereof to declare such Indebtedness to be due and payable prior to its maturity or (ii) a default by Avista Corp. or any Restricted Subsidiary 39 in the payment at maturity of the principal under any such instrument, and such unpaid portion exceeds $25 million and is not paid, or such default is not cured or waived, within any grace period applicable thereto, unless such acceleration is rescinded or annulled or such Indebtedness is discharged within 20 days of Avista Corp. or a Restricted Subsidiary becoming aware of such default; provided, however, that this clause (5) shall not apply to any default on Non-Recourse Debt; (6) any final judgment or order for the payment of money shall be rendered against Avista Corp., or any Restricted Subsidiary of Avista Corp. that is a Significant Subsidiary, in an amount in excess of $25 million and shall not be discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order in excess of $25 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (7) certain events of bankruptcy or insolvency with respect to Avista Corp. or any Restricted Subsidiary of Avista Corp. that is a Significant Subsidiary; and (8) except as permitted by the indenture, any guarantee of the notes is held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any guarantor, or any Person acting on behalf of any guarantor, shall deny or disaffirm its obligations under such guarantor's guarantee of the notes. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to Avista Corp. or any Restricted Subsidiary that is a Significant Subsidiary of Avista Corp., all outstanding notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately. Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from holders of the notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest on, premium, if any, or the principal of, the notes. Avista Corp. is required to deliver to the trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, Avista Corp. is required to deliver to the trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator, controlling person or stockholder of Avista Corp., as such, shall have any liability for any obligations of Avista Corp. under the notes or the indenture, or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. LEGAL DEFEASANCE AND COVENANT DEFEASANCE Avista Corp. may, at its option and at any time, elect to have all of its obligations discharged with respect to all or a portion of the outstanding notes ("Legal Defeasance") except for: (1) the rights of holders of outstanding notes to receive payments in respect of the principal of, or interest or premium, if any, on such notes, when such payments are due from the trust referred to below; 40 (2) Avista Corp.'s obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee, and Avista Corp.'s obligations in connection therewith; and (4) the Legal Defeasance provisions of the indenture. In addition, Avista Corp. may, at its option and at any time, elect to have the obligations of Avista Corp. released with respect to certain covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission to comply with those covenants shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "-Events of Default" will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) Avista Corp. must irrevocably deposit with the trustee, in trust, for the benefit of the holders of the notes (or, in the case of Legal Defeasance, a specified principal amount thereof), cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants to pay the principal of, premium, if any, and interest on the notes (or in the case of Legal Defeasance, such specified principal amount thereof) on the stated maturity or prior Redemption Date thereof, as the case may be, (2) in the case of Legal Defeasance, Avista Corp. shall have delivered to the trustee: (a) an opinion of counsel in the United States reasonably acceptable to the trustee confirming that (i) Avista Corp. has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; or (b)(i) an instrument wherein Avista Corp., notwithstanding the satisfaction and discharge of its Indebtedness in respect of the notes or a portion of the principal amount thereof, shall assume the obligation (which shall be absolute and unconditional) to irrevocably deposit with the trustee such additional sums of money, if any, or additional Government Securities, if any, or any combination thereof, at such time or times, as shall be necessary, together with the money and/or Government Securities theretofore so deposited, to pay when due the principal of and premium, if any, and interest due and to become due on such notes or portions thereof, provided, however, that such instrument may state that the obligation of Avista Corp. to make additional deposits as aforesaid shall arise only upon the delivery to Avista Corp. by the trustee of a notice asserting the deficiency and showing the calculation thereof and shall continue only until Avista Corp. shall have delivered to the trustee a further opinion of an independent public accountant of nationally recognized standing to the effect that no such deficiency exists and showing the calculation of the sufficiency of the deposits then held by the trustee; and (ii) an opinion of recognized tax counsel in the United States reasonably acceptable to the trustee to the effect that the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; 41 (3) in the case of Covenant Defeasance, Avista Corp. shall have delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the indenture) to which Avista Corp. or any of it Subsidiaries is a party or by which Avista Corp. or any of its Subsidiaries is bound; (6) Avista Corp. must deliver to the trustee an opinion of counsel to the effect that (assuming that no holder of any notes would be considered an insider of Avista Corp. under applicable bankruptcy or insolvency law) after the 123rd day following the deposit, the trust funds will not constitute a "voidable preference" under Section 547 of the Bankruptcy Code; (7) Avista Corp. must deliver to the trustee an Officers' Certificate stating that the deposit was not made by Avista Corp. with the intent of preferring the holders of notes over the other creditors of Avista Corp. or with the intent of defeating, hindering, delaying or defrauding creditors of Avista Corp. or others; and (8) Avista Corp. must deliver to the trustee an Officers' Certificate and an opinion of counsel (with usual and customary exceptions acceptable to the trustee), each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the indenture or the notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes), and any existing default or compliance with any provision of the indenture or the notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, notes). Without the consent of each holder affected, an amendment or waiver may not (with respect to any notes held by a non-consenting holder): (1) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any note; (3) reduce the rate of or change the time for payment of interest on any note; (4) waive a Default or Event of Default in the payment of principal of, or interest or premium, if any, on the notes (except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the then outstanding notes and a waiver of the payment default that resulted from such acceleration); (5) make any note payable in money other than that stated in the notes; (6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of holders of notes to receive payments of principal of, or interest or premium, if any, on the notes; and (7) make any change in the preceding amendment and waiver provisions. 42 Notwithstanding the preceding, without the consent of any holder of notes, Avista Corp. and the trustee may amend or supplement the indenture or the notes: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; (3) to provide for the assumption of Avista Corp.'s obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of Avista Corp.'s assets; (4) to make any change that would provide any additional rights or benefits to the holders of notes or that does not adversely affect the legal rights under the indenture of any such holder; (5) to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act, or (6) to evidence and provide the acceptance of the appointment of a successor trustee under the indenture. SATISFACTION AND DISCHARGE The indenture will be discharged and will cease to be of further effect as to all notes issued thereunder except as to: (1) Avista Corp.'s right to redeem the notes at its option; (2) substitution of apparently mutilated, defaced, destroyed, lost or stolen notes; (3) rights of holders to receive payment of principal of and premium, if any, and interest on the notes; (4) rights, obligations an immunity of the trustee under the indenture; and (5) rights of the holder of notes with respect to any property deposited with the trustee payable to all or any of them, if: (1) either (a) all notes that have been authenticated (except lost, stolen or destroyed notes that have been replaced or paid and notes for whose payment money has theretofore been deposited in trust and thereafter repaid to Avista Corp.) have been delivered to the trustee for cancellation; or (b) a Legal Defeasance has been effected with respect to all notes that have not been so delivered; (2) no Default or Event of Default shall have occurred and be continuing on the date Legal Defeasance has occurred or shall occur as a result of such Legal Defeasance and such Legal Defeasance will not result in a breach or violation of, or constitute a default under, any other material instrument to which Avista Corp. is a party or by which Avista Corp. is bound; (3) Avista Corp. has paid or caused to be paid all sums payable by it under the indenture; and (4) Avista Corp. has delivered irrevocable instructions to the trustee under the indenture to apply the deposited money toward the payment of the notes at the maturity date of the notes. In addition, Avista Corp. must deliver an Officers' Certificate and an Opinion of Counsel to the trustee stating that all conditions precedent to satisfaction and discharge have been satisfied. 43 CONCERNING THE TRUSTEE If the trustee becomes a creditor of Avista Corp., the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign. The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default shall occur and be continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of notes, unless such holder shall have offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. BOOK-ENTRY, DELIVERY AND FORM The New NotesBonds initially will be represented by one or more notesbonds in registered, global form without interest coupons (collectively, the "Global Notes"Bonds"). Upon issuance, the Global NotesBonds will be deposited upon issuance with the trustee as custodian for The Depository Trust Company ("DTC"), in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Except as set forth below, the Global NotesBonds may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global NotesBonds may not be exchanged for notesbonds in certificated form except in the limited circumstances described below. See "--Exchange of Global NotesBonds for Certificated Notes.Bonds." Except in the limited circumstances described below, owners of beneficial interests in the Global NotesBonds will not be entitled to receive physical delivery of notesbonds in certificated form. In addition, transfers of beneficial interests in the Global NotesBonds will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of the Euroclear System ("Euroclear") and Clearstream Banking ("Clearstream"))Clearstream), which may change from time to time. DEPOSITORY PROCEDURES The following description of the operations and procedures of DTC, Euroclear and Clearstream are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them from time to time. Avista Corp. takes no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC has advised Avista Corp. that DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). 33 Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised Avista Corp. that, pursuant to procedures established by it: 44 (1) Uponupon deposit of the Global NotesBonds representing the Old Notes,Bonds, DTC credited the accounts of Participants designated by the initial purchasers of the Old NotesBonds with portions of the principal amount of suchthe Global Notes;Bonds; and (2) ownership of these interests in the Global Notes representing Old NotesBonds are, and ownership of interests in New NotesBonds will be, shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes)Bonds). Investors in the Global NotesBonds who are Participants in DTC's system may hold their interests therein directly through DTC. Investors in the Global NotesBonds who are not Participants may hold their interests therein indirectly through organizations (including Euroclear and Clearstream) which are Participants in such system. Euroclear and Clearstream will hold interests in the Global NotesBonds on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositories, which are Euroclear Bank, S.A./N.V., as operator of Euroclear, and Citibank, N.A., as operator of Clearstream. All interests in a Global Note,Bond, including those held through Euroclear or Clearstream, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream may also be subject to the procedures and requirements of such systems. The laws of some states require that certain Persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global NoteBond to such Persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants, the ability of a Person having beneficial interests in a Global NoteBond to pledge such interests to Persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTESBONDS WILL NOT HAVE NOTESBONDS REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NOTESBONDS IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTUREMORTGAGE OR THE NOTESBONDS FOR ANY PURPOSE. Payments in respect of the principal of, and interest and premium, if any, on a Global NoteBond registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the indenture.mortgage. Under the terms of the indenture,mortgage, Avista Corp. and the trustee will treat the Persons in whose names the notes,bonds, including the Global Notes,Bonds, are registered as the owners thereof for the purpose of receiving payments and for all other purposes. Consequently, neither Avista Corp., the trustee nor any agent of Avista Corp. or the trustee has or will have any responsibility or liability for: (1) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interests in the Global NotesBonds or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes;Bonds; or (2) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised Avista Corp. that its current practice, upon receipt of any payment in respect of securities such as the bonds (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant Participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of notesbonds 34 will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the trustee or Avista Corp. Neither Avista Corp. nor the trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the notes,bonds, and Avista Corp. and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. 45 DTC has also advised Avista Corp. that transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and Clearstream will be effected in accordance with their respective rules and operating procedures. Subject to compliance with the applicable transfer and exchange restrictions described herein, cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Clearstream participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global NoteBond in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositories for Euroclear or Clearstream. DTC has advised Avista Corp. that it will take any action permitted to be taken by a Holder of notesbonds only at the direction of one or more Participants to whose account DTC has credited the interests in the Global NotesBonds and only in respect of such portion of the aggregate principal amount of the notesbonds as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the notes,bonds, DTC reserves the right to exchange the Global NotesBonds for legended notesbonds in certificated form, and to distribute such notesbonds to its Participants. Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures to facilitate transfers of interests in the Global NotesBonds among participants in DTC, Euroclear and Clearstream, they are under no obligation to perform or to continue to perform such procedures, and may discontinue such procedures at any time. Neither Avista Corp. nor the trustee nor any of their respective agents will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. EXCHANGE OF GLOBAL NOTESBONDS FOR CERTIFICATED NOTESBONDS A Global NoteBond is exchangeable for definitive notesbonds in registered certificated form ("Certificated Notes"Bonds") if: (1) DTC (a) notifies Avista Corp. that it is unwilling or unable to continue as depositary for the Global NotesBonds and Avista Corp. fails to appoint a successor depositary or (b) has ceased to be a clearing agency registered under the Exchange Act and Avista Corp. fails to appoint a successor depositary; or (2) Avista Corp., at its option, notifies the trustee in writing that it elects to cause the issuance of the Certificated Notes; or (3) there shall have occurred and be continuing a Default or Event of Default with respect to the notes. In addition, beneficial interests in a Global Note may be exchanged forBonds. Certificated Notes upon prior written notice given to the trustee by or on behalf of DTC in accordance with the indenture. In all cases, Certificated NotesBonds delivered in exchange for any Global NoteBond or beneficial interests in Global NotesBonds will be registered in the names, and issued in any approved denominations, requested by or on behalf of DTCthe depositary (in accordance with its customary procedures). Any such exchange will be effected through the DTC Deposit/Withdraw at Custodian system and an appropriate adjustment will be made to reflect a decrease in the principal amount of the relevant Global Note.Bond. 35 SAME DAY SETTLEMENT AND PAYMENT Avista Corp. will make payments in respect of the notesbonds represented by the Global NotesBonds (including principal, premium, if any, and interestinterest) by wire transfer of immediately available funds to the accounts specified by the Global 46 NoteBond Holder. Avista Corp. or its paying agent will make all payments of principal, interest and premium with respect to Certificated NotesBonds by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. The notesbonds represented by the Global NotesBonds are expected to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such notesbonds will, therefore, be required by DTC to be settled in immediately available funds. Avista Corp. expects that secondary trading in any Certificated NotesBonds will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in a Global NoteBond from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Clearstream participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream) immediately following the settlement date of DTC. DTC has advised Avista Corp. that cash received in Euroclear or Clearstream as a result of sales of interests in a Global NoteBond by or through a Euroclear or Clearstream participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Clearstream cash account only as of the business day for Euroclear or Clearstream following DTC's settlement date. GOVERNING LAW The internal lawsBANK CREDIT AGREEMENTS AVISTA CORP. Avista Corp. has a $220 million line of credit with various banks under a credit agreement that expires May 29, 2002. We have pledged our shares of common stock of Avista Capital as security for our indebtedness under this agreement. As of December 31, 2001, $55 million was outstanding under this line of credit. This agreement contains customary covenants and default provisions, including covenants not to permit (1) the stateratio of New York will govern and be used to construe the indenture without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. CERTAIN DEFINITIONS Set forth below are certain"consolidated total debt" (as defined terms used in the indenture. Reference is madeAvista Corp. credit agreement) to "consolidated total capitalization" (as defined in the indenture for a full disclosureAvista Corp. credit agreement) of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respectAvista Corp. to any specified Person: (1) Indebtednessbe, at the end of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of suchfiscal quarter, greater than certain specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person;ratios; and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "Affiliate"the ratio of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control", as used with respect to any Person, shall mean"consolidated cash flow" (as defined in the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. For purposes of this definition, the terms "controlling", "controlled by" and "under common control with" shall have correlative meanings. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or Sale/Leaseback Transaction) in one or a series of transactions by Avista Corp. or any Restricted Subsidiarycredit agreement) to any Person other than"consolidated fixed charges" (as defined in the Avista Corp. or any Restricted Subsidiary of Avista Corp., of: (1) all or any of the Capital Stock of any Restricted Subsidiary of Avista Corp.; (2) all or substantially all of the assets of any operating unit, Facility, division or line of businesscredit agreement) of Avista Corp. or Avista Utilities for any Restricted Subsidiary; or 47 (3)four-fiscal-quarter period ending on any other property or assets or rights to acquire property or assets of Avista Corp. or any Restricted Subsidiary of Avista Corp. outside of the ordinary course of business of Avista Corp. or such Restricted Subsidiary. Notwithstanding the preceding, the following items shall not be deemeddate set forth below to be Asset Sales: (1) any single transaction or series of related transactions that involves assets having a fair market value of less than $10 million; (2) an issuance of Equity Interests by a Restricted Subsidiarycertain specified ratios. In August 2001 we determined that we would not comply with the fixed charge coverage covenant with respect to Avista Corp. described above for the four-fiscal-quarter period ending September 30, 2001 or to another Restricted Subsidiary of Avista Corp.; (3)for any sale or lease of obsolete equipment or other assets that are no longer being used by Avista Corp. or any of its Restricted Subsidiaries; (4) any primary offering of Common Stock of Avista Communications, Avista Advantage or Avista Labs, or any Subsidiary of any of them, provided thatsubsequent period through the issuer of such Common Stock is operating substantially the same business as is conducted by such issuer (or in case of a Subsidiary, all or a portion of the same business as is conducted by the respective parent company named above in this clause (4)) as of theexpiration date of the indenture; (5)agreement. Accordingly, Avista Corp. requested, and obtained, a Restricted Payment or Permitted Investment that iswaiver of this covenant. The failure to comply with the covenant for these periods will not prohibitedconstitute an event of default under the agreement. In connection with this waiver, on September 21, 2001 Avista Corp. issued to the agent bank $220 million in principal amount of non-transferable first mortgage bonds under the mortgage in order to provide the benefit of the lien of the mortgage to secure Avista Corp.'s obligations under the credit agreement. AVISTA ENERGY Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers, have a credit agreement with various banks in the aggregate amount of $135 million expiring June 28, 2002. The credit agreement may be terminated by the covenant described abovebanks at any time and all extensions of credit under the caption "-Certain Covenants--Restricted Payments";agreement are payable upon demand, in either case at the lenders' sole discretion. The agreement also provides, on an uncommitted basis, for the issuance of letters of credit to secure contractual obligations to counterparties. The facility is guaranteed by Avista Capital and (6) any disposition of property or assetsis secured by a Restricted Subsidiarysubstantially all of Avista Corp. to Avista Corp. or by Avista Corp. or a Restricted Subsidiary of Avista Corp. to a Restricted Subsidiary of Avista Corp. "Attributable Debt" means, in respect of a Sale/Leaseback Transaction, as of the time of determination, the present value discounted at the interest rate assumed in making calculations in accordance with GAAP of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction, including any period for which such lease has been extended or may be extended at the option of the lessor. "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act.Energy's assets. The terms "Beneficially Owns" and "Beneficially Owned" shall have a corresponding meaning. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation or any duly authorized committee of such board of directors; (2) with respect to a partnership, the Board of Directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Capital Lease Obligation" means, at the time any determination thereof is to be made, themaximum amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents, however designated, of corporate stock or other equity participations, including partnership interests, whether general or limited, of the Person. "Cash Equivalents" means: 48 (1) United States dollars; (2) securities issued or directly and fully guaranteed or insuredcredit extended by the United States government or any agency or instrumentality thereof (provided that the full faithlenders for cash advances is $30 million. At December 31, 2001, there were no cash advances (demand notes payable) outstanding, and letters of credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition; (3) certificates of depositoutstanding totaled approximately $40 million. 36 The Avista Energy agreement contains customary covenants and eurodollar time deposits with maturities of twelve months or less from the date of acquisition, bankers' acceptances with maturities not exceeding twelve monthsdefault provisions, including covenants to maintain "minimum net working capital" and overnight bank deposits, in each case, issued or accepted by any financial institution organized under the laws of the United States or any state thereof or the District of Columbia that either (x) has a long-term deposit rating of at least A-2 from Moody's and A from S&P or (y) is at least "adequately capitalized""minimum net worth" (as defined in the regulations of its primary federal banking regulator)Avista Energy credit agreement) and (b) has Tier 1 Capital (as defined in such regulations) of not less than $100,000,000; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having the highest rating obtainable from Moody's or S&P (or in their absence an equivalent rating from another nationally recognized securities rating agency) and in each case maturing within twelve months after the date of acquisition; and (6) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (5) of this definition. "Change of Control" means the occurrence of any of the following: (1) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of Avista Corp. and its Restricted Subsidiaries taken as a whole to any "person" (as that term is used in Section 13(d)(3) of the Exchange Act); (2) the adoption of a plan relating to the liquidation or dissolution of Avista Corp. other than in a transaction that complies with the provisions of the covenant described above under "-Certain Covenants--Merger, Consolidation or Sale of Assets"; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) becomes the Beneficial Owner, directly or indirectly, of more than 35% of the Voting Stock of Avista Corp., measured by voting power rather than number of shares; (4) the first day on which a majority of the members of the Board of Directors of Avista Corp. are not Continuing Directors; or (5) Avista Corp. consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, Avista Corp., in any such event pursuant to a transaction in which any of the outstanding Voting Stock of Avista Corp. or such other Person is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of Avista Corp. outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person (immediately after giving effect to such issuance). "Commodity Price Protection Obligation" means any forward contract, commodity swap, commodity option or other similar financial agreement or arrangement relating to, or the value of which is dependent on, fluctuations in commodity prices entered into in the ordinary course of business. 49 "Common Stock" of any Person means any class of Capital Stock of such Person that has no preference, as to dividends or upon liquidation, over any other class of Capital Stock of such Person and that is not convertible into or exchangeable for any other class of Capital Stock or other securities of such Person. "Consolidated Cash Flow" means, with respect to any specified Person for any period, the Consolidated Net Income of such Person for such period plus: (1) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (2) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs (other than those in existence on or created on the date of the indenture) and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (3) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period, and excluding amortization of power and natural gas cost deferrals, to the extent such deferrals were previously financed with Indebtedness permitted by clause (9) of the definition of Permitted Debt) and other non-cash expenses (excluding any such non-cash expense to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income; minus (4) non-cash items increasing such Consolidated Net Income for such period (including power and natural gas cost deferrals, but only to the extent not financed with Indebtedness permitted by clause (9) of the definition of Permitted Debt) in each case, on a consolidated basis and determined in accordance with GAAP. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the net income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the net income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent oflimiting the amount of dividends or distributions paid in cash to the specified Person or a Wholly Owned Subsidiary thereof; (2) the net income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by the Restricted Subsidiary of that net income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders; (3) the net income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded; (4) the cumulative effect of a change in accounting principles shall be excluded; 50 (5) all extraordinary or nonrecurring gains and losses (including without limitation any one-time costs incurred in connection with acquisitions, or regulatory disallowances or write-offs of regulatory assets) shall be excluded; and (6) any gain or loss realized upon the sale or other disposition of any property, plant or equipment of Avista Corp. or its Restricted Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition by Avista Corp. or any Restricted Subsidiary of any Capital Stock of any Person shall be excluded. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of Avista Corp. who: (1) was a member of such Board of Directors on the date of the indenture; or (2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Credit Facilities" means one or more debt facilities or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, or letters of credit, in each case, as amended, restated, modified, renewed, refunded, restructured, supplemented, replaced or refinanced in whole or in part from time to time, including without limitation any amendment increasing the amount of Indebtedness incurred or available to be borrowed thereunder, extending the maturity of any Indebtedness incurred thereunder or contemplated thereby or deleting, adding or substituting one or more parties thereto (whether or not with banks or other institutional lenders). "Currency Hedging Obligations" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against the fluctuations in currency values entered into in the ordinary course of business and not for speculative purposes. "Debt Rating" shall mean the rating assigned to the notes offered hereby by Moody's or S&P, as the case may be. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of Avista Corp. who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date onindebtedness which the notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require Avista Corp. to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that Avista Corp.co-borrowers may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less that $500 million or its equivalent in foreign currency, whose debt is rated "A" or higher (or the equivalent rating or higher), according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in 51 Rule 436 under the Securities Act)), respectively, at the time as of which any investment or rollover therein is made. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Existing Indebtedness" means Indebtedness of Avista Corp. and its Subsidiaries in existence on the date of the indenture, other than amounts outstanding under Credit Facilities, until such amounts are repaid. "Facility" means retail electric and natural gas distribution and storage facilities, electric transmission facilities and electric generation and production facilities, and assets related to or used in the operation of such facilities. "Fixed Charges" means, with respect to any specified Person for any period, the sum, without duplication, of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of debt issuance costs (other than those in existence on or created on the date of the indenture) and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to Attributable Debt, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net of the effect of all payments made or received pursuant to Hedging Obligations; plus (2) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period (excluding interest capitalized in connection with the construction of a new Facility or addition to a Facility, in each case, to the extent such interest is capitalized during the construction of such Facility); plus (3) any interest expense actually paid on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; plus (4) the product of (a) all dividends, whether paid or accrued and whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividends on Equity Interests payable solely in Equity Interests of such Person (other than Disqualified Stock) or to such Person or a Restricted Subsidiary of such Person, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal; in each case, calculated on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any specified Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In the event that the specified Person or any of its Subsidiaries incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness (other than ordinary working capital borrowings) or issues, repurchases or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated and on or prior to the date of the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), including the incurrence of the Indebtedness giving rise to the need to make such calculation, then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or such issuance, repurchase or redemption of preferred stock, and the use of the proceeds therefrom including to refinance other Indebtedness as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of calculating the Fixed Charge Coverage Ratio: (1) acquisitions that have been made by the specified Person or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter 52 reference period or subsequent to such reference period and on or prior to the Calculation Date shall be given pro forma effect as if they had occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated on a pro forma basis (calculated in accordance with Regulation S-X under the Securities Act), but without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income; (2) the consolidated interest expense attributable to interest on any Indebtedness computed on a pro forma basis and (a) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period and (b) that was not outstanding during the period for which the computation is being made but which bears, at the option of such Person, a fixed or floating rate of interest, shall be computed by applying at the option of such Person either the fixed or floating rate; (3) the consolidated interest expense attributable to interest on any working capital borrowings under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such working capital borrowings during the applicable period; and (4) acquisitions and dispositions that have been made by any Person that has become a Restricted Subsidiary of Avista Corp. or been merged with or into Avista Corp. or any Restricted Subsidiary of Avista Corp. during the four-quarter reference period, or subsequent to the four-quarter reference period but prior to the Calculation Date, shall be calculated on a pro forma basis, including all of the calculations referred to above, assuming that such acquisitions and dispositions had occurred on the first day of the reference period. In addition, in calculating the Fixed Charge Coverage Ratio, discontinued operations will be given pro forma effect as follows: (1) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, and (2) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of on or prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of Avista Corp. or any of its Restricted Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect (i) with respect to periodic reporting requirements, from time to time, and (ii) otherwise on the date of the indenture. "Government Securities" means securities issued directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof). "Guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any specified Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and 53 (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) representing banker's acceptances; (4) representing Capital Lease Obligations; (5) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing any Hedging Obligations, if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) appears as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP.incur. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by the specified Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be: (1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness; provided that for purposes of determining the amount of any Indebtedness, if recourse with respect to such Indebtedness is limited to such asset, the amount of such Indebtedness shall be limited to the lesser of the fair market value of such asset or the amount of such Indebtedness. "Investments" means, with respect to any Person, all direct or indirect investments by such Person in other Persons (including Affiliates) in the forms of loans (including Guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel, entertainment, moving and similar advances or loans to officers, directors, consultants and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. The term "Investment" shall exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade terms. If Avista Corp. or any Subsidiary of Avista Corp. sells or otherwise disposes of any Equity Interests of any direct or indirect Subsidiary of Avista Corp. such that, after giving effect to any such sale or disposition, such Person is no longer a Subsidiary of Avista Corp., Avista Corp. shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." The acquisition by Avista Corp. or any Subsidiary of Avista Corp. of a Person that holds an Investment in a third Person shall be deemed to be an Investment by Avista Corp. or such Subsidiary in such third Person in an amount equal to the fair market value of the Investment held by the acquired Person in such third Person in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." 54 "Lancaster Project" means a 270 MW combined cycle project, presently under construction, in Rathdrum, Idaho, in which Avista Power owns an indirect 49% interest through its wholly-owned subsidiary Avista Rathdrum, LLC. The project is presently scheduled to begin commercial operation in August 2001. All of the output has been sold to Avista Energy under a 25-year capacity sales contract, under which Avista Energy is responsible for dispatch and delivery of fuel to the project. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "Liquidity Condition Date" means the date on which Avista Corp. obtains funding in cash from completed financing transactions, or contractual entitlement to such funding on such date pursuant to definitive credit facilities then in effect and available to be drawn pursuant to arrangements put into effect (or amendments increasing the amount available under existing credit facilities) after the date of the indenture, in an aggregate amount that, when added to the net proceeds of the offering of the Old Notes, is not less than $475 million. "Marketable U.S. Securities" means: (i) any time deposit account, money market deposit and certificate of deposit maturing not more that 365 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (ii) commercial paper maturing not more than 365 days after the date of acquisition issued by a corporation (other than an Affiliate of Avista Corp.) with a rating, at the time as of which any investment therein is made, of "P-1" or higher according to Moody's or "A-1" or higher according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (iii) any banker's acceptances or money market deposit accounts issued or offered by an Eligible Institution; (iv) repurchase obligations with a term of not more than 7 days for Government Securities entered into with an Eligible Institution; and (v) any fund investing exclusively in investments of the types described in clauses (i) through (iv) above and or Government Securities. "Moody's" mean Moody's Investors Service, Inc., and its successors. "Net Proceeds" means the aggregate cash proceeds and Cash Equivalents received by Avista Corp. or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof, in each case, after taking into account any available tax credits or deductions and any tax sharing arrangements, any amounts that Avista Corp. may be required by any regulatory authority to refund or repay to customers in respect of or as a result of such Asset Sale, any amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness: (1) as to which neither Avista Corp. nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness but excluding any agreement to provide managerial support), (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; and (2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness (other than the notes) of Avista Corp. or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause thecontains certain restricted payment thereof to be accelerated or payable prior to its stated maturity. 55 "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Peaker Turbine Project" means a 95 MW simple cycle project presently under development, currently expected to be located in southwest Washington and currently 100% owned by Avista Power. A letter of intent has been signed for the purchase of the output of the facility for five years under a capacity sales contract for a fixed price per KW-month. The purchaser will be financially responsible for purchasing natural gas to fuel the turbines and for contracting for gas transportation. The turbines are General Electric simple cycle LM6000. "Permitted Business" means the business of acquiring, developing, constructing, expanding, managing, improving, owning and operating Facilities, as well as any other activities reasonably related, complimentary or ancillary to the foregoing activities (including acquiring and holding reserves), including but not limited to investing in Persons engaged in one or more Permitted Businesses. "Permitted Debt" has the meaning set forth under "-Certain Other Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." "Permitted Investments" means: (1) any Investment in Avista Corp. or in a Restricted Subsidiary of Avista Corp.; provided, that prior to the Liquidity Condition Date, Avista Corp. and its Restricted Subsidiaries will not make Investments in Subsidiaries of Avista Corp. (other than Avista Energy or Avista Power) exceeding $35 million in the aggregate; provided further that Avista Corp. may nonetheless make reimbursement to a Subsidiary, pursuant to the Tax Sharing Agreement as in effect on the date of the indenture, in an amount not to exceed the net tax benefit realized by Avista Corp. in any period, as reflected in its consolidated federal income tax return, by reason of losses incurred by such Subsidiary; (2) any Investment in cash or Cash Equivalents or Marketable U.S. Securities; (3) any Investment by Avista Corp. or any Subsidiary of Avista Corp. in a Person, if as a result of such Investment: (a) such Person becomes a Restricted Subsidiary of Avista Corp.; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, Avista Corp. or a Restricted Subsidiary of Avista Corp.; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales"; (5) any Investment in exchange for the issuance of Equity Interests other than Disqualified Stock of Avista Corp.; (6) Hedging Obligations; (7) Investments in any of the notes; (8) Indebtedness of Avista Corp. or a Restricted Subsidiary of Avista Corp. described under clause (5) of the definition of Permitted Debt; (9) Investments in existence on the date of the indenture or made pursuant to a legally binding written commitment in existence on the date of the indenture; 56 (10) Guarantees of Indebtedness of a Restricted Subsidiary of Avista Corp. given by Avista Corp. or another Restricted Subsidiary of Avista Corp., in each case, in accordance with the terms of the indenture; (11) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and worker's compensation, performance and other similar deposits provided to third parties in the ordinary course of business; (12) Hedging Obligations, Currency Hedging Obligations and Commodity Price Protection Obligations permitted by the indenture that are entered into in the ordinary course of business; (13) Investments representing Capital Stock or obligations issued to Avista Corp. or any Restricted Subsidiary of Avista Corp. (i) in settlement of claims against any other Person by reason of a composition or readjustment of debt or a reorganization of any debtor (including customers and suppliers) of Avista Corp. or such Restricted Subsidiary, or (ii) as a result of an Asset Sale in which the Capital Stock of Avista Communications, Avista Advantage or Avista Labs is exchanged for Capital Stock or other securities of another Person, upon completion of which the subject or transferee Person is not a Subsidiary of Avista Corp.; (14) Investments in the Lancaster Project and the Peaker Turbine Project in an aggregate amount not to exceed $40 million; (15) Investments by Avista Corp. or any Restricted Subsidiary in Avista -STEAG, LLC; and (16) loans or advances, or performance guarantees in support of Avista Energy or Avista Power to customers or suppliers in the ordinary course of business. "Permitted Liens" means: (1) Liens securing Indebtedness and other Obligations of Avista Corp. and its Restricted Subsidiaries under Credit Facilities (to the extent that such Indebtedness and Obligations under such Credit Facilities were permitted by the terms of the indenture to be incurred); (2) Liens in favor of Avista Corp. or a Restricted Subsidiary of Avista Corp.; (3) Liens on assets or Equity Interests of a Person existing at the time such Person is merged with or into or consolidated with Avista Corp. or any Restricted Subsidiary of Avista Corp.; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with Avista Corp. or the Restricted Subsidiary; (4) Liens on assets existing at the time of acquisition thereof by Avista Corp. or any Restricted Subsidiary of Avista Corp., provided that such Liens were in existence prior to the contemplation of such acquisition; (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds, performance bids, tenders or contracts, statutory and common law landlord's liens or other obligations of a like nature incurred in the ordinary course of business; (6) Liens existing on the date of the indenture; (7) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (8) Liens to secure any refinancing, refunding, extension, renewal or replacement (or successive refinancings, refundings, extensions, renewals or replacements) as a whole, or in part, of any Indebtedness secured by any 57 Lien referred to in the foregoing clauses (3), (4), or (6), provided, however, that (x) such new Lien shall be limited to all or part of the same assets that secured the original Lien (plus improvements on such property) and (y) the Indebtedness secured by such Lien at such time is not increased (other than by an amount necessary to pay fees and expenses, including premiums, related to the refinancing, refunding, extension, renewal or replacement of such Indebtedness); (9) any Lien securing Indebtedness permitted to be incurred under Hedging Obligations or otherwise incurred to hedge interest rate risk or risks of commodity price fluctuations; (10) Liens securing Indebtedness relating to governmental obligations the interest on which is not included in gross income for purposes of federal income taxation pursuant to Section 103 of the Internal Revenue Code of 1986, as amended (or any successor provision of law), for the purpose of financing or refinancing, in whole or in part, costs of acquisition or construction of property to be used by Avista Corp., to the extent that the Lien which secures such secured Indebtedness is required either by applicable law or by the issuer of such governmental obligations or is otherwise necessary in order to establish or maintain such exclusion from gross income; (11) any Lien securing Capital Lease Obligations or other Indebtedness incurred pursuant to clause (8) of the definition of Permitted Debt; and (12) any Lien securing Indebtedness permitted to be incurred pursuant to clause (9) of the definition of Permitted Debt. "Permitted Refinancing Indebtedness" means any Indebtedness of Avista Corp. or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, restructure, supplement, defease or refund other Indebtedness of Avista Corp. or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, restructured, supplemented, defeased or refunded (plus all accrued interest thereon and the amount of all expenses and premiums incurred in connection therewith); (2) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness is subordinated in right of payment to the notes on terms at least as favorable to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (3) Indebtedness is incurred by Avista Corp. if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded was Indebtedness of Avista Corp. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company, government, governmental subdivision or other entity. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "RTO Transaction" means an Asset Sale entered into in connection with the formation of a regional transmission organization pursuant to or in a manner consistent with regulatory requirements applicable to Avista Corp. "Sale/Leaseback Transaction" means an arrangement relating to property owned as of the date of the indenture or thereafter acquired whereby Avista Corp. or a Restricted Subsidiary transfers such property to a Person and leases 58 it back from such Person, other than leases for a term of not more than 36 months or between Avista Corp. and a Restricted Subsidiary or between Restricted Subsidiaries. "S&P" means Standard & Poor's, and its successors. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, or any redemption or similar payment in respect of Disqualified Stock, the date on which such payment was scheduled to be paid in the original documentation governing such Indebtedness or Disqualified Stock, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal, or made such redemption of other payment, prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any specified Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Tax Sharing Agreement" means the Tax Sharing Agreement among Avista Corp. and its Subsidiaries as in effect on the date of the indenture. "Unrestricted Subsidiary" means any Subsidiary of Avista Corp. that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with Avista Corp. or any Restricted Subsidiary of Avista Corp. unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Avista Corp. or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Avista Corp.; (3) is a Person with respect to which neither Avista Corp. nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of Avista Corp. or any of its Restricted Subsidiaries. Any designation of a Subsidiary of Avista Corp. as an Unrestricted Subsidiary shall be evidenced to the trustee by filing with the trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of Avista Corp. as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock", Avista Corp. shall be in default of such covenant. The Board of Directors of Avista 59 Corp. may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Avista Corp. of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock", calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness or Disqualified Stock at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments or principal or redemption or similar payment, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the sum of all such payments. "Wholly Owned Subsidiary" of any specified Person means a Subsidiary of such Person all of the outstanding capital stock or other ownership interests of which (other than directors' qualifying shares) will at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly Owned Subsidiaries of such Person.provisions generally prohibiting distributions. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS This section describes the material United States federal income tax consequences of exchanging the Old NotesBonds for New NotesBonds and of owning and disposing of notes.bonds. This section reflects the opinion of Thelen Reid & Priest LLP, counsel to Avista Corp. This section applies to you only if you acquired the Old NotesBonds in the offering at the offering price and you hold your notesbonds as capital assets for tax purposes. This section does not apply to you if you are a member of a class of holders subject to special rules, such as: o a dealer in securities or currencies, o a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings, o a bank, o a life insurance company, o a tax-exempt organization, o a person that owns notesbonds that are a hedge or that are hedged against interest rate risks, o a person that owns notesbonds as part of a straddle or conversion transaction for tax purposes, or o a person whose functional currency for tax purposes is not the U.S. dollar. If you purchase notesbonds at a price other than the offering price, the amortizable bond premium or market discount rules may also apply to you. You should consult your tax advisor regarding this possibility. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed Treasury regulations, under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These lawsauthorities are subject to change, possibly on a retroactive basis. 60 This section does not discuss all aspects of taxation that may be relevant to you. Accordingly, you should consult your tax advisor as to the application and effect of state and local taxes, foreign taxes and other tax laws. UNITED STATES HOLDERS This subsection describes the tax consequences to a United States holder. You are a United States holder if you are a beneficial owner of a notebond and you are: o a citizen or resident of the United States, o a domestic corporation or partnership, o an estate whose income is subject to United States federal income tax regardless of its source, or o a trust if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust. 37 If you are not a United States holder, this subsection does not apply to you and you should refer to "United"--United States Alien Holders" below. Exchange of Old NotesBonds for New NotesBonds An exchange of Old NotesBonds for New NotesBonds will not be a taxable event for federal income tax purposes. Rather, the New NotesBonds will be treated as a continuation of the Old NotesBonds in the hands of a United States holder. As a result, you will not recognize any income, gain or loss for federal income tax purposes upon an exchange of Old NotesBonds for New Notes,Bonds, and you will have the same tax basis and holding period in the New NotesBonds as you had in the Old Notes.Bonds. Payments of Interest You will be taxed on interest on your notesbonds as ordinary income at the time you receive the interest or when it accrues, depending on your method of accounting for tax purposes. Purchase, Sale and Retirement of the NotesBonds Your tax basis in your Old NotesBonds generally will be their cost, and your tax basis in any New NotesBonds acquired in the Exchange Offer will be equal to your tax basis in the Old NotesBonds surrendered. You will generally recognize capital gain or loss on the sale or retirement of notesbonds equal to the difference between the amount you realize on the sale or retirement, excluding any amounts attributable to accrued but unpaid interest, and your tax basis in your notes.bonds. Capital gain of a noncorporate United States holder is generally taxed at a maximum rate of 20% where the property is held more than one year. UNITED STATES ALIEN HOLDERS This subsection describes the tax consequences to a United States alien holder. You are a United States alien holder if you are the beneficial owner of a notebond and are, for United States federal income tax purposes: o a nonresident alien individual, o a foreign corporation, o a foreign partnership, o an estate unless its income is subject to United States federal income tax regardless of its source, or o a trust unless a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust. 61 If you are a United States holder, this section does not apply to you. An exchange of Old NotesBonds for New NotesBonds will not constitute a taxable event for federal income tax purposes. Rather, the New NotesBonds will be treated as a continuation of the Old NotesBonds in the hands of a United States alien holder. As a result, you will not recognize any income, gain or loss for federal income tax purposes upon an exchange of Old NotesBonds for New Notes,Bonds, and you will have the same tax basis and holding period in the New NotesBonds as you had in the Old Notes.Bonds. Under United States federal income and estate tax law, and subject to the discussion of backup withholding below, if you are a United States alien holder of a note:bond: o we and other U.S. payors generally will not be required to deduct United States withholding tax from payments of principal, premium, if any, and interest to you if, in the case of payments of interest: 38 (1) you do not actually or constructively own 10% or more of the total combined voting power of all classes of stock of Avista Corp. entitled to vote, (2) you are not a controlled foreign corporation that is related to Avista Corp. through stock ownership, and (3) your income or gain from the note is not effectively connected with a trade or business that you conduct within the United States, and (4) either (i)(1) you furnish the U.S. payor an Internal Revenue Service Form W-8BEN certifying under penalties of perjury that you are not a United States person, or (ii)(2) the payor can otherwise be satisfied that you are not a United States person by relying on account documentation or other evidence as prescribed in Treasury regulations. You should consult your tax advisor regarding this requirement. However, this requirement will not be considered satisfied if the payor has actual knowledge or reason to know that you are a United States person notwithstanding the certificate or other documentation. o no deduction for any United States federal withholding tax will be made from any gain that you realize on the sale or exchange of your note,bond, including the exchange of Old NotesBonds for New Notes. We and other payors are required to report payments of interest on your notes on Internal Revenue Service Form 1042-S even if the payments are not otherwise subject to information reporting requirements.Bonds. If you are engaged in a trade or business within the United States and the interest on the notebond is effectively connected with your United States business, the interest and any gain on the notebond will not be subject to withholding if you have provided the payor an Internal Revenue Service Form W-8 as prescribed in the Treasury regulations. However, interest on a notebond that is effectively connected with your United States business will be subject to United States taxation in the same manner as applies to United States holders. In addition, ifmany tax treaties with the United States provide that interest and gain from United States sources are not taxable in the United States, unless such amounts are attributable to a permanent establishment in the United States. If you are entitled to the benefits of a tax treaty with the United States that provides these benefits, then interest and gain from the notebond will generally not be taxable, even if effectively connected with a United States trade or business, unless you also have a permanent establishment in the United States to which the interest or gain is attributable. In order to claim benefits under a tax treaty with the United States, you must furnish an Internal Revenue Service Form W-8BEN to the payor. Further, a notebond held by an individual who at death is not a citizen or resident of the United States will not be includible in the individual's gross estate for United States federal estate tax purposes if: o the decedent did not actually or constructively own 10% or more of the total combined voting power of all classes of stock of Avista Corp. entitled to vote at the time of death, and o the income on the notebond would not have been effectively connected with a United States trade or business of the decedent at the same time. 62 BACKUP WITHHOLDING AND INFORMATION REPORTING We and other payors, including brokers, may be required to report to you and to the Internal Revenue Service any payments of principal, premium and interest on your notebond and the amount of any proceeds from the sale or exchange of your note.bond. As described more fully below, we and other payors may also be required to make "backup withholding" from payments of principal, premium, interest and sales proceeds if you fail to provide an accurate taxpayer identification number or otherwise establish an exemption from backup withholding. Backup withholding is not an additional tax. If you are subject to backup withholding, you may obtain a credit or refund of the amount withheld by filing the required information with the Internal Revenue Service. UNITED STATES HOLDERS In general, if you are a noncorporate United States holder, we and other payors are required to report to the Internal Revenue Service all payments of principal, any premium and interest on your note.bond. In addition, we and other 39 payors are required to report to the Internal Revenue Service any payment of proceeds of the sale of your notebond before maturity within the United States. Additionally, backup withholding at a rate of 31%30% (subject to phase-in rate reductions until the rate equals 28% for payments after 2005) will apply to any payments if you fail to provide an accurate taxpayer identification number, or you are notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns. UNITED STATES ALIEN HOLDERS In general, payments of principal, premium or interest made by us and other payors to you will not be subject to backup withholding and information reporting, provided that the certification requirements described above under "United"--United States Alien Holders" are satisfied or you otherwise establish an exemption. We and other payors are required to report payments of interest on your bonds on Internal Revenue Service Form 1042-S even if the payments are not otherwise subject to information reporting requirements. In general, proceeds of your sale of a notebond will not be subject to backup withholding or information reporting if: o you furnish your broker an Internal Revenue Service Form W-8BEN certifying under penalties of perjury that you are not a United States person, or o your broker possesses other documentation concerning your account on which the broker is permitted to rely under Treasury regulations to establish that you are a non-United States person, or o you otherwise establish an exemption. If you are not exempted from backup withholding and information reporting under the preceding paragraph: o Backup withholding and information reporting will apply to the proceeds of any sale that you make through the United States office of any broker, foreign or domestic. o Information reporting will also apply to the proceeds of sales that are made through a foreign office of a broker if the proceeds are paid into a United States account, or such proceeds or the confirmation of the sale are mailed to you at a United States address, or if you have opened an account with a United States office of your broker, or regularly communicated with the broker from the United States concerning the sale in question and other sales, or negotiated the sale in question through the broker's United States office. Backup withholding will also apply unless the proceeds of such a sale are paid to an account maintained at a bank or other financial institution located outside the United States. o Information reporting, but not backup withholding, will apply to sales made through a foreign office of a broker that is (1) a United States person or that isas defined in the Internal Revenue Code, (2) a foreign corporationperson that derived 50% or partnership controlled by U.S. persons or that derives more than 50% of its gross income for certain periods from U.S. 63 the conduct of a trade or business activities over a three-year period as specified in the Treasury regulations.United States, (3) a controlled foreign corporation as defined in the Internal Revenue Code, or (4) a foreign partnership with certain U.S. connections. Notwithstanding any withholding certificate or documentary evidence in a broker's possession, a broker who has actual knowledge or reason to know that you are a United States person will be required to make backup withholdings and file information reports with the Internal Revenue Service if the broker is a U.S. person or is a foreign person that has a U.S. connection of the type discussed in the last bullet point of the preceding paragraph. PLAN OF DISTRIBUTION As discussed under THE EXCHANGE OFFER, based on an interpretation of the staff of the SEC, New NotesBonds issued pursuant to the Exchange Offer may be offered for resale and resold or otherwise transferred by any Holder of such New NotesBonds (other than any such Holder which is an "affiliate" of Avista Corp. within the meaning of Rule 405 under the Securities Act and except as otherwise discussed below with respect to Holders which are broker-dealers) without compliance with the registration and prospectus delivery requirements of the Securities Act so long as such New NotesBonds are acquired in the ordinary course of 40 such Holder's business and such Holder has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of such New Notes.Bonds. Each broker-dealer that receives New NotesBonds for its own account in exchange for Old NotesBonds which were acquired by such broker-dealer as a result of market-making activities or other trading activities must, and must agree to, deliver a prospectus in connection with any resale of such New Notes.Bonds. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New NotesBonds received in exchange for Old NotesBonds where such Old NotesBonds were acquired as a result of market-making activities or other trading activities. Avista Corp. will for a period of 90180 days after the Expiration Date make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until _____, 2001, all dealers effecting transactions in the New Notes may be required to deliver a prospectus. New NotesBonds received by broker-dealers for their own account in the Exchange Offer as described above may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New NotesBonds or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes.Bonds. Any broker-dealer that resells New NotesBonds that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New NotesBonds may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New NotesBonds and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The interpretation of the staff of the SEC referred to in the first paragraph of this section does not apply to, and this prospectus may not be used in connection with, the resale by any broker-dealer of any New NotesBonds received in exchange for an unsold allotment of Old NotesBonds purchased directly from Avista Corp. Avista Corp. will not receive any proceeds from the issuance of the New NotesBonds pursuant to the Exchange Offer or from any subsequent sale of the New Notes.Bonds. Avista Corp. has agreed to pay all expenses incident to the Exchange Offer other than commissions or concessions of any brokers or dealers and expenses of counsel for the holders of the New NotesBonds and will indemnify the holders of the New NotesBonds (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. 64 WHERE YOU CAN FIND MORE INFORMATION Avista Corp. files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document Avista Corp. files at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Avista Corp. SEC filings are also available to the public from the SEC's website at http://www.sec.gov. However, information on this website does not constitute a part of this prospectus. During 2001, Avista Corp. has filed the following documents with the SEC pursuant to the Exchange Act: o Annual Report on Form 10-K for the year ended December 31, 2000, as amended by Form 10-K/A (the "Form 10-K"). o Quarterly Report on Form 10-Q for the quarterquarters ended March 31, June 30 and September 30, 2001. o Current ReportReports on Form 8-K filed May 2, July 23, September 27, October 22, October 31 and December 11, 2001. 41 These documents, as well as any other documents subsequently filed with the SEC before the termination of the offering of the New Notes,Bonds, are incorporated herein by reference and are considered to be part of this prospectus. Later information contained in this prospectus updates and supersedes the information set forth in the Form 10-K and any other incorporated documents. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS We are including the following cautionary statements in this prospectus to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, Avista Corp. Forward-looking statements include statements concerning plans, objectives, goals, strategies, projections of future events or performance, and underlying assumptions (many of which are based, in turn, upon further assumptions) and are all statements which are not statements of historical fact. Forward-looking statements include statements that are identified by the use of the words such as, but not limited to, "will," "anticipates," "seeks to," "estimates," "expects," "intends," "plans," "predicts," and similar expressions. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of Avista Corp., are also expressly qualified by these cautionary statements. Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation management's examination of historical operating trends, data contained in our records and other data available from third parties, but 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, and we undertake no obligation to update or revise any forward-looking statement or statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based 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 Avista Corp.'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. In addition to other factors and matters discussed elsewhere in this offering circular, the following are some important factors that could cause actual results or outcomes from our operations to differ materially from the forward-looking statements. AVISTA UTILITIES' OPERATIONS Important factors relating to Avista Utilities' operations include continuing legislative developments, governmental policies and regulatory actions with respect to allowed rates of return, financings, or industry and rate structures (including the outcome of the general rate case filed in the state of Washington to address, among other things, the prudence and recovery of significant deferred power costs); weather conditions and future streamflow conditions and their impact on the availability of hydroelectric resources; outages of any of our thermal or other generating facilities; changes in demand for energy due to weather conditions, customer growth and other factors; wholesale and retail competition (including but not limited to electric retail wheeling and transmission cost); availability of economic supplies of purchased power and natural gas; competition in present or future natural gas distribution or transmission (including but not limited to prices of alternative fuels and system deliverability costs); the availability and costs of electric capacity and energy and natural gas in wholesale markets as well as volatility and illiquidity in these markets and the ability to recover purchased power and purchased gas costs; the ability to make profitable sales of any surplus electric capacity or energy in wholesale markets; present or prospective generation, operations and construction of plant facilities; and acquisition and disposal of assets or facilities. ENERGY TRADING AND MARKETING OPERATIONS Energy Trading and Marketing includes the operations of Avista Energy and Avista Power. Important factors relating to our Energy Trading and Marketing operations include further industry restructuring evolving from federal and/or state legislation; federal and state regulatory and legislative actions; governmental controls on market operations and prices (including FERC price controls and possible retroactive price caps and resulting refunds); demand for 42 and availability of energy throughout the country; wholesale competition; availability of economic supplies of natural gas; margins on purchased power; changes in market factors; the formation of additional alliances or entities; the availability of economically feasible generating projects; and the availability of funding for new generating assets. INFORMATION AND TECHNOLOGY, AND OTHER OPERATIONS Important factors relating to the remaining Avista Corp. subsidiaries' operations include competition from other companies and other technologies; obsolescence of technologies; the inability to reduce costs of the technologies down to economic levels; the inability to obtain new customers and loss of significant customers or suppliers; reliability of customer orders; business acquisitions; disposal of assets; the availability of funding from other sources; research and development findings; and the availability of economic expansion or development opportunities. FACTORS COMMON TO ALL OPERATIONS The business and profitability of Avista Corp. are also influenced by, among other things, economic risks; changes in and compliance with environmental and safety laws and policies; weather conditions; population growth rates and demographic patterns; market demand for energy from plants or facilities; changes in tax rates or policies; unanticipated project delays or changes in project costs; unanticipated changes in operating expenses or capital expenditures; labor negotiations or disputes; changes in credit ratings or capital market conditions; inflation rates; inability of the various counterparties to meet their obligations with respect to financial instruments; failure to deliver on the part of any parties from which Avista Corp. purchases capacity or energy; Avista Corp.'s ability to obtain debt or equity financing; changes in accounting principles and/or the application of such principles to Avista Corp.; changes in technology; changes in economic, business or political conditions, including the continuing impact on the economy of the September 11, 2001 terrorist attacks; and legal proceedings. LEGAL MATTERS The validity of the New NotesBonds will be passed upon for Avista Corp. by Thelen Reid & Priest LLP and Heller Ehrman White & McAuliffe LLP. In addition, matters of federal income tax law and federal securities law will be passed upon by Thelen Reid & Priest LLP. In giving their opinion, Thelen Reid & Priest LLP may rely as to matters of Washington, California, Idaho, Montana and Oregon law upon the opinion of Heller Ehrman White & McAuliffe LLP. EXPERTS The financial statements and the related financial statement schedules incorporated in this prospectus by reference from Avista Corp.'s Annual Report on Form 10-K for the year ended December 31, 2000 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the reportsreport of such firm given upon their authority as experts in accounting and auditing. 6543 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article Seventh of the Registrant's Restated Articles of Incorporation ("Articles") provides, in part, as follows: "The Corporation shall, to the full extent permitted by applicable law, as from time to time in effect, indemnify any person made a party to, or otherwise involved in, any proceeding by reason of the fact that he or she is or was a director of the Corporation against judgments, penalties, fines, settlements and reasonable expenses actually incurred by him or her in connection with any such proceeding. The Corporation shall pay any reasonable expenses incurred by a director in connection with any such proceeding in advance of the final determination thereof upon receipt from such director of such undertakings for repayment as may be required by applicable law and a written affirmation by such director that he or she has met the standard of conduct necessary for indemnification, but without any prior determination, which would otherwise be required by Washington law, that such standard of conduct has been met. The Corporation may enter into agreements with each director obligating the Corporation to make such indemnification and advances of expenses as are contemplated herein. Notwithstanding the foregoing, the Corporation shall not make any indemnification or advance which is prohibited by applicable law. The rights to indemnity and advancement of expenses granted herein shall continue as to any person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person. " The Registrant has entered into indemnification agreements with each director as contemplated in Article Seventh of the Articles. Reference is made to Revised Code of Washington 23B.08.510, which sets forth the extent to which indemnification is permitted under the laws of the State of Washington. Article IX of the Registrant's Bylaws contains an indemnification provision similar to that contained in the Articles and, in addition, provides in part as follows: "SECTION 2. LIABILITY INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the laws of the State of Washington." Insurance is maintained on a regular basis (and not specifically in connection with this offering) against liabilities arising on the part of directors and officers out of their performance in such capacities or arising on the part of the Registrant out of its foregoing indemnification provisions, subject to certain exclusions and to the policy limits. ITEM 21. EXHIBITS. Reference is made to the Exhibit Index on p. II-6II-5 hereof. ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1)1. That, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each II-1 each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (2)2. To respond to requests for information that is incorporated by reference into the prospectus pursuant to item 4,10(b), 11 or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this registration statement through the date of responding to the request. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, such Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 POWER OF ATTORNEY The Registrant hereby appoints Jon E. Eliassen and each Agent for Service named in this registration statement, and each of them severally, as its attorney-in-fact to sign in its name and behalf, and to file with the Securities and Exchange Commission any and all amendments, including post effectivepost-effective amendments, to this registration statement, and each director and/or officer of the Registrant whose signature appears below hereby appoints Jon E. Eliassen and each such Agent for Service, and each of them severally, as his or her attorney-in-fact with like authority to sign in his or her name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission, any and all such amendments. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spokane and State of Washington on the 31st11th day of May, 2001.February, 2002. AVISTA CORPORATION /s/ JONJon E. ELIASSEN ----------------------------------Eliassen --------------------------- Jon E. Eliassen Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATES /s/ GARYGary G. ELYEly - ------------------------------------------------------------------ Gary G. Ely Director and Principal May 31, 2001February 11, 2002 (Director, President and Chief Principal Executive Officer Executive Officer) Officer /s/ JONJon E. ELIASSENEliassen - ------------------------------------------------------------------ Jon E. Eliassen Principal Financial and May 31, 2001February 11, 2002 (Senior Vice President and Chief and Accounting Officer Financial Officer) Officer /s/ ERIKErik. J. ANDERSONAnderson - ------------------------------------------------------------------ Erik. J. Anderson Director May 31, 2001February 11, 2002 II-3 /s/ KRISTIANNE BLAKEKristianne Blake - ------------------------------------------------------------------ Kristianne Blake Director May 31, 2001 II-3 February 11, 2002 /s/ D.A. CLACKDavid A. Clack - ------------------------------------------------------------------ David A. Clack Director May 31, 2001February 11, 2002 /s/ S.M.R. JEWELLSarah M. R. (Sally) Jewell - ------------------------------------------------------------------ Sarah M. R. (Sally) Jewell Director May 31, 2001February 11, 2002 /s/ J.F. KELLYJohn F. Kelly - ------------------------------------------------------------------ John F. Kelly Director May 31, 2001February 11, 2002 /s/ JESSIEJessie J. KNIGHT JR.Knight, Jr. - ------------------------------------------------------------------ Jessie J. Knight, Jr. Director May 31, 2001February 11, 2002 /s/ EUGENEEugene W. MEYERMeyer - ------------------------------------------------------------------ Eugene W. Meyer Director May 31, 2001February 11, 2002 /s/ BOBBY SCHMIDTBobby Schmidt - ------------------------------------------------------------------ Bobby Schmidt Director May 31, 2001February 11, 2002 /s/ R. JOHN TAYLORJohn Taylor - ------------------------------------------------------------------ R. John Taylor Director May 31, 2001February 11, 2002 /s/ DANIELDaniel J. ZALOUDEKZaloudek - ------------------------------------------------------------------ Daniel J. Zaloudek Director May 31, 2001February 11, 2002 II-4 EXHIBIT 23(B) CONSENT We consent to the incorporation by reference in this Registration Statement of Avista Corporation on Form S-4 of our report dated February 2, 2001 (February 26, 2001 as to Note 22), appearing in the Annual Report on Form 10-K of Avista Corporation for the year ended December 31, 2000 and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ Deloitte & Touche LLP Seattle, Washington June 1, 2001 II-5 EXHIBIT INDEX Exhibit No. Description of Exhibit ----------- ---------------------- 4(a) - IndentureMortgage and Deed of Trust dated as of April 3, 2001,June 1, 1939, by and among Avista Corporation and Chase Manhattan Bank and Trust Company, National Association,Citibank, N.A., as Trustee (filed as Exhibit 4(f) to Quarterly Report on Form 10-Q for quarter ended March 31, 2001)with registration number 2-4077 B-3). 4(b) - Twenty-ninth Supplemental Indenture to the Mortgage, dated as of December 1, 2001. 4(c) - Exchange and Registration Rights Agreement betweenamong Avista Corporation and Goldman Sachs & Co. 4(c)the Initial Purchasers. 4(d) - Form of Letter of Transmittal. 4(e) - Form of New Bond. 5(a) - Opinion of Heller Ehrman White & McAuliffe LLP. 5(b) - Opinion of Thelen Reid & Priest LLP. 8 - Opinion as to tax matters of Thelen Reid & Priest LLP (contained in their opinion filed as Exhibit 5(b)) and 8.8). 23(a) - Consents of Heller Ehrman White & McAuliffe LLP and Thelen Reid & Priest LLP are contained in their opinions filed as Exhibits 5(a) and 5(b) and 8, respectively. 23(b) - Consent of Deloitte & Touche LLP (contained on page II-5).LLP. 24 - Power of Attorney (contained on page II-3). 25 - Statement of Eligibility of Trustee on Form T-1 of Chase Manhattan Bank and Trust Company, National Association. II-6Citibank, N.A. II-5