INVESTING IN OUR SHARED FUTURE 2010 ANNUAL REPORT A STATEMENT OF OUR PURPOSE: DELIVERING RELIABLE ENERGY SERVICE AND THE CHOICES THAT MATTER MOST TO YOU. THIS IS THE IDEA THAT GUIDES OUR WORK EVERY DAY • IT IS THE YARDSTICK AGAINST WHICH WE GAUGE OUR PRIORITIES AND MEASURE OUR RESULTS. IT EXPRESSES WHAT WE WORK TOWARD • OUR SHARED FUTURE. ON THE COVER: Avista looks back on 2010 as a year of investment in our shared future. Operational challenges were met head-on and programs successfully implemented which resulted in strong financial health and a clear, empowered vision for moving forward. ON THIS PAGE: Natural gas is the cleanest burning fossil fuel. Its most efficient use is to directly heat homes and businesses. Construction of new natural gas lines continues as Avista meets increasing residential and business demand for this clean heating source. Scott Morris Chairman, President and Chief Executive Officer D EAR FelloW SHAREHOLDERS: Let’s talk about two thoughts: FINANCIAL HIGHLIGHTS We’ve come through 2010 with solid [ shared value and shared future. As a financial results and modest growth. We believe these are good outcomes given the shareholder of Avista Corp., you have weak economy both regionally and nationally. invested in the work of this company – The year started with weather that once again set records. This time, though, it wasn’t record for today and for tomorrow. As the snow levels as in 2009; instead 2010 was one of the warmest January to March time chairman of Avista Corp., my job is periods in this region. This resulted in lower than normal energy use from customers to to see that your trust in our work is heat their homes and businesses. However, paid back as a fair return on your improved results throughout the remainder of the year, power supply costs lower than investment. Together, we have a vested the amount included in rates and our disciplined management of operating expenses interest in the ongoing success of this helped to mostly offset the effects of the first company. So, please read on for a good quarter weather. With that, we delivered year-end earnings sense of the work we’re doing and the of $1.65 per diluted share, an increase from $1.58 in 2009. Our 2011 earnings are expected direction we’re heading. to benefit from a return to normal weather and the effects of general electric and natural gas rate increases we received in Washington and Idaho. We expect this may be partially offset, however, by slower load growth due to the still-sluggish economy, a lag in the recovery of operating expenses and capital investments, as well as increased costs for materials. 2011 CAPITAL BUDGET (total capital budget $250 million) ($ in millions) Transmission & Distribution – $68 Generation – $42 Growth – $40 Technology – $28 Smart Grid – $19 Natural Gas – $16 Environmental – $12 Facilities – $10 Fleet – $10 Other – $5 We remain committed to investing in our utility infrastructure to keep system reliability high. Replacing and upgrading our transmission and distribution system and renewable hydroelectric generation plants, as well as building the infrastructure to meet regional demand growth were the primary drivers of our $210 million capital budget in 2010. The 2011 capital budget of $250 million includes funds to match our smart grid grants. As we invest in our system to reliably and safely bring energy to our customers, we are also diligently working with our regulators to receive timely recovery of these investments. In addition to the electric and natural gas rate increases in Washington and Idaho, we filed a natural gas rate case in Oregon in September. A proposed settlement has been reached subject to commission approval expected in the first half of 2011. We remain focused on maintaining a healthy balance sheet and credit rating strength. At the end of 2010 we had a combined $258 million of available liquidity under our two committed lines of credit. We also have a sales agency agreement in place to sell shares of common stock from time to time. In 2010 we issued $43 million of common stock under this agreement, and we expect to issue up to $25 million of common stock in 2011 to maintain an appropriate capital structure. Another sign of progress: the Board of Directors raised the common stock dividend in 2010 for the eighth consecutive year, bringing our dividend payout ratio to 60 percent and reaching our goal of being in line with the industry average. This reflects the confidence our directors have in our continued progress toward achieving our corporate goals. TOTAL RETURN TO SHAREHOLDERS ADVANTAGE IQ REVENUE (includes reinvestment of dividend) Avista Corp. (AVA) ($ in millions) S&P 500 Index $200 S&P 400 Electric Utilities Index $120 $102 AVA AVA $152 $100 $146 AVA $150 AVA $139 $128 AVA $77 AVA $119 $80 Base Period $100 $59 $100 $60 $47 $40 $40 $50 $20 $0 $0 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 S TRATEGIC ENERGY MANAGEMENT We are on the cusp of some of the biggest changes our industry has seen in decades – driven by new technology, new information and new partnerships. The opportunities and challenges ahead are very exciting. Being innovative in the way we look for opportunities is nothing new for us. It’s deeply rooted in our history. Avista has long been an innovative energy company, from pioneering transmission and generation operations to helping create the automated meter reading industry; from developing fuel cell innovations to becoming the leader in energy management. Advantage IQ, our primary non-utility subsidiary, is a leading provider of strategic energy management solutions. It partners with Fortune 1000 organizations to maximize business results by reducing energy and other facility expenses, managing risk and improving environmental performance. Its strategic acquisitions – including Ecos in 2009 and The Loyalton Group in 2010 – have broadened the value proposition Advantage IQ brings to its clients. Through the energy consumption information it manages for clients, Advantage IQ has an electric usage database of more than 25,000 megawatts of commercial and industrial load. This business SMART Advantages — Advantage IQ With energy in the top five expense categories for most businesses, visibility and understanding of how to best utilize energy is crucial. The value-added online tools, data resources and consulting we provide our clients make a competitive difference, helping them make informed decisions that can positively impact their financial stability and the environment. It is a win-win situation. Doug Barry Manager, Advanced Analysis, Advantage IQ continues to show long-term growth potential in as a trusted and knowledgeable partner clients, revenues and its positive contribution to with our customers in managing their Avista Corp.’s earnings. energy use tomorrow. New, enabling technologies, plus S MART MOVES AT THE RIGHT TIME a fast-changing market and evolving Being in the right place, at the right time, with customer needs demand that we engage Gerard Fischer the right resources means we can capitalize on with our customers in new ways. We’re Avista Utilities Residential Customer opportunities when they arise – enhancing our working from our strength, building annual revenues and helping moderate power on a solid foundation of customer [ Our energy future relies on making the supply costs for customers. For example, Avista satisfaction. Among other indicators, most efficient use of regularly sells available capacity, energy, ancillary our customer service center has achieved the resources that produce the power services and green, renewable energy in the western over 90 percent satisfaction ratings from we need. Avista’s markets. By optimizing the value of our resources customers for more than 10 consecutive in-home audit showed where I could cut through these activities, we are able to capture years. And in 2010, J.D. Power and energy losses and millions of dollars in additional revenue that serves Associates ranked Avista “Highest in better manage utility costs, saving money, to lower costs for our retail customers. Customer Satisfaction with Residential making my home Doing due diligence is our first step in Natural Gas Service in the Western U.S. more comfortable and helping me be implementing new technologies. Such is the case among Mid-size Utilities in a Tie.” a better steward of with the advent of smart grid. There’s a lot to know We are focusing on identifying the environment. before we make full-scale investments in hardware more ways to create value-added and technology. As one of a handful of utilities interactions with our customers. Our award- to receive multiple smart grid grants under the winning Web site is a dynamic resource for doing American Recovery and Reinvestment Act of 2009, business with us and finding information to help we’re putting these funds to good use – enhancing manage energy use. We’re among the industry our distribution system to improve reliability leaders in using social media channels such as the and energy efficiency; modeling how to implement Avista blog, Twitter and Facebook to communicate new technology and communicate with customers with our customers where the conversations are in the Smart Grid Demonstration Project happening – in the digital world. We’re holding (Pullman, Wash.); and developing the workforce community meetings with opportunities for needed to install and maintain the new customers, civic leaders and elected officials to technologies. The smart grid capabilities we’re share ideas and help us deliver responsive energy building into our system today position us well solutions. We’re undertaking outreach activities Wattson, Avista’s energy watchdog, attended more than 25 community events and school presentations in 2010, reaching more than 100,000 people and bringing the message of energy efficiency and conservation to the next generation of Avista customers.