Good day ladies andgentlemen, and welcome to the fourth quarter 2007 Avista Corporation earnings conferencecall. My name is Gina and I will be your coordinator for today. At this time,all participants are in a listen-only mode. We will be facilitating aquestion-and-answer session towards the end of today’s conference. (OperatorInstructions) As a reminder, thisconference is being recorded for replay purposes. I would now like to turn thepresentation over to your host for today’s call, Jason Lang, Manager ofInvestor Relations.

Thank you, Gina. Goodmorning, everyone. Welcome to Avista’s fourth quarter and fiscal year 2007earnings conference call. Our earnings were released pre-market this morningand the release is available on our website at avistacorp.com. Joining me this morningare Avista Corp’s Chairman of the Board, President and CEO Scott Morris; Executive VicePresident and CFO Malyn Malquist; Vice President of Finance and Treasurer AnnWilson; Vice President, State and Federal Regulation, Kelly Norwood; and VicePresident, Controller and Principal Accounting Officer ChristyBurmeister-Smith. Before we begin, I’d liketo remind you that some of the statements that will be made today areforward-looking statements that involve risks and uncertainties, which aresubject to change. For reference to the various factors whichcould cause actual results to differ materially from those discussed in today’scall, I would direct you to our Form 10-K for 2006, and Form 10-Q for thequarter ended September 30 2007, which are available on our website. We will also bediscussing our credit rating. It is important to note that these credit ratingsare not recommendations to buy, sell or hold securities. The ratings aresubject to change or withdraw at any time by the respective creditrating agencies. Each credit rating should be evaluated independently of anyother ratings. To begin thispresentation, I’d like to briefly recap the financial results presented intoday’s press release. Our consolidated earnings for the fourth quarter of 2007were $0.26 per diluted share, compared with earnings of $0.35 per diluted sharefor the fourth quarter of 2006. For the full year of 2007, our consolidatedearnings were $0.72 per diluted share, compared with $1.46 per diluted sharefor 2006. Now I’ll turn thediscussion over to Avista’s Chairman of the Board, President and Chief ExecutiveOfficer, Scott Morris.

Thanks, Jason, and goodmorning, everyone. As we mentioned earlier in the year, 2007 was the year ofrepositioning our company with a focus on the future of our utility operations.Our consolidated earnings for the full year of 2007 were lower than weoriginally forecasted, and we’re not pleased with these results. This was due to both theperformance of Avista Energy during the first half of the year and certainvariables that worked against us at the utility. The Washington Commissiondecision in late 2006 to deny our request for more timely recovery oftransmission and generation investments, and to align our cost of power withmarket cost, presented a significant challenge for us without the rate reliefwe had anticipated. We also experienced lowerthan expected loads in 2007, which were largely weather-related. Our challengewas compounded by below normal hydro generation and higher purchase power andfuel cost that was allowed in rates. This caused us to absorb higher electricresource cost under the Energy Recovery Mechanism in Washington. However, I believe thatwe are well-positioned to meet the complex challenges in the energy and utilitysector in 2008 and beyond, thanks to the hard work of our employees, and theguidance of Gary Ely, who retired as Chairman of the Board and Chief Executive Officer atthe end of 2007. Gary led our company from the depths of the energycrisis through the rebuilding of confidence and financial health. And now someseven years later, Avista has regained an investment grade status from bothMoody’s and Standard & Poor’s. A significant event in2007 was the sale of substantially all of Avista Energy’s contracts and ourongoing operations to Shell Energy. This transaction was completed on June 30;it lowers our corporate risk profile and should improve the stability of ourearnings. The majority of the $169million of proceeds from the Avista Energy transaction were deployed into ourregulated utility operations.…

Thanks, Scott, and goodmorning, everyone. Avista Utilitiescontributed $0.23 per diluted share for the fourth quarter of 2007 compared to$0.28 per diluted share for the fourth quarter of 2006. The decrease in results reflects an increasein other operating expenses and taxes other than income taxes. Depreciation andamortization also increased as compared to the prior year due to our investmentin utility plant beyond the level that was being covered in rates. Our utility plant in service increased $193million during 2007. For the full year of2007, our utility operation contributed $0.82 per diluted share compared to acontribution of $1.16 per diluted share for 2006. The decline in our results for 2007 ascompared to 2006 was primarily due to a decrease in electric gross margin. The decrease was also dueto the disallowance of $3.8 million of unamortized debt repurchase costs in theWashington general rate case and an increase in otheroperating expenses, as well as depreciation and amortization. Electric resource costswere higher than the amount included in base rates in 2007. This was largely driven by higher purchasepower costs and fuel costs and greater use of our thermal generating resourcesto meet demand in the early part of the year. Also, hydro generation was below normal, and we experienced someunexpected outages at our generating plants in the second quarter. We recognized $8.5million of expense under the ERM during 2007 as compared to a $2.6 millionbenefit recognized during 2006. This change from the prior year reduced our earnings by$0.14 per diluted share. The ERM is onlythe Washington fuel recovery mechanism; we also under-recoveredin Idaho. In addition to the effectof the ERM, our electric and natural gas loads were below ourexpectations. This was due to warmerthan normal weather during the heating season; lower than expected customergrowth; and customer response to price increases particularly with respect tonatural gas. Also…

Thanks, Malyn. And now at this time we’ll open the call upfor questions.

(Operator Instructions)And your first question is from the line of Paul Ridzon - KeyBanc.

Just wanted a little moredetail; one of the places I got caught by surprise was the tax timing issues atthe utility for other taxes, and what was driving that year-over-yeardiscrepancy? At the end of the year it all makes sense and probably you shouldhave seen it coming.

Good morning. In the fourth quarter of 2006, we had anunusual reduction in property tax. It was primarily in Idaho and it related to the Idaho state law changing, they rolled back sales tax and they rolledback property tax and replaced it with sales tax. What that did is cause usin 2006 to adjust our accrual downward. The results saw a small impact in Montana, so in 2006, we had about $3 million pre-taxadjustment in the fourth quarter. Year-over-year our property tax is just the same at about $20 million.

Pre-tax would be the sameas after-tax in this case?

As a property tax itwould be tax affected of about 65%, so about $2 million after tax.

And, Malyn, we have asurprise dividend hike this quarter. I am sure shareholders appreciate that butgoing forward should we think about the August Board Meeting at the time whenthey’ll visit this every year?

I think that it will bedone in the second half of the year, and what we’re shooting for as you’llrecall was getting the investment grade credit rating back and refinancing the 9¾% notes and of course the 9 ¾% notes are going to happen in the secondquarter, so I won’t predict which quarter the Board will do that in Paul, but Ithink that they’ll be in a position to look pretty hard at it in August.

And certainly otherindustrial sectors are having troubles in the debt markets; what are you seeingout there? How are the spreads and what’s your outlook for the refi on the 9 ¾%?

It’s certainly a lot morevolatile than we’d like it to be and we’re hoping that things will calm down abit, the spreads have blown out pretty significantly for us but we’re stillanticipating we’re going to see a very substantial savings versus the 9 ¾% thatwe have. We’re looking at probablydoing $250 million of debt sometime in the March to May timeframe. And we’re looking at rates still I think thatare lower than 7% if we went really long and probably in the low 6% if we wentwith ten-year which is what we’re leaning towards at this point. Ann, would youadd anything to that?

No, I think that we’retrying to go with as plain vanilla as possible. So, that’s why we’re looking atsecured first mortgage bonds.

Yes, your ERM was reset;what’s the embedded power price in 2008 versus that which was in 2007?

Paul, I think we’re goingto have to get back to you with that. We don’t have that right off the top.Kelly?

We don’t really set aspecific rate per kilowatt-hour for power supply, what we do is reflect in ourbase rates the known contracts, fuel cost, levels of hydro and wholesale marketprices in our base rates. So, it’s a combination of numbers that make up thatbase set of numbers. So, there isn’t any specific rate per kilowatt-hour that’sseparately determined.

One another thing thatsurprised me was with 96% normal hydro, we still incurred $8.6 million of ERMcosts. Is that just proportion or was there something unusual about this yearthat let the ERM get so high even with water that close to normal?

I think that there were acouple of things, first we did have some outages at our hydro facilities in May-Junetimeframe, and I think that was harmful to us. Also we knew and what we’retrying to do with the PCORC was reset natural gas price and the purchase powerprice to be closer to market. And I don’t recall whatthose were, but I do remember that that was a fairly significant piece ofsomething that we needed from the Commission so that our prices reallyreflected the market and we obviously weren’t unable to true those up. So, Ithink it was a lot more than just the hydro, I think it was the natural gasprice, maybe even more than the lower than normal hydro.

And Paul, we did have anoutage at Coyote Springs unexpectedly for two to three weeks in the spring thatadded to the expense as well.

I just have one morequestion. It’s in IQ; you’ve got a lot of intellectual property in thatbusiness. It looks as though efficiency in DSM markets are probably going to beattractive. What do you see as your opportunities to pick your market leadingposition, and potentially pursue other strategic opportunities around thatbusiness and growing in that way?

Paul, as you know thatwe’ve been really focused on not only just growing our core business of thebill pay operation, but also really focused on consulting services. And wecurrently have a pretty aggressive plan around increasing those services to ourcustomers. We did very well in 2007,had a significant increase in revenues in consulting services, and see somevast opportunities and exciting opportunities for us in 2008. So, you’reexactly right, we will get pretty aggressive in the DSM and green initiativesthat are opportunities for us to expand into. So, you can look forward to that.

Is there a lot of capitalthat you’re going to need to do that?

No, we’ve got great, as yousaid, intellectual capital; we’ve got tremendous IFIT capability, it’s justbeing able to repackage and work closely with our customers. And we know whattheir needs are, and are looking at ways to help them reduce their carbonfootprint and offer other new products into the market.

We do have, Paul, we dohave about $6 million to $7 million of CapEx in Advantage IQ which will befunded from their operations, so there is no requirement to put additionaldollars in there. We’re basicallyrebuilding our processing engine, which is our own propitiatory engine, andfrankly we’re trying to get ready to process hundreds of thousands more billsper month than we’re currently processing as well as help us to bring someadditional efficiencies in the long-term there. So, all of those things,in addition to the growth in other areas like consulting and telecom that Scotttalked about, should really help us to take this business to the next level.

Great, thank you again.

Your next question comesfrom the line of James Bellessa - D.A. Davidson & Company. James Bellessa - D.A. Davidson & Company : On the fourth quarter yousay that the utility came in lower than you originally forecasted, was thatjust exclusively the tax timing issues or were there other items? You talked about $0.5 million more ofabsorption than you thought; are there other items than those two things?

Yes, there were a coupleof additional items. We had some increased maintenance costs partly related toan outage at Colstrip; we had a little bit increase in (inaudible) expense thathad been included in our rate case that we should up (inaudible). Also in 2006 in operating expenses we had a settlement related toour Northeast turbine sale, which had reduced 2006 operating expenses byapproximately $1 million pre-tax. So, those are the primary items of that;that’s the difference between 2007 and 2006. James Bellessa - D.A. Davidson & Company : Now, is this tax issueone-time adjustment or is this going to go forward somehow?

Proper tax year-over-year2007 to 2006 is approximately the same level at $20 million. We anticipate thatit will be a similar amount in 2008. There can be a little bit of difference inthe timing of (inaudible) adjustments that are made, depending on when we getinformation from the Jackson Authorities, but it shouldn’t be as significant asit was in 2006. James Bellessa - D.A. Davidson & Company : And the sales tax figurefor this year of 2007 would be the same in 2008?

When you say sales taxare you talking about taxes associated with our revenue? James Bellessa - D.A. Davidson & Company : I thought you said thatin Idaho they decreased the property taxes, and replacedit with the sales tax.

Correct and property taxhas a much greater impact on us than sales tax in Idaho.

I would just maybe try toframe up the 2007 fourth quarter was a continuation of really our rates notreflecting our costs. And so, with the Washington general rate case we expect that is behind usnow, because our rates now our really are much more indicative of what ourcosts are. James Bellessa - D.A. Davidson & Company : In the fourth quarter theERM absorption was that $0.01 or $0.02 a share?

That’s approximately$0.01 per share. James Bellessa - D.A. Davidson & Company : And that’s about flatwith the year even though the dollar amount is up it’s still about $0.01 versus$0.01?

Correct. James Bellessa - D.A. Davidson & Company : And in the delta that youwere explaining about earnings levels in 2008 versus 2007, did you say thatdebt in turbine write-down was $0.10 in 2007?

It was $0.08. James Bellessa - D.A. Davidson & Company : Thank you very much.

(Operator Instructions)And your next question is from the line of Brian Russo - Ladenburg Thalmann.

What income tax rate areyou are assuming in the 2008 earnings per share guidance?

Off the top of my head, Ithink it’s around 37%.

Okay. And anymore detailson the upcoming Washington rate case filing; I think you mentioned a few monthsfrom now, any way to narrow that timeframe down, and then also any expectationson the reinstatement of the PCORC?

We do plan to file orexpect to file in Washington by the end of the first quarter. We haven’t set adate, but that’s our expectation at this point in time. In terms of the PCORC, inthis last filing with rates effective January 1 of 2008, as Malyn mentioned wedid reset the base power supply cost; that was one of our objectives in proposinga PCORC was to be able to keep that base power supply cost updated on a regularbasis. With this filing in thefirst quarter of this year, it should allow us to reset the base for 2009, andas long as we can keep that base updated there is less of a need for a PCORC.So, there is no plan at this point to continue to pursue that PCORC.

Okay. So, in terms ofreaching the settlement or an outcome on the upcoming Washington filing, you would hope to have new rates ineffect in early 2009; is that correct?

That’s correct. Yes.

Okay. And then lastly howlong was the Colstrip outage, and how much expense did you incur on that?

Brian, we’ll have to get backto you, it was not significant as far as linked or expense. But, I need to getback to you on the number because I don’t have it off the top of my head.

Okay, thank you verymuch.

You have a follow-up questionfrom the line of Paul Ridzon - KeyBanc.

Do you have any sense ofa timeline on Oregon, when we could get those rates implemented?

Yes. We right now are inthe middle of discussions with the Commission staff and the other parties onresolving that case. As we indicated we do have an all-party settlement on thecost of money. The staff testimony is due on the 28 of this month in that Oregon case. So, we’re hopeful that we’ll be able toresolve those issues with the parties; several discussions are ongoing now.

What you’ve agreed on iscapital structure, ROE; have you agreed on rate base?

I have not, just the costof money component, cap structure and the cost of those components.

Thank you again.

You have anotherfollow-up question from the line of James Bellessa - D.A. Davidson &Company. James Bellessa - D.A. Davidson & Company. : In your guidance you usethe assumption of slightly above normal hydroelectric generation, and you wentthrough a description of what the water content was. It sounded above normal;well above normal not just slightly above. Why is hydroelectric generation justslightly above?

Jim, a couple things justto refresh your memory. On the Spokane River, it’s run of the river; we don’t have significant reservoirs. So, wereally get the water whenever it runs off. A lot of this Spokane snowpack is in some lower elevations as well. So,while it’s 125% normal you can only get so much through the Spokane River dam system. On the Clark Fork system, again, we’re optimistic, it’s abovenormal; the snow-water equivalent to 110%. So, lot of it’s going to depend onhow it melts, when it melts, and how the run-off forms. And as you know, itreally depends on do we have a cool wet spring or does it get warm fast. So, as you know, and LaNina, as we said we’re optimistic, the long-term weather reports say that it’ssupposed to continue to be wetter than normal and average normal temperatures.So, assuming we don’t get a real hot streak and things proceed as usual, we’rehopeful that that run-off on the Clark Forkhopefully extends into June-July, but we don’t know that until we get there. James Bellessa - D.A. Davidson & Company. : Your Advantage IQguidance went down, and you talked about lower short-term interest rates. Doyou have something that can give us some help about what your average realizedinterest return was on the float during 2007, and what your assumption is for 2008?

During 2007, our averagereturn on our daily balances was around 5%. And while we’re off to a decentstart this year, because we had our investments locked in at the end of theyear, so January looked pretty good. But we’re expecting that starting with thesecond quarter, we’re going to basically be yielding about 2.5%. So, for nine months ofthe year we’re going to basically see a float rate about half of what we sawlast year. Now, the good news is we’re adding more customers, and so balancesgo up for that. Also most utilities are seeing their rates increase, so ourbalances are going up for that, so there is a little bit of an offset there. But, a significantreduction from 5% to 2.5%, and that pretty much flows right to the bottom line.So, that’s definitely going to hurt us for the year, and that’s why we feltlike we had to pull our guidance even though we still feel very, very positiveabout this business. James Bellessa - D.A. Davidson & Company. : Does the float show up inyour cash item on your assets and your balance sheet?

We do have a line thatis...

Funds held for customers.

Funds held for customers;thanks, Ann. James Bellessa - D.A. Davidson & Company. : And I’m looking down; I’mnot seeing that immediately. How far down do I have to go?

Let me look here for asecond, Jim, and I’ll find it. James Bellessa - D.A. Davidson & Company. : Can you characterize themagnitude of the size of those funds held for customers?

Our average dailybalances can be well above $100 million. Our customers fund the money and weimmediately write a check or wire a transfer, but we still nevertheless havesignificant amounts of funds especially this time of year. James Bellessa - D.A. Davidson & Company. : And can you give us apicture of how those funds may have increased over the last couple of years? Isit increasing about the same as your revenues?

The answer is yes,perhaps even a little bit above the revenues because of the fact that utilityrates have been going up.

Jim, that amount isincluded with other current assets on the balance sheet that’s in front of you.And it’s roughly $90 million. James Bellessa - D.A. Davidson & Company. : Thank you.

That concludes theQ&A session. And now I’d like to turn the call back to Jason Lang forclosing.

Thank you all for joiningus today. We certainly appreciate your interest in our company. Have a greatday.

Thank you for yourparticipation in today’s conference. This concludes the presentation.