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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______ TO _______

COMMISSION FILE NUMBER 1-3701

AVISTA CORPORATION
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(Exact name of Registrant as specified in its charter)

Washington 91-0462470
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1411 East Mission Avenue, Spokane, Washington 99202-2600
- ---------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of Each Exchange
Title of Class on Which Registered
- ---------------------------------------------------- -------------------------
Common Stock, no par value, together with New York Stock Exchange
Preferred Share Purchase Rights appurtenant thereto Pacific Stock Exchange

7 7/8% Trust Originated Preferred Securities, Series A New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Title of Class
Preferred Stock, Cumulative, Without Par Value

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

-------------------
Yes [X] No [ ]
-------------------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the Registrant's outstanding Common Stock, no par
value (the only class of voting stock), held by non-affiliates is
$743,889,494.25, based on the last reported sale price thereof on the
consolidated tape on February 28, 2001.

At February 28, 2001, 47,231,079 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.

Documents Incorporated By Reference

Part of Form 10-K into Which
Document Document is Incorporated
- -------------------------------------------- --------------------------------
Proxy Statement to be filed in Part III, Items 10, 11,
connection with the annual meeting 12 and 13
of shareholders to be held May 10, 2001

AVISTA CORPORATION
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INDEX

Item Page
No. No.
--- ---

Acronyms and Terms............................................................................ iv

Part I

1. Business...................................................................................... 1
Company Overview............................................................................ 1
Avista Utilities............................................................................ 4
General..................................................................................... 4
Electric Operations......................................................................... 4
Electric Requirements....................................................................... 5
Electric Resources.......................................................................... 5
Future Resource Needs....................................................................... 6
Forecasted Electric Requirements and Resources.............................................. 7
Hydroelectric Relicensing................................................................... 7
Natural Gas Operations...................................................................... 8
Natural Gas Resources....................................................................... 8
Regulatory Issues........................................................................... 9
Industry Restructuring...................................................................... 11
Federal Level............................................................................... 11
State Level................................................................................. 12
Environmental Issues........................................................................ 12
Avista Utilities Operating Statistics....................................................... 13
Energy Trading and Marketing Line of Business............................................... 15
Avista Energy............................................................................... 15
Avista Power................................................................................ 16
Information and Technology Line of Business................................................. 16
Avista Advantage............................................................................ 16
Avista Labs................................................................................. 17
Avista Communications....................................................................... 17
Avista Ventures Line of Business............................................................ 17
Energy Trading and Marketing Operating Statistics........................................... 18
Information and Technology Operating Statistics............................................. 18
2. Properties.................................................................................... 19
Avista Utilities............................................................................ 19
3. Legal Proceedings............................................................................. 20
4. Submission of Matters to a Vote of Security Holders........................................... 20

Part II

5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20
6. Selected Financial Data....................................................................... 21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 22
Results of Operations....................................................................... 24
Liquidity and Capital Resources............................................................. 31
Future Outlook.............................................................................. 35
7A. Quantitative and Qualitative Disclosure about Market Risk..................................... 41
8. Financial Statements and Supplementary Data................................................... 43
Independent Auditors' Report................................................................ 42
Financial Statements........................................................................ 43
Notes to Financial Statements............................................................... 50
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... *

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INDEX

Item Page
No. No.
--- ---

Part III

10. Directors and Executive Officers of the Registrant............................................ 74
11. Executive Compensation........................................................................ 75
12. Security Ownership of Certain Beneficial Owners and Management................................ 75
13. Certain Relationships and Related Transactions................................................ 75

Part IV

14. Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K......... 76
Signatures.................................................................................... 77
Independent Auditors' Consent................................................................. 78
Exhibit Index................................................................................. 79

* = not an applicable item in the 2000 calendar year for the Company

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ACRONYMS AND TERMS
(The following acronyms and terms are found in multiple locations
within the document)

Acronym/Term Meaning
- ------------ -------

aMW - Average Megawatt - a measure of electrical energy over time

AFUCE - Allowance for Funds Used to Conserve Energy; a carrying
charge similar to AFUDC (see below) for conservation-related
capital expenditures

AFUDC - Allowance for Funds Used During Construction; represents
the cost of both the debt and equity funds used to finance
utility plant additions during the construction period

Avista Capital - Parent company to the Company's non-regulated businesses

Avista Corp. - Avista Corporation, the Company

BPA - Bonneville Power Administration

Capacity - a measure of the rate at which a particular generating
source produces electricity

Centralia - the coal-fired Centralia Power Plant in western Washington
State

Colstrip - the coal-fired Colstrip Generating Project in southeastern
Montana

CPUC - California Public Utilities Commission

CT - combustion turbine; a natural gas-fired unit

Energy - a measure of the amount of electricity produced from a
particular generating source over time

FERC - Federal Energy Regulatory Commission

IPUC - Idaho Public Utilities Commission

KV - Kilovolt - a measure of capacity on transmission lines

KW, KWH - Kilowatt, kilowatthour, 1000 watts or 1000 watt hours

MW, MWH - Megawatt, megawatthour, 1000 KW or 1000 KWH

OPUC - Public Utility Commission of Oregon

Pentzer - Pentzer Corporation, a wholly owned subsidiary of the
Company which was the parent company to the majority
of the Company's non-energy businesses

Therm - Unit of measurement for natural gas; a therm is equal to
one hundred cubic feet (volume) or 100,000 BTUs (energy)

Watt - Unit of measurement for electricity; a watt is equal to the
rate of work represented by a current of one ampere under
a pressure of one volt

WUTC - Washington Utilities and Transportation Commission

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AVISTA CORPORATION
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PART I

This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Forward-looking statements should be
read with the cautionary statements and important factors included in this Form
10-K at Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor Forward-Looking Statements."
Forward-looking statements are all statements other than statements of current
or historical fact, including without limitation those that are identified by
the use of the words "will," "anticipates," "seeks to," "estimates," "expects,"
"intends," "plans," "predicts," and similar expressions.

ITEM 1. BUSINESS

COMPANY OVERVIEW

Avista Corporation (Avista Corp., or the Company) was incorporated in the State
of Washington in 1889, and is an energy, information and technology company with
utility and subsidiary operations located in the Pacific Northwest. At December
31, 2000, the Company's employees included approximately 1,460 people in its
utility operations and approximately 800 people in its subsidiary businesses.
The Company's 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.

The Company's operations are organized into four lines of business -- Avista
Utilities, Energy Trading and Marketing, Information and Technology, and Avista
Ventures. Avista Utilities, which is an operating division of Avista Corp. and
not a separate entity, represents the regulated utility operations that are
responsible for retail electric and natural gas distribution, electric
transmission services and electric generation and production. Avista Utilities
also engages in electric wholesale sales and purchases of capacity and energy.
Avista Capital, a wholly owned subsidiary of Avista Corp., owns all of the
subsidiary companies engaged in the other lines of business. The Energy Trading
and Marketing line of business includes Avista Energy, Inc. (Avista Energy),
Avista Power, LLC (Avista Power) and Avista-STEAG, LLC (Avista-STEAG). The
Information and Technology line of business includes Avista Advantage, Inc.
(Avista Advantage), Avista Labs, Inc. (Avista Labs) and Avista Communications,
Inc. (Avista Communications). The Avista Ventures line of business includes
Avista Ventures, Inc. (Avista Ventures), and several other minor subsidiaries.
As of December 31, 2000, the Company had common equity investments of $363.0
million and $361.2 million in Avista Utilities and Avista Capital, respectively.

Regulatory, political, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, presenting
both opportunities and challenges. Avista Utilities seeks to maintain a strong,
low-cost utility business focused on delivering efficient, reliable and high
quality service to its customers. The utility business is expected to grow
modestly, consistent with historical trends. Expansion will primarily result
from economic growth in its service territory. Avista Energy scaled back
operations to the Western Systems Coordinating Council (WSCC) during 2000, and
will continue to focus on reducing the size and the risk associated with its
energy trading and marketing activities. Avista Energy's marketing efforts are
expected to be driven by its base of knowledge and experience in the operation
of both electric energy and natural gas physical systems in the region, as well
as its relationship-focused approach to its customers. Avista Power will
continue to pursue opportunities to develop new generation to support the
growing power requirements in the Northwest. The Company also intends to focus
on its investments in the Information and Technology subsidiaries as part of its
overall plan for generating shareholder value, which could include finding
equity partners to assist in financing the continued growth of the businesses.

The Company's operations are exposed to risks, including legislative and
governmental regulations, the price and supply of purchased power, fuel and
natural gas, recovery of purchased power and purchased natural gas costs,
weather conditions, availability of generation facilities, competition,
technology and availability of funding. In addition, the energy business exposes
the Company to the financial, liquidity, credit and commodity price risks
associated with wholesale sales and purchases.

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AVISTA CORPORATION
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Following is a list of the major companies owned by Avista Capital:

Avista Energy - An electricity and natural gas trading and marketing company, operating
primarily in the WSCC.

Avista Power - A developer, purchaser and owner of electricity generating plants in strategic
locations throughout the West. Some projects may be developed with STEAG AG, a German
independent power producer, under Avista-STEAG, LLC.

Avista Advantage - A provider of Internet-based specialty billing and information services.

Avista Labs - The developer of proton exchange membrane (PEM) fuel cell technology
and fuel cell components.

Avista Communications - An Integrated Communications Provider (ICP) that provides local facilities-based
telecommunications solutions, and designs, builds and manages metropolitan area
fiber optic networks. Avista Capital owned 82% at December 31, 2000.

Avista Ventures - Responsible for investing in business opportunities that have potential value in
the lines of business in which the Company is already involved and managing the existing
businesses.

The Company's lines of business, and the companies included within them, are
illustrated below:

[CHART]

[ ] - denotes a business entity.
( ) - denotes an operating division or line of business.

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For the years ended December 31, 2000, 1999 and 1998, respectively, the four
primary business segments of the Company contributed the following percentages
of consolidated operating revenues, gross margins and pre-tax income/(loss) from
operations:

Income/(Loss) from
Operating Revenues Gross Margins Operations (pre-tax)
-------------------------- --------------------------- ----------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----

Avista Utilities 19% 14% 29% 44% 105% 89% 2% 455% 83%
Energy Trading and Marketing 81% 85% 65% 56% (5)% 11% 123% (312)% 13%
Information and Technology -- -- -- n/a n/a n/a (20)% (42)% (3)%
Avista Ventures -- 1% 6% n/a n/a n/a (5)% (1)% 7%

n/a -- not applicable

Gross margin is calculated by subtracting resource costs from operating
revenues. (See Schedule of Information by Business Segments for further
information).

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AVISTA CORPORATION
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AVISTA UTILITIES

GENERAL

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. 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. At the end of 2000, retail
electric service was supplied to approximately 313,000 customers in eastern
Washington and northern Idaho; retail natural gas service was supplied to
approximately 279,000 customers in parts of Washington, Idaho, Oregon and
California.

Avista Utilities anticipates residential and commercial electric load growth to
average approximately 2.6% annually for the next five years primarily due to
expected increases 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%
annually for the next five years. The Oregon 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 to expected conversions
from electric space and water heating to natural gas, and increases in both
population and the number of businesses in its service territories. These
electric and natural gas load growth 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. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook for additional information.

ELECTRIC OPERATIONS

In addition to providing electric transmission and distribution services, Avista
Utilities is responsible for electric generation and production. 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 CT generating units. In
addition, Avista Utilities has a number of long-term power purchase and exchange
contracts that increase its available resources. With this diverse energy
resource portfolio, Avista Utilities remains one of the nation's lowest-cost
producers of electric energy services. See Item 2. Properties -- Generating
Plants for additional information.

Avista Utilities sells and purchases electric capacity and energy at wholesale
to and from utilities and other entities under firm long-term contracts having
terms of more than one year. In addition, Avista Utilities engages in short-term
sales and purchases in the wholesale market as part of an economic selection of
resources to serve its retail and firm wholesale loads. Avista Utilities makes
continuing projections of (1) future retail and firm wholesale loads based on,
among other things, forward estimates of factors such as customer usage and
weather as well as historical data and contract terms and (2) resource
availability based on, among other things, estimates of streamflows, generating
unit availability, historic and forward market information and experience. On
the basis of these continuing projections, Avista Utilities makes purchases and
sales of energy on a quarterly, monthly, daily and hourly basis to match actual
resources to actual energy requirements, as it operates the lowest-cost
resources to serve its load requirements, and sells any surplus at the best
available price. This process includes hedging transactions.

In the second quarter of 2000, certain wholesale transactions contributed to
significant losses in Avista Utilities, as more fully discussed in Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Avista Utilities competes in the electric wholesale market with other western
utilities, federal marketing agencies and power marketers. The electric
wholesale market has changed significantly over the last few years with respect
to market participants, level of activity, variability of prices and credit.
These changes have contributed to the increased volatility of the market. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Significant Changes in Energy Markets for information about the
California energy situation.

Avista Energy, a wholly owned subsidiary of Avista Corp., pursues electric
energy trading activities; however, Avista Energy's activities are not related
to Avista Utilities' operations.

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weather conditions and the ability to recover increased costs of purchased
power. Avista Utilities believes it faces minimal risk for stranded utility
assets resulting from deregulation due to its low-cost generation portfolio. In
a deregulated environment, however, evolving technologies that provide alternate
energy supplies could affect the market price of power, and certain generating
assets could have capital and operating costs above the adjusted market price.
See Industry Restructuring and Note 1 of Notes to Financial Statements for
additional information.

ELECTRIC REQUIREMENTS

Avista Utilities' 2000 annual peak requirements, including long-term and
short-term contractual obligations, were 3,829 MW. This peak occurred on January
31, 2000, at which time the maximum capacity available from Avista Utilities'
generating facilities, including long-term and short-term purchases, was 4,194
MW. The electric requirements include both retail distribution needs and
wholesale short-term and long-term commitments. Variations in energy usage by
Avista Utilities' ultimate customers occur from year to year, from season to
season and from month to month within a season, primarily as a result of weather
conditions. This results in a continual balancing of loads and resources, and
requires both purchases and sales of energy on a quarterly, monthly, daily and
hourly basis in order to be able to meet its load with the lowest cost
resources.

ELECTRIC RESOURCES

General Avista Utilities' diverse resource mix of hydroelectric projects,
thermal generating facilities, and power purchases and exchanges, combined with
strategic access to regional electric transmission systems, enables it to remain
one of the nation's lowest-cost producers and sellers of retail electric energy
services. At December 31, 2000, Avista Utilities' total owned resources
available were 65% hydroelectric and 35% thermal. See Avista Utilities' Electric
Operating Statistics for energy resource statistics.

Hydroelectric Resources Total hydroelectric resources provide 547 aMW annually
under normal streamflow conditions. Hydroelectric generation is Avista
Utilities' lowest cost source of electricity and the availability of
hydroelectric generation has a significant effect on its total energy costs.
Under average operating conditions, Avista Utilities meets approximately
one-third of its total energy requirements (both retail and long-term wholesale)
with its own hydroelectric generation and long-term hydroelectric contracts. The
streamflows to company-owned hydroelectric projects were 86%, 112% and 93% of
normal in 2000, 1999 and 1998, respectively.

Thermal Resources Total thermal resources provide 374 aMW annually under normal
operating conditions. Avista Utilities has a 15% interest in a twin-unit
coal-fired generating facility, the Colstrip Generating Project (Colstrip) in
southeastern Montana. Avista Utilities also owns a wood-waste-fired generating
facility known as the Kettle Falls Generating Station (Kettle Falls) in
northeastern Washington and two natural gas-fired CT generating units, located
in Spokane (Northeast Combustion Turbine). In addition, Avista Utilities also
operates and leases two natural gas-fired CT generating units in northern Idaho
(Rathdrum).

Avista Utilities also had a 17.5% interest in another twin-unit coal-fired
generating facility, the Centralia Power Plant (Centralia) in western
Washington. On May 5, 2000, the owners of Centralia sold the plant to TransAlta,
a Canadian company. Avista Utilities is purchasing energy from TransAlta to
replace the output from Centralia for the period from July 1, 2000 through
December 31, 2003. Avista Utilities will receive approximately 200 megawatts per
hour beginning each July and continuing through March of the following year
during the term of the contract. In 2000, 1999 and 1998, Centralia provided
approximately 15%, 37% and 37%, respectively, of Avista Utilities' thermal
generation.

Colstrip, which is operated by PPL Global, Inc., is supplied with fuel under
coal supply and transportation agreements in effect through December 2019 from
adjacent coal reserves. In 2000, 1999 and 1998, Colstrip provided approximately
47%, 48% and 46% of Avista Utilities' thermal generation, respectively.

Kettle Falls' primary fuel is wood-waste generated as a by-product from forest
industry operations within one hundred miles of the plant. Natural gas may be
used as an alternate fuel. A combination of long-term contracts plus spot
purchases provides Avista Utilities the flexibility to meet expected future fuel
requirements for the plant. In 2000, 1999 and 1998, Kettle Falls provided
approximately 12%, 8% and 9% of Avista Utilities' thermal generation,
respectively.

The four CTs are natural gas-fired generating units that formerly were primarily
used for peaking needs. Due to the high demand for power during 2000 and the
relative operating cost compared to higher wholesale market prices, these
generating units were run on a more regular basis, and will continue to be run
more regularly in the

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future. All four CTs have access to domestic and/or Canadian natural gas
supplies. In 2000, 1999 and 1998, these four units provided approximately 26%,
7% and 8%, respectively, of Avista Utilities' thermal generation.

Purchases, Exchanges and Sales In 2000, Avista Utilities had various long-term
purchase contracts with non-coincident peak (peak that does not occur during the
same hour) equating to 832 MW. Additionally, long-term hydroelectric purchase
contracts of 195 MW peak were available. Avista Utilities also enters into a
significant number of short-term sales and purchases with durations of up to one
year. Energy purchases and exchanges for the years 2000, 1999 and 1998 provided
approximately 68%, 69% and 70%, respectively, of Avista Utilities' total
electric energy requirements.

Under the Public Utility Regulatory Policies Act of 1978 (PURPA), Avista
Utilities is required to purchase generation from qualifying facilities,
including small hydroelectric and cogeneration projects, at avoided cost rates
adopted by the Washington Utilities and Transportation Commission (WUTC) and the
Idaho Public Utilities Commission (IPUC). Avista Utilities purchased
approximately 594,944 MWH, or about 2% of its total energy requirements, from
these sources at a cost of approximately $28 million in 2000. These contracts
expire at various times during the period 2001-2022.

FUTURE RESOURCE NEEDS

In August 2000, the WUTC approved Avista Utilities' plan for a Request for
Proposal (RFP) process to increase its power resources. New resources are needed
to serve Avista Utilities' long-term load requirements. As part of the order,
the WUTC agreed to waive normal time limits related to going out into the market
to determine the resource options available to Avista Utilities. In December
2000, Avista Utilities selected the Coyote Springs 2 project near Boardman,
Oregon.

The Coyote Springs 2 project is a combined-cycle natural gas fired combustion
turbine with generation output of approximately 280-megawatts. Key factors in
the selection of Coyote Springs 2 included its fully licensed status and the
fact that the manufacture and delivery of natural gas turbine equipment that
will power the project is secured. Engineering and procurement of the other
required major equipment began in January 2001, with completion of construction
expected in June 2002. Permits and contract modifications are being filed to
transfer ownership at cost to Avista Utilities from its subsidiary, Avista
Power, which previously acquired the rights for the project from Enron North
America and Portland General Electric. The Company is working to secure a term
loan for financing the construction. The total cost of the project is estimated
at $190 million.

In addition, Avista Utilities selected three demand side management proposals
which will yield approximately 13 MW in energy savings over a three-year period.
Avista Utilities expects negotiations of these proposals to be finalized during
the first quarter of 2001.

Avista Utilities has operational strategies in place to address the issue of
available resources to meet the increased demand for energy. Future capital
expenditures include plans for increasing capacity and generation at various
hydroelectric and thermal generating plants. In addition, action is being taken
to increase the energy output from the CT generating units owned and leased by
Avista Utilities. On February 16, 2001, Avista Utilities filed for permission to
increase the amount of operating hours allowed and for a small increase in the
amount of emissions allowed for minor pollutants. The increase in operating
hours does not require an increase in the emission levels of major pollutants
from these CTs. Approval of the request is expected in mid-2001. Avista
Utilities is also in the process of upgrading the air operating permit at the CT
units in Spokane to a Title V permit, which will increase the annual amount of
emissions allowed. In addition, Avista Utilities is asking to add additional
pollution control equipment at the site in order to increase the available hours
of operation.

The Company reached an agreement with the Spokane County Air Pollution Control
Authority that will allow operation of the Northeast Combustion Turbine for a
90-day period, beginning February 21, 2001, when it would have been idled due to
pollution control limits, producing power equivalent to 14 aMW on an annual
basis. In return for this waiver, the Company will contribute up to $324,000 to
a fund to defray the energy expenses of low-income residents of Spokane County,
and will also spend up to $900,000 to design and implement an environmental
offset project to reduce emissions in an amount equivalent to the emissions of
the plant during the waiver period.

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years on record. In response to the reduced hydroelectric generation, Avista
Utilities has made additional fixed price purchases of energy, and expects to
receive the necessary local, state and federal approvals to increase the energy
output of its gas-fired thermal generation to cover its firm retail and
wholesale load requirements for 2001, with minimal additional purchases expected
from the high cost short-term wholesale market. However, if hydroelectric
conditions further deteriorate, its thermal plants do not operate as planned, or
weather conditions cause retail loads to increase, Avista Utilities would incur
increased costs from increased purchases in the short-term wholesale energy
market.

FORECASTED ELECTRIC REQUIREMENTS AND RESOURCES
(Average MW)

2001 2002 2003
----- ----- -----

Requirements:
System load(1) 1,026 995 1,027
Contracts 479 131 80
Short-term sales 56 -- --
----- ----- -----
Total Requirements 1,561 1,126 1,107
===== ===== =====

Resources:
System/contract hydro(2) 547 547 547
Company owned thermal generation 367 456 594
Contracts for purchased power(1) 546 262 251
Short-term purchased power 167 -- --
----- ----- -----

Total Resources 1,627 1,265 1,392
===== ===== =====

Surplus Resources 66 139 285

(1) Decrease from 2001 to 2002 reflects the expiration of a long-term sales
contract. There is a corresponding decrease in resources as a result of
the contract expiration. This information assumes no renewal of the
contract.
(2) Forecast above assumes normal water, which is the median of the 60
years of water between 1928 and 1988. Water conditions are expected to
be 60% of normal in 2001 due to current snow pack conditions. Avista
Utilities currently anticipates that hydro generation may be as much as
150 aMW below normal in 2001. This is offset by the waiver received on
February 21, 2001, for Northeast Combustion Turbine (14 aMW), the
original estimated surplus from the table above (66 aMW), the
anticipated change in Rathdrum permit to allow for additional hours of
operations (27 aMW) and additional short-term purchases.

HYDROELECTRIC RELICENSING

Avista Corp. is a licensee under the Federal Power Act, which regulates certain
of its hydroelectric generation resources and is administered by the Federal
Energy Regulatory Commission (FERC), and its licensed projects are subject to
the provisions of Part I of that Act. These provisions include payment for
headwater benefits, condemnation of licensed projects upon payment of just
compensation, and take-over of such projects after the expiration of the license
upon payment of the lesser of "net investment" or "fair value" of the project,
in either case plus severance damages. All but one of the Company's
hydroelectric plants are regulated by the FERC through project licenses issued
for 30-50 year periods. See Item 2. Properties -- Avista Utilities for
additional information.

The Cabinet Gorge and Noxon Rapids plants (764 MW) received a new 45-year
operating license from the FERC on February 23, 2000. The existing licenses were
combined into one license under the name Clark Fork Projects. The application to
relicense Cabinet Gorge and Noxon Rapids was filed with the FERC on February 18,
1999, and included the Clark Fork Settlement Agreement signed by 27 parties and
a collaboratively written environmental assessment report. The application
culminated seven years of planning and consultation with Native American Tribes,
special interest groups, resource agencies and the general public. Settlement
was reached two years before the license expired, and preserved the projects'
economic peaking and load following operations.

As part of the Settlement Agreement, Avista Utilities committed to early
implementation of protection, mitigation and enhancement measures, which began
in March 1999. Measures in the agreement, which will cost approximately $4.7
million annually, address issues related to fisheries, water quality, wildlife,
recreation, land use, cultural

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resources and erosion. Recovery of previously deferred hydro relicensing costs,
as well as estimated levels of ongoing costs associated with implementation of
the Settlement Agreement, have been addressed by both the WUTC and IPUC and
received favorable treatment. Process costs that had been deferred during the
licensing phase were allowed in rate base and are being amortized over the
45-year license term. The ongoing Settlement Agreement costs were allowed as
operating expenses. See Item 2. Properties - Avista Utilities and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook for additional information.

The issue of high dissolved gas levels which exceed Idaho water quality
standards downstream of Cabinet Gorge during spill periods continues to be
studied, as agreed to in the Settlement Agreement. To date, intensive biological
studies in the lower Clark Fork River and Lake Pend Oreille have documented
minimal biological effects of high dissolved gas levels on free ranging fish. An
engineering feasibility study has identified several possible structural
alternatives at Cabinet Gorge that may reduce dissolved gas levels. Under the
terms of the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy in 2002 in conjunction with the other signatories to the
agreement.

The Company operates six hydroelectric plants (191 MW) on the Spokane River, and
five of these (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls)
are under one FERC license. The sixth, Little Falls, is not licensed by the
FERC. The license for the Spokane River Projects expires in August 2007, and the
Company will be required to file a notice of intent to relicense prior to August
2002. Planning, discussions with stakeholder groups and information gathering
activities are currently underway.

NATURAL GAS OPERATIONS

Most of Avista Utilities' large industrial customers purchase their own natural
gas requirements through gas marketers. For these customers, Avista Utilities
provides transportation from its pipeline interconnection to the customer's
premises. Avista Utilities has numerous individual contracts for natural gas
transportation service, most of which contain negotiated rates for its
distribution service based on the customer's competitive alternatives. Seven of
Avista Utilities' largest natural gas customers are provided natural gas
transportation service under individual contracts. These negotiated contracts
were entered into to retain these customers who can either by-pass Avista
Utilities' distribution system or have competitive alternative fuel capability.
All individual contracts are subject to regulatory review and approval. The
competitive nature of the natural gas spot market results in savings in the cost
of purchased natural gas, which encourages large customers with fuel-switching
capabilities to continue to utilize natural gas for their energy needs when
economic. The total volume transported on behalf of transportation customers for
2000, 1999 and 1998 was approximately 225.4, 232.7 and 226.1 million therms,
which represented approximately 38%, 40% and 41% of Avista Utilities' total
system deliveries.

Challenges facing Avista Utilities' natural gas operations include, among other
things, volatility in the price of natural gas, changes in the availability of
natural gas, legislative and governmental regulations, weather conditions,
conservation and the ability to recover increased costs of natural gas.

NATURAL GAS RESOURCES

Natural Gas Supply A diverse portfolio of resources allows Avista Utilities to
capture market opportunities that benefit its natural gas customers. Natural gas
supplies are available from both domestic and Canadian sources through both
long- and short-term, or spot market, purchases. Avista Utilities holds capacity
on six pipelines and owns natural gas storage facilities. This allows Avista
Utilities to optimize its available resources.

The Company's energy trading and marketing subsidiary, Avista Energy, is
responsible for the daily management and optimization of these resources for the
requirements of customers in the states of Washington, Idaho and Oregon under an
agreement with Avista Utilities. Under this relationship, Avista Utilities
retains ownership of its transportation, storage and long-term contracts and
Avista Energy acts as an agent to optimize these important

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resources. The utility commissions have approved Benchmark Incentive Mechanisms
that allow Avista Utilities and its customers to share some of the benefits of
Avista Energy's resource optimization activities. See Regulatory Issues for
additional information.

Firm natural gas supplies are available through negotiated agreements for terms
ranging between one month and seven years. Approximately 25% of the natural gas
supply is obtained from domestic sources, with the remaining 75% from Canadian
sources. Nearly all natural gas purchased from Canadian sources is contracted in
U.S. dollar denominations, limiting any foreign currency exchange exposure.
Canadian natural gas supplies are not considered to be at greater risk of
non-delivery than U.S. supplies.

Avista Utilities holds capacity on six natural gas pipelines, Northwest Pipeline
Company (NWP), Gas Transmission Northwest (GTN), Paiute Pipeline (Paiute),
Tuscarora Gas Transmission Company (Tuscarora), NOVA Pipeline, Ltd. (NOVA) and
Alberta Natural Gas Co. Ltd. (ANG), which provide it access to both domestic and
Canadian natural gas supplies.

Avista Utilities contracts with NWP for three types of firm service
(transportation, liquefied natural gas storage and underground storage), with
Paiute for firm transportation and liquefied natural gas storage and with GTN,
Tuscarora, NOVA and ANG for firm transportation only.

Jackson Prairie Natural Gas Storage Project (Storage Project) Avista Utilities
owns a one-third interest in the Storage Project, an underground natural gas
storage field located near Chehalis, Washington. The role of the Storage Project
in providing flexible natural gas supplies is increasingly important to Avista
Utilities' natural gas operations. It enables Avista Utilities to place natural
gas into storage when prices are low or to meet minimum natural gas purchasing
requirements, as well as to withdraw natural gas from storage when spot prices
are high or as needed to meet high demand periods. During 1999, Avista Utilities
completed the process of increasing the capacity at the Storage Project. This
increased capacity is being operated and managed by Avista Energy for the next
ten years. Avista Utilities has contracted to release some of its Storage
Project capacity to two other utilities until 2001 and 2002, with a provision
under one of the releases to partially recall the released capacity if Avista
Utilities determines additional natural gas storage is required for its own
system supply.

REGULATORY ISSUES

Avista Corp., as a regulated public utility, is currently subject to regulation
by state utility commissions with respect to prices, accounting, the issuance of
securities and other matters. The retail electric operations are subject to the
jurisdiction of the WUTC and the IPUC. The retail natural gas operations are
subject to the jurisdiction of the WUTC, the IPUC, the Oregon Public Utility
Commission (OPUC) and the California Public Utilities Commission (CPUC). The
Company is also subject to the jurisdiction of the FERC for its wholesale
natural gas rates charged for the release of capacity from the Jackson Prairie
Storage Project, and for electric transmission service and wholesale electric
sales.

In each regulatory jurisdiction, the price the Company may charge for retail
electric and natural gas services (other than specially negotiated retail rates
for industrial or large commercial customers, which are subject to regulatory
review and approval) is currently determined on a "cost of service" basis and is
designed to provide, after recovery of allowable operating expenses, an
opportunity to earn a reasonable return on "rate base." "Rate base" is generally
determined by reference to the original cost (net of accumulated depreciation)
of utility plant in service, subject to various adjustments for deferred taxes
and other items. Over time, rate base is increased by additions to utility plant
in service and reduced by depreciation of utility plant. As the energy business
is restructured, traditional "cost of service" ratemaking may evolve into some
other form of ratemaking. Rates for transmission services are based on the "cost
of service" principles and are set forth in tariffs on file with the FERC. See
Note 1 of Notes to Financial Statements for additional information about
regulation, depreciation and deferred taxes. Also see Industry Restructuring for
additional information about deregulation.

General Rate Cases In October 1999, Avista Utilities filed with the WUTC a
request for a general electric rate increase of $26.2 million, or 10.4%,
subsequently revised to $18.2 million, and a general natural gas rate increase
of $4.9 million, or 6.5%. On September 29, 2000, the WUTC ordered a $3.4
million, or 1.4%, reduction in electric rates and a $1.7 million, or 2.1%,
increase in natural gas rates. The WUTC also ordered that Avista Utilities'
annual rate of return on investment for both electricity and natural gas be
reduced from its current rate of return of 10.7% to 9.03%. Avista Utilities had
requested a 9.9% rate of return. Avista Utilities filed a Petition for
Reconsideration before the WUTC requesting that the commission reconsider
certain portions of its order. On November 8, 2000,

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the Commission slightly modified the original order by reducing the electric
reduction from $3.4 million to $2.9 million and increasing the natural gas
increase from $1.7 million to $1.8 million.

In Avista Utilities' last general electric rate case in the State of Idaho, the
IPUC granted a rate increase of $9.3 million, or 7.6%, with an authorized rate
of return of 8.98%, effective August 1999.

Power Cost Deferrals (Washington) On August 9, 2000, the WUTC approved Avista
Utilities' request for deferred accounting treatment for certain power costs
related to increases in short-term power prices beginning July 1, 2000 and
ending June 30, 2001. The specific power costs deferred include the changes in
power costs to Avista Utilities from those included in base retail rates,
related to three power cost components: the net effect of changes in short-term
wholesale market prices on short-term wholesale purchases and sales; the effect
on power costs from changes in the level of hydroelectric generation; and the
net effect on power costs from 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 Utilities associated with
these three power cost components, and the level of costs included in Avista
Utilities' base retail rates. The power costs deferred are related solely to the
operation of Avista Utilities' system resources to serve its system retail and
wholesale load obligations. During 2000, the Company deferred a total of $33.9
million under this accounting order.

On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of Company-owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of the deferred accounting treatment beyond June
30, 2001.

Power Cost Adjustment (PCA) (Idaho) Avista Utilities has a PCA mechanism in
Idaho that tracks changes in hydroelectric generation, secondary energy prices,
related changes in thermal generation, as well as changes in PURPA contracts,
but not changes in revenues or costs associated with other wheeling or power
contracts. Rate changes were triggered when the deferred balance reached $2.2
million. No more than two surcharges or rebates are to be in effect at the same
time. A new trigger of $3.0 million was effective beginning December 2000. On
January 16, 2001, Avista Utilities filed an application with the IPUC seeking
proposed modifications to the existing PCA mechanism. Due to extremely high
short-term power prices, Avista Utilities is requesting to recover power supply
costs associated with meeting increased retail and wholesale system load
requirements, as well as to recover replacement power costs associated with
possible thermal plant forced outages. See Note 1 of Notes to Financial
Statements for additional information.

Purchased Gas Adjustment (PGA or Natural Gas Trackers) Natural gas trackers are
supplemental tariffs filed with state regulatory commissions which are designed
to pass through changes in purchased natural gas costs, and do not normally
result in any changes in net income. In December 2000, Avista Utilities filed
natural gas trackers with the WUTC, IPUC and OPUC requesting increases of $33.9
million, or 29%, $14.1 million, or 29%, and $22.4 million, or 35%, respectively.
Avista Utilities received effective approval dates from the WUTC of January 12,
2001, the IPUC of February 15, 2001, and the OPUC of January 24, 2001. In
February 2001, Avista Utilities filed with CPUC a gas tracker requesting an
increase of $7.7 million, or 61%. Prior to the above mentioned increases, the
WUTC and IPUC each approved increases of 29% effective September 1, 2000. The
OPUC approved a 19% increase effective October 1, 2000.

Natural Gas Benchmark Mechanism Avista Utilities received regulatory approval of
its Natural Gas Benchmark Mechanism in 1999 from the IPUC, WUTC and OPUC. The
mechanism eliminates natural gas procurement operations within Avista Utilities
and consolidates gas procurement operations under Avista Energy, the Company's
non-regulated affiliate. The ownership of the natural gas assets remains with
Avista Utilities, but the assets are managed by Avista Energy through an Agency
Agreement. Avista Utilities maintains a natural gas staff to prepare load
forecasts and analyses related to long-term resource acquisitions, to manage the
Agency Agreement with Avista Energy and to support state and federal regulatory
activities. The Natural Gas Benchmark Mechanism was implemented September 1,
1999 and runs through March 31, 2002.

Consolidation of natural gas procurement operations under Avista Energy allows
the Company to gain synergies and better manage its risk by combining and
operating the two portfolios as one portfolio and gain efficiencies by
eliminating duplicate functions. Effective January 1, 2001, the WUTC and IPUC
approved Avista Utilities' modifications to the Benchmark Mechanism,
incorporating the use of financial products (fixed-price transactions or
hedging). Due to the unprecedented increase in and volatility of natural gas
commodity costs, it was determined that

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such additional flexibility was needed in the Mechanism to properly manage
costs. (The use of financial products was incorporated in the original Oregon
Mechanism.) The Natural Gas Benchmark Mechanism provides certain guaranteed
benefits to retail customers and provides the Company with the opportunity to
improve earnings, i.e., a performance-based mechanism.

Demand Side Management (DSM) Programs On January 17, 2001, Avista Utilities
filed a request with the WUTC and IPUC to implement a natural gas revenue
surcharge of 0.5% to provide funding for natural gas energy-efficiency programs.
The WUTC approved the surcharge effective February 8, 2001 and the IPUC approved
it effective February 15, 2001. Avista Utilities currently has an electric
revenue surcharge, or tariff rider, of approximately 1.5% and 1.0% in Washington
and Idaho, respectively, to fund its electric DSM programs. Avista Utilities
expects to file a request with the IPUC in mid-March 2001 to increase the Idaho
Electric DSM rider to 1.5%. The tariff rider has been in place since 1995 and
was the first "system benefit charge" for energy efficiency in the country.

INDUSTRY RESTRUCTURING

FEDERAL LEVEL

Industry restructuring to open the electric wholesale energy market to
competition was initially promoted by federal legislation. The Energy Policy Act
of 1992 (Energy Act) amended provisions of the Public Utility Holding Company
Act of 1935 (PUHCA) and the Federal Power Act to remove certain barriers to a
competitive wholesale market. The Energy Act confers expanded authority upon the
FERC to issue orders requiring electric utilities to transmit power and energy
to or for wholesale purchasers and sellers, and to require electric utilities to
enlarge or construct additional transmission capacity for the purpose of
providing these services. It also created "exempt wholesale generators", a new
class of independent power plant owners that are able to sell generation only at
the wholesale level. This permits public utilities and other entities to
participate through subsidiaries in the development of independent electric
generating plants for sales to wholesale customers without being required to
register under the PUHCA.

FERC Order No. 888, issued in April 1996, requires public utilities operating
under the Federal Power Act to provide access to their transmission systems to
third parties pursuant to the terms and conditions of the FERC's pro-forma open
access transmission tariff. FERC Order No. 889, the companion rule to Order No.
888, requires public utilities to establish an Open Access Same-Time Information
System (OASIS) to provide transmission customers with information about
available transmission capacity and other information by electronic means. It
also requires each public utility subject to the rule to functionally separate
its transmission and wholesale power merchant functions. The FERC issued its
initial order accepting the non-rate terms and conditions of Avista Utilities'
open access transmission tariff in November 1996. Avista Utilities filed its
"Procedures for Implementing Standards of Conduct under FERC Order No. 889" with
the FERC in December 1996 and adopted these Procedures effective January 3,
1997. FERC Orders No. 888 and No. 889 have not had a material effect on Avista
Utilities' operating results.

In December 1999, FERC Order No. 2000 was issued regarding the development of
Regional Transmission Organizations (RTO). This final rule required public
utilities subject to FERC regulation to file an RTO proposal, or a description
of efforts to participate in an RTO, and any existing obstacles to RTO
participation, by October 2000. Avista Utilities and five other Western
utilities have taken steps toward the formation of an independent transmission
company, TransConnect, which would serve six states. TransConnect would be a
member of the planned regional transmission organization, RTO West. The new,
for-profit company would own or lease the high voltage transmission facilities
currently held by the Company, Montana Power Co., Puget Sound Energy Corp.,
Portland General Electric Co., Nevada Power Co. and Sierra Pacific Power Co. The
proposal was filed October 17, 2000. If a final proposal emerges, it must be
approved by the FERC, the boards of directors of the filing companies and
regulators in various states. The companies' decision to move forward with the
formation of TransConnect will ultimately depend on the economics and conditions
related to the formation of TransConnect, as well as the economics and
conditions related to the regulatory approval process.

The North American Electric Reliability Council and the Western Systems
Coordinating Council (WSCC) have undertaken initiatives to establish a series of
security coordinators to oversee the reliable operation of the regional
transmission system. Accordingly, Avista Utilities, in cooperation with other
utilities in the Pacific Northwest, established the Pacific Northwest Security
Coordinator (PNSC), which oversees daily and short-term operations of the
Northwest sub-regional transmission grid, and has limited authority to direct
certain actions of control area

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operators in the case of a pending transmission system emergency. Avista
Utilities executed its service agreement with the PNSC in September 1998.

STATE LEVEL

Further competition may be introduced by state action. Competition for retail
customers is not generally allowed in Avista Utilities' service territory. While
the Energy Act precludes the FERC from mandating retail wheeling, state
regulators and legislators could open service territories to full competition at
the retail level. Legislative action at the state level would be required for
full retail wheeling and customer choice to occur in Washington and Idaho.

For the past several years, the legislatures and public utility commissions in
Washington and Idaho have conducted a series of hearings and several studies
regarding electric industry restructuring. Issues such as unbundling,
deregulation, reliability and consumer protection have been examined. Impacts on
customer service quality and system reliability (generation, transmission and
distribution) have been considered on a "macro" basis under various
restructuring scenarios. Public policy makers in Washington and Idaho continue
to examine other states' experiences with restructuring, while cognizant that
the Pacific Northwest generally benefits from the lowest electric rates in the
country.

Although there is currently no action surrounding deregulation in Washington or
Idaho, activities related to California's deregulation have affected wholesale
power prices in the West, including the Company's service territory. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for information about the California energy situation.

ENVIRONMENTAL ISSUES

The Company is subject to environmental regulation by federal, state and local
authorities. The generation, transmission, distribution, service and storage
facilities in which Avista Utilities has an ownership interest have been
designed to comply with all environmental laws presently applicable.
Furthermore, the Company conducts periodic reviews of all its facilities and
operations to anticipate emerging environmental issues. The Company's Board of
Directors has an Environmental Committee to deal specifically with these issues.

Air Quality The most significant impact of the Clean Air Act (CAA) and the 1990
Clean Air Act Amendments (CAAA) was on the Centralia Power Plant, which is
classified as a "Phase II" coal plant under the CAAA. Obligations under the CAA
were assumed by TransAlta when the sale of Centralia was completed in May 2000.

Colstrip, which is also a "Phase II" coal-fired plant under the CAAA, is not
expected to be required to implement any additional SO2 mitigation in the
foreseeable future in order to continue operations.

Avista Utilities' other thermal projects also are subject to various CAAA
standards. Every five years each project requires an updated operating permit
(known as a Title V permit) which addresses, among other things, the compliance
of the plant with the CAAA. The operating permit for the CT peaking units at
Rathdrum was issued in December 2000. During 2001, the Company will renew the
operating permit for the Kettle Falls plant and apply for an upgrade to a Title
V permit for the natural gas-fired CTs located in Spokane.

See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook and Note 22 to Financial Statements for
additional information.

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AVISTA UTILITIES OPERATING STATISTICS

Years Ended December 31,
------------------------
2000 1999 1998
----------- ----------- -----------

ELECTRIC OPERATIONS
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Residential ..................................................... $ 158,065 $ 158,658 $ 157,019
Commercial ...................................................... 149,770 152,107 149,767
Industrial ...................................................... 82,992 69,559 64,662
Public street and highway lighting .............................. 3,612 3,517 3,387
----------- ----------- -----------
Total retail revenues ........................................ 394,439 383,841 374,835
----------- ----------- -----------
Long-term wholesale ............................................. 322,229 134,945 102,928
Short-term wholesale ............................................ 542,525 387,554 354,413
----------- ----------- -----------
Total wholesale revenues ..................................... 864,754 522,499 457,341
----------- ----------- -----------
Total energy revenues ........................................ 1,259,193 906,340 832,176
Other ........................................................... 28,062 21,824 23,898
----------- ----------- -----------
Total electric operating revenues ............................ $ 1,287,255 $ 928,164 $ 856,074
=========== =========== ===========

ELECTRIC ENERGY SALES (Thousands of MWhs):
Residential ..................................................... 3,279 3,237 3,217
Commercial ...................................................... 2,886 2,848 2,810
Industrial ...................................................... 2,048 2,032 1,878
Public street and highway lighting .............................. 25 25 24
----------- ----------- -----------
Total retail energy sales .................................... 8,238 8,142 7,929
----------- ----------- -----------
Long-term wholesale ............................................. 5,554 5,335 3,680
Short-term wholesale ............................................ 10,253 14,443 15,535
----------- ----------- -----------
Total wholesale energy sales ................................. 15,807 19,778 19,215
----------- ----------- -----------
Total electric energy sales .................................. 24,045 27,920 27,144
=========== =========== ===========

ELECTRIC ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities) ...................... 3,819 4,287 3,860
Thermal generation (from Company facilities) .................... 3,153 3,353 3,522
Purchased power - long-term hydro ............................... 929 1,093 910
Purchased power - other ......................................... 16,706 19,697 19,405
Power exchanges ................................................. 67 16 26
----------- ----------- -----------
Total power resources ........................................ 24,674 28,446 27,723
Energy losses and Company use ................................... (629) (526) (579)
----------- ----------- -----------
Total energy resources (net of losses) ....................... 24,045 27,920 27,144
=========== =========== ===========

NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Residential ..................................................... 273,219 270,013 265,891
Commercial ...................................................... 35,060 34,877 34,407
Industrial ...................................................... 1,254 1,189 1,169
Public street and highway lighting .............................. 392 389 383
----------- ----------- -----------
Total electric retail customers .............................. 309,925 306,468 301,850
Wholesale ....................................................... 58 68 85
----------- ----------- -----------
Total electric customers ..................................... 309,983 306,536 301,935
=========== =========== ===========

ELECTRIC RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh) ................................... 12,003 11,990 12,099
Revenue per KWh (in cents) ...................................... 4.82 4.90 4.88
Annual revenue per customer ..................................... $ 578.53 $ 587.59 $ 590.54

ELECTRIC AVERAGE HOURLY LOAD (aMW) ................................. 1,012 990 971
=========== =========== ===========

RESOURCE AVAILABILITY at time of system peak (MW):
Total requirements (winter):
Retail ....................................................... 1,491 1,351 1,701
Long-term contract obligations ............................... 965 941 663
Short-term sales ............................................. 1,373 2,340 2,401
----------- ----------- -----------
Total requirements (winter) ............................... 3,829 4,632 4,765
Total resource availability (winter) ............................ 4,194 4,831 4,991

Total requirements (summer):
Retail ....................................................... 1,473 1,418 1,521
Long-term contract obligations ............................... 1,231 1,155 780
Short-term sales ............................................. 1,525 3,435 2,792
----------- ----------- -----------
Total requirements (summer) ............................... 4,229 6,008 5,093
Total resource availability (summer) ............................ 4,656 6,633 5,340

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AVISTA UTILITIES OPERATING STATISTICS

Years Ended December 31,
------------------------
2000 1999 1998
----------- ----------- -----------

NATURAL GAS OPERATIONS
NATURAL GAS OPERATING REVENUES (Thousands of Dollars):
Residential ..................................................... $ 128,240 $ 99,879 $ 92,614
Commercial ...................................................... 69,982 51,952 49,539
Industrial - firm ............................................... 5,404 3,695 3,685
Industrial - interruptible ...................................... 2,276 1,352 1,639
----------- ----------- -----------
Total retail natural gas revenues ............................ 205,902 156,878 147,477
Non-retail sales ................................................ 5,691 15,189 24,846
Transportation .................................................. 10,254 10,784 12,100
Other revenues .................................................. 2,999 4,633 8,715
----------- ----------- -----------
Total natural gas operating revenues ......................... $ 224,846 $ 187,484 $ 193,138
=========== =========== ===========

THERMS DELIVERED (Thousands of Therms):
Residential ..................................................... 212,198 200,184 187,571
Commercial ...................................................... 135,126 125,611 122,263
Industrial - firm ............................................... 12,604 11,241 11,494
Industrial - interruptible ...................................... 5,746 5,209 6,053
----------- ----------- -----------
Total retail sales ........................................... 365,674 342,245 327,381
Non-retail sales ................................................ 4,034 74,117 126,522
Transportation .................................................. 225,392 232,739 226,139
Interdepartmental sales and Company use ......................... 802 9,801 32,647
----------- ----------- -----------
Total therms delivered ....................................... 595,902 658,902 712,689
=========== =========== ===========

SOURCES OF NATURAL GAS SUPPLY (Thousands of Therms):
Purchases ....................................................... 372,795 430,698 499,983
Storage - injections ............................................ (467) (30,508) (32,023)
Storage - withdrawals ........................................... 403 23,972 23,140
Natural gas for transportation .................................. 225,392 232,739 226,139
Distribution system gains (losses) .............................. (2,221) 2,001 (4,550)
----------- ----------- -----------
Total supply ................................................. 595,902 658,902 712,689
=========== =========== ===========

NUMBER OF NATURAL GAS CUSTOMERS (Average for Period):
Residential ..................................................... 242,983 234,844 226,165
Commercial ...................................................... 29,739 29,032 28,236
Industrial - firm ............................................... 296 308 310
Industrial - interruptible ...................................... 38 30 26
----------- ----------- -----------
Total retail customers ....................................... 273,056 264,214 254,737
Non-retail sales ................................................ 2 9 19
Transportation .................................................. 96 107 119
----------- ----------- -----------
Total natural gas customers .................................. 273,154 264,330 254,875
=========== =========== ===========

NATURAL GAS RESIDENTIAL SERVICE AVERAGES:
Washington and Idaho
Annual use per customer (therms) ............................. 950 887 861
Revenue per therm (in cents) ................................. 57.82 45.74 44.97
Annual revenue per customer .................................. $ 549.07 $ 405.51 $ 387.17
Oregon and California
Annual use per customer (therms) ............................. 730 789 772
Revenue per therm (in cents) ................................. 66.83 58.59 58.32
Annual revenue per customer .................................. $ 487.80 $ 462.21 $ 450.13

NET SYSTEM MAXIMUM CAPABILITY (Thousands of Therms):
Net system maximum demand (winter) .............................. 2,347 2,077 3,284
Net system maximum firm contractual capacity (winter) ........... 4,320 4,320 4,220

HEATING DEGREE DAYS:(1)
Spokane, WA
Actual ....................................................... 7,176 6,408 5,951
30 year average .............................................. 6,842 6,842 6,842
% of average ................................................. 105% 94% 87%
Medford, OR
Actual ....................................................... 4,388 4,401 4,421
30 year average .............................................. 4,611 4,611 4,611
% of average ................................................. 95% 95% 96%

- --------------------
(1) Heating degree days are the measure of the coldness of weather
experienced, based on the extent to which the average of high and low
temperatures for a day falls below 65 degrees Fahrenheit (annual degree
days below historic average indicate warmer than average temperatures).

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ENERGY TRADING AND MARKETING LINE OF BUSINESS

The Energy Trading and Marketing line of business includes Avista Energy, Avista
Power and Avista-STEAG. Avista Energy and Avista Power are wholly owned
subsidiaries of Avista Capital. Avista-STEAG is 50% owned by Avista Capital.

AVISTA ENERGY

Avista Energy is an electricity and natural gas trading and marketing business
focused on marketing energy in the Western U.S. In 1997, Avista Energy began
conducting business on a national basis and expanded operations with its
acquisition of Vitol Gas & Electric, LLC (Vitol) in 1999. However, in November
1999, the decision was made to reduce Avista Energy's size and risk by
redirecting its focus away from national energy trading and marketing toward a
more regionally-based energy trading and marketing effort in the West backed by
contracts for energy commodities and by the output of specific facilities
available under contract.

Avista Energy's headquarters are in Spokane, Washington, with offices in
Portland, Oregon, and Vancouver, British Columbia, Canada.

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, including futures, options, swaps and other contractual
arrangements on national exchanges and through unregulated exchanges and brokers
from whom these commodity derivatives are available. During 1999, Avista Energy
also sold and traded coal and sulfur dioxide (SO2) allowances, but eliminated
these activities in 2000 as contracts expired. In 2000, Avista Energy sold
approximately 105.5 million MWhs of electric energy, 309.2 million dekatherms of
natural gas and 3.5 million tons of coal, compared to approximately 135.1
million MWhs of electric energy, 775.8 million dekatherms of natural gas and 1.6
million tons of coal in 1999.

Avista Energy's business is affected by many factors, including, among other
things, volatility of prices within the power and natural gas markets, the
demand for and availability of energy, lower unit margins on new sales contracts
and deregulation of the electric utility industry.

In April 1997, Avista Energy entered into a marketing agreement with Chelan
County Public Utility District (Chelan PUD), located in Washington State. The
agreement allows Avista Energy to market, on a "real-time" basis, a portion of
the output from Chelan PUD's hydroelectric resources (557 Mwhs) and to jointly
market energy products and services to other utilities in the region.

Effective September 1, 1999, Avista Energy began managing Avista Utilities'
natural gas assets and natural gas purchasing operations. Under the agreement,
Avista Energy serves as agent for Avista Utilities, managing its pipeline
transportation and natural gas storage assets, as well as purchasing natural gas
for Avista Utilities' retail customers. The assets continue to be owned by
Avista Utilities, but they are fully integrated operationally into Avista
Energy's portfolio to optimize the value. An incentive plan allows Avista Energy
the opportunity to retain a portion of the benefits associated with asset
optimization and the efficiencies gained in purchasing natural gas for Avista
Utilities. Approvals were received from the state regulatory agencies in
Washington, Idaho and Oregon. The incentive plan began September 1, 1999 and
ends March 31, 2002. Avista Utilities may seek continuation of the plan from
regulators with six months notice prior to the end of the term.

The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities, but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges).

Avista Energy is subject to the various risks inherent in commodity trading
including, particularly, market risk and credit risk. Because Avista Energy
operates within the WSCC, the company is directly and indirectly exposed to the
California markets. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations: Results of Operations and Future
Outlook, and Notes 1, 2, 4 and 5 of Notes to Financial Statements for additional
information regarding the market

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and credit risks inherent in the energy trading business, fourth quarter 1999
restructuring costs, Avista Energy's risk management policies and procedures,
accounting practices, and positions held by Avista Energy at December 31, 2000.

Avista Capital provides guarantees for Avista Energy's line of credit agreement
and, in the course of business, may provide guarantees to other parties with
whom Avista Energy may be doing business.

AVISTA POWER

Avista Power develops and owns electricity generation in strategic locations
primarily throughout the West. 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 the 270 megawatt facility located in
Rathdrum, Idaho, with 100 percent of its output contracted to Avista Energy for
25 years. The facility is currently under construction and is expected to be
on-line in August 2001. The total cost of the project is estimated at $160
million; Avista Power's equity in the project is approximately $16 million.

In December 2000, Avista Utilities selected the Coyote Springs 2 project, a
280-megawatt combined-cycle natural gas turbine plant under construction near
Boardman, Oregon, to add generation to its portfolio. Permits and contract
modifications are in the process of being filed to transfer ownership from
Avista Power to Avista Utilities. The final permit transfers are expected in
early 2001, with project completion in mid-2002.

Avista Power is also in the permitting process for an additional 249-megawatt
turbine plant to be sited in Longview, Washington. This project is a joint
venture with STEAG AG, Germany's largest independent power producer.

As a further execution of its strategy to shift focus to the western regional
power markets, Avista Power sold all its licensed and unlicensed
assets located outside the WSCC to STEAG AG. In addition, Avista Power's
interest in a project site located in Bogalusa, Louisiana, was sold in late
2000.

Some projects may be developed with STEAG AG under Avista-STEAG, LLC.

INFORMATION AND TECHNOLOGY LINE OF BUSINESS

The Information and Technology line of business includes Avista Advantage,
Avista Labs and Avista Communications. Avista Fiber and Avista Communications
merged operations in 2000, incorporating Avista Fiber into Avista
Communications. Avista Advantage and Avista Labs are majority-owned and wholly
owned subsidiaries of Avista Capital, respectively. As of December 31, 2000,
Avista Capital owned approximately 82% of Avista Communications.

AVISTA ADVANTAGE

Headquartered in Spokane, Avista Advantage is an e-commerce provider of
facilities management billing and information services to commercial customers
throughout the U.S. and Canada.

Avista Advantage processes and presents consolidated bills on-line, and pays
utility and maintenance and repair bills for multi-site commercial and
industrial customers. Information gathered from invoices, utilities and other
customer-specific data allows Avista Advantage to provide its customers with
in-depth analytical support, real-time reporting and unbiased consulting in
regard to energy, water, waste, and maintenance and repair expenses.

Avista Advantage has secured patents on its two critical business systems, the
Advantage Customer Internet Site (ACIS), which provides high value, operational
information drawn from utility bills, and the AviTrack database, which processes
and reports on information gathered from utilities to ensure customers are
receiving the most effective services at the proper price. Avista Advantage is
not aware of any claimed or threatened infringement on any patents issued to
date and will continue to expand and protect its existing patents, as well as
file additional patent applications for new products, services and process
enhancements.

As of the end of 2000, Avista Advantage's customer base was over 140 customers,
having over 46,000 billed sites throughout the U.S. and Canada. Two venture
capital firms invested in Avista Advantage during the fourth quarter

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of 2000. The strategic investments will help refine, expand and market Avista
Advantage's growing number of facility cost management services.

AVISTA LABS

Avista Labs has developed a unique modular PEM fuel cell that delivers reliable,
affordable and clean distributed power solutions. The modular design allows fuel
cell cartridges to be easily removed and replaced without interrupting power.
The company believes this exclusive "hot swap" feature makes Avista Labs'
technology more scalable, configurable, reliable and durable than other fuel
cell technologies. In addition to its modular-based PEM fuel cell, Avista Labs
is dedicated to commercializing a broad array of components to complement its
fuel cell in order to deliver system solutions to residential, industrial and
commercial markets.

Avista Labs has been granted two patents, with more than 230 issued claims
recognizing and protecting the unique attributes of its fuel cell system. The
company has eight more patent applications pending or in process directed to its
unique approach.

Testing of the Avista Labs' fuel cells is underway to gather field data in a
wide variety of operating conditions. In September 2000, Avista Labs delivered
its latest prototype to the Houston Advanced Research Center for testing and
evaluation. Avista Labs continues to add new locations to its current list of
seven Beta testing sites around the country.

Key alliances in bringing Avista Labs' product to market include a joint
marketing/installation agreement with Black & Veatch, a global leader in
engineering, procurement and construction, and an agreement with Logan
Industries, Inc., which has been manufacturing and assembling Avista Labs fuel
cell units for field testing since early 1999.

Effective December 1, 2000, Avista Labs exercised its right to terminate the
exclusivity obligations of the Joint Development Agreement with UOP, LLC,
entered into in August 1999. The Joint Development Agreement included a
provision obligating the parties to work exclusively with one another in regard
to the subject matter of the Agreement, which involved programs to develop a
fuel cell system utilizing a fuel cell and a fuel processor. Avista Labs formed
a new company, H2fuel, LLC, in January 2001 to develop and commercialize a new
Technology for manufacturing hydrogen for fuel cells. Avista Labs owns a 70%
interest in H2fuel. The remaining interest is owned by United Fuel
Technologies, LLC. Avista Labs will transfer its ongoing fuel processor
development work to H2fuel.

AVISTA COMMUNICATIONS

A provider of facilities-based telecommunications solutions in under-served
communities throughout Washington, Idaho and Montana, Avista Communications
delivers integrated voice and broadband data services over a state-of-the-art
network, offering business customers a choice in bundled communications services
including data transport, Internet access and local voice services. Continually
seeking new ways to leverage advancing technology, Avista Communications is
dedicated to creating competitive advantages for customers delivered by
experienced teams of local experts. The total number of lines sold at December
31, 2000 was over 7,200, with approximately 5,400 lines installed.

Based in Spokane, Avista Communications currently serves customers in 10
northwest markets including Billings, Montana; Coeur d'Alene, Post Falls, Moscow
and Lewiston, Idaho; Spokane, Yakima, Bellingham, Clarkston and Pullman,
Washington. In 2001, Avista Communications expects to add additional products
and services to complement its strategic direction toward the
convergence of voice and data service delivery for business customers in
communities with populations under 500,000.

AVISTA VENTURES LINE OF BUSINESS

The Avista Ventures line of business includes Avista Ventures and several other
minor subsidiaries, including Pentzer Corporation, Avista Development and Avista
Services. Avista Ventures was formed in April 2000 to align Avista Corp.'s
investment and acquisition activities in the strategic growth areas of energy,
information and technology.

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ENERGY TRADING AND MARKETING OPERATING STATISTICS

Years Ended December 31,
------------------------
2000 1999 1998
---------- ---------- ----------

AVISTA ENERGY

REVENUES (Thousands of Dollars):
Electric .................................................... $4,721,291 $4,745,615 $1,665,348
Natural gas ................................................. 1,751,264 1,900,487 743,386
Coal ........................................................ 58,996 49,569 --
---------- ---------- ----------
Total revenues ........................................... $6,531,551 $6,695,671 $2,408,734
========== ========== ==========

SALES VOLUMES:
Electricity (Thousands of MWhs) ............................. 105,548 135,099 54,430
Natural gas (Thousands of dekatherms) ....................... 309,160 775,822 424,152
Coal (Thousands of tons) .................................... 3,514 1,638 --

INFORMATION AND TECHNOLOGY OPERATING STATISTICS

Years Ended December 31,
------------------------
2000 1999 1998
---------- ---------- ----------

AVISTA ADVANTAGE

Contracted Sites ................................................ 65,858 26,056 5,603
Billed Sites .................................................... 46,127 21,186 3,081

AVISTA LABS

Beta Units Produced ............................................. 114 n/a n/a
Beta Units Installed ............................................ 29 n/a n/a

AVISTA COMMUNICATIONS

Lines Sold ...................................................... 7,248 2,857 n/a
Lines Installed ................................................. 5,395 1,598 n/a

n/a - not available

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ITEM 2. PROPERTIES

AVISTA UTILITIES

Avista Utilities' electric properties, located in the States of Washington,
Idaho and Montana, include the following:

Generating Plants

Nameplate Present Year of
No. of Rating Capability FERC License
Units (MW)(1) (MW)(2) Expiration
------------ ------------ ------------ ------------

Hydroelectric Generating Stations (River)
Washington:
Long Lake (Spokane) 4 70.0 88.0 2007
Little Falls (Spokane) 4 32.0 36.0 n/a
Nine Mile (Spokane) 4 26.4 24.5 2007
Upper Falls (Spokane) 1 10.0 10.2 2007
Monroe Street (Spokane) 1 14.8 14.8 2007
Idaho:
Cabinet Gorge (Clark Fork) 4 231.3 236.0 2045(3)
Post Falls (Spokane) 6 14.8 18.0 2007
Montana:
Noxon Rapids (Clark Fork) 5 466.2 528.0 2045(3)
------------ ------------
Total Hydroelectric 865.5 955.5

Thermal Generating Stations
Washington:
Kettle Falls 1 50.7 49.0
Northeast (Spokane) CT 2 61.2 68.0
Idaho:
Rathdrum CT 2 166.5 176.0
Montana:
Colstrip (Units 3 and 4)(4) 2 233.4 222.0
------------ ------------
Total Thermal 511.8 515.0

Total Generation Properties 1,377.3 1,470.5
============ ============

n/a not applicable.

(1) Nameplate Rating, also referred to as "installed capacity", is the
manufacturer's assigned power rating under specified conditions.
(2) Capability is the maximum generation of the plant without exceeding
approved limits of temperature, stress and environmental conditions.
(3) On February 23, 2000, the Company received a new operating license for
Cabinet Gorge and Noxon Rapids. (See Item 1. Business: Avista Utilities
- Hydroelectric Relicensing for additional information.)
(4) Jointly owned; data above refers to Avista Utilities' 15% interest.

Electric Distribution and Transmission Plant

Avista Utilities operates approximately 12,200 miles of primary and secondary
distribution lines in its electric system in addition to a transmission system
of approximately 575 miles of 230 kV line and 1,520 miles of 115 kV line. Avista
Utilities also owns a 10% interest in 495 miles of a 500 kV line between
Colstrip, Montana and Townsend, Montana.

The 230 kV lines are used to transmit power from Avista Utilities' Noxon Rapids
and Cabinet Gorge hydroelectric generating stations to major load centers in its
service area, as well as to transfer power between points of interconnection
with adjoining electric transmission systems. These lines interconnect with
Bonneville at five locations and at one location each with PacifiCorp, Montana
Power and Idaho Power Company. The Bonneville interconnections serve as points
of delivery for power from the Colstrip generating station, as well as for the

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interchange of power with entities outside the Pacific Northwest. The
interconnection with PacifiCorp is used to integrate Mid-Columbia hydroelectric
generating facilities to Avista Utilities' loads, as well as for the interchange
of power with entities within the Pacific Northwest.

The 115 kV lines provide for transmission of energy and the integration of the
Spokane River hydroelectric and Kettle Falls wood-waste generating stations with
service-area-load centers. These lines interconnect with Bonneville at nine
locations, Grant County Public Utility District (PUD), Seattle City Light and
Tacoma City Light at two locations and one interconnection each with Chelan
County PUD, PacifiCorp and Montana Power.

Natural Gas Plant

Avista Utilities has natural gas distribution mains of approximately 3,877 miles
in Washington and Idaho and 1,849 miles in Oregon and California, as of December
31, 2000.

Avista Utilities, Northwest Pipeline and Puget Sound Energy each own a one-third
undivided interest in the Jackson Prairie Natural Gas Storage Project, which has
a total peak day deliverability of 8.8 million therms, with a total working
natural gas inventory of 190.3 million therms.

ITEM 3. LEGAL PROCEEDINGS

See Note 22 of Notes to Financial Statements for additional information.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Outstanding shares of Common Stock are listed on the New York and Pacific Stock
Exchanges. As of February 28, 2001, there were approximately 19,066 registered
shareholders of the Company's no par value Common Stock.

See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Future Outlook for additional
general information about common stock dividends.

For additional information, refer to Notes 1, 18 and 21 of Notes to Financial
Statements. For high and low stock price information, refer to Note 24 of Notes
to Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA

Years Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Thousands of Dollars except Per Share Data and Ratios)

Operating Revenues:
Avista Utilities ........................ $ 1,512,101 $ 1,115,647 $ 1,049,212 $ 891,665 $ 798,994
Energy Trading and Marketing ............ 6,531,551 6,695,671 2,408,734 247,028 --
Information and Technology .............. 11,645 4,851 1,995 1,030 813
Avista Ventures ......................... 32,937 122,303 231,483 163,598 145,150
Intersegment eliminations ............... (176,744) (33,488) (7,440) (1,149) --
----------- ----------- ----------- ----------- -----------
Total ................................... $ 7,911,490 $ 7,904,984 $ 3,683,984 $ 1,302,172 $ 944,957

Operating Income/(Loss) (pre-tax):
Avista Utilities ........................ $ 3,177 $ 142,567 $ 143,153 $ 178,289 $ 173,658
Energy Trading and Marketing ............ 250,196 (97,785) 22,826 6,577 (649)
Information and Technology .............. (40,084) (13,002) (5,192) (5,364) (1,443)
Avista Ventures ......................... (9,861) (423) 12,033 9,962 15,355
----------- ----------- ----------- ----------- -----------
Total ................................... $ 203,428 $ 31,357 $ 172,820 $ 189,464 $ 186,921

Net Income/(Loss):
Avista Utilities ........................ $ (38,781) $ 59,573 $ 56,297 $ 100,777(3) $ 62,404
Energy Trading and Marketing ............ 161,753 (60,739) 14,116 5,346 (414)
Information and Technology .............. (28,408) (8,620) (3,398) (3,425) (919)
Avista Ventures ......................... (2,885) 35,817 11,124 12,099 22,382
----------- ----------- ----------- ----------- -----------
Total ................................... $ 91,679 $ 26,031 $ 78,139 $ 114,797 $ 83,453

Preferred Stock Dividend Requirements ...... $ 23,735(1) $ 21,392(1) $ 8,399(1) $ 5,392 $ 7,978
Income Available for Common Stock .......... $ 67,944 $ 4,639 $ 69,740 $ 109,405(3) $ 75,475

Outstanding Common Stock (000s):
Weighted Average ........................ 45,690 38,213(1) 54,604(1) 55,960 55,960
Year-End ................................ 47,209 35,648(1) 40,454(1) 55,960 55,960
Book Value per Share .................... $ 15.34 $ 11.04(1) $ 12.07(1) $ 13.36 $ 12.70

Earnings per Share:
Avista Utilities ........................ $ (1.36) $ 1.00 $ 0.88 $ 1.70(3) $ 0.97
Energy Trading and Marketing ............ 3.51 (1.59) 0.26 0.10 (0.01)
Information and Technology .............. (0.62) (0.23) (0.06) (0.06) (0.01)
Avista Ventures ......................... (0.06) 0.94 0.20 0.22 0.40
----------- ----------- ----------- ----------- -----------
Total, Diluted .......................... $ 1.47 $ 0.12 $ 1.28 $ 1.96 $ 1.35
Total, Basic ............................ $ 1.49 $ 0.12 $ 1.28 $ 1.96(3) $ 1.35
Dividends Paid per Common Share ......... $ 0.48 $ 0.48(2) $ 1.05(2) $ 1.24 $ 1.24

Total Assets at Year-End:
Avista Utilities ........................ $ 2,129,614 $ 1,976,716 $ 2,004,935 $ 1,926,739 $ 1,921,429
Energy Trading and Marketing ............ 10,271,834 1,595,470 955,615 212,868 320
Information and Technology .............. 59,632 26,379 7,461 3,475 1,517
Avista Ventures ......................... 102,844 114,929 285,625 268,703 254,032
----------- ----------- ----------- ----------- -----------
Total ................................... $12,563,924 $ 3,713,494 $ 3,253,636 $ 2,411,785 $ 2,177,298

Long-term Debt at Year-End ................. $ 679,806 $ 718,203 $ 730,022 $ 762,185 $ 764,526
Company-Obligated Mandatorily
Redeemable Preferred Trust Securities ... $ 100,000 $ 110,000 $ 110,000 $ 110,000 --
Preferred Stock Subject to Mandatory
Redemption at Year-End .................. $ 35,000 $ 35,000 $ 35,000 $ 45,000 $ 65,000
Convertible Preferred Stock ................ -- $ 263,309 $ 269,227(1) -- --

Ratio of Earnings to Fixed Charges ......... 3.26 1.61 2.66 3.49 2.97
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements .......... 2.06 1.07 2.25 3.12 2.50

(1) In December 1998, the Company 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.)
(2) The Company paid a quarterly common stock dividend of $0.31 per share
through the third quarter of 1998. Beginning in the fourth quarter of 1998,
the quarterly common stock dividend was reduced to $0.12 per share.
(3) Includes the $41.4 million after-tax effect of an IRS income tax recovery
related to the Company's investment in the terminated nuclear project 3
of the Washington Public Power Supply System.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Avista Corporation (Avista Corp. or the Company) operates as an energy,
information and technology company with a regional utility operation and
subsidiary operations located in the Pacific Northwest. The Company's operations
are organized into four lines of business -- Avista Utilities, Energy Trading
and Marketing, Information and Technology, and Avista Ventures. Avista
Utilities, which is an operating division of Avista Corp. and not a separate
entity, represents the regulated utility operations. Avista Capital, a wholly
owned subsidiary of Avista Corp., owns all of the subsidiary companies engaged
in the other lines of business. As of December 31, 2000, the Company had common
equity investments of $363.0 million and $361.2 million in Avista Utilities and
Avista Capital, respectively.

In addition to providing electricity and natural gas distribution and electric
transmission services, Avista Utilities is responsible for electric generation
and production. 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 CT
generating units. In addition, Avista Utilities has a number of long-term power
purchase and exchange contracts that increase its available resources. With this
diverse energy resource portfolio, Avista Utilities remains one of the nation's
lowest-cost producers of electric energy services.

The Energy Trading and Marketing line of business excludes the regulated utility
operations, Avista Utilities, and is comprised of Avista Energy, Inc. (Avista
Energy), Avista Power, Inc. (Avista Power) and Avista-STEAG, LLC (Avista-STEAG).
Avista Energy is an electricity and natural gas trading and marketing business,
operating primarily in the Western Systems Coordinating Council (WSCC). Avista
Power was formed to develop and own generation assets. Avista-STEAG is a joint
venture between Avista Capital and STEAG AG, a German independent power
producer, to develop electric generating assets.

The Information and Technology line of business is comprised of Avista
Advantage, Inc. (Avista Advantage), Avista Laboratories, Inc. (Avista Labs) and
Avista Communications, Inc. (Avista Communications). Avista Advantage is a
business-to-business e-commerce enabled portal that provides a variety of
energy-related products and services to commercial and industrial customers on a
North American basis. Its primary product lines include consolidated billing,
resource accounting, energy analysis, load profiling, and maintenance and repair
billing services. Avista Labs is in the process of developing both modular
Proton Exchange Membrane (PEM) fuel cells for power generation at the site of
the consumer or industrial user and fuel cell components. Avista Communications
is an Integrated Communications Provider (ICP) providing local dial tone, data
transport, internet services, voice messaging and other telecommunications
services to under-served communities in the Western U.S. In April 2000, Avista
Communications and Avista Fiber, Inc. merged operations, with Avista
Communications now additionally responsible for designing, building and managing
metropolitan area fiber optic networks.

The Avista Ventures line of business includes Avista Ventures, Inc. (Avista
Ventures), and several other minor subsidiaries. This line of business is
responsible for investing in business opportunities that have potential value in
the lines of business in which the Company is already involved.

SIGNIFICANT CHANGES IN ENERGY MARKETS

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Regulatory, political, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, presenting
both opportunities and challenges.

These changes have had a significant effect on energy markets. Historically, the
price of power in wholesale markets has been affected primarily by production
costs and by other factors including streamflows, the availability of hydro and
thermal generation and transmission capacity, weather and the resulting retail
loads, and the price of coal, natural gas and oil for thermal generating units.
Any combination of these factors that resulted in a shortage of energy or
increased cost of production generally caused the market price of power to move
upward. Now, however, wholesale power market prices appear to react more
independently from traditional cost-driven and supply and demand factors.
Significant emerging factors include the gradual depletion of excess generating
capacity in the WSCC, increasing instances of transmission congestion and
increased ownership of generating facilities by entities which are not
traditional "public utilities". Wholesale power markets have been affected by
the restructuring of electric utility regulation at the state and federal
levels.

Wholesale power prices rose dramatically starting in the second quarter of 2000
and remain significantly above historic levels in the Pacific Northwest and
throughout the WSCC. Federal and state officials, including the Federal Energy
Regulatory Commission (FERC) and the California Public Utility Commission
(CPUC), commenced reviews to determine the cause of the market changes.
Additionally, President Bush has appointed Vice President Cheney to chair an
energy policy task force at least in part as a response to the extreme market
pressures and power shortages that have affected California and other parts of
the WSCC. The governors of Washington, Oregon and Idaho have also become
involved in seeking to stabilize power market prices and the availability of
power in the region.

California Energy Crisis. During 2000, particularly in the fourth quarter, the
changes in Western energy markets resulted in an energy supply shortage that
particularly affected power availability in California. Power shortages, coupled
with California's power market structure, led to the two largest of California's
three investor-owned utilities (IOUs), Southern California Edison (SCE) and
Pacific Gas & Electric (PG&E), issuing warnings of their impending inability to
meet payment commitments. In the first quarter of 2001, SCE and PG&E defaulted
on several hundred million dollars of payment obligations owed to various
creditors. Because of regulatory changes that were adopted by California law in
1997, California's IOUs were required to divest ownership of much of their owned
power generation capacity, to sell output from their remaining generating plants
into a power market, to reduce retail customer prices and hold them at a fixed
level until certain transition charges were amortized, and to buy all
requirements for customers' needs through short-term purchases from the
newly-created California Power Exchange (CalPX), California Independent System
Operator (CalISO), Automated Power Exchange (APX) and other specified entities.
As demand began to outstrip supply in California, the price of power skyrocketed
and these IOUs bought power at much higher prices than they sold it to end
users. They exhausted their credit and capital capacity early in 2001. The PG&E
and SCE defaults resulted in subsequent defaults by CalPX, CalISO and APX in
amounts the latter three parties owed to Avista Energy.

There were approximately 50 participants in the CalPX at the end of 2000. Avista
Energy participated in transactions with the CalPX and CalISO, primarily as a
seller. The CalPX tariff, approved by the FERC, includes a provision that
permits backcharges to CalPX participants under certain circumstances to keep
its settlement accounts whole in the event of a default by a participant. The
CalPX tariff specifies that collateral and contracts of the defaulting parties
be liquidated to provide funds to cover their defaults, followed by liquidation
of a performance bond posted by participants collectively, before backcharges
will be levied. The CalPX did not obtain sufficient collateral from SCE or PG&E
to assure their performance, even when signals of their financial difficulties
were gaining attention from rating agencies, from the press, and from reports
filed by SCE and PG&E with the Securities and Exchange Commission. When SCE and
PG&E defaulted, the Governor of California obtained a temporary restraining
order (TRO) to block the CalPX from liquidating the SCE and PG&E contracts. When
the TRO expired and an injunction was not granted, the Governor invoked
emergency executive powers to seize those contracts. The CalPX began levying
backcharges by withholding amounts payable to participants and sending invoices
for additional amounts. In January 2001, the CalPX gave notice that it was
suspending its block forward and day-ahead market operations. Several of the
CalPX participants, including PG&E, have protested the backcharges through
filings with the FERC and the courts. Avista Energy is among the entities
seeking to have the backcharge provisions ruled inoperable by the FERC. In its
second round of backcharges in February 2001, the CalPX backcharged remaining
participants for the increasing cascade of defaults, leading to the possibility
that, if backcharges were continued and additional parties either could not or
would not pay amounts so invoiced, the last remaining participant might bear the
entire market's settlement obligation. On February 9, 2001, Avista Energy
obtained a TRO in Federal Court in the Central District of California that
suspended the backcharges and preserved Avista Energy's $500,000 letter of
credit posted to the CalPX for assurance of performance; on March 5, 2001, the
court issued a preliminary injunction that continued the relief granted by the
TRO and required the escrowing of amounts received by the CalPX. Avista Energy
joined in a group of nine complainants to file with the FERC to take action to
declare the backcharge practices to be contrary to the tariff's

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purpose, to declare the backcharges to be inoperable because of the removal of
the SCE and PG&E contracts, and to invoke jurisdiction over the CalPX in winding
up its affairs. The court action and the FERC complaint are continuing.

Avista Energy participated in the California power market as part of its Western
U.S. business focus. At December 31, 2000, Avista Energy had net accounts
receivable of $66.3 million from CalPX, CalISO and APX and had a special bad
debt reserve of $8.3 million against that amount. Avista Energy received $21.4
million in January and February of 2001 against the $66.3 million balance, with
$22.5 million being due in March 2001.

Avista Energy also has forward contracts with affiliates of SCE's parent
corporation, Edison International (EIX), through its Edison Mission Energy (EME)
unit and with affiliates of PG&Es' parent corporation, PG&E Corp. (PGC), through
entities in its National Energy Group (NEG). EIX and PGC have taken steps
collectively referred to as "ring-fencing" to protect EME and NEG, respectively,
and their subsidiaries from creditors of their utility business units, SCE and
PG&E, respectively. The CPUC and certain customer groups have initiated
investigations into the transactions between regulated units of EIX and PGC and
their affiliates. Avista Energy is continuing to monitor the situation with
respect to EME and NEG counterparties and cannot predict the ultimate outcome of
its positions with these entities. Avista Energy does not believe these
conditions will have a material adverse impact on the results of operations or
its financial position.

The Company expects Avista Utilities' electric and natural gas business to earn
between $0.90 and $1.00 per share for 2001, based on current streamflow and
weather projections, anticipated purchased power prices and the continued
ability to defer excess purchased power costs. Avista Corp.'s consolidated
earnings for 2001 will reflect continued support of the Information and
Technology subsidiaries and the expectations for a reduced contribution from
Avista Energy as it continues to manage the size and risk of the business.
Consolidated earnings per share could be significantly less than the $0.90 to
$1.00 anticipated from the Avista Utilities business segment.

RESULTS OF OPERATIONS

OVERALL OPERATIONS

2000 COMPARED TO 1999

Overall diluted earnings per share for 2000 were $1.47, compared to $0.12 in
1999. The primary reason for the increase was earnings of $161.8 million
recorded by the Energy Trading and Marketing line of business, after a loss of
$60.7 million in 1999 recorded by this business segment. Avista Energy benefited
in 2000 from a well-positioned portfolio in the volatile Pacific Northwest and
western energy markets. The loss from Avista Energy in 1999 related to expenses
associated with the downsizing and restructuring of the business, as well as
operational losses. The positive earnings from Avista Energy in 2000 were
partially offset by losses from the other lines of business. In February 2000,
the Company converted all the remaining outstanding shares of its Series L
Preferred Stock back into common stock, which resulted in a one-time charge of
$21.3 million to preferred dividend requirements. In addition, Avista Utilities'
operations recorded losses, which were primarily the result of significantly
higher purchased power costs that were compounded by short positions related to
wholesale trading activity at the utility during the second quarter of 2000.
(See paragraphs below for additional information about the higher energy prices
and short positions.)

Net income available for common stock increased $63.3 million in 2000 over 1999.
Energy Trading and Marketing's contribution to income available for common stock
increased to $161.8 million over 1999, for earnings of $3.51 per diluted share
in 2000 compared to a loss of $1.59 per share in 1999, due primarily to the
volatile energy market discussed above. Avista Utilities' contribution to income
available for common stock decreased $100.7 million from 1999 due to the
conversion costs associated with the convertible preferred stock discussed
above, higher purchased power expenses and wholesale trading activities, for a
loss of $1.36 per diluted share in 2000 compared to a contribution of $1.00 in
1999. Information and Technology's contribution to income available for common
stock decreased $19.8 million from 1999, for a loss of $0.62 per diluted share
in 2000 compared to a loss of $0.23 in 1999, as these businesses continued to
grow their operations. The contribution to income available for common stock
from the Avista Ventures line of business decreased $38.7 million in 2000, for a
loss of $0.06 per

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diluted share in 2000 compared to a contribution of $0.94 in 1999. The 1999
earnings included transactional gains recorded by Pentzer that totaled $35.9
million, or $0.94 per share, from the sale of two groups of portfolio companies.

Total revenues increased $6.5 million in 2000 over 1999, but there were large
changes within the individual lines of business. Avista Utilities' revenues
increased 36%, primarily due to increased prices of both electricity and natural
gas. Revenues at Avista Energy decreased 2% due to decreased sales volumes of
electricity and natural gas from the restructuring and downsizing of the
business, offset by sharply higher prices. Revenues from the Information and
Technology companies increased 140% to $11.6 million as these companies
continued to grow their businesses. Intersegment eliminations represent the
transactions between Avista Utilities and Avista Energy for commodities and
services. The large increase in 2000 over 1999 was primarily due to an entire
year of activity under the agency agreement whereby Avista Energy serves as
agent for Avista Utilities, managing its pipeline transportation contract rights
and natural gas storage assets, as well as purchasing natural gas for Avista
Utilities' retail customers.

Resource costs decreased $97.7 million in total. Avista Utilities' resource
costs increased 73%, primarily due to electric and natural gas commodity prices.
Avista Energy's resource costs decreased 7%, due to decreased energy trading
volumes but offset by the increased prices of commodities. Intersegment
eliminations also increased due to an entire year of activity under the agency
agreement between Avista Utilities and Avista Energy.

Operations and maintenance, administrative and general, and depreciation and
amortization expenses were all primarily impacted by the Information and
Technology and Avista Ventures lines of business. All three categories of
expenses increased at the Information and Technology companies as they continued
to grow their businesses. All three categories of expenses decreased at the
Avista Ventures line of business as a result of the sales of portfolio companies
by Pentzer during 1999.

Interest expense increased $3.6 million in 2000 over 1999, primarily due to
higher levels of outstanding debt during the year. During 2000, $224.0 million
of long-term debt was issued, while $54.6 million of long-term debt matured and
$10.0 million of Preferred Trust Securities were repurchased. Long-term debt and
short-term borrowings outstanding at December 31, 2000 were $217.1 million
higher than at the end of 1999.

Income taxes increased $56.7 million in 2000 over 1999, primarily due to
increased earnings recorded by the Energy Trading and Marketing line of business
and gains on the sale of the Centralia Power Plant (Centralia) recorded by
Avista Utilities. Income taxes in 1999 were lower than normal primarily as a
result of the operational losses and restructuring charges incurred by Avista
Energy.

Preferred stock dividend requirements increased $2.3 million in 2000 over 1999
due to the conversion costs and dividends paid associated with converting the
Convertible Preferred Stock, Series L, into common stock in February 2000.

1999 COMPARED TO 1998

Overall diluted earnings per share for 1999 were $0.12, compared to $1.28 in
1998. The primary reason for the decrease was a $60.7 million after-tax loss
recorded by the Energy Trading and Marketing line of business, due to a $27.3
million after-tax charge recorded by Avista Energy related to the downsizing and
restructuring of the business, and $32.1 million of after-tax operational losses
due to warmer than normal weather across the nation, soft national energy
markets and a lack of volatility within those markets. The restructuring charge
includes a charge for impairment of assets from the purchase of Vitol in
February 1999 and reserves for severance and other related expenses. In December
1998, the Company exchanged 15,404,595 shares of its common stock for shares of
Convertible Preferred Stock, Series L, which resulted in an increase of $13.4
million in preferred stock dividend requirements in 1999 over 1998. In addition,
the utility operations recorded charges of approximately $5 million related to
the impairment of utility assets, which were partially offset by the reversal of
certain environmental reserves. These charges were partially offset by the $35.9
million of transactional gains recorded by Pentzer due to the sales of two
groups of portfolio companies.

Net income available for common stock decreased $65.1 million in 1999 from 1998.
Avista Utilities' income available for common stock decreased $9.8 million from
1998 due to the increased preferred stock dividend associated with the
Convertible Preferred Stock, contributing $1.00 per diluted share for 1999,
compared to $0.88 in 1998. Energy Trading and Marketing's income available for
common stock decreased $74.9 million from 1998, for a loss of $1.59 per diluted
share in 1999, as compared to a contribution of $0.26 per share in 1998, due
primarily to the restructuring charges and operational losses discussed above.
Information and Technology's income available

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for common stock decreased $6.8 million from 1998, for a loss of $0.27 per share
in 1999, compared to a loss of $0.06 in 1998, due primarily to continued
start-up and expansion costs. Income available for common stock from the Avista
Ventures line of business increased $26.3 million in 1999 and contributed $0.98
to diluted earnings per share in 1999, compared to $0.20 per share in 1998.
Transactional gains recorded by Pentzer totaled $35.9 million, or $0.94 per
share, and $4.3 million, or $0.08 per share, in 1999 and 1998, respectively.

Total revenues increased $4.22 billion in 1999 over 1998, primarily due to the
growth of Avista Energy's business as a result of its acquisition of Vitol.
Resource costs increased $4.40 billion, again primarily as a result of the
growth in Avista Energy's business. Intersegment eliminations represent the
transactions between Avista Utilities and Avista Energy for commodities and
services. The large increase in 1999 over 1998 was primarily due to an agreement
whereby Avista Energy serves as agent for Avista Utilities, managing its
pipeline transportation and natural gas storage assets, as well as purchasing
natural gas for Avista Utilities' retail customers. Gross margins for Avista
Utilities decreased $3.0 million primarily due to larger increases in purchased
power costs than in the associated wholesale revenues. Avista Energy's gross
margin decreased $66.6 million to a negative $17.9 million, primarily due to
losses on positions taken in anticipation of certain weather patterns in
particular areas of the country which did not occur. Operations and maintenance
expenses decreased $74.4 million, primarily due to decreased expenses as a
result of the sales of portfolio companies by Pentzer. Administrative and
general expenses decreased $1.8 million primarily due to decreased expenses as a
result of the sales of portfolio companies by Pentzer, partially offset by
increased salary expenses from the growth in Avista Energy's business and the
purchase of Vitol, which added significantly to staffing levels, and increased
start-up costs at the Information and Technology companies.

Interest expense decreased $4.0 million in 1999, as compared to 1998, primarily
due to lower levels of outstanding debt during the year. During 1999, $108.7
million of long-term debt was issued, while $208.3 million of long-term debt
matured or was redeemed. At December 31, 1999, $118.5 million of notes payable
were outstanding, compared to no balances at December 31, 1998. Long-term debt
outstanding at December 31, 1999 was $11.8 million lower than at the end of
1998.

Income taxes decreased $26.6 million, or 61%, in 1999 from 1998, primarily due
to losses and restructuring charges incurred by the Energy Trading and Marketing
line of business, which were partially offset by higher taxes resulting from the
transactional gains from the sales of the portfolio companies by Pentzer.

Preferred stock dividend requirements increased $13.0 million in 1999 over 1998
due to the exchange of shares of common stock for shares of $12.40 Convertible
Preferred Stock, Series L, which occurred in December 1998 and the redemption of
the final $10.0 million of Preferred Stock, Series I in June 1998.

AVISTA UTILITIES

2000 COMPARED TO 1999

Avista Utilities' pre-tax income from operations was $3.2 million in 2000, or a
decrease of $139.4 million from 1999. The loss resulted primarily from
significantly higher electric energy prices in wholesale markets, compounded by
a short position related to wholesale trading activity. The results for 2000
include a $9.0 million after-tax gain recorded as a result of the sale of its
interest in Centralia. The balance of the total after-tax gain of $37.2 million
from the sale of Centralia was deferred and has been or will be returned to
Avista Utilities' customers through rates. Avista Utilities' operating revenues
and expenses increased $396.5 million and $535.8 million, respectively, in 2000
over 1999.

During 2000, Avista Utilities purchased energy in order to meet system
obligations to serve retail and wholesale customers. Unprecedented sustained
peaks in electric energy prices throughout the WSCC beginning in May 2000,
compounded by a wholesale short position discussed below, contributed to
significant losses recorded by Avista Utilities in the second quarter of 2000.
The cost of these power purchases was significantly higher than the amounts
currently being recovered from customers. The increased purchased power prices
caused a reduction in gross margin of approximately $138.9 million in 2000 from
1999. Based on historical trends, Avista Utilities' business plan had forecast
on-peak power prices of approximately $19 per megawatthour for May and June of
2000. On-peak power costs in the market averaged $60 per megawatthour in May and
over $180 per megawatthour in June, with hourly spikes as high as $1,300 per
megawatthour.

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On August 9, 2000, the Washington Utilities and Transportation Commission (WUTC)
approved Avista Utilities' request for deferred accounting treatment for certain
power costs related to increases in short-term power prices beginning July 1,
2000 and ending June 30, 2001. The specific power costs deferred include the
changes in power costs to Avista Utilities from those included in base retail
rates, related to three power cost components: the net effect of changes in
short-term wholesale market prices on short-term wholesale purchases and sales;
the effect on power costs from changes in the level of hydroelectric generation;
and the net effect on power costs from 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 Utilities
associated with these three power cost components, and the level of costs
included in Avista Utilities' base retail rates. The power costs deferred are
related solely to the operation of Avista Utilities' system resources to serve
its system retail and wholesale load obligations.

On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of Company-owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of this deferred accounting treatment beyond June
30, 2001.

On January 16, 2001, Avista Utilities filed an application with the Idaho Public
Utilities Commission (IPUC) seeking proposed modifications to the existing Power
Cost Adjustment (PCA) mechanism. Due to extremely high short-term power prices,
Avista Utilities is requesting to recover power supply costs associated with
meeting increased retail and wholesale system load requirements, as well as to
recover replacement power costs associated with possible thermal plant forced
outages.

During 2000, Avista Utilities deferred $33.9 million in power costs in
Washington and $4.5 million in Idaho under the PCA mechanism currently in place.

Based on Avista Utilities' views of streamflows, historic market prices and
energy availability in the second quarter of 2000, Avista Utilities entered into
contracts and sold call options for fixed-price power for delivery through the
remainder of 2000, without making matching purchases at the same time, and also
made certain short-term sales at fixed prices which were offset by purchases at
prices indexed to the market price at the time of delivery. Certain of these
wholesale trading positions were outside normal operating guidelines. Avista
Utilities was required to buy additional power not only to meet its obligations
to its retail and long-term wholesale customers, as described above, but also to
cover its wholesale trading positions. An orderly process to complete the
necessary power purchases was impeded by the rapid escalation of market prices
and lack of liquidity in the power markets. These purchases were made at fixed
prices significantly higher than the related selling prices and at index, which
settled at unprecedented levels in June. The pricing of these purchases caused
the majority of Avista Utilities' loss for the second quarter.

Avista Utilities' short position was compounded by the May 5 sale of its
interest in Centralia, which reduced its system capacity by 201 megawatts. Based
on historical trends and Avista Utilities' views on power prices and
availability of power for May and June, Avista Utilities did not seek to replace
the Centralia generation for those two months with firm commitments. Avista
Utilities entered into a three-and-one-half-year contract to purchase 200
megawatts from TransAlta beginning in July 2000.

On September 29, 2000, the WUTC ordered a $3.4 million, or 1.4%, reduction in
electric rates and a $1.7 million, or 2.1%, increase in natural gas rates.
Avista Utilities had filed a request with the WUTC in October 1999 for a general
electric rate increase of $26.2 million, or 10.4%, subsequently revised to $18.2
million, and a general natural gas rate increase of $4.9 million, or 6.5%. The
WUTC also ordered that Avista Utilities' annual rate of return on investment for
both electricity and natural gas be reduced from 10.7% to 9.03%. Avista
Utilities had requested a 9.9% rate of return. Avista Utilities filed a Petition
for Reconsideration before the WUTC requesting that the commission reconsider
certain portions of its order. On November 8, 2000, the Commission slightly
modified the original order by reducing the electric reduction from $3.4 million
to $2.9 million and increasing the natural gas increase from $1.7 million to
$1.8 million.

Retail electric revenues increased $10.6 million in 2000 over 1999 due primarily
to increased prices, as well as greater sales volumes due to customer growth and
increased usage due to weather. Wholesale electric revenues increased $342.3
million, or 66%, while sales volumes decreased 20% in 2000 compared to 1999,
reflecting average sales prices 107% higher in 2000. Wholesale sales volumes
decreased due to management's decision in mid-year to reduce power imbalance
volume limits (the difference between projected load obligations and projected
resource availability), based on the emergent market price volatility, and to
focus primarily on energy transactions necessary

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to efficiently manage power resources to meet retail customer loads and
wholesale obligations. The extent of future wholesale transactions will be
determined based on resource additions or changes and load obligations and
contract commitments. Wholesale transactions continue to be an integral tool in
efficiently managing and economically dispatching Avista Utilities' power
resource availability to meet supply obligations within the coordinated Pacific
Northwest power grid.

Natural gas revenues increased $37.4 million in 2000 over 1999. Retail natural
gas revenues increased $49.0 million, primarily due to increased natural gas
prices, but were offset by a $9.5 million decrease in non-retail sales.
Non-retail natural gas sales are sales of natural gas commodity and related
services outside of the Avista Utilities distribution system to other utilities
and large industrial customers. Revenues from these sales are offset by like
increases in purchased gas expense, and margins from these transactions are
credited back to retail customers through rate changes approved by state
regulators for the cost of natural gas. Non-retail sales have decreased since
mid-1999 primarily due to the agency agreement between Avista Utilities and
Avista Energy mentioned above. Avista Energy will make the majority of these
sales in the future, if it is optimal to managing the natural gas portfolio. The
utility commissions of Washington, Idaho and Oregon have approved Benchmark
Incentive Mechanisms that allow Avista Utilities and its customers to share some
of the benefits of Avista Energy's resource optimization activities.

Purchased power volumes were 15% lower in 2000 primarily due to decreased
wholesale sales, but purchased power prices averaged 132% higher, resulting in a
$529.0 million, or 97%, increase in purchased power expense in 2000 over 1999.
The $33.9 million deferral of power costs pursuant to the WUTC accounting order
and the $4.5 million deferred under the Idaho PCA partially offset purchased
power expense recognized in 2000. Streamflows in 2000 were 86% of normal
compared to 112% in 1999. Fuel for power generation expense increased $22.7
million due to increased generation at the thermal plants as a result of
increased demand for power and increases in natural gas commodity prices.
Purchased natural gas costs increased $39.7 million in 2000, primarily due to
increased prices for the commodity, increased volumes of sales due to customer
growth and increased usage due to weather.

Operations and maintenance expenses increased $5.6 million, or 10%, due to a
variety of items, including increased distribution expenses, higher fees
associated with the increased amount of customer accounts receivables sold,
increased accruals for uncollectible accounts and other expenses related to
customer accounting services.

1999 COMPARED TO 1998

Avista Utilities' pre-tax income from operations decreased $0.6 million in 1999
from 1998. Operating revenues and expenses increased $66.4 million and $67.0
million, respectively, during 1999.

Retail electric revenues increased $9.0 million due to increased kWh sales of 3%
due to customer growth of 1.5% and slightly cooler weather in Avista Utilities'
service area in 1999 than in 1998. Wholesale electric revenues increased $65.2
million, primarily due to prices 11% greater and sales volumes 3% higher in 1999
over 1998. Natural gas revenues decreased $5.7 million primarily as a result of
decreased non-retail sales, partially offset by increased retail sales due to
customer growth and increased customer usage as a result of slightly cooler
weather in Avista Utilities' service area in 1999.

Purchased power volumes increased 2% and prices were 13% higher than the
previous year, which resulted in a $72.9 million, or 15%, increase in purchased
power expense in 1999 over 1998. This increase accounted for the majority of the
increase in Avista Utilities' operating expenses. Operations and maintenance
expenses decreased $4.6 million in 1999 from 1998 as a result of fewer storms,
resulting in less storm damage, and realizing the benefit of preventive
maintenance programs such as cable replacement, pole test and treat, and tree
trimming. Administrative and general expenses decreased $3.3 million due to
increased expenditures during 1998 associated with the change in executive
officers and the corporate name change. Avista Utilities also recorded charges
of approximately $5 million related to impairment of assets, which primarily
included items such as deferred charges now deemed unrecoverable through rates
and a defective inventory software system.

ENERGY TRADING AND MARKETING

Energy Trading and Marketing includes the results of Avista Energy, Avista
Power, and Avista-STEAG. Avista Power and Avista-STEAG operations had minimal
impact on earnings in 2000, 1999 or 1998. Avista Energy maintains an energy
trading portfolio that it marks to fair market value on a daily basis
(mark-to-market accounting), and which may cause earnings variability in the
future. Market prices are utilized in determining the value of the electric,
natural gas and related derivative commodity instruments. For longer-term
positions, in addition to market prices, a model based on forward price curves
is also utilized. See Liquidity and Capital Resources: Risk Management and Note
4 of Notes to Financial Statements for additional information about market risk
and credit risk.

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2000 COMPARED TO 1999

Energy Trading and Marketing's income available for common stock for 2000 was
$161.8 million compared to a loss of $60.7 million in 1999. Avista Energy's
operations in 2000 were positively affected by a well-positioned portfolio in
the volatile Pacific Northwest and western electric markets. Avista Energy's
operations were negatively impacted by losses from the liquidation of its
Eastern electric book and associated operating costs to close its Eastern
operations in Houston and Boston.

In November 1999, Avista Energy began redirecting its focus away from national
energy trading toward a more regionally-based energy trading and marketing
effort in the West. Its more narrowly focused operations in the West are backed
by contracts for energy commodities and by the output of specific facilities
available under contracts. The change in strategy followed significant changes
in the overall energy trading and marketing industry that created low margins
while requiring higher levels of investment, credit commitments and
value-at-risk limits. By late 1999, mergers and consolidations within the
industry reduced the number of firms and increased the remaining firms' typical
size, leaving a marketplace where liquidity and volatility were not favorable.
Avista Energy shut down its operations in Houston and Boston during the first
and second quarters of 2000 and reduced its workforce by approximately 80
positions. The Eastern electric book was sold at a $1.0 million after-tax loss
in early 2000. The remaining Eastern natural gas contracts, primarily for
transportation and storage, are being managed out of the Spokane office until
the last of the contracts expire in 2002.

Energy Trading and Marketing's revenues and operating expenses decreased $164.1
million and $512.1 million, respectively, in 2000 from 1999. The decrease in
revenues was primarily due to lower sales volumes, partially offset by increased
prices. The decreased expenses primarily resulted from decreased volumes of
transactions, partially offset by increased resource costs due to increased
commodity prices, and the closure of Avista Energy's Eastern operations and
refocusing the business to the West.

The volume of power and natural gas sales decreased significantly as Avista
Energy's focus was redirected to the WSCC. Electric sales volumes decreased 22%,
while natural gas sales decreased 60%. The exception to this was the
comparatively minor coal sales, which increased 115% in volume in 2000 over
1999. However, after the Houston and Boston offices were closed, no more coal
sales were made and the remaining contracts expired by the end of 2000, so there
will be no more coal sales or revenues to the future.

Energy Trading and Marketing's balance sheet increased $8.68 billion from
December 1999 to December 2000. Avista Energy's energy commodity assets and
liabilities increased primarily as a result of significant price increases for
both natural gas and power during this period. Trade receivables and payables
increased due to higher market prices on current positions.

1999 COMPARED TO 1998

Energy Trading and Marketing income available for common stock for 1999 was an
after-tax loss of $60.7 million compared to earnings of $14.1 million in 1998.
The primary reason for the decrease was a $27.3 million after-tax charge
recorded by Avista Energy related to the downsizing and restructuring of the
business, and $32.1 million of after-tax operational losses due to warmer than
normal weather across the nation, soft national energy markets and a lack of
volatility within those markets. The restructuring charge consisted of a $21.4
million after-tax charge for the write-off of goodwill from the purchase of
Vitol in February 1999 and a $5.9 million after-tax reserve for severance
payments and other related expenses. Avista Energy recognized losses (1) on
positions taken in anticipation of certain weather patterns in particular areas
of the country, which lost value when the expected patterns did not occur, and
(2) on options, also taken in anticipation of certain weather patterns in
particular areas of the country, which expired unexercised when the expected
patterns did not occur.

Since its inception in 1997, Avista Energy developed and expanded its business
and added experienced traders and staff. This growth continued in 1999 with
Avista Energy's purchase of Vitol in the first quarter. Vitol, located in
Boston, Massachusetts, was one of the top 20 energy marketing companies in the
United States. Late in the second quarter of 1999, Avista Energy added a
significant number of energy professionals in its Spokane and Houston offices.
The integration of Vitol operations into Avista Energy began during the second
quarter with the consolidation of back-office support, improvements in
accounting and trading processes and personnel, and continued enhancements in
risk management systems across Avista Energy.

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Energy Trading and Marketing's revenues and operating expenses increased $4.29
billion and $4.36 billion, respectively, in 1999 over 1998. The increase in
revenues and expenses was primarily the result of Avista Energy continuing to
grow its business. Energy Trading and Marketing's assets increased $639.9
million from December 1998 to December 1999. Avista Energy's energy commodity
assets and liabilities increased as a result of additional trading volumes,
which were partially offset by market price declines. Trade receivables and
payables increased due to additional volumes of sales and purchases.

INFORMATION AND TECHNOLOGY

The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Corp. has committed to
invest in the continued growth of these information and technology businesses as
part of its overall strategic focus on generating shareholder value.

2000 COMPARED TO 1999

Information and Technology's loss attributable to common stock for the year was
$28.4 million compared to a loss of $8.6 million in 1999. Operating revenues and
expenses for this line of business increased $6.8 million and $33.9 million,
respectively, over 1999, primarily due to growth in each of the individual
businesses.

1999 COMPARED TO 1998

Information and Technology's income available for common stock for 1999 was a
loss of $10.2 million, compared to a loss of $3.4 million in 1998. Increases in
revenues and various expense categories for this line of business were primarily
due to growth in each of the individual businesses.

AVISTA VENTURES

The Avista Ventures line of business includes the results of Avista Ventures,
Pentzer, Avista Development and Avista Services.

2000 COMPARED TO 1999

The loss attributable to common stock from this line of business was $2.9
million for 2000, compared to earnings of $35.8 million in 1999. The 2000 loss
includes a $1.2 million after-tax charge recorded by Pentzer in the first
quarter for expenses related to employee terminations resulting from a
redirection of Pentzer's business focus. The 1999 earnings included
transactional gains totaling $35.9 million, net of taxes, recorded by Pentzer as
a result of the sale of its Creative Solutions Group and Store Fixtures Group of
portfolio companies, partially offset by a loss on the sale of equipment.

Operating revenues and expenses from this line of business decreased $89.4
million and $79.9 million, respectively, during 2000, primarily as a result of
the sales of portfolio companies by Pentzer. The Creative Solutions Group of
companies was sold at the end of the first quarter of 1999 and the Store
Fixtures Group of companies was sold during the third quarter of 1999. Revenues
and expenses from these companies were included only in the 1999 amounts.

1999 COMPARED TO 1998

Income available for common stock for 1999 from the Avista Ventures line of
business totaled $35.8 million, which was a $24.7 million increase over 1998.
The increased earnings resulted primarily from transactional gains recorded by
Pentzer in 1999 totaling $35.9 million, net of taxes, from the sales of two
groups of portfolio companies. Transactional gains during 1998 totaled $4.3
million, net of taxes, as a result of the sale of a portfolio company.

Non-transactional earnings totaled $1.2 million in 1999, a decrease of $6.2
million from 1998, primarily due to the loss of income resulting from the sales
of portfolio companies. Operating revenues and expenses decreased $109.2 million
and $96.7 million, respectively, primarily as a result of the sales of portfolio
companies by Pentzer.

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LIQUIDITY AND CAPITAL RESOURCES

OVERALL OPERATIONS

Operating Activities Operating activities provided cash of $76.2 million in 2000
compared to $111.2 million in 1999. The primary reasons for the decrease in cash
were the second quarter losses at Avista Utilities, not included in retail
rates, caused by higher power costs and the funds expended for power and natural
gas, but deferred for later recovery from customers. Increased commodity prices
that affected both Avista Utilities and Avista Energy were primarily responsible
for the large changes in various working capital components, such as receivables
and payables.

Investing Activities Investing activities used cash of $96.9 million in 2000
compared to $27.2 million in 1999. In 2000, Avista Utilities sold the Centralia
Power Plant, resulting in proceeds of approximately $89.2 million. In 1999,
Pentzer sold the Creative Solutions and Store Fixtures groups of companies and
Avista Energy acquired Vitol. Utility operations' capital expenditures,
excluding Allowance for Funds Used During Construction (AFUDC) and Allowance for
Funds Used to Conserve Energy (AFUCE, a carrying charge similar to AFUDC for
conservation-related capital expenditures), were $270 million for the 1998-2000
period.

Financing Activities Financing activities provided net cash of $175.0 million in
2000 compared to using cash of $116.8 million in 1999. In 2000, short-term notes
payable increased $42.1 million and $224.0 million of long-term debt was issued,
while $54.6 million of long-term debt matured or was redeemed. In addition, the
Company repurchased $10.0 million of Preferred Trust Securities. In 1999,
short-term notes payable increased $110.5 million and $116.5 million of proceeds
were received from the issuance of long-term debt, including $25.0 million of
Medium-Term Notes (MTNs). These proceeds, plus cash provided from operating
activities, were used to retire $211.5 million of long-term debt and repurchase
$82.0 million of common stock and $5.9 million of preferred stock. During the
1998-2000 period, $296 million of long-term debt and preferred stock matured,
was mandatorily redeemed or was optionally redeemed and refinanced at a lower
cost.

In August 1998, the Company announced a dividend restructuring plan that reduced
the Company's annual common stock dividend from $1.24 per share to $0.48 per
share, a 61% reduction, which was effective with the payment of the common stock
dividend paid on December 15, 1998. At the same time, an exchange offer was made
whereby shareholders were provided the opportunity to exchange their shares of
common stock for depositary shares, also known as RECONS (Return-Enhanced
Convertible Securities). Each RECONS represented a one-tenth ownership interest
in one share of mandatorily convertible Series L Preferred Stock. Each RECONS
paid an annual dividend of $1.24 for a period of about three years and after
three years would automatically convert back to common stock, unless the Company
exercised its option to convert the Series L Preferred Stock prior to the end of
the three-year period. Shareholders who chose not to participate in the exchange
offer retained their ownership in Avista Corp. common stock. The annual savings
resulting from the dividend restructuring were approximately $30 million for the
periods that the preferred stock was outstanding, increasing to about $42
million annually after the conversion of the preferred shares back to common
stock. The savings assisted in funding a portion of the Company's capital
expenditures, maturing long-term debt and preferred stock sinking fund
requirements. See Note 15 of Notes to Financial Statements for additional
information about the convertible preferred stock.

On February 16, 2000, the Company exercised its option to convert all the
remaining outstanding shares of Series L Preferred Stock back into common stock.
The RECONS were also converted into common stock on the same conversion date,
and each of the RECONS was converted into the following: 0.7205 shares of common
stock, representing the optional conversion price; plus 0.0361 shares of common
stock, representing the optional conversion premium; plus the right to receive
$0.21 in cash, representing an amount equivalent to accumulated and unpaid
dividends up until, but excluding, the conversion date. Cash payments were made
in lieu of fractional shares.

In March 2000, the Company began issuing new shares of common stock to the
Employee Investment Plan rather than the Plan purchasing shares of common stock
on the open market. In the fourth quarter of 2000, the Company also began
issuing new shares of common stock for the Dividend Reinvestment and Stock
Purchase Plan. Through December 31, 2000, a total of 125,636 new shares of
common stock were issued to both plans.

In August and December of 2000, the Company issued a total of $224.0 million of
Unsecured MTNs, Series D at rates of 8.000% and 8.625% due in 2001 and 2003. A
total of $44.9 million of Secured MTNs matured during 2000, with rates between
6.13% and 8.20%. As of December 31, 2000, the Company had a total of $317.0
million of Unsecured MTNs authorized to be issued.

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In May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the following two years. The
repurchased shares will return to the status of authorized but unissued shares.
During 1999, the Company repurchased approximately 4.8 million common shares and
322,500 shares of RECONS (which was equivalent to 32,250 shares of Convertible
Preferred Stock, Series L). The combined repurchases of these two securities
represent 9% of outstanding common stock and common stock equivalents. There was
no activity under this plan during 2000.

The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.

The Company's cash flows have been affected because of the higher power and
natural gas costs, as well as cash collateral required for counterparties and
trading at Avista Energy. The higher power and natural gas prices are expected
to continue to affect cash flows during 2001. The purchased power and natural
gas costs incurred to serve the utility's retail customers are generally
recovered or expected to be recovered in retail rates, however, there is a lag
between the time the costs are incurred by the Company and the time they are
collected from customers. As more fully described in Note 1 of Notes to the
Financial Statements -- "Power Cost Deferrals and Power and Natural Gas
Adjustment Provisions", costs in excess of those included in rates are deferred
as an asset on the balance sheet. Deferral balances at the end of 2000 totaled
$78.8 million. Costs during 2001 are expected to continue to exceed the levels
included in rates and, as a result, deferral balances are expected to increase
during 2001. Because of the continuing high level of power and natural gas
prices, a significant change in company resource availability (such as hydro
generation) or customer demand could have a significant positive or negative
impact on expected deferrals and cash flows. On an interim basis, the Company
uses its revolving line of credit to fund these costs to the extent that they
exceed the cash flows available from operations. The Company expects to issue
longer-term debt during 2001 to pay down balances outstanding under the
revolving line of credit. This will provide additional liquidity needed to fund
the deferral balances. The Company intends to file applications with regulatory
commissions during 2001 to address timing of recovery of the deferred costs. If
the commissions approve the Company's requests, the deferral balances are
expected to begin being recovered starting in 2001 or 2002. The Company's
existing lines of credit are expected to be adequate to meet the current needs.

Under normal water conditions and loads, Avista Utilities' own generation plants
and long-term contracts would be able to provide approximately 90% 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 requirements in the
forward markets for 2001. Current forecasts show streamflow conditions for
hydroelectric generation for 2001, estimated at 60% of normal, to be among the
worst five years on record. In response to the reduced hydroelectric generation,
Avista Utilities has made additional fixed price purchases of energy, and
expects to receive the necessary local, state and federal approvals to increase
the energy output of its natural gas-fired thermal generation to cover its firm
retail and wholesale load requirements for 2001, with minimal additional
purchases expected from the high cost short-term wholesale market. However, if
hydroelectric conditions further deteriorate, its thermal plants do not operate
as planned, or weather conditions cause retail loads to increase, Avista
Utilities would incur increased costs from increased purchases in the short-term
wholesale energy market.

Higher volatility in 2000 in power and natural gas prices and significant
increases in average price levels have resulted in the need for energy trading
counterparties to provide one another adequate assurances of their future
performance on energy transaction obligations. The adequate assurance demands
are satisfied through various means, including letters of credit, cash deposits
or prepayments, parent entity guaranties, contract terms and portfolio
management.

As mentioned earlier, the Company is currently in the process of obtaining
separate financing for construction of the Coyote Springs 2 project. The Company
is seeking to finance a majority of the costs during construction with a term
loan that would match the construction period. The project would serve as
collateral for the term loan. If the Company does not complete a separate
financing for this project, there would be a need to issue other debt or equity
securities during 2001 and 2002 to provide the funding.

The California Energy Crisis discussed earlier has had an impact on banks'
willingness to extend credit to energy and utility companies. Banks are
particularly concerned with the credit of companies in California and those in
the West with exposure to California or the potential to be impacted by what
ultimately happens in California. This may impact

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the Company's ability to obtain financing from traditional sources. However, the
Company currently expects that it will be able to obtain financing required to
meet its capital and operating needs on reasonable terms. Capital expenditures
are financed on an interim basis with short-term borrowings or notes payable
(due within one year). The Company has $230 million in two committed lines of
credit, which expire on June 26, 2001. As part of the renewal of the agreements
in 2000, the Company pledged its shares of common stock in Avista Capital as
security for these agreements. The Company also had a $60 million three-month
line of credit that expired on October 25, 2000 and was not replaced. In
addition, the Company has a $50 million regional commercial paper program that
is backed by the committed lines of credit. During 2000, the Company could also
borrow up to $100 million through other borrowing arrangements with banks, but
none of these agreements were in place at year-end. As of December 31, 2000,
$152.0 million was outstanding under the committed line of credit and $11.2
million was outstanding under the commercial paper program.

From time to time the Company enters into sale/leaseback arrangements for
various long-term assets which provide additional sources of funds. See Note 13
of Notes to Financial Statements for additional information about leases.

The Company is restricted under various agreements as to the additional
securities it can issue. As of December 31, 2000, under its Restated Articles of
Incorporation, approximately $844.0 million of additional preferred stock could
be issued at an assumed dividend rate of 6.95%.

During 1998, the Company entered into an agreement that increased the amount of
customer accounts receivable the Company could sell from $40 million to $80
million to provide additional funds for capital expenditures, maturing long-term
debt and preferred stock sinking fund requirements. At December 31, 2000, $80.0
million in receivables had been sold pursuant to the agreement.

As part of its ongoing cash management practices and operations, Avista Corp.
may, at any time, have short-term notes receivable and payable with Avista
Capital. In turn, Avista Capital may also have short-term notes receivable and
payable with its subsidiaries. As of December 31, 2000, Avista Corp. had
short-term notes receivable of $113.6 million from Avista Capital, which
includes $56.7 million for the Coyote Springs 2 project, compared to short-term
notes payable of $18.3 million at December 31, 1999.

Avista Capital provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Capital
totaled $361.2 million at December 31, 2000.

AVISTA UTILITIES OPERATIONS

During the 2001-2003 period, utility capital expenditures are expected to be
$478 million, and $348 million will be required for long-term debt maturities
and preferred stock sinking fund requirements. During this three-year period,
internally generated funds and external financings will be used to fund the
Company's capital expenditure program, maturing long-term debt and preferred
stock sinking fund requirements. Sources of funds would include, but are not
necessarily limited to, sales of certain assets, additional long-term debt,
leasing or issuance of other equity securities. These estimates of capital
expenditures are subject to continuing review and adjustment. Actual capital
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.

See Notes 3, 11, 12, 13, 14, 15, 16, 17 and 18 of Notes to Financial Statements
for additional details related to financing activities.

ENERGY TRADING AND MARKETING OPERATIONS

Avista Capital's total investment in this line of business was $291.7 million at
December 31, 2000. Avista Energy funds its ongoing operations with a combination
of internally generated cash and a bank line of credit.

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banks for cash advances is $30 million, with availability of up to $110 million
(less the amount of outstanding cash advances, if any) for the issuance of
letters of credit. At December 31, 2000 and 1999, there were no cash advances
(demand notes payable) outstanding. Letters of credit outstanding under the
facility totaled approximately $71.5 million and $75.8 million at December 31,
2000 and 1999, respectively.

Capital expenditures for the Energy Trading and Marketing companies were $71.1
million for the 1998-2000 period, primarily due to Avista Power's investment in
the Coyote Springs 2 projects. Avista Power's equity investment of $16 million
in Rathdrum is expected to occur in 2001.

At December 31, 2000, the Energy Trading and Marketing companies had $179.6
million in cash and cash equivalents and $0.5 million in long-term debt
outstanding.

As of December 31, 2000, Avista Capital had loaned $21.6 million to Avista
Energy to support its short-term cash and collateral needs. These loans are
subordinate to any obligations to the banks under the credit agreements.

Rising prices in power and natural gas beginning in the second quarter of 2000
and continuing beyond the end of 2000 triggered additional collateral
requirements with counterparties. Avista Energy is managing the collateral calls
by providing letters of credit, providing guarantees from Avista Capital and
offsetting transactions with counterparties. In addition to the letters of
credit and other items included above, cash deposited with counterparties
totaled $40.5 million as of December 31, 2000, and is included in the
Consolidated Balance Sheets in prepayments and other. The posted collateral will
be returned to Avista Energy depending on the effect of changing market values
of forward contracts or as forward positions settle. Avista Energy held cash
deposits from other parties in the amount of $96.6 million as of December 31,
2000, and such amounts are subject to refund if conditions warrant because of
continuing portfolio value fluctuations with those parties.

Avista Power and Cogentrix Energy, Inc. entered into an agreement to jointly
build a 270 megawatt natural gas combustion turbine facility in Rathdrum, Idaho,
with 100% of its output contracted to Avista Energy for 25 years. Non-recourse
project financing was completed in March 2000 and the facility is currently
under construction, with generation expected to start in late 2001. The total
cost of the project is estimated at $160 million; Avista Power's equity in the
project is approximately $16 million.

INFORMATION AND TECHNOLOGY OPERATIONS

Capital expenditures for the Information and Technology companies were $55.1
million for the 1998-2000 period. The 2001-2003 capital expenditures are
expected to be $61.0 million, and $0.1 million in debt maturities will also
occur. These companies expect to seek outside funding through partnerships or
other arrangements to support these capital requirements.

Two venture capital firms made small minority interest investments in Avista
Advantage during the fourth quarter of 2000.

At December 31, 2000, the Information and Technology companies had $1.3 million
in long-term debt outstanding.

In early 1999, Avista Labs announced the receipt of a $2 million technology
development award from the Department of Commerce's National Institute of
Standards and Technology Advanced Technology Program. Avista Labs is working on
technology that will increase the energy density of its fuel cell design and
develop multiple fuel processing approaches using propane, methane and methanol
as base fuels to integrate into its fuel cell subsystem.

AVISTA VENTURES OPERATIONS

Capital expenditures for these companies were $18.6 million for the 1998-2000
period. The 2001-2003 capital expenditures are expected to be $27.3 million, and
$0.5 million in debt maturities will also occur. During the next three years,
internally generated cash and other debt obligations are expected to provide the
majority of the funds for these capital expenditure requirements. The decrease
in these projected capital expenditures is primarily related to the change in
Pentzer's focus beginning in 2000.

At December 31, 2000, this line of business had $1.2 million in cash and cash
equivalents and temporary investments, with $0.8 million in long-term debt
outstanding.

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TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
Actual Projected
------------------------ ------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----

Avista Utilities operations:
Capital expenditures(1) $ 92 $ 86 $100 $256 $131 $ 91
Debt and preferred securities
maturities and redemptions(2) 24 214 55 89 52 207
---- ---- ---- ---- ---- ----

Total Avista Utilities 116 300 155 345 183 298
---- ---- ---- ---- ---- ----
Avista Capital operations:
Capital expenditures(3) 14 29 101(4) 38 28 22
Investments 53 51 4 29 -- 2
Debt maturities 18 3 10 -- 1 --
---- ---- ---- ---- ---- ----
Total Avista Capital 85 83 115 67 29 24
---- ---- ---- ---- ---- ----
Total Company $201 $383 $270 $412 $212 $322
==== ==== ==== ==== ==== ====

Funding of Avista Capital(5) 42 40 114 75 22 2

(1) Capital expenditures exclude AFUDC and AFUCE.
(2) Excludes short-term borrowings and notes payable (due within one year).
(3) Represents Avista Capital's portion of projected joint projects. Some
projected capital expenditures may depend on the availability of additional
funding from other outside sources.
(4) The 2000 capital expenditures by Avista Capital includes funding of Coyote
Springs 2, which will be transferred to Avista Utilities.
(5) Funding of Avista Capital by Avista Corp. includes both equity investments
and notes payable.

The Company's total common equity increased $330.7 million to $724.2 million at
the end of 2000. The increase was primarily due to the conversion of convertible
preferred stock into common stock and the earnings recorded by Avista Energy.
The Company's consolidated capital structure at December 31, 2000, was 44% debt,
9% preferred securities (including the Preferred Trust Securities) and 47%
common equity as compared to 47% debt, 27% preferred securities (including the
Preferred Trust Securities) and 26% common equity at year-end 1999. Had the
convertible preferred stock been converted into common stock, the Company's
consolidated capital structure at December 31, 1999, would have been 47% debt,
10% preferred securities (including the Preferred Trust Securities) and 43%
common equity.

ADDITIONAL FINANCIAL DATA

At December 31, 2000, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $679.8 million. Of such amount, $473.8 million
represents long-term unsecured and unsubordinated indebtedness of the Company,
and $203.5 million represents secured indebtedness of the Company. The balance
of $2.5 million represents indebtedness of subsidiaries. Consolidated long-term
debt does not include the Company's subordinated indebtedness held by the
issuers of Company-obligated preferred trust securities. An additional $163.2
million of the Company's short-term debt outstanding under or backed by the
committed lines of credit is secured.

FUTURE OUTLOOK

Business Strategy

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Avista Utilities seeks to maintain a strong, low-cost utility business focused
on delivering efficient, reliable and high quality service to its customers. The
utility business is expected to grow modestly, consistent with historical
trends. Expansion will primarily result from economic growth in its service
territory. Avista Energy scaled back operations to the WSCC during 2000, and
will continue to focus on reducing the size and the risk associated with its
energy trading and marketing activities. Avista Energy's marketing efforts are
expected to be driven by its base of knowledge and experience in the operation
of both electric energy and natural gas physical systems in the region, as well
as its relationship-focused approach to its customers. Avista Power will
continue to pursue opportunities to develop new generation to support the
growing power requirements in the Northwest. The Company also intends to focus
on its investments in the Information and Technology subsidiaries as part of its
overall plans for generating shareholder value, which could include finding
equity partners to assist in financing the continued growth of the businesses.

Competition

Avista Utilities competes to provide service to new retail electric customers
with various rural electric cooperatives and public utility districts in and
adjacent to its service territories. Alternate sources of power may compete for
sales to existing Avista Utilities customers, including new market entrants as a
result of deregulation. Competition for available electric resources has become
more critical to utilities as surplus power resources have been absorbed by load
growth. Avista Utilities' natural gas distribution operations compete with other
energy sources but natural gas continues to maintain a price advantage compared
to heating oil, propane and other fuels, provided that the natural gas
distribution system is proximate to prospective customers.

The Avista Capital subsidiaries, particularly the Information and Technology
companies, are subject to competition as they develop products and services and
enter new markets. Competition from other companies in these emerging industries
may mean challenges for a company to be the first to market a new product or
service to gain the advantage in market share. In order for these new businesses
to grow as planned, one significant challenge will be the availability of
funding and resources to meet the capital needs. Other challenges will be
rapidly advancing technologies, possibly making some of the current technology
quickly obsolete, and requiring continual research and development for product
advancement. In order for some of these subsidiaries to succeed, they will need
to reduce costs of these emerging technologies to make them affordable to future
customers.

Business Risk

Challenges facing Avista Utilities' electric operations include, among other
things, changes in the availability of and volatility in the prices of power and
fuel, generating unit availability, legislative and governmental regulations,
weather conditions, and the ability to recover increased costs of purchased
power. Avista Utilities believes it faces minimal risk for stranded utility
assets resulting from deregulation due to its low-cost generation portfolio and
because of the slower and more cautious approach to regulatory changes that have
been under consideration in Washington and Idaho. In a deregulated environment,
however, evolving technologies that provide alternate energy supplies could
affect the market price of power, and certain generating assets could have
capital and operating costs above the adjusted market price.

In addition, the energy trading and marketing business exposes the Company to
the financial, liquidity, credit and commodity price risks associated with
wholesale sales and purchases.

Natural gas commodity prices increased dramatically during 2000. However, market
prices for natural gas continue to be competitive compared to alternative fuel
sources for residential, commercial and industrial customers. Proven reserves
and future natural gas development opportunities lead the Company to believe
that natural gas should sustain its market advantage. Significant growth has
occurred in the natural gas business in recent years due to increased demand for
natural gas in new construction. Challenges facing Avista Utilities' natural gas
operations include, among other things, volatility in the price of natural gas,
changes in the availability of natural gas, legislative and governmental
regulations, weather conditions, conservation and the timing for recovery of
increased commodity supply costs. Avista Utilities' natural gas business also
faces the potential for large natural gas customers to by-pass its natural gas
system. To reduce the potential for such by-pass, Avista Utilities prices its
natural gas services, including transportation contracts, competitively and has
varying degrees of flexibility to price its transportation and delivery rates by
means of individual contracts. Avista Utilities has long-term transportation
contracts with seven of

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its largest industrial customers, which reduces the risks of these customers
by-passing the system in the foreseeable future.

Commodity Price Risk. Both Avista Utilities and Avista Energy are subject to
commodity price risk. Historically, the price of power in wholesale markets has
been affected primarily by production costs and by other factors including
streamflows, the availability of hydro and thermal generation and transmission
capacity, weather and the resulting retail loads, and the price of coal, natural
gas and oil to thermal generating units. Any combination of these factors that
resulted in a shortage of energy generally caused the market price of power to
move upward. Now, however, market prices appear to be affected by other factors
as well. These factors include the gradual elimination of excess generating
capacity in the WSCC and the effects of the restructuring of the electric
utility business at the state and federal levels and the deregulation of
wholesale energy markets.

Price risk is, in general, the risk of fluctuation in the market price of the
commodity needed, held or traded. In the case of electricity, price movements
are correlated to adequacy of generating reserve margins, scheduled and
unscheduled outages of generating facilities, availability of streamflows for
hydroelectric production, the price of thermal generating plant fuel, and
disruptions or constraints to transmission facilities. Demand changes (caused by
variations in the weather and other factors) are also correlated to price
movements. Price risk also includes the risk of fluctuation in the market price
of associated derivative commodity instruments (such as options and forward
contracts). Price risk may also be influenced to the extent that the performance
or non-performance by market participants of their contractual obligations and
commitments affect the supply of, or demand for, the commodity. As discussed
earlier, market prices for power and natural gas in the Western U.S. and Western
Canada were significantly higher in 2000 than at any time in history, with
unprecedented levels of volatility. The extreme price volatility experienced in
2000 suggests that other factors, including unexplained influences, also affect
market prices.

Credit Risk. Credit risk relates to the risk of loss that Avista Utilities
and/or Avista Energy would incur as a result of non-performance by
counterparties of their contractual obligations to deliver energy and make
financial settlements. Credit risk includes not only the risk that a
counterparty may default due to circumstances relating directly to it, but also
the risk that a counterparty may default due to circumstances which relate to
other market participants which have a direct or indirect relationship with such
counterparty. Avista Utilities and Avista Energy seek to mitigate credit risk by
applying specific eligibility criteria to existing and prospective
counterparties and by actively monitoring current credit exposures. However,
despite mitigation efforts, defaults by counterparties occur from time to time.
Avista Energy has experienced payment receipt defaults from certain parties
impacted by the California energy crisis and ultimate collection is not known at
this time. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Significant Changes in Energy Markets:
California Energy Crisis and Note 4 of Notes to Financial Statements for more
information about credit reserves.

Credit risk also involves the exposure that counterparties perceive related to
performance by Avista Utilities and Avista Energy to perform deliveries and
settlement of energy resource transactions. These counterparties seek assurance
of performance in the form of letters of credit, prepayment or cash deposits,
and, in the case of Avista Energy, parent company performance guaranties. In
periods of price volatility, the level of exposure can change significantly,
with the result that sudden and significant demands may be made against the
Company's capital resource reserves (credit facilities and cash).

Other Operating Risks. In addition to commodity price risk, Avista Utilities'
commodity positions are also subject to operational and event risks including,
among others, increases in load demand, transmission or transport disruptions,
fuel quality specifications and forced outages at generating plants. Some of
these factors have been addressed in the recent changes to the Washington
deferred power accounting adjustment and the Idaho PCA.

Interest Rate Risk. The Company is subject to the risk of fluctuating interest
rates in the normal course of business. The fair value of the Company's cash and
short-term investment portfolio and the fair value of notes payable at December
31, 2000 approximated carrying value. Given the short-term nature of these
instruments, market risk, as measured by the change in fair value resulting from
a hypothetical change in interest rates, is immaterial.

The Company manages interest rate risk by taking advantage of market conditions
when timing the issuance of long-term financings and optional debt redemptions
and through the use of fixed rate long-term debt with varying maturities. A
portion of the Company's capitalization consists of floating rate Pollution
Control Bonds, of which the interest rate resets periodically, and
Company-Obligated Mandatorily Redeemable Preferred Trust Securities, of which
the interest portion of the $40 million Series B resets on a quarterly basis,
both reflecting current market

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conditions. As of December 31, 2000, a hypothetical 15% change in interest rates
would result in an immaterial change in the Company's cash flows related to the
increased interest expense associated with these floating rate securities.

Foreign Currency Risk. The Company has investments in several Canadian companies
through Avista Energy Canada, Ltd. and its acquisition of Coast Pacific
Management, Inc. (see Note 23 for additional information about this
acquisition). The Company's exposure to foreign currency risk and other foreign
operations risk was immaterial to the Company's consolidated results of
operations and financial position in 2000 and is not expected to change
materially in the near future.

Risk Management

Risk Policies and Oversight. Avista Utilities and Avista Energy use a variety of
techniques to manage risks. The Company has established risk management
oversight for these risks for each area of the Company's energy-related
business. The Company has established a Risk Management Committee composed of
senior management separate from the units that create such risk exposure and
overseen by the Audit and Finance Committee of the Company's Board of Directors,
to monitor compliance with the Company's risk management policies. Avista
Utilities and Avista Energy have adopted policies and procedures to manage the
risks, both quantitative and qualitative, inherent in their businesses. The
Company's Risk Management Committee reviews the status of risk exposures through
regular reports and monitors compliance with the Company's risk management
policies and procedures on a regular basis. Nonetheless, adverse changes in
commodity prices, generating capacity, customer loads, and other factors may
result in losses in earnings, cash flow and/or fair values.

Avista Utilities hired Williams Energy Marketing & Trading Company in July 2000
to advise on risk management, risk analysis and power resource optimization
issues for all system requirements. The work was completed and the contract
ended in the fourth quarter of 2000.

Quantitative Risk Measurements. Avista Utilities has established volume limits
for its imbalance between projected loads and resources. Normal operations
result in seasonal mismatches between power loads and available resources.
Avista Utilities uses the wholesale power markets to sell projected resource
surpluses and obtain resources when deficits are projected in the 24-month
forward planning horizon. Any imbalance is required to remain within limits, or
management action or decisions are triggered to address larger imbalance
situations. Volume limits for forward periods are based on monthly and quarterly
averages, which may vary materially from the actual load and resource variations
within any given month or operating day. Future projections of resources are
updated as forecasted streamflows and other factors differ from prior estimates.
Forward power markets may be illiquid, and market products may only be available
to approximate Avista Utilities' desired transaction size and shape. Therefore,
open imbalance positions exist at any given time. During 2000, as market prices
and volatility rose to unprecedented levels, the Risk Management Committee
decreased the size of Avista Utilities' forward power imbalance limits.

Avista Energy measures the risk in its power and natural gas portfolio daily
utilizing a Value-at-Risk (VAR) model and monitors its risk in comparison to
established thresholds. VAR measures the worst expected loss over a given time
interval under normal market conditions at a given confidence level. Avista
Energy also measures its open positions in terms of volumes at each delivery
location for each forward time period. The extent of open positions is included
in the risk management policy and is measured with stress tests and VAR
modeling. The Risk Management Committee adopted a revised Avista Energy risk
policy in early 2000 to reflect the change in focus from a national operation to
the Western energy markets. The revised risk policy also reduced targeted levels
of risk compared to the prior policy.

The VAR computations are based on an historical simulation, which utilizes price
movements over a specified period to simulate forward price curves in the energy
markets to estimate the unfavorable impact of price movement in the portfolio of
transactions scheduled to settle within the following eight calendar quarters.
The quantification of market risk using VAR provides a consistent measure of
risk across Avista Energy's continually changing portfolio. VAR represents an
estimate of reasonably possible net losses in earnings that would be recognized
on its portfolio assuming hypothetical movements in future market rates and is
not necessarily indicative of actual results that may occur.

Avista Energy's VAR computations utilize several key assumptions, including a
95% confidence level for the resultant price movement and holding periods of one
and three days. The calculation includes derivative commodity instruments held
for trading purposes and excludes the effects of written and embedded physical
options in the trading portfolio.

38
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AVISTA CORPORATION
- -------------------------------------------------------------------------------

At December 31, 2000, Avista Energy's estimated potential one-day unfavorable
impact on gross margin was $4.0 million, as measured by VAR, related to its
commodity trading and marketing business, compared to $1.1 million at December
31, 1999. The average daily VAR for 2000 was $1.6 million, compared to $3.7
million in 1999, primarily due to Avista Energy's restructuring. Changes in
markets inconsistent with historical trends or assumptions used could cause
actual results to exceed predicted limits. Market risks associated with
derivative commodity instruments held for purposes other than trading were not
material at December 31, 2000.

For forward transactions that would settle beyond the immediate eight calendar
quarters, Avista Energy applies other risk measurement techniques, including
price sensitivity stress tests, to assess the future market risk. Volatility in
longer-dated forward markets tends to be significantly less than near-term
markets.

Economic and Load Growth

Avista Utilities expects economic growth to continue in its eastern Washington
and northern Idaho service area. Avista Utilities, along with others in the
service area, is continuing its efforts to facilitate expansion of existing
businesses and attract new businesses to the Inland Northwest. Although
agriculture, mining and lumber were the primary industries for many years, today
health care, education, electronic and other manufacturing, tourism and the
service sectors are becoming increasingly important industries that operate in
Avista Utilities' service area. Avista Utilities also anticipates moderate
economic growth to continue in its Oregon service area.

Avista Utilities anticipates residential and commercial electric load growth to
average approximately 2.6% annually for the next five years, primarily due to
increases 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. A
Public Utility Regulatory Policies Act of 1978 (PURPA) contract with Avista
Utilities' largest customer expires in 2002. The customer is expected to
self-generate at that time, which will reduce the load to this customer by the
amount Avista Utilities has been purchasing and then reselling to them.

Avista Utilities anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.7%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 3.4% growth annually during that same
period. The anticipated natural gas load growth is primarily due to expected
conversions from electric space and water heating to natural gas, and increases
in both population and the number of businesses in its service territory.

The forward-looking projections set forth above regarding retail sales growth
are based, in part, upon purchased economic forecasts and publicly available
population and demographic studies. The expectations regarding retail sales
growth are also based upon various assumptions including, without limitation,
assumptions relating to weather and economic and competitive conditions,
internal analysis of company-specific data, such as energy consumption patterns
and internal business plans, and an assumption that Avista Utilities will incur
no material loss of retail customers due to self-generation or retail wheeling.
Changes in the underlying assumptions can cause actual experience to vary
significantly from forward-looking projections.

Environmental Issues

Since December 1991, a number of species of fish in the Northwest, including the
Snake River sockeye salmon and fall chinook salmon, the Kootenai River white
sturgeon, the upper Columbia River steelhead, the upper Columbia River spring
chinook salmon and the bull trout have been listed as threatened or endangered
under the Federal Endangered Species Act (ESA). Thus far, measures which have
been adopted and implemented to save the Snake River sockeye salmon and fall
chinook salmon have not directly impacted generation levels at any of Avista
Utilities' hydroelectric dams. Avista Utilities does, however, purchase power
from four projects on the Columbia River that are being directly impacted by
ongoing mitigation measures for salmon and steelhead. The reduction in
generation at these projects is relatively minor, resulting in minimal economic
impact on Avista Utilities at this time. It is currently not possible to
accurately predict the likely economic costs to the Company resulting from all
future actions.

The Company received a new FERC operating license for the Cabinet Gorge and
Noxon Rapids hydroelectric projects on February 23, 2000 that incorporates a
comprehensive settlement agreement reached with 27 signatories. The restoration
of native salmonid fish, in particular bull trout, is a principal focus of the
agreement. Bull trout are native to this area and were listed as "threatened" in
1998 under the ESA. A collaborative bull trout recovery program with the U.S.
Fish and Wildlife Service, Native American tribes and the states of Idaho and
Montana is underway on the lower Clark Fork River. The new FERC license
establishes a plan for bull trout restoration, including annual budget
estimates.

39
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AVISTA CORPORATION
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The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
for relicensing of Cabinet Gorge. To date, intensive biological studies in the
lower Clark Fork River and Lake Pend Oreille have documented minimal biological
effects of high dissolved gas levels on free ranging fish. Under the terms of
the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy in 2002.

See Note 22 of Notes to Financial Statements for additional information.

Lake Coeur d'Alene Decision

On July 28, 1998, the United States District Court for the District of Idaho
issued its finding that the Coeur d'Alene Tribe of Idaho owns portions of the
bed and banks of Lake Coeur d'Alene and the St. Joe River lying within the
current boundaries of the Coeur d'Alene Reservation. The disputed bed and banks
comprise approximately the southern one-third of Lake Coeur d'Alene. This
action had been brought by the United States on behalf of the Tribe against the
State of Idaho. While the Company is not a party to this action, which has been
appealed by the State of Idaho to the Ninth Circuit Court of Appeals, the
Company is continuing to evaluate the potential impact of this decision on the
operation of its hydroelectric facilities on the Spokane River, downstream of
Lake Coeur d'Alene. The State of Idaho filed a petition for writ of
certiorari with the United States Supreme Court, which petition was granted.
The Company expects that the matter will be heard and decided by July 2001.

Other

The Board of Directors considers the level of dividends on the Company's common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Company's results of operations and financial condition,
as well as general economic and competitive conditions. The Company's net income
available for dividends is derived from Avista Utilities' operations.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

The Company is including the following cautionary statement in this Form 10-K 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, the Company. 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 other
than statements of historical fact, including without limitation those that are
identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," and similar expressions. From time to time, the
Company 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 the Company, 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. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's 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 the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement.

Avista Utilities' Operations --

In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for Avista
Utilities' operations to differ materially from those discussed in
forward-looking

40
45
AVISTA CORPORATION
- -------------------------------------------------------------------------------

statements include prevailing legislative developments, governmental policies
and regulatory actions with respect to allowed rates of return, financings, or
industry and rate structures, weather conditions, wholesale and retail
competition (including but not limited to electric retail wheeling and
transmission cost), availability of economic supplies of natural gas, present or
prospective natural gas distribution or transmission competition (including but
not limited to prices of alternative fuels and system deliverability costs),
recovery of purchased power and purchased gas costs, present or prospective
generation, operations and construction of plant facilities, and acquisition and
disposal of assets or facilities.

Energy Trading and Marketing Operations --

In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the Energy
Trading and Marketing operations to differ materially from those discussed in
forward-looking statements include further industry restructuring evolving from
federal and/or state legislation, regulatory actions by state utility
commissions, demand for 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, Technology, and Avista Ventures' Operations --

Certain additional important factors which could cause actual results or
outcomes for the remaining subsidiaries' operations to differ materially from
those discussed in forward-looking statements include competition from other
companies and other technologies, obsolescence of technologies, the ability or
inability to reduce costs of the technologies down to economic levels, the
ability to obtain new customers and retain old ones, 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 the Company 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 negotiation or disputes, changes in credit ratings or
capital market conditions, inflation rates, inability of the various
counterparties to meet their obligations with respect to the Company's financial
instruments, changes in accounting principles and/or the application of such
principles to the Company, changes in technology and legal proceedings.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook: Business Risk and Risk Management."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Independent Auditor's Report and Financial Statements begin on the next
page.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

41
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AVISTA CORPORATION
- -------------------------------------------------------------------------------

INDEPENDENT AUDITORS' REPORT

Avista Corporation
Spokane, Washington

We have audited the accompanying consolidated balance sheets and statements of
capitalization of Avista Corporation and subsidiaries (the Company) as of
December 31, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows, which include the schedule of information
by business segments, for each of the three years in the period ended December
31, 2000. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Seattle, Washington
February 2, 2001
(February 26, 2001, as to Note 22)

42
47

CONSOLIDATED STATEMENTS OF INCOME
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars

2000 1999 1998
------------ ----------- -----------

OPERATING REVENUES .......................................................... $ 7,911,490 $ 7,904,984 $ 3,683,984
------------ ----------- -----------

OPERATING EXPENSES:
Resource costs ........................................................... 7,320,261 7,417,940 3,021,046
Operations and maintenance ............................................... 108,092 155,176 229,620
Administrative and general ............................................... 139,355 127,958 129,771
Depreciation and amortization ............................................ 75,941 76,474 70,547
Taxes other than income taxes ............................................ 54,608 53,157 60,180
Asset impairment and restructuring charges ............................... 9,805 42,922 --
------------ ----------- -----------
Total operating expenses ............................................... 7,708,062 7,873,627 3,511,164
------------ ----------- -----------

INCOME FROM OPERATIONS ...................................................... 203,428 31,357 172,820
------------ ----------- -----------

OTHER INCOME (EXPENSE):
Interest expense ......................................................... (68,723) (65,076) (69,077)
Net gain on subsidiary transactions ...................................... 770 57,531 7,937
Other income (deductions)-net ............................................ 29,665 18,959 9,794
------------ ----------- -----------
Total other income (expense)-net ....................................... (38,288) 11,414 (51,346)
------------ ----------- -----------

INCOME BEFORE INCOME TAXES .................................................. 165,140 42,771 121,474

INCOME TAXES ................................................................ 73,461 16,740 43,335
------------ ----------- -----------

NET INCOME .................................................................. 91,679 26,031 78,139

DEDUCT-Preferred stock dividend requirements ................................ 23,735 21,392 8,399
------------ ----------- -----------

INCOME AVAILABLE FOR COMMON STOCK ........................................... $ 67,944 $ 4,639 $ 69,740
============ =========== ===========

Average common shares outstanding, basic (thousands) ....................... 45,690 38,213 54,604

EARNINGS PER SHARE OF COMMON STOCK, BASIC ................................... $ 1.49 $ 0.12 $ 1.28

EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 19) ...................... $ 1.47 $ 0.12 $ 1.28

Dividends paid per common share ............................................. $ 0.48 $ 0.48 $ 1.05

43
48

CONSOLIDATED BALANCE SHEETS
Avista Corporation
- -------------------------------------------------------------------------------
At December 31
Thousands of Dollars

2000 1999
----------- -----------

ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 194,365 $ 40,041
Temporary cash investments ............................................... 1,058 9,277
Accounts and notes receivable-net ........................................ 861,308 530,774
Energy commodity assets .................................................. 7,956,229 585,913
Materials and supplies, fuel stock and natural gas stored ................ 24,496 28,352
Prepayments and other .................................................... 54,244 21,499
------------ -----------
Total current assets ................................................... 9,091,700 1,215,856
------------ -----------

UTILITY PROPERTY:
Utility plant in service-net ............................................. 2,205,230 2,184,698
Construction work in progress ............................................ 33,535 30,912
------------ -----------
Total .................................................................. 2,238,765 2,215,610
Less: Accumulated depreciation and amortization ......................... 720,453 714,773
------------ -----------
Net utility plant ...................................................... 1,518,312 1,500,837
------------ -----------

OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ......................................... 46,981 54,123
Non-utility properties and investments-net ............................... 219,450 135,426
Energy commodity assets .................................................. 1,367,107 491,799
Other-net ................................................................ 21,885 31,051
----------- -----------
Total other property and investments ................................... 1,655,423 712,399
------------ -----------

DEFERRED CHARGES:
Regulatory assets for deferred income tax ................................ 156,692 166,456
Conservation programs .................................................... 18,528 44,444
Unamortized debt expense ................................................. 27,874 31,122
Other-net ................................................................ 95,395 42,380
------------ -----------
Total deferred charges ................................................. 298,489 284,402
------------ -----------

TOTAL ................................................................ $ 12,563,924 $ 3,713,494
============ ===========

LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 892,545 $ 522,478
Energy commodity liabilities ............................................. 7,834,007 594,065
Current portion of long-term debt ........................................ 89,000 --
Short-term borrowings .................................................... 163,160 --
Taxes and interest accrued ............................................... 1,971 35,123
Other .................................................................... 144,524 35,313
------------ -----------
Total current liabilities .............................................. 9,125,207 1,186,979
------------ -----------

NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities .................................................. 38,975 47,366
Deferred revenue ......................................................... 46,498 132,975
Energy commodity liabilities ............................................. 1,272,374 441,372
Deferred income taxes .................................................... 446,310 377,049
Other deferred credits ................................................... 95,530 11,041
------------ -----------
Total non-current liabilities and deferred credits ..................... 1,899,687 1,009,803
------------ -----------

CAPITALIZATION (See Consolidated Statements of Capitalization) .............. 1,539,030 1,516,712
------------ -----------

COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 22)

TOTAL ................................................................ $ 12,563,924 $ 3,713,494
============ ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

44
49

CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- -------------------------------------------------------------------------------
At December 31
Thousands of Dollars

2000 1999
------------ -----------

LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 625% to 790% due 2002 through 2023 ........................ $ 129,500 $ 139,400
Series B - 650% to 789% due 2001 through 2010 ........................ 74,000 124,000
----------- -----------
Total first mortgage bonds ........................................... 203,500 263,400
----------- -----------

Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ................................ 66,700 66,700
Floating Rate, Colstrip 1999B, due 2034 ................................ 17,000 17,000
6% Series due 2023 ..................................................... 4,100 4,100
----------- -----------
Total pollution control bonds ........................................ 87,800 87,800
----------- -----------

Unsecured Medium-Term Notes:
Series A - 794% to 957% due 2001 through 2007 .......................... 13,000 31,000
Series B - 675% to 823% due 2001 through 2023 .......................... 89,000 96,000
Series C - 599% to 802% due 2007 through 2028 .......................... 109,000 109,000
Series D - 800% to 8625% due 2001 through 2003 ......................... 175,000 --
----------- -----------
Total unsecured medium-term notes .................................... 386,000 236,000
----------- -----------

Notes payable (due within one year) to be refinanced ..................... -- 118,500
Other .................................................................... 2,506 9,204
----------- -----------
Total long-term debt ................................................... 679,806 714,904
----------- -----------

COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ............................................. 60,000 60,000
Floating Rate, Series B, due 2037 ...................................... 40,000 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust
securities ......................................................... 100,000 110,000
----------- -----------

PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$695 Series K; 350,000 shares outstanding ($100 stated value) .......... 35,000 35,000
----------- -----------
Total subject to mandatory redemption ................................ 35,000 35,000
----------- -----------

CONVERTIBLE PREFERRED STOCK:
Not subject to mandatory redemption:
$1240 Convertible Series L; 0 and 1,508,210 shares outstanding ($18280
stated value) ........................................................ -- 263,309
----------- -----------
Total convertible preferred stock .................................... -- 263,309
----------- -----------

COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
47,208,689 and 35,648,239 shares outstanding ........................... 610,741 318,731
Note receivable from employee stock ownership plan ....................... (7,040) (8,240)
Capital stock expense and other paid in capital .......................... (11,696) (4,347)
Other comprehensive income ............................................... (723) (166)
Retained earnings ........................................................ 132,942 87,521
----------- -----------
Total common equity .................................................... 724,224 393,499
----------- -----------

TOTAL CAPITALIZATION ........................................................ $ 1,539,030 $ 1,516,712
=========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

45
50

CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars

2000 1999 1998
------------ ----------- -----------

OPERATING ACTIVITIES:
Net income ............................................................... $ 91,679 $ 26,031 $ 78,139
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization .......................................... 75,941 76,474 70,547
Provision for deferred income taxes .................................... 79,274 (1,085) 10,402
Allowance for equity funds used during construction .................... (604) (1,040) (1,283)
Power and natural gas cost deferrals and amortizations ................. (67,299) (14,906) (3,512)
Gain on sale of property and subsidiary investments-net ................ (16,506) (57,860) (8,084)
Energy commodity assets and liabilities ................................ (172,918) (9,841) (23,563)
Impairment of assets ................................................... -- 33,622 --
Other-net .............................................................. 13,954 (31,821) 25,334
(Increase) decrease in working capital components:
Sale of customer accounts receivable-net ............................. 35,000 20,000 (15,000)
Receivables and prepaid expense ...................................... (377,285) (140,348) (246,873)
Materials & supplies, fuel stock and natural gas stored .............. 3,857 497 9,524
Payables and other accrued liabilities ............................... 446,184 164,908 246,208
Other ................................................................ (35,081) 46,545 (17,336)
Monetization of contract ................................................. -- -- 143,400
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......................... 76,196 111,176 267,903
------------ ----------- -----------

INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ................. (98,680) (87,160) (92,942)
Other capital requirements ............................................... (100,661) (29,451) (14,920)
(Increase) decrease in other noncurrent balance sheet items-net .......... 3,470 (7,712) 27,266
Proceeds from property sales and sale of subsidiary investments .......... 105,228 148,851 16,385
Assets acquired and investments in subsidiaries .......................... (6,223) (51,729) (52,780)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ......................... (96,866) (27,201) (116,991)
------------ ----------- -----------

FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ............................. 42,126 110,522 (108,500)
Redemption of preferred trust securities ................................. (10,000) -- --
Proceeds from issuance of long-term debt ................................. 224,000 116,516 84,000
Redemption and maturity of long-term debt ................................ (54,603) (211,514) (14,000)
Redemption of preferred stock ............................................ -- (5,918) (10,000)
Sale (repurchase) of common stock ........................................ 2,625 (81,985) (1,475)
Cash dividends paid ...................................................... (28,304) (39,757) (64,548)
Other-net ................................................................ (850) (4,634) 5,854
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......................... 174,994 (116,770) (108,669)
------------ ----------- -----------

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS .......................... 154,324 (32,795) 42,243
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................. 40,041 72,836 30,593
------------ ----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD .................................... $ 194,365 $ 40,041 $ 72,836
============ =========== ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ............................................................... $ 61,774 $ 63,207 $ 64,402
Income taxes ........................................................... 31,404 42,891 40,716
Noncash financing and investing activities:
Series L preferred stock converted to common stock ..................... 271,286 -- --
Property purchased under capitalized leases ............................ -- 2,557 1,209
Net unrealized holding gains (losses) .................................. (475) 201 (2,052)
Notes receivable for sale of investment ................................ 3,500 -- --
Common stock and retained earnings transfer to preferred stock ......... -- -- 276,821

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

46
51

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars

Preferred Stock Convertible Preferred Stock
Series K Series L Common Stock
------------------------- ------------------------------ ----------------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1997 350,000 $35,000 -- $ -- 55,960,360 $ 594,852
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Conversion of common stock to
convertible preferred stock 1,540,460 269,227 (15,404,595) (211,201)
Stock issued under compensatory plans (102,036) (2,250)
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 350,000 $35,000 1,540,460 $ 269,227 40,453,729 $ 381,401
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Repurchase of common stock and
common stock equivalents (32,250) (5,918) (4,788,900) (62,393)
Stock issued under compensatory plans (16,590) (277)
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 350,000 $35,000 1,508,210 $ 263,309 35,648,239 $ 318,731
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Conversion of convertible preferred
stock into common stock (1,508,210) (263,309) 11,410,047 289,118
Repurchase of common stock (45,975) (1,488)
Stock issued under compensatory plans
net of tax benefit of $359 70,742 1,192
Employee Investment Plan (401-K) 97,478 2,614
Dividend Reinvestment Plan 28,158 574
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 350,000 $35,000 -- $ -- 47,208,689 $ 610,741
- ------------------------------------------------------------------------------------------------------------------------------------

Note
Receivable Capital Accumulated
from Employee Stock Expense Other
Stock and Other Comprehensive Retained
Ownership Plan Paid-in Capital Income Earnings Total
- --------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1997 $ (9,750) $ (10,143) $ 2,077 $ 171,776 $ 783,812
- --------------------------------------------------------------------------------------------------------------------------------
Net income 78,139 78,139
Conversion of common stock to
convertible preferred stock 5,967 (64,844) (851)
Stock issued under compensatory plans (419) (2,669)
Repayments of note receivable 455 455
Foreign currency translation adjustment (366) (366)
Unrealized investment loss-net (2,052) (2,052)
Cash dividends paid (common stock) (56,898) (56,898)
Cash dividends paid (preferred stock) (7,639) (7,639)
ESOP dividend tax savings 330 330
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (9,295) $ (4,176) $ (341) $ 120,445 $ 792,261
- --------------------------------------------------------------------------------------------------------------------------------
Net income 26,031 26,031
Repurchase of common stock and
common stock equivalents (171) (19,315) (87,797)
Stock issued under compensatory plans (84) (361)
Repayments of note receivable 1,055 1,055
Foreign currency translation adjustment 376 376
Unrealized investment loss-net (201) (201)
Cash dividends paid (common stock) (18,301) (18,301)
Cash dividends paid (preferred stock) (21,402) (21,402)
ESOP dividend tax savings 147 147
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (8,240) $ (4,347) $ (166) $ 87,521 $ 691,808
- --------------------------------------------------------------------------------------------------------------------------------
Net income 91,679 91,679
Conversion of convertible preferred
stock into common stock (8,009) (17,868) (68)
Repurchase of common stock (419) (1,907)
Stock issued under compensatory plans -
net of tax benefit of $359 689 101 1,982
Employee Investment Plan (401-K) (29) 2,585
Dividend Reinvestment Plan 574
Repayments of note receivable 1,200 1,200
Foreign currency translation adjustment (82) (82)
Unrealized investment loss-net (475) (475)
Cash dividends paid (common stock) (22,616) (22,616)
Cash dividends paid (preferred stock) (5,600) (5,600)
ESOP dividend tax savings 144 144
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ (7,040) $ (11,696) $ (723) $ 132,942 $ 759,224
- --------------------------------------------------------------------------------------------------------------------------------

-- -- -- -- --

SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars

2000 1999 1998
------------ ----------- -----------

OPERATING REVENUES:
Avista Utilities .......................................... $ 1,512,101 $ 1,115,647 $ 1,049,212
Energy Trading and Marketing .............................. 6,531,551 6,695,671 2,408,734
Information and Technology ................................ 11,645 4,851 1,995
Avista Ventures ........................................... 32,937 122,303 231,483
Intersegment eliminations ................................. (176,744) (33,488) (7,440)
------------ ----------- -----------
Total operating revenues ................................ $ 7,911,490 $ 7,904,984 $ 3,683,984
============ =========== ===========

RESOURCE COSTS:
Avista Utilities:
Power purchased ......................................... $ 1,072,475 $ 543,436 $ 470,604
Natural gas purchased for resale ........................ 141,700 101,958 109,182
Fuel for generation ..................................... 69,077 46,368 44,281
Other ................................................... (10,052) 46,053 44,309
Energy Trading and Marketing:
Cost of sales ........................................... 6,223,805 6,713,613 2,360,110
Intersegment eliminations ................................. (176,744) (33,488) (7,440)
------------ ----------- -----------
Total resource costs (excluding non-energy businesses) .. $ 7,320,261 $ 7,417,940 $ 3,021,046
============ =========== ===========

GROSS MARGINS:
Avista Utilities .......................................... $ 238,901 $ 377,832 $ 380,836
Energy Trading and Marketing .............................. 307,746 (17,942) 48,624
------------ ----------- -----------
Total gross margins (excluding non-energy businesses) ... $ 546,647 $ 359,890 $ 429,460
============ =========== ===========

OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities .......................................... $ 61,883 $ 56,291 $ 60,847
Energy Trading and Marketing .............................. 249 370 --
Information and Technology ................................ 18,229 7,732 3,902
Avista Ventures ........................................... 27,731 90,783 164,871
------------ ----------- -----------
Total operations and maintenance expenses ............... $ 108,092 $ 155,176 $ 229,620
============ =========== ===========

ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities .......................................... $ 62,111 $ 66,362 $ 69,693
Energy Trading and Marketing .............................. 41,256 31,732 25,201
Information and Technology ................................ 26,772 7,351 2,607
Avista Ventures ........................................... 9,216 22,513 32,270
------------ ----------- -----------
Total administrative and general expenses ............... $ 139,355 $ 127,958 $ 129,771
============ =========== ===========

DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities .......................................... $ 63,972 $ 62,981 $ 59,538
Energy Trading and Marketing .............................. 2,466 3,692 596
Information and Technology ................................ 5,681 2,340 653
Avista Ventures ........................................... 3,822 7,461 9,760
------------ ----------- -----------
Total depreciation and amortization expenses ............ $ 75,941 $ 76,474 $ 70,547
============ =========== ===========

INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities .......................................... $ 3,177 $ 142,567 $ 143,153
Energy Trading and Marketing .............................. 250,196 (97,785) 22,826
Information and Technology ................................ (40,084) (13,002) (5,192)
Avista Ventures ........................................... (9,861) (423) 12,033
------------ ----------- -----------
Total income from operations ............................ $ 203,428 $ 31,357 $ 172,820
============ =========== ===========

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2000 1999 1998
------------ ----------- -----------

INCOME AVAILABLE FOR COMMON STOCK:
Avista Utilities ....................................... $ (62,516) $ 38,181 $ 47,898
Energy Trading and Marketing ........................... 161,753 (60,739) 14,116
Information and Technology ............................. (28,408) (8,620) (3,398)
Avista Ventures ........................................ (2,885) 35,817 11,124
------------ ----------- -----------
Total income available for common stock .............. $ 67,944 $ 4,639 $ 69,740
============ =========== ===========

ASSETS:
Avista Utilities ....................................... $ 2,129,614 $ 1,976,716 $ 2,004,935
Energy Trading and Marketing ........................... 10,271,834 1,595,470 955,615
Information and Technology ............................. 59,632 26,379 7,461
Avista Ventures ........................................ 102,844 114,929 285,625
------------ ----------- -----------
Total assets ......................................... $ 12,563,924 $ 3,713,494 $ 3,253,636
============ =========== ===========

CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ....................................... $ 99,807 $ 86,256 $ 92,295
Energy Trading and Marketing ........................... 65,095 3,676 2,357
Information and Technology ............................. 35,555 15,506 4,120
Avista Ventures ........................................ 976 10,171 7,498
------------ ----------- -----------
Total capital expenditures ........................... $ 201,433 $ 115,609 $ 106,270
============ =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

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NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS
Avista Corporation (Avista Corp. or the Company) operates as an energy,
information and technology company with a regional utility operation and
subsidiary operations located in the Pacific Northwest. The utility portion of
the Company, doing business as Avista Utilities, is subject to state and federal
price regulation. The other businesses are conducted under Avista Capital, which
is the parent company to the Company's subsidiaries.

BASIS OF REPORTING
The financial statements are presented on a consolidated basis and, as such,
include the assets, liabilities, revenues and expenses of the Company and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in the consolidation. The accompanying financial statements include
the Company's proportionate share of utility plant and related operations
resulting from its interests in jointly owned plants (See Note 7). The financial
activity of each of the Company's lines of business is reported in the "Schedule
of Information by Business Segments." Such information is an integral part of
these financial statements.

The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that directly
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from estimates.

SYSTEM OF ACCOUNTS
The accounting records of the Company's utility operations are maintained in
accordance with the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) and adopted by the appropriate state regulatory
commissions.

REGULATION
The Company is subject to state regulation in Washington, Idaho, Montana, Oregon
and California. The Company is subject to regulation by the FERC with respect to
its wholesale electric transmission rates and the natural gas rates charged for
the release of capacity from the Jackson Prairie Storage Project.

BUSINESS SEGMENTS
The business segment presentation reflects the basis currently used by the
Company's management to analyze performance and determine the allocation of
resources. Avista Utilities' business is managed based on the total regulated
operations. The Energy Trading and Marketing line of business has redirected its
focus to a Western regional effort, but its operations are non-regulated, as
opposed to Avista Utilities' operations. The Information and Technology line of
business reflects the Company's newest businesses with operations related to
internet billing services, fuel cells and telecommunications. The Avista
Ventures line of business reflects the other non-energy operations of various
subsidiaries.

OPERATING REVENUES
The Company accrues estimated unbilled revenues for electric and natural gas
sales and services provided through month-end. Avista Energy follows the
mark-to-market method of accounting for energy contracts entered into for
trading and price risk management purposes. Avista Energy recognizes revenue
based on the change in the market value of outstanding derivative commodity
sales contracts, net of future servicing costs and reserves, in addition to
revenue related to physical and financial contracts that have matured.

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INTERSEGMENT ELIMINATIONS
Intersegment eliminations represent the transactions between Avista Utilities
and Avista Energy for commodities and services.

RESEARCH AND DEVELOPMENT EXPENSES
Company-sponsored research and development expenses related to present and
future products are expensed as incurred. The majority of the Company's research
and development expenses are related to subsidiary businesses. Research and
development expenses totaled approximately $8.1 million, $3.3 million and $1.0
million in 2000, 1999 and 1998, respectively.

OTHER INCOME (DEDUCTIONS) -- NET
Other income (deductions)-net is composed of the following items:

YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
-------- ------- -------
(Thousands of Dollars)

Interest income ........................ $ 11,824 $ 3,615 $ 9,560
Capitalized interest (debt) ............ 3,476 1,001 1,592
Gain (loss) on property dispositions ... 20,278 4,071 12
Minority interest ...................... 3,148 2,002 296
Capitalized interest (equity) .......... 604 1,040 1,283
Other .................................. (9,665) 7,230 (2,949)
-------- ------- -------
Total ............................. $ 29,665 $18,959 $ 9,794
======== ======= =======

EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if dilutive securities, such as
stock options and convertible stock, were exercised or converted into common
stock that then shared in the earnings of the Company. See Note 19 for specific
information about the Company's EPS calculations.

UTILITY PLANT
The cost of additions to utility plant, including an allowance for funds used
during construction and replacements of units of property and betterments, is
capitalized. Costs of depreciable units of property retired plus costs of
removal less salvage are charged to accumulated depreciation.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of
both the debt and equity funds used to finance utility plant additions during
the construction period. In accordance with the uniform system of accounts
prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost
of utility plant and is credited currently as a noncash item to Other Income
(see Other Income (Deductions)-net above). The Company generally is permitted,
under established regulatory rate practices, to recover the capitalized AFUDC,
and a fair return thereon, through its inclusion in rate base and the provision
for depreciation after the related utility plant has been placed in service.
Cash inflow related to AFUDC does not occur until the related utility plant
investment is placed in service.

The effective AFUDC rate was 10.67% in 2000, 1999 and 1998. The Company's AFUDC
rates do not exceed the maximum allowable rates as determined in accordance with
the requirements of regulatory authorities.

DEPRECIATION
For utility operations, depreciation provisions are estimated by a method of
depreciation accounting utilizing unit rates for hydroelectric plants and
composite rates for other properties. Such rates are designed to provide for
retirements of properties at the expiration of their service lives. The rates
for hydroelectric plants include annuity and interest components, in which the
interest component is 9%. For utility operations, the ratio of depreciation
provisions to average depreciable property was 2.72% in 2000, 2.69% in 1999 and
2.60% in 1998.

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The average service lives and remaining average service lives, respectively, for
the following broad categories of utility property are: electric thermal
production -- 35 and 16 years; hydroelectric production -- 100 and 78 years;
electric transmission -- 60 and 27 years; electric distribution -- 40 and 30
years; and natural gas distribution property -- 44 and 29 years.

CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with an initial maturity of three months or
less to be cash equivalents.

TEMPORARY INVESTMENTS
Temporary investments consist of marketable equity securities that are
classified as "available for sale." At December 31, 2000 and 1999, unrealized
investment losses totaled $0.7 million and $0.2 million, respectively, net of
taxes, and are reflected as a component of other comprehensive income on the
consolidated Statements of Capitalization. At December 31, 2000 and 1999, the
carrying value of available for sale securities was $1.1 million and $9.3
million, respectively.

INVENTORY
Inventory consists primarily of materials and supplies, fuel stock and natural
gas stored. Inventory is recorded at the lower of cost or market, primarily
using the average cost method.

DEFERRED CHARGES AND CREDITS
The Company prepares its financial statements in accordance with the provisions
of FAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A
regulated enterprise can prepare its financial statements in accordance with FAS
No. 71 only if (i) the enterprise's rates for regulated services are established
by or subject to approval by an independent third-party regulator, (ii) the
regulated rates are designed to recover the enterprise's cost of providing the
regulated services and (iii) in view of demand for the regulated services and
the level of competition, it is reasonable to assume that rates set at levels
that will recover the enterprise's costs can be charged to and collected from
customers. FAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. In
certain circumstances, FAS No. 71 requires that certain costs and/or obligations
(such as incurred costs not currently recovered through rates, but expected to
be so recovered in the future) be reflected in a deferral account in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. If at some point in the future the Company determines
that it no longer meets the criteria for continued application of FAS No. 71 to
all or a portion of the Company's regulated operations, the Company could be
required to write off its regulatory assets and could be precluded from the
future deferral in the Consolidated Balance Sheets of costs not recovered
through rates at the time such costs were incurred, even if such costs were
expected to be recovered in the future.

The Company's primary regulatory assets include Investment in Exchange Power,
conservation programs, deferred income taxes, unrecovered purchased gas costs,
deferred power costs, the provision for postretirement benefits and debt
issuance and redemption costs. Those items without a specific line on the
Consolidated Balance Sheets are included in Deferred Charges -- Other-net.
Deferred credits include natural gas deferrals, regulatory liabilities created
when the Centralia plant was sold and the gain on the general office building
sale/leaseback which is being amortized over the life of the lease, and are
included on the Consolidated Balance Sheets as Non-current Liabilities and
Deferred Credits -- Other Deferred Credits.

DEFERRED REVENUES
In December 1998, the Company received cash proceeds of $143.4
million from the monetization of a contract in which the Company assigned and
transferred certain rights under a long-term power sales contract to a funding
trust. The proceeds were recorded as deferred revenue and are being amortized
into revenues over the 16-year period of the long-term sales contract. Pursuant
to the WUTC order in late 2000, the Company was directed to offset the
Washington jurisdiction's share of the deferred revenue by writing down certain
of the Company's assets and liabilities, such as conservation programs and a
PURPA contract buyout. The balance at December 31, 2000 was $40.4 million,
which represents the Idaho jurisdiction's share of the deferred revenue.

POWER COST DEFERRALS
On August 9, 2000, the WUTC approved Avista Utilities' request for deferred
accounting treatment for certain power costs related to increases in short-term
power prices beginning July 1, 2000 and ending June 30, 2001. The specific power
costs deferred include the changes in power costs to Avista Utilities from those
included in base retail rates, related to three power cost components: the net
effect of changes in short-term wholesale market prices on short-term wholesale
purchases and sales; the effect on power costs from changes in the level of
hydroelectric generation; and the net effect on power costs from 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
Utilities

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AVISTA CORPORATION
- --------------------------------------------------------------------------------

associated with these three power cost components, and the level of costs
included in Avista Utilities' base retail rates. The power costs deferred are
related solely to the operation of Avista Utilities' system resources to serve
its system retail and wholesale load obligations. Deferrals do not include net
losses associated with wholesale trading activity incurred in the first half of
2000. During 2000, Avista Utilities deferred a total of $33.9 million under this
accounting order.

On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of its owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of this deferred accounting treatment through
2001.

POWER AND NATURAL GAS COST ADJUSTMENT PROVISIONS
Avista Utilities has a power cost adjustment mechanism (PCA) in Idaho which
allows it to modify electric rates to recover or rebate a portion of the
difference between actual and allowed net power supply costs. The PCA tracks
changes in hydroelectric generation, secondary prices, related changes in
thermal generation and Public Utility Regulatory Policies Act of 1978 (PURPA)
contracts. Rate changes were triggered when the deferred balance reached $2.2
million. The new trigger is $3.0 million. The following surcharges and rebates
were in effect during 1998 through 2000: a $2.4 million (2.0%) rebate effective
August 1, 2000 scheduled to expire July 31, 2001; a $2.8 million (2.5%) rebate
effective August 1, 1999 which expired July 31, 2000; a $3.1 million (2.7%)
rebate effective February 1, 1999, which expired January 31, 2000; a $2.7
million (2.4%) rebate effective June 1, 1998, which expired May 31, 1999; a $2.6
million (2.3%) rebate effective September 1, 1997, which expired August 31,
1998; and a $2.6 million (2.4%) rebate effective June 1, 1997, which expired May
31, 1998. Avista Utilities has filed for a $5.7 million (4.8%) surcharge to be
effective February 1, 2001 and expire on January 31, 2002. The rebate balances
and the deferred balance are included in the Current Liabilities -- Other and
Non-Current Liabilities and Deferred Credits -- Other Deferred Credits lines,
respectively, on the Consolidated Balance Sheets. The surcharge balance is
included on the Consolidated Balance Sheets in Current Assets -- Accounts and
Notes Receivable-Net.

On January 16, 2001, Avista Utilities filed an application with the IPUC seeking
proposed modifications to the existing PCA mechanism. Due to extremely high
short-term power prices, Avista Utilities is requesting to recover power supply
costs associated with meeting increased retail and wholesale system load
requirements, as well as to recover replacement power costs associated with
possible thermal plant forced outages.

Under established regulatory practices, Avista Utilities is also allowed to
adjust its natural gas rates from time to time to reflect increases or decreases
in the cost of natural gas purchased. Differences between actual natural gas
costs and the natural gas costs allowed in rates are deferred and charged or
credited to expense when regulators approve inclusion of the cost changes in
rates. In Oregon, regulatory provisions include a sharing of benefits and risks
associated with changes in natural gas prices, as well as a sharing of benefits
if certain threshold earnings levels are exceeded. The balance is included on
the Consolidated Balance Sheets as Non-current Liabilities and Deferred Credits
- -- Other Deferred Credits.

INCOME TAXES
The Company and its eligible subsidiaries file consolidated federal income tax
returns. Subsidiaries are charged or credited with the tax effects of their
operations on a stand-alone basis. The Company's federal income tax returns have
been examined with all issues resolved, and all payments made, through the 1996
return.

STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation using the intrinsic value method and provides pro forma disclosures
of net income and net earnings per common share as if the fair value method had
been applied in measuring compensation expense.

Equity instruments issued to non-employees for good or services are accounted
for at fair value and are marked to market until service is complete or a
performance commitment date is reached.

OTHER COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income, foreign currency
translation adjustments and unrealized gains and losses on investments held as
available-for-sale investments.

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AVISTA CORPORATION
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CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Assets and liabilities of Avista Energy Canada, Ltd. are denominated in Canadian
dollars and translated to U.S. dollars at exchange rates in effect on the
balance sheet date. Revenues, costs and expenses for the company are translated
using an average rate. Cumulative translation adjustments resulting from this
process are reflected as a component of other comprehensive income in the
shareholders' equity section in the Consolidated Statements of Capitalization.

NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that all derivative financial instruments (including certain derivative
instruments embedded in other contracts) be recognized as either assets or
liabilities on a company's balance sheet at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. In June 2000, the FASB issued FAS No.
138, which amends certain provisions of FAS No. 133 to clarify certain issues.

Avista Utilities buys and sells power under forward contracts that are
considered to be derivatives. Under forward contracts, Avista Utilities commits
to purchase or sell a specified amount of capacity and energy. These contracts
are generally entered into to manage Avista Utilities' loads and resources.
Avista Energy accounts for derivative commodity instruments entered into for
trading purposes using the mark-to-market method of accounting, in compliance
with EITF 98-10, "Accounting for Energy Trading and Risk Management Activities",
with unrealized gains and losses recognized in the income statement.

The Company adopted FAS No. 133, and the corresponding amendments under FAS No.
138, on January 1, 2001. Based on the Company's current interpretations of FAS
No. 133, 138 and the FASB's Derivative Implementation Group (DIG), the Company
believes that the majority of its long-term purchases and sales contracts for
both capacity and energy qualify as normal purchases and sales under FAS No.
133. Some of the Company's contracts for less than one year in duration
(short-term) are subject to booking out, whereby power may not be physically
delivered. The Company does not believe that these short-term contracts can be
classified as normal purchases and sales. The fair value of these specific
short-term contracts will be recorded on the Company's balance sheet as of
January 1, 2001. The Company received accounting orders from the WUTC and the
IPUC requiring the Company to offset any derivative assets or liabilities with a
regulatory asset or liability, thus deferring the unrealized gains or losses.

On January 1, 2001, the Company recorded a derivative asset of $252.3 million
and a derivative liability of $36.1 million. The difference of $216.2 million
has been recorded as a regulatory liability in accordance with the accounting
treatment prescribed by the accounting orders from the WUTC and IPUC discussed
above.

Because of the complexity of derivatives and FAS No. 133, the FASB established
the DIG, as mentioned above. To date, the DIG has issued more than 100
interpretations to provide guidance in applying FAS No. 133. Certain pending
issues and other interpretations that may be issued by the DIG may change the
conclusions that the Company has reached and, as a result, the accounting
treatment and financial statement impact could change in the future.

In September 2000, the FASB issued FAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures. This statement
will be effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company does not believe there will be a material
financial statement impact resulting from adopting this statement.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company adopted SAB No. 101 in the
fourth quarter of 2000. There was no material impact on the Company's
Consolidated Statements of Income.

RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.

NOTE 2. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

In November 1999, Avista Energy began to redirect its focus away from national
energy trading toward a more regionally-based energy marketing and trading
effort in the West. The downsizing plan called for the shutting down
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AVISTA CORPORATION
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of all of the operations in Houston and Boston and eliminating approximately 80
positions. The Houston operations were closed during the first quarter of 2000,
and the Boston operations were closed during the second quarter of 2000. In the
fourth quarter of 1999, Avista Energy recorded a charge of $5.9 million, after
taxes, for expenses related to employee terminations. Avista Energy sold its
Eastern power book during the first quarter of 2000 for a $1.0 million after-tax
loss, but did not find a buyer for its natural gas or coal contracts in the
East. The remaining Eastern natural gas contracts, primarily for transportation
and storage, are being managed out of the Spokane office until the last of the
contracts expire in 2002. A former employee scheduled the remaining
coal contracts until the last of the contracts expired at the end of 2000. In
addition to the restructuring charges previously reserved and paid, other
transition costs in the amount of $3.1 million and $1.8 million, both after
taxes, for the first and second quarters of 2000, respectively, were incurred
related to closing the Houston and Boston offices and discontinuing operations
in the East. Minimal transition costs were recorded in the second half of 2000.

In the 1999 Form 10-K, it was announced that Pentzer would also be redirecting
its focus. In the first quarter of 2000, Pentzer recorded a charge of $1.2
million, after taxes, for expenses related to employee terminations, which was
paid during 2000.

NOTE 3. ACCOUNTS RECEIVABLE SALE

In 1997, WWP Receivables Corp. (WWPRC) was incorporated as a wholly owned,
bankruptcy-remote subsidiary of the Company for the purpose of acquiring or
purchasing interests in certain accounts receivable, both billed and unbilled,
of the Company. Subsequently, WWPRC and the Company have entered into an
agreement whereby WWPRC can sell without recourse, on a revolving basis, up to
$80.0 million of those receivables. WWPRC is obligated to pay fees that
approximate the purchaser's cost of issuing commercial paper equal in value to
the interests in receivables sold. On a consolidated basis, the amount of such
fees is included in operating expenses of the Company. At December 31, 2000 and
1999, $80.0 million and $45.0 million, respectively, in receivables had been
sold pursuant to the agreement.

NOTE 4. ENERGY COMMODITY TRADING

The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, Avista Utilities utilizes electric,
natural gas and related derivative commodity instruments, such as forwards,
futures, swaps and options, and Avista Energy engages in the trading of such
instruments. Avista Utilities and Avista Energy have adopted policies and
procedures to manage the risks, both quantitative and qualitative, inherent in
these activities and have established a comprehensive Risk Management Committee,
separate from the units that create such risk exposure and overseen by the Audit
and Finance Committee of the Company's Board of Directors, to monitor compliance
with the Company's risk management policies and procedures.

AVISTA UTILITIES

Avista Utilities protects itself against price fluctuations on electric energy
by establishing volume limits for the imbalance between projected loads and
resources and through the use of derivative commodity instruments for hedging
purposes. Any imbalance is required to remain within limits, or management
action or decisions are triggered to address larger imbalance situations and
limit the exposure to market risk. Avista Energy is responsible for the daily
management of gas resources to meet the requirements of Avista Utilities
customers. In addition, Avista Utilities utilizes derivative commodity
instruments for hedging price risk associated with natural gas. The Risk
Management Committee has limited the types of commodity instruments Avista
Utilities may trade to those related to electricity and natural gas commodities
and those instruments are to be used for hedging price fluctuations associated
with the management of resources. Commodity instruments are not generally held
by Avista Utilities for speculative trading purposes. Gains and losses related
to derivative commodity instruments which qualify as hedges are recognized in
the Consolidated Statements of Income when the underlying hedged physical
transaction closes (the deferral method) and are included in the same category
as the hedged item (natural gas purchased or purchased power expense, as the
case may be). At December 31, 2000, the Company had $1.0 million of derivative
commodity instruments outstanding. At December 31, 1999, the Company's
derivative commodity instruments outstanding were immaterial.

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ENERGY TRADING AND MARKETING

Avista Energy purchases natural gas and electricity directly from producers and
other trading companies, and its customers include commercial and industrial
end-users, electric utilities, natural gas distribution companies, and other
trading companies. Avista Energy's marketing and energy risk management services
are provided through the use of a variety of derivative commodity contracts to
purchase or supply natural gas and electric energy at specified delivery points
and at specified future dates. Avista Energy also trades natural gas and
electricity derivative commodity instruments on national exchanges and through
other unregulated exchanges and brokers from whom these commodity derivatives
are available, and therefore experiences net open positions in terms of price,
volume, and specified delivery point.

The open positions expose Avista Energy to the risk that fluctuating market
prices may adversely impact its financial position or results of operations.
However, the net open position is actively managed with strict policies designed
to limit the exposure to market risk and which require daily reporting to
management of potential financial exposure. These policies include statistical
risk tolerance limits using historical price movements to calculate daily
earnings at risk as well as total Value-at-Risk (VAR) measurement.

Derivative commodity instruments sold and purchased by Avista Energy include:
forward contracts, involving physical delivery of an energy commodity; futures
contracts, which involve the buying or selling of natural gas, electricity or
other energy-related commodities at a fixed price; over-the-counter swap
agreements which require Avista Energy to receive or make payments based on the
difference between a specified price and the actual price of the underlying
commodity; and options, which mitigate price risk by providing for the right,
but not the requirement, to buy or sell energy-related commodities at a fixed
price.

Foreign currency risks associated with the fair value of the energy commodity
portfolio are primarily related to Canadian currency exchange rates and are
managed using a variety of financial instruments, including forward rate
agreements.

Avista Energy's trading activities are subject to mark-to-market accounting,
under which changes in the market value of outstanding electric, natural gas and
related derivative commodity instruments are recognized as gains or losses in
the period of change. Market prices are utilized in determining the value of the
electric, natural gas and related derivative commodity instruments. For
longer-term positions, in addition to market prices, a model based on forward
price curves is also utilized. Gains and losses on electric, natural gas and
related derivative commodity instruments utilized for trading are recognized in
income on a current basis (the mark-to-market method) and are included on the
Consolidated Statements of Income in operating revenues or resource costs, as
appropriate, and on the Consolidated Balance Sheets as current or non-current
energy commodity assets or liabilities. Contracts in a receivable position, as
well as the options held, are reported as assets. Similarly, contracts in a
payable position, as well as options written, are reported as liabilities.
Cashflows are recognized during the period of settlement.

Contract Amounts and Terms Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity (or currency) or a fixed amount
or (ii) as "fixed price receiver," is entitled to receive a fixed price or
amount and is obligated to deliver the commodity (or currency) or pay a fixed
amount or (iii) as "index price payor," is obligated to pay an indexed price or
amount and is entitled to receive the commodity or a variable amount or (iv) as
"index price receiver," is entitled to receive an indexed price or amount and is
obligated to deliver the commodity or pay a variable amount. The contract or
notional amounts and terms of Avista Energy's derivative commodity investments
outstanding at December 31, 2000 are set forth below (volumes in thousands of
mmBTUs, MWhs and tons, dollars in thousands):

Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
-------------- -------------- --------------

Energy commodities (volumes)
Natural gas ............. 92,329 77,033 9
Electric ................ 142,709 132,962 16
Coal .................... 10 10 1

Index Price Index Price Maximum
Payor Receiver Terms in Years
-------------- -------------- --------------

Energy commodities (volumes)
Natural gas ............. 674,311 692,794 4
Electric ................ 918 155 4

Market prices are utilized in determining the value of the electric, natural
gas and related derivative commodity instruments. For longer-term positions, in
addition to market prices, a model based on forward price curves is also
utilized.

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Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the amounts exchanged by the parties to the derivative
commodity instruments. Accordingly, contract or notional amounts do not
accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time in response to
Avista Energy's risk management needs.

Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at December 31, 2000, and the average fair value of those
instruments held during the year are set forth below (dollars in thousands):

Fair Value Average Fair Value for the
as of December 31, 2000 year ended December 31, 2000
-------------------------------------------------------- --------------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Natural gas $ 442,655 $ 125,306 $ 432,113 $ 121,342 $ 189,652 $ 61,832 $ 185,421 $ 56,888
Electric 7,512,658 1,241,801 7,401,791 1,151,032 2,952,962 781,731 2,935,918 714,271
Emission
allowances 916 -- 103 -- 4,322 343 3,617 46
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 7,956,229 $ 1,367,107 $ 7,834,007 $ 1,272,374 $ 3,146,936 $ 843,906 $ 3,124,956 $ 771,205
=========== =========== =========== =========== =========== =========== =========== ===========

The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of December 31, 2000 was approximately six months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at December 31, 2000 was approximately six months. The change in the
fair value position of Avista Energy's energy commodity portfolio, net of the
reserves for credit and market risk for the year ended December 31, 2000 was
$176.8 million and is included on the Consolidated Statements of Income in
operating revenues.

MARKET RISK

Avista Utilities and Avista Energy manage, on a portfolio basis, the market
risks inherent in their activities subject to parameters established by the
Company's Risk Management Committee. Market risks are monitored by the Risk
Management Committee to ensure compliance with the Company's stated risk
management policies. Avista Utilities measures exposure to market risk through
daily evaluation of the imbalance between projected loads and resources. Avista
Energy measures the risk in its portfolio on a daily basis utilizing a value-at
risk model and monitors its risk in comparison to established thresholds.

CREDIT RISK

Credit risk relates to the risk of loss that Avista Utilities and/or Avista
Energy would incur as a result of non-performance by counterparties of their
contractual obligations to deliver energy and make financial settlements. Credit
risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. Avista Utilities
and Avista Energy seek to mitigate credit risk by applying specific eligibility
criteria to existing and prospective counterparties and by actively monitoring
current credit exposures. However, despite mitigation efforts, defaults by
counterparties occur from time to time.

OTHER OPERATING RISKS

In addition to commodity price risk, Avista Utilities' commodity positions are
also subject to operational and event risks including, among others, increases
in load demand, transmission or transport disruptions, fuel quality

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specifications and forced outages at generating plants. Some of these factors
have been addressed in the recent changes to the Washington deferred power
accounting adjustment and the Idaho PCA.

NOTE 5. ENERGY TRADING AND MARKETING EQUITY INVESTMENT

Effective November 30, 1998, Avista Energy sold its 50% ownership interest in
Howard/Avista Energy LLC to H&H Star Energy, Inc. for $25 million. Avista
Energy's initial equity investment in Howard/Avista Energy, LLC was $25 million
in August 1997. Dividends of $0.7 million were received from Howard/Avista
Energy, LLC in 1998. Avista Energy's pre-tax equity in earnings of Howard/Avista
Energy LLC was $(1.0) million for the eleven months ended November 30, 1998.

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

The year-end balances of the major classifications of property, plant and
equipment are detailed in the following table (thousands of dollars):

AT DECEMBER 31,
--------------------------
2000 1999
---------- ----------

Avista Utilities:
Electric production ..................... $ 672,070 $ 720,409
Electric transmission ................... 280,271 272,299
Electric distribution ................... 652,966 622,974
CWIP and other .......................... 95,219 85,648
---------- ----------
Electric total ....................... 1,700,526 1,701,330
---------- ----------
Natural gas underground storage ......... 18,687 18,418
Natural gas transmission ................ 2,674 3,194
Natural gas distribution ................ 396,100 372,208
CWIP and other .......................... 45,884 49,259
---------- ----------
Natural gas total .................... 463,345 443,079
---------- ----------
Common plant (including CWIP) ........... 74,894 71,201
---------- ----------
Total Avista Utilities .................... 2,238,765 2,215,610
Energy Trading and Marketing .............. 68,544 8,304
Information and Technology ................ 49,242 21,613
Avista Ventures ........................... 23,842 24,027
---------- ----------
Total ..................................... $2,380,393 $2,269,554
========== ==========

Property, plant, and equipment under capital leases at Avista Capital's
subsidiaries totaled $12.7 million and $11.1 million and the associated
accumulated depreciation totaled $6.8 million and $3.8 million in 2000 and 1999,
respectively.

NOTE 7. JOINTLY OWNED ELECTRIC FACILITIES

The Company has an investment in a jointly owned thermal generating plant. The
Company provides financing for its ownership in the project. The Company's share
of related operating and maintenance expenses for plant in service is included
in corresponding accounts in the Consolidated Statements of Income. The
following table indicates the Company's percentage ownership and the extent of
the Company's investment in the plant at December 31, 2000:

COMPANY'S CURRENT SHARE OF
----------------------------------------------------------------------
KW of Construction
Installed Fuel Ownership Plant in Accumulated Net Plant Work in
Project Capacity Source (%) Service Depreciation In Service Progress
- --------- -------- ------ ----------- -------- ------------ ---------- -------------
(Thousands of Dollars)

Colstrip 3 & 4........ 1,556,000 Coal 15% $311,651 $140,295 $171,356 $ --

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NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has a pension plan covering substantially all of its regular
full-time employees. Certain of the Company's subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employee's average compensation as specified in the Plan. The Company's
funding policy is to contribute annually an amount equal to the net periodic
pension cost, provided that such contributions are not less than the minimum
amounts required to be funded under the Employee Retirement Income Security Act,
nor more than the maximum amounts which are currently deductible for tax
purposes. Pension fund assets are invested primarily in marketable debt and
equity securities. The Company also has other plans that cover the executive
officers and key managers.

The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. The Company accrues the estimated
cost of postretirement benefit payments during the years that employees provide
services. The Company elected to amortize this obligation of approximately $34.5
million over a period of twenty years, beginning in 1993.

The following table sets forth the pension and health care plan disclosures:

PENSION BENEFITS OTHER BENEFITS
-------------------------- ------------------------
2000 1999 2000 1999
--------- --------- -------- --------
(Thousands of Dollars)

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 162,097 $ 178,589 $ 30,637 $ 32,345
Service cost 5,347 5,951 601 696
Interest cost 12,711 11,915 2,407 2,178
Amendments -- (6,463) -- --
Actuarial (gain)/loss 7,966 (14,679) 1,580 (2,377)
Benefits paid (11,860) (12,109) (2,427) (2,205)
Expenses paid (970) (1,107) (37) --
--------- --------- -------- --------
Benefit obligation at end of year $ 175,291 $ 162,097 $ 32,761 $ 30,637
========= ========= ======== ========

CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 185,564 $ 178,879 $ 15,808 $ 12,459
Actual return on plan assets (1,005) 19,902 (784) 3,228
Employer contributions 3,304 -- 1,182 809
Benefits paid (11,860) (12,109) (973) (688)
Expenses paid (970) (1,107) (37) --
--------- --------- -------- --------
Fair value of plan assets at end of year $ 175,033 $ 185,565 $ 15,196 $ 15,808
========= ========= ======== ========

Funded status $ (257) $ 23,467 $(17,566) $(14,829)
Unrecognized net actuarial gain (12,595) (38,667) (5,960) (9,997)
Unrecognized prior service cost 10,679 11,651 -- --
Unrecognized net transition
obligation/(asset) (4,843) (5,929) 18,399 19,933
--------- --------- -------- --------
Accrued benefit cost $ (7,016) $ (9,478) $ (5,127) $ (4,893)
========= ========= ======== ========
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 4.00%
Medical cost trend -- initial 5.00% 5.00%
Medical cost trend -- ultimate 6.00% 5.00%
Year for ultimate medical cost trend 2000 1999

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PENSION BENEFITS OTHER BENEFITS
-------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
(Thousands of Dollars)

COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 5,347 $ 5,951 $ 4,982 $ 600 $ 696 $ 585
Interest cost 12,711 11,915 11,247 2,407 2,178 2,100
Expected return on plan assets (16,243) (15,681) (14,768) (1,372) (1,075) (953)
Transition (asset)/obligation recognition (1,086) (1,086) (1,086) 1,534 1,534 1,533
Amortization of prior service cost 971 1,341 1,654 -- -- --
Net gain recognition (858) -- (562) (299) (159) (326)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 842 $ 2,440 $ 1,467 $ 2,870 $ 3,174 $ 2,939
======== ======== ======== ======== ======== ========

Assumed health cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point increase in the
assumed health care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of December 31, 2000 by approximately $2.5
million and the service and interest cost by approximately $0.2 million. A
one-percentage-point decrease in the assumed health care cost trend rate for
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 2000 by approximately $2.3 million and the service and interest
cost by approximately $0.2 million.

The Company also sponsors an employee savings plan that covers substantially all
employees. Employer matching contributions of $3.3 million, $3.4 million, $2.8
million were expensed in 2000, 1999 and 1998, respectively.

NOTE 9. ACCOUNTING FOR INCOME TAXES

As of December 31, 2000 and 1999, the Company had recorded net regulatory assets
of $156.7 million and $166.5 million, respectively, related to the probable
recovery of FAS No. 109, "Accounting for Income Taxes," deferred tax liabilities
from customers through future rates. Such regulatory assets will be adjusted by
amounts recovered through rates.

Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The net deferred federal income tax liability consists of the
following (thousands of dollars):

AT DECEMBER 31,
----------------------
2000 1999
-------- --------

Deferred tax assets:
Reserves not currently deductible $ 31,696 $ 10,747
Contributions in aid of construction 8,543 7,878
Centralia sale regulatory liability 9,650 --
Centralia Trust -- 2,897
Gain on sale of office building 1,007 1,098
Other 24,360 14,430
-------- --------
Total deferred tax assets 75,256 37,050
-------- --------

Deferred tax liabilities:
Differences between book and tax bases
of utility plant 411,560 383,729
Loss on reacquired debt 4,872 5,357
Energy commodity gains 85,263 16,871
Other 19,871 8,142
-------- --------
Total deferred tax liabilities 521,566 414,099
-------- --------
Net deferred tax liability $446,310 $377,049
======== ========

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A reconciliation of federal income taxes derived from statutory tax rates
applied to income from continuing operations and federal income tax as set forth
in the accompanying Consolidated Statements of Income and Retained Earnings is
as follows:

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
(Thousands of Dollars)

Computed federal income taxes at statutory rate ......... $ 57,450 $ 14,970 $ 42,516
Increase (decrease) in tax resulting from:
Accelerated tax depreciation ........................ 4,835 1,869 1,431
Prior year audit adjustments ........................ 72 (1,642) (1,526)
Other ............................................... 7,392 3,687 (2,343)
-------- -------- --------
Total federal income tax expense* ....................... $ 69,749 $ 18,884 $ 40,078
======== ======== ========

INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
Federal taxes currently provided ........................ $(12,088) $ 6,974 $ 20,094
Deferred income taxes ................................... 81,837 11,910 19,984
-------- -------- --------
Total federal income tax expense ........................ 69,749 18,884 40,078
State income tax expense ................................ 3,712 (2,144) 3,257
-------- -------- --------
Federal and state income taxes .......................... $ 73,461 $ 16,740 $ 43,335
======== ======== ========

*Federal Income Tax Expense:
Avista Utilities ................................... $ (1,789) $ 34,757 $ 28,582
Energy Trading and Marketing ....................... 91,353 (32,680) 7,789
Information and Technology ......................... (13,675) (3,383) (2,010)
Avista Ventures .................................... (6,140) 20,190 5,717
-------- -------- --------
Total Federal Income Tax Expense ........................ $ 69,749 $ 18,884 $ 40,078
======== ======== ========

Federal statutory rate .................................. 35% 35% 35%

NOTE 10. LONG-TERM PURCHASED POWER CONTRACTS WITH REQUIRED MINIMUM PAYMENTS

Under fixed contracts with Public Utility Districts (PUD), the Company has
agreed to purchase portions of the output of certain generating facilities.
Although the Company has no investment in such facilities, these contracts
provide that the Company pay certain minimum amounts (which are based at least
in part on the debt service requirements of the supplier) whether or not the
facility is operating. The cost of power obtained under the contracts, including
payments made when a facility is not operating, is included in operations and
maintenance expense in the Consolidated Statements of Income. Information as of
December 31, 2000, pertaining to these contracts is summarized in the following
table:

COMPANY'S CURRENT SHARE OF
--------------------------------------------------------------------------------
Contract
Debt Revenue Expira-
Kilowatt Annual Service Bonds tion
Output Capability Costs(1) Costs(2) Outstanding Date
----------- ----------- ----------- ----------- ----------- -----------
(Thousands of Dollars)

PUD CONTRACTS:
Chelan County PUD:
Rocky Reach Project ..... 2.9% 37,000 $ 1,742 $ 1,218 $ 6,196 2011
Grant County PUD:
Priest Rapids Project ... 6.1 55,000 1,799 936 10,088 2005
Wanapum Project ......... 8.2 75,000 2,917 1,829 14,732 2009
Douglas County PUD:
Wells Project ........... 3.5 30,000 1,042 591 6,193 2018
----------- ----------- ----------- -----------
Totals .......... 197,000 $ 7,500 $ 4,574 $ 37,209
=========== =========== =========== ===========

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(1) The annual costs will change in proportion to the percentage of output
allocated to the Company in a particular year. Amounts represent the
operating costs for the year 2000.
(2) Included in annual costs.

Actual expenses for payments made under the above contracts for the years 2000,
1999 and 1998, were $7.5 million, $6.4 million and $6.2 million, respectively.
The estimated aggregate amounts of required minimum payments (the Company's
share of debt service costs) under the above contracts for the next five years
are $3.8 million in 2001, $3.9 million in 2002, $4.0 million in 2003, $3.6
million in 2004 and $3.6 million in 2005 (minimum payments thereafter are
dependent on then market conditions). In addition, the Company will be required
to pay its proportionate share of the variable operating expenses of these
projects.

NOTE 11. LONG-TERM DEBT

The annual sinking fund requirements and maturities for the next five years for
long-term debt outstanding (excluding subsidiary debt) at December 31, 2000 are
as follows:

YEAR ENDING SINKING FUND
DECEMBER 31 MATURITIES REQUIREMENTS TOTAL
----------- ---------- ------------ -------
(Thousands of Dollars)

2001.............. $ 89,000 $2,185 $ 91,185
2002.............. 50,000 2,035 52,035
2003.............. 205,000 1,635 206,635
2004.............. 30,000 1,485 31,485
2005.............. 29,500 1,485 30,985

The sinking fund requirements may be met by certification of property additions
at the rate of 167% of requirements. All of the utility plant is subject to the
lien of the Mortgage and Deed of Trust securing outstanding First Mortgage
Bonds.

In September 1999, $83.7 million of Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project), Series 1999A due 2032 and Series 1999B
due 2034 were issued by the City of Forsyth, Montana. The proceeds of the bonds
were utilized to refund the $66.7 million of 7 1/8% First Mortgage Bonds due
2013 and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series
1999A and Series 1999B Bonds are backed by an insurance policy issued by AMBAC
Assurance Corporation and bear interest on a floating rate basis that is reset
periodically. The interest rate during 2000 ranged from 3.60% to 4.43%. At
December 31, 2000, the rate was 4.43%.

In 2000, the Company issued a total of $224.0 million of Unsecured MTNs, Series
D at rates of 8.000% and 8.625% due in 2001 and 2003. A total of $44.9 million
of Secured MTNs matured during 2000, with rates between 6.13% and 8.20%. In
1999, $25.0 million of Unsecured Medium-Term Notes (MTNs) were issued, while
$98.1 million of Secured MTNs and $26.5 million of Unsecured MTNs matured or
were redeemed. As of December 31, 2000, the Company had remaining authorization
to issue up to $317.0 million of Unsecured MTNs.

At December 31, 2000, the Company had $163.2 million in outstanding balances
under borrowing arrangements and commercial paper. See Note 12 for details of
credit agreements.

Included in other long-term debt are the following items related to subsidiary
operations (thousands of dollars):

OUTSTANDING AT DECEMBER 31,
---------------------------
2000 1999
------- -------

Notes payable ............................ $ 642 $ 9,598
Capital lease obligations ................ 2,877 6,457
------- -------
Subsidiary total debt ................. 3,519 16,055
Less: current portion .................... 901 6,147
------- -------
Subsidiary net long-term debt ......... $ 2,618 $ 9,908
======= =======

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NOTE 12. BANK BORROWINGS

At December 31, 2000, the Company maintained lines of credit with various banks
under two separate credit agreements. The two lines of credit total $230
million, and both expire on June 26, 2001. Avista Corp. has pledged its shares
of common stock in Avista Capital as security for these agreements. The Company
pays commitment fees of up to 0.2% per annum on the average daily unused portion
of each credit agreement, and utilization fees of up to 0.5%.

In addition, the Company has a $50 million regional commercial paper program
that is backed by the committed lines of credit. During 2000, under various
agreements with banks, the Company could also have up to $100.0 million in loans
outstanding at any one time, with the loans available at the banks' discretion.
These arrangements provided, if funds were made available, for fixed-term loans
for up to 180 days at a fixed rate of interest. None of these agreements were in
place at December 31, 2000.

Balances and interest rates of bank borrowings under these arrangements were as
follows:

YEARS ENDED DECEMBER 31,
------------------------
2000 1999
-------- --------
(Thousands of Dollars)

BALANCE OUTSTANDING AT END OF PERIOD:
Fixed-term loans ............................ $ -- $ 33,500
Commercial paper ............................ 11,160 10,000
Revolving credit agreement .................. 152,000 75,000

MAXIMUM BALANCE DURING PERIOD:
Fixed-term loans ............................ $ 80,000 $ 93,500
Commercial paper ............................ 36,900 10,000
Revolving credit agreement .................. 185,000 75,000

AVERAGE DAILY BALANCE DURING PERIOD:
Fixed-term loans ............................ $ 19,538 $ 29,110
Commercial paper ............................ 16,833 2,604
Revolving credit agreement .................. 84,255 23,767

AVERAGE ANNUAL INTEREST RATE DURING PERIOD:
Fixed-term loans ............................ 6.70% 5.48%
Commercial paper ............................ 6.82 5.89
Revolving credit agreement .................. 7.26 5.87

AVERAGE ANNUAL INTEREST RATE AT END OF PERIOD:
Fixed-term loans ............................ --% 6.56%
Commercial paper ............................ 7.63 6.70
Revolving credit agreement .................. 7.55 6.71

Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, decreasing periodically to $70 million at the end of the
agreement, and expiring April 30, 2001. The credit agreement may be terminated
by the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the banks' 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 is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the banks for cash advances is $30
million, with availability of up to $110 million (less the amount of outstanding
cash advances, if any) for the issuance of letters of credit. At December 31,
2000 and 1999, there were no cash advances (demand notes payable) outstanding.
Letters of credit outstanding under the facility totaled approximately $71.5
million and $75.8 million at December 31, 2000 and 1999, respectively.

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NOTE 13. LEASES

The Company has entered into several lease arrangements involving various
assets, with minimum terms ranging from one to eleven years and expiration dates
from 2001 to 2011. Certain of the lease arrangements require the Company, upon
the occurrence of specified events, to purchase the leased assets for varying
amounts over the term of the lease. The Company's management believes that the
likelihood of the occurrence of the specified events under which the Company
could be required to purchase the property is remote. Rent expense for the years
ended December 31, 2000, 1999 and 1998 was $16.2 million, $18.7 million and
$17.6 million, respectively. Future minimum lease payments (in thousands of
dollars) required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2000 are
estimated as follows:

Year ending December 31:

2001 $ 5,616
2002 5,626
2003 5,496
2004 4,974
2005 3,543
Later years 16,109
-------
Total minimum payments required $41,364
=======

The Company also has various other cancelable operating leases, which are
charged to operating expense, consisting of the Rathdrum combustion turbines,
the Company airplane and a large number of small, relatively short-term,
renewable agreements for various items, such as office equipment and office
space.

The payments under the Avista Capital subsidiaries' capital leases for the next
four years are $1.8 million in 2001, $1.2 million in 2002, $0.5 million in 2003
and $0.2 million in 2004. At December 31, 2000, there were no capital leases at
any Avista Capital subsidiaries that extended past 2004.

NOTE 14. PREFERRED STOCK

CUMULATIVE PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION:

In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock). The Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock in 1999 and converted all remaining outstanding shares
to common stock in February 2000. See Note 15 for additional information.

CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION:

Redemption requirements:

$6.95, Series K - On September 15, 2002, 2003, 2004, 2005 and 2006, the
Company must redeem 17,500 shares at $100 per share plus accumulated
dividends through a mandatory sinking fund. Remaining shares must be
redeemed on September 15, 2007. The Company has the right to redeem an
additional 17,500 shares on each September 15 redemption date.

There are $7.0 million in mandatory redemption requirements during the 2001-2005
period.

NOTE 15. CONVERTIBLE PREFERRED STOCK

In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock), in exchange for 15,404,595 shares of common stock, on the
basis of a one-tenth interest in one share of preferred stock for each share of
common stock. The Series L Preferred Stock had a liquidation preference of
$182.8125 per share.

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During 1999, the Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock. On February 16, 2000, the Company exercised its option
to convert all the remaining outstanding shares of Series L Preferred Stock back
into common stock. One share of Series L Preferred Stock equaled 10 depositary
shares, also known as RECONS (Return-Enhanced Convertible Securities). The
RECONS were also converted into common stock on the same conversion date.

On the conversion date, each of the RECONS was converted into the following:
0.7205 shares of common stock, representing the optional conversion price; plus
0.0361 shares of common stock, representing the optional conversion premium;
plus the right to receive $0.21 in cash, representing an amount equivalent to
accumulated and unpaid dividends up until, but excluding, the conversion date.
Cash payments were made in lieu of fractional shares.

NOTE 16. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES

In 1997, Avista Capital I, a business trust, issued to the public $60,000,000 of
Preferred Trust Securities having a distribution rate of 7 7/8%. Concurrent with
the issuance of the Preferred Trust Securities, the Trust issued $1,855,675 of
Common Trust Securities to the Company. The sole assets of the Trust are the
Company's 7 7/8% Junior Subordinated Deferrable Interest Debentures, Series A,
with a principal amount of $61,855,675. These debt securities may be redeemed at
the Company's option on or after January 15, 2002 and mature January 15, 2037.

In 1997, Avista Capital II, a business trust, issued to the public $50,000,000
of Preferred Trust Securities having a floating distribution rate of LIBOR plus
0.875%, calculated and reset quarterly. The distribution rate paid during 2000
ranged from 6.976% to 7.715%. At December 31, 2000, the distribution rate was
7.61125%. Concurrent with the issuance of the Preferred Trust Securities, the
Trust issued $1,547,000 of Common Trust Securities to the Company. The sole
assets of the Trust are the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures, Series B, with a principal amount of
$51,547,000. These debt securities may be redeemed at the Company's option on or
after June 1, 2007 and mature June 1, 2037. On December 18, 2000, the Company
purchased $10.0 million of these Preferred Trust Securities.

The Company has guaranteed the payment of distributions on, and redemption price
and liquidation amount in respect of, the Preferred Trust Securities to the
extent that the Trust has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the Trust
Securities will be mandatorily redeemed. The Company's Consolidated Statements
of Capitalization reflect only the $60 million and $40 million of Preferred
Trust Securities, accordingly all intercompany transactions have been
eliminated.

NOTE 17. FAIR VALUE OF FINANCIAL SECURITIES

The fair value of the Company's long-term debt (excluding notes payable and
other) at December 31, 2000 and 1999 is estimated to be $772.5 million, or 101%
of the carrying value and $545.8 million, or 93% of the carrying value,
respectively. The fair value of the Company's mandatorily redeemable preferred
stock at December 31, 2000 and 1999 is estimated to be $17.5 million, or 50% of
the carrying value and $35.1 million, or 100% of the carrying value,
respectively. The fair value of the Company's preferred trust securities at
December 31, 2000 and 1999 is estimated to be $79.2 million, or 79% of the
carrying value and $94.3 million, or 86% of the carrying value, respectively.
These estimates are all based on available market information. The fair value of
the Company's convertible preferred securities at December 31, 1999 was
estimated to be $230.0 million, or 87%, of the carrying value. This valuation
was based on the closing price of the securities on December 31, 1999. No
convertible preferred securities were outstanding at December 31, 2000.

NOTE 18. COMMON STOCK

In April 1990, the Company sold 1,000,000 shares of its common stock to the
Trustee of the Investment and Employee Stock Ownership Plan for Employees of the
Company (Plan) for the benefit of the participants and beneficiaries of the
Plan. In payment for the shares of Common Stock, the Trustee issued a promissory
note payable to the Company in the amount of $14,125,000. Dividends paid on the
stock held by the Trustee, plus Company

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contributions to the Plan, if any, are used by the Trustee to make interest and
principal payments on the promissory note. The balance of the promissory note
receivable from the Trustee ($7.0 million at December 31, 2000) is reflected as
a reduction to common equity. The shares of Common Stock are allocated to the
accounts of participants in the Plan as the note is repaid. During 2000, the
cost recorded for the Plan was $7.0 million. Interest on the note payable to the
Company, cash and stock contributions to the Plan and dividends on the shares
held by the Trustee were $0.7 million, $1.8 million and $0.2 million,
respectively.

In May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares return to the status of authorized but unissued shares. As of
December 31, 2000, the Company had repurchased approximately 4.8 million common
shares and 322,500 shares of Return-Enhanced Convertible Securities (which was
equivalent to 32,250 shares of Convertible Preferred Stock, Series L). The
combined repurchases of these two securities represent 9% of outstanding common
stock and common stock equivalents.

In November 1999, the Company adopted a shareholder rights plan pursuant to
which holders of Common Stock outstanding on February 15, 1999, or issued
thereafter, have been granted one preferred share purchase right (Right) on each
outstanding share of Common Stock. Each Right, initially evidenced by and traded
with the shares of Common Stock, entitles the registered holder to purchase one
one-hundredth of a share of Preferred Stock of the Company, without par value,
at a purchase price of $70, subject to certain adjustments, regulatory approval
and other specified conditions. The Rights will be exercisable only if a person
or group acquires 10% or more of the outstanding shares of Common Stock or
commences a tender or exchange offer, the consummation of which would result in
the beneficial ownership by a person or group of 10% or more of the outstanding
shares of Common Stock. Upon any such acquisition, each Right will entitle its
holder to purchase, at the purchase price, that number of shares of Common Stock
or Preferred Stock of the Company (or, in the case of a merger of the Company
into another person or group, common stock of the acquiring person) which has a
market value at that time equal to twice the purchase price. In no event will
the Rights be exercisable by a person which has acquired 10% or more of the
Company's Common Stock. The Rights may be redeemed, at a redemption price of
$0.01 per Right, by the Board of Directors of the Company at any time until any
person or group has acquired 10% or more of the Common Stock. The Rights will
expire on March 31, 2009. This plan replaced a similar shareholder rights plan
that expired in February 2000.

The Company has a Dividend Reinvestment and Stock Purchase Plan under which the
Company's stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Company's Common Stock at current
market value.

In March 2000, the Company began issuing new shares of common stock to the
Employee Investment Plan rather than having the Plan purchasing shares of common
stock on the open market. In the fourth quarter of 2000, the Company also began
issuing new shares of common stock for the Dividend Reinvestment and Stock
Purchase Plan. Through December 31, 2000, a total of 125,636 new shares of
common stock were issued to both plans.

NOTE 19. EARNINGS PER SHARE

On February 16, 2000, all outstanding shares of Series L Preferred Stock were
converted into 11,410,047 shares of common stock. The weighted-average number of
shares of common stock outstanding during the twelve months ended December 31,
2000 related to the converted shares was 9,975,997. The costs of converting the
Series L Preferred Stock into common stock totaled $21.3 million during the
first quarter of 2000, with $18.1 million representing the optional conversion
premium and $3.2 million attributable to the regular dividend on the stock. At
December 31, 1999 and 1998, 1,508,210 and 1,540,460 shares of $12.40 Convertible
Preferred Stock, Series L, which were convertible into 15,082,100 and 15,404,595
million shares of common stock, respectively, were outstanding. All of these
potential common shares and the associated dividends were excluded from the
computation of diluted EPS for 1999 and 1998 because their inclusion had an
antidilutive effect on EPS.

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The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):

2000 1999 1998
------- ------- -------

Net income $91,679 $26,031 $78,139
Less: Preferred stock dividends 23,735 21,392 8,399
------- ------- -------
Income available for common stock-basic and diluted $67,944 $ 4,639 $69,740
======= ======= =======

Weighted-average number of common shares
outstanding-basic 45,690 38,213 54,604
Restricted stock 101 112 --
Stock options 312 -- 54
------- ------- -------
Weighted-average number of common shares
outstanding-diluted 46,103 38,325 54,658
======= ======= =======

Earnings per common share
Basic $ 1.49 $ 0.12 $ 1.28
Diluted $ 1.47 $ 0.12 $ 1.28

For additional information regarding the convertible preferred stock and stock
option plans, see Notes 15 and 21, respectively.

NOTE 20. INFORMATION AND TECHNOLOGY SEGMENT INFORMATION

The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Fiber and Avista
Communications merged operations in 2000, so Avista Fiber's financial
information has been included with Avista Communications. Additional information
for each of these three separate companies is provided as follows (thousands of
dollars):

YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------

AVISTA ADVANTAGE
Operating Revenues $ 4,971 $ 1,518 $ 1,186
Operating Loss (pre-tax) $(14,481) $ (5,042) $ (2,904)
Net Loss $(11,022) $ (3,428) $ (2,052)

AVISTA LABS
Operating Revenues $ 761 $ 748 $ 132
Operating Loss (pre-tax) $(11,942) $ (3,924) $ (2,076)
Net Loss $ (8,010) $ (2,561) $ (1,169)

AVISTA COMMUNICATIONS
Operating Revenues $ 5,913 $ 2,585 $ 677
Operating Income (Loss) (pre-tax) $(13,661) $ (4,036) $ (212)
Net Income (Loss) $ (9,376) $ (2,631) $ (177)

NOTE 21. STOCK COMPENSATION PLANS

AVISTA CORP.

In 1998, the Company adopted and shareholders approved an incentive compensation
plan, the Long-Term Incentive Plan (1998 Plan). Under the 1998 Plan, certain key
employees, directors and officers of the Company and its subsidiaries may be
granted stock options, stock appreciation rights, stock awards (including
restricted stock) and other stock-based awards and dividend equivalent rights.
The Company has made available a maximum of 2.5

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million shares of its common stock for grant under the 1998 Plan. The shares
issued under the 1998 Plan will be purchased by the trustee on the open market.
Non-employee Directors were added to this plan in 2000.

In addition, in 2000, the Company adopted a Non-Officer Employee Long-Term
Incentive Plan (2000 Plan). The provisions of the 2000 Plan are essentially the
same as those under the 1998 Plan, except for the exclusion of directors and
officers of the Company.

The following summarizes stock options activity for 2000, 1999 and 1998 under
the Plan:

2000 1999 1998
------------- ------------- -------------

Number of shares under stock options:
Outstanding at beginning of year 1,360,325 589,800 --
Granted 623,200 780,700 589,800
Exercised (44,975) -- --
Canceled (94,650) (10,175) --
------------- ------------- -------------

Unexercised options outstanding at end of year 1,843,900 1,360,325 589,800
============= ============= =============

Exercisable options 581,025 147,200 --
============= ============= =============

Weighted average exercise price:
Granted $ 23.03 $ 17.21 $ 20.14
Exercised $ 18.53 -- --
Canceled $ 18.15 $ 18.63 --
Outstanding at end of year $ 19.80 $ 18.29 $ 20.14
Exercisable at end of year $ 18.72 $ 19.63 --

Weighted average fair value of options granted during the year $ 12.02 $ 5.02 $ 4.74

Principal assumptions used in applying the Black-Scholes model:
Risk-free interest rate 5.87% - 6.87% 5.57% - 6.63% 4.81% - 5.53%
Expected life, in years 7 7 7
Expected volatility 58.47% 27.92% 22.19%
Expected dividend yield 2.34% 3.11% 3.01%

Information with respect to stock options outstanding and stock options
exercisable at December 31, 2000 is as follows:

Stock options outstanding
Range of exercise prices $16.91 - $29.22
Weighted average remaining contractual life, in years 9
Weighted average exercise price $19.80

Stock options exercisable
Range of exercise prices $16.66 - $22.62
Number exercisable 581,025
Weighted average exercise price $18.72

The Company granted 1,000 and 20,000 shares of restricted common stock under the
Plan in 2000 and 1999, respectively. Plan participants are entitled to dividends
and to vote their respective shares. The sale or transfer of restricted stock is
prohibited during the vesting period except as specified in the award
agreements. The value of restricted stock awards is established by the average
market price on the date of grant. Restricted stock awarded in 2000 and 1999
have vesting periods from four to five years.

Common equity was reduced in the accompanying Consolidated Balance Sheets by the
cost of restricted shares acquired by the Plan trustee on the open market.
Accordingly, the Company is recording compensation expense ratably over the
restriction periods based on the reduction to common equity.

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The Company accounts for stock based compensation using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under this method, compensation cost
is recognized on the excess, if any, of the market price of the stock at grant
date over the exercise price of the option. As the exercise price for options
granted under the Plan was equal to the market price at grant date, no
compensation expense has been recorded by the Company in connection this the
Plan. In accordance with FAS No. 123, "Accounting for Stock-Based Compensation,"
compensation expense is determined based on the fair value of the award and
recognizes that cost over the service period. Had compensation costs for these
plans been determined based on the fair value at the grant dates with FAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below. The pro forma amounts include the pro forma effect of
subsidiary companies' stock option plans.

2000 1999 1998
---------- ---------- ----------

Net income (in thousands):
As reported $ 91,679 $ 26,031 $ 78,139
Pro forma $ 89,850 $ 24,636 $ 76,891
Basic EPS as reported $ 1.49 $ 0.12 $ 1.28
Proforma Basic EPS $ 1.45 $ 0.08 $ 1.25
Diluted EPS as Reported $ 1.47 $ 0.12 $ 1.28
Proforma Diluted EPS $ 1.43 $ 0.08 $ 1.25

AVISTA CAPITAL COMPANIES

Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which key employees and directors were granted the opportunity to
purchase shares of subsidiary common stock at prices equal to the fair market
value as determined by each subsidiary's Board of Directors. Restricted shares
are subject to transfer agreements and vest over various periods as defined in
the plans.

Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which certain employees and directors of the Company and the
subsidiaries are granted options to purchase subsidiary shares at prices no less
than the fair market value on the date of grant. Options outstanding under these
plans usually become fully exercisable between three and five years from the
date granted and terminate ten years from the date granted. Upon termination of
employment, vested options may be exercised and the related subsidiary shares
may be, but are not required to be, repurchased by the applicable subsidiary at
fair value.

NOTE 22. COMMITMENTS AND CONTINGENCIES

The Company believes, based on the information presently known, that the
ultimate liability for the matters discussed in this note, individually or in
the aggregate, taking into account established accruals for estimated
liabilities, will not be material to the consolidated financial position of the
Company, but could be material to results of operations or cash flows for a
particular quarter or annual period. No assurance can be given, however, as to
the ultimate outcome with respect to any particular lawsuit.

SECURITIES LITIGATION

On July 27, 2000, John Bain filed a lawsuit in the U.S. District Court for the
Eastern District of Washington against the Company and Thomas M. Matthews, the
former Chairman of the Board, President and Chief Executive Officer of the
Company, and Jon E. Eliassen, a Senior Vice President and the Chief Financial
Officer of the Company. On August 2, 2000, Wei Cao and William Dalton filed
separate lawsuits in the same Court against the Company and Mr. Matthews. On
August 7, 2000, Martin Capetz filed a lawsuit in the same Court against the
Company, Mr. Matthews and Mr. Eliassen. On November 9, 2000, the court entered
an order consolidating the cases, appointing the lead stockholder-plaintiff, and
appointing lead stockholders-plaintiffs' counsel to prosecute the litigation. On
February 13, 2001, plaintiffs filed their First Amended and Consolidated Class
Action asserting claims on behalf of a purported class of persons who purchased
Company common stock during the period April 14, 2000 through June 21, 2000. In
their consolidated complaint, plaintiffs assert violations of Section 10(b) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder,
arising out of various alleged misstatements and omissions in the Company's
Annual Report on Form 10-K for the year 1999, its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, and in other information made publicly
available by the Company, and, further, claim that

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plaintiffs and the purported class suffered damages as a result thereof. Such
alleged misstatements and omissions are claimed to relate to the Company's
trading activities in wholesale energy markets, the Company's risk management
policies and procedures with respect thereto, and the Company's trading losses
in the second quarter of 2000. The plaintiffs request, among other things,
compensatory damages in unspecified amounts and other relief as the Court may
deem proper. The Company denies liability and intends to defend the consolidated
lawsuit vigorously.

The staff of the Securities and Exchange Commission has requested from the
Company certain information regarding Avista Utilities' wholesale trading
activities and its risk management policies and procedures with respect thereto.
The Company is complying with this request.

COMMODITY FUTURES TRADING COMMISSION INVESTIGATION

Avista Energy and one or more of its former employees are the subject of an
investigation by the Commodity Futures Trading Commission (CFTC) into futures
trading, including certain electricity futures contracts, in July of 1998. As
part of its investigation, the CFTC is examining the placement of orders on
three separate dates in 1998 to purchase Palo Verde and California-Oregon Border
(COB) futures contracts traded on the New York Mercantile Exchange and whether
the trading in question amounted to a manipulation of the price of those
contracts.

STATE OF WASHINGTON BUSINESS AND OCCUPATION TAX

The State of Washington's Business and Occupation Tax generally applies to gross
receipts from business activities. Exceptions apply for financial trading
activities involving stocks, bonds and futures contracts. For those activities,
the gain from the transactions is the taxable basis. On an audit for the years
1997 through June of 2000, the Department of Revenue (DOR) made a distinction
between certain types of energy trades entered into by Avista Energy. As a
result, the DOR is attempting to apply tax to the gross receipts rather than the
trading gains on about 20% of Avista Energy's trading volume for the audit
period. Avista Energy has received a notice of assessment that contains a
deficiency of about $13.5 million related to the disputed issue. Avista Energy
believes that all of its trading activity should be subject to tax on the
trading gains only, and taxes have been accrued and paid based on this position.
An administrative appeal is currently being prepared for submittal to the DOR.
No estimate of the timing for an administrative resolution is available. In the
event a satisfactory determination is not received from the administrative
process, Avista Energy is prepared to seek recourse through the courts.

SPOKANE GAS PLANT

The Spokane Natural Gas Plant site (which was operated as a coal gasification
plant for approximately 60 years until 1948) was acquired by the Company through
a merger in 1958. The Company no longer owns the property. Initial core samples
taken from the site indicate environmental contamination at the site. On January
15, 1999, the Company received notice from the State of Washington's Department
of Ecology (DOE) that it had been designated as a potentially liable party (PLP)
with respect to any hazardous substances located on this site, stemming from the
Company's past ownership of the former Gas Plant. In its notice, the DOE stated
that it intended to complete an on-going remedial investigation of this site,
complete a feasibility study to determine the most effective means of halting or
controlling future releases of substances from the site, and implement
appropriate remedial measures.

The Company responded to the DOE acknowledging its listing as a PLP, but
requested that additional parties also be listed as PLPs. In the spring of 1999,
the DOE named two other parties as additional PLPs. The Company completed
additional characterization of the site for the remedial investigation (RI).

The DOE issued a Draft Agreed Order to the Company on January 17, 2000, and
solicited public comment. The Agreed Order was signed by the DOE, the Company
and Burlington Northern & Santa Fe Railway Co. (another PLP) on March 13, 2000.
The work to be performed under the Agreed Order includes three major technical
parts: completion of the RI; performance of a focused Feasibility Study (FS);
and implementation of an interim groundwater monitoring plan. During the second
quarter, the Company received comments from the DOE on its initial RI, then
submitted another draft of the RI, which has been accepted as final by the DOE.
The Company also received comments from the DOE pertaining to the FS, which
outlines cleanup alternatives. Another FS, which responded to the DOE comments,
was submitted to the DOE on October 13. The Company received final comments and
submitted another draft of the FS in November, which was accepted. The public
comment period ran from December 15, 2000 through January 18, 2001. After the
comment period, the DOE will issue a draft Clean-up Action Plan (CAP), which is
expected by the end of March.

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EASTERN PACIFIC ENERGY

On October 9, 1998, Eastern Pacific Energy (Eastern Pacific), an energy
aggregator participating in the restructured retail energy market in California,
filed suit against the Company and its affiliates, Avista Advantage and Avista
Energy, in the United States District Court for the Central District of
California. Eastern Pacific alleges, among other things, a breach of an oral or
implied joint venture agreement whereby the Company agreed to supply not less
than 300 megawatts of power to Eastern Pacific's California customers and that
Avista Advantage agreed to provide energy-related products and services. The
complaint seeks an unspecified amount of damages and also seeks to recover any
future profits earned from sales of the aforementioned amount of power to
California consumers.

On December 4, 1998, Avista Advantage, Avista Energy and the Company jointly
filed a motion to dismiss the complaint for failure to state a claim upon which
relief can be granted. On May 4, 1999, the Court granted the Company's and its
affiliates' motion to dismiss the case and granted the plaintiff the opportunity
to file and serve an Amended Complaint, which it did. The Company and its
affiliates renewed their motion to dismiss and on October 22, 1999, the Court
again granted the motion to dismiss, this time with prejudice. Plaintiff
appealed this adverse determination to the Ninth Circuit Court of Appeals. A
settlement agreement was reached among the parties, whereby the suit would be
dismissed with prejudice and without any payment to Eastern Pacific, up vacation
by the Federal District Court of its earlier judgment of dismissal of Eastern
Pacific's claims. On February 8, 2001, the Court entered its Order Granting the
Joint Motion to Vacated Judgment and Dismissing the Action with Prejudice. The
Ninth Circuit Court of Appeals had previously entered an Order on October 29,
2000, dismissing the appeal pursuant to a stipulation of the parties.

SALE OF CERTAIN PENTZER CORPORATION SUBSIDIARIES

On February 26, 2001, IDX Corporation, formerly known was Store Fixtures Group,
Inc., filed a complaint against Pentzer in the United States District Court for
the District of Massachusetts, alleging breach of contract and negligent
misrepresentation relating to a stock purchase agreement. Pursuant to this
agreement, Pentzer sold the capital stock of a group of companies on August 31,
1999. Plaintiff alleges that Pentzer breached various representations and
warranties concerning financial statements and inventory, contending that
reliance on such representations and warranties caused them to pay more for the
group of companies than they were worth. In total, plaintiff claims damages in
the approximate amount of $9 million. Pentzer has retained legal counsel and
intends to vigorously defend against this action.

On April 7, 2000, Creative Solutions Group, Inc. and Form House Holdings, Inc.
filed a complaint against Pentzer Corporation in the United States District
Court for the District of Massachusetts, alleging misrepresentations and breach
of representations and warranties made under a stock purchase agreement.
Pursuant to this agreement, Pentzer sold the capital stock of a group of
companies on March 31, 1999. Plaintiffs allege that Pentzer breached various
representations and warranties concerning financial statements, cost of goods
sold and inventory, contending that reliance on such representations and
warranties caused them to pay more for the group of companies than they were
worth. In total, plaintiffs allege damages in the approximate amount of $27
million. Pentzer has retained legal counsel and intends to vigorously defend
against this action. The Court denied Pentzer's request that the matter be sent
to arbitration and Pentzer has appealed that determination to the First Circuit
Court of Appeals.

OTHER CONTINGENCIES

The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates of investigation, cleanup and
monitoring costs to be incurred.

The Company has potential liabilities under the Federal Endangered Species Act
(ESA) for species of fish that have either already been added to the endangered
species list, been listed as "threatened" or been petitioned for listing. Thus
far, measures that have been adopted and implemented have had minimal impact of
the Company. The new operating license for the Clark Fork Projects describes the
approach to restore bull trout populations in the project areas. Using the
concept of adaptive management, the Company will evaluate the feasibility of
fish passage, and, depending upon the results of these experimental studies,
determine the applications of funds toward continuing fish passage efforts or
other population enhancement measures.

71
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AVISTA CORPORATION
- --------------------------------------------------------------------------------

The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
of the new license for Cabinet Gorge. To date, intensive biological studies in
the lower Clark Fork River and Lake Pend Oreille have documented minimal
biological effects of high dissolved gas levels on free ranging fish. Under the
terms of the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy by 2002.

Under the federal licenses for its hydroelectric projects, the Company is
obligated to protect its property rights, including water rights. The State of
Montana is examining the status of all water right claims within state
boundaries, which could potentially adversely affect the generating capacity of
the Company's Cabinet Gorge and Noxon Rapids hydroelectric facilities. The
Company is participating in this extended process, which is unlikely to be
concluded in the foreseeable future.

The Company must be in compliance with requirements under the Clean Air Act
Amendments (CAAA) at the Colstrip thermal generating plant, in which the Company
maintains an ownership interest. The anticipated share of costs at Colstrip is
not expected to have a major economic impact on the Company.

The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. Terms of the natural gas
purchase contracts range from one month to five years and the majority provide
for minimum purchases at the then effective market rate. The Company also has
various agreements for the purchase, sale or exchange of electric energy with
other utilities, cogenerators, small power producers and government agencies.

As of December 31, 2000, the Company's collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 53% of
employees. The current agreement with the union local representing the majority
of the bargaining unit employees expires on March 25, 2002. A local agreement in
the South Lake Tahoe area, which represents 5 employees, expires on March 25,
2002.

NOTE 23. ACQUISITIONS AND DISPOSITIONS

On May 5, 2000, the owners of the Centralia Power Plant sold the plant to
TransAlta, a Canadian company. Avista Utilities recorded an after-tax gain
totaling $9.0 million from the sale of its 17.5% ownership interest in the
plant. Of the total after-tax gain of $37.2 million from the sale of Centralia,
$28.2 million was deferred, to be returned to Avista Utilities' customers
through rates over established periods of time. Washington customers received
$20.7 million of the after-tax gain through pre-tax credits to their electric
bills over the two-month period of December 2000 and January 2001. Idaho
customers will receive the remaining $7.5 million of the after-tax gain, which
translates into a pre-tax reduction of 1.8% over an eight-year period.

During the first quarter of 1999, Pentzer sold its Creative Solutions Group, a
group of five portfolio companies that provide point-of-purchase displays and
other merchandising and packaging services to retailers and consumer product
companies. The sale resulted in a gain of $10.1 million, net of taxes. During
the third quarter of 1999, Pentzer sold its Store Fixtures Group, a group of six
portfolio companies that design, manufacture and deliver store fixture products
to major retailers. The sale resulted in a gain of $27.6 million, net of taxes.
During the first quarter of 1998, Pentzer sold Systran Financial Services,
resulting in an after-tax gain of $5.5 million. In November 1999, Pentzer
purchased the International Retail Services Group, a company that provides
backroom supplies for retail stores; this company was sold in November 2000.

In February 1999, Avista Energy purchased Vitol Gas & Electric, LLC (Vitol),
based in Boston, Massachusetts. Vitol traded natural gas, electricity, coal and
SO2 allowances in markets in the eastern half of the United States. The
acquisition was funded through the issuance of additional shares of common stock
to Avista Capital.

In January 1999, Avista Corp. acquired a majority ownership in One Eighty
Communications, a competitive local exchange carrier that provided local dial
tone and data services to commercial accounts in local communities. The new
company was renamed Avista Communications.

72
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AVISTA CORPORATION
- --------------------------------------------------------------------------------

NOTE 24. SELECTED QUARTERLY INFORMATION (UNAUDITED)

The Company's energy operations are significantly affected by weather
conditions. Consequently, there can be large variances in revenues, expenses and
net income between quarters based on seasonal factors such as temperatures and
streamflow conditions. A summary of quarterly operations (in thousands of
dollars except per share amounts) for 2000 and 1999 follows:

THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
-------------- -------------- -------------- --------------
2000

Operating revenues ........................ $ 1,381,974 $ 1,353,414 $ 2,864,305 $ 2,311,797
Operating income .......................... 29,073 (27,743) 67,899 134,199
Net income ................................ 10,525 (21,493) 34,540 68,107
Income available for common stock ......... (11,385) (22,101) 33,932 67,498
Outstanding common stock (000s):
Weighted average ....................... 41,297 47,113 47,147 47,172
Actual ................................. 47,078 47,128 47,159 47,209
Earnings per share:
Avista Utilities ....................... $ (0.05) $ (1.33) $ (0.02) $ 0.03
Energy Trading and Marketing ........... (0.09) 1.00 0.89 1.74
Information and Technology ............. (0.14) (0.13) (0.14) (0.21)
Avista Ventures ........................ -- (0.01) (0.01) (0.04)
-------------- -------------- -------------- --------------
Earnings per share, basic .............. $ (0.28) $ (0.47) $ 0.72 $ 1.52
Earnings per share, diluted ............ $ (0.28) $ (0.47) $ 0.72 $ 1.50
Dividends paid per common share ........... $ 0.12 $ 0.12 $ 0.12 $ 0.12

Trading price range per share:
High ................................... $ 68.000 $ 41.125 $ 30.440 $ 23.500
Low .................................... $ 14.625 $ 15.750 $ 16.813 $ 17.880

1999
Operating revenues ........................ $ 1,212,822 $ 1,411,736 $ 3,718,109 $ 1,562,317
Operating income .......................... 30,363 17,380 18,197 (34,583)
Net income ................................ 19,388 8,509 27,613 (29,479)
Income available for common stock ......... 14,004 3,125 22,273 (34,763)
Outstanding common stock (000s):
Weighted average ....................... 40,454 40,185 36,634 35,648
Actual ................................. 40,454 38,881 35,645 35,648
Earnings per share:
Avista Utilities ....................... $ 0.35 $ 0.39 $ (0.13) $ 0.39
Energy Trading and Marketing ........... (0.18) (0.27) 0.02 (1.16)
Information and Technology ............. (0.03) (0.04) (0.06) (0.14)
Avista Ventures ........................ 0.21 -- 0.78 (0.01)
-------------- -------------- -------------- --------------
Earnings per share, basic .............. $ 0.35 $ 0.08 $ 0.61 $ (0.92)
Earnings per share, diluted ............ $ 0.34 $ 0.08 $ 0.52 $ (0.92)
Dividends paid per common share ........... $ 0.12 $ 0.12 $ 0.12 $ 0.12

Trading price range per share:
High ................................... $ 19.563 $ 18.188 $ 18.063 $ 18.125
Low .................................... $ 15.938 $ 14.625 $ 16.250 $ 15.000

73
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AVISTA CORPORATION
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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of the Registrant has been omitted pursuant
to General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 10, 2001.

Executive Officers of the Registrant

Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------

Larry A. Stanley 72 Chairman of the Board since November 2000.

Gary G. Ely 53 President and Chief Executive Officer since October 2000; Executive Vice
President February 1999 - October 2000; Senior Vice President and
General Manager August 1996 - February 1999; Vice President - Natural
Gas February 1991- August 1996.

Jon E. Eliassen 53 Senior Vice President and Chief Financial Officer since November 1998;
Senior Vice President, Chief Financial Officer and Treasurer December
1997 - November 1998; Senior Vice President and Chief Financial Officer
August 1996 - December 1997; Vice President - Finance and Chief
Financial Officer February 1986 - August 1996.

David J. Meyer 47 Senior Vice President and General Counsel since September 1998; prior to
employment with the Registrant: Attorney - Paine Hamblen Coffin Brooke &
Miller 1974 - September 1998.

David A. Brukardt 46 Chief Communication Officer and Vice President of Investor and Corporate
Relations since August 2000; Vice President - Investor Relations July 1999
- August 2000; prior to employment with the Registrant: Director - Investor
and Corporate Relations - Harnischfeger Industries, Inc. and Vice President -
Harnischfeger Foundation July 1995 - July 1999.

Christy M. Burmeister-Smith 44 Vice President and Controller since June 1999; Controller - Energy
Delivery and various other positions with the Company since 1980.

Robert D. Fukai 51 Vice President - External Relations since August 1996; Vice President -
Human Resources, Corporate Services and Marketing January 1993 - August 1996.

Scott Morris 43 Vice President since November 2000; President - Avista Utilities since
August 2000; General Manager - Avista Utilities October 1991 - August 2000.

Kelly Norwood 42 Vice President since November 2000; Vice President and General Manager of
Energy Resources - Avista Utilities since August 2000; various other staff
and management positions with the Company since 1981.

Ronald R. Peterson 48 Vice President and Treasurer since November 1998; Vice President and
Controller February 1998 - November 1998; Controller August 1996 -
February 1998; Treasurer February 1992 - August 1996.

Terry L. Syms 52 Vice President and Corporate Secretary since February 1998; Corporate
Secretary March 1988 - February 1998.

74
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AVISTA CORPORATION
- --------------------------------------------------------------------------------

Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------

Roger D. Woodworth 44 Vice President - Corporate Development since November 1998; Director of
Corporate Development and various other positions with the Company since
1979.

All of the Company's executive officers, with the exception of Messrs. Fukai,
Norwood and Woodworth and Mme. Burmeister-Smith were officers or directors of
one or more of the Company's subsidiaries in 2000.

Executive officers are elected annually by the Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's annual meeting of shareholders to be held on May 10, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) Security ownership of certain beneficial owners (owning 5% or more of
Registrant's voting securities):

Information regarding security ownership of certain beneficial owners
(owning 5% or more of Registrant's voting securities) has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to
the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Registrant's annual meeting
of shareholders to be held on May 10, 2001.

(b) Security ownership of management:

Information regarding security ownership of management has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to
the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Registrant's annual meeting
of shareholders to be held on May 10, 2001.

None.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions has been
omitted pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of shareholders to
be held on May 10, 2001.

75
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AVISTA CORPORATION
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PART IV

ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K

(a) 1. Financial Statements (Included in Part II of this report):

Independent Auditors' Report

Consolidated Statements of Income, Comprehensive Income and Retained
Earnings for the Years Ended December 31, 2000, 1999 and 1998

Consolidated Balance Sheets, December 31, 2000 and 1999

Consolidated Statements of Capitalization, December 31, 2000 and 1999

Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998

Schedule of Information by Business Segments for the Years Ended
December 31, 2000, 1999 and 1998

Notes to Financial Statements

(a) 2. Financial Statement Schedules:

None

(a) 3. Exhibits:

Reference is made to the Exhibit Index commencing on page 79. The
Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K:

Dated January 6, 2000, regarding lower utility revenues due to warm
weather and fourth quarter charges due to restructuring at Avista
Energy and impairment of utility assets.

Dated January 28, 2000, announcing the conversion of the Series L
Convertible Preferred Stock into common stock.

Dated June 21, 2000, reporting significant increases in energy expenses
and the impact on Company earnings.

Dated July 26, 2000, announcing earnings for the second quarter of
2000.

Dated August 25, 2000, announcing executive changes within Avista Corp.
and Avista Utilities.

Dated October 25, 2000, announcing earnings for the third quarter of
2000 and the resignation of T. M. Matthews, the Company's Chairman of
the Board, President and Chief Executive Officer.

76
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AVISTA CORPORATION
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AVISTA CORPORATION

March 8, 2001 By /s/ Gary G. Ely
------------------ ---------------------------------------
Date Gary G. Ely
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Gary G. Ely Principal Executive Officer March 8, 2001
- ----------------------------------------------------
Gary G. Ely
President and Chief Executive Officer

/s/ J. E. Eliassen Principal Financial March 8, 2001
- ---------------------------------------------------- and Accounting Officer
J. E. Eliassen (Senior Vice President
and Chief Financial Officer)

/s/ Erik J. Anderson Director March 8, 2001
- ----------------------------------------------------
Erik J. Anderson

/s/ Kristianne Blake Director March 8, 2001
- ----------------------------------------------------
Kristianne Blake

/s/ David A. Clack Director March 8, 2001
- ----------------------------------------------------
David A. Clack

/s/ Sarah M. R. Jewell Director March 8, 2001
- ----------------------------------------------------
Sarah M. R. Jewell

/s/ John F. Kelly Director March 8, 2001
- ----------------------------------------------------
John F. Kelly

/s/ Eugene W. Meyer Director March 8, 2001
- ----------------------------------------------------
Eugene W. Meyer

/s/ Bobby Schmidt Director March 8, 2001
- ----------------------------------------------------
Bobby Schmidt

/s/ Larry A. Stanley Director March 8, 2001
- ----------------------------------------------------
Larry A. Stanley

/s/ R. John Taylor Director March 8, 2001
- ----------------------------------------------------
R. John Taylor

/s/ Daniel J. Zaloudek Director March 8, 2001
- ----------------------------------------------------
Daniel J. Zaloudek

77
82

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
2-81697, 2-94816, 33-54791, 33-32148, 333-33790, and 333-47290 on Form S-8, and
in Registration Statement Nos. 33-53655, 333-39551, 333-82165, 333-16353, and
333-16353-03 on Form S-3 of our report dated February 2, 2001, (February 26,
2001 as to Note 22), appearing in this Annual Report on Form 10-K of Avista
Corporation for the year ended December 31, 2000.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Seattle, Washington
March 6, 2001

78
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AVISTA CORPORATION
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EXHIBIT INDEX

Previously Filed*
----------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------

3(a) 1-3701 (with Restated Articles of Incorporation of Avista Corporation as
1998 Form 10-K) restated February 25, 1999.

3(b) 1-3701 (with 2000 Bylaws of Avista Corporation, as amended July 1, 2000.
2nd Quarter 10-Q)

4(a)-1 2-4077 B-3 Mortgage and Deed of Trust, dated as of June 1, 1939.

4(a)-2 2-9812 4(c) First Supplemental Indenture, dated as of October 1, 1952.

4(a)-3 2-60728 2(b)-2 Second Supplemental Indenture, dated as of May 1, 1953.

4(a)-4 2-13421 4(b)-3 Third Supplemental Indenture, dated as of December 1, 1955.

4(a)-5 2-13421 4(b)-4 Fourth Supplemental Indenture, dated as of March 15, 1967.

4(a)-6 2-60728 2(b)-5 Fifth Supplemental Indenture, dated as of July 1, 1957.

4(a)-7 2-60728 2(b)-6 Sixth Supplemental Indenture, dated as of January 1, 1958.

4(a)-8 2-60728 2(b)-7 Seventh Supplemental Indenture, dated as of August 1, 1958.

4(a)-9 2-60728 2(b)-8 Eighth Supplemental Indenture, dated as of January 1, 1959.

4(a)-10 2-60728 2(b)-9 Ninth Supplemental Indenture, dated as of January 1, 1960.

4(a)-11 2-60728 2(b)-10 Tenth Supplemental Indenture, dated as of April 1, 1964.

4(a)-12 2-60728 2(b)-11 Eleventh Supplemental Indenture, dated as of March 1, 1965.

4(a)-13 2-60728 2(b)-12 Twelfth Supplemental Indenture, dated as of May 1, 1966.

4(a)-14 2-60728 2(b)-13 Thirteenth Supplemental Indenture, dated as of August 1, 1966.

4(a)-15 2-60728 2(b)-14 Fourteenth Supplemental Indenture, dated as of April 1, 1970.

4(a)-16 2-60728 2(b)-15 Fifteenth Supplemental Indenture, dated as of May 1, 1973.

4(a)-17 2-60728 2(b)-16 Sixteenth Supplemental Indenture, dated as of February 1,
1975.

4(a)-18 2-60728 2(b)-17 Seventeenth Supplemental Indenture, dated as of
November 1, 1976.

4(a)-19 2-69080 2(b)-18 Eighteenth Supplemental Indenture, dated as of June 1, 1980.

4(a)-20 1-3701 (with 4(a)-20 Nineteenth Supplemental Indenture, dated as of January 1,
1980 Form 10-K) 1981.

4(a)-21 2-79571 4(a)-21 Twentieth Supplemental Indenture, dated as of August 1, 1982.

*Incorporated herein by reference.
**Filed herewith.

79
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AVISTA CORPORATION
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EXHIBIT INDEX (continued)

Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------

4(a)-22 1-3701 (with 4(a)-22 Twenty-First Supplemental Indenture, dated as of
Form 8-K dated September 1, 1983.
September 20, 1983)

4(a)-23 2-94816 4(a)-23 Twenty-Second Supplemental Indenture, dated as of
March 1, 1984.
4(a)-24 1-3701 (with 4(a)-24 Twenty-Third Supplemental Indenture, dated as of
1986 Form 10-K) December 1, 1986.

4(a)-25 1-3701 (with 4(a)-25 Twenty-Fourth Supplemental Indenture, dated as of
1987 Form 10-K) January 1, 1988.

4(a)-26 1-3701 (with 4(a)-26 Twenty-Fifth Supplemental Indenture, dated as of
1989 Form 10-K) October 1, 1989.

4(a)-27 33-51669 4(a)-27 Twenty-Sixth Supplemental Indenture, dated as of
April 1, 1993.

4(a)-28 1-3701 (with 4(a)-28 Twenty-Seventh Supplemental Indenture, dated as of
1993 Form 10-K) January 1, 1994.

4(a)-29 333-82165 4(a) Indenture dated as of April, 1 1998 between Avista Corp.
Corporation and The Chase Manhattan Bank, as Trustee.

4(b)-1 1-3701 (with Loan Agreement between City of Forsyth, Montana, and the
1999 Form 10-K) Company, dated as of September 1, 1999 (Series 1999A).

4(b)-2 1-3701 (with Indenture of Trust, Pollution Control Revenue Refunding
1999 Form 10-K) Bonds (Series 1999A) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.

4(b)-3 1-3701 (with Loan Agreement between City of Forsyth, Montana, and the
1999 Form 10-K) Company, dated as of September 1, 1999 (Series 1999B).

4(b)-4 1-3701 (with Indenture of Trust, Pollution Control Revenue Refunding
1999 Form 10-K) Bonds (Series 1999B) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.

4(c)-1 1-3701 (with 4(h)-1 Indenture between the Company and Chemical Bank dated
1988 Form 10-K) as of July 1, 1988 (Series A and B Medium-Term Notes).

4(d)-2 ** Amended and Restated Revolving Credit Agreement among Avista
Corporation, Toronto Dominion (Texas), Inc., Bank of America,
N.A. and The Bank of New York, dated June 26, 2000.

- -----------------
*Incorporated herein by reference.
**Filed herewith.

80
85
AVISTA CORPORATION
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EXHIBIT INDEX (continued)

Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------

4(e) 1-3701 (with 4 Rights Agreement, dated as of November 15, 1999, between
Form 8-K dated the Company and the Bank of New York as successor
November 15, 1999) Rights Agent.

10(a)-l 2-13788 13(e) Power Sales Contract (Rocky Reach Project) with
Public Utility District No. 1 of Chelan County, Washington,
dated as of November 14, 1957.

10(a)-2 2-60728 10(b)-1 Amendment to Power Sales Contract (Rocky Reach
Project) with Public Utility District No. 1 of Chelan
County, Washington, dated as of June 1, 1968.

10(b)-1 2-13421 13(d) Power Sales Contract (Priest Rapids Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of May 22, 1956.

10(b)-2 2-60728 5(d)-1 Second Amendment to Power Sales Contract (Priest Rapids
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.

10(c)-1 2-60728 5(e) Power Sales Contract (Wanapum Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of June 22, 1959.

10(c)-2 2-60728 5(e)-1 First Amendment to Power Sales Contract (Wanapum
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.

10(d)-1 2-60728 5(g) Power Sales Contract (Wells Project) with Public Utility
District No. 1 of Douglas County, Washington, dated as
of September 18, 1963.

10(d)-2 2-60728 5(g)-1 Amendment to Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of February 9, 1965.

10(d)-3 2-60728 5(h) Reserved Share Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of September 18, 1963.

10(d)-4 2-60728 5(h)-1 Amendment to Reserved Share Power Sales Contract
(Wells Project) with Public Utility District No. 1 of Douglas
County, Washington, dated as of February 9, 1965.

10(e) 2-60728 5(i) Canadian Entitlement Exchange Agreement executed by
Bonneville Power Administration Columbia Storage Power
Exchange and the Company, dated as of August 13, 1964.

10(f) 2-60728 5(j) Pacific Northwest Coordination Agreement, dated as of
September 15, 1964.

- ------------------
*Incorporated herein by reference.
**Filed herewith.

81
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AVISTA CORPORATION
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EXHIBIT INDEX (continued)

Previously Filed*
----------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------

10(h)-l 2-47373 13(y) Agreement between the Company, Bonneville Power
Administration and Washington Public Power Supply
System for purchase and exchange of power from the Nuclear
Project No. 1 (Hanford), dated as of January 6, 1973.

10(h)-2 2-60728 5(m)-1 Amendment No. 1 to the Agreement between the Company
between the Company, Bonneville Power Administration and
Washington Public Power Supply System for purchase and
exchange of power from the Nuclear Project No. 1 (Hanford),
dated as of May 8, 1974.

10(h)-3 1-3701 (with 10(i)-3 Agreement between Bonneville Power Administration,
Form 10-K for the Montana Power Company, Pacific Power & Light,
1986) Portland General Electric, Puget Sound Power & Light, the
Company and the Supply System for relocation costs of
Nuclear Project No. 1 (Hanford) dated as of July 9, 1986.

10(i)-1 2-60728 5(n) Ownership Agreement of Nuclear Project No. 3, sponsored
by Washington Public Power Supply System, dated as of
September 17, 1973.

10(i)-2 1-3701 (with 1 Settlement Agreement and Covenant Not to Sue executed
Form 10-Q for by the United States Department of Energy acting
quarter ended by and through the Bonneville Power Administration
September 30, and the Company, dated as of September 17, 1985,
1985) describing the settlement of Project 3 litigation.

10(i)-3 1-3701 (with 2 Agreement to Dismiss Claims and Covenant
Form 10-Q for Not to Sue between the Washington Public
quarter ended Power Supply System and the Company, dated
September 30, as of September 17, 1985, describing the settlement
1985) of Project 3 litigation with the Supply System.

10(i)-4 1-3701 (with 3 Agreement among Puget Sound Power & Light
Form 10-Q for Company, the Company, Portland General Electric
quarter ended Company and PacifiCorp, dba Pacific Power & Light
September 30, Company, agreeing to execute contemporaneously
1985) an irrevocable offer, to and for the benefit of the Bonneville
Power Administration, dated as of September 17, 1985.

10(j)-1 2-66184 5(r) Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.

10(j)-2 2-60728 5(s) Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.

- -----------------
*Incorporated herein by reference.
**Filed herewith.

82
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AVISTA CORPORATION
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EXHIBIT INDEX (continued)

Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------

10(j)-3 1-3701 (with 10(k)-4 Amendment dated as of January 1, 1990, to Firm
1989 Form 10-K) Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.

10(j)-4 1-3701 (with 10(k)-6 Firm Transportation Service Agreement, dated as of
1992 Form 10-K) April 25, 1991, between the Company and Pacific Gas
Transmission Company.

10(j)-5 1-3701 (with 10(k)-7 Service Agreement Applicable to Firm Transportation Service,
1992 Form 10-K) dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.

10(k)-1 1-3701 (with 13(b) Letter of Intent for the Construction and Ownership
Form 8-K for of Colstrip Units No. 3 and 4, sponsored by The
August 1976) Montana Power Company, dated as of April 16, 1974.

10(k)-2 1-3701 (with 10(s)-7 Ownership and Operation Agreement for Colstrip
1981 Form 10-K) Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.

10(k)-3 1-3701 (with 10(s)-2 Coal Supply Agreement for Colstrip Units No. 3 and 4
1981 Form 10-K) between The Montana Power Company, Puget Sound
Power & Light Company, Portland General Electric Company,
Pacific Power & Light Company, Western Energy
Company and the Company, dated as of July 2, 1980.

10(k)-4 1-3701 (with 10(s)-3 Amendment No. 1 to Coal Supply Agreement for
1981 Form 10-K) Colstrip Units No. 3 and 4, dated as of July 10, 1981.

10(k)-5 1-3701 (with 10(l)-5 Amendment No. 4 to Coal Supply Agreement for Colstrip
1988 Form 10-K) Units No. 3 and 4, dated as of January 1, 1988.

10(l)-1 1-3701 (with 10(n)-2 Lease Agreement between the Company and IRE-4
1986 Form 10-K) New York, Inc., dated as of December 15, 1986,
relating to the Company's central operating facility.

10(m) 1-3701 (with 10(v) Supplemental Agreement No. 2, Skagit/Hanford Project,
1983 Form 10-K) dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.

10(n) 1-3701 (with 10(p)-l Agreement for Purchase and Sale of Firm Capacity and
1986 Form 10-K) Energy between Puget Sound Power & Light Company
and the Company, dated as of August 1, 1986.

10(o) 1-3701 (with 10(q)-1 Electric Service and Purchase Agreement between
1991 Form 10-K) Potlatch Corporation and the Company, dated as of
January 3, 1991.

- -----------------
*Incorporated herein by reference.
**Filed herewith.

83
88
AVISTA CORPORATION
- --------------------------------------------------------------------------------

EXHIBIT INDEX (continued)

Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------

10(p) 1-3701 (with 10(s)-1 Agreements for Purchase and Sale of Firm Capacity
1992 Form 10-K) between the Company and Portland General Electric
Company dated March and June 1992.

10(q)-1 1-3701 (with 10(t)-8 Executive Deferral Plan of the Company. (***)
1992 Form 10-K)

10(q)-2 1-3701 (with 10(t)-10 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Retirement Plan. (***)

10(q)-3 1-3701 (with 10(t)-11 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Disability Plan. (***)

10(q)-4 1-3701 (with 10(t)-12 Income Continuation Plan of the Company. (***)
1992 Form 10-K)

10(q)-5 1-3701 (with Long-Term Incentive Plan. (***)
1998 Form 10-K)

10(q)-6 1-3701 (with
1998 Form 10-K) Employment Agreement between the Company
and T.M. Matthews. (***)

10(q)-7 1-3701 (with Employment Agreement between the Company and
1999 Form 10-K) David J. Meyer. (***)

12 ** Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.

21 ** Subsidiaries of Registrant.

- ----------------
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits by reference
per Item 601(10)(iii)of Regulation S-K.

   1

                                                                  EXHIBIT 4(d)-2

                              AMENDED AND RESTATED


                           REVOLVING CREDIT AGREEMENT

                                 ($120,000,000)

                                    (364 DAY)

                                      among


                               AVISTA CORPORATION,


                             THE BANKS NAMED HEREIN,


                         TORONTO DOMINION (TEXAS), INC.,


                              BANK OF AMERICA, N.A.


                                       and


                              THE BANK OF NEW YORK


                             -----------------------


                            Dated as of June 26, 2000


                                       1
   2

                                TABLE OF CONTENTS



Article      Section                                                                       Page
- -------      -------                                                                       ----
                                                                                     
I.  DEFINITIONS

             SECTION 1.01.  Defined Terms                                                    4
             SECTION 1.02.  Terms Generally                                                 21

II.  THE CREDITS

             SECTION 2.01.  Commitments                                                     21
             SECTION 2.02.  Loans                                                           22
             SECTION 2.03.  Notice of Revolving Borrowings                                  24
             SECTION 2.04.  Auction Bid Procedure                                           24
             SECTION 2.05.  Repayment of Loans; Evidence of Debt                            28
             SECTION 2.06.  Letters of Credit                                               28
             SECTION 2.07.  Fees                                                            33
             SECTION 2.08.  Interest on Loans                                               35
             SECTION 2.09.  Default Interest                                                35
             SECTION 2.10.  Alternate Rate of Interest                                      36
             SECTION 2.11.  Termination, Extension and Reduction of Commitments             36
             SECTION 2.12.  Prepayment                                                      37
             SECTION 2.13.  Reserve Requirements; Change in Circumstances                   38
             SECTION 2.14.  Change in Legality                                              39
             SECTION 2.15.  Indemnity                                                       40
             SECTION 2.16.  Pro Rata Treatment                                              41
             SECTION 2.17.  Sharing of Setoffs                                              41
             SECTION 2.18.  Payments                                                        42
             SECTION 2.19.  Taxes                                                           43
             SECTION 2.20.  Termination or Assignment of Commitments Under
                            Certain Circumstances                                           46

III.  REPRESENTATIONS AND WARRANTIES

             SECTION 3.01.  Organization; Powers                                            47
             SECTION 3.02.  Authorization                                                   47
             SECTION 3.03.  Enforceability                                                  48
             SECTION 3.04.  Governmental Approvals                                          48
             SECTION 3.05.  Financial Statements                                            48
             SECTION 3.06.  No Material Adverse Change                                      49
             SECTION 3.07.  Litigation; Compliance with Laws                                49
             SECTION 3.08.  Federal Reserve Regulations                                     49



   3



Article      Section                                                                       Page
- -------      -------                                                                       ----
                                                                                     
             SECTION 3.09.  Investment Company Act; Public Utility Holding Company Act      50
             SECTION 3.10.  Use of Proceeds                                                 50
             SECTION 3.11.  No Material Misstatements                                       50
             SECTION 3.12.  Employee Benefit Plans                                          50
             SECTION 3.13.  Environmental and Safety Matters                                51
             SECTION 3.14.  Significant Subsidiaries                                        51

IV.  CONDITIONS OF LENDING

             SECTION 4.01.  All Borrowings                                                  52
             SECTION 4.02.  First Borrowing                                                 53

V.  AFFIRMATIVE COVENANTS

             SECTION 5.01.  Existence; Businesses and Properties                            55
             SECTION 5.02.  Insurance                                                       56
             SECTION 5.03.  Taxes and Obligations                                           56
             SECTION 5.04.  Financial Statements, Reports, etc                              57
             SECTION 5.05.  Litigation and Other Notices                                    58
             SECTION 5.06.  ERISA                                                           58
             SECTION 5.07.  Maintaining Records; Access to Properties and Inspections       59
             SECTION 5.08.  Use of Proceeds and Letters of Credit                           59
             SECTION 5.09.  Further Assurance                                               59

VI.  NEGATIVE COVENANTS

             SECTION 6.01.  Liens                                                           60
             SECTION 6.02.  Mergers, Consolidations and Acquisitions                        64
             SECTION 6.03.  Disposition of Assets                                           65
             SECTION 6.04.  Consolidated Total Debt to



                                       3
   4



Article      Section                                                                       Page
- -------      -------                                                                       ----
                                                                                     
                            Consolidated Total Capitalization Ratio                         65
             SECTION 6.05.  Public Utility Regulatory Borrowing Limits                      65
             SECTION 6.06.  Guarantees                                                      65

VII.  EVENTS OF DEFAULT

VIII. THE AGENT

IX.  MISCELLANEOUS

             SECTION 9.01.  Notices                                                         73
             SECTION 9.02.  Survival of Agreement                                           73
             SECTION 9.03.  Binding Effect                                                  74
             SECTION 9.04.  Successors and Assigns                                          74
             SECTION 9.05.  Expenses; Indemnity                                             78
             SECTION 9.06.  Right of Setoff                                                 80
             SECTION 9.07.  Applicable Law                                                  80
             SECTION 9.08.  Waivers; Amendment                                              80
             SECTION 9.09.  Interest Rate Limitation                                        81
             SECTION 9.10.  Entire Agreement                                                82
             SECTION 9.11.  Waiver of Jury Trial                                            82
             SECTION 9.12.  Severability                                                    82
             SECTION 9.13.  Counterparts                                                    82
             SECTION 9.14.  Headings                                                        83
             SECTION 9.15.  Jurisdiction; Consent to Service of Process                     83



References
- ----------

Exhibit A             Form of Note
Exhibit B             Form of Assignment and Acceptance
Exhibit C             Form of Administrative Questionnaire
Exhibit D-1           Form of Opinion of Counsel for the


                                       4
   5

                      Borrower
Exhibit D-2           Form of Opinion of Special Counsel for the Borrower
Schedule 2.01         Banks
Schedule 3.14         Significant Subsidiaries
Schedule 4.02(b)      Statutes and Orders of Governmental Authorities


                                        5
   6

                            AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
                     dated as of June 26, 2000, among AVISTA CORPORATION, a
                     Washington corporation (herein called the "Borrower"), the
                     banks listed in Schedule 2.01 (the "Banks"), TORONTO
                     DOMINION (TEXAS), INC., as agent for the Banks (in such
                     capacity, the "Agent"), BANK OF AMERICA, N.A. (formerly
                     known as "Bank of America National Trust and Savings
                     Association"), as syndication agent (the "Syndication
                     Agent") and THE BANK OF NEW YORK, as documentation agent
                     (the "Documentation Agent").

              Pursuant to the Pre-Restatement Credit Agreement (as defined
herein), certain banks have extended credit to, and/or issued letters of credit
on behalf of, the Borrower. The Borrower has requested that the Pre-Restatement
Credit Agreement be amended and restated in the form of this Agreement and that
the Banks extend credit to the Borrower in order to enable the Borrower to
borrow on a standby revolving credit basis and obtain letters of credit on and
after the date hereof, at any time prior to the Expiration Date (as defined
herein) in a principal amount not in excess of $108,825,000 at any time
outstanding (subject to a possible increase to $120,000,000, as provided in
Section 2.01(b) below). The proceeds of such borrowings and such letters of
credit are to be used for general corporate purposes. In consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:


ARTICLE I. DEFINITIONS

              SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms shall have the meanings specified below:

              "ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.

              "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.

              "ABR Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.


                                       6
   7

              "Administrative Questionnaire" shall mean an Administrative
Questionnaire in the form of Exhibit C.

              "Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with the
person specified.

              "Agency Fees" shall have the meaning assigned to such term in
Section 2.07(c).

              "Alternate Base Rate" shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the greater
of (a) the Prime Rate (computed on the basis of the actual number of days
elapsed over a year of 365 or 366 days, as the case may be) in effect on such
day and (b) the sum of (i) the Federal Funds Effective Rate in effect for such
day plus (ii) 1/2 of 1%. If for any reason the Agent shall have determined
(which determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate for any reason, the
Alternate Base Rate shall be determined without regard to clause (b) of the
first sentence of this definition until the circumstances giving rise to such
inability no longer exist.

              "Applicable Percentage" shall mean, with respect to any Bank, the
percentage of the total Commitments represented by such Bank's Commitment. If
the Commitments have terminated or expired, the Applicable Percentage shall be
determined based upon the Commitments most recently in effect, giving effect to
any assignments.

              "Applicable Rate" shall mean on any date, with respect to any ABR
Loan or Eurodollar Revolving Loan, or with respect to the Commitment Fees, the
Letter of Credit fees or the Utilization Fees payable hereunder, as the case may
be, the applicable rate per annum set forth below under the caption "ABR
Spread," "Eurodollar Spread," "Commitment Fee", "Letter of Credit Participation
Fees" or "Utilization Fees", as the case may be, based upon the Ratings or the
Utilization Level, as the case may be:

              (a) Loan Spreads, Commitment Fee and Letters of Credit
Participation Fees


                                       7
   8



- ------------------------------------------------------------------------------------------------------
                                                                                           Letter of
                                                                                             Credit
                                 ABR            Eurodollar         Commitment            Participation
          Ratings               Spread            Spread              Fee                    Fees
- ------------------------------------------------------------------------------------------------------
                                                                             
Level 1                         0.00%             .625%              .125%                   .625%

A- or higher by
S&P; and A3 or
higher by
Moody's
- ------------------------------------------------------------------------------------------------------
Level 2                         0.00%              .75%               .15%                    .75%

BBB+ by S&P;
and Baa1 by
Moody's
- ------------------------------------------------------------------------------------------------------
Level 3                         0.00%             .875%               .20%                   .875%

BBB by S&P; and
Baa2 by Moody's
- ------------------------------------------------------------------------------------------------------
Level 4                         0.00%             1.00%               .25%                   1.00%

BBB- by S&P;
and Baa3 by
Moody's
- ------------------------------------------------------------------------------------------------------
Level 5                          .25%             1.25%              .375%                   1.25%

BB+ by S&P; and
Ba1 by Moody's
- ------------------------------------------------------------------------------------------------------
Level 6                          .50%             1.50%               .50%                   1.50%

Lower than BB+
by S&P; and
lower than Ba1
by Moody's
- ------------------------------------------------------------------------------------------------------



For purposes of the foregoing, (i) if the Ratings in effect on any date fall in
different Levels, the Applicable Rate shall be determined on such date by
reference to the inferior (numerically higher) Level, unless the Ratings differ
by more than one Level, in which case the applicable Level shall be the Level
next below the superior (numerically lower) of the two; (ii) if either Moody's
or S&P shall not have in effect a Rating (other than because such rating agency
shall no longer be in the business of rating corporate debt obligations), then
such rating agency


                                       8
   9

will be deemed to have established a Rating in Level 5; and (iii) if any
rating established or deemed to have been established by Moody's or S&P shall be
changed (other than as a result of a change in the rating system of either
Moody's or S&P), such change shall be effective as of the day after the date on
which such change is first announced by the rating agency making such change.
Each change in the Applicable Rate shall apply during the period commencing on
the effective date of such change and ending on the date immediately preceding
the effective date of the next such change. If the rating system of either
Moody's or S&P shall change, or if either such rating agency shall cease to be
in the business of rating corporate debt obligations, the Borrower and the Banks
shall negotiate in good faith to amend the references to specific ratings in
this definition to reflect such changed rating system or the non- availability
of ratings from such rating agency.

                              (b) Utilization Fees





- --------------------------------------------------------------------------------
             Utilization Level                            Utilization Fee
- --------------------------------------------------------------------------------
                                                       
Level 1                                                        .15%

>.33 and less than/equal to .50
- --------------------------------------------------------------------------------
Level 2                                                        .30%

>.50 and less than/equal to .75
- --------------------------------------------------------------------------------
Level 3                                                        .50%

>.75
- --------------------------------------------------------------------------------


              "Assignment and Acceptance" shall mean an assignment and
acceptance entered into by a Bank and an assignee, and accepted by the Agent and
the Borrower, in the form of Exhibit B or such other form as shall be approved
by the Agent.

              "Auction Bid" shall mean an offer by a Bank to


                                       9
   10

make an Auction Loan in accordance with Section 2.04.

              "Auction Bid Rate" shall mean, with respect to any Auction Bid,
the Margin for Eurodollar Auction Loans, the Fixed Rate for Fixed Rate Loans or
the Delayed Fixed Rate for Delayed Fixed Rate Loans, as applicable, offered by
the Bank in making such Auction Bid.

              "Auction Bid Request" shall mean a request by the Borrower for
Auction Bids in accordance with Section 2.04.

              "Auction Facility" shall mean the facility described in Section
2.04.

              "Auction Loan" shall mean a Loan made pursuant to Section 2.04.

              "Availability Period" shall mean the period from and including the
Effective Date to but excluding the earlier of the Expiration Date and the date
of the termination of the Commitments.

              "Board" shall mean the Board of Governors of the Federal Reserve
System of the United States.

              "Borrowing" shall mean (a) a group of Revolving Loans of the same
Type, made, converted or continued on the same date and, in the case of
Eurodollar Loans, as to which a single Interest Period is in effect or (b) an
Auction Loan or group of Auction Loans of the same Type made on the same date
and as to which a single Interest Period is in effect.

              "Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City.

              "Capital Lease Obligations" of any person shall mean the
obligations of such person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time


                                       10
   11

shall be the capitalized amount thereof at such time determined in accordance
with GAAP.

              "Change in Control" means (a) the acquisition of ownership,
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities Exchange Act of 1934 and the rules of the
Securities and Exchange Commission thereunder as in effect on the date hereof),
of shares representing more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Borrower; or (b)
occupation of a majority of the seats (other than vacant seats) on the board of
directors of the Borrower by Persons who were neither (i) nominated by the board
of directors of the Borrower nor (ii) appointed by directors so nominated;
provided, that no event described in clause (a) or clause (b) shall constitute a
"Change in Control" if the senior secured long-term debt rating of the Borrower
shall be at least BBB or higher by S&P and Baa2 or higher by Moody's immediately
after giving effect to the transaction that would otherwise constitute a Change
in Control.

              "Class", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are Revolving
Loans or Auction Loans.

              "Closing Date" shall mean the date of this Agreement.

              "Code" shall mean the Internal Revenue Code of 1986, as the same
may be amended from time to time.

              "Commitment" shall mean, with respect to each Bank, the commitment
of such Bank to make Revolving Loans and to acquire participations in Letters of
Credit hereunder as set forth in Sections 2.01 and 2.06, as the same may be
reduced from time to time pursuant to Section 2.11.

              "Commitment Fee" shall have the meaning assigned to such term in
Section 2.07(a).

              "Consolidated Total Capitalization" on any date means the sum,
without duplication, of the following with respect to the Borrower and its
consolidated subsidiaries: (a) total capitalization as of such date, as
determined in accordance with GAAP, (b) the current portion of liabilities which
as of such date would be classified in whole or part


                                       11
   12

as long-term debt in accordance with GAAP (it being understood that the
noncurrent portion of such liabilities is included in the total capitalization
referred to in clause (a)), (c) all obligations as lessee which, in accordance
with GAAP, are capitalized as liabilities (including the current portion
thereof), and (d) all other liabilities which would be classified as short-term
debt in accordance with GAAP.

              "Consolidated Total Debt" on any date means the sum, without
duplication, of the following with respect to the Borrower and its consolidated
subsidiaries: (a) all liabilities which as of such date would be classified in
whole or in part as long-term debt in accordance with GAAP (including the
current portion thereof), (b) all obligations as lessee which, in accordance
with GAAP, are capitalized as liabilities (including the current portion
thereof), (c) all other liabilities which would be classified as short-term debt
in accordance with GAAP, and (d) all Guarantees of or by the Borrower.

              "Control" shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto.

              "Default" shall mean any event or condition which upon notice,
lapse of time or both would constitute an Event of Default.

              "Delayed Fixed Rate" shall mean, with respect to any Auction Loan
(other than a Eurodollar Auction Loan or a Fixed Rate Loan), the fixed rate of
interest per annum specified by the Bank in making such Auction Loan in its
related Auction Bid.

              "Delayed Fixed Rate Loan" shall mean an Auction Loan bearing
interest at a Delayed Fixed Rate for which an Auction Bid Request is made two
Business Days before the proposed date of borrowing.

              "dollars" or "$" shall mean lawful money of the United States of
America.


                                       12
   13

              "Environmental Law" shall mean any and all applicable present and
future treaties, laws, regulations, enforceable requirements, binding
determinations, orders, decrees, judgments, injunctions, permits, approvals,
authorizations, licenses, permissions, notices or binding agreements issued,
promulgated or entered by any Governmental Authority, relating to the
environment, preservation or reclamation of natural resources, or to the
management, release or threatened release of contaminants or noxious odor,
including the Hazardous Materials Transportation Act, Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, Solid Waste Disposal
Act, as amended by the Resource Conservation and Recovery Act of 1976 and
Hazardous and Solid Waste Amendments of 1984, Federal Water Pollution Control
Act, as amended by the Clean Water Act of 1977, Clean Air Act of 1970, as
amended, Toxic Substances Control Act of 1976, Occupational Safety and Health
Act of 1970, as amended, Emergency Planning and Community Right-to-Know Act of
1986, Safe Drinking Water Act of 1974, as amended, and any similar or
implementing state law, and all amendments or regulations promulgated
thereunder.

              "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.

              "ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.

              "Eurodollar", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Eurodollar Rate.

              "Eurodollar Borrowing" shall mean a Borrowing comprised of
Eurodollar Loans.

              "Eurodollar Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate in accordance with the provisions
of Article II.


                                       13
   14

              "Eurodollar Rate" shall mean, with respect to any Eurodollar Loan
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/100 of 1%) equal to the product of (i) the arithmetic
average of rates at which dollar deposits approximately equal to the principal
amount of the portion of such Eurodollar Loan to be made by The Toronto-Dominion
Bank, and for a maturity equal to the applicable Interest Period, are offered to
The Toronto-Dominion Bank for Eurodollars at approximately 10:00 a.m., New York
City time, two Business Days prior to the commencement of such Interest Period
and (ii) Statutory Reserves. In the event that such rate is not available at
such time for any reason, then the "Eurodollar Rate" with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Agent in immediately available
funds in the London interbank market at approximately 10:00 a.m., New York City
time, two Business Days prior to the commencement of such Interest Period.

              "Event of Default" shall have the meaning assigned to such term in
Article VII.

              "Expiration Date" shall mean June 25, 2001.

              "Federal Funds Effective Rate" shall mean, for any day, the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
reported on such Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so reported for any day that is a Business Day, the average of
the quotations for the day of such transactions received by the Agent from three
Federal funds brokers of recognized standing selected by it.

              "Fees" shall mean the Commitment Fee and the Agency Fees.

              "Financial Officer" of any corporation shall mean the chief
financial officer or Treasurer of such corporation.

              "First Mortgage" shall mean the Mortgage and Deed of Trust dated
as of June 1, 1939, made by the Borrower in


                                       14
   15

favor of Citibank, N.A., as successor Trustee, as the same has been amended,
modified or supplemented to date and as the same may be further amended,
modified or supplemented from time to time hereafter.

              "Fixed Rate" shall mean, with respect to any Auction Loan (other
than a Eurodollar Auction Loan or a Delayed Fixed Rate Loan), the fixed rate of
interest per annum specified by the Bank making such Auction Loan in its related
Auction Bid.

              "Fixed Rate Loan" shall mean an Auction Loan bearing interest at a
Fixed Rate for which an Auction Bid Request is made on the day of the proposed
borrowing.

              "GAAP" shall mean generally accepted accounting principles,
applied on a consistent basis.

              "Governmental Authority" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.

              "Guarantee" of or by any person shall mean any obligation,
contingent or otherwise, of such person guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other person (the "primary
obligor") in any manner, whether directly or indirectly, and including any
obligation of such person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary obligor so as
to enable the primary obligor to pay such Indebtedness; provided, however, that
the term Guarantee shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.

              "Indebtedness" of any person shall mean, without duplication, (a)
all obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,

                                       15
   16

debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services (other
than trade payables incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such person, whether or not the obligations
secured thereby have been assumed, but limited, if such obligations are without
recourse to such person, to the lesser of the principal amount of such
Indebtedness or the fair market value of such property, (g) all Guarantees by
such person of Indebtedness of others, (h) all Capital Lease Obligations of such
person, (i) all obligations of such person in respect of interest rate
protection agreements, foreign currency exchange agreements or other interest or
exchange rate hedging arrangements (the amount of any such obligation to be the
amount that would be payable upon the acceleration, termination or liquidation
thereof) and (j) all obligations of such person as an account party in respect
of letters of credit and bankers' acceptances. The Indebtedness of any person
shall include the Indebtedness of any partnership in which such person is a
general partner.

              "Interest Payment Date" shall mean, with respect to any Loan, the
last day of the Interest Period applicable to the Borrowing of which such Loan
is a part and, in the case of a Eurodollar Borrowing with an Interest Period of
more than three months' duration, each day that would have been an Interest
Payment Date had successive Interest Periods of three months' duration been
applicable to such Borrowing and, in addition, the date of any refinancing or
conversion of such Borrowing with or to a Borrowing of a different Type.

              "Interest Period" shall mean (a) as to any Eurodollar Borrowing,
the period commencing on the date of such Borrowing and ending on the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 1, 2, 3 or 6


                                       16
   17

months thereafter, as the Borrower may elect, (b) as to any ABR Borrowing, the
period commencing on the date of such Borrowing and ending on the earliest of
(i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the
Expiration Date, and (iii) the date such Borrowing shall be repaid or prepaid in
accordance with Section 2.12 and (c) with respect to any Fixed Rate Borrowing or
Delayed Fixed Rate Borrowing, the period (which shall not be less than 7 days or
more than 360 days) commencing on the date of such Borrowing and ending on the
date specified in the applicable Auction Bid Request; provided, however, that if
any Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless, in the case
of a Eurodollar Borrowing only, such next succeeding Business Day would fall in
the next calendar month, in which case such Interest Period shall end on the
next preceding Business Day. Interest shall accrue from and including the first
day of an Interest Period to but excluding the last day of such Interest Period.

              "Issuing Bank" shall mean The Toronto-Dominion Bank in its
capacity as the issuer of Letters of Credit hereunder, and its successors in
such capacity as provided in Section 2.06(i). The Issuing Bank may, in its
discretion, arrange for one or more Letters of Credit to be issued by Affiliates
of the Issuing Bank, in which case the term "Issuing Bank" shall include any
such Affiliate with respect to Letters of Credit issued by such Affiliate.

              "LC Disbursement" shall mean a payment made by the Issuing Bank
pursuant to a Letter of Credit.

              "LC Exposure" shall mean, at any time, the sum of (a) the
aggregate undrawn amount of all outstanding Letters of Credit at such time plus
(b) the aggregate amount of all LC Disbursements that have not yet been
reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any
Bank at any time shall be its Applicable Percentage of the total LC Exposure at
such time.

              "Letter of Credit" shall mean any letter of credit issued pursuant
to this Agreement.

              "Lien" shall mean, with respect to any asset, (a) any mortgage,
deed of trust, lien, pledge, encumbrance, charge or security interest in or on
such asset, (b) the interest of a vendor or a lessor under any conditional sale


                                       17
   18

agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities.

              "Loans" shall mean loans made by the Banks to the Borrower
pursuant to this Agreement.

              "Loan Documents" shall mean this Agreement and any Notes and any
Letter of Credit applications referred to in Section 2.06(a).

              "Margin" shall mean, with respect to any Auction Loan bearing
interest at a rate based on the Eurodollar Rate, the marginal rate of interest,
if any, to be added to or subtracted from the Eurodollar Rate to determine the
rate of interest applicable to such Loan, as specified by the Bank making such
Loan in its related Auction Bid.

              "Margin Stock" shall have the meaning given such term under
Regulation U.

              "Material Adverse Effect" shall mean an effect on the business,
assets, operations or financial condition of the Borrower and the Subsidiaries
taken as a whole which could reasonably be expected to have a material adverse
effect on the creditworthiness of the Borrower.

              "Moody's" shall mean Moody's Investors Service, Inc.

              "Notes" shall mean any promissory notes of the Borrower,
substantially in the form of Exhibit A, evidencing Loans, as may be delivered
pursuant to Section 2.05.

              "PBGC" shall mean the Pension Benefit Guaranty Corporation
referred to and defined in ERISA.

              "person" shall mean a corporation, association, partnership,
trust, organization, business, individual or government or governmental agency
or political subdivision thereof.

              "Plan" shall mean any pension plan subject to the provisions of
Title IV of ERISA or Section 412 or the Code which is maintained for employees
of the Borrower or any


                                       18
   19

ERISA Affiliate.

              "Pre-Restatement Credit Agreement" shall mean the Revolving Credit
Agreement (3 Year) among the Borrower, the banks named therein, Toronto Dominion
(Texas), Inc., Bank of America National Trust and Savings Association and The
Bank of New York, dated as of June 30, 1998, and as in effect prior to its
amendment and restatement hereby.

              "Prime Rate" shall mean the rate of interest per annum adopted
from time to time by The Toronto-Dominion Bank at its principal office in New
York City as its prime rate. For purposes of this Agreement, any change in the
Alternate Base Rate due to a change in the Prime Rate shall be effective on the
date such change in the Prime Rate is adopted.

              "Ratings" shall refer to the ratings of Moody's and S&P applicable
to the Borrower's senior unsecured long-term debt obligations.

              "Register" shall have the meaning given to such term in Section
9.04(d).

              "Regulation D" shall mean Regulation D of the Board as from time
to time in effect and all official rulings and interpretations thereunder or
thereof and shall include any successor or other regulation or official
interpretation of the Board relating to reserve requirements applicable to
member banks of the Federal Reserve System.

              "Regulation U" shall mean Regulation U of the Board as from time
to time in effect and all official rulings and interpretations thereunder or
thereof.

              "Regulation X" shall mean Regulation X of the Board as from time
to time in effect and all official rulings and interpretations thereunder or
thereof.

              "Related Parties" shall mean, with respect to any specified
Person, such Person's Affiliates and the respective directors, officers,
employees, agents and advisors of such Person and such Person's Affiliates.

              "Reportable Event" shall mean any reportable event


                                       19
   20

as defined in Section 4043(b) of ERISA or the regulations issued thereunder with
respect to a Plan (other than a Plan maintained by an ERISA Affiliate which is
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code).

              "Required Banks" shall mean, at any time, Banks having Revolving
Credit Exposures representing at least 66-2/3% of the aggregate Revolving
Exposures or, if there shall be no Revolving Credit Exposure, Banks having
Commitments representing at least 66-2/3% of the aggregate Commitments. For
purposes of declaring the Loans to be due and payable pursuant to Article VII
and of demanding the deposit of cash collateral pursuant to Section 2.06(i), and
for all purposes after the Loans become due and payable pursuant to Article VII
or the Commitments expire or terminate, the outstanding Auction Loans of the
Banks shall be included in their respective Revolving Credit Exposure in
determining the Required Banks.

              "Responsible Officer" of any corporation shall mean any executive
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.

              "Revolving Credit Exposure" shall mean, with respect to any Bank
at any time, the sum of the outstanding principal amount of such Bank's
Revolving Loans and its LC Exposure at such time.

              "Revolving Loan" shall mean a Loan made pursuant to Section 2.03.

              "S&P" shall mean Standard & Poor's Ratings Services.

              "Significant Subsidiary" shall mean a Subsidiary meeting any one
of the following conditions: (a) the investments in and advances to such
Subsidiary by the Borrower and the other Subsidiaries, if any, as at the end of
the Borrower's latest fiscal quarter exceeded 10% of the total assets of the
Borrower and its Subsidiaries at such date, computed and consolidated in
accordance with GAAP; or (b) the Borrower's and the other Subsidiaries'
proportionate share of the total assets (after intercompany eliminations) of
such Subsidiary as at the end of the Borrower's latest


                                       20
   21

fiscal quarter exceeded 10% of the total assets of the Borrower and its
Subsidiaries at such date, computed and consolidated in accordance with GAAP; or
(c) the equity in the income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in accounting principle of
such Subsidiary for the period of four consecutive fiscal quarters ending at the
end of the Borrower's latest fiscal quarter exceeded 10% of such income of the
Borrower and its Subsidiaries for such period, computed and consolidated in
accordance with GAAP; or (d) such Subsidiary is the parent of one or more
Subsidiaries and, together with such Subsidiaries would, if considered in the
aggregate, constitute a Significant Subsidiary.

              "Statutory Reserves" shall mean a fraction (expressed as a
decimal) the numerator of which is the number one and the denominator of which
is the number one minus the aggregate of the maximum reserve percentages
(including, without limitation, any marginal, special, emergency or supplemental
reserves) with respect to Euro dollar funding (including with respect to
Eurocurrency Liabilities as defined in Regulation D) in an amount approximately
equal to the respective Eurodollar Loan and with a term approximately equal to
the Interest Period for such Eurodollar Loan expressed as a decimal established
by the Board or by any other United States banking authority to which the Agent
is subject. Such reserve percentages shall include, without limitation, those
imposed under Regula tion D. Statutory Reserves shall be adjusted automatically
on and as of the effective date of any change in any reserve percentage.

              "Structuring Fee" shall have the meaning assigned to such term in
Section 2.07(c).

              "subsidiary" shall mean, for any person (the "Parent"), any
corporation, partnership or other entity of which securities or other ownership
interests having by the terms thereof ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or


                                       21
   22

might have voting power by reason of the happening of any contingency) are at
the time directly or indirectly owned or controlled by the Parent or one or more
of its subsidiaries or by the Parent and one or more of its subsidiaries.

              "Subsidiary" shall mean a subsidiary of the Borrower.

              A "Subsidiary Event" shall mean the following; provided, however,
that a Subsidiary Event shall not be deemed to have occurred if the Banks have
previously consented thereto:

              (a) any Significant Subsidiary shall fail to observe or perform
       any covenant, condition or agreement contained in Section 5.01(a) as if
       such section applied to such Significant Subsidiary, with all references
       therein to the Borrower being deemed references to such Significant
       Subsidiary;

              (b) any Significant Subsidiary shall fail to observe or perform
       any covenant, condition or agreement in Sections 5.01(b), 5.02, 5.03 or
       5.07 as if such sections applied to such Significant Subsidiary, with all
       references therein to the Borrower being deemed references to such
       Significant Subsidiary, and such default shall continue unremedied for a
       period of 30 days after notice thereof from the Agent or any Bank to the
       Borrower;

              (c) any Significant Subsidiary shall:

                     (i) merge into or consolidate with any other person, or
              permit any other person to merge into or consolidate with it, or
              purchase, lease or otherwise acquire (in one transaction or a
              series of transactions) all or substantially all of the assets of
              any other person (whether directly by purchase, lease or other
              acquisition of all or substantially all of the assets of such
              person or indirectly by purchase or other acquisition of all or
              substantially all of the capital stock of such other person) other
              than acquisitions in the ordinary course of such Significant
              Subsidiary's business, except that if, at the time thereof and
              immediately after giving effect thereto no Event


                                       22
   23

              of Default or Default shall have occurred and be continuing, then
              (A) such Significant Subsidiary may (i) merge with or into, or
              consolidate with, any Subsidiary or (ii) merge with or into, or
              consolidate with, the Borrower in a transaction in which the
              Borrower is the surviving corporation, (B) such Significant
              Subsidiary may purchase, lease or otherwise acquire from any
              Subsidiary all or substantially all of its assets and may purchase
              or otherwise acquire all or substantially all of the capital stock
              of any person who immediately thereafter is a Subsidiary, (C) such
              Significant Subsidiary may merge with or into, or consolidate
              with, any other person so long as the assets of such person at the
              time of such consolidation or merger, do not exceed 10% of the
              total assets of the Borrower and its Subsidiaries, after giving
              effect to such merger or consolidation, computed and consolidated
              in accordance with GAAP consistently applied, and (D) such
              Significant Subsidiary may purchase, lease or otherwise acquire
              any or all of the assets of any other person (and may purchase or
              otherwise acquire the capital stock of any other person) so long
              as the assets being purchased, leased or acquired (or the
              Significant Subsidiary's proportionate share of the assets of the
              person whose capital stock is being acquired) do not exceed 10% of
              the total assets of the Borrower and its Subsidiaries, after
              giving effect to such acquisition, computed and consolidated in
              accordance with GAAP consistently applied, or

                     (ii) sell, lease, transfer, assign or other wise dispose of
              (in one transaction or in a series of transactions), in any fiscal
              year, assets (whether now owned or hereafter acquired) which,
              together with the amount of all sales, leases, transfers,
              assignments or dispositions by the Borrower permitted under
              Section 6.03 (other than sales, leases, transfers, assignments or
              other dispositions permitted under clauses (i) through (iv) of
              such Section), are in excess of 10% of the assets of the Borrower
              and its Subsidiaries as of the end of the most recent fiscal year,
              computed


                                       23
   24

              and consolidated in accordance with GAAP consistently applied,
              except (A) a Significant Subsidiary may sell, lease, transfer,
              assign or otherwise dispose of, in any fiscal year, assets in the
              ordinary course of business which, together with the amount of all
              sales, leases, transfers, assignments or dispositions in the
              ordinary course permitted under Section 6.03(i), do not exceed 5%
              of the assets of the Borrower and its Subsidiaries as of the end
              of the most recent fiscal year, computed and consolidated in
              accordance with GAAP consistently applied, (B) to the extent
              permitted in clause (c)(i) above and (C) any Significant
              Subsidiary may sell, lease, transfer, assign or otherwise dispose
              of, or create, incur, assume or permit to exist Liens on,
              receivables and related properties or interests therein;

provided, however, that, notwithstanding anything in this clause (c) to the
contrary, a Subsidiary Event shall not be deemed to have occurred and shall not
constitute an Event of Default under paragraph (k) of Article VII if, after
giving effect to the consummation of any transaction contemplated by clause
(c)(i) or (c)(ii) hereof, such Significant Subsidiary shall have or shall be
deemed to have a ratio of total long-term Indebtedness to total stockholders'
equity equal to or less than 1.5 to 1.0.

              "Transactions" shall have the meaning assigned to such term in
Section 3.02.

              "Type", when used in respect of any Loan or Borrowing, shall refer
to the Rate by reference to which interest on such Loan or on the Loans
comprising such Borrowing is determined. For purposes hereof, "Rate" shall mean,
in the case of a Revolving Loan or Borrowing, the Eurodollar Rate and the
Alternate Base Rate or, in the case of an Auction Loan or Borrowing, the
Eurodollar Rate, Fixed Rate or Delayed Fixed Rate.

              "Utilization Fee" shall have the meaning assigned to such term in
Section 2.07.

              "Utilization Level" shall mean the ratio of the outstanding
principal amount of Loans and the LC Exposure to


                                       24
   25

the total Commitments.

              SECTION 1.02. Terms Generally. The definitions in Section 1.01
shall apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time; provided,
however, that, for purposes of determining compliance with any covenant set
forth in Article VI, such terms shall be construed in accordance with GAAP as in
effect on the date of this Agreement applied on a basis consistent with the
application used in preparing the Borrower's audited financial statements
referred to in Section 3.05.


ARTICLE II. THE CREDITS

              SECTION 2.01. (a) Commitments. Subject to the terms and conditions
and relying upon the representations and warranties herein set forth, each Bank
agrees, severally and not jointly, to make Revolving Loans to the Borrower, at
any time and from time to time on or after the date of this Agreement, and until
the earlier of the Expiration Date and the termination of the Commitment of such
Bank in accordance with the terms hereof, in an aggregate principal amount at
any time outstanding that will not result in (i) the Revolving Credit Exposure
of any Bank exceeding the Commitment set forth opposite its name in Schedule
2.01 hereto, as the same may be reduced from time to time pursuant to Section
2.11 or (ii) the sum of the total Revolving Credit Exposure plus the aggregate
principal amount of outstanding Auction Loans exceeding the total Commitments.

              Within the limits set forth in the preceding sentence, the
Borrower may borrow, pay or prepay and


                                       25
   26

reborrow Revolving Loans on or after the date of this Agreement and prior to the
Expiration Date, subject to the terms, conditions and limitations set forth
herein.

              (b) On not more than two occasions the Borrower may by written
notice to the Administrative Agent cause New Banks (as defined below) to assume
Commitments by an aggregate amount not in excess of $11,175,000 in the aggregate
(the "New Commitments"). Each such notice shall specify (i) the date (each a
"Transition Date") on which the Borrower proposes that New Commitments shall
become effective, which shall be not less than ten Business Days
after the date on which such notice is delivered to the Administrative Agent and
(ii) the identity of each person that has agreed to assume any portion of such
New Commitments (each a "New Bank") and the amount of such New Commitments
allocated to such New Bank. Subject only to there not existing any Default or
Event of Default on such Transition Date before or after giving effect to such
New Commitments, such New Commitments shall become effective as of such
Transition Date and, if any Revolving Loans are outstanding on such Transition
Date, each Bank shall assign to the New Banks, and each of the New Banks shall
purchase from the Banks, at the principal amount thereof, such interests in the
Revolving Loans outstanding on such Transition Date as shall be necessary in
order that, after giving effect to all such assignments and purchases, such
Revolving Loans will be held by Banks and New Banks ratably in accordance with
their Commitments after giving effect to the addition of such New Commitments to
the Commitments. The Administrative Agent shall notify the Banks promptly upon
receipt of the Borrower's notice thereof of each Transition Date and in respect
thereof the New Commitments, the New Banks and, in the case of each notice to
any Bank, the respective interests in such Bank's Revolving Loans subject to the
assignments contemplated by the immediately preceding sentence. In the event
that any Bank shall incur any breakage cost as a result of making any such
assignment, or that any New Bank shall incur any reverse breakage cost as a
result of taking any such assignment, the Borrower shall indemnify it for such
cost, calculated as contemplated by Section 2.15 in the case of breakage costs
and calculated based upon the difference between the Eurodollar Rate applicable
to each assigned Revolving Loan and the cost to the New Bank of funding its
assigned interests in the case


                                       26
   27

of reverse breakage costs. It is expressly understood that no Bank shall have
any obligation to agree to an increase in the amount of the Commitment pursuant
to this Section.

              SECTION 2.02. Loans. (a) Each Revolving Loan shall be made as part
of a Borrowing consisting of Revolving Loans made by the Banks ratably in
accordance with their Commitments. Each Auction Loan shall be made in accordance
with the procedures set forth in Section 2.04. The failure of any Bank to make
any Loan required to be made hereunder shall not in itself relieve any other
Bank of its obligation to lend hereunder (it being understood, however, that no
Bank shall be responsible for the failure of any other Bank to make any Loan
required to be made by such other Bank). The Loans comprising each Borrowing
shall be in an aggregate principal amount which is an integral multiple of
$1,000,000.

              (b) Subject to Section 2.10, (i) each Revolving Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans, as the Borrower may request
pursuant to Section 2.03, and (ii) each Auction Borrowing shall be comprised
entirely of Eurodollar Loans, Fixed Rate Loans or Delayed Fixed Rate Loans as
the Borrower may request in accordance with Section 2.04. Each Bank may at its
option fulfill its Commitment with respect to any Eurodollar Loan by causing any
domestic or foreign branch or Affiliate of such Bank to make such Loan; provided
that any exercise of such option shall not affect the obligation of the Borrower
to repay such Loan in accordance with the terms of this Agreement or any
applicable Note. Borrowings of more than one Type or Class may be outstanding at
the same time; provided, however, that the Borrower shall not be entitled to
request any Borrowing which, if made, would result in an aggregate of more than
five separate Eurodollar Loans of any Bank being outstanding hereunder at any
one time. For purposes of the foregoing, Loans having different Interest
Periods, regardless of whether they commence on the same date, shall be
considered separate Loans.

              (c) Subject to paragraph (e) below, each Bank shall make a
Revolving Loan in the amount of its pro rata portion, as determined under
Section 2.16, or, if an Auction Loan, in the relevant amount as determined under
Section 2.04, of each Borrowing hereunder on the proposed date


                                       27
   28

thereof by wire transfer of immediately available funds to the Agent in Houston,
Texas, not later than 2:00 p.m., New York City time, and the Agent shall by 3:00
p.m., New York City time, make available to the Borrower in immediately
available funds the amounts so received (i) by wire transfer for credit to the
account of the Borrower with Bank of America, N.A., Account Number 12332-29152;
ABA # 12100358, or (ii) as otherwise specified by the Borrower in its notice of
Borrowing or, if a Borrowing shall not occur on such date because any condition
precedent herein specified shall not have been met, return the amounts so
received to the respective Banks. Unless the Agent shall have received notice
from a Bank prior to the date of any Borrowing that such Bank will not make
available to the Agent such Bank's portion of such Borrowing, the Agent may
assume that such Bank has made such portion available to the Agent on the date
of such Borrowing in accordance with this paragraph (c) and the Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have made
such portion available to the Agent, such Bank and the Borrower severally agree
to repay to the Agent forthwith on demand such corresponding amount together
with interest thereon, for each day from the date such amount is made available
to the Borrower until the date such amount is repaid to the Agent at (i) in the
case of the Borrower the interest rate applicable at the time to the Loans
comprising such Borrowing and (ii) in the case of such Bank, the Federal Funds
Effective Rate. If such Bank shall repay to the Agent such corresponding amount,
such amount shall constitute such Bank's Loan as part of such Borrowing for
purposes of this Agreement.

              (d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Expiration Date.

              (e) The Borrower may refinance all or any part of any Borrowing
with a Borrowing of the same or a different Type or Class, subject to the
conditions and limitations set forth in this Agreement. Any Borrowing or part
thereof so refinanced shall be deemed to be repaid or prepaid in accordance with
Section 2.05 or 2.12, as applicable, with the proceeds of a new


                                       28
   29

Borrowing, and the proceeds of the new Borrowing, to the extent they do not
exceed the principal amount of the Borrowing being refinanced, shall not be paid
by the Banks to the Agent or by the Agent to the Borrower pursuant to paragraph
(c) above.

              SECTION 2.03. Notice of Revolving Borrowings. To request a
Revolving Borrowing, the Borrower shall give the Agent written or telecopy
notice (or telephone notice promptly confirmed in writing or by telecopy) (a) in
the case of a Eurodollar Borrowing, not later than 10:00 a.m., New York City
time, three Business Days before a proposed borrowing and (b) in the case of an
ABR Borrowing, not later than 12:00 (noon), New York City time, the day of a
proposed borrowing. Such notice shall be irrevocable and shall in each case
refer to this Agreement and specify (i) whether the Borrowing then being
requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of
such Borrowing (which shall be a Business Day) and the amount thereof; and (iii)
if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with
respect thereto. If no election as to the Type of Borrowing is specified in any
such notice, then the requested Borrowing shall be an ABR Borrowing. If no
Interest Period with respect to any Eurodollar Borrowing is specified in any
such notice, then the Borrower shall be deemed to have selected an Interest
Period of one month's duration. If the Borrower shall not have given notice in
accordance with this Section 2.03 of its election to refinance a Borrowing prior
to the end of the Interest Period in effect for such Borrowing, then the
Borrower shall (unless such Borrowing is repaid at the end of such Interest
Period) be deemed to have given notice of an election to refinance such
Borrowing with an ABR Borrowing. The Agent shall promptly advise the Banks of
any notice given pursuant to this Section 2.03 and of each Bank's portion of the
requested Borrowing.


              SECTION 2.04. Auction Bid Procedure. (a) Subject to the terms and
conditions set forth herein, from time to time during the Availability Period
the Borrower may request Auction Bids and may (but shall not have any obligation
to) accept Auction Bids and borrow Auction Loans; provided that the sum of the
total Revolving Credit Exposure plus the aggregate principal amount of
outstanding Auction Loans at any time shall not exceed the total Commitments.


                                       29
   30

To request Auction Bids, the Borrower shall notify the Agent of such request by
telephone, in the case of a Eurodollar Borrowing, not later than 1:00 p.m., New
York City time, four Business Days before the date of the proposed Borrowing, in
the case of a Fixed Rate Borrowing, not later than 1:00 p.m., New York City
time, one Business Day before the date of the proposed Borrowing, or, in the
case of a Delayed Fixed Rate Borrowing, not later than 2:00 p.m., New York City
time, two Business Days before the date for the proposed Borrowing; provided
that the Borrower may submit up to (but not more than) (i) 1 Eurodollar Auction
Bid Request and (ii) 1 Fixed Rate Auction Bid Request or 1 Delayed Fixed Rate
Auction Bid Request on the same day. Each such telephonic Auction Bid Request
shall be confirmed promptly by hand delivery or telecopy to the Agent of a
written Auction Bid Request in a form approved by the Agent and signed by the
Borrower. Each such telephonic and written Auction Bid Request shall specify the
following information in compliance with Section 2.02:

              (i) the aggregate amount of the requested Borrowing;

       (ii) the date of such Borrowing, which shall be a Business Day;

       (iii) whether such Borrowing is to be a Eurodollar Borrowing, a Fixed
       Rate Borrowing, or a Delayed Fixed Rate Borrowing;

       (iv) the Interest Period (or Interest Periods) to be applicable to such
       Borrowing, which shall be a period contemplated by the definition of the
       term "Interest Period"; and

              (v) the location and number of the Borrower's account to which
       funds are to be disbursed, which shall comply with the requirements of
       Section 2.02.

              (b) Following receipt of an Auction Bid Request in accordance with
this Section, the Agent shall notify the Banks of the details thereof by
telecopy, inviting the Banks to submit Auction Bids in the case of a Eurodollar
Auction Bid Request, no later than 2:00 p.m., New York City time, four Business
Days before the proposed date


                                       30
   31

of the Borrowing, in the case of a Fixed Rate Auction Bid Request, no later than
2:00 p.m., one Business Day before the proposed date of the Borrowing, and, in
the case of a Delayed Fixed Rate Bid Request, not later than 3:00 p.m., New York
City time, two Business Days before the proposed date of the Borrowing.

              (c) Each Bank may (but shall not have any obligation to) make one
or more Auction Bids to the Borrower in response to an Auction Bid Request. Each
Auction Bid by a Bank must be in a form approved by the Agent and must be
received by the Agent by telecopy, in the case of a Eurodollar Auction
Borrowing, not later than 12:00 (noon), New York City time, three Business Days
before the proposed date of such Auction Borrowing, in the case of a Fixed Rate
Borrowing, not later than 10:30 a.m., New York City time, on the proposed date
of such Auction Borrowing, and, in the case of a Delayed Fixed Rate Bid, not
later than 12:00 (noon), New York City time, one Business Day before the
proposed date of such Auction Borrowing. Auction Bids that do not conform
substantially to the form approved by the Agent may be rejected by the Agent,
and the Agent shall notify the applicable Bank as promptly as practicable. Each
Auction Bid shall specify (i) the principal amount (which shall be an integral
multiple of $1,000,000 and which may equal the entire principal amount of the
Auction Borrowing requested by the Borrower) of the Auction Loan or Loans that
the Bank is willing to make, (ii) the Auction Bid Rate or Rates at which the
Bank is prepared to make such Loan or Loans (expressed as a percentage rate per
annum in the form of a decimal to no more than four decimal places) and (iii)
the Interest Period applicable to each such Loan and the last day thereof in
accordance with the Auction Bid Request.

              (d) The Agent shall promptly notify the Borrower by telecopy of
the Auction Bid Rate and the principal amount specified in each Auction Bid and
the identity of the Bank that shall have made such Auction Bid.

              (e) Subject only to the provisions of this paragraph, the Borrower
may accept or reject any Auction Bid. The Borrower shall notify the Agent by
telephone, confirmed by telecopy in a form approved by the Agent, whether and to
what extent it has decided to accept or


                                       31
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reject each Auction Bid, in the case of a Eurodollar Auction Borrowing, not
later than 2:00 p.m., New York City time, three Business Days before the date of
the proposed Auction Borrowing, in the case of a Fixed Rate Borrowing, not later
than 11:30 a.m., New York City time, on the proposed date of the Auction
Borrowing, and, in the case of a Delayed Fixed Rate Borrowing, not later than
1:00 p.m., New York City time, one Business day before the date of the proposed
Auction Borrowing; provided that (i) the failure of the Borrower to give such
notice shall be deemed to be a rejection of each Auction Bid, (ii) the Borrower
shall not accept an Auction Bid made at a particular Auction Bid Rate if the
Borrower rejects an Auction Bid made at a lower Auction Bid Rate, (iii) the
aggregate amount of the Auction Bids accepted by the Borrower shall not exceed
the aggregate amount of the requested Auction Borrowing specified in the related
Auction Bid Request, (iv) to the extent necessary to comply with clause (iii)
above, the Borrower may accept Auction Bids at the same Auction Bid Rate in
part, which acceptance, in the case of multiple Auction Bids at such Auction Bid
Rate, shall be made pro rata in accordance with the amount of each such Auction
Bid, and (v) except pursuant to clause (iv) above, no Auction Bid shall be
accepted for an Auction Loan unless such Auction Loan is in an integral multiple
of $1,000,000. A notice given by the Borrower pursuant to this paragraph shall
be irrevocable.

              (f) The Agent shall notify each bidding Bank by telephone and
telecopy whether or not its Auction Bid has been accepted (and, if so, the
amount and Auction Bid Rate so accepted) in the case of Eurodollar Auction
Loans, by 3:00 p.m., New York City time, three Business Days before the
borrowing date, in the case of Fixed Rate Loans, by 12:00 (noon), New York City
time, on the borrowing date, and, in the case of Delayed Fixed Rate Loans, by
3:00 p.m., New York City time, one Business Day before the Borrowing Date. Each
successful bidder will thereupon become bound, subject to the terms and
conditions hereof, to make the Auction Loan in respect of which its Auction Bid
has been accepted.

              (g) If the Agent shall elect to submit an Auction Bid in its
capacity as a Bank, it shall submit such Auction Bid directly to the Borrower at
least one quarter of an hour earlier than the time by which the other Banks are
required


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to submit their Auction Bids to the Agent pursuant to paragraph (b) of this
Section.

              SECTION 2.05. Repayment of Loans; Evidence of Debt. (a) The
Borrower hereby unconditionally promises to pay each Bank the then unpaid
principal amount of each Loan of such Bank on the last day of the Interest
Period applicable to such Loan and on the Expiration Date. Each Loan shall bear
interest on the outstanding principal balance thereof as set forth in Section
2.08.

              (b) Each Bank shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrower to such Bank
resulting from each Loan made by such Bank, including the amounts of principal
and interest payable and paid to such Bank from time to time hereunder.

              (c) The Agent shall maintain accounts in which it shall record (i)
the amount and date of each Loan made hereunder, the Class and Type thereof and
the Interest Period applicable thereto, (ii) the amount of any principal,
interest or fees due and payable or to become due and payable from the Borrower
to each Bank hereunder and (iii) the amount of any principal, interest or fees
received by the Agent hereunder for the account of the Banks and each Bank's
share thereof.

              (d) The entries made in the accounts maintained pursuant to
paragraph (b) or (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein; provided that the
failure of any Bank or the Agent to maintain such accounts or any error therein
shall not in any manner affect the obligation of the Borrower to repay the Loans
in accordance with the terms of this Agreement.

              (e) Any Bank may request that Loans of any Class made by it be
evidenced by a Note. In such event, the Borrower shall prepare, execute and
deliver to such Bank a Note payable to the order of such Bank (or, if requested
by such Bank, to such Bank and its registered assigns). Thereafter, the Loans
evidenced by such Note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more


                                       33
   34

Notes in such form payable to the order of the payee named therein (or, if such
Note is a registered Note, to such payee and its registered assigns).

              SECTION 2.06. Letters of Credit. (a) General. Subject to the terms
and conditions set forth herein, the Borrower may request the issuance of
Letters of Credit for its own account, in a form reasonably acceptable to the
Agent and the Issuing Bank, at any time and from time to time during the
Availability Period. In the event of any inconsistency between the terms and
conditions of this Agreement and the terms and conditions of any form of letter
of credit application or other agreement submitted by the Borrower to, or
entered into by the Borrower with, the Issuing Bank relating to any Letter of
Credit, the terms and conditions of this Agreement shall control.

              (b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. To request the issuance of a Letter of Credit (or the amendment,
renewal or extension of an outstanding Letter of Credit), the Borrower shall
hand deliver or telecopy (or transmit by electronic communication, if
arrangements for doing so have been approved by the Issuing Bank) to the Issuing
Bank and the Agent (reasonably in advance of the requested date of issuance,
amendment, renewal or extension) a notice requesting the issuance of a Letter of
Credit, or identifying the Letter of Credit to be amended, renewed or extended,
and specifying the date of issuance, amendment, renewal or extension (which
shall be a Business Day), the date on which such Letter of Credit is to expire
(which shall comply with paragraph (c) of this Section), the amount of such
Letter of Credit, the name and address of the beneficiary thereof and such other
information as shall be necessary to prepare, amend, renew or extend such Letter
of Credit. If requested by the Issuing Bank, the Borrower also shall submit a
letter of credit application on the Issuing Bank's standard form in connection
with any request for a Letter of Credit. A Letter of Credit shall be issued,
amended, renewed or extended only if (and upon issuance, amendment, renewal or
extension of each Letter of Credit the Borrower shall be deemed to represent and
warrant that), after giving effect to such issuance, amendment, renewal or
extension (i) the LC Exposure shall not exceed $25,000,000 and (ii) the sum of
the total Revolving Credit Exposure plus


                                       34
   35

the aggregate principal amount of outstanding Auction Loans shall not exceed the
total Commitments.

              (c) Expiration Date. Each Letter of Credit shall expire not later
than the close of business on the date that is five Business Days prior to the
Expiration Date.

              (d) Participations. By the issuance of a Letter of Credit (or an
amendment to a Letter of Credit increasing the amount thereof) and without any
further action on the part of the Issuing Bank or the Banks, the Issuing Bank
hereby grants to each Bank, and each Bank hereby acquires from the Issuing Bank,
a participation in such Letter of Credit equal to such Bank's Applicable
Percentage of the aggregate amount available to be drawn under such Letter of
Credit. In consideration and in furtherance of the foregoing, each Bank hereby
absolutely and unconditionally agrees to pay to the Agent, for the account of
the Issuing Bank, such Bank's Applicable Percentage of each LC Disbursement made
by the Issuing Bank and not reimbursed by the Borrower on the date due as
provided in paragraph (e) of this Section, or of any reimbursement payment
required to be refunded to the Borrower for any reason to the extent received by
such Bank. Each Bank acknowledges and agrees that its obligation to acquire
participations pursuant to this paragraph in respect of Letters of Credit is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of any Letter of
Credit or the occurrence and continuance of a Default or reduction or
termination of the Commitments, and that each such payment shall be made without
any offset, abatement, withholding or reduction whatsoever.

              (e) Reimbursement. If the Issuing Bank shall make any LC
Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such
LC Disbursement by paying to the Agent an amount equal to such LC Disbursement
not later than 12:00 (noon), New York City time, on (i) the Business Day that
the Borrower receives notice of such LC Disbursement, if such notice is received
prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the
Business Day immediately following the day that the Borrower receives such
notice, if such notice is not received prior to such time on the day of receipt;
provided that ,if such LC Disbursement is not less than $1,000,000, the Borrower
may, subject to the conditions to borrowing set forth herein, request in
accordance with Section 2.03 that such payment be financed with an ABR Revolving
Borrowing in an equivalent amount and, to the extent so financed, the Borrower's
obligation to make such payment shall be discharged and replaced by the
resulting ABR Revolving Borrowing. If the Borrower fails to make such payment
when due, the Agent shall notify each Bank of the applicable LC Disbursement,
the payment then due from the Borrower in respect thereof and such Bank's
Applicable Percentage thereof. Promptly following receipt of such notice, each
Bank shall pay to the Agent its Applicable Percentage of the


                                       35
   36

payment then due from the Borrower, in the same manner as provided in Section
2.02 with respect to Loans made by such Bank (and Section 2.02 shall apply,
mutatis mutandis, to the payment obligations of the Banks), and the Agent shall
promptly pay to the Issuing Bank the amounts so received by it from the Banks.
Promptly following receipt by the Agent of any payment from the Borrower
pursuant to this paragraph, the Agent shall distribute such payment to the
Issuing Bank or, to the extent that Banks have made payments pursuant to this
paragraph to reimburse the Issuing Bank, then to such Banks and the Issuing Bank
as their interests may appear. Any payment made by a Bank pursuant to this
paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the
funding of ABR Revolving Loans as contemplated above) shall not constitute a
Loan and shall not relieve the Borrower of its obligation to reimburse such LC
Disbursement.

              (f) Obligations Absolute. The Borrower's obligation to reimburse
LC Disbursements as provided in paragraph (e) of this Section shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement under any and all circumstances whatsoever and
irrespective of (i) any lack of validity or enforceability of any Letter of
Credit or this Agreement, or any term or provision therein, (ii) any draft or
other document presented under a Letter of Credit proving to be forged,
fraudulent or invalid in any respect or any statement therein being untrue or
inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of
Credit against presentation of a draft or other document that does not comply
with the terms of such Letter of Credit, or (iv) any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for
the provisions of this Section, constitute a legal or equitable discharge of, or
provide a right of setoff against, the Borrower's obligations hereunder. Neither
the Agent, the Banks nor the Issuing Bank, nor any of their Related Parties,
shall have any liability or responsibility by reason of or in connection with
the issuance or transfer of any Letter of Credit or any payment or failure to
make any payment thereunder (irrespective of any of the circumstances referred
to in the preceding sentence), or any error, omission, interruption, loss or
delay in transmission or delivery of any draft, notice or other communication
under or relating to any Letter of Credit (including any document required to
make a drawing thereunder), any error in interpretation of technical terms or
any consequence arising from causes beyond the control of the Issuing Bank;
provided that the foregoing shall not be construed to excuse the Issuing Bank
from liability to the Borrower to the extent of any direct damages (as opposed
to consequential damages, claims in respect of which are hereby waived by the
Borrower to the extent permitted by applicable law) suffered by the Borrower
that are caused by the Issuing Bank's gross negligence or wilful misconduct. The
parties hereto expressly agree that, in the absence of gross negligence or
wilful misconduct on the part of the Issuing Bank (as finally determined by a
court of competent jurisdiction), the Issuing Bank shall be deemed to have
exercised care in each such determination. In furtherance of


                                       36
   37

the foregoing and without limiting the generality thereof, the parties agree
that, with respect to documents presented which appear on their face to be in
substantial compliance with the terms of a Letter of Credit, the Issuing Bank
may, in its sole discretion, either accept and make payment upon such documents
without responsibility for further investigation, regardless of any notice or
information to the contrary, or refuse to accept and make payment upon such
documents if such documents are not in strict compliance with the terms of such
Letter of Credit.

              (g) Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Issuing Bank shall promptly
notify the Agent and the Borrower by telephone (confirmed by telecopy) of such
demand for payment and whether the Issuing Bank has made or will make an LC
Disbursement thereunder; provided that any failure to give or delay in giving
such notice shall not relieve the Borrower of its obligation to reimburse the
Issuing Bank and the Banks with respect to any such LC Disbursement.

              (h) Interim Interest. If the Issuing Bank shall make any LC
Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in
full on the date such LC Disbursement is made, the unpaid amount thereof shall
bear interest, for each day from and including the date such LC Disbursement is
made to but excluding the date that the Borrower reimburses such LC
Disbursement, at the rate per annum then applicable to ABR Revolving Loans;
provided that, if the Borrower fails to reimburse such LC Disbursement when due
pursuant to paragraph (e) of this Section, then Section 2.09 shall apply.
Interest accrued pursuant to this paragraph shall be for the account of the
Issuing Bank, except that interest accrued on and after the date of payment by
any Bank pursuant to paragraph (e) of this Section to reimburse the Issuing Bank
shall be for the account of such Bank to the extent of such payment.

              (i) Cash Collateralization. If any Event of Default shall occur
and be continuing, on the Business Day that the Borrower receives notice from
the Agent, at the request of the Required Banks, demanding the deposit of cash
collateral pursuant to this paragraph, the Borrower shall deposit in an account
with the Agent, in the name of the Agent and for the benefit of the Banks, an
amount in cash equal to the LC Exposure as of such date plus any accrued and
unpaid interest thereon; provided that the obligation to deposit such cash
collateral shall become effective immediately, and such deposit shall become
immediately due and payable, without demand or other notice of any kind, upon
the occurrence of any Event of Default with respect to the Borrower described in
clause (g) or (h) of Article VII. Such deposit shall be held by the Agent as
collateral for the payment and performance of the obligations of the Borrower
under this Agreement. The Agent shall have exclusive dominion and control,
including the exclusive right of withdrawal, over such account. Other than any


                                       37
   38

interest earned on the investment of such deposits, which investments shall be
made at the option and sole discretion of the Agent and at the Borrower's risk
and expense, such deposits shall not bear interest. Interest or profits, if any,
on such investments shall accumulate in such account. Moneys in such account
shall be applied by the Agent to reimburse the Issuing Bank for LC Disbursements
for which it has not been reimbursed and, to the extent not so applied, shall be
held for the satisfaction of the reimbursement obligations of the Borrower for
the LC Exposure at such time or be applied to satisfy other obligations of the
Borrower under this Agreement. If the Borrower is required to provide an amount
of cash collateral hereunder as a result of the occurrence of an Event of
Default, such amount (to the extent not applied as aforesaid) shall be returned
to the Borrower within three Business Days after all Events of Default have been
cured or waived.

              SECTION 2.07. Fees. (a) The Borrower agrees to pay to each Bank,
through the Agent, on the first Business Day of January, April, July and
October, in each year, and on the date on which the Commitment of such Bank
shall be terminated as provided herein, a commitment fee (a "Commitment Fee") on
the average daily unused amount of the Commitment of such Bank during the
preceding quarter (or shorter period commencing with the date hereof or ending
with the Expiration Date or the date on which the Commitment of such Bank shall
be terminated); provided, that, for purposes of determining the Commitment Fee,
the undrawn portion of the Commitments shall not be deemed to be reduced by the
amount of any borrowing under the Auction Facility. The Commitment Fees shall
accrue on each day at a rate per annum equal to the Applicable Rate in effect on
such day. All Commitment Fees shall be computed on the basis of the actual
number of days elapsed in a year of 365 or 366 days, as appropriate. The
Commitment Fee due to each Bank shall commence to accrue on the date of this
Agreement and shall cease to accrue on the date on which the Commitment of such
Bank shall be terminated as provided herein.

              (b) The Borrower agrees to pay (i) to the Agent for the account of
each Bank a participation fee with respect to its participations in Letters of
Credit, which shall accrue at the Applicable Rate on the average daily amount of
such Bank's LC Exposure (excluding any portion thereof attributable to
unreimbursed LC Disbursements) during the period from and including the
Effective Date to but excluding the later of the date on which such Bank's
Commitment terminates and the date on which such Bank ceases to have any LC
Exposure, and (ii) to the Issuing Bank a fronting fee for Letters of Credit,
which shall accrue at the rate per annum of .125% on the average daily amount of
the LC Exposure (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the


                                       38
   39

period from and including the Effective Date to but excluding the later of the
date of termination of the Commitments and the date on which there ceases to be
any LC Exposure. Participation fees and fronting fees accrued through and
including the last day of March, June, September and December of each year shall
be payable on the first Business Day following such last day, commencing on the
first such date to occur after the Effective Date; provided that all such fees
shall be payable on the date on which the Commitments terminate and any such
fees accruing after the date on which the Commitments terminate shall be payable
on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph
shall be payable within 10 days after demand. All participation fees and
fronting fees shall be computed on the basis of a year of 365 or 366 days, as
appropriate and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).

              (c) The Borrower agrees to pay to the Agent, for its own account,
the fees separately agreed between the Agent and the Borrower (the "Agency Fees"
and the "Structuring Fee").

              (d) The Borrower agrees to pay the Agent, for its own account,
$100 for each Auction Bid Request the Borrower makes, payable the day on which
the Auction Bid Request is made.

              (e) For any day on which the outstanding principal amount of Loans
and the LC Exposure shall be greater than 33% of the total Commitments (or,
following the Expiration Date, 33% of the total Commitments on the Expiration
Date), the Borrower shall pay to the Administrative Agent for the account of
each Bank a utilization fee (a "Utilization Fee") at a rate per annum equal to
the Applicable Rate in effect for such day on such Bank's Applicable Percentage
of the aggregate amount of the outstanding Loans and the LC Exposure on such
day. The Utilization Fees, if any, in respect of any fiscal quarter shall be
payable in arrears on each March 31, June 30, September 30 and December 31, on
the date on which the Commitments terminate and on any later date on which the
Loans are repaid in full or on which the LC Exposure is terminated; provided,
however, that if the Utilization Fee should be payable on a day other than a
Business Day, such date of payment shall be extended to the next succeeding
Business Day. All Utilization Fees shall be computed on the basis of a year of
365 or 366 days, as appropriate, and shall be payable for the actual number of
days elapsed


                                       39
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(including the first day but excluding the last day).

              (f) All Fees shall be paid on the dates due, in immediately
available funds, to the Agent (or to the Issuing Bank, in the case of fees
payable to it) for distribution, if and as appropriate, among the Banks. Once
paid, none of the Fees shall be refundable under any circumstances.

              SECTION 2.08. Interest on Loans. (a) Subject to the provisions of
Section 2.09, the Loans comprising each ABR Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be) at a rate per annum equal to the Alternate Base
Rate plus the Applicable Rate.

              (b) Subject to the provisions of Section 2.09, the Loans
comprising each Eurodollar Borrowing shall bear interest (computed on the basis
of the actual number of days elapsed over a year of 360 days) (i) in the case of
a Eurodollar Revolving Loan at a rate per annum equal to the Eurodollar Rate for
the Interest Period in effect for such Borrowing plus the Applicable Rate or
(ii) in the case of a Eurodollar Auction Loan, at the Eurodollar Rate for the
Interest Period in effect for such Borrowing plus the Margin applicable to such
Loan.

              (c) Each Fixed Rate Loan shall bear interest at the Fixed Rate
applicable to such Loan. Each Delayed Fixed Rate Loan shall bear interest at the
Delayed Fixed Rate applicable to such Loan.

              (d) Interest on each Loan shall be payable on the Interest Payment
Dates applicable to such Loan except as otherwise provided in this Agreement.
The applicable Alternate Base Rate or Eurodollar Rate for each Interest Period
or day within an Interest Period, as the case may be, shall be determined by the
Agent, and such determination shall be conclusive absent manifest error.

              SECTION 2.09. Default Interest. If the Borrower shall default in
the payment of the principal of or interest on any Loan or any other amount
becoming due hereunder, by acceleration or otherwise, the Borrower shall on
demand from time to time pay interest, to the extent permitted by law, on such
defaulted amount up to (but not including) the date


                                       40
   41

of actual payment (after as well as before judgment) at a rate per annum
(computed on the basis of the actual number of days elapsed over a year of 360
days) equal to the Alternate Base Rate plus the Applicable Rate plus 2%.

              SECTION 2.10. Alternate Rate of Interest. In the event, and on
each occasion, that on the day two Business Days prior to the commencement of
any Interest Period for a Eurodollar Borrowing the Agent shall have in good
faith determined that dollar deposits in the principal amounts of the Loans
comprising such Borrowing are not generally available in the London interbank
market, or that the rates at which such dollar deposits are being offered will
not adequately and fairly reflect the cost to the majority in interest of the
Banks of making or maintaining their Eurodollar Loans during such Interest
Period, or that reasonable means do not exist for ascertaining the Eurodollar
Rate, the Agent shall, as soon as practicable thereafter, give written or
telecopy notice of such determination to the Borrower and the Banks. In the
event of any such determination, (i) any request by the Borrower for a
Eurodollar Borrowing pursuant to Section 2.03 shall, until the Agent shall have
advised the Borrower and the Banks that the circumstances giving rise to such
notice no longer exist, be deemed to be a request for an ABR Borrowing and (ii)
any request by the Borrower for a Eurodollar Auction Borrowing shall be
ineffective; provided that (A) if the circumstances giving rise to such notice
do not affect all the Banks, then requests by Borrower for Eurodollar Auction
Borrowings may be made to Banks that are not affected thereby and (B) if the
circumstances giving rise to such notice affect only one Type of Borrowings,
then the other Type of Borrowings shall be permitted. Each determination by the
Agent hereunder shall be conclusive absent manifest error.

              SECTION 2.11. Termination, Reduction and Extension of Commitments.
(a) The Commitments shall be automatically terminated on the Expiration Date.

              (b) Upon at least three Business Days' prior irrevocable written
or telecopy notice to the Agent, the Borrower may at any time in whole
permanently terminate, or from time to time in part permanently reduce, the
unused portion of the Commitments; provided, however, that (i) each


                                       41
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partial reduction of the Commitments shall be in an integral multiple of
$1,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments
if, after giving effect to any concurrent prepayment of the Loans in accordance
with Section 2.12, the sum of the Revolving Credit Exposure plus the aggregate
principal amount of outstanding Auction Loans would exceed the total
Commitments.

              (c) Each reduction in the Commitments hereunder shall be made
ratably among the Banks in accordance with their respective applicable
Commitments. The Borrower shall pay to the Agent for the account of the Banks,
on the date of each termination or reduction, the Commitment Fees on the amount
of the Commitments so terminated or reduced accrued through the date of such
termination or reduction.

              (d) The Borrower may request an extension of this Agreement upon
60 days' prior written notice to the Agent; provided, that, such extension will
be at the sole option of the Banks and will require the written agreement of
each Bank in order to become effective.

              SECTION 2.12. Prepayment. (a) The Borrower shall have the right at
any time and from time to time to prepay any Borrowing, in whole or in part,
upon at least three Business Days' prior written or telecopy notice (or
telephone notice promptly confirmed by written or telecopy notice) to the Agent;
provided, however, that each partial prepayment shall be in an amount which is
an integral multiple of $1,000,000, and that the Borrower shall not have the
right to prepay any Auction Loan without the prior consent of the Bank thereof.

              (b) On the date of any termination or reduction of the Commitments
pursuant to Section 2.11, the Borrower shall pay or prepay so much of the
Borrowings as shall be necessary in order that the aggregate principal amount of
the Revolving Credit Exposure plus the aggregate principal amount of Auction
Loans outstanding will not exceed the aggregate Commitments after giving effect
to such termination or reduction.

             (c) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Borrowing (or portion thereof) to be prepaid, shall
be irrevocable and shall commit the Borrower to prepay such Borrowing by the


                                       42
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amount stated therein on the date stated therein. All prepayments under this
Section 2.12 shall be subject to Section 2.15 but otherwise without premium or
penalty. All prepayments under this Section 2.12 shall be accompanied by accrued
interest on the principal amount being prepaid to the date of payment.

              SECTION 2.13. Reserve Requirements; Change in Circumstances. (a)
Notwithstanding any other provision herein, if after the date of this Agreement
there is adopted any new law, rule or regulation or any change in applicable law
or regulation or in the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration thereof
(whether or not having the force of law) which shall impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of or credit extended by such Bank (except
any such reserve requirement which is reflected in the Eurodollar Rate) or shall
impose on such Bank or the London interbank market any other condition affecting
this Agreement or Eurodollar Loans made by such Bank, and the result of any of
the foregoing shall be to increase the cost to such Bank of making or
maintaining any Eurodollar Loan or to reduce the amount of any sum received or
receivable by such Bank hereunder or under any Notes (whether of principal,
interest or otherwise) in respect of Eurodollar Loans by an amount deemed by
such Bank to be material, then the Borrower will pay to such Bank upon demand
such additional amount or amounts as will compensate such Bank for such
additional costs incurred or reduction suffered.

              (b) If any Bank shall have determined that the applicability of
any law, rule, regulation, agreement or guideline adopted after the date hereof
regarding capital adequacy, or any change in any of the foregoing or the
adoption after the date hereof of any change in any law, rule, regulation,
agreement or guideline existing on the date hereof or in the interpretation or
administration of any of the foregoing by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or any lending office of such Bank) or any
Bank's holding company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such


                                       43
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author ity, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Bank's capital or on the capital of such
Bank's holding company, if any, as a consequence of this Agreement or the Loans
made by such Bank pursuant hereto to a level below that which such Bank or such
Bank's holding company could have achieved but for such applicability, adoption,
change or compliance (taking into consideration such Bank's policies and the
policies of such Bank's holding company with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank or such Bank's holding company for any such reduction suffered.

              (c) A certificate of each Bank setting forth in reasonable detail
such amount or amounts as shall be necessary to compensate such Bank or its
holding company as specified in paragraph (a) or (b) above, as the case may be,
and the manner in which such Bank has determined the same, shall be delivered to
the Borrower and shall be conclusive absent manifest error. The Borrower shall
pay each Bank the amount shown as due on any such certificate delivered by it
within 10 days after its receipt of the same.

              (d) Failure on the part of any Bank to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Bank's right to demand compensation with respect to such period or any
other period. The protection of this Section shall be available to each Bank
regardless of any possible contention of the invalidity or inapplicability of
the law, rule, regulation, guideline or other change or condition which shall
have occurred or been imposed.

              SECTION 2.14. Change in Legality. (a) Notwithstanding any other
provision herein, if any change in, or adoption of, any law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for any Bank to
make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written notice
to the Borrower and to the Agent, such Bank may:


                                       44
   45

              (i) declare that Eurodollar Loans will not thereafter be made by
       such Bank hereunder, whereupon any request by the Borrower for a
       Eurodollar Borrowing shall, as to such Bank only, be deemed a request for
       an ABR Loan unless such declaration shall be subsequently withdrawn; and

       (ii) require that all outstanding Eurodollar Loans made by it be
       converted to ABR Loans, in which event all such Eurodollar Loans shall be
       automatically converted to ABR Loans as of the effective date of such
       notice as provided in paragraph (b) below.

In the event any Bank shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the Eurodollar Loans that would have been made by such Bank or the
converted Eurodollar Loans of such Bank shall instead be applied to repay the
ABR Loans made by such Bank in lieu of, or resulting from the conversion of,
such Eurodollar Loans.

              (b) For purposes of this Section 2.14, a notice to the Borrower by
any Bank shall be effective as to each Eurodollar Loan, if lawful, on the last
day of the Interest Period currently applicable to such Eurodollar Loan.

              SECTION 2.15. Indemnity. The Borrower shall indemnify each Bank
against any loss or expense which such Bank may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
Eurodollar Borrowing hereunder the applicable conditions set forth in Article
IV, (b) any failure by the Borrower to borrow or to refinance any Eurodollar
Loan hereunder after irrevocable notice of such borrowing or refinancing has
been given pursuant to Sections 2.03 and 2.04, (c) any payment or prepayment of
a Eurodollar Loan required by any other provision of this Agreement or otherwise
made or deemed made on a date other than the last day of the Interest Period
applicable thereto or (d) any default in payment or prepay ment of the principal
amount of any Eurodollar Loan or any part thereof or interest accrued thereon,
as and when due and payable (at the due date thereof, whether by scheduled
maturity, acceleration, irrevocable notice of prepayment or otherwise)
including, in each such case, any


                                       45
   46

loss or reasonable expense sustained or incurred or to be sustained or incurred
in liquidating or employing deposits from third parties acquired to effect or
maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or
reasonable expense shall include an amount equal to the excess, if any, as
reasonably determined by such Bank, of (i) its cost of obtaining the funds for
the Eurodollar Loan being paid, prepaid, converted or not borrowed (assumed to
be the Eurodollar Rate applicable thereto) for the period from the date of such
payment, prepayment, conversion or failure to borrow to the last day of the
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Eurodollar Loan which would have commenced on the date
of such failure) over (ii) the amount of interest (as reasonably determined by
such Bank) that would be realized by such Bank in reemploying the funds so paid,
prepaid or not borrowed for such period or Interest Period, as the case may be.
A certificate of any Bank setting forth any amount or amounts which such Bank is
entitled to receive pursuant to this Section, and the manner in which such Bank
has determined the same, shall be delivered to the Borrower and shall be
conclusive absent manifest error.

              SECTION 2.16. Pro Rata Treatment. Except as required under
Sections 2.04 and 2.14, each Borrowing, each payment or prepayment of principal
of any Borrowing, each payment of interest on the Loans, each payment of the
Commitment Fees, each reduction of the Commitments and each refinancing of any
Borrowing with a Borrowing of any Type shall be allocated pro rata among the
Banks in accordance with their respective applicable Commitments (or, if such
Commitments shall have expired or been terminated, in accordance with the
respective principal amounts of their outstanding Loans). Each Bank agrees that
in computing such Bank's portion of any Borrowing to be made hereunder, the
Agent may, in its discretion, round each Bank's percentage of such Borrowing,
computed in accordance with Section 2.01, to the next higher or lower whole
dollar amount.

              SECTION 2.17. Sharing of Setoffs. Each Bank agrees that if it
shall, through the exercise of a right of banker's lien, setoff or counterclaim
against the Borrower, or pursuant to a secured claim under Section 506 of Title
11 of the United States Code or other security or interest


                                       46
   47

arising from, or in lieu of, such secured claim, received by such Bank under any
applicable bankruptcy, insolvency or other similar law or otherwise, or by any
other means, obtain payment (voluntary or involuntary) in respect of any
Revolving Loan or Revolving Loans or participations in LC Disbursements as a
result of which the unpaid principal portion of its Revolving Loans or
participations in LC Disbursements shall be proportionately less than the unpaid
principal portion of the Revolving Loans or participations in LC Disbursements
of any other Bank, it shall be deemed simultaneously to have purchased from such
other Bank at face value, and shall promptly pay to such other Bank the purchase
price for, a participation in the Revolving Loans or participations in LC
Disbursements of such other Bank, so that the aggregate unpaid principal amount
of the Revolving Loans and participations in Revolving Loans and in LC
Disbursements held by each Bank shall be in the same proportion to the aggregate
unpaid principal amount of all Revolving Loans and participations in LC
Disbursements then outstanding as the principal amount of its Revolving Loans
and participations in LC Disbursements prior to such exercise of banker's lien,
setoff or counterclaim or other event was to the principal amount of all
Revolving Loans and participations in LC Disbursements outstanding prior to such
exercise of banker's lien, setoff or counter-claim or other event; provided,
however, that, if any such purchase or purchases or adjustments shall be made
pursuant to this Section and the payment giving rise thereto shall thereafter be
recovered, such purchase or purchases or adjustments shall be rescinded to the
extent of such recovery and the purchase price or prices or adjustment restored
without interest. The Borrower expressly consents to the foregoing arrangements
and agrees that any Bank holding a participation in a Revolving Loan or in an LC
Disbursement deemed to have been so purchased may exercise any and all rights of
banker's lien, setoff or counterclaim with respect to any and all moneys owing
by the Borrower to such Bank by reason thereof as fully as if such Bank had made
a Loan directly to the Borrower in the amount of such participation.

              SECTION 2.18. Payments. (a) The Borrower shall make each payment
(including principal of or interest on any Borrowing or reimbursements of LC
Disbursements or any Fees or other amounts) hereunder and under any other Loan


                                       47
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Document not later than 12:00 (noon), New York City time, on the date when due
in dollars to the Agent at its offices at 909 Fanning, Suite 1700, Houston,
Texas, in immediately
available funds.

              (b) Whenever any payment (including principal of or interest on
any Borrowing or reimbursements of LC Disbursements or any Fees or other
amounts) hereunder or under any other Loan Document shall become due, or
otherwise would occur, on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest or Fees, if applicable.

              SECTION 2.19. Taxes. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.18, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding taxes imposed on the net income of the Agent, any Bank or the Issuing
Bank (or any transferee or assignee thereof, including a participation holder
(any such entity being called a "Transferee")) and franchise taxes imposed on
the Agent, any Bank or the Issuing Bank (or Transferee) by the United States or
any jurisdiction under the laws of which the Agent, any such Bank or the Issuing
Bank (or such Transferee) or the applicable lending office, is organized or any
political subdivision thereof (all such nonexcluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder to the Banks or the Issuing Bank (or
any Transferee) or the Agent, (i) the sum payable shall be increased by the
amount necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 2.19) such
Bank or the Issuing Bank (or such Transferee) or the Agent (as the case may be)
shall receive an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxing authority or
other Governmental Authority in accordance with applicable law; provided,
however, that no Transferee of any Bank shall be


                                       48
   49

entitled to receive any greater payment under this paragraph (a) than such Bank
would have been entitled to receive with respect to the rights assigned,
participated or other wise transferred unless such assignment, participation or
transfer shall have been made at a time when the circumstances giving rise to
such greater payment did not exist.

               (b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").

               (c) The Borrower will indemnify each Bank (or Transferee), the
Issuing Bank (or Transferee) and the Agent for the full amount of Taxes and
Other Taxes paid by such Bank (or such Transferee), the Issuing Bank (or such
Transferee) or the Agent, as the case may be, and any liability (including
penalties, interest and reasonable expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted by the relevant taxing authority or other Governmental Authority. Such
indemnification shall be made within 30 days after the date any Bank or the
Issuing Bank (or Transferee) or the Agent, as the case may be, makes written
demand therefor. If a Bank or the Issuing Bank (or Transferee) or the Agent
shall become aware that it is entitled to receive a refund in respect of Taxes
or Other Taxes as to which it has been indemnified by the Borrower pursuant to
this Section 2.19, it shall promptly notify the Borrower of the availability of
such refund and shall, within 30 days after receipt of a request by the
Borrower, apply for such refund at the Borrower's expense. If any Bank or the
Issuing Bank (or Transferee) or the Agent receives a refund in respect of any
Taxes or Other Taxes as to which it has been indemnified by the Borrower
pursuant to this Section 2.19, it shall promptly notify the Borrower of such
refund and shall repay such refund to the Borrower (to the extent of amounts
that have been paid by the Borrower under this Section 2.19 with respect to such
refund) within 30 days (or promptly upon receipt, if the Borrower has requested
application for such refund pursuant hereto), net


                                       49
   50

of all reasonable out-of-pocket expenses of such Bank and without interest;
provided that the Borrower, upon the request of such Bank or the Issuing Bank
(or such Transferee) or the Agent, agrees to return such refund (plus penalties,
interest or other charges) to such Bank or the Issuing Bank (or such Transferee)
or the Agent in the event such Bank or the Issuing Bank (or such Transferee) or
the Agent is required to repay such refund. Nothing contained in this paragraph
(c) shall require any Bank or the Issuing Bank (or Transferee) or the Agent to
make available any of its tax returns (or any other information relating to its
taxes which it deems to be confidential); provided that Borrower, at its
expense, shall have the right to receive an opinion from a firm of independent
public accountants of recognized national standing acceptable to the Borrower
that the amount due hereunder is correctly calculated.

               (d) Within 30 days after the date of any payment of Taxes or
Other Taxes withheld by the Borrower in respect of any payment to any Bank or
the Issuing Bank (or Transferee) or the Agent, the Borrower will furnish to the
Agent, at its address referred to in Section 9.01, the original or a certified
copy of a receipt evidencing payment thereof.

               (e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section 2.19
shall survive the payment in full of the principal of and interest on all Loans
made hereunder.

               (f) On or prior to the execution of this Agreement and on or
before the transfer to a Transferee, the Agent shall notify the Borrower of each
Bank's or the Issuing Bank's (or Transferee's) address. On or prior to the
Banks' or the Issuing Bank's (or Transferee's) first Interest Payment Date, and
from time to time as required by law, each Bank or the Issuing Bank (or
Transferee) that is organized under the laws of a jurisdiction outside the
United States shall, if legally able to do so, deliver to the Borrower and the
Agent such certificates, documents or other evidence, as required by the Code or
Treasury Regulations issued pursuant thereto, including Internal Revenue Service
Form 1001 or Form 4224 and any other certificate or statement of exemption
required by Treasury


                                       50
   51

Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any subsequent version
thereof or successors thereto, properly completed and duly executed by such Bank
or such Issuing Bank (or Transferee) establishing that such payment is (i) not
subject to United States Federal withholding tax under the Code because such
payment is effectively connected with the conduct by such Bank or such Issuing
Bank (or Transferee) of a trade or business in the United States or (ii) totally
exempt from United States Federal withholding tax, or subject to a reduced rate
of such tax under a provision of an applicable tax treaty. Unless the Borrower
and the Agent have received forms or other documents satisfactory to them
indicating that such payments hereunder or under any Notes are not subject to
United States Federal withholding tax or are subject to such tax at a rate
reduced by an applicable tax treaty, the Borrower shall withhold taxes from such
payments at the applicable statutory rate.

               (g) The Borrower shall not be required to pay any additional
amounts to any Bank or the Issuing Bank (or Transferee) in respect of United
States Federal withholding tax pursuant to paragraph (a) above if the obligation
to pay such additional amounts would not have arisen but for a failure by such
Bank or such Issuing Bank (or Transferee) to comply with the provisions of
paragraph (f) above; provided, however, that the Borrower shall be required to
pay those amounts to any Bank or the Issuing Bank (or Transferee) that it was
required to pay hereunder prior to the failure of such Bank or such Issuing Bank
(or Transferee) to comply with the provisions of such paragraph (f).

               SECTION 2.20. Termination or Assignment of Commitments Under
Certain Circumstances. (a) Any Bank or the Issuing Bank (or Transferee) claiming
any additional amounts payable pursuant to Section 2.13 or Section 2.19 or
exercising its rights under Section 2.14 shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any certificate or
document requested by the Borrower or to change the jurisdiction of its
applicable lending office if the making of such a filing or change would avoid
the need for or reduce the amount of any such additional amounts which may
thereafter accrue or avoid the circumstances giving rise to such exercise and
would not, in the sole determination of such Bank or such Issuing Bank, be
otherwise disadvantageous to such Bank or such



                                       51
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Issuing Bank (or Transferee).

               (b) In the event that any Bank shall have delivered a notice or
certificate pursuant to Section 2.13 or 2.14, or the Borrower shall be required
to make additional payments under Section 2.19 to any Bank or the Issuing Bank
(or Transferee) or to the Agent with respect to any Bank or the Issuing Bank (or
Transferee), the Borrower shall have the right, at its own expense, upon notice
to such Bank or the Issuing Bank (or Transferee) and the Agent (and, if a
Commitment is being assigned, the Issuing Bank), (a) to terminate the Commitment
of such Bank or such Issuing Bank (or Transferee) or (b) to require such Bank or
the Issuing Bank (or Transferee) to transfer and assign without recourse (in
accordance with and subject to the restrictions contained in Section 9.04) all
its interests, rights and obligations under this Agreement (other than any
outstanding Auction Loans) to another financial institution which shall assume
such obligations; provided that (i) no such termination or assignment shall
conflict with any law, rule or regulation or order of any Governmental Authority
and (ii) the Borrower or the assignee, as the case may be, shall pay to the
affected Bank or the Issuing Bank (or Transferee) in immediately available funds
on the date of such termination or assignment the principal of and interest
accrued to the date of payment on the Loans made by it hereunder and all other
amounts accrued for its account or owed to it hereunder and, in the case of a
termination or assignment by the Issuing Bank, shall cause all Letters of Credit
to be surrendered for cancelation on or prior to the date of such termination or
assignment.


ARTICLE III. REPRESENTATIONS AND WARRANTIES

               The Borrower represents and warrants to each of the Banks that:

               SECTION 3.01. Organization; Powers. Each of the Borrower and the
Significant Subsidiaries (a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization, (b)
has all requisite power and authority to own its property and assets and to
carry on its business as now conducted and as proposed to be conducted, (c) is


                                       52
   53

qualified to do business in every jurisdiction where such qualification is
required, except where the failure so to qualify would not result in a Material
Adverse Effect, and (d) in the case of the Borrower, has the corporate power and
authority to execute, deliver and perform its obligations under each of the Loan
Documents and each other agreement or instrument contemplated thereby to which
it is or will be a party and to borrow hereunder.

               SECTION 3.02. Authorization. The execution, delivery and
performance by the Borrower of each of the Loan Documents and the borrowings
hereunder (collectively, the "Transactions") (a) have been duly authorized by
all requisite corporate and, if required, stockholder action and (b) will not
(i) violate (A) any provision of law, statute, rule or regulation the violation
of which could reasonably be expected to impair the validity and enforceability
of this Agreement or any other Loan Document or materially impair the rights of
or benefits available to the Banks under the Loan Documents, or of the
certificate or articles of incorporation or other constitutive documents or
by-laws of the Borrower or any Significant Subsidiary, (B) any order of any
Governmental Authority the violation of which could reasonably be expected to
impair the validity or enforce ability of this Agreement or any other Loan
Document, or materially impair the rights of or benefits available to the Banks
under the Loan Documents, or (C) any provision of any indenture or other
material agreement or instrument evidencing or relating to borrowed money to
which the Borrower or any Significant Subsidiary is a party or by which any of
them or any of their property is or may be bound in a manner which could
reasonably be expected to impair the validity and enforceability of this
Agreement or any other Loan Document or materially impair the rights of or
benefits available to the Banks under the Loan Documents, (ii) be in conflict
with, result in a breach of or constitute (alone or with notice or lapse of time
or both) a default under any such indenture, agreement or other instru ment in a
manner which could reasonably be expected to impair the validity and
enforceability of this Agreement or any other Loan Document or materially impair
the rights of or benefits available to the Banks under the Loan Documents or
(iii) result in the creation or imposition under any such indenture, agreement
or other instrument of any Lien upon or with respect to any property or assets
now owned or


                                       53
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hereafter acquired by the Borrower.

               SECTION 3.03. Enforceability. This Agreement has been duly
executed and delivered by the Borrower and constitutes, and each other Loan
Document when executed and delivered by the Borrower will constitute, a legal,
valid and binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms.

               SECTION 3.04. Governmental Approvals. No action, consent or
approval of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except
such as have been made or obtained and are in full force and effect.

               SECTION 3.05. Financial Statements. The Borrower has heretofore
furnished to the Banks its consolidated balance sheets and statements of income
and statements of cash flow as of and for the fiscal year ended December 31,
1999, audited by and accompanied by the opinion of Deloitte & Touche,
independent public accountants. Such financial statements present fairly the
financial condition and results of operations of the Borrower and its
consolidated subsidiaries as of such dates and for such periods. Such balance
sheets and the notes thereto, together with the Borrower's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, reflect all liabilities,
direct or contingent, of the Borrower and its consolidated Subsidiaries as of
the dates thereof which are material on a consolidated basis. Such financial
statements were prepared in accordance with GAAP applied (except as noted
therein) on a consistent basis.

               SECTION 3.06. No Material Adverse Change. Except as disclosed in
the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, in the Borrower's Form 10-Q for the fiscal quarter ended March 31, 2000
and in any document filed prior to the date of this Agreement pursuant to
Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, there has
been no change in the business, assets, operations or financial condition of the
Borrower and the Subsidiaries, taken as a whole, since December 31, 1999, which
could reasonably be expected to have a material adverse effect on the
creditworthiness of the Borrower.


                                       54
   55

               SECTION 3.07. Litigation; Compliance with Laws. (a) Except as set
forth in the Annual Report of the Borrower on Form 10-K for the year ended
December 31, 1999, in the Borrower's Form 10-Q for the fiscal quarter ended
March 31, 2000 or in any document filed prior to the date of this Agreement
pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
there are not any actions, suits or proceedings at law or in equity or by or
before any Governmental Authority now pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any Subsidiary or any
business, property or rights of any such person (i) which involve any Loan Docu
ment or the Transactions or (ii) which could reasonably be anticipated,
individually or in the aggregate, to result in a Material Adverse Effect.

               (b) Neither the Borrower nor any of the Subsidiaries is in
violation of any law, rule or regulation, or in default with respect to any
judgment, writ, injunction or decree of any Governmental Authority, where such
violation or default would be reasonably likely to result in a Material Adverse
Effect.

               SECTION 3.08. Federal Reserve Regulations. (a) Neither the
Borrower nor any of the Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock.

               (b) No part of the proceeds of any Loan or Letter of Credit will
be used, whether directly or indirectly, and whether immediately, incidentally
or ultimately, (i) to purchase or carry Margin Stock or to extend credit to
others for the purpose of purchasing or carrying Margin Stock or to refund
indebtedness originally incurred for such purpose, or (ii) for any purpose which
entails a violation of, or which is inconsistent with, the provisions of the
Regulations of the Board, including Regulation U or X.

               SECTION 3.09. Investment Company Act; Public Utility Holding
Company Act. The Borrower is not (a) an "investment company" as defined in, or
subject to regulation under, the Investment Company Act of 1940 or (b) subject
to regulation as a "holding company" under the Public Utility


                                       55
   56

Holding Company Act of 1935.

               SECTION 3.10. Use of Proceeds and Letters of Credit. The Borrower
will use the proceeds of the Loans and the Letters of Credit only for the
purposes specified in the preamble to this Agreement.

               SECTION 3.11. No Material Misstatements. No information, report,
financial statement, exhibit or schedule furnished by or on behalf of the
Borrower to the Agent, the Issuing Bank or any Bank in connection with the
negotiation of any Loan Document or included therein or delivered pursuant
thereto contained, contains or will contain any material misstatement of fact
or, when considered together with all reports theretofore filed with the
Securities and Exchange Commission, omitted, omits or will omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were, are or will be made, not misleading.

               SECTION 3.12. Employee Benefit Plans. Each of the Borrower and
its ERISA Affiliates is in compliance in all material respects with the
applicable provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred as to which the Borrower or any
ERISA Affiliate was required to file a report with the PBGC, and the present
value of all benefit liabilities under each Plan (based on those assumptions
used to fund such Plan) did not, as of the last annual valuation date applicable
thereto, exceed by more than $10,000,000 the value of the assets of such Plan.

               SECTION 3.13. Environmental and Safety Matters. Each of the
Borrower and each Subsidiary has complied with all Federal, state, local and
other statutes, ordinances, orders, judgments, rulings and regulations relating
to environmental pollution or to environmental or nuclear regulation or control
or to employee health or safety, except where noncompliance would not be
reasonably likely to result in a Material Adverse Effect. Neither the Borrower
nor any Subsidiary has received notice of any failure so to comply, except where
noncompliance would not be reasonably likely to result in a Material Adverse
Effect. The Borrower's and the Subsidiaries' plants do not manage any hazardous
wastes, hazardous substances, hazardous materials,


                                       56
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toxic substances, toxic pollutants or substances similarly denominated, as those
terms or similar terms are used in the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response Compensation and Liability Act, the
Hazardous Materials Transportation Act, the Toxic Substance Control Act, the
Clean Air Act, the Clean Water Act or any other applicable law relating to
environmental pollution or employee health and safety, or any nuclear fuel or
other radioactive materials, in violation of any law or any regulations
promulgated pursuant thereto, where such violation would be reasonably likely to
result in a Material Adverse Effect. The Borrower is aware of no events,
conditions or circumstances involving environmental pollution or contamination
or employee health or safety that could reasonably be expected to result in a
Material Adverse Effect. The representations and warranties set forth in this
Section 3.13 are, however, subject to any matters, circumstances or events set
forth in the Borrower's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, in the Borrower's Form 10-Q for the fiscal quarter ended
March 31, 2000 and in any document filed prior to the date of this Agreement
pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934;
provided, however, that the inclusion of such matters, circumstances or events
as exceptions (or any other exceptions contained in the representations and
warranties which refer to the Borrower's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, the Borrower's Form 10-Q for the fiscal
quarter ended March 31, 2000 or in any document filed prior to the date of this
Agreement pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act
of 1934) shall not be construed to mean that the Borrower has concluded that any
such matter, circumstance or effect is likely to result in a Material Adverse
Effect.

               SECTION 3.14. Significant Subsidiaries. Schedule 3.14 sets forth
as of the date hereof a list of all Significant Subsidiaries of the Borrower and
the percentage ownership interest of the Borrower therein.


ARTICLE IV. CONDITIONS OF LENDING

               The obligations of the Banks to make Loans and of the Issuing
Bank to issue, amend, renew, or extend Letters


                                       57
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of Credit, hereunder are subject to the satisfaction of the following
conditions:

               SECTION 4.01. All Borrowings. On the date of each Borrowing or
issuance, renewal, extension or amending of a Letter of Credit, including each
Borrowing in which Loans are refinanced with new Loans as contemplated by
Section 2.02(e):

               (a) The Agent shall have received a notice of such Borrowing as
        required by Section 2.03.

               (b) The representations and warranties set forth in Article III
        hereof (except, in the case of a refinancing of Loans or the issuance,
        amendment, renewal or extension of a Letter of Credit or the refinancing
        of a LC Disbursement that does not increase the sum of the Revolving
        Credit Exposure, LC Disbursements and the Auction Loans of any Bank
        outstanding, the representations set forth in Sections 3.06 and 3.07)
        shall be true and correct in all material respects on and as of the date
        of such Borrowing or the date of issuance, amendment, renewal or
        extension of such Letter of Credit with the same effect as though made
        on and as of such date, except to the extent such representations and
        warranties expressly relate to an earlier date.

               (c) The Borrower shall be in compliance with all the terms and
        provisions set forth herein and in each other Loan Document on its part
        to be observed or performed, and at the time of and immediately after
        such Borrowing or the date of issuance, amendment, renewal or extension
        of such Letter of Credit no Event of Default or Default shall have
        occurred and be continuing.

Each Borrowing and issuance, amendment, renewal or extension of such Letter of
Credit shall be deemed to constitute a representation and warranty by the
Borrower on the date of such Borrowing as to the matters specified in paragraphs
(b) and (c) of this Section 4.01.

               SECTION 4.02. First Borrowing. On the date of this Agreement:


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               (a) The Agent shall have received favorable written opinions of
        (i) Paine, Hamblen, Coffin, Brooke & Miller, counsel for the Borrower,
        and (ii) Thelen, Reid & Priest, special counsel to the Borrower, each
        dated the date of this Agreement and addressed to the Banks, to the
        effect set forth in Exhibits D-1 and D-2 hereto, and the Borrower hereby
        instructs such counsel to deliver such opinions to the Agent.

               (b) The Agent shall have received evidence satisfactory to it and
        set forth on Schedule 4.02(b) that the Borrower shall have obtained all
        consents and approvals of, and shall have made all filings and
        registrations with, any Governmental Authority required in order to
        consummate the Transactions, in each case without the imposition of any
        condition which, in the judgment of the Banks, could adversely affect
        their rights or interests hereunder.

               (c) All legal matters incident to this Agreement and the
        borrowings hereunder shall be satisfactory to the Banks and their
        counsel and to Cravath, Swaine & Moore, counsel for the Agent.

               (d) The Agent shall have received (i) a copy of the certificate
        or articles of incorporation, including all amendments thereto, of the
        Borrower, certified as of a recent date by the Secretary of State of the
        state of its organization, and a certificate as to the good standing of
        the Borrower as of a recent date, from such Secretary of State; (ii) a
        certificate of the Secretary or Assistant Secretary of the Borrower
        dated the Closing Date and certifying (A) that attached thereto is a
        true and complete copy of the by-laws of the Borrower as in effect on
        the Closing Date and at all times since a date prior to the date of the
        resolutions described in clause (B) below, (B) that attached thereto is
        a true and complete copy of resolutions duly adopted by the board of
        directors of the Borrower authorizing the execution, delivery and
        performance of the Loan Documents and the borrowings hereunder, and that
        such resolutions have not been modified, rescinded or amended and are in
        full force and effect, (C) that the certificate or articles of
        incorporation of the


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        Borrower have not been amended since the date of the last amendment
        thereto shown on the certificate of good standing furnished pursuant to
        clause (i) above, and (D) as to the incumbency and specimen signature of
        each officer executing any Loan Document or any other document delivered
        in connection herewith on behalf of the Borrower; (iii) a certificate of
        another officer as to the incumbency and specimen signature of the
        Secretary or Assistant Secretary executing the certificate pursuant to
        (ii) above; and (iv) such other documents as the Banks or their counsel
        or Cravath, Swaine & Moore, counsel for the Agent, may reasonably
        request.

               (e) The Agent shall have received a certificate, dated the
        Closing Date and signed by a Financial Officer of the Borrower,
        confirming compliance with the conditions precedent set forth in
        paragraphs (b) and (c) of Section 4.01.

               (f) The Agent shall have received all Fees and other amounts due
        and payable on or prior to the date of this Agreement, including all
        Fees accrued to the date hereof under the Pre-Restatement Credit
        Agreement, this Agreement or the fee schedule set forth in the
        invitation schedule and fee schedule dated May 12, 2000.


ARTICLE V. AFFIRMATIVE COVENANTS

               The Borrower covenants and agrees with each Bank and with the
Issuing Bank that so long as this Agreement shall remain in effect or the
principal of or interest on any Loan, any Fees or any other expenses, any LC
Disbursement or amounts payable under any Loan Document shall be unpaid or any
Letter of Credit remains outstanding, unless the Required Banks shall otherwise
consent in writing, the Borrower will:

               SECTION 5.01. Existence; Businesses and Proper ties. (a) Do or
cause to be done all things necessary to preserve, renew and keep in full force
and effect its legal existence, except as otherwise expressly permitted under
Section 6.02.


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               (b) Do or cause to be done all things necessary to obtain,
preserve, renew, extend and keep in full force and effect the rights, licenses,
permits, franchises, authorizations, patents, copyrights, trademarks and trade
names utilized in the conduct of the Borrower's business except where the
failure so to obtain, preserve, renew, extend or maintain any of the foregoing
would not result in a Material Adverse Effect; maintain and operate such
business in substantially the manner in which it is presently conducted and
operated, except as otherwise expressly permitted under this Agreement; comply
in all material respects with all applicable laws, rules, regulations and orders
of any Governmental Authority, whether now in effect or hereafter enacted if
failure to comply with such requirements would result in a Material Adverse
Effect; and at all times maintain and preserve all property material to the
conduct of such business and keep such property in good repair, working order
and condition and from time to time make, or cause to be made, all needful and
proper repairs, renewals, additions, improvements and replacements thereto
necessary in order that the business carried on in connection therewith may be
properly conducted at all times; provided, however, that the Borrower may cause
the discontinuance of the operation or a reduction in the capacity of any of its
facilities, or any element or unit thereof including, without limitation, real
and personal properties, facilities, machinery and equipment, (i) if, in the
judgment of the Borrower, it is no longer advisable to operate the same, or to
operate the same at its former capacity, and such discontinuance or reduction
would not result in a Material Adverse Effect, or (ii) if the Borrower intends
to sell and dispose of its interest in the same in accordance with the terms of
this Agreement and within a reasonable time shall endeavor to effectuate the
same.

               SECTION 5.02. Insurance. (a) Maintain insurance, to such extent
and against such risks, as is customary with companies in the same or similar
businesses and owning similar properties in the same general area in which the
Borrower operates and (b) maintain such other insurance as may be required by
law. All insurance required by this Section 5.02 shall be maintained with
financially sound and reputable insurers or through self-insurance; provided,
however, that the portion of such insurance constituting


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self-insurance shall be comparable to that usually maintained by companies
engaged in the same or similar businesses and owning similar properties in the
same general area in which the Borrower operates and the reserves maintained
with respect to such self-insured amounts are deemed adequate by the officer or
officers of the Borrower responsible for insurance matters.

               SECTION 5.03. Taxes and Obligations. Pay and discharge promptly
when due all taxes, assessments and governmental charges or levies imposed upon
it or upon its income or profits or in respect of its property, before the same
shall become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might give rise to a Lien
upon such properties or any part thereof; provided, however, that such payment
and discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrower shall, to
the extent required by GAAP, have set aside on its books adequate reserves with
respect thereto.

               SECTION 5.04. Financial Statements, Reports, etc. Furnish to the
Agent and each Bank:

               (a) within 105 days after the end of each fiscal year, its
        consolidated and consolidating balance sheets and related statements of
        income and statements of cash flow, showing the financial condition of
        the Borrower and its consolidated Subsidiaries as of the close of such
        fiscal year and the results of its operations and the operations of such
        Subsidiaries during such year, all audited by Deloitte & Touche or other
        independent public accountants of recognized national standing
        acceptable to the Required Banks and accompanied by an opinion of such
        accountants (which shall not be qualified in any material respect) to
        the effect that such consolidated financial statements fairly present
        the financial condition and results of operations of the Borrower on a
        consolidated basis (except as noted therein) in accordance with GAAP
        consistently applied;

               (b) within 50 days after the end of each of the first three
        fiscal quarters of each fiscal year, its


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        consolidated and, to the extent otherwise available, consolidating
        balance sheets and related statements of income and statements of cash
        flow, showing the financial condition of the Borrower and its
        consolidated subsidiaries as of the close of such fiscal quarter and the
        results of its operations and the operations of such subsidiaries during
        such fiscal quarter and the then elapsed portion of the fiscal year, all
        certified by one of its Financial Officers as fairly presenting the
        financial condition and results of operations of the Borrower on a
        consolidated basis in accordance with GAAP consistently applied, subject
        to normal year-end audit adjustments;

               (c) concurrently with any delivery of financial statements under
        (a) or (b) above, a certificate of the relevant accounting firm opining
        on or certifying such statements or Financial Officer (which
        certificate, when furnished by an accounting firm, may be limited to
        accounting matters and disclaim responsibility for legal
        interpretations) certifying that to the knowledge of the accounting firm
        or the Financial Officer, as the case may be, no Event of Default or
        Default has occurred or, if such an Event of Default or Default has
        occurred, specifying the nature and extent thereof and any corrective
        action taken or proposed to be taken with respect thereto;

               (d) promptly after the same become publicly available, copies of
        all periodic and other reports, proxy statements and other materials
        filed by it with the Securities and Exchange Commission, or any
        governmental authority succeeding to any of or all the functions of said
        Commission, or with any national securities exchange, or distributed to
        its share holders, as the case may be; and

               (e) promptly, from time to time, such other information regarding
        the operations, business affairs and financial condition of the Borrower
        or any Significant Subsidiary, or compliance with the terms of any Loan
        Document, as the Agent or any Bank may reasonably request.

               SECTION 5.05. Litigation and Other Notices.


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Furnish to the Agent and each Bank prompt written notice of the following:

               (a) any Event of Default or Default, specifying the nature and
        extent thereof and the corrective action (if any) proposed to be taken
        with respect thereto;

               (b) the filing or commencement of, or any written threat or
        notice of intention of any person to file or commence, any action, suit
        or proceeding, whether at law or in equity or by or before any
        Governmental Authority, against the Borrower or any Subsidiary thereof
        which could reasonably be anticipated to result in a Material Adverse
        Effect; and

               (c) any development that has resulted in, or could reasonably be
        anticipated to result in, a Material Adverse Effect.

               SECTION 5.06. ERISA. (a) Comply in all material respects with the
applicable provisions of ERISA and (b) furnish to the Agent and each Bank (i) as
soon as possible, and in any event within 30 days after any Responsible Officer
of the Borrower or any ERISA Affiliate either knows or has reason to know that
any Reportable Event has occurred that alone or together with any other
Reportable Event could reasonably be expected to result in liability of the
Borrower to the PBGC in an aggregate amount exceeding $10,000,000, a statement
of a Financial Officer setting forth details as to such Reportable Event and the
action proposed to be taken with respect thereto, together with a copy of the
notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after
receipt thereof, a copy of any notice the Borrower or any ERISA Affiliate may
receive from the PBGC relating to the intention of the PBGC to terminate any
Plan or Plans (other than a Plan maintained by an ERISA Affiliate which is
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) or to appoint a trustee to administer any Plan or Plans and
(iii) within 10 days after the due date for filing with the PBGC pursuant to
Section 412(n) of the Code of a notice of failure to make a required installment
or other payment with respect to a Plan, a statement of a Financial Officer
setting forth details as to such failure and the action proposed to be taken
with respect thereto, together


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with a copy of such notice given to the PBGC.

               SECTION 5.07. Maintaining Records; Access to Properties and
Inspections. Maintain all financial records in accordance with GAAP and permit
any representatives designated by any Bank to visit and inspect the financial
records and the properties of the Borrower at reasonable times and as often as
requested and to make extracts from and copies of such financial records, and
permit any representatives designated by any Bank to discuss the affairs,
finances and condition of the Borrower with the chief financial officer of the
Borrower, or other person designated by the chief financial officer, and
independent accountants therefor.

               SECTION 5.08. Use of Proceeds and Letters of Credit. Use the
proceeds of the Loans and the Letters of Credit only for the purposes set forth
in the preamble to this Agreement.

               SECTION 5.09. Further Assurance. Pledge all the capital stock
(including any warrants, options or other rights entitling the Borrower to
purchase or acquire such capital stock) of Avista Capital, Inc. to the Agent for
the benefit of the Banks by August 15, 2000. Such pledge shall be made pursuant
to a pledge agreement in a form reasonably satisfactory to the Agent. Such
pledge shall not restrict, limit or encumber the Borrower's ability to conduct
any business activities of Avista Capital, Inc. or any of its affiliates
(subject to any restrictions on Avista Capital, Inc. under this Agreement as a
result of it being a Significant Subsidiary), including, but not limited to, its
decisions related to disposition of assets in whole or in part, mergers,
acquisitions, inter-company loans, dividends or other commitments.

ARTICLE VI. NEGATIVE COVENANTS

               The Borrower covenants and agrees with each Bank that, so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan shall be unpaid, any LC Disbursement, any Fees or any other expenses or
amounts payable under any Loan Document shall be unpaid or any Letter of Credit
remains outstanding, unless the Required Banks shall otherwise consent in
writing, the Borrower will not:


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   66

               SECTION 6.01. Liens. Create, incur, assume or permit to exist any
Lien on any property or assets (including stock or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights in respect of any thereof, except:

               (a) Liens on property or assets of the Borrower created by the
        documents, instruments or agreements existing on the date hereof and
        which are listed as exhibits to the Borrower's Annual Report on Form
        10-K for the fiscal year ended December 31, 1999, to the extent that
        such Liens secure only obligations arising under such existing
        documents, agreements or instruments;

               (b) any Lien existing on any property or asset prior to the
        acquisition thereof by the Borrower; provided that (i) such Lien is not
        created in contemplation of or in connection with such acquisition and
        (ii) such Lien does not apply to any other property or assets of the
        Borrower;

               (c) the Lien of the First Mortgage;

               (d) Liens permitted under the First Mortgage (whether or not such
        permitted Liens cover properties or assets subject to the Lien of the
        First Mortgage) and any other Liens to which the Lien of the First
        Mortgage is expressly made subject;

               (e) the Lien of any collateral trust mortgage or similar
        instrument which would be intended to eventually replace (in one
        transaction or a series of transactions) the First Mortgage (as amended,
        modified or supplemented from time to time, "Collateral Trust Mortgage")
        on properties or assets of the Borrower to secure bonds, notes and other
        obligations of the Borrower; provided that, so long as the First
        Mortgage shall constitute a Lien on properties or assets of the
        Borrower, the bonds, notes or other obligations issued under the
        Collateral Trust Mortgage (i) shall also be secured by an equal
        principal amount of bonds issued under the First Mortgage or (ii) shall
        be issued against property additions not subject to the Lien of


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        the First Mortgage;

               (f) Liens permitted under the Collateral Trust Mortgage (whether
        or not such permitted Liens cover properties or assets subject to the
        Lien of the Collateral Trust Mortgage) and any other Liens to which the
        Lien of the Collateral Trust Mortgage is subject;

               (g) Liens for taxes, assessments or governmental charges not yet
        due or which are being contested in compliance with Section 5.03;

               (h) carriers', warehousemen's, mechanic's, materialmen's,
        repairmen's or other like Liens arising in the ordinary course of
        business and securing obligations that are not due or which are being
        contested in compliance with Section 5.03;

               (i) pledges and deposits made in the ordinary course of business
        in compliance with workmen's compen sation, unemployment insurance and
        other social secur ity laws or regulations;

               (j) Liens incurred or created in connection with or to secure the
        performance of bids, tenders, trade contracts (other than for
        Indebtedness), leases, statutory obligations, surety and appeal bonds,
        performance bonds and other obligations of a like nature incurred in the
        ordinary course of business;

               (k) zoning restrictions, easements, rights-of-way, restrictions
        on use of real property and other similar encumbrances incurred in the
        ordinary course of business which, in the aggregate, are not substantial
        in amount and do not materially detract from the value of the property
        subject thereto or interfere with the ordinary conduct of the business
        of the Borrower or any of its Subsidiaries;

               (l) Liens (i) which secure obligations not assumed by the
        Borrower, (ii) on account of which the Borrower has not and does not
        expect to pay interest directly or indirectly and (iii) which exist upon
        real estate or rights in or relating to real estate in respect of which
        the Borrower has a right-of-way or other easement


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        for purposes of substations or transmission or distribution facilities;

               (m) rights reserved to or vested in any federal, state or local
        governmental body or agency by the terms of any right, power, franchise,
        grant, license, contract or permit, or by any provision of law, to
        recapture or to purchase, or designate a purchase of or order the sale
        of, any property of the Borrower or to terminate any such right, power,
        franchise, grant, license, contract or permit before the expiration
        thereof;

               (n) Liens of judgments covered by insurance, or upon appeal and
        covered by bond, or to the extent not so covered not exceeding at one
        time $10,000,000 in aggregate amount;

               (o) any Liens, moneys sufficient for the discharge of which shall
        have been deposited in trust with the trustee or mortgagee under the
        instrument evidencing such Lien, with irrevocable authority of such
        trustee or mortgagee to apply such moneys to the discharge of such Lien
        to the extent required for such purpose;

               (p) rights reserved to or vested in any federal, state or local
        governmental body or agency or other public authority to control or
        regulate the business or property of the Borrower;

               (q) any obligations or duties, affecting the property of the
        Borrower to any federal, state or local governmental body or agency or
        other public authority with respect to any authorization, permit,
        consent or license of such body, agency or authority, given in
        connection with the purchase, construction, equipping, testing and
        operation of the Borrower's utility property;

               (r) with respect to any property which the Borrower may hereafter
        acquire, any exceptions or reservations therefrom existing at the time
        of such acquisition or any terms, conditions, agreements, covenants,
        exceptions and reservations expressed or provided in the deeds of other
        instruments,


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        respectively, under and by virtue of which the Borrower shall hereafter
        acquire the same, none of which materially impairs the use of such
        property for the purposes for which it is acquired by the Borrower;

               (s) leases and subleases entered into in the ordinary course of
        business;

               (t) banker's Liens and other Liens in the nature of a right of
        setoff;

               (u) Liens resulting from any transaction permitted under Section
        6.03(v);

               (v) renewals, replacements, amendments, modifications,
        supplements, refinancings or extensions of Liens set forth above to the
        extent that the principal amount of Indebtedness secured by such Lien
        immediately prior thereto is not increased and such Lien is not extended
        to other property (it being understood that such limitation does not
        apply to the Liens described in subsection (c), (e) or (u) above);

               (w) security deposits or amounts paid into trust funds for the
        reclamation of mining properties;

               (x) restrictions on transfer or use of properties and assets,
        first rights of refusal, and rights to acquire properties and assets
        granted to others;

               (y) non-consensual equitable Liens on the Borrower's
        tenant-in-common or other interest in joint projects;

               (z) Liens on the Borrower's tenant-in-common or other interest in
        joint projects incurred by the project sponsor without the express
        consent of the Borrower to such incurrence;

               (aa) cash collateral contemplated under Section 2.06(i) and the
        pledge of Avista Capital, Inc. stock contemplated under Section 5.09 of
        this Agreement and under Section 5.09 of the $140,000,000 Amended and
        Restated Credit Agreement dated as of June 26, 2000 among the Borrower,
        the banks named therein and


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        Toronto-Dominion (Texas), Inc., as agent; and

               (ab) Liens not expressly permitted in clauses (a) through (aa) of
        this Section 6.01 to secure Indebtedness of the Borrower, provided that
        the aggregate outstanding principal amount of the Indebtedness so
        secured does not at any one time exceed 5% of the total assets of the
        Borrower and its Subsidiaries, computed and consolidated in accordance
        with GAAP consistently applied.

               SECTION 6.02. Mergers, Consolidations and Acquisitions. Merge
into or consolidate with any other person, or permit any other person to merge
into or consolidate with it, or purchase, lease or otherwise acquire (in one
transaction or a series of transactions) all or substantially all of the assets
of any other person (whether directly by purchase, lease or other acquisition of
all or substantially all of the assets of such person or indirectly by purchase
or other acquisition of all or substantially all of the capital stock of such
other person) other than acquisitions in the ordinary course of the Borrower's
business, except that if (A) at the time thereof and immediately after giving
effect thereto no Event of Default or Default shall have occurred and be
continuing and (B) in the case of any merger or consolidation involving the
Borrower in which the Borrower is not the surviving corporation, the surviving
corporation shall assume in writing the obligations of the Borrower under this
Agreement and any other Loan Documents, then (a) the Borrower may merge or
consolidate with any Subsidiary in a transaction in which the Borrower is the
surviving corporation, (b) the Borrower may purchase, lease or otherwise acquire
from any Subsidiary all or substantially all of its assets and may purchase or
otherwise acquire all or substantially all of the capital stock of any person
who immediately thereafter is a Subsidiary, (c) the Borrower may merge with or
into, or consolidate with, any other person so long as (i) in the case where the
business of such other person, or an Affiliate of such other person, entirely or
primarily consists of an electric or gas utility business, the senior secured
long-term debt rating of the Borrower shall be at least BBB or higher by S&P and
Baa2 or higher by Moody's immediately after such merger or consolidation, or in
the case of a merger or consolidation in which the Borrower is


                                       70
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not the surviving entity, the senior secured long-term debt rating of the
surviving entity or an Affiliate thereof shall be at least BBB+ or higher by S&P
and Baa1 or higher by Moody's immediately after such merger or consolidation, or
(ii) in the case where such other person's business does not entirely or
primarily consist of an electric or gas utility business, the assets of such
person at the time of such consolidation or merger do not exceed 10% of the
total assets of the Borrower and its Subsidiaries after giving effect to such
merger or consolidation, computed and consolidated in accordance with GAAP
consistently applied, and (d) the Borrower may purchase, lease or otherwise
acquire any or all of the assets of any other person (and may purchase or
otherwise acquire the capital stock of any other person) so long as (i) the
assets being purchased, leased or acquired (or the assets of the person whose
capital stock is being acquired) entirely or primarily consist of electric or
gas utility assets or (ii) in the case where the assets being purchased, leased
or acquired (or the assets of the person whose capital stock is being acquired)
do not entirely or primarily consist of electric or gas utility assets, the
assets being acquired (or the Borrower's proportionate share of the assets of
the person whose capital stock is being acquired) do not exceed 10% of the total
assets of the Borrower and its Subsidiaries, after giving effect to such
acquisition, computed and consolidated in accordance with GAAP consistently
applied.

               SECTION 6.03. Disposition of Assets. Sell, lease, transfer,
assign or otherwise dispose of (in one transaction or in a series of
transactions), in any fiscal year, assets (whether now owned or hereafter
acquired) which, together with the amount of all sales, leases, transfers,
assignments or other dispositions permitted under clause (c)(ii) of the
definition of Subsidiary Event in Article I (other than sales, leases,
transfers, assignments or other dispositions permitted under clauses (c)(ii) (A)
through (C) in such definition), exceed 10% of the assets of the Borrower and
its Subsidiaries as of the end of the most recent fiscal year, computed and
consolidated in accordance with GAAP consistently applied, except (i) the
Borrower may, in any fiscal year, sell, lease, transfer, assign or otherwise
dispose of assets in the ordinary course of business which, together with the
amount of all sales, leases, transfers, assignments or other dispositions in the


                                       71
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ordinary course permitted under clause (c)(ii)(A) of the definition of
Subsidiary Event in Article I, do not exceed 5% of the assets of the Borrower
and its Subsidiaries as of the end of the most recent fiscal year, computed and
consolidated in accordance with GAAP consistently applied, (ii) to the extent
permitted under Section 5.03, 6.01 or Section 6.02, (iii) the Borrower may sell,
lease, transfer, assign or otherwise dispose of its interest in the Washington
Public Power Supply System Nuclear Project No. 3 in accordance with the
settlement agreement among the Borrower, the Washington Public Power Supply
System and Bonneville Power Administration, as the same may be amended, modified
or supplemented from time to time, (iv) the Borrower may sell, lease, transfer,
assign or otherwise dispose of its interests in the Colstrip and Centralia
Projects and related assets and (v) the Borrower may sell, lease, transfer,
assign or otherwise dispose (including by way of capital contribution) of, or
create, incur, assume or permit to exist Liens on, receivables and related
properties or interests therein.

               SECTION 6.04. Consolidated Total Debt to Consolidated Total
Capitalization Ratio. Permit the ratio of Consolidated Total Debt to
Consolidated Total Capitalization to be, at the end of any fiscal quarter,
greater than 0.60 to 1.00 for the preceding twelve-month period, and to remain
greater than 0.60 to 1.00 for a period of 30 days.

               SECTION 6.05. Public Utility Regulatory Borrowing Limits. Incur
actual borrowings or commitments or issued and outstanding debt of the Borrower
in excess of the amount authorized (i) by statute without necessity of public
utility commission approval and/or (ii) by orders of public utility commissions,
as in effect from time to time.

               SECTION 6.06. Guarantees. Incur Guarantees of or by the Borrower
with respect to Avista Energy, Inc. in excess of $50,000,000 in the aggregate or
Guarantees of or by the Borrower with respect to Avista Energy, Inc. with a
duration of one year or longer.

ARTICLE VII. EVENTS OF DEFAULT

        In case of the happening (and during the


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continuance) of any of the following events ("Events of Default"):

               (a) any representation or warranty made or deemed made in or in
        connection with any Loan Document or the borrowings hereunder, or any
        representation, warranty, statement or information contained in any
        report, certificate, financial statement or other instrument furnished
        in connection with or pursuant to any Loan Document, shall prove to have
        been false or misleading in any material respect when so made, deemed
        made or furnished;

               (b) default shall be made in the payment of any principal of any
        Loan or any reimbursement obligation in respect of any LC Disbursement
        when and as the same shall become due and payable, whether at the due
        date thereof or at a date fixed for prepayment thereof or by
        acceleration thereof or otherwise;

               (c) default shall be made in the payment of any interest on any
        Loan or any Fee or any other amount (other than an amount referred to in
        (b) above) due under any Loan Document, when and as the same shall
        become due and payable, and such default shall continue unremedied for a
        period of five Business Days;

               (d) default shall be made in the due observance or performance by
        the Borrower of any covenant, condition or agreement contained in
        Section 5.01(a) or 5.05 or in Article VI;

               (e) default shall be made in the due observance or performance by
        the Borrower of any covenant, condition or agreement contained in any
        Loan Document (other than those specified in (b), (c) or (d) above) and
        such default shall continue unremedied for a period of 30 days after
        notice thereof from the Agent or any Bank to the Borrower;

               (f) the Borrower or any Significant Subsidiary shall (i) fail to
        pay any principal or interest, regardless of amount, due in respect of
        any Indebtedness when the aggregate unpaid principal amount is in excess
        of $25,000,000, when and as the same shall


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        become due and payable (after expiration of any applicable grace
        period), or (ii) fail to observe or perform any other term, covenant,
        condition or agreement (after expiration of any applicable grace period)
        contained in any agreement or instrument evidencing or governing any
        such Indebtedness if the effect of any failure referred to in this
        clause (ii) is to cause, or to permit the holder or holders of such
        Indebtedness or a trustee on its or their behalf (with or without the
        giving of notice, the lapse of time or both) to cause, such Indebtedness
        to become due prior to its stated maturity;

               (g) an involuntary proceeding shall be commenced or an
        involuntary petition shall be filed in a court of competent jurisdiction
        seeking (i) relief in respect of the Borrower or any Significant
        Subsidiary, or of a substantial part of the property or assets of the
        Borrower or a Significant Subsidiary, under Title 11 of the United
        States Code, as now constituted or hereafter amended, or any other
        Federal or state bankruptcy, insolvency, receivership or similar law,
        (ii) the appointment of a receiver, trustee, custodian, sequestrator,
        conservator or similar official for the Borrower or any Significant
        Subsidiary or for a substantial part of the property or assets of the
        Borrower or a Significant Subsidiary or (iii) the winding-up or
        liquidation of the Borrower or any Significant Subsidiary; and such
        proceeding or petition shall continue undismissed, or an order or decree
        approving or ordering any of the foregoing shall be entered and continue
        unstayed and in effect, for a period of 60 or more days;

               (h) the Borrower or any Significant Subsidiary shall (i)
        voluntarily commence any proceeding or file any petition seeking relief
        under Title 11 of the United States Code, as now constituted or
        hereafter amended, or any other Federal or state bankruptcy, insolvency,
        receivership or similar law, (ii) consent to the institution of, or fail
        to contest in a timely and appropriate manner, any proceeding or the
        filing of any petition described in (g) above, (iii) apply for or
        consent to the appointment of a receiver, trustee, custodian,
        sequestrator, conservator or similar


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        official for the Borrower or any Significant Subsidiary or for a
        substantial part of the property or assets of the Borrower or any
        Significant Subsidiary, (iv) file an answer admitting the material
        allegations of a petition filed against it in any such proceeding, (v)
        make a general assignment for the benefit of creditors, (vi) become
        unable, admit in writing its inability or fail generally to pay its
        debts as they become due or (vii) take any action for the purpose of
        effecting any of the foregoing;

               (i) a final judgment or judgments shall be rendered against the
        Borrower, any Significant Subsidiary or any combination thereof for the
        payment of money with respect to which an aggregate amount in excess of
        $25,000,000 is not covered by insurance and the same shall remain
        undischarged for a period of 30 consecutive days during which execution
        shall not be effectively stayed, or any action shall be legally taken by
        a judgment creditor to levy upon assets or properties of the Borrower or
        any Significant Subsidiary to enforce any such judgment;

               (j) a Reportable Event or Reportable Events, or a failure to make
        a required installment or other payment (within the meaning of Section
        412(n)(l) of the Code), shall have occurred with respect to any Plan or
        Plans that reasonably could be expected to result in liability of the
        Borrower to the PBGC or to a Plan in an aggregate amount exceeding
        $25,000,000 and, within 30 days after the reporting of any such
        Reportable Event to the Agent or after the receipt by the Agent of the
        statement required pursuant to Section 5.06, the Agent shall have
        notified the Borrower in writing that (i) the Required Banks have made a
        determination that, on the basis of such Reportable Event or Reportable
        Events or the failure to make a required payment, there are reasonable
        grounds (A) for the termination of such Plan or Plans by the PBGC, (B)
        for the appointment by the appropriate United States District Court of a
        trustee to administer such Plan or Plans or (C) for the imposition of a
        lien in favor of a Plan and (ii) as a result thereof an Event of Default
        exists hereunder; or a trustee shall be appointed by a United States
        District Court to administer any such Plan or Plans; or


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        the PBGC shall institute proceedings to terminate any Plan or Plans;

               (k) there shall occur a Subsidiary Event; or

               (l) a Change in Control shall occur;

then, and in every such event (other than an event with respect to the Borrower
described in paragraph (g) or (h) above), and at any time thereafter during the
continuance of such event, the Agent, at the request of the Required Banks,
shall, by notice to the Borrower, take either or both of the following actions,
at the same or different times: (i) terminate forthwith the Commitments and (ii)
declare the Loans then outstanding to be forthwith due and payable in whole or
in part, whereupon (A) the Commitments will automatically be terminated and (B)
the principal of the Loans so declared to be due and payable, together with
accrued interest thereon and any unpaid accrued Fees and all other liabilities
of the Borrower accrued hereunder and under any other Loan Document, shall
become forthwith due and payable, without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding; and in any event with respect to the Borrower
described in para graph (g) or (h) above, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder and under any other Loan Document, shall
automatically become due and payable, without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding.


ARTICLE VIII. THE AGENT

               In order to expedite the various transactions contemplated by
this Agreement, Toronto Dominion (Texas), Inc. is hereby appointed to act as
Agent on behalf of the Banks and the Issuing Bank. Each of the Banks and the
Issuing Bank hereby irrevocably authorizes and directs the


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Agent to take such action on behalf of such Bank under the terms and provisions
of this Agreement, and to exercise such powers hereunder as are specifically
delegated to or required of the Agent by the terms and provisions hereof,
together with such powers as are reasonably incidental thereto. The Agent is
hereby expressly authorized on behalf of the Banks and the Issuing Bank, without
hereby limiting any implied authority, (a) to receive on behalf of each of the
Banks any payment of principal of or interest on the Loans outstanding
hereunder, LC Reimbursements and all other amounts accrued hereunder paid to the
Agent, and to distribute to each Bank its proper share of all payments so
received as soon as practicable; (b) to give notice promptly on behalf of each
of the Banks to the Borrower of any event of default specified in this Agreement
of which the Agent has actual knowledge acquired in connection with its agency
hereunder; and (c) to distribute promptly to each Bank copies of all notices,
agreements and other material as provided for in this Agreement as received by
such Agent.

               Neither the Agent nor any of its directors, officers, employees
or agents shall be liable to any Bank as such for any action taken or omitted by
any of them hereunder except for its or his own gross negligence or wilful
misconduct, or be responsible for any statement, warranty or representation
herein or the contents of any document delivered in connection herewith or be
required to ascertain or to make any inquiry concerning the performance or
observance by the Borrower of any of the terms, conditions, covenants or
agreements of this Agreement. The Agent shall not be responsible to the Banks
and the Issuing Bank for the due execution, genuineness, validity,
enforceability or effectiveness of this Agreement or any other instrument to
which reference is made herein. The Agent shall in all cases be fully protected
in acting, or refraining from acting, in accordance with written instructions
signed by the Required Banks, and, except as otherwise specifically provided
herein, such instructions and any action taken or failure to act pursuant
thereto shall be binding on all the Banks. The Agent shall, in the absence of
knowledge to the contrary, be entitled to rely on any paper or document believed
by it in good faith to be genuine and correct and to have been signed or sent by
the proper person or persons. Neither the Agent nor any of its directors,
officers, employees or agents shall have any


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responsibility to the Borrower on account of the failure or delay in performance
or breach by any Bank or the Issuing Bank of any of its obligations hereunder or
to any Bank or the Issuing Bank on account of the failure of or delay in
performance or breach by any other Bank or the Borrower of any of their
respective obligations hereunder or in connection herewith. The Agent may
execute any and all duties hereunder by or through agents or employees and shall
be entitled to advice of legal counsel selected by it with respect to all
matters arising hereunder and shall not be liable for any action taken or
suffered in good faith by it in accordance with the advice of such counsel.

               The Agent and its affiliates may accept deposits from, lend money
to and generally engage in any kind of business with the Borrower or other
affiliate thereof as if it were not the Agent.

               Each Bank recognizes that applicable laws, rules, regulations or
guidelines of governmental authorities may require the Agent to determine
whether the transactions contemplated hereby should be classified as "highly
lever aged" or assigned any similar or successor classification, and that such
determination may be binding upon the other Banks. Each Bank understands that
any such determination shall be made solely by the Agent based upon such factors
(which may include, without limitation, the Agent's internal policies and
prevailing market practices) as the Agent shall deem relevant and agrees that
the Agent shall have no liability for the consequences of any such
determination.

               Each Bank agrees (i) to reimburse the Agent in the amount of such
Bank's pro rata share (based on its Commitment hereunder) of any expenses
incurred for the benefit of the Banks by the Agent, including reasonable counsel
fees and compensation of agents and employees paid for services rendered on
behalf of the Banks, not reimbursed by the Borrower and (ii) to indemnify and
hold harmless the Agent and any of its directors, officers, employees or agents,
on demand, in the amount of its pro rata share, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against it in its capacity as the Agent or
any of them in any way


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relating to or arising out of this Agreement or any action taken or omitted by
it or any of them under this Agreement, to the extent not reimbursed by the
Borrower; provided, however, that no Bank shall be liable to the Agent for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the gross
negligence or wilful misconduct of the Agent or any of its directors, officers,
employees or agents.

               Each Bank acknowledges that it has, independently and without
reliance upon the Agent or any other Bank and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any other Bank based on
such documents and information as it shall deem appropriate at the time,
continue to make its own decisions in taking or not taking action under or based
upon this Agreement, any related agreement or any document furnished hereunder.

               The Agent may execute any of its duties under this Agreement by
or through agents or attorneys selected by them using reasonable care and shall
be entitled to advice of counsel concerning all matters pertaining to such
duties. The Agent shall not be responsible for the negligence or misconduct of
any agents or attorneys selected and authorized to act by it with reasonable
care unless the damage complained of directly results from an act or failure to
act on part of the Agent which constitutes gross negligence or wilful
misconduct. Delegation to an attorney or agent shall not release the Agent from
its obligation to perform or cause to be performed the delegated duty.

               The Documentation Agent and the Syndication Agent shall not have
any rights, powers, obligations, liabilities, responsibilities or duties under
this Agreement other than those applicable to all Banks as such. Without
limiting the foregoing, none of the Banks identified as "Documentation Agent" or
"Syndication Agent" shall have or be deemed to have any fiduciary relationship
with any Bank. Each Bank acknowledges that it has not relied, and will not rely,
on any of the Banks so identified in deciding to enter into this Agreement or in
taking or not taking action hereunder.


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ARTICLE IX. MISCELLANEOUS

               SECTION 9.01. Notices. Notices and other communications provided
for herein shall be in writing and shall be delivered by hand or overnight
courier service, mailed or sent by telecopy, graphic scanning or other tele
graphic communications equipment of the sending party, as follows:

               (a) if to the Borrower, to it at East 1411 Mission Avenue
        (99202), P.O. Box 3727, Spokane, Washington 99220, Attention of the
        Senior Vice President and Chief Financial Officer (Telecopy No.
        509-482-4879);

               (b) if to the Agent, to it at 909 Fannin, Suite 1700, Houston,
        Texas 77010, Attention of Kimberly Burleson (Telecopy No. 713-951-9921);

               (c) if to the Issuing Bank, to it at 909 Fannin, Suite 1700,
        Houston, Texas 77010, Attention of Kimberly Burleson (Telecopy No.
        713-951- 0021); and

               (d) if to a Bank, to it at its address (or telecopy number) set
        forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to
        which such Bank shall have become a party hereto.

All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or other telegraphic communications equipment of the sender, or on the
date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 9.01.

               SECTION 9.02. Survival of Agreement. All covenants, agreements,
representations and warranties, including, without limitation, any indemnities
and


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reimbursement obligations, made by the Borrower herein and in the certificates
or other instruments prepared or delivered in connection with or pursuant to
this Agreement or any other Loan Document shall be considered to have been
relied upon by the Banks and shall survive the making by the Banks of the Loans
and issuance of any Letters of Credit, and the execution and delivery to the
Banks of any Notes evidencing such Loans, regardless of any investigation made
by the Banks, or on their behalf, or by the Issuing Bank and shall continue in
full force and effect as long as the principal of or any accrued interest on any
Loan or any Fee or any other amount payable under this Agreement or any other
Loan Document is outstanding and unpaid or any Letter of Credit is outstanding
and so long as the Commitments have not been terminated.

               SECTION 9.03. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the Agent and
when the Agent shall have received copies hereof which, when taken together,
bear the signatures of each Bank and the Issuing Bank, and thereafter shall be
binding upon and inure to the benefit of the Borrower, the Agent, the Issuing
Bank and each Bank and their respective successors and assigns, except that the
Borrower shall not have the right to assign its rights hereunder or any interest
herein without the prior consent of all the Banks and the Issuing Bank.

               SECTION 9.04. Successors and Assigns. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and permitted assigns of such party; and all
covenants, promises and agreements by or on behalf of the Borrower, the Agent,
the Issuing Bank or the Banks that are contained in this Agreement shall bind
and inure to the benefit of their respective successors and permitted assigns.

               (b) Each Bank (including the Agent when acting as a Bank) may
assign to one or more assignees all or a portion of its interests, rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Credit Commitment and the same portion of the
applicable Loan or Loans at the time owing to it other than any Auction Loans,
which may, but need not, be


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assigned); provided, however, that (i) except in the case of an assignment to a
Bank or an Affiliate of such Bank, the Borrower and the Agent (and, in the case
of an assignment of all or a portion of a Commitment or any Bank's obligation in
respect of its LC Exposure, the Issuing Bank) must give their prior written
consent to such assignment (which consent shall not be unreasonably withheld),
(ii) that no assignee of any Bank shall be entitled to receive any greater
payment or protection under Sections 2.13, 2.14(a), 2.15 or 2.19 than such Bank
would have been entitled to receive with respect to the rights assigned or
otherwise transferred unless such assignment or transfer shall have been made at
a time when the circumstances giving rise to such greater payment did not exist,
(iii) each such assignment shall be of a constant, and not a varying, percentage
of all the assigning Bank's rights and obligations under this Agreement, except
that this clause (iii) shall not apply to rights in respect of outstanding
Auction Loans, (iv) the amount of the Commitment of the assigning Bank subject
to each such assignment (determined as of the date the Assignment and Acceptance
with respect to such assignment is delivered to the Agent) shall not be less
than $5,000,000 (or, if less, the total amount of their Commitments), (v) the
parties to each such assignment shall execute and deliver to the Agent an
Assignment and Acceptance and a processing and recordation fee of $5,000 and
(vi) the assignee, if it shall not be a Bank, shall deliver to the Agent an
Administrative Questionnaire. Upon acceptance and recording pursuant to
paragraph (e) of this Section 9.04, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least five
Business Days after the execution thereof, (A) the assignee thereunder shall be
a party hereto and, to the extent of the interest assigned by such Assignment
and Acceptance, have the rights and obligations of a Bank under this Agreement
and (B) the assigning Bank thereunder shall, to the extent of the interest
assigned by such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all or the remaining portion of an assigning Bank's rights and obligations under
this Agreement, such Bank shall cease to be a party hereto but shall continue to
be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to
any Fees accrued for its account and not yet paid).


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               (c) By executing and delivering an Assignment and Acceptance, the
assigning Bank thereunder and the assignee thereunder shall be deemed to confirm
to and agree with each other and the other parties hereto as follows: (i) such
assigning Bank warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Accep tance; (ii) except as set forth in (i) above,
such assigning Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of the Borrower or any Subsidiary or the
performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Agent, such assigning Bank or any other Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Agreement are required to be performed by it as a Bank.


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               (d) The Agent shall maintain a copy of each Assignment and
Acceptance delivered to it including the recordation of the names and addresses
of the Banks, and the Commitment of, and principal amount of the Loans and LC
Disbursements owing to, each Bank pursuant to the terms hereof from time to time
(the "Register"). The Agent, the Issuing Bank and the Banks may treat each
person whose name is recorded in the Register pursuant to the terms hereof as a
Bank hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower, the Issuing Bank and any Bank, at any
reasonable time and from time to time upon reasonable prior notice.

               (e) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Bank and an assignee, an Administrative
Questionnaire completed in respect of the assignee (unless the assignee shall
already be a Bank hereunder), the processing and recordation fee referred to in
paragraph (b) above and, if required, the written consent of the Borrower and
the Agent to such assignment, the Agent shall (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to the Banks. Upon the request of the assignee,
the Borrower, at its own expense, shall execute and deliver to the Agent, a new
Note or Notes to the order of such assignee in a principal amount equal to the
applicable Commitment assumed by it pursuant to such Assignment and Acceptance
and, if the assigning Bank has retained a Commitment, upon the request of the
assigning bank, the Borrower shall execute and deliver a new Note to the order
of such assigning Bank in a principal amount equal to the applicable Commitment
retained by it. Canceled Notes shall be returned to the Borrower.

               (f) Each Bank may without the consent of the Borrower, the
Issuing Bank or the Agent sell participations to one or more banks or other
entities in all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it and any
Notes held by it); provided, however, that (i) such Bank's obligations under
this Agreement shall remain unchanged, (ii) such Bank shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) the participating banks or other entities shall be entitled to the benefit
of the cost


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protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same
extent as if they were Banks (provided, that the amount of such benefit shall be
limited to the amount in respect of the interest sold to which the seller of
such participation would have been entitled had it not sold such interest) and
(iv) the Borrower, the Agent, the Issuing Bank and the other Banks shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement, and such Bank shall retain
the sole right to enforce the obligations of the Borrower relating to the Loans
and to approve any amendment, modification or waiver of any provision of this
Agreement (other than amendments, modifications or waivers decreasing any fees
payable hereunder or the amount of principal of or the rate at which interest is
payable on the Loans, extending any scheduled principal payment date or date
fixed for the payment of interest on the Loans or changing or extending the
Commitments).

               (g) Any Bank or participant may, in connection with any
assignment or participation or proposed assignment or participation pursuant to
this Section 9.04, disclose to the assignee or participant or proposed assignee
or participant any information relating to the Borrower furnished to such Bank
by or on behalf of the Borrower; provided that, prior to any such disclosure of
information designated by the Borrower as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of such confidential information.

               (h) Notwithstanding anything to the contrary contained herein,
any Bank (a "Granting Bank") may grant to a special purpose funding vehicle (an
"SPC") the option to fund all or any part of any Loan that such Granting Bank
would otherwise be obligated to fund pursuant to this Agreement; provided that
(i) nothing herein shall constitute a commitment by any SPC to fund any Loan,
and (ii) if an SPC elects not to exercise such option or otherwise fails to fund
all or any part of such Loan, the Granting Bank shall be obligated to fund such
Loan pursuant to the terms hereof. The funding of a Loan by an SPC hereunder
shall utilize the Commitment of the Granting Bank to the same extent, and as


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if, such Loan were funded by such Granting Bank. Each party hereto hereby agrees
that no SPC shall be liable for any indemnity or payment under this Agreement
for which a Bank would otherwise be liable for so long as, and to the extent,
the Granting Bank provides such indemnity or makes such payment. Notwithstanding
anything to the contrary contained in this Agreement, any SPC may disclose on a
confidential basis any non-public information relating to its funding of Loans
to any rating agency, commercial paper dealer or provider of any surety or
guarantee to such SPC. This paragraph may not be amended without the prior
written consent of each Granting Bank, all or any part of whose Loan is being
funded by an SPC at the time of such amendment.

               (i) Any Bank may at any time assign for security purposes all or
any portion of its rights under this Agreement and any Notes issued to it to a
Federal Reserve Bank; provided that no such assignment shall release a Bank from
any of its obligations hereunder.

               (j) Subject to Section 6.02, the Borrower shall not assign or
delegate any of its rights or duties hereunder.

               SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay
(i) all reasonable out-of-pocket expenses incurred by the Agent in connection
with the preparation of this Agreement and the other Loan Documents or in
connection with any amendments, modifications or waivers of the provisions
hereof or thereof (whether or not the transactions hereby contemplated shall be
consummated) or incurred by the Agent or any Bank in connection with the
enforcement or protection of their rights in connection with this Agreement and
the other Loan Documents or in connection with the Loans made or the Notes
issued hereunder, including the fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Agent, and, in connection with any such
amendment, modification or waiver or any such enforcement or protection, the
fees, charges and disbursements of any other internal or external counsel for
the Agent, the Issuing Bank or any Bank and (ii) all reasonable out-of-pocket
expenses incurred by the Issuing Bank in connection with the issuance,
amendment, renewal or extension of any Letter of Credit or any demand for
payment thereunder. The Borrower further agrees that it shall indemnify the
Banks from and hold them harmless


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against any documentary taxes, assessments or charges made by any Governmental
Authority by reason of the execution and delivery of this Agreement or any of
the other Loan Documents.

               (b) The Borrower agrees to indemnify the Agent, the Issuing Bank
and each Bank and each of their respective directors, officers, employees and
agents (each such person being called an "Indemnitee") against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including reasonable counsel fees, charges and disbursements,
incurred by or asserted against any Indemnitee arising out of, in any way
connected with, or as a result of (i) the execution or delivery of this
Agreement or any other Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the Transactions and the other transactions
contemplated thereby, (ii) the use of the proceeds of the Loans and of the
Letters of Credit (including any refusal by the Issuing Bank to honor a demand
for payment under a Letter of Credit if the documents presented in connection
with such demand do not strictly comply with the terms of such Letter of Credit)
or (iii) any claim, litigation, investigation or proceeding relating to any of
the foregoing, whether or not any Indemnitee is a party thereto; provided that
such indemnity shall not, as to any Indemnitee, be available to the extent that
such losses, claims, damages, liabilities or related expenses are determined by
a court of competent jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or wilful misconduct of such Indemnitee.

               (c) The provisions of this Section 9.05 shall remain operative
and in full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or any investigation
made by or on behalf of the Agent, the Issuing Bank or any Bank. All amounts due
under this Section 9.05 shall be payable on written demand therefor.

               SECTION 9.06. Right of Setoff. If an Event of


                                       87
   88

Default shall have occurred and be continuing and the Loans shall have been
accelerated as set forth in Article VII, each Bank is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such Bank
(or bank Controlling such Bank) to or for the credit or the account of the
Borrower against any of and all the obligations of the Borrower now or hereafter
existing under this Agreement and other Loan Documents held by such Bank. The
rights of each Bank under this Section are in addition to other rights and
remedies (including other rights of setoff) which such Bank may have. Any Bank
shall provide the Borrower with written notice promptly after exercising its
rights under this Section.

               SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.

               SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the
Agent, the Issuing Bank or any Bank in exercising any power or right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
the exercise of any other right or power. The rights and remedies of the Agent,
the Issuing Bank and the Banks hereunder and under the other Loan Documents are
cumulative and are not exclusive of any rights or remedies which they would
otherwise have. No waiver of any provision of this Agreement or any other Loan
Document or consent to any departure by the Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) below,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.

               (b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to


                                       88
   89

an agreement or agreements in writing entered into by the Borrower and the
Required Banks; provided, however, that no such agreement shall (i) decrease the
principal amount of, or extend the maturity of or any scheduled principal
payment date or date for the payment of any interest on any Loan or LC
Disbursement, or waive or excuse any such payment or any part thereof, or
decrease the rate of interest on any Loan, without the prior written consent of
each Bank affected thereby, (ii) change or extend the Commitment or decrease the
Commitment Fees of any Bank without the prior written consent of such Bank, or
(iii) amend or modify the provisions of Section 2.16, the provisions of this
Section or the definition of "Required Banks", without the prior written consent
of each Bank; provided further that no such agreement shall amend, modify or
otherwise affect the rights or duties of the Agent or the Issuing Bank hereunder
without the prior written consent of the Agent or the Issuing Bank, as the case
may be. Each Bank and each holder of a Note shall be bound by any waiver,
amendment or modification authorized by this Section regardless of whether its
Note shall have been marked to make reference thereto, and any consent by any
Bank or holder of a Note pursuant to this Section shall bind any person
subsequently acquiring a Note from it, whether or not such Note shall have been
so marked.

               SECTION 9.09. Interest Rate Limitation. Notwithstanding anything
herein or in any Notes to the contrary, if at any time the applicable interest
rate, together with all fees and charges which are treated as interest under
applicable law (collectively the "Charges"), as provided for herein or in any
other document executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by any Bank, shall exceed the maximum
lawful rate (the "Maximum Rate") which may be contracted for, charged, taken,
received or reserved by such Bank in accordance with applicable law, the rate of
interest payable under any Note held by such Bank, together with all Charges
payable to such Bank, shall be limited to the Maximum Rate.

               SECTION 9.10. Entire Agreement. This Agreement and the other Loan
Documents constitute the entire contract between the parties relative to the
subject matter hereof. Any previous agreement among the parties with respect to
the


                                       89
   90

subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
and thereto any rights, remedies, obligations or liabilities under or by reason
of this Agreement or the other Loan Documents.

               SECTION 9.11. Waiver of Jury Trial. Each party hereto hereby
waives, to the fullest extent permitted by applicable law, any right it may have
to a trial by jury in respect of any litigation directly or indirectly arising
out of, under or in connection with this Agreement or any of the other Loan
Documents. Each party hereto (a) certifies that no representative, agent or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver and (b) acknowledges that it and the other parties hereto have been
induced to enter into this Agreement and the other Loan Documents, as
applicable, by, among other things, the mutual waivers and certifications in
this Section 9.11.

               SECTION 9.12. Severability. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall endeavor
in good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.

               SECTION 9.13. Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract, and shall become
effec tive as provided in Section 9.03.

               SECTION 9.14. Headings. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and are not to affect the construction of, or to


                                       90
   91

be taken into consideration in interpreting, this Agreement.

               SECTION 9.15. Jurisdiction; Consent to Service of Process. (a)
The Borrower hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that the
Agent, Issuing Bank or any other Bank may otherwise have to bring any action or
proceeding relating to this Agreement or the other Loan Documents against the
Borrower or its properties in the courts of any jurisdiction.

               (b) The Borrower hereby irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection which
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this agreement or the other Loan
Documents in any New York State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.

               (c) Each party to this Agreement irrevocably consents to service
of process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.


                                       91
   92

               WITNESS the due execution hereof as of the date first above
written.



                                        AVISTA CORPORATION,

                                        by
                                           /s/ Ronald R. Peterson
                                           ------------------------------------
                                           Name: Ronald R. Peterson
                                           Title: Vice President and
                                           Treasurer

                                        TORONTO DOMINION (TEXAS),
                                        INC., as Agent,

                                        by
                                           /s/ Jeffery R. Lents
                                           ------------------------------------
                                           Name: Jeffery R. Lents
                                           Title: Vice President




                                       92
   93

                                        THE BANK OF NEW YORK, as
                                        Documentation Agent,

                                        by
                                           /s/ Steven Kalachman
                                           ------------------------------------
                                           Name: Steven Kalachman
                                           Title: Vice President

                                        BANK OF AMERICA, N.A., as
                                        Syndication Agent,

                                        by
                                           /s/ Gary M. Tsuyuki
                                           ------------------------------------
                                           Name: Gary M. Tsuyuki
                                           Title: Managing Director

                                        TORONTO DOMINION (TEXAS), INC.,

                                        by
                                           /s/ Jeffery R. Lents
                                           ------------------------------------
                                           Name: Jeffery R. Lents
                                           Title: Vice President

                                        THE TORONTO-DOMINION BANK, as
                                        Issuing Bank

                                        by
                                           /s/ Jeffery R. Lents
                                           ------------------------------------
                                           Name: Jeffery R. Lents
                                           Title: Mgr. Cr. Admin.

                                        THE BANK OF NEW YORK,

                                        by
                                           /s/ Steven Kalachman
                                           ------------------------------------
                                           Name: Steven Kalachman
                                           Title: Vice President



                                       93
   94

                                        BANK OF AMERICA, N.A.,

                                        by
                                           /s/ Gary M. Tsuyuki
                                           ------------------------------------
                                           Name: Gary M. Tsuyuki
                                           Title: Managing Director


                                        FIRST SECURITY BANK, N.A.,

                                        by
                                           /s/ Brian W. Cook
                                           ------------------------------------
                                           Name: Brian W. Cook
                                           Title:

                                        FLEET NATIONAL BANK,

                                        by
                                           /s/Suresh V. Chivukula
                                           ------------------------------------
                                           Name: Suresh V. Chivukula
                                           Title: Senior Vice President

                                        MORGAN GUARANTY TRUST COMPANY
                                        OF NEW YORK,

                                        by
                                           /s/ Robert Bottamedi
                                           ------------------------------------
                                           Name: Robert Bottamedi
                                           Title: Vice President

                                        U.S. BANK, NATIONAL ASSOCIATION,

                                        by
                                           /s/ Wilfred C. Jack
                                           ------------------------------------
                                           Name: Wilfred C. Jack
                                           Title: Vice President



                                       94
   95

                                        WELLS FARGO BANK, N.A.,

                                        by
                                           /s/ Tom Beil
                                           ------------------------------------
                                           Name: Tom Beil
                                           Title: Vice President





                                       95


   96

                                                                       EXHIBIT A


                                    [FORM OF]


                                      NOTE


$__________________                                                June 26, 2000
New York, New York


          FOR VALUE RECEIVED, the undersigned, AVISTA CORPORATION, a Washington
corporation (the "Borrower"), hereby promises to pay to the order of
_______________________ (the "Bank"), at the office of Toronto Dominion (Texas),
Inc., (the "Agent"), at 909 Fanning, Suite 1700, Houston, Texas 77010, (i) on
the last day of each Interest Period, as defined in the $120,000,000 Amended and
Restated Revolving Credit Agreement dated as of June 26, 2000 (the "Credit
Agreement"), among the Borrower, the Banks named therein and the Agent, the
aggregate unpaid principal amount of all Loans (as defined in the Credit
Agreement) made to the Borrower by the Bank pursuant to the Credit Agreement to
which such Interest Period applies and (ii) on the Expiration Date (as defined
in the Credit Agreement) the aggregate unpaid principal amount of all Loans made
to the Borrower by the Bank pursuant to the Credit Agreement, in lawful money of
the United States of America in immediately available funds, and to pay interest
from the date hereof on the principal amount hereof from time to time
outstanding, in like funds, at said office, at the rate or rates per annum and
payable on the dates provided in the Credit Agreement.

          The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at the rate or rates provided in the Credit Agreement.

          The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.

          All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates and
maturity dates thereof shall be endorsed by



                                       96
   97

the holder hereof on the schedule attached hereto and made a part hereof or on a
continuation thereof which shall be attached hereto and made a part hereof, or
otherwise recorded by such holder in its internal records; provided, however,
that the failure of the holder hereof to make such a notation or any error in
such a notation shall not affect the obligations of the Borrower under this
Note.

          This Note is one of the Notes referred to in the Credit Agreement,
which, among other things, contains provisions for the acceleration of the
maturity hereof upon the happening of certain events, for optional and mandatory
prepayment of the principal hereof prior to the maturity hereof and for the
amendment or waiver of certain provisions of the Credit Agreement, all upon the
terms and conditions therein specified. This Note shall be construed in
accordance with and governed by the laws of the State of New York and any
applicable laws of the United States of America.


                                       AVISTA CORPORATION

                                        by
                                           -------------------------------------
                                           Name:
                                           Title:



                                       97
   98

                               Loans and Payments




                                                            Unpaid      Name of
             Amount                       Payments         Principal    Person
              and        Maturity    -------------------   Balance of   Making
Date     Type/Class of     Date      Principal Interest      Note      Notation
             Loan
- --------------------------------------------------------------------------------
                                                     




                                       98
   99

                                                                       EXHIBIT B


                                    [FORM OF]

                            ASSIGNMENT AND ACCEPTANCE


          Reference is made to the $120,000,000 Amended and Restated Credit
Agreement dated as of June 26, 2000 (as in effect from time to time, the "Credit
Agreement"), among Avista Corporation, a Washington corporation (the
"Borrower"), the banks listed on Schedule 2.01 thereto (the "Banks") and Toronto
Dominion (Texas), Inc., as agent for the Banks (in such capacity, the "Agent").
Terms defined in the Credit Agreement are used herein with the same meanings.

          1. The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse, from
the Assignor, effective as of the Effective Date set forth on the reverse
hereof, the interests set forth on the reverse hereof (the "Assigned Interest")
in the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the interests set forth on the reverse hereof in the
Commitment of the Assignor on the Effective Date and Revolving Loans [and
Auction Loans] owing to the Assignor which are outstanding on the Effective
Date, together with unpaid interest accrued on the assigned Revolving Loans [and
Auction Loans] to the Effective Date, together with the participations in
Letters of Credit and LC Disbursements held by the Assignor on the Effective
Date, and the amount, if any, set forth on the reverse hereof of the Fees
accrued to the Effective Date for the account of the Assignor. Each of the
Assignor and the Assignee hereby makes and agrees to be bound by all the
representations, warranties and agreements set forth in Section 9.04(c) of the
Credit Agreement, a copy of which has been received by each such party. From and
after the Effective Date (i) the Assignee shall be a party to and be bound by
the provisions of the Credit Agreement and, to the extent of the interests
assigned by this Assignment and Acceptance, have the rights and obligations of a
Bank thereunder and under the Loan Documents and (ii) the Assignor shall, to the
extent of the interests assigned by this Assignment and Acceptance, relinquish
its rights and be released from its obligations under the Credit Agreement.

          2.  This Assignment and Acceptance is being



                                       99
   100

delivered to the Agent together with (i) if the Assignee is organized under the
laws of a jurisdiction outside the United States, the forms specified in Section
2.19(f) of the Credit Agreement, duly completed and executed by such Assignee,
(ii) if the Assignee is not already a Bank under the Credit Agreement, an
Administrative Questionnaire in the form of Exhibit C to the Credit Agreement
and (iii) a processing and recordation fee of $5,000.

          3.  This Assignment and Acceptance shall be governed by and construed
in accordance with the laws of the State of New York.


Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee's Address for Notices:

Effective Date of Assignment
(may not be fewer than 5 Business
Days after the Date of Assignment):



                                      100
   101



                                                            Percentage
                                                            Assigned of
                                                            Facility and
                                                            Commitment
                                                            Thereunder (set
                                                            forth, to at
                                                            least 8 decimals,
                            Principal Amount                as a percentage
                            Assigned (and                   of the Facility
                            identifying                     and the aggregate
                            information as to               Commitments of
                            individual                      all Banks
Facility                    Auction Loans)                  thereunder)
- --------                    --------------                  -----------
                                                      
Commitment                        $                                   %
Assigned:

Revolving Loans:                  $                                   %

[Auction Loans:                   $                                   %]
Fees Assigned (if                 $                                   %
any):


The terms set forth above and on
the reverse side hereof are
hereby agreed to:                                 Accepted:


___________________, as Assignor                  TORONTO DOMINION (TEXAS),
                                                  INC., as Agent

By:____________________________                   By:___________________________
   Name:                                             Name:
   Title:                                            Title:

___________________, as                              Title:
Assignee


By:____________________________
   Name:



                                      101
   102

AVISTA CORPORATION


By:____________________________
Name:
Title:



                                      102
   103

                                                                       EXHIBIT C


                          Administrative Questionnaire



                                      103
   104

                                                                     EXHIBIT D-1


                       Opinion of Counsel for the Borrower



                                      104
   105

                                                                     EXHIBIT D-2


                   Opinion of Special Counsel to the Borrower



                                      105
   106

                                  SCHEDULE 2.01





                                      Banks



Bank                                                 Commitment
- ----                                                 ----------
                                              
Toronto Dominion (Texas), Inc.                   $18,450,000.00
909 Fanning
Suite 1700
Houston, TX 77010
Attention: Ms. Kimberly Burleson

Telecopy:  (713) 951-9921

   With copies to:

   Toronto Dominion Bank U.S.A. Division
   31 West 52nd Street
   New York, NY 10019-6101

   Attention:  Mr. Peter Cody
   Telecopy:  (212) 262-1929

Bank of America, N.A.                            $18,450,000.00
555 California Street
41st Floor
San Francisco, CA 94104

Attention: Gary Tsuyuki
Telecopy: (415) 622-0632




                                      106
   107



Bank                                                 Commitment
- ----                                                 ----------
                                              
The Bank of New York                             $18,450,000.00
One Wall Street
New York, NY 10286

Attention:  Ms. Trisha E. Hardy
Telecopy:   (212) 635-7923

First Security Bank, N.A.                        $11,925,000.00
119 North 9th Street (83702)
Boise, ID 83730

Attention: Mr. Brian Cook
Telecopy: (509) 353-2472

Fleet National Bank                              $11,525,000.00
100 Federal Street
Boston, MA 02110

Attention: Leroy Gayle
Telecopy: (617) 434-3652

Morgan Guaranty Trust Company of New York        $11,525,000.00
60 Wall Street
New York, NY 10261

Attention:  Mr. Robert Bottamedi
Telecopy: (212) 640-5010




                                      107
   108

                                              
U.S. Bank                                          $9,250,000.00
1420 Fifth Avenue
11th Floor
WWH276
Seattle, WA 98101

Attention:  Mr. Wilfred C. Jack
Telecopy:   (206) 344-3654

Wells Fargo Bank, National Association             $9,250,000.00
524 W. Riverside Avenue
8th Floor
Spokane, WA 99210

Attention:  Mr. Tom Beil
Telecopy:   (509) 455-5762

                                                  --------------------

                                                 $108,825,000.00





                                      108
   109

                                  SCHEDULE 3.14


                            Significant Subsidiaries




   Name                       Percent Ownership
   ----                       -----------------
                           
Avista Capital, Inc.               100%




                                      109
   110

                                SCHEDULE 4.02(b)


                 Statutes and Orders of Governmental Authorities


1. Statute of Washington authorizing borrowings of one year or less without
approval and/or Order(s) of the Washington Utilities and Transportation
Commission.

2. Statute of Oregon authorizing borrowings of one year or less without approval
and/or Order(s) of the Oregon Public Utility Commission.

3. Statute of Idaho authorizing borrowings of one year or less without approval
and/or Order(s) of the Idaho Public Utilities Commission.

4. Statute of California authorizing borrowings of one year or less without
approval and/or Order(s) of the California Public Utilities Commission.



                                      110
   111
                 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

                                 ($140,000,000)

                                    (364 DAY)

                                      among


                               AVISTA CORPORATION,


                             THE BANKS NAMED HEREIN,


                         TORONTO DOMINION (TEXAS), INC.,


                              BANK OF AMERICA, N.A.


                                       and


                              THE BANK OF NEW YORK




                            Dated as of June 26, 2000

   112

Article           Section                                                                                Page
- -------           -------                                                                                ----
                                                                                                     
I.  DEFINITIONS

                  SECTION 1.01.  Defined Terms.............................................................6
                  SECTION 1.02.  Terms Generally..........................................................24

II.  THE CREDITS

                  SECTION 2.01.  Commitments..............................................................25
                  SECTION 2.02.  Loans....................................................................26
                  SECTION 2.03.  Notice of Revolving Borrowings...........................................28
                  SECTION 2.04.  Auction Bid Procedure....................................................29
                  SECTION 2.05.  Repayment of Loans; Evidence of Debt.....................................32
                  SECTION 2.06.  Fees.....................................................................33
                  SECTION 2.07.  Interest on Loans........................................................35
                  SECTION 2.08.  Default Interest.........................................................35
                  SECTION 2.09.  Alternate Rate of Interest...............................................35
                  SECTION 2.10.  Termination, Reduction and Extension of Commitments......................36
                  SECTION 2.11.  Prepayment...............................................................37
                  SECTION 2.12.  Reserve Requirements; Change in Circumstances............................38
                  SECTION 2.13.  Change in Legality.......................................................39
                  SECTION 2.14.  Indemnity................................................................40
                  SECTION 2.15.  Pro Rata Treatment.......................................................41
                  SECTION 2.16.  Sharing of Setoffs.......................................................41
                  SECTION 2.17.  Payments.................................................................42
                  SECTION 2.18.  Taxes....................................................................43
                  SECTION 2.19.  Termination or Assignment of Commitments Under Certain Circumstances.....46

III.  REPRESENTATIONS AND WARRANTIES

                  SECTION 3.01.  Organization; Powers.....................................................47
                  SECTION 3.02.  Authorization............................................................47
                  SECTION 3.03.  Enforceability...........................................................48
                  SECTION 3.04.  Governmental Approvals...................................................48
                  SECTION 3.05.  Financial Statements.....................................................48
                  SECTION 3.06.  No Material Adverse Change...............................................49
                  SECTION 3.07.  Litigation; Compliance with Laws.........................................49
                  SECTION 3.08.  Federal Reserve Regulations..............................................49
                  SECTION 3.09.  Investment Company Act; Public Utility Holding Company Act...............50





                                       2
   113


Article           Section                                                                                Page
- -------           -------                                                                                ----
                                                                                                     
                  SECTION 3.10.  Use of Proceeds..........................................................50
                  SECTION 3.11.  No Material Misstatements................................................50
                  SECTION 3.12.  Employee Benefit Plans...................................................50
                  SECTION 3.13.  Environmental and Safety Matters.........................................51
                  SECTION 3.14.  Significant Subsidiaries.................................................52

IV.  CONDITIONS OF LENDING

                  SECTION 4.01.  All Borrowings...........................................................52
                  SECTION 4.02.  First Borrowing..........................................................53

V.  AFFIRMATIVE COVENANTS

                  SECTION 5.01.  Existence; Businesses and Properties.....................................54
                  SECTION 5.02.  Insurance................................................................55
                  SECTION 5.03.  Taxes and Obligations....................................................56
                  SECTION 5.04.  Financial Statements, Reports, etc.......................................56
                  SECTION 5.05.  Litigation and Other Notices.............................................58
                  SECTION 5.06.  ERISA....................................................................58
                  SECTION 5.07.  Maintaining Records; Access to Properties and Inspections................59
                  SECTION 5.08.  Use of Proceeds..........................................................59
                  SECTION 5.09.  Further Assurance........................................................59

VI.  NEGATIVE COVENANTS

                  SECTION 6.01.  Liens....................................................................60
                  SECTION 6.02.  Mergers, Consolidations and Acquisitions.................................64
                  SECTION 6.03.  Disposition of Assets....................................................65
                  SECTION 6.04.  Consolidated Total Debt to Consolidated Total Capitalization Ratio.......66
                  SECTION 6.05.  Public Utility Regulatory Borrowing Limits...............................66




                                       3
   114


Article           Section                                                                                Page
- -------           -------                                                                                ----
                                                                                                     
                  SECTION 6.06.  Guarantees...............................................................66


VII.  EVENTS OF DEFAULT...................................................................................66


VIII. THE AGENT...........................................................................................70


IX.  MISCELLANEOUS

                  SECTION 9.01.  Notices..................................................................74
                  SECTION 9.02.  Survival of Agreement....................................................74
                  SECTION 9.03.  Binding Effect...........................................................75
                  SECTION 9.04.  Successors and Assigns...................................................75
                  SECTION 9.05.  Expenses; Indemnity......................................................80
                  SECTION 9.06.  Right of Setoff..........................................................81
                  SECTION 9.07.  Applicable Law...........................................................81
                  SECTION 9.08.  Waivers; Amendment.......................................................82
                  SECTION 9.09.  Interest Rate Limitation.................................................83
                  SECTION 9.10.  Entire Agreement.........................................................83
                  SECTION 9.11.  Waiver of Jury Trial.....................................................83
                  SECTION 9.12.  Severability.............................................................84
                  SECTION 9.13.  Counterparts.............................................................84
                  SECTION 9.14.  Headings.................................................................84
                  SECTION 9.15.  Jurisdiction; Consent to Service of Process..............................84



References
Exhibit A         Form of Note
Exhibit B         Form of Assignment and Acceptance
Exhibit C         Form of Administrative Questionnaire
Exhibit D-1       Form of Opinion of Counsel for the
                  Borrower
Exhibit D-2       Form of Opinion of Special Counsel for
                  the Borrower



                                       4

   115

Schedule 2.01     Banks
Schedule 3.14     Significant Subsidiaries
Schedule 4.02(b)  Statutes and Orders of Governmental
                  Authorities


                                       5
   116
                                    AMENDED AND RESTATED REVOLVING CREDIT
                           AGREEMENT dated as of June 26, 2000, among AVISTA
                           CORPORATION, a Washington corporation (herein called
                           the "Borrower"), the banks listed in Schedule 2.01
                           (the "Banks"), TORONTO DOMINION (TEXAS), INC., as
                           agent for the Banks (in such capacity, the "Agent"),
                           BANK OF AMERICA, N.A. (formerly known as "Bank of
                           America National Trust and Savings Association"), as
                           syndication agent (the "Syndication Agent") and THE
                           BANK OF NEW YORK, as documentation agent (the
                           "Documentation Agent").

                  Pursuant to the Pre-Restatement Credit Agreement (as defined
herein), certain banks have extended credit to the Borrower. The Borrower has
requested that the Pre- Restatement Credit Agreement be amended and restated in
the form of this Agreement and that the Banks extend credit to the Borrower in
order to enable the Borrower to borrow on a standby revolving credit basis on
and after the date hereof, at any time prior to the Expiration Date (as defined
herein) in a principal amount not in excess of $121,175,000 at any time
outstanding (subject to a possible increase to $140,000,000, as provided in
Section 2.01(b) below). The proceeds of such borrowings are to be used for
general corporate purposes. In consideration of the mutual covenants and
agreements contained herein, the parties agree as follows:


ARTICLE I.  DEFINITIONS

                  SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms shall have the meanings specified below:

                  "ABR", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Alternate Base Rate.

                  "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.

                  "ABR Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.

                  "Administrative Questionnaire" shall mean an



                                       6
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Administrative Questionnaire in the form of Exhibit C.

                  "Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with the
person specified.

                  "Agency Fees" shall have the meaning assigned to such term in
Section 2.06(b).

                  "Alternate Base Rate" shall mean, for any day, a rate per
annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to the
greater of (a) the Prime Rate (computed on the basis of the actual number of
days elapsed over a year of 365 or 366 days, as the case may be) in effect on
such day and (b) the sum of (i) the Federal Funds Effective Rate in effect for
such day plus (ii) 1/2 of 1%. If for any reason the Agent shall have determined
(which determination shall be conclusive absent manifest error) that it is
unable to ascertain the Federal Funds Effective Rate for any reason, the
Alternate Base Rate shall be determined without regard to clause (b) of the
first sentence of this definition until the circumstances giving rise to such
inability no longer exist.

                  "Applicable Percentage" shall mean, with respect to any Bank,
the percentage of the total Commitments represented by such Bank's Commitment.
If the Commitments have terminated or expired, the Applicable Percentage shall
be determined based upon the Commitments most recently in effect, giving effect
to any assignments.

                  "Applicable Rate" shall mean on any date, with respect to any
ABR Loan or Eurodollar Revolving Loan, or with respect to the Commitment Fees or
Utilization Fees payable hereunder, as the case may be, the applicable rate per
annum set forth below under the caption "ABR Spread," "Eurodollar Spread",
"Commitment Fee" or "Utilization Fee", as the case may be, based upon the
Ratings or the Utilization Level, as the case may be:


                                       7
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                  (a)  Loan Spreads and Commitment Fee





- -----------------------------------------------------------------------------------------
           Ratings          ABR Spread               Eurodollar                Commitment
                                                      Spread                     Fee
- -----------------------------------------------------------------------------------------
                                                                      
Level 1                       0.00%                    .625%                    .10%

A- or higher by
S&P; and A3 or
higher by Moody's
- -----------------------------------------------------------------------------------------

Level 2                       0.00%                    .75%                     .125%

BBB+ by S&P; and
Baa1 by Moody's
- -----------------------------------------------------------------------------------------

Level 3                       0.00%                    .875%                    .15%

BBB by S&P; and
Baa2 by Moody's
- -----------------------------------------------------------------------------------------

Level 4                       0.00%                    1.00%                    .20%

BBB- by S&P; and
Baa3 by Moody's
- -----------------------------------------------------------------------------------------

Level 5                       .25%                     1.25%                    .25%

BB+ by S&P; and
Ba1 by Moody's
- -----------------------------------------------------------------------------------------

Level 6                       .50%                     1.50%                    .50%

Lower than BB+ by
S&P; and lower
than Ba1 by
Moody's
- -----------------------------------------------------------------------------------------



For purposes of the foregoing, (i) if the Ratings in effect on any date fall in
different Levels, the Applicable Rate shall be determined on such date by
reference to the inferior (numerically higher) Level, unless the Ratings differ
by more than one Level, in which case the applicable Level shall be the Level
next below the superior (numerically lower) of the two; (ii) if either Moody's
or S&P shall not have in effect a Rating (other than because such rating agency
shall no longer be in the business of rating corporate debt obligations), then
such rating agency will be deemed to have established a Rating in Level 5; and




                                       8
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(iii) if any rating established or deemed to have been established by Moody's or
S&P shall be changed (other than as a result of a change in the rating system of
either Moody's or S&P), such change shall be effective as of the day after the
date on which such change is first announced by the rating agency making such
change. Each change in the Applicable Rate shall apply during the period
commencing on the effective date of such change and ending on the date
immediately preceding the effective date of the next such change. If the rating
system of either Moody's or S&P shall change, or if either such rating agency
shall cease to be in the business of rating corporate debt obligations, the
Borrower and the Banks shall negotiate in good faith to amend the references to
specific ratings in this definition to reflect such changed rating system or the
non- availability of ratings from such rating agency.


                  (b) Utilization Fees





- -------------------------------------------------------------------
           Utilization Level                       Utilization Fee
- -------------------------------------------------------------------
                                                
Level 1                                                 .15%

>.33 and less than/equal to .50
- -------------------------------------------------------------------

Level 2                                                 .30%

>.50 and less than/equal to .75
- -------------------------------------------------------------------

Level 3                                                 .50%

>.75
- -------------------------------------------------------------------




                  "Assignment and Acceptance" shall mean an assignment and
acceptance entered into by a Bank and an assignee, and accepted by the Agent and
the Borrower, in the form of Exhibit B or such other form as shall be approved
by the Agent.

                  "Auction Bid" shall mean an offer by a Bank to make an Auction
Loan in accordance with Section 2.04.



                                       9
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                  "Auction Bid Rate" shall mean, with respect to any Auction
Bid, the Margin for Eurodollar Auction Loans, the Fixed Rate for Fixed Rate
Loans or the Delayed Fixed Rate for Delayed Fixed Rate Loans, as applicable,
offered by the Bank in making such Auction Bid.

                  "Auction Bid Request" shall mean a request by the Borrower for
Auction Bids in accordance with Section 2.04.

                  "Auction Facility" shall mean the facility described in
Section 2.04.

                  "Auction Loan" shall mean a Loan made pursuant to Section
2.04.

                  "Availability Period" shall mean the period from and including
the Effective Date to but excluding the earlier of the Expiration Date and the
date of the termination of the Commitments.

                  "Board" shall mean the Board of Governors of the Federal
Reserve System of the United States.

                  "Borrowing" shall mean (a) a group of Revolving Loans of the
same Type, made, converted or continued on the same date and, in the case of
Eurodollar Loans, as to which a single Interest Period is in effect or (b) an
Auction Loan or group of Auction Loans of the same Type made on the same date
and as to which a single Interest Period is in effect.

                  "Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City.

                  "Capital Lease Obligations" of any person shall mean the
obligations of such person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.



                                       10
   121

                  "Change in Control" means (a) the acquisition of ownership,
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities Exchange Act of 1934 and the rules of the
Securities and Exchange Commission thereunder as in effect on the date hereof),
of shares representing more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Borrower; or (b)
occupation of a majority of the seats (other than vacant seats) on the board of
directors of the Borrower by Persons who were neither (i) nominated by the board
of directors of the Borrower nor (ii) appointed by directors so nominated;
provided, that no event described in clause (a) or clause (b) shall constitute a
"Change in Control" if the senior secured long-term debt rating of the Borrower
shall be at least BBB or higher by S&P and Baa2 or higher by Moody's immediately
after giving effect to the transaction that would otherwise constitute a Change
in Control.

          "Class", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans
or Auction Loans.

          "Closing Date" shall mean the date of this Agreement.

          "Code" shall mean the Internal Revenue Code of 1986, as the same may
be amended from time to time.

          "Commitment" shall mean, with respect to each Bank, the commitment of
such Bank to make Revolving Loans hereunder as set forth in Section 2.01, as the
same may be reduced from time to time pursuant to Section 2.10.

          "Commitment Fee" shall have the meaning assigned to such term in
Section 2.06(a).

          "Consolidated Total Capitalization" on any date means the sum, without
duplication, of the following with respect to the Borrower and its consolidated
subsidiaries: (a) total capitalization as of such date, as determined in
accordance with GAAP, (b) the current portion of liabilities which as of such
date would be classified in whole or part as long-term debt in accordance with
GAAP (it being understood that the noncurrent portion of such liabilities is
included in the total capitalization referred to in



                                       11
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clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are
capitalized as liabilities (including the current portion thereof), and (d) all
other liabilities which would be classified as short-term debt in accordance
with GAAP.

          "Consolidated Total Debt" on any date means the sum, without
duplication, of the following with respect to the Borrower and its consolidated
subsidiaries: (a) all liabilities which as of such date would be classified in
whole or in part as long-term debt in accordance with GAAP (including the
current portion thereof), (b) all obligations as lessee which, in accordance
with GAAP, are capitalized as liabilities (including the current portion
thereof), and (c) all other liabilities which would be classified as short-term
debt in accordance with GAAP, and (d) all Guarantees of or by the Borrower.

          "Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto.

          "Default" shall mean any event or condition which upon notice, lapse
of time or both would constitute an Event of Default.

          "Delayed Fixed Rate" shall mean, with respect to any Auction Loan
(other than a Eurodollar Auction Loan or a Fixed Rate Loan), the fixed rate of
interest per annum specified by the Bank in making such Auction Loan in its
related Auction Bid.

          "Delayed Fixed Rate Loan" shall mean an Auction Loan bearing interest
at a Delayed Fixed Rate for which an Auction Bid Request is made two Business
Days before the proposed date of borrowing.

          "dollars" or "$" shall mean lawful money of the United States of
America.

          "Environmental Law" shall mean any and all applicable present and
future treaties, laws, regulations,



                                       12
   123

enforceable requirements, binding determinations, orders, decrees, judgments,
injunctions, permits, approvals, authorizations, licenses, permissions, notices
or binding agreements issued, promulgated or entered by any Governmental
Authority, relating to the environment, preservation or reclamation of natural
resources, or to the management, release or threatened release of contaminants
or noxious odor, including the Hazardous Materials Transportation Act,
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986, Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and Hazardous and Solid Waste Amendments of 1984, Federal Water Pollution
Control Act, as amended by the Clean Water Act of 1977, Clean Air Act of 1970,
as amended, Toxic Substances Control Act of 1976, Occupational Safety and Health
Act of 1970, as amended, Emergency Planning and Community Right-to-Know Act of
1986, Safe Drinking Water Act of 1974, as amended, and any similar or
implementing state law, and all amendments or regulations promulgated
thereunder.

          "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.

          "ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.

          "Eurodollar", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Eurodollar Rate.

          "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar
Loans.

          "Eurodollar Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate in accordance with the provisions
of Article II.

          "Eurodollar Rate" shall mean, with respect to any Eurodollar Loan for
any Interest Period, an interest rate



                                       13
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per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the
product of (i) the arithmetic average of rates at which dollar deposits
approximately equal to the principal amount of the portion of such Eurodollar
Loan to be made by The Toronto-Dominion Bank, and for a maturity equal to the
applicable Interest Period, are offered to The Toronto-Dominion Bank for
Eurodollars at approximately 10:00 a.m., New York City time, two Business Days
prior to the commencement of such Interest Period and (ii) Statutory Reserves.
In the event that such rate is not available at such time for any reason, then
the "Eurodollar Rate" with respect to such Eurodollar Borrowing for such
Interest Period shall be the rate at which dollar deposits of $5,000,000 and for
a maturity comparable to such Interest Period are offered by the principal
London office of the Agent in immediately available funds in the London
interbank market at approximately 10:00 a.m., New York City time, two Business
Days prior to the commencement of such Interest Period.

          "Event of Default" shall have the meaning assigned to such term in
Article VII.

          "Expiration Date" shall mean June 25, 2001.

          "Federal Funds Effective Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as reported on such
Business Day by the Federal Reserve Bank of New York, or, if such rate is not so
reported for any day that is a Business Day, the average of the quotations for
the day of such transactions received by the Agent from three Federal funds
brokers of recognized standing selected by it.

          "Fees" shall mean the Commitment Fee and the Agency Fees.

          "Financial Officer" of any corporation shall mean the chief financial
officer or Treasurer of such corporation.

          "First Mortgage" shall mean the Mortgage and Deed of Trust dated as of
June 1, 1939, made by the Borrower in favor of Citibank, N.A., as successor
Trustee, as the same



                                       14
   125

has been amended, modified or supplemented to date and as the same may be
further amended, modified or supplemented from time to time hereafter.

          "Fixed Rate" shall mean, with respect to any Auction Loan (other than
a Eurodollar Auction Loan or a Delayed Fixed Rate Loan), the fixed rate of
interest per annum specified by the Bank making such Auction Loan in its related
Auction Bid.

          "Fixed Rate Loan" shall mean an Auction Loan bearing interest at a
Fixed Rate for which an Auction Bid Request is made on the day of the proposed
borrowing.

          "GAAP" shall mean generally accepted accounting principles, applied on
a consistent basis.

          "Governmental Authority" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.

          "Guarantee" of or by any person shall mean any obligation, contingent
or otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor") in any
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase property, securities or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness
or (c) to maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term Guarantee
shall not include endorsements for collection or deposit, in either case in the
ordinary course of business.

          "Indebtedness" of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all



                                       15
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obligations of such person upon which interest charges are customarily paid, (d)
all obligations of such person under conditional sale or other title retention
agreements relating to property or assets purchased by such person, (e) all
obligations of such person issued or assumed as the deferred purchase price of
property or services (other than trade payables incurred in the ordinary course
of business), (f) all Indebtedness of others secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien on property owned or acquired by such person, whether or
not the obligations secured thereby have been assumed, but limited, if such
obligations are without recourse to such person, to the lesser of the principal
amount of such Indebtedness or the fair market value of such property, (g) all
Guarantees by such person of Indebtedness of others, (h) all Capital Lease
Obligations of such person, (i) all obligations of such person in respect of
interest rate protection agreements, foreign currency exchange agreements or
other interest or exchange rate hedging arrangements (the amount of any such
obligation to be the amount that would be payable upon the acceleration,
termination or liquidation thereof) and (j) all obligations of such person as an
account party in respect of letters of credit and bankers' acceptances. The
Indebtedness of any person shall include the Indebtedness of any partnership in
which such person is a general partner.

          "Interest Payment Date" shall mean, with respect to any Loan, the last
day of the Interest Period applicable to the Borrowing of which such Loan is a
part and, in the case of a Eurodollar Borrowing with an Interest Period of more
than three months' duration, each day that would have been an Interest Payment
Date had successive Interest Periods of three months' duration been applicable
to such Borrowing and, in addition, the date of any refinancing or conversion of
such Borrowing with or to a Borrowing of a different Type.

          "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the
period commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the
Borrower may elect, (b) as to any



                                       16
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ABR Borrowing, the period commencing on the date of such Borrowing and ending on
the earliest of (i) the next succeeding March 31, June 30, September 30 or
December 31, (ii) the Expiration Date, and (iii) the date such Borrowing shall
be repaid or prepaid in accordance with Section 2.11 and (c) with respect to any
Fixed Rate Borrowing or Delayed Fixed Rate Borrowing, the period (which shall
not be less than 7 days or more than 360 days) commencing on the date of such
Borrowing and ending on the date specified in the applicable Auction Bid
Request; provided, however, that if any Interest Period would end on a day other
than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such
next succeeding Business Day would fall in the next calendar month, in which
case such Interest Period shall end on the next preceding Business Day. Interest
shall accrue from and including the first day of an Interest Period to but
excluding the last day of such Interest Period.

          "Lien" shall mean, with respect to any asset, (a) any mortgage, deed
of trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities.

          "Loans" shall mean loans made by the Banks to the Borrower pursuant to
this Agreement.

          "Loan Documents" shall mean this Agreement and any Notes.

          "Margin" shall mean, with respect to any Auction Loan bearing interest
at a rate based on the Eurodollar Rate, the marginal rate of interest, if any,
to be added to or subtracted from the Eurodollar Rate to determine the rate of
interest applicable to such Loan, as specified by the Bank making such Loan in
its related Auction Bid.

          "Margin Stock" shall have the meaning given such term under Regulation
U.



                                       17
   128

          "Material Adverse Effect" shall mean an effect on the business,
assets, operations or financial condition of the Borrower and the Subsidiaries
taken as a whole which could reasonably be expected to have a material adverse
effect on the creditworthiness of the Borrower.

          "Moody's" shall mean Moody's Investors Service, Inc.

          "Notes" shall mean any promissory notes of the Borrower, substantially
in the form of Exhibit A, evidencing Loans, as may be delivered pursuant to
Section 2.05.

          "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA.

          "person" shall mean a corporation, association, partnership, trust,
organization, business, individual or government or governmental agency or
political subdivision thereof.

          "Plan" shall mean any pension plan subject to the provisions of Title
IV of ERISA or Section 412 or the Code which is maintained for employees of the
Borrower or any ERISA Affiliate.

          "Pre-Restatement Credit Agreement" shall mean the Amended and Restated
Revolving Credit Agreement (364 day) among the Borrower, the banks named
therein, Toronto Dominion (Texas), Inc., Bank of America National Trust and
Savings Association and The Bank of New York, dated as of June 29, 1999, and as
in effect prior to its amendment and restatement hereby.

          "Prime Rate" shall mean the rate of interest per annum adopted from
time to time by The Toronto-Dominion Bank at its principal office in New York
City as its prime rate. For purposes of this Agreement, any change in the
Alternate Base Rate due to a change in the Prime Rate shall be effective on the
date such change in the Prime Rate is adopted.

          "Ratings" shall refer to the ratings of Moody's and S&P applicable to
the Borrower's senior unsecured long-term debt obligations.



                                       18
   129

          "Register" shall have the meaning given to such term in Section
9.04(d).

          "Regulation D" shall mean Regulation D of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof and shall include any successor or other regulation or official
interpretation of the Board relating to reserve requirements applicable to
member banks of the Federal Reserve System.

          "Regulation U" shall mean Regulation U of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.

          "Regulation X" shall mean Regulation X of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.

          "Related Parties" shall mean, with respect to any specified Person,
such Person's Affiliates and the respective directors, officers, employees,
agents and advisors of such Person and such Person's Affiliates.

          "Reportable Event" shall mean any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate which is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).

          "Required Banks" shall mean, at any time, Banks having Revolving
Credit Exposures representing at least 66-2/3% of the aggregate Revolving
Exposures or, if there shall be no Revolving Credit Exposure, Banks having
Commitments representing at least 66-2/3% of the aggregate Commitments. For
purposes of declaring the Loans to be due and payable pursuant to Article VII,
and for all purposes after the Loans become due and payable pursuant to Article
VII or the Commitments expire or terminate, the outstanding Auction Loans of the
Banks shall be included in their respective Revolving Credit Exposure in
determining the Required Banks.

          "Responsible Officer" of any corporation shall mean any executive
officer or Financial Officer of such



                                       19
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corporation and any other officer or similar official thereof responsible for
the administration of the obligations of such corporation in respect of this
Agreement.

          "Revolving Credit Exposure" shall mean, with respect to any Bank at
any time, the sum of the outstanding principal amount of such Bank's Revolving
Loans at such time.

          "Revolving Loan" shall mean a Loan made pursuant to Section 2.03.

          "S&P" shall mean Standard & Poor's Ratings Services.

          "Significant Subsidiary" shall mean a Subsidiary meeting any one of
the following conditions: (a) the investments in and advances to such Subsidiary
by the Borrower and the other Subsidiaries, if any, as at the end of the
Borrower's latest fiscal quarter exceeded 10% of the total assets of the
Borrower and its Subsidiaries at such date, computed and consolidated in
accordance with GAAP; or (b) the Borrower's and the other Subsidiaries'
proportionate share of the total assets (after intercompany eliminations) of
such Subsidiary as at the end of the Borrower's latest fiscal quarter exceeded
10% of the total assets of the Borrower and its Subsidiaries at such date,
computed and consolidated in accordance with GAAP; or (c) the equity in the
income from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of such Subsidiary for the
period of four consecutive fiscal quarters ending at the end of the Borrower's
latest fiscal quarter exceeded 10% of such income of the Borrower and its
Subsidiaries for such period, computed and consolidated in accordance with GAAP;
or (d) such Subsidiary is the parent of one or more Subsidiaries and, together
with such Subsidiaries would, if considered in the aggregate, constitute a
Significant Subsidiary.

          "Statutory Reserves" shall mean a fraction (expressed as a decimal)
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages



                                       20
   131

(including, without limitation, any marginal, special, emergency or supplemental
reserves) with respect to Eurodollar funding (including with respect to
Eurocurrency Liabilities as defined in Regulation D) in an amount approximately
equal to the respective Eurodollar Loan and with a term approximately equal to
the Interest Period for such Eurodollar Loan expressed as a decimal established
by the Board or by any other United States banking authority to which the Agent
is subject. Such reserve percentages shall include, without limitation, those
imposed under Regulation D. Statutory Reserves shall be adjusted automatically
on and as of the effective date of any change in any reserve percentage.

          "Structuring Fee" shall have the meaning assigned to such term in
Section 2.06(b).

          "subsidiary" shall mean, for any person (the "Parent"), any
corporation, partnership or other entity of which securities or other ownership
interests having by the terms thereof ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting
power by reason of the happening of any contingency) are at the time directly or
indirectly owned or controlled by the Parent or one or more of its subsidiaries
or by the Parent and one or more of its subsidiaries.

          "Subsidiary" shall mean a subsidiary of the Borrower.

          A "Subsidiary Event" shall mean the following; provided, however, that
a Subsidiary Event shall not be deemed to have occurred if the Banks have
previously consented thereto:

          (a) any Significant Subsidiary shall fail to observe or perform any
     covenant, condition or agreement contained in Section 5.01(a) as if such
     section applied to such Significant Subsidiary, with all references therein
     to the Borrower being deemed references to such Significant Subsidiary;



                                       21
   132

          (b) any Significant Subsidiary shall fail to observe or perform any
     covenant, condition or agreement in Sections 5.01(b), 5.02, 5.03 or 5.07 as
     if such sections applied to such Significant Subsidiary, with all
     references therein to the Borrower being deemed references to such
     Significant Subsidiary, and such default shall continue unremedied for a
     period of 30 days after notice thereof from the Agent or any Bank to the
     Borrower;

          (c) any Significant Subsidiary shall:

               (i) merge into or consolidate with any other person, or permit
          any other person to merge into or consolidate with it, or purchase,
          lease or otherwise acquire (in one transaction or a series of
          transactions) all or substantially all of the assets of any other
          person (whether directly by purchase, lease or other acquisition of
          all or substantially all of the assets of such person or indirectly by
          purchase or other acquisition of all or substantially all of the
          capital stock of such other person) other than acquisitions in the
          ordinary course of such Significant Subsidiary's business, except that
          if, at the time thereof and immediately after giving effect thereto no
          Event of Default or Default shall have occurred and be continuing,
          then (A) such Significant Subsidiary may (i) merge with or into, or
          consolidate with, any Subsidiary or (ii) merge with or into, or
          consolidate with, the Borrower in a transaction in which the Borrower
          is the surviving corporation, (B) such Significant Subsidiary may
          purchase, lease or otherwise acquire from any Subsidiary all or
          substantially all of its assets and may purchase or otherwise acquire
          all or substantially all of the capital stock of any person who
          immediately thereafter is a Subsidiary, (C) such Significant
          Subsidiary may merge with or into, or consolidate with, any other
          person so long as the assets of such person at the time of such
          consolidation or merger, do not exceed 10% of the total assets of the
          Borrower and its Subsidiaries, after giving effect to such merger or




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          consolidation, computed and consolidated in accordance with GAAP
          consistently applied, and (D) such Significant Subsidiary may
          purchase, lease or otherwise acquire any or all of the assets of any
          other person (and may purchase or otherwise acquire the capital stock
          of any other person) so long as the assets being purchased, leased or
          acquired (or the Significant Subsidiary's proportionate share of the
          assets of the person whose capital stock is being acquired) do not
          exceed 10% of the total assets of the Borrower and its Subsidiaries,
          after giving effect to such acquisition, computed and consolidated in
          accordance with GAAP consistently applied, or

               (ii) sell, lease, transfer, assign or otherwise dispose of (in
          one transaction or in a series of transactions), in any fiscal year,
          assets (whether now owned or hereafter acquired) which, together with
          the amount of all sales, leases, transfers, assignments or
          dispositions by the Borrower permitted under Section 6.03 (other than
          sales, leases, transfers, assignments or other dispositions permitted
          under clauses (i) through (iv) of such Section), are in excess of 10%
          of the assets of the Borrower and its Subsidiaries as of the end of
          the most recent fiscal year, computed and consolidated in accordance
          with GAAP consistently applied, except (A) a Significant Subsidiary
          may sell, lease, transfer, assign or otherwise dispose of, in any
          fiscal year, assets in the ordinary course of business which, together
          with the amount of all sales, leases, transfers, assignments or
          dispositions in the ordinary course permitted under Section 6.03(i),
          do not exceed 5% of the assets of the Borrower and its Subsidiaries as
          of the end of the most recent fiscal year, computed and consolidated
          in accordance with GAAP consistently applied, (B) to the extent
          permitted in clause (c)(i) above and (C) any Significant Subsidiary
          may sell, lease, transfer, assign or otherwise dispose of, or create,
          incur, assume or permit to exist Liens on, receivables and related
          properties or interests therein;



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provided, however, that, notwithstanding anything in this clause (c) to the
contrary, a Subsidiary Event shall not be deemed to have occurred and shall not
constitute an Event of Default under paragraph (k) of Article VII if, after
giving effect to the consummation of any transaction contemplated by clause
(c)(i) or (c)(ii) hereof, such Significant Subsidiary shall have or shall be
deemed to have a ratio of total long-term Indebtedness to total stockholders'
equity equal to or less than 1.5 to 1.0.

          "Transactions" shall have the meaning assigned to such term in Section
3.02.

          "Type", when used in respect of any Loan or Borrowing, shall refer to
the Rate by reference to which interest on such Loan or on the Loans comprising
such Borrowing is determined. For purposes hereof, "Rate" shall mean, in the
case of a Revolving Loan or Borrowing, the Eurodollar Rate and the Alternate
Base Rate or, in the case of an Auction Loan or Borrowing, the Eurodollar Rate,
Fixed Rate or Delayed Fixed Rate.

          "Utilization Fee" shall have the meaning assigned to such term in
Section 2.06.

          "Utilization Level" shall mean the ratio of the outstanding principal
amount of Loans to the total Commitments.

          SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time; provided,
however, that, for purposes of determining compliance with any covenant set
forth in



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Article VI, such terms shall be construed in accordance with GAAP as in
effect on the date of this Agreement applied on a basis consistent with the
application used in preparing the Borrower's audited financial statements
referred to in Section 3.05.


ARTICLE II.  THE CREDITS

          SECTION 2.01. (a) Commitments. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, each Bank
agrees, severally and not jointly, to make Revolving Loans to the Borrower, at
any time and from time to time on or after the date of this Agreement, and until
the earlier of the Expiration Date and the termination of the Commitment of such
Bank in accordance with the terms hereof, in an aggregate principal amount at
any time outstanding that will not result in (i) the Revolving Credit Exposure
of any Bank exceeding the Commitment set forth opposite its name in Schedule
2.01 hereto, as the same may be reduced from time to time pursuant to Section
2.10 or (ii) the sum of the total Revolving Credit Exposure plus the aggregate
principal amount of outstanding Auction Loans exceeding the total Commitments.

          Within the limits set forth in the preceding sentence, the Borrower
may borrow, pay or prepay and reborrow Revolving Loans on or after the date of
this Agreement and prior to the Expiration Date, subject to the terms,
conditions and limitations set forth herein.

          (b) On not more than two occasions the Borrower may by written notice
to the Administrative Agent cause New Banks (as defined below) to assume
Commitments by an aggregate amount not in excess of $18,825,000 in the aggregate
(the "New Commitments"). Each such notice shall specify (i) the date (each a
"Transition Date") on which the Borrower proposes that New Commitments shall
become effective, which shall be not less than ten Business Days
after the date on which such notice is delivered to the Administrative Agent and
(ii) the identity of each person that has agreed to assume any portion of such
New Commitments (each a "New Bank") and the amount of such New Commitments
allocated to such New Bank. Subject only to



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there not existing any Default or Event of Default on such Transition Date
before or after giving effect to such New Commitments, such New Commitments
shall become effective as of such Transition Date and, if any Revolving Loans
are outstanding on such Transition Date, each Bank shall assign to the New
Banks, and each of the New Banks shall purchase from the Banks, at the principal
amount thereof, such interests in the Revolving Loans outstanding on such
Transition Date as shall be necessary in order that, after giving effect to all
such assignments and purchases, such Revolving Loans will be held by Banks and
New Banks ratably in accordance with their Commitments after giving effect to
the addition of such New Commitments to the Commitments. The Administrative
Agent shall notify the Banks promptly upon receipt of the Borrower's notice
thereof of each Transition Date and in respect thereof the New Commitments, the
New Banks and, in the case of each notice to any Bank, the respective interests
in such Bank's Revolving Loans subject to the assignments contemplated by the
immediately preceding sentence. In the event that any Bank shall incur any
breakage cost as a result of making any such assignment, or that any New Bank
shall incur any reverse breakage cost as a result of taking any such assignment,
the Borrower shall indemnify it for such cost, calculated as contemplated by
Section 2.14 in the case of breakage costs and calculated based upon the
difference between the Eurodollar Rate applicable to each assigned Revolving
Loan and the cost to the New Bank of funding its assigned interests in the case
of reverse breakage costs. It is expressly understood that no Bank shall have
any obligation to agree to an increase in the amount of the Commitment pursuant
to this Section.

          SECTION 2.02. Loans. (a) Each Revolving Loan shall be made as part of
a Borrowing consisting of Revolving Loans made by the Banks ratably in
accordance with their Commitments. Each Auction Loan shall be made in accordance
with the procedures set forth in Section 2.04. The failure of any Bank to make
any Loan required to be made hereunder shall not in itself relieve any other
Bank of its obligation to lend hereunder (it being understood, however, that no
Bank shall be responsible for the failure of any other Bank to make any Loan
required to be made by such other Bank). The Loans comprising each Borrowing
shall be in an aggregate principal amount which is an integral multiple of
$1,000,000.



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          (b) Subject to Section 2.09, (i) each Revolving Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans, as the Borrower may request
pursuant to Section 2.03, and (ii) each Auction Borrowing shall be comprised
entirely of Eurodollar Loans, Fixed Rate Loans or Delayed Fixed Rate Loans as
the Borrower may request in accordance with Section 2.04. Each Bank may at its
option fulfill its Commitment with respect to any Eurodollar Loan by causing any
domestic or foreign branch or Affiliate of such Bank to make such Loan; provided
that any exercise of such option shall not affect the obligation of the Borrower
to repay such Loan in accordance with the terms of this Agreement or any
applicable Note. Borrowings of more than one Type or Class may be outstanding at
the same time; provided, however, that the Borrower shall not be entitled to
request any Borrowing which, if made, would result in an aggregate of more than
five separate Eurodollar Loans of any Bank being outstanding hereunder at any
one time. For purposes of the foregoing, Loans having different Interest
Periods, regardless of whether they commence on the same date, shall be
considered separate Loans.

          (c) Subject to paragraph (e) below, each Bank shall make a Revolving
Loan in the amount of its pro rata portion, as determined under Section 2.15,
or, if an Auction Loan, in the relevant amount as determined under Section 2.04,
of each Borrowing hereunder on the proposed date thereof by wire transfer of
immediately available funds to the Agent in Houston, Texas, not later than 2:00
p.m., New York City time, and the Agent shall by 3:00 p.m., New York City time,
make available to the Borrower in immediately available funds the amounts so
received (i) by wire transfer for credit to the account of the Borrower with
Bank of America, N.A., Account Number 12332-29152; ABA # 12100358, or (ii) as
otherwise specified by the Borrower in its notice of Borrowing or, if a
Borrowing shall not occur on such date because any condition precedent herein
specified shall not have been met, return the amounts so received to the
respective Banks. Unless the Agent shall have received notice from a Bank prior
to the date of any Borrowing that such Bank will not make available to the Agent
such Bank's portion of such Borrowing, the Agent may assume that such Bank has
made such portion available to the Agent on the date of such Borrowing in
accordance with this paragraph (c)



                                       27
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and the Agent may, in reliance upon such assumption, make available to the
Borrower on such date a corresponding amount. If and to the extent that such
Bank shall not have made such portion available to the Agent, such Bank and the
Borrower severally agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrower until the date such amount is
repaid to the Agent at (i) in the case of the Borrower the interest rate
applicable at the time to the Loans comprising such Borrowing and (ii) in the
case of such Bank, the Federal Funds Effective Rate. If such Bank shall repay to
the Agent such corresponding amount, such amount shall constitute such Bank's
Loan as part of such Borrowing for purposes of this Agreement.

          (d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Expiration Date.

          (e) The Borrower may refinance all or any part of any Borrowing with a
Borrowing of the same or a different Type or Class, subject to the conditions
and limitations set forth in this Agreement. Any Borrowing or part thereof so
refinanced shall be deemed to be repaid or prepaid in accordance with Section
2.05 or 2.11, as applicable, with the proceeds of a new Borrowing, and the
proceeds of the new Borrowing, to the extent they do not exceed the principal
amount of the Borrowing being refinanced, shall not be paid by the Banks to the
Agent or by the Agent to the Borrower pursuant to paragraph (c) above.

          SECTION 2.03. Notice of Revolving Borrowings. To request a Revolving
Borrowing, the Borrower shall give the Agent written or telecopy notice (or
telephone notice promptly confirmed in writing or by telecopy) (a) in the case
of a Eurodollar Borrowing, not later than 10:00 a.m., New York City time, three
Business Days before a proposed borrowing and (b) in the case of an ABR
Borrowing, not later than 12:00 (noon), New York City time, the day of a
proposed borrowing. Such notice shall be irrevocable and shall in each case
refer to this Agreement and specify (i) whether the Borrowing then being
requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of
such



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Borrowing (which shall be a Business Day) and the amount thereof; and (iii)
if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with
respect thereto. If no election as to the Type of Borrowing is specified in any
such notice, then the requested Borrowing shall be an ABR Borrowing. If no
Interest Period with respect to any Eurodollar Borrowing is specified in any
such notice, then the Borrower shall be deemed to have selected an Interest
Period of one month's duration. If the Borrower shall not have given notice in
accordance with this Section 2.03 of its election to refinance a Borrowing prior
to the end of the Interest Period in effect for such Borrowing, then the
Borrower shall (unless such Borrowing is repaid at the end of such Interest
Period) be deemed to have given notice of an election to refinance such
Borrowing with an ABR Borrowing. The Agent shall promptly advise the Banks of
any notice given pursuant to this Section 2.03 and of each Bank's portion of the
requested Borrowing.


          SECTION 2.04. Auction Bid Procedure. (a) Subject to the terms and
conditions set forth herein, from time to time during the Availability Period
the Borrower may request Auction Bids and may (but shall not have any obligation
to) accept Auction Bids and borrow Auction Loans; provided that the sum of the
total Revolving Credit Exposure plus the aggregate principal amount of
outstanding Auction Loans at any time shall not exceed the total Commitments. To
request Auction Bids, the Borrower shall notify the Agent of such request by
telephone, in the case of a Eurodollar Borrowing, not later than 1:00 p.m., New
York City time, four Business Days before the date of the proposed Borrowing, in
the case of a Fixed Rate Borrowing, not later than 1:00 p.m., New York City
time, one Business Day before the date of the proposed Borrowing, or, in the
case of a Delayed Fixed Rate Borrowing, not later than 2:00 p.m., New York City
time, two Business Days before the date for the proposed Borrowing; provided
that the Borrower may submit up to (but not more than) (i) 1 Eurodollar Auction
Bid Request and (ii) 1 Fixed Rate Auction Bid Request or 1 Delayed Fixed Rate
Auction Bid Request on the same day. Each such telephonic Auction Bid Request
shall be confirmed promptly by hand delivery or telecopy to the Agent of a
written Auction Bid Request in a form approved by the Agent and signed by the
Borrower. Each such telephonic and written



                                       29
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Auction Bid Request shall specify the following information in compliance with
Section 2.02:

          (i) the aggregate amount of the requested Borrowing;

          (ii) the date of such Borrowing, which shall be a Business Day;

          (iii) whether such Borrowing is to be a Eurodollar Borrowing, a Fixed
     Rate Borrowing, or a Delayed Fixed Rate Borrowing;

          (iv) the Interest Period (or Interest Periods) to be applicable to
     such Borrowing, which shall be a period contemplated by the definition of
     the term "Interest Period"; and

          (v) the location and number of the Borrower's account to which funds
     are to be disbursed, which shall comply with the requirements of Section
     2.02.

          (b) Following receipt of an Auction Bid Request in accordance with
this Section, the Agent shall notify the Banks of the details thereof by
telecopy, inviting the Banks to submit Auction Bids in the case of a Eurodollar
Auction Bid Request, no later than 2:00 p.m., New York City time, four Business
Days before the proposed date of the Borrowing, in the case of a Fixed Rate
Auction Bid Request, no later than 2:00 p.m., one Business Day before the
proposed date of the Borrowing, and, in the case of a Delayed Fixed Rate Bid
Request, not later than 3:00 p.m., New York City time, two Business Days before
the proposed date of the Borrowing.

          (c) Each Bank may (but shall not have any obligation to) make one or
more Auction Bids to the Borrower in response to an Auction Bid Request. Each
Auction Bid by a Bank must be in a form approved by the Agent and must be
received by the Agent by telecopy, in the case of a Eurodollar Auction
Borrowing, not later than 12:00 (noon), New York City time, three Business Days
before the proposed date of such Auction Borrowing, in the



                                       30
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case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time,
on the proposed date of such Auction Borrowing, and, in the case of a Delayed
Fixed Rate Bid, not later than 12:00 (noon), New York City time, one Business
Day before the proposed date of such Auction Borrowing. Auction Bids that do not
conform substantially to the form approved by the Agent may be rejected by the
Agent, and the Agent shall notify the applicable Bank as promptly as
practicable. Each Auction Bid shall specify (i) the principal amount (which
shall be an integral multiple of $1,000,000 and which may equal the entire
principal amount of the Auction Borrowing requested by the Borrower) of the
Auction Loan or Loans that the Bank is willing to make, (ii) the Auction Bid
Rate or Rates at which the Bank is prepared to make such Loan or Loans
(expressed as a percentage rate per annum in the form of a decimal to no more
than four decimal places) and (iii) the Interest Period applicable to each such
Loan and the last day thereof in accordance with the Auction Bid Request.

          (d) The Agent shall promptly notify the Borrower by telecopy of the
Auction Bid Rate and the principal amount specified in each Auction Bid and the
identity of the Bank that shall have made such Auction Bid.

          (e) Subject only to the provisions of this paragraph, the Borrower may
accept or reject any Auction Bid. The Borrower shall notify the Agent by
telephone, confirmed by telecopy in a form approved by the Agent, whether and to
what extent it has decided to accept or reject each Auction Bid, in the case of
a Eurodollar Auction Borrowing, not later than 2:00 p.m., New York City time,
three Business Days before the date of the proposed Auction Borrowing, in the
case of a Fixed Rate Borrowing, not later than 11:30 a.m., New York City time,
on the proposed date of the Auction Borrowing, and, in the case of a Delayed
Fixed Rate Borrowing, not later than 1:00 p.m., New York City time, one Business
day before the date of the proposed Auction Borrowing; provided that (i) the
failure of the Borrower to give such notice shall be deemed to be a rejection of
each Auction Bid, (ii) the Borrower shall not accept an Auction Bid made at a
particular Auction Bid Rate if the Borrower rejects an Auction Bid made at a
lower Auction Bid Rate, (iii) the aggregate amount of the Auction Bids accepted
by the Borrower shall not exceed the aggregate amount of the requested Auction
Borrowing specified in the related Auction Bid Request, (iv) to the extent
necessary to



                                       31
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comply with clause (iii) above, the Borrower may accept Auction Bids at the same
Auction Bid Rate in part, which acceptance, in the case of multiple Auction Bids
at such Auction Bid Rate, shall be made pro rata in accordance with the amount
of each such Auction Bid, and (v) except pursuant to clause (iv) above, no
Auction Bid shall be accepted for an Auction Loan unless such Auction Loan is in
an integral multiple of $1,000,000. A notice given by the Borrower pursuant to
this paragraph shall be irrevocable.

          (f) The Agent shall notify each bidding Bank by telephone and telecopy
whether or not its Auction Bid has been accepted (and, if so, the amount and
Auction Bid Rate so accepted) in the case of Eurodollar Auction Loans, by 3:00
p.m., New York City time, three Business Days before the borrowing date, in the
case of Fixed Rate Loans, by 12:00 (noon), New York City time, on the borrowing
date, and, in the case of Delayed Fixed Rate Loans, by 3:00 p.m., New York City
time, one Business Day before the Borrowing Date. Each successful bidder will
thereupon become bound, subject to the terms and conditions hereof, to make the
Auction Loan in respect of which its Auction Bid has been accepted.

          (g) If the Agent shall elect to submit an Auction Bid in its capacity
as a Bank, it shall submit such Auction Bid directly to the Borrower at least
one quarter of an hour earlier than the time by which the other Banks are
required to submit their Auction Bids to the Agent pursuant to paragraph (b) of
this Section.

          SECTION 2.05. Repayment of Loans; Evidence of Debt. (a) The Borrower
hereby unconditionally promises to pay each Bank the then unpaid principal
amount of each Loan of such Bank on the last day of the Interest Period
applicable to such Loan and on the Expiration Date. Each Loan shall bear
interest on the outstanding principal balance thereof as set forth in Section
2.07.

          (b) Each Bank shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrower to such Bank
resulting from each Loan made by such Bank, including the amounts of principal
and interest payable and paid to such Bank from time to time hereunder.



                                       32
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          (c) The Agent shall maintain accounts in which it shall record (i) the
amount and date of each Loan made hereunder, the Class and Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal, interest
or fees due and payable or to become due and payable from the Borrower to each
Bank hereunder and (iii) the amount of any principal, interest or fees received
by the Agent hereunder for the account of the Banks and each Bank's share
thereof.

          (d) The entries made in the accounts maintained pursuant to paragraph
(b) or (c) of this Section shall be prima facie evidence of the existence and
amounts of the obligations recorded therein; provided that the failure of
any Bank or the Agent to maintain such accounts or any error therein shall not
in any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.

          (e) Any Bank may request that Loans of any Class made by it be
evidenced by a Note. In such event, the Borrower shall prepare, execute and
deliver to such Bank a Note payable to the order of such Bank (or, if requested
by such Bank, to such Bank and its registered assigns). Thereafter, the Loans
evidenced by such Note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more Notes in such
form payable to the order of the payee named therein (or, if such Note is a
registered Note, to such payee and its registered assigns).

          SECTION 2.06. Fees. (a) The Borrower agrees to pay to each Bank,
through the Agent, on the first Business Day of January, April, July and
October, in each year, and on the date on which the Commitment of such Bank
shall be terminated as provided herein, a commitment fee (a "Commitment Fee") on
the average daily unused amount of the Commitment of such Bank during the
preceding quarter (or shorter period commencing with the date hereof or ending
with the Expiration Date or the date on which the Commitment of such Bank shall
be terminated); provided, that, for purposes of determining the Commitment Fee,
the undrawn portion of the Commitments shall not be deemed to be reduced by the
amount of any borrowing under the Auction Facility.



                                       33
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The Commitment Fees shall accrue on each day at a rate per annum equal to the
Applicable Rate in effect on such day. All Commitment Fees shall be computed on
the basis of the actual number of days elapsed in a year of 365 or 366 days, as
appropriate. The Commitment Fee due to each Bank shall commence to accrue on the
date of this Agreement and shall cease to accrue on the date on which the
Commitment of such Bank shall be terminated as provided herein.

          (b) The Borrower agrees to pay to the Agent, for its own account, the
fees separately agreed between the Agent and the Borrower, at the times agreed
to (the "Agency Fees" and the "Structuring Fee").

          (c) For any day on which the outstanding principal amount of Loans
shall be greater than 33% of the total Commitments (or, following the Expiration
Date, 33% of the total Commitments on the Expiration Date), the Borrower shall
pay to the Administrative Agent for the account of each Bank a utilization fee
(a "Utilization Fee") at a rate per annum equal to the Applicable Rate in effect
for such day on such Bank's Applicable Percentage of the aggregate amount of the
outstanding Loans on such day. The Utilization Fees, if any, in respect of any
fiscal quarter shall be payable in arrears on each March 31, June 30, September
30 and December 31, on the date on which the Commitments terminate and on any
later date on which the Loans are repaid in full; provided, however, that if the
Utilization Fee should be payable on a day other than a Business Day, such date
of payment shall be extended to the next succeeding Business Day. All
Utilization Fees shall be computed on the basis of a year of 365 or 366 days, as
appropriate, and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).

          (d) The Borrower agrees to pay the Agent, for its own account, $100
for each Auction Bid Request the Borrower makes, payable the day on which the
Auction Bid Request is made.

          (e) All Fees shall be paid on the dates due, in immediately available
funds, to the Agent for distribution, if and as appropriate, among the Banks.
Once paid, none of the Fees shall be refundable under any circumstances.



                                       34
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          SECTION 2.07. Interest on Loans. (a) Subject to the provisions of
Section 2.08, the Loans comprising each ABR Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be) at a rate per annum equal to the Alternate Base
Rate plus the Applicable Rate.

          (b) Subject to the provisions of Section 2.08, the Loans comprising
each Eurodollar Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) (i) in the case of a
Eurodollar Revolving Loan at a rate per annum equal to the Eurodollar Rate for
the Interest Period in effect for such Borrowing plus the Applicable Rate or
(ii) in the case of a Eurodollar Auction Loan, at the Eurodollar Rate for the
Interest Period in effect for such Borrowing plus the Margin applicable to such
Loan.

          (c) Each Fixed Rate Loan shall bear interest at the Fixed Rate
applicable to such Loan. Each Delayed Fixed Rate Loan shall bear interest at the
Delayed Fixed Rate applicable to such Loan.

          (d) Interest on each Loan shall be payable on the Interest Payment
Dates applicable to such Loan except as otherwise provided in this Agreement.
The applicable Alternate Base Rate or Eurodollar Rate for each Interest Period
or day within an Interest Period, as the case may be, shall be determined by the
Agent, and such determination shall be conclusive absent manifest error.

          SECTION 2.08. Default Interest. If the Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, by acceleration or otherwise, the Borrower shall on demand from
time to time pay interest, to the extent permitted by law, on such defaulted
amount up to (but not including) the date of actual payment (after as well as
before judgment) at a rate per annum (computed on the basis of the actual number
of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus
the Applicable Rate plus 2%.

          SECTION 2.09. Alternate Rate of Interest. In the event, and on each
occasion, that on the day two Business



                                       35
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Days prior to the commencement of any Interest Period for a Eurodollar Borrowing
the Agent shall have in good faith determined that dollar deposits in the
principal amounts of the Loans comprising such Borrowing are not generally
available in the London interbank market, or that the rates at which such dollar
deposits are being offered will not adequately and fairly reflect the cost to
the majority in interest of the Banks of making or maintaining their Eurodollar
Loans during such Interest Period, or that reasonable means do not exist for
ascertaining the Eurodollar Rate, the Agent shall, as soon as practicable
thereafter, give written or telecopy notice of such determination to the
Borrower and the Banks. In the event of any such determination, (i) any request
by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 shall, until
the Agent shall have advised the Borrower and the Banks that the circumstances
giving rise to such notice no longer exist, be deemed to be a request for an ABR
Borrowing and (ii) any request by the Borrower for a Eurodollar Auction
Borrowing shall be ineffective; provided that (A) if the circumstances giving
rise to such notice do not affect all the Banks, then requests by Borrower for
Eurodollar Auction Borrowings may be made to Banks that are not affected thereby
and (B) if the circumstances giving rise to such notice affect only one Type of
Borrowings, then the other Type of Borrowings shall be permitted. Each
determination by the Agent hereunder shall be conclusive absent manifest error.

          SECTION 2.10. Termination, Reduction and Extension of Commitments. (a)
The Commitments shall be automatically terminated on the Expiration Date.

          (b) Upon at least three Business Days' prior irrevocable written or
telecopy notice to the Agent, the Borrower may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the unused portion
of the Commitments; provided, however, that (i) each partial reduction of the
Commitments shall be in an integral multiple of $1,000,000 and (ii) the Borrower
shall not terminate or reduce the Commitments if, after giving effect to any
concurrent prepayment of the Loans in accordance with Section 2.11, the sum of
the Revolving Credit Exposure plus the aggregate principal amount of outstanding
Auction Loans would exceed the total Commitments.



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          (c) Each reduction in the Commitments hereunder shall be made ratably
among the Banks in accordance with their respective applicable Commitments. The
Borrower shall pay to the Agent for the account of the Banks, on the date of
each termination or reduction, the Commitment Fees on the amount of the
Commitments so terminated or reduced accrued through the date of such
termination or reduction.

          (d) The Borrower may request an extension of this Agreement upon 60
days' prior written notice to the Agent; provided, that, such extension will be
at the sole option of the Banks and will require the written agreement of each
Bank in order to become effective.

          SECTION 2.11. Prepayment. (a) The Borrower shall have the right at any
time and from time to time to prepay any Borrowing, in whole or in part, upon at
least three Business Days' prior written or telecopy notice (or telephone notice
promptly confirmed by written or telecopy notice) to the Agent; provided,
however, that each partial prepayment shall be in an amount which is an integral
multiple of $1,000,000, and that the Borrower shall not have the right to prepay
any Auction Loan without the prior consent of the Bank thereof.

          (b) On the date of any termination or reduction of the Commitments
pursuant to Section 2.10, the Borrower shall pay or prepay so much of the
Borrowings as shall be necessary in order that the aggregate principal amount of
the Revolving Credit Exposure plus the aggregate principal amount of Auction
Loans outstanding will not exceed the aggregate Commitments after giving effect
to such termination or reduction.

          (c) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Borrowing (or portion thereof) to be prepaid, shall
be irrevocable and shall commit the Borrower to prepay such Borrowing by the
amount stated therein on the date stated therein. All prepayments under this
Section 2.11 shall be subject to Section 2.14 but otherwise without premium or
penalty. All prepayments under this Section 2.11 shall be accompanied by accrued
interest on the principal amount being prepaid to the date of payment.



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          SECTION 2.12. Reserve Requirements; Change in Circumstances. (a)
Notwithstanding any other provision herein, if after the date of this Agreement
there is adopted any new law, rule or regulation or any change in applicable law
or regulation or in the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration thereof
(whether or not having the force of law) which shall impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of or credit extended by such Bank (except
any such reserve requirement which is reflected in the Eurodollar Rate) or shall
impose on such Bank or the London interbank market any other condition affecting
this Agreement or Eurodollar Loans made by such Bank, and the result of any of
the foregoing shall be to increase the cost to such Bank of making or
maintaining any Eurodollar Loan or to reduce the amount of any sum received or
receivable by such Bank hereunder or under any Notes(whether of principal,
interest or otherwise) in respect of Eurodollar Loans by an amount deemed by
such Bank to be material, then the Borrower will pay to such Bank upon demand
such additional amount or amounts as will compensate such Bank for such
additional costs incurred or reduction suffered.

          (b) If any Bank shall have determined that the applicability of any
law, rule, regulation, agreement or guideline adopted after the date hereof
regarding capital adequacy, or any change in any of the foregoing or the
adoption after the date hereof of any change in any law, rule, regulation,
agreement or guideline existing on the date hereof or in the interpretation or
administration of any of the foregoing by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or any lending office of such Bank) or any
Bank's holding company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on such Bank's capital or on the capital of such Bank's holding company, if any,
as a consequence of this Agreement or the Loans made by such Bank pursuant
hereto to a level below that which such Bank or such Bank's holding company
could



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have achieved but for such applicability, adoption, change or compliance (taking
into consideration such Bank's policies and the policies of such Bank's holding
company with respect to capital adequacy) by an amount deemed by such Bank to be
material, then from time to time the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank or such Bank's holding
company for any such reduction suffered.

          (c) A certificate of each Bank setting forth in reasonable detail such
amount or amounts as shall be necessary to compensate such Bank or its holding
company as specified in paragraph (a) or (b) above, as the case may be, and the
manner in which such Bank has determined the same, shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
each Bank the amount shown as due on any such certificate delivered by it within
10 days after its receipt of the same.

          (d) Failure on the part of any Bank to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Bank's right to demand compensation with respect to such period or any
other period. The protection of this Section shall be available to each Bank
regardless of any possible contention of the invalidity or inapplicability of
the law, rule, regulation, guideline or other change or condition which shall
have occurred or been imposed.

          SECTION 2.13. Change in Legality. (a) Notwithstanding any other
provision herein, if any change in, or adoption of, any law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for any Bank to
make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written notice
to the Borrower and to the Agent, such Bank may:

          (i) declare that Eurodollar Loans will not thereafter be made by such
     Bank hereunder, whereupon any request by the Borrower for a Eurodollar
     Borrowing shall, as to such Bank only, be deemed a request for an ABR Loan
     unless such declaration shall be subsequently



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     withdrawn; and

          (ii) require that all outstanding Eurodollar Loans made by it be
     converted to ABR Loans, in which event all such Eurodollar Loans shall be
     automatically converted to ABR Loans as of the effective date of such
     notice as provided in paragraph (b) below.

In the event any Bank shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the Eurodollar Loans that would have been made by such Bank or the
converted Eurodollar Loans of such Bank shall instead be applied to repay the
ABR Loans made by such Bank in lieu of, or resulting from the conversion of,
such Eurodollar Loans.

          (b) For purposes of this Section 2.13, a notice to the Borrower by any
Bank shall be effective as to each Eurodollar Loan, if lawful, on the last day
of the Interest Period currently applicable to such Eurodollar Loan.

          SECTION 2.14. Indemnity. The Borrower shall indemnify each Bank
against any loss or expense which such Bank may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
Eurodollar Borrowing hereunder the applicable conditions set forth in Article
IV, (b) any failure by the Borrower to borrow or to refinance any Eurodollar
Loan hereunder after irrevocable notice of such borrowing or refinancing has
been given pursuant to Sections 2.03 and 2.04, (c) any payment or prepayment of
a Eurodollar Loan required by any other provision of this Agreement or otherwise
made or deemed made on a date other than the last day of the Interest Period
applicable thereto or (d) any default in payment or prepay ment of the principal
amount of any Eurodollar Loan or any part thereof or interest accrued thereon,
as and when due and payable (at the due date thereof, whether by scheduled
maturity, acceleration, irrevocable notice of prepayment or otherwise)
including, in each such case, any loss or reasonable expense sustained or
incurred or to be sustained or incurred in liquidating or employing deposits
from third parties acquired to effect or maintain such Loan or any part thereof
as a Eurodollar Loan. Such loss or reasonable expense shall include an amount
equal to the excess, if any, as reasonably determined by such Bank, of



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(i) its cost of obtaining the funds for the Eurodollar Loan being paid, prepaid,
converted or not borrowed (assumed to be the Eurodollar Rate applicable thereto)
for the period from the date of such payment, prepayment, conversion or failure
to borrow to the last day of the Interest Period for such Loan (or, in the case
of a failure to borrow, the Interest Period for such Eurodollar Loan which would
have commenced on the date of such failure) over (ii) the amount of interest (as
reasonably determined by such Bank) that would be realized by such Bank in
reemploying the funds so paid, prepaid or not borrowed for such period or
Interest Period, as the case may be. A certificate of any Bank setting forth any
amount or amounts which such Bank is entitled to receive pursuant to this
Section, and the manner in which such Bank has determined the same, shall be
delivered to the Borrower and shall be conclusive absent manifest error.

          SECTION 2.15. Pro Rata Treatment. Except as required under Sections
2.04 and 2.13, each Borrowing, each payment or prepayment of principal of any
Borrowing, each payment of interest on the Loans, each payment of the Commitment
Fees, each reduction of the Commitments and each refinancing of any Borrowing
with a Borrowing of any Type shall be allocated pro rata among the Banks in
accordance with their respective applicable Commitments (or, if such Commitments
shall have expired or been terminated, in accordance with the respective
principal amounts of their outstanding Loans). Each Bank agrees that in
computing such Bank's portion of any Borrowing to be made hereunder, the Agent
may, in its discretion, round each Bank's percentage of such Borrowing, computed
in accordance with Section 2.01, to the next higher or lower whole dollar
amount.

          SECTION 2.16. Sharing of Setoffs. Each Bank agrees that if it shall,
through the exercise of a right of banker's lien, setoff or counterclaim against
the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of
the United States Code or other security or interest arising from, or in lieu
of, such secured claim, received by such Bank under any applicable bankruptcy,
insolvency or other similar law or otherwise, or by any other means, obtain
payment (voluntary or involuntary) in respect of any Revolving Loan or Revolving
Loans as a result of which the unpaid principal portion of its Revolving Loans
shall be



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proportionately less than the unpaid principal portion of the Revolving Loans of
any other Bank, it shall be deemed simultaneously to have purchased from such
other Bank at face value, and shall promptly pay to such other Bank the purchase
price for, a participation in the Revolving Loans of such other Bank, so that
the aggregate unpaid principal amount of the Revolving Loans and participations
in Revolving Loans held by each Bank shall be in the same proportion to the
aggregate unpaid principal amount of all Revolving Loans then outstanding as the
principal amount of its Revolving Loans prior to such exercise of banker's lien,
setoff or counterclaim or other event was to the principal amount of all
Revolving Loans outstanding prior to such exercise of banker's lien, setoff or
counter-claim or other event; provided, however, that, if any such purchase or
purchases or adjustments shall be made pursuant to this Section and the payment
giving rise thereto shall thereafter be recovered, such purchase or purchases or
adjustments shall be rescinded to the extent of such recovery and the purchase
price or prices or adjustment restored without interest. The Borrower expressly
consents to the foregoing arrangements and agrees that any Bank holding a
participation in a Revolving Loan deemed to have been so purchased may exercise
any and all rights of banker's lien, setoff or counterclaim with respect to any
and all moneys owing by the Borrower to such Bank by reason thereof as fully as
if such Bank had made a Loan directly to the Borrower in the amount of such
participation.

          SECTION 2.17. Payments. (a) The Borrower shall make each payment
(including principal of or interest on any Borrowing or any Fees or other
amounts) hereunder and under any other Loan Document not later than 12:00
(noon), New York City time, on the date when due in dollars to the Agent at its
offices at 909 Fanning, Suite 1700, Houston, Texas, in immediately available
funds.

          (b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.



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          SECTION 2.18. Taxes. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.17, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding taxes imposed on the net income of the Agent or any Bank (or any
transferee or assignee thereof, including a participation holder (any such
entity being called a "Transferee")) and franchise taxes imposed on the Agent or
any Bank (or Transferee) by the United States or any jurisdiction under the laws
of which the Agent or any such Bank (or such Transferee) or the applicable
lending office, is organized or any political subdivision thereof (all such
nonexcluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Banks (or any Transferee) or the Agent, (i) the sum payable
shall be increased by the amount necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.18) such Bank (or such Transferee) or the Agent (as the case may
be) shall receive an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxing authority or
other Governmental Authority in accordance with applicable law; provided,
however, that no Transferee of any Bank shall be entitled to receive any greater
payment under this paragraph (a) than such Bank would have been entitled to
receive with respect to the rights assigned, participated or other wise
transferred unless such assignment, participation or transfer shall have been
made at a time when the circumstances giving rise to such greater payment did
not exist.

          (b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").



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          (c) The Borrower will indemnify each Bank (or Transferee) and the
Agent for the full amount of Taxes and Other Taxes paid by such Bank (or such
Transferee)or the Agent, as the case may be, and any liability (including
penalties, interest and reasonable expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted by the relevant taxing authority or other Governmental Authority. Such
indemnification shall be made within 30 days after the date any Bank (or
Transferee) or the Agent, as the case may be, makes written demand therefor. If
a Bank (or Transferee) or the Agent shall become aware that it is entitled to
receive a refund in respect of Taxes or Other Taxes as to which it has been
indemnified by the Borrower pursuant to this Section 2.18, it shall promptly
notify the Borrower of the availability of such refund and shall, within 30 days
after receipt of a request by the Borrower, apply for such refund at the
Borrower's expense. If any Bank (or Transferee) or the Agent receives a refund
in respect of any Taxes or Other Taxes as to which it has been indemnified by
the Borrower pursuant to this Section 2.18, it shall promptly notify the
Borrower of such refund and shall repay such refund to the Borrower (to the
extent of amounts that have been paid by the Borrower under this Section 2.18
with respect to such refund) within 30 days (or promptly upon receipt, if the
Borrower has requested application for such refund pursuant hereto), net of all
reasonable out-of-pocket expenses of such Bank and without interest; provided
that the Borrower, upon the request of such Bank (or such Transferee) or the
Agent, agrees to return such refund (plus penalties, interest or other charges)
to such Bank (or such Transferee) or the Agent in the event such Bank (or such
Transferee) or the Agent is required to repay such refund. Nothing contained in
this paragraph (c) shall require any Bank (or Transferee) or the Agent to make
available any of its tax returns (or any other information relating to its taxes
which it deems to be confidential); provided that Borrower, at its expense,
shall have the right to receive an opinion from a firm of independent public
accountants of recognized national standing acceptable to the Borrower that the
amount due hereunder is correctly calculated.

          (d) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by the Borrower in respect



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of any payment to any Bank (or Transferee) or the Agent, the Borrower will
furnish to the Agent, at its address referred to in Section 9.01, the original
or a certified copy of a receipt evidencing payment thereof.

          (e) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section 2.18 shall
survive the payment in full of the principal of and interest on all Loans made
hereunder.

          (f) On or prior to the execution of this Agreement and on or before
the transfer to a Transferee, the Agent shall notify the Borrower of each Bank's
(or Transferee's) address. On or prior to the Bank's (or Transferee's) first
Interest Payment Date, and from time to time as required by law, each Bank (or
Transferee) that is organized under the laws of a jurisdiction outside the
United States shall, if legally able to do so, deliver to the Borrower and the
Agent such certificates, documents or other evidence, as required by the Code or
Treasury Regulations issued pursuant thereto, including Internal Revenue Service
Form 1001 or Form 4224 and any other certificate or statement of exemption
required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any
subsequent version thereof or successors thereto, properly completed and duly
executed by such Bank (or Transferee) establishing that such payment is (i) not
subject to United States Federal withholding tax under the Code because such
payment is effectively connected with the conduct by such Bank (or Transferee)
of a trade or business in the United States or (ii) totally exempt from United
States Federal withholding tax, or subject to a reduced rate of such tax under a
provision of an applicable tax treaty. Unless the Borrower and the Agent have
received forms or other documents satisfactory to them indicating that such
payments hereunder or under any Notes are not subject to United States Federal
withholding tax or are subject to such tax at a rate reduced by an applicable
tax treaty, the Borrower shall withhold taxes from such payments at the
applicable statutory rate.

          (g) The Borrower shall not be required to pay any additional amounts
to any Bank (or Transferee) in respect of United States Federal withholding tax
pursuant to



                                       45
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paragraph (a) above if the obligation to pay such additional amounts would not
have arisen but for a failure by such Bank (or Transferee) to comply with the
provisions of paragraph (f) above; provided, however, that the Borrower shall be
required to pay those amounts to any Bank (or Transferee) that it was required
to pay hereunder prior to the failure of such Bank (or Transferee) to comply
with the provisions of such paragraph (f).

          SECTION 2.19. Termination or Assignment of Commitments Under Certain
Circumstances. (a) Any Bank (or Transferee) claiming any additional amounts
payable pursuant to Section 2.12 or Section 2.18 or exercising its rights under
Section 2.13 shall use reasonable efforts (consistent with legal and regulatory
restrictions) to file any certificate or document requested by the Borrower or
to change the jurisdiction of its applicable lending office if the making of
such a filing or change would avoid the need for or reduce the amount of any
such additional amounts which may thereafter accrue or avoid the circumstances
giving rise to such exercise and would not, in the sole determination of such
Bank, be otherwise disadvantageous to such Bank (or Transferee).

          (b) In the event that any Bank shall have delivered a notice or
certificate pursuant to Section 2.12 or 2.13, or the Borrower shall be required
to make additional payments under Section 2.18 to any Bank (or Transferee) or to
the Agent with respect to any Bank (or Transferee), the Borrower shall have the
right, at its own expense, upon notice to such Bank (or Transferee) and the
Agent (a) to terminate the Commitment of such Bank (or Transferee) or (b) to
require such Bank (or Transferee) to transfer and assign without recourse (in
accordance with and subject to the restrictions contained in Section 9.04) all
its interests, rights and obligations under this Agreement (other than any
outstanding Auction Loans) to another financial institution which shall assume
such obligations; provided that (i) no such termination or assignment shall
conflict with any law, rule or regulation or order of any Governmental Authority
and (ii) the Borrower or the assignee, as the case may be, shall pay to the
affected Bank (or Transferee) in immediately available funds on the date of such
termination or assignment the principal of and interest accrued to the date of
payment on the Loans made by



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it hereunder and all other amounts accrued for its account or owed to it
hereunder.

ARTICLE III.  REPRESENTATIONS AND WARRANTIES

          The Borrower represents and warrants to each of the Banks that:

          SECTION 3.01. Organization; Powers. Each of the Borrower and the
Significant Subsidiaries (a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization, (b)
has all requisite power and authority to own its property and assets and to
carry on its business as now conducted and as proposed to be conducted, (c) is
qualified to do business in every jurisdiction where such qualification is
required, except where the failure so to qualify would not result in a Material
Adverse Effect, and (d) in the case of the Borrower, has the corporate power and
authority to execute, deliver and perform its obligations under each of the Loan
Documents and each other agreement or instrument contemplated thereby to which
it is or will be a party and to borrow hereunder.

          SECTION 3.02. Authorization. The execution, delivery and performance
by the Borrower of each of the Loan Documents and the borrowings hereunder
(collectively, the "Transactions") (a) have been duly authorized by all
requisite corporate and, if required, stockholder action and (b) will not (i)
violate (A) any provision of law, statute, rule or regulation the violation of
which could reasonably be expected to impair the validity and enforceability of
this Agreement or any other Loan Document or materially impair the rights of or
benefits available to the Banks under the Loan Documents, or of the certificate
or articles of incorporation or other constitutive documents or by-laws of the
Borrower or any Significant Subsidiary, (B) any order of any Governmental
Authority the violation of which could reasonably be expected to impair the
validity or enforce ability of this Agreement or any other Loan Document, or
materially impair the rights of or benefits available to the Banks under the
Loan Documents, or (C) any provision of any indenture or other material
agreement or instrument evidencing or relating to borrowed money to which the




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Borrower or any Significant Subsidiary is a party or by which any of them or any
of their property is or may be bound in a manner which could reasonably be
expected to impair the validity and enforceability of this Agreement or any
other Loan Document or materially impair the rights of or benefits available to
the Banks under the Loan Documents, (ii) be in conflict with, result in a breach
of or constitute (alone or with notice or lapse of time or both) a default under
any such indenture, agreement or other instru ment in a manner which could
reasonably be expected to impair the validity and enforceability of this
Agreement or any other Loan Document or materially impair the rights of or
benefits available to the Banks under the Loan Documents or (iii) result in the
creation or imposition under any such indenture, agreement or other instrument
of any Lien upon or with respect to any property or assets now owned or
hereafter acquired by the Borrower.

          SECTION 3.03. Enforceability. This Agreement has been duly executed
and delivered by the Borrower and constitutes, and each other Loan Document when
executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms.

          SECTION 3.04. Governmental Approvals. No action, consent or approval
of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except
such as have been made or obtained and are in full force and effect.

          SECTION 3.05. Financial Statements. The Borrower has heretofore
furnished to the Banks its consolidated balance sheets and statements of income
and statements of cash flow as of and for the fiscal year ended December 31,
1999, audited by and accompanied by the opinion of Deloitte & Touche,
independent public accountants. Such financial statements present fairly the
financial condition and results of operations of the Borrower and its
consolidated subsidiaries as of such dates and for such periods. Such balance
sheets and the notes thereto, together with the Borrower's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, reflect all liabilities,
direct or contingent, of the Borrower and its consolidated Subsidiaries as of
the dates thereof which are material on a



                                       48
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consolidated basis. Such financial statements were prepared in accordance with
GAAP applied (except as noted therein) on a consistent basis.

          SECTION 3.06. No Material Adverse Change. Except as disclosed in the
Borrower's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, in the Borrower's Form 10-Q for the fiscal quarter ended March 31, 2000
and in any document filed prior to the date of this Agreement pursuant to
Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, there has
been no change in the business, assets, operations or financial condition of the
Borrower and the Subsidiaries, taken as a whole, since December 31, 1999, which
could reasonably be expected to have a material adverse effect on the
creditworthiness of the Borrower.

          SECTION 3.07. Litigation; Compliance with Laws. (a) Except as set
forth in the Annual Report of the Borrower on Form 10-K for the year ended
December 31, 1999, in the Borrower's Form 10-Q for the fiscal quarter ended
March 31, 2000 or in any document filed prior to the date of this Agreement
pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
there are not any actions, suits or proceedings at law or in equity or by or
before any Governmental Authority now pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any Subsidiary or any
business, property or rights of any such person (i) which involve any Loan Docu
ment or the Transactions or (ii) which could reasonably be anticipated,
individually or in the aggregate, to result in a Material Adverse Effect.

          (b) Neither the Borrower nor any of the Subsidiaries is in violation
of any law, rule or regulation, or in default with respect to any judgment,
writ, injunction or decree of any Governmental Authority, where such violation
or default would be reasonably likely to result in a Material Adverse Effect.

          SECTION 3.08. Federal Reserve Regulations. (a) Neither the Borrower
nor any of the Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying Margin Stock.



                                       49
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          (b) No part of the proceeds of any Loan will be used, whether directly
or indirectly, and whether immediately, incidentally or ultimately, (i) to
purchase or carry Margin Stock or to extend credit to others for the purpose of
purchasing or carrying Margin Stock or to refund indebtedness originally
incurred for such purpose, or (ii) for any purpose which entails a violation of,
or which is inconsistent with, the provisions of the Regulations of the Board,
including Regulation U or X.

          SECTION 3.09. Investment Company Act; Public Utility Holding Company
Act. The Borrower is not (a) an "investment company" as defined in, or subject
to regulation under, the Investment Company Act of 1940 or (b) subject to
regulation as a "holding company" under the Public Utility Holding Company Act
of 1935.

          SECTION 3.10. Use of Proceeds. The Borrower will use the proceeds of
the Loans only for the purposes specified in the preamble to this Agreement.

          SECTION 3.11. No Material Misstatements. No information, report,
financial statement, exhibit or schedule furnished by or on behalf of the
Borrower to the Agent or any Bank in connection with the negotiation of any Loan
Document or included therein or delivered pursuant thereto contained, contains
or will contain any material misstatement of fact or, when considered together
with all reports theretofore filed with the Securities and Exchange Commission,
omitted, omits or will omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were, are
or will be made, not misleading.

          SECTION 3.12. Employee Benefit Plans. Each of the Borrower and its
ERISA Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred as to which the Borrower or any
ERISA Affiliate was required to file a report with the PBGC, and the present
value of all benefit liabilities under each Plan (based on those assumptions
used to fund such Plan) did not, as of the last annual valuation date applicable
thereto, exceed by more than $10,000,000 the



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value of the assets of such Plan.

          SECTION 3.13. Environmental and Safety Matters. Each of the Borrower
and each Subsidiary has complied with all Federal, state, local and other
statutes, ordinances, orders, judgments, rulings and regulations relating to
environmental pollution or to environmental or nuclear regulation or control or
to employee health or safety, except where noncompliance would not be reasonably
likely to result in a Material Adverse Effect. Neither the Borrower nor any
Subsidiary has received notice of any failure so to comply, except where
noncompliance would not be reasonably likely to result in a Material Adverse
Effect. The Borrower's and the Subsidiaries' plants do not manage any hazardous
wastes, hazardous substances, hazardous materials, toxic substances, toxic
pollutants or substances similarly denominated, as those terms or similar terms
are used in the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act, the
Clean Water Act or any other applicable law relating to environmental pollution
or employee health and safety, or any nuclear fuel or other radioactive
materials, in violation of any law or any regulations promulgated pursuant
thereto, where such violation would be reasonably likely to result in a Material
Adverse Effect. The Borrower is aware of no events, conditions or circumstances
involving environmental pollution or contamination or employee health or safety
that could reasonably be expected to result in a Material Adverse Effect. The
representations and warranties set forth in this Section 3.13 are, however,
subject to any matters, circumstances or events set forth in the Borrower's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999, in the
Borrower's Form 10-Q for the fiscal quarter ended March 31, 2000 and in any
document filed prior to the date of this Agreement pursuant to Sections 13(a),
14 or 15(d) of the Securities Exchange Act of 1934; provided, however, that the
inclusion of such matters, circumstances or events as exceptions (or any other
exceptions contained in the representations and warranties which refer to the
Borrower's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, in the Borrower's Form 10-Q for the fiscal quarter ended March 31, 2000 or
in any document filed prior to the date of this Agreement pursuant to



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Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934 shall not be
construed to mean that the Borrower has concluded that any such matter,
circumstance or effect is likely to result in a Material Adverse Effect.

          SECTION 3.14. Significant Subsidiaries. Schedule 3.14 sets forth as of
the date hereof a list of all Significant Subsidiaries of the Borrower and the
percentage ownership interest of the Borrower therein.


ARTICLE IV.  CONDITIONS OF LENDING

          The obligations of the Banks to make Loans hereunder are subject to
the satisfaction of the following conditions:

          SECTION 4.01. All Borrowings. On the date of each Borrowing, including
each Borrowing in which Loans are refinanced with new Loans as contemplated by
Section 2.02(e):

          (a) The Agent shall have received a notice of such Borrowing as
     required by Section 2.03.

          (b) The representations and warranties set forth in Article III hereof
     (except, in the case of a refinancing of Loans that does not increase the
     sum of the Revolving Credit Exposure and the Auction Loans of any Bank
     outstanding, the representations set forth in Sections 3.06 and 3.07) shall
     be true and correct in all material respects on and as of the date of such
     Borrowing with the same effect as though made on and as of such date,
     except to the extent such representations and warranties expressly relate
     to an earlier date.

          (c) The Borrower shall be in compliance with all the terms and
     provisions set forth herein and in each other Loan Document on its part to
     be observed or performed, and at the time of and immediately after such
     Borrowing no Event of Default or Default shall have occurred and be
     continuing.

Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date of



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such Borrowing as to the matters specified in paragraphs (b) and (c) of this
Section 4.01.

          SECTION 4.02. First Borrowing. On the date of this Agreement:

          (a) The Agent shall have received favorable written opinions of (i)
     Paine, Hamblen, Coffin, Brooke & Miller, counsel for the Borrower, and (ii)
     Thelen, Reid & Priest, special counsel to the Borrower, each dated the date
     of this Agreement and addressed to the Banks, to the effect set forth in
     Exhibits D-1 and D-2 hereto, and the Borrower hereby instructs such counsel
     to deliver such opinions to the Agent.

          (b) The Agent shall have received evidence satisfactory to it and set
     forth on Schedule 4.02(b) that the Borrower shall have obtained all
     consents and approvals of, and shall have made all filings and
     registrations with, any Governmental Authority required in order to
     consummate the Transactions, in each case without the imposition of any
     condition which, in the judgment of the Banks, could adversely affect their
     rights or interests hereunder.

          (c) All legal matters incident to this Agreement and the borrowings
     hereunder shall be satisfactory to the Banks and their counsel and to
     Cravath, Swaine & Moore, counsel for the Agent.

          (d) The Agent shall have received (i) a copy of the certificate or
     articles of incorporation, including all amendments thereto, of the
     Borrower, certified as of a recent date by the Secretary of State of the
     state of its organization, and a certificate as to the good standing of the
     Borrower as of a recent date, from such Secretary of State; (ii) a
     certificate of the Secretary or Assistant Secretary of the Borrower dated
     the Closing Date and certifying (A) that attached thereto is a true and
     complete copy of the by-laws of the Borrower as in effect on the Closing
     Date and at all times since a date prior to the date of the resolutions
     described in clause (B) below, (B) that attached thereto is a true and
     complete copy of resolutions duly adopted by the board of directors of the
     Borrower



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     authorizing the execution, delivery and performance of the Loan Documents
     and the borrowings hereunder, and that such resolutions have not been
     modified, rescinded or amended and are in full force and effect, (C) that
     the certificate or articles of incorporation of the Borrower have not been
     amended since the date of the last amendment thereto shown on the
     certificate of good standing furnished pursuant to clause (i) above, and
     (D) as to the incumbency and specimen signature of each officer executing
     any Loan Document or any other document delivered in connection herewith on
     behalf of the Borrower; (iii) a certificate of another officer as to the
     incumbency and specimen signature of the Secretary or Assistant Secretary
     executing the certificate pursuant to (ii) above; and (iv) such other
     documents as the Banks or their counsel or Cravath, Swaine & Moore, counsel
     for the Agent, may reasonably request.

          (e) The Agent shall have received a certificate, dated the Closing
     Date and signed by a Financial Officer of the Borrower, confirming
     compliance with the conditions precedent set forth in paragraphs (b) and
     (c) of Section 4.01.

          (f) The Agent shall have received all Fees and other amounts due and
     payable on or prior to the date of this Agreement, including all Fees
     accrued to the date hereof under the Pre-Restatement Credit Agreement, this
     Agreement or the fee schedule set forth in the invitation schedule and fee
     schedule dated May 12, 2000.


ARTICLE V.  AFFIRMATIVE COVENANTS

          The Borrower covenants and agrees with each Bank that so long as this
Agreement shall remain in effect or the principal of or interest on any Loan,
any Fees or any other expenses or any amounts payable under any Loan Document
shall be unpaid, unless the Required Banks shall otherwise consent in writing,
the Borrower will:

          SECTION 5.01. Existence; Businesses and Proper ties. (a) Do or cause
to be done all things



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necessary to preserve, renew and keep in full force and effect its legal
existence, except as otherwise expressly permitted under Section 6.02.

     (b) Do or cause to be done all things necessary to obtain, preserve, renew,
extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
utilized in the conduct of the Borrower's business except where the failure so
to obtain, preserve, renew, extend or maintain any of the foregoing would not
result in a Material Adverse Effect; maintain and operate such business in
substantially the manner in which it is presently conducted and operated, except
as otherwise expressly permitted under this Agreement; comply in all material
respects with all applicable laws, rules, regulations and orders of any
Governmental Authority, whether now in effect or hereafter enacted if failure to
comply with such requirements would result in a Material Adverse Effect; and at
all times maintain and preserve all property material to the conduct of such
business and keep such property in good repair, working order and condition and
from time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times; provided, however, that the Borrower may cause the discontinuance
of the operation or a reduction in the capacity of any of its facilities, or any
element or unit thereof including, without limitation, real and personal
properties, facilities, machinery and equipment, (i) if, in the judgment of the
Borrower, it is no longer advisable to operate the same, or to operate the same
at its former capacity, and such discontinuance or reduction would not result in
a Material Adverse Effect, or (ii) if the Borrower intends to sell and dispose
of its interest in the same in accordance with the terms of this Agreement and
within a reasonable time shall endeavor to effectuate the same.

          SECTION 5.02. Insurance. (a) Maintain insurance, to such extent and
against such risks, as is customary with companies in the same or similar
businesses and owning similar properties in the same general area in which the
Borrower operates and (b) maintain such other insurance as may be required by
law. All insurance required by this



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Section 5.02 shall be maintained with financially sound and reputable insurers
or through self-insurance; provided, however, that the portion of such insurance
constituting self-insurance shall be comparable to that usually maintained by
companies engaged in the same or similar businesses and owning similar
properties in the same general area in which the Borrower operates and the
reserves maintained with respect to such self-insured amounts are deemed
adequate by the officer or officers of the Borrower responsible for insurance
matters.

          SECTION 5.03. Taxes and Obligations. Pay and discharge promptly when
due all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits or in respect of its property, before the same shall
become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might give rise to a Lien
upon such properties or any part thereof; provided, however, that such payment
and discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrower shall, to
the extent required by GAAP, have set aside on its books adequate reserves with
respect thereto.

          SECTION 5.04. Financial Statements, Reports, etc. Furnish to the Agent
and each Bank:

          (a) within 105 days after the end of each fiscal year, its
     consolidated and consolidating balance sheets and related statements of
     income and statements of cash flow, showing the financial condition of the
     Borrower and its consolidated Subsidiaries as of the close of such fiscal
     year and the results of its operations and the operations of such
     Subsidiaries during such year, all audited by Deloitte & Touche or other
     independent public accountants of recognized national standing acceptable
     to the Required Banks and accompanied by an opinion of such accountants
     (which shall not be qualified in any material respect) to the effect that
     such consolidated financial statements fairly present the financial
     condition and results of operations of the Borrower on a consolidated basis
     (except as noted therein) in accordance with GAAP consistently applied;



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          (b) within 50 days after the end of each of the first three fiscal
     quarters of each fiscal year, its consolidated and, to the extent otherwise
     available, consolidating balance sheets and related statements of income
     and statements of cash flow, showing the financial condition of the
     Borrower and its consolidated subsidiaries as of the close of such fiscal
     quarter and the results of its operations and the operations of such
     subsidiaries during such fiscal quarter and the then elapsed portion of the
     fiscal year, all certified by one of its Financial Officers as fairly
     presenting the financial condition and results of operations of the
     Borrower on a consolidated basis in accordance with GAAP consistently
     applied, subject to normal year-end audit adjustments;

          (c) concurrently with any delivery of financial statements under (a)
     or (b) above, a certificate of the relevant accounting firm opining on or
     certifying such statements or Financial Officer (which certificate, when
     furnished by an accounting firm, may be limited to accounting matters and
     disclaim responsibility for legal interpretations) certifying that to the
     knowledge of the accounting firm or the Financial Officer, as the case may
     be, no Event of Default or Default has occurred or, if such an Event of
     Default or Default has occurred, specifying the nature and extent thereof
     and any corrective action taken or proposed to be taken with respect
     thereto;

          (d) promptly after the same become publicly available, copies of all
     periodic and other reports, proxy statements and other materials filed by
     it with the Securities and Exchange Commission, or any governmental
     authority succeeding to any of or all the functions of said Commission, or
     with any national securities exchange, or distributed to its share holders,
     as the case may be; and

          (e) promptly, from time to time, such other information regarding the
     operations, business affairs and financial condition of the Borrower or any
     Significant Subsidiary, or compliance with the terms of any Loan Document,
     as the Agent or any Bank may




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     reasonably request.

          SECTION 5.05. Litigation and Other Notices. Furnish to the Agent and
each Bank prompt written notice of the following:

          (a) any Event of Default or Default, specifying the nature and extent
     thereof and the corrective action (if any) proposed to be taken with
     respect thereto;

          (b) the filing or commencement of, or any written threat or notice of
     intention of any person to file or commence, any action, suit or
     proceeding, whether at law or in equity or by or before any Governmental
     Authority, against the Borrower or any Subsidiary thereof which could
     reasonably be anticipated to result in a Material Adverse Effect; and

          (c) any development that has resulted in, or could reasonably be
     anticipated to result in, a Material Adverse Effect.

          SECTION 5.06. ERISA. (a) Comply in all material respects with the
applicable provisions of ERISA and (b) furnish to the Agent and each Bank (i) as
soon as possible, and in any event within 30 days after any Responsible Officer
of the Borrower or any ERISA Affiliate either knows or has reason to know that
any Reportable Event has occurred that alone or together with any other
Reportable Event could reasonably be expected to result in liability of the
Borrower to the PBGC in an aggregate amount exceeding $10,000,000, a statement
of a Financial Officer setting forth details as to such Reportable Event and the
action proposed to be taken with respect thereto, together with a copy of the
notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after
receipt thereof, a copy of any notice the Borrower or any ERISA Affiliate may
receive from the PBGC relating to the intention of the PBGC to terminate any
Plan or Plans (other than a Plan maintained by an ERISA Affiliate which is
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) or to appoint a trustee to administer any Plan or Plans and
(iii) within 10 days after the due date for filing with the PBGC pursuant to
Section 412(n) of the Code of a notice of failure to make a required installment
or other



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payment with respect to a Plan, a statement of a Financial Officer
setting forth details as to such failure and the action proposed to be taken
with respect thereto, together with a copy of such notice given to the PBGC.

          SECTION 5.07. Maintaining Records; Access to Properties and
Inspections. Maintain all financial records in accordance with GAAP and permit
any representatives designated by any Bank to visit and inspect the financial
records and the properties of the Borrower at reasonable times and as often as
requested and to make extracts from and copies of such financial records, and
permit any representatives designated by any Bank to discuss the affairs,
finances and condition of the Borrower with the chief financial officer of the
Borrower, or other person designated by the chief financial officer, and
independent accountants therefor.

          SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans only for
the purposes set forth in the preamble to this Agreement.

          SECTION 5.09. Further Assurance. Pledge all the capital stock
(including any warrants, options or other rights entitling the Borrower to
purchase or acquire such capital stock) of Avista Capital, Inc. to the Agent for
the benefit of the Banks by August 15, 2000. Such pledge shall be made pursuant
to a pledge agreement in a form reasonably satisfactory to the Agent. Such
pledge shall not restrict, limit or encumber the Borrower's ability to conduct
any business activities of Avista Capital, Inc. or any of its affiliates
(subject to any restrictions on Avista Capital, Inc. under this Agreement as a
result of it being a Significant Subsidiary), including, but not limited to, its
decisions related to disposition of assets in whole or in part, mergers,
acquisitions, inter-company loans, dividends or other commitments.


ARTICLE VI.  NEGATIVE COVENANTS

          The Borrower covenants and agrees with each Bank that, so long as this
Agreement shall remain in effect or the principal of or interest on any Loan,
any Fees or any other expenses or amounts payable under any Loan Document shall
be unpaid, unless the Required Banks shall otherwise consent in



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writing, the Borrower will not:

          SECTION 6.01. Liens. Create, incur, assume or permit to exist any Lien
on any property or assets (including stock or other securities of any person,
including any Subsidiary) now owned or hereafter acquired by it or on any income
or revenues or rights in respect of any thereof, except:

          (a) Liens on property or assets of the Borrower created by the
     documents, instruments or agreements existing on the date hereof and which
     are listed as exhibits to the Borrower's Annual Report on Form 10-K for the
     fiscal year ended December 31, 1999, to the extent that such Liens secure
     only obligations arising under such existing documents, agreements or
     instruments;

          (b) any Lien existing on any property or asset prior to the
     acquisition thereof by the Borrower; provided that (i) such Lien is not
     created in contemplation of or in connection with such acquisition and (ii)
     such Lien does not apply to any other property or assets of the Borrower;

          (c) the Lien of the First Mortgage;

          (d) Liens permitted under the First Mortgage (whether or not such
     permitted Liens cover properties or assets subject to the Lien of the First
     Mortgage) and any other Liens to which the Lien of the First Mortgage is
     expressly made subject;

          (e) the Lien of any collateral trust mortgage or similar instrument
     which would be intended to eventually replace (in one transaction or a
     series of transactions) the First Mortgage (as amended, modified or
     supplemented from time to time, "Collateral Trust Mortgage") on properties
     or assets of the Borrower to secure bonds, notes and other obligations of
     the Borrower; provided that, so long as the First Mortgage shall constitute
     a Lien on properties or assets of the Borrower, the bonds, notes or other
     obligations issued under the Collateral Trust Mortgage (i) shall also be
     secured by an equal principal amount of bonds issued



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     under the First Mortgage or (ii) shall be issued against property additions
     not subject to the Lien of the First Mortgage;

          (f) Liens permitted under the Collateral Trust Mortgage (whether or
     not such permitted Liens cover properties or assets subject to the Lien of
     the Collateral Trust Mortgage) and any other Liens to which the Lien of the
     Collateral Trust Mortgage is subject;

          (g) Liens for taxes, assessments or governmental charges not yet due
     or which are being contested in compliance with Section 5.03;

          (h) carriers', warehousemen's, mechanic's, materialmen's, repairmen's
     or other like Liens arising in the ordinary course of business and securing
     obligations that are not due or which are being contested in compliance
     with Section 5.03;

          (i) pledges and deposits made in the ordinary course of business in
     compliance with workmen's compensation, unemployment insurance and other
     social security laws or regulations;

          (j) Liens incurred or created in connection with or to secure the
     performance of bids, tenders, trade contracts (other than for
     Indebtedness), leases, statutory obligations, surety and appeal bonds,
     performance bonds and other obligations of a like nature incurred in the
     ordinary course of business;

          (k) zoning restrictions, easements, rights-of-way, restrictions on use
     of real property and other similar encumbrances incurred in the ordinary
     course of business which, in the aggregate, are not substantial in amount
     and do not materially detract from the value of the property subject
     thereto or interfere with the ordinary conduct of the business of the
     Borrower or any of its Subsidiaries;

          (l) Liens (i) which secure obligations not assumed by the Borrower,
     (ii) on account of which the Borrower has not and does not expect to pay
     interest directly or indirectly and (iii) which exist upon real estate or




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     rights in or relating to real estate in respect of which the Borrower has a
     right-of-way or other easement for purposes of substations or transmission
     or distribution facilities;

          (m) rights reserved to or vested in any federal, state or local
     governmental body or agency by the terms of any right, power, franchise,
     grant, license, contract or permit, or by any provision of law, to
     recapture or to purchase, or designate a purchase of or order the sale of,
     any property of the Borrower or to terminate any such right, power,
     franchise, grant, license, contract or permit before the expiration
     thereof;

          (n) Liens of judgments covered by insurance, or upon appeal and
     covered by bond, or to the extent not so covered not exceeding at one time
     $10,000,000 in aggregate amount;

          (o) any Liens, moneys sufficient for the discharge of which shall have
     been deposited in trust with the trustee or mortgagee under the instrument
     evidencing such Lien, with irrevocable authority of such trustee or
     mortgagee to apply such moneys to the discharge of such Lien to the extent
     required for such purpose;

          (p) rights reserved to or vested in any federal, state or local
     governmental body or agency or other public authority to control or
     regulate the business or property of the Borrower;

          (q) any obligations or duties, affecting the property of the Borrower
     to any federal, state or local governmental body or agency or other public
     authority with respect to any authorization, permit, consent or license of
     such body, agency or authority, given in connection with the purchase,
     construction, equipping, testing and operation of the Borrower's utility
     property;

          (r) with respect to any property which the Borrower may hereafter
     acquire, any exceptions or reservations therefrom existing at the time of
     such acquisition or any terms, conditions, agreements,



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     covenants, exceptions and reservations expressed or provided in the deeds
     of other instruments, respectively, under and by virtue of which the
     Borrower shall hereafter acquire the same, none of which materially impairs
     the use of such property for the purposes for which it is acquired by the
     Borrower;

          (s) leases and subleases entered into in the ordinary course of
     business;

          (t) banker's Liens and other Liens in the nature of a right of setoff;

          (u) Liens resulting from any transaction permitted
     under Section 6.03(v);

          (v) renewals, replacements, amendments, modifications, supplements,
     refinancings or extensions of Liens set forth above to the extent that the
     principal amount of Indebtedness secured by such Lien immediately prior
     thereto is not increased and such Lien is not extended to other property
     (it being understood that such limitation does not apply to the Liens
     described in subsection (c), (e) or (u) above);

          (w) security deposits or amounts paid into trust funds for the
     reclamation of mining properties;

          (x) restrictions on transfer or use of properties and assets, first
     rights of refusal, and rights to acquire properties and assets granted to
     others;

          (y) non-consensual equitable Liens on the Borrower's tenant-in-common
     or other interest in joint projects;

          (z) Liens on the Borrower's tenant-in-common or other interest in
     joint projects incurred by the project sponsor without the express consent
     of the Borrower to such incurrence;

          (aa) cash collateral contemplated under Section 2.06(i) and the pledge
     of Avista Capital, Inc. stock contemplated under Section 5.09 of this
     Agreement and under Section 5.09 of the $120,000,000 Amended and



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     Restated Credit Agreement dated as of June 26, 2000 among the Borrower, the
     banks named therein and Toronto-Dominion (Texas), Inc., as agent; and

          (ab) Liens not expressly permitted in clauses (a) through (aa) of this
     Section 6.01 to secure Indebtedness of the Borrower, provided that the
     aggregate outstanding principal amount of the Indebtedness so secured does
     not at any one time exceed 5% of the total assets of the Borrower and its
     Subsidiaries, computed and consolidated in accordance with GAAP
     consistently applied.

          SECTION 6.02. Mergers, Consolidations and Acquisitions. Merge into or
consolidate with any other person, or permit any other person to merge into or
consolidate with it, or purchase, lease or otherwise acquire (in one transaction
or a series of transactions) all or substantially all of the assets of any other
person (whether directly by purchase, lease or other acquisition of all or
substantially all of the assets of such person or indirectly by purchase or
other acquisition of all or substantially all of the capital stock of such other
person) other than acquisitions in the ordinary course of the Borrower's
business, except that if (A) at the time thereof and immediately after giving
effect thereto no Event of Default or Default shall have occurred and be
continuing and (B) in the case of any merger or consolidation involving the
Borrower in which the Borrower is not the surviving corporation, the surviving
corporation shall assume in writing the obligations of the Borrower under this
Agreement and any other Loan Documents, then (a) the Borrower may merge or
consolidate with any Subsidiary in a transaction in which the Borrower is the
surviving corporation, (b) the Borrower may purchase, lease or otherwise acquire
from any Subsidiary all or substantially all of its assets and may purchase or
otherwise acquire all or substantially all of the capital stock of any person
who immediately thereafter is a Subsidiary,(c) the Borrower may merge with or
into, or consolidate with, any other person so long as (i) in the case where the
business of such other person, or an Affiliate of such other person, entirely or
primarily consists of an electric or gas utility business, the senior secured
long-term debt rating of the Borrower shall be at least BBB or higher by S&P and
Baa2 or higher by Moody's



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immediately after such merger or consolidation, or in the case of a merger or
consolidation in which the Borrower is not the surviving entity, the senior
secured long-term debt rating of the surviving entity or an Affiliate thereof
shall be at least BBB+ or higher by S&P and Baa1 or higher by Moody's
immediately after such merger or consolidation, or (ii) in the case where such
other person's business does not entirely or primarily consist of an electric or
gas utility business, the assets of such person at the time of such
consolidation or merger do not exceed 10% of the total assets of the Borrower
and its Subsidiaries after giving effect to such merger or consolidation,
computed and consolidated in accordance with GAAP consistently applied, and (d)
the Borrower may purchase, lease or otherwise acquire any or all of the assets
of any other person (and may purchase or otherwise acquire the capital stock of
any other person) so long as (i) the assets being purchased, leased or acquired
(or the assets of the person whose capital stock is being acquired) entirely or
primarily consist of electric or gas utility assets or (ii) in the case where
the assets being purchased, leased or acquired (or the assets of the person
whose capital stock is being acquired) do not entirely or primarily consist of
electric or gas utility assets, the assets being acquired (or the Borrower's
proportionate share of the assets of the person whose capital stock is being
acquired) do not exceed 10% of the total assets of the Borrower and its
Subsidiaries, after giving effect to such acquisition, computed and consolidated
in accordance with GAAP consistently applied.

          SECTION 6.03. Disposition of Assets. Sell, lease, transfer, assign or
otherwise dispose of (in one transaction or in a series of transactions), in any
fiscal year, assets (whether now owned or hereafter acquired) which, together
with the amount of all sales, leases, transfers, assignments or other
dispositions permitted under clause (c)(ii) of the definition of Subsidiary
Event in Article I (other than sales, leases, transfers, assignments or other
dispositions permitted under clauses (c)(ii) (A) through (C) in such
definition), exceed 10% of the assets of the Borrower and its Subsidiaries as of
the end of the most recent fiscal year, computed and consolidated in accordance
with GAAP consistently applied, except (i) the Borrower may, in any fiscal year,
sell, lease, transfer, assign or otherwise dispose of assets in the ordinary
course of



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business which, together with the amount of all sales, leases, transfers,
assignments or other dispositions in the ordinary course permitted under clause
(c)(ii)(A) of the definition of Subsidiary Event in Article I, do not exceed 5%
of the assets of the Borrower and its Subsidiaries as of the end of the most
recent fiscal year, computed and consolidated in accordance with GAAP
consistently applied, (ii) to the extent permitted under Section 5.03, 6.01 or
Section 6.02, (iii) the Borrower may sell, lease, transfer, assign or otherwise
dispose of its interest in the Washington Public Power Supply System Nuclear
Project No. 3 in accordance with the settlement agreement among the Borrower,
the Washington Public Power Supply System and Bonneville Power Administration,
as the same may be amended, modified or supplemented from time to time, (iv) the
Borrower may sell, lease, transfer, assign or otherwise dispose of its interests
in the Colstrip and Centralia Projects and related assets and (v) the Borrower
may sell, lease, transfer, assign or otherwise dispose (including by way of
capital contribution) of, or create, incur, assume or permit to exist Liens on,
receivables and related properties or interests therein.

          SECTION 6.04. Consolidated Total Debt to Consolidated Total
Capitalization Ratio. Permit the ratio of Consolidated Total Debt to
Consolidated Total Capitalization to be, at the end of any fiscal quarter,
greater than 0.60 to 1.00 for the preceding twelve-month period, and to remain
greater than 0.60 to 1.00 for a period of 30 days.

          SECTION 6.05. Public Utility Regulatory Borrowing Limits. Incur actual
borrowings or commitments or issued and outstanding debt of the Borrower in
excess of the amount authorized (i) by statute without necessity of public
utility commission approval and/or (ii) by orders of public utility commissions,
as in effect from time to time.

          SECTION 6.06. Guarantees. Incur Guarantees of or by the Borrower with
respect to Avista Energy, Inc. in excess of $50,000,000 in the aggregate or
Guarantees of or by the Borrower with respect to Avista Energy, Inc. with a
duration of one year or longer.

ARTICLE VII.  EVENTS OF DEFAULT


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          In case of the happening (and during the continuance) of any of the
following events ("Events of Default"):

          (a) any representation or warranty made or deemed made in or in
     connection with any Loan Document or the borrowings hereunder, or any
     representation, warranty, statement or information contained in any report,
     certificate, financial statement or other instrument furnished in
     connection with or pursuant to any Loan Document, shall prove to have been
     false or misleading in any material respect when so made, deemed made or
     furnished;

          (b) default shall be made in the payment of any principal of any Loan
     when and as the same shall become due and payable, whether at the due date
     thereof or at a date fixed for prepayment thereof or by acceleration
     thereof or otherwise;

          (c) default shall be made in the payment of any interest on any Loan
     or any Fee or any other amount (other than an amount referred to in (b)
     above) due under any Loan Document, when and as the same shall become due
     and payable, and such default shall continue unremedied for a period of
     five Business Days;

          (d) default shall be made in the due observance or performance by the
     Borrower of any covenant, condition or agreement contained in Section
     5.01(a) or 5.05 or in Article VI;

          (e) default shall be made in the due observance or performance by the
     Borrower of any covenant, condition or agreement contained in any Loan
     Document (other than those specified in (b), (c) or (d) above) and such
     default shall continue unremedied for a period of 30 days after notice
     thereof from the Agent or any Bank to the Borrower;

          (f) the Borrower or any Significant Subsidiary shall (i) fail to pay
     any principal or interest, regardless of amount, due in respect of any
     Indebtedness when the aggregate unpaid principal amount



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     is in excess of $25,000,000, when and as the same shall become due and
     payable (after expiration of any applicable grace period), or (ii) fail to
     observe or perform any other term, covenant, condition or agreement (after
     expiration of any applicable grace period) contained in any agreement or
     instrument evidencing or governing any such Indebtedness if the effect of
     any failure referred to in this clause (ii) is to cause, or to permit the
     holder or holders of such Indebtedness or a trustee on its or their behalf
     (with or without the giving of notice, the lapse of time or both) to cause,
     such Indebtedness to become due prior to its stated maturity;

          (g) an involuntary proceeding shall be commenced or an involuntary
     petition shall be filed in a court of competent jurisdiction seeking (i)
     relief in respect of the Borrower or any Significant Subsidiary, or of a
     substantial part of the property or assets of the Borrower or a Significant
     Subsidiary, under Title 11 of the United States Code, as now constituted or
     hereafter amended, or any other Federal or state bankruptcy, insolvency,
     receivership or similar law, (ii) the appointment of a receiver, trustee,
     custodian, sequestrator, conservator or similar official for the Borrower
     or any Significant Subsidiary or for a substantial part of the property or
     assets of the Borrower or a Significant Subsidiary or (iii) the winding-up
     or liquidation of the Borrower or any Significant Subsidiary; and such
     proceeding or petition shall continue undismissed, or an order or decree
     approving or ordering any of the foregoing shall be entered and continue
     unstayed and in effect, for a period of 60 or more days;

          (h) the Borrower or any Significant Subsidiary shall (i) voluntarily
     commence any proceeding or file any petition seeking relief under Title 11
     of the United States Code, as now constituted or hereafter amended, or any
     other Federal or state bankruptcy, insolvency, receivership or similar law,
     (ii) consent to the institution of, or fail to contest in a timely and
     appropriate manner, any proceeding or the filing of any petition described
     in (g) above, (iii) apply for or consent to the appointment of a receiver,
     trustee,



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     custodian, sequestrator, conservator or similar official for the Borrower
     or any Significant Subsidiary or for a substantial part of the property or
     assets of the Borrower or any Significant Subsidiary, (iv) file an answer
     admitting the material allegations of a petition filed against it in any
     such proceeding, (v) make a general assignment for the benefit of
     creditors, (vi) become unable, admit in writing its inability or fail
     generally to pay its debts as they become due or (vii) take any action for
     the purpose of effecting any of the foregoing;

          (i) a final judgment or judgments shall be rendered against the
     Borrower, any Significant Subsidiary or any combination thereof for the
     payment of money with respect to which an aggregate amount in excess of
     $25,000,000 is not covered by insurance and the same shall remain
     undischarged for a period of 30 consecutive days during which execution
     shall not be effectively stayed, or any action shall be legally taken by a
     judgment creditor to levy upon assets or properties of the Borrower or any
     Significant Subsidiary to enforce any such judgment;

          (j) a Reportable Event or Reportable Events, or a failure to make a
     required installment or other payment (within the meaning of Section
     412(n)(l) of the Code), shall have occurred with respect to any Plan or
     Plans that reasonably could be expected to result in liability of the
     Borrower to the PBGC or to a Plan in an aggregate amount exceeding
     $25,000,000 and, within 30 days after the reporting of any such Reportable
     Event to the Agent or after the receipt by the Agent of the statement
     required pursuant to Section 5.06, the Agent shall have notified the
     Borrower in writing that (i) the Required Banks have made a determination
     that, on the basis of such Reportable Event or Reportable Events or the
     failure to make a required payment, there are reasonable grounds (A) for
     the termination of such Plan or Plans by the PBGC, (B) for the appointment
     by the appropriate United States District Court of a trustee to administer
     such Plan or Plans or (C) for the imposition of a lien in favor of a Plan
     and (ii) as a result thereof an Event of Default exists hereunder; or a
     trustee shall be appointed by a United States



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     District Court to administer any such Plan or Plans; or the PBGC shall
     institute proceedings to terminate any Plan or Plans;

          (k) there shall occur a Subsidiary Event; or

          (l) a Change in Control shall occur;

then, and in every such event (other than an event with respect to the Borrower
described in paragraph (g) or (h) above), and at any time thereafter during the
continuance of such event, the Agent, at the request of the Required Banks,
shall, by notice to the Borrower, take either or both of the following actions,
at the same or different times: (i) terminate forthwith the Commitments and (ii)
declare the Loans then outstanding to be forthwith due and payable in whole or
in part, whereupon (A) the Commitments will automatically be terminated and (B)
the principal of the Loans so declared to be due and payable, together with
accrued interest thereon and any unpaid accrued Fees and all other liabilities
of the Borrower accrued hereunder and under any other Loan Document, shall
become forthwith due and payable, without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding; and in any event with respect to the Borrower
described in paragraph (g) or (h) above, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder and under any other Loan Document, shall
automatically become due and payable, without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding.


ARTICLE VIII. THE AGENT

          In order to expedite the various transactions contemplated by this
Agreement, Toronto Dominion (Texas), Inc. is hereby appointed to act as Agent on
behalf of the Banks. Each of the Banks hereby irrevocably authorizes and



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directs the Agent to take such action on behalf of such Bank under the terms and
provisions of this Agreement, and to exercise such powers hereunder as are
specifically delegated to or required of the Agent by the terms and provisions
hereof, together with such powers as are reasonably incidental thereto. The
Agent is hereby expressly authorized on behalf of the Banks, without hereby
limiting any implied authority, (a) to receive on behalf of each of the Banks
any payment of principal of or interest on the Loans outstanding hereunder and
all other amounts accrued hereunder paid to the Agent, and to distribute to each
Bank its proper share of all payments so received as soon as practicable; (b) to
give notice promptly on behalf of each of the Banks to the Borrower of any event
of default specified in this Agreement of which the Agent has actual knowledge
acquired in connection with its agency hereunder; and (c) to distribute promptly
to each Bank copies of all notices, agreements and other material as provided
for in this Agreement as received by such Agent.

          Neither the Agent nor any of its directors, officers, employees or
agents shall be liable to any Bank as such for any action taken or omitted by
any of them hereunder except for its or his own gross negligence or wilful
misconduct, or be responsible for any statement, warranty or representation
herein or the contents of any document delivered in connection herewith or be
required to ascertain or to make any inquiry concerning the performance or
observance by the Borrower of any of the terms, conditions, covenants or
agreements of this Agreement. The Agent shall not be responsible to the Banks
for the due execution, genuineness, validity, enforceability or effectiveness of
this Agreement or any other instrument to which reference is made herein. The
Agent shall in all cases be fully protected in acting, or refraining from
acting, in accordance with written instructions signed by the Required Banks,
and, except as otherwise specifically provided herein, such instructions and any
action taken or failure to act pursuant thereto shall be binding on all the
Banks. The Agent shall, in the absence of knowledge to the contrary, be entitled
to rely on any paper or document believed by it in good faith to be genuine and
correct and to have been signed or sent by the proper person or persons. Neither
the Agent nor any of its directors, officers, employees or agents shall have any
responsibility to the



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Borrower on account of the failure or delay in performance or breach by any Bank
of any of its obligations hereunder or to any Bank on account of the failure of
or delay in performance or breach by any other Bank or the Borrower of any of
their respective obligations hereunder or in connection herewith. The Agent may
execute any and all duties hereunder by or through agents or employees and shall
be entitled to advice of legal counsel selected by it with respect to all
matters arising hereunder and shall not be liable for any action taken or
suffered in good faith by it in accordance with the advice of such counsel.

          The Agent and its affiliates may accept deposits from, lend money to
and generally engage in any kind of business with the Borrower or other
affiliate thereof as if it were not the Agent.

          Each Bank recognizes that applicable laws, rules, regulations or
guidelines of governmental authorities may require the Agent to determine
whether the transactions contemplated hereby should be classified as "highly
lever aged" or assigned any similar or successor classification, and that such
determination may be binding upon the other Banks. Each Bank understands that
any such determination shall be made solely by the Agent based upon such factors
(which may include, without limitation, the Agent's internal policies and
prevailing market practices) as the Agent shall deem relevant and agrees that
the Agent shall have no liability for the consequences of any such
determination.

          Each Bank agrees (i) to reimburse the Agent in the amount of such
Bank's pro rata share (based on its Commitment hereunder) of any expenses
incurred for the benefit of the Banks by the Agent, including reasonable counsel
fees and compensation of agents and employees paid for services rendered on
behalf of the Banks, not reimbursed by the Borrower and (ii) to indemnify and
hold harmless the Agent and any of its directors, officers, employees or agents,
on demand, in the amount of its pro rata share, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against it in its capacity as the Agent or
any of them in any way relating to or arising out of this Agreement or any
action



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taken or omitted by it or any of them under this Agreement, to the extent not
reimbursed by the Borrower; provided, however, that no Bank shall be liable to
the Agent for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the gross negligence or wilful misconduct of the Agent or any of its
directors, officers, employees or agents.

          Each Bank acknowledges that it has, independently and without reliance
upon the Agent or any other Bank and based on such documents and information as
it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement. Each Bank also acknowledges that it will, independently and
without reliance upon the Agent or any other Bank based on such documents and
information as it shall deem appropriate at the time, continue to make its own
decisions in taking or not taking action under or based upon this Agreement, any
related agreement or any document furnished hereunder.

          The Agent may execute any of its duties under this Agreement by or
through agents or attorneys selected by them using reasonable care and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
The Agent shall not be responsible for the negligence or misconduct of any
agents or attorneys selected and authorized to act by it with reasonable care
unless the damage complained of directly results from an act or failure to act
on part of the Agent which constitutes gross negligence or wilful misconduct.
Delegation to an attorney or agent shall not release the Agent from its
obligation to perform or cause to be performed the delegated duty.

          The Documentation Agent and the Syndication Agent shall not have any
rights, powers, obligations, liabilities, responsibilities or duties under this
Agreement other than those applicable to all Banks as such. Without limiting the
foregoing, none of the Banks identified as "Documentation Agent" or "Syndication
Agent" shall have or be deemed to have any fiduciary relationship with any Bank.
Each Bank acknowledges that it has not relied, and will not rely, on any of the
Banks so identified in deciding to enter into this Agreement or in taking or not
taking action hereunder.


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ARTICLE IX.  MISCELLANEOUS

          SECTION 9.01. Notices. Notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed or sent by telecopy, graphic scanning or other telegraphic
communications equipment of the sending party, as follows:

          (a) if to the Borrower, to it at East 1411 Mission Avenue (99202),
     P.O. Box 3727, Spokane, Washington 99220, Attention of the Senior Vice
     President and Chief Financial Officer (Telecopy No. 509-482-4879);

          (b) if to the Agent, to it at 909 Fannin, Suite 1700, Houston, Texas
     77010, Attention of Kimberly Burleson (Telecopy No. 713-951-9921); and

          (c) if to a Bank, to it at its address (or telecopy number) set forth
     in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such
     Bank shall have become a party hereto.

All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or other telegraphic communications equipment of the sender, or on the
date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 9.01.

          SECTION 9.02. Survival of Agreement. All covenants, agreements,
representations and warranties, including, without limitation, any indemnities
and reimbursement obligations, made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Banks and shall survive the making by the



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Banks of the Loans, and the execution and delivery to the Banks of any Notes
evidencing such Loans, regardless of any investigation made by the Banks, or on
their behalf, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any Fee or any other amount
payable under this Agreement or any other Loan Document is outstanding and
unpaid and so long as the Commitments have not been terminated.

          SECTION 9.03. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Borrower and the Agent and when the
Agent shall have received copies hereof which, when taken together, bear the
signatures of each Bank, and thereafter shall be binding upon and inure to the
benefit of the Borrower, the Agent and each Bank and their respective successors
and assigns, except that the Borrower shall not have the right to assign its
rights hereunder or any interest herein without the prior consent of all the
Banks.

          SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and permitted assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower, the Agent or the Banks
that are contained in this Agreement shall bind and inure to the benefit of
their respective successors and permitted assigns.

          (b) Each Bank (including the Agent when acting as a Bank) may assign
to one or more assignees all or a portion of its interests, rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Credit Commitment and the same portion of the
applicable Loan or Loans at the time owing to it other than any Auction Loans,
which may, but need not, be assigned); provided, however, that (i) except in the
case of an assignment to a Bank or an Affiliate of such Bank, the Borrower and
the Agent must give their prior written consent to such assignment (which
consent shall not be unreasonably withheld), (ii) that no assignee of any Bank
shall be entitled to receive any greater payment or protection under Sections
2.12, 2.13(a), 2.14 or 2.18 than such Bank would have been entitled to receive
with respect to the rights assigned or otherwise transferred unless such
assignment or



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transfer shall have been made at a time when the circumstances giving rise to
such greater payment did not exist, (iii) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Bank's rights and
obligations under this Agreement, except that this clause (iii) shall not apply
to rights in respect of outstanding Auction Loans, (iv) the amount of the
Commitment of the assigning Bank subject to each such assignment (determined as
of the date the Assignment and Acceptance with respect to such assignment is
delivered to the Agent) shall not be less than $5,000,000 (or, if less, the
total amount of their Commitments), (v) the parties to each such assignment
shall execute and deliver to the Agent an Assignment and Acceptance and a
processing and recordation fee of $5,000 and (vi) the assignee, if it shall not
be a Bank, shall deliver to the Agent an Administrative Questionnaire. Upon
acceptance and recording pursuant to paragraph (e) of this Section 9.04, from
and after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five Business Days after the execution thereof,
(A) the assignee thereunder shall be a party hereto and, to the extent of the
interest assigned by such Assignment and Acceptance, have the rights and
obligations of a Bank under this Agreement and (B) the assigning Bank thereunder
shall, to the extent of the interest assigned by such Assignment and Acceptance,
be released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Bank's rights and obligations under this Agreement, such Bank shall cease to be
a party hereto but shall continue to be entitled to the benefits of Sections
2.12, 2.14, 2.18 and 9.05, as well as to any Fees accrued for its account and
not yet paid).

          (c) By executing and delivering an Assignment and Acceptance, the
assigning Bank thereunder and the assignee thereunder shall be deemed to confirm
to and agree with each other and the other parties hereto as follows: (i) such
assigning Bank warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Acceptance; (ii) except as set forth in (i) above,
such



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assigning Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of the Borrower or any Subsidiary or the
performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such Assignment and Acceptance; (v) such assignee will independently and
without reliance upon the Agent, such assigning Bank or any other Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (vi) such assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees that
it will perform in accordance with their terms all the obligations which by the
terms of this Agreement are required to be performed by it as a Bank.

          (d) The Agent shall maintain a copy of each Assignment and Acceptance
delivered to it including the recordation of the names and addresses of the
Banks, and the Commitment of, and principal amount of the Loans owing to,
each Bank pursuant to the terms hereof from time to time (the "Register"). The
Agent and the Banks may treat each person whose name is recorded in the Register
pursuant to the terms hereof as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower and
any Bank, at any reasonable time and from time to time upon reasonable prior
notice.


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          (e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Bank and an assignee, an Administrative Questionnaire
completed in respect of the assignee (unless the assignee shall already be a
Bank hereunder), the processing and recordation fee referred to in paragraph (b)
above and, if required, the written consent of the Borrower and the Agent to
such assignment, the Agent shall (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register and (iii) give prompt
notice thereof to the Banks. Upon the request of the assignee, the Borrower, at
its own expense, shall execute and deliver to the Agent, a new Note or Notes to
the order of such assignee in a principal amount equal to the applicable
Commitment assumed by it pursuant to such Assignment and Acceptance and, if the
assigning Bank has retained a Commitment, upon the request of the assigning
bank, the Borrower shall execute and deliver a new Note to the order of such
assigning Bank in a principal amount equal to the applicable Commitment retained
by it. Canceled Notes shall be returned to the Borrower.

          (f) Each Bank may without the consent of the Borrower or the Agent
sell participations to one or more banks or other entities in all or a portion
of its rights and obligations under this Agreement (including all or a portion
of its Commitment and the Loans owing to it and any Notes held by it); provided,
however, that (i) such Bank's obligations under this Agreement shall remain
unchanged, (ii) such Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) the participating banks or
other entities shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.12, 2.14 and 2.18 to the same extent as if
they were Banks (provided, that the amount of such benefit shall be limited to
the amount in respect of the interest sold to which the seller of such
participation would have been entitled had it not sold such interest) and (iv)
the Borrower, the Agent and the other Banks shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement, and such Bank shall retain the sole right to enforce the
obligations of the Borrower relating to the Loans and to approve any amendment,
modification or waiver of any provision of this Agreement (other than
amendments, modifications or waivers decreasing any fees payable



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hereunder or the amount of principal of or the rate at which interest is payable
on the Loans, extending any scheduled principal payment date or date fixed for
the payment of interest on the Loans or changing or extending the Commitments).

          (g) Any Bank or participant may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
9.04, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Borrower furnished to such Bank by
or on behalf of the Borrower; provided that, prior to any such disclosure of
information designated by the Borrower as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of such confidential information.

          (h) Notwithstanding anything to the contrary contained herein, any
Bank (a "Granting Bank") may grant to a special purpose funding vehicle (an
"SPC") the option to fund all or any part of any Loan that such Granting Bank
would otherwise be obligated to fund pursuant to this Agreement; provided that
(i) nothing herein shall constitute a commitment by any SPC to fund any Loan,
and (ii) if an SPC elects not to exercise such option or otherwise fails to fund
all or any part of such Loan, the Granting Bank shall be obligated to fund such
Loan pursuant to the terms hereof. The funding of a Loan by an SPC hereunder
shall utilize the Commitment of the Granting Bank to the same extent, and as if,
such Loan were funded by such Granting Bank. Each party hereto hereby agrees
that no SPC shall be liable for any indemnity or payment under this Agreement
for which a Bank would otherwise be liable for so long as, and to the extent,
the Granting Bank provides such indemnity or makes such payment. Notwithstanding
anything to the contrary contained in this Agreement, any SPC may disclose on a
confidential basis any non-public information relating to its funding of Loans
to any rating agency, commercial paper dealer or provider of any surety or
guarantee to such SPC. This paragraph may not be amended without the prior
written consent of each Granting Bank, all or any part of whose Loan is being
funded by an SPC at the time of such amendment.



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          (i) Any Bank may at any time assign for security purposes all or any
portion of its rights under this Agreement and any Notes issued to it to a
Federal Reserve Bank; provided that no such assignment shall release a Bank from
any of its obligations hereunder.

          (j) Subject to Section 6.02, the Borrower shall not assign or delegate
any of its rights or duties hereunder.

          SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay all
reasonable out-of-pocket expenses incurred by the Agent in connection with the
preparation of this Agreement and the other Loan Documents or in connection with
any amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions hereby contemplated shall be consummated) or
incurred by the Agent or any Bank in connection with the enforcement or
protection of their rights in connection with this Agreement and the other Loan
Documents or in connection with the Loans made or the Notes issued hereunder,
including the fees, charges and disbursements of Cravath, Swaine & Moore,
counsel for the Agent, and, in connection with any such amendment, modification
or waiver or any such enforcement or protection, the fees, charges and
disbursements of any other internal or external counsel for the Agent or any
Bank. The Borrower further agrees that it shall indemnify the Banks from and
hold them harmless against any documentary taxes, assessments or charges made by
any Governmental Authority by reason of the execution and delivery of this
Agreement or any of the other Loan Documents.

          (b) The Borrower agrees to indemnify the Agent and each Bank and each
of their respective directors, officers, employees and agents (each such person
being called an "Indemnitee") against, and to hold each Indemnitee harmless
from, any and all losses, claims, damages, liabilities and related expenses,
including reasonable counsel fees, charges and disbursements, incurred by or
asserted against any Indemnitee arising out of, in any way connected with, or as
a result of (i) the execution or delivery of this Agreement or any other Loan
Document or any agreement or instrument contemplated thereby, the



                                       80
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performance by the parties thereto of their respective obligations thereunder or
the consummation of the Transactions and the other transactions contemplated
thereby, (ii) the use of the proceeds of the Loans or (iii) any claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether or not any Indemnitee is a party thereto; provided that such indemnity
shall not, as to any Indemnitee, be available to the extent that such losses,
claims, damages, liabilities or related expenses are deter mined by a court of
competent jurisdiction by final and nonappealable judgment to have resulted from
the gross negligence or wilful misconduct of such Indemnitee.

          (c) The provisions of this Section 9.05 shall remain operative and in
full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or any investigation
made by or on behalf of the Agent or any Bank. All amounts due under this
Section 9.05 shall be payable on written demand therefor.

          SECTION 9.06. Right of Setoff. If an Event of Default shall have
occurred and be continuing and the Loans shall have been accelerated as set
forth in Article VII, each Bank is hereby authorized at any time and from time
to time, to the fullest extent permitted by law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by such Bank (or bank
Controlling such Bank) to or for the credit or the account of the Borrower
against any of and all the obligations of the Borrower now or hereafter existing
under this Agreement and other Loan Documents held by such Bank. The rights of
each Bank under this Section are in addition to other rights and remedies
(including other rights of setoff) which such Bank may have. Any Bank shall
provide the Borrower with written notice promptly after exercising its rights
under this Section.

          SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.

                                       81
   192

          SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Agent
or any Bank in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Agent and the Banks hereunder and
under the other Loan Documents are cumulative and are not exclusive of any
rights or remedies which they would otherwise have. No waiver of any provision
of this Agreement or any other Loan Document or consent to any departure by the
Borrower therefrom shall in any event be effective unless the same shall be
permitted by paragraph (b) below, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice or demand on the Borrower in any case shall entitle the Borrower to any
other or further notice or demand in similar or other circumstances.

          (b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Banks; provided, however, that no
such agreement shall (i) decrease the principal amount of, or extend the
maturity of or any scheduled principal payment date or date for the payment of
any interest on any Loan, or waive or excuse any such payment or any part
thereof, or decrease the rate of interest on any Loan, without the prior written
consent of each Bank affected thereby, (ii) change or extend the Commitment or
decrease the Commitment Fees of any Bank without the prior written consent of
such Bank, or (iii) amend or modify the provisions of Section 2.15, the
provisions of this Section or the definition of "Required Banks", without the
prior written consent of each Bank; provided further that no such agreement
shall amend, modify or otherwise affect the rights or duties of the Agent
hereunder without the prior written consent of the Agent. Each Bank and each
holder of a Note shall be bound by any waiver, amendment or modification
authorized by this Section regardless of whether its Note shall have been marked
to make reference thereto, and any consent by any Bank or holder of a Note
pursuant to this Section shall bind any



                                       82
   193

person subsequently acquiring a Note from it, whether or not such Note shall
have been so marked.

          SECTION 9.09. Interest Rate Limitation. Notwithstanding anything
herein or in any Notes to the contrary, if at any time the applicable interest
rate, together with all fees and charges which are treated as interest under
applicable law (collectively the "Charges"), as provided for herein or in any
other document executed in connection herewith, or otherwise contracted for,
charged, received, taken or reserved by any Bank, shall exceed the maximum
lawful rate (the "Maximum Rate") which may be contracted for, charged, taken,
received or reserved by such Bank in accordance with applicable law, the rate of
interest payable under any Note held by such Bank, together with all Charges
payable to such Bank, shall be limited to the Maximum Rate.

          SECTION 9.10. Entire Agreement. This Agreement and the other Loan
Documents constitute the entire contract between the parties relative to the
subject matter hereof. Any previous agreement among the parties with respect to
the subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
and thereto any rights, remedies, obligations or liabilities under or by reason
of this Agreement or the other Loan Documents.

          SECTION 9.11. Waiver of Jury Trial. Each party hereto hereby waives,
to the fullest extent permitted by applicable law, any right it may have to a
trial by jury in respect of any litigation directly or indirectly arising out
of, under or in connection with this Agreement or any of the other Loan
Documents. Each party hereto (a) certifies that no representative, agent or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver and (b) acknowledges that it and the other parties hereto have been
induced to enter into this Agreement and the other Loan Documents, as
applicable, by, among other things, the mutual waivers and certifications in
this Section 9.11.



                                       83
   194

          SECTION 9.12. Severability. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall endeavor
in good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.

          SECTION 9.13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract, and shall become effec
tive as provided in Section 9.03.

          SECTION 9.14. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.

          SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) The
Borrower hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that the Agent
or any Bank may otherwise have to bring any action or proceeding relating to
this Agreement or the other Loan Documents against the Borrower or its
properties in the courts of any



                                       84
   195

jurisdiction.

          (b) The Borrower hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this agreement or the other Loan Documents in any
New York State or Federal court. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.

          (c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.


          WITNESS the due execution hereof as of the date first above written.


                                   AVISTA CORPORATION,

                                   by  /s/ Ronald R. Peterson
                                     --------------------------------
                                     Name:  Ronald R. Peterson
                                     Title: Vice President and
                                            Treasurer


                                   TORONTO DOMINION (TEXAS),
                                   INC., as Agent,

                                   by   /s/ Jeffery R. Lents
                                     --------------------------------
                                     Name:  Jeffery R. Lents
                                     Title: Vice President


                                   THE BANK OF NEW YORK, as
                                   Documentation Agent,



                                       85
   196

                                   by  /s/ Steven Kalachman
                                     --------------------------------
                                     Name:  Steven Kalachman
                                     Title: Vice President


                                   BANK OF AMERICA, N.A, as
                                   Syndication Agent,

                                   by  /s/ Gary M. Tsuyuki
                                     --------------------------------
                                     Name:  Gary M. Tsuyuki
                                     Title: Managing Director

                                   TORONTO DOMINION (TEXAS), INC.,

                                   by  /s/ Jeffery R. Lents
                                     --------------------------------
                                     Name:  Jeffery R. Lents
                                     Title: Vice President


                                   THE BANK OF NEW YORK,

                                   by  /s/ Steven Kalachman
                                     --------------------------------
                                     Name:  Steven Kalachman
                                     Title: Vice President


                                   BANK OF AMERICA, N.A.,

                                   by /s/ Gary M. Tsuyuki
                                     --------------------------------
                                     Name:  Gary M. Tsuyuki
                                     Title: Managing Director


                                   FIRST SECURITY BANK, N.A.,

                                   by  /s/ Brian W. Cook
                                     --------------------------------
                                     Name:  Brian W. Cook
                                     Title:


                                       86
   197

                                   FLEET NATIONAL BANK,

                                   by /s/ Suresh V. Chivukula
                                     --------------------------------
                                     Name:  Suresh V. Chivukula
                                     Title: Senior Vice
                                            President



                                   MORGAN GUARANTY TRUST COMPANY
                                   OF NEW YORK,

                                   by  /s/ Robert Bottamedi
                                     --------------------------------
                                     Name:  Robert Bottamedi
                                     Title: Vice President


                                   U.S. BANK, NATIONAL ASSOCIATION,

                                   by  /s/ Wilfred C. Jack
                                     --------------------------------
                                     Name:  Wilfred C. Jack
                                     Title: Vice President


                                   WELLS FARGO BANK, N.A.,

                                   by  /s/ Tom Beil
                                     --------------------------------
                                     Name:  Tom Beil
                                     Title: Vice President


                                       87
   198

                                                                       EXHIBIT A





                                    [FORM OF]


                                      NOTE


$__________________                                               June 26, 2000
New York, New York


          FOR VALUE RECEIVED, the undersigned, AVISTA CORPORATION, a Washington
corporation (the "Borrower"), hereby promises to pay to the order of
_______________________ (the "Bank"), at the office of Toronto Dominion (Texas),
Inc., (the "Agent"), at 909 Fanning, Suite 1700, Houston, Texas 77010, (i) on
the last day of each Interest Period, as defined in the $140,000,000 Amended and
Restated Revolving Credit Agreement dated as of June 26, 2000 (the "Credit
Agreement"), among the Borrower, the Banks named therein and the Agent, the
aggregate unpaid principal amount of all Loans (as defined in the Credit
Agreement) made to the Borrower by the Bank pursuant to the Credit Agreement to
which such Interest Period applies and (ii) on the Expiration Date (as defined
in the Credit Agreement) the aggregate unpaid principal amount of all Loans made
to the Borrower by the Bank pursuant to the Credit Agreement, in lawful money of
the United States of America in immediately available funds, and to pay interest
from the date hereof on the principal amount hereof from time to time
outstanding, in like funds, at said office, at the rate or rates per annum and
payable on the dates provided in the Credit Agreement.

          The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at the rate or rates provided in the Credit Agreement.

          The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.


                                       88
   199

          All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates and
maturity dates thereof shall be endorsed by the holder hereof on the schedule
attached hereto and made a part hereof or on a continuation thereof which shall
be attached hereto and made a part hereof, or otherwise recorded by such holder
in its internal records; provided, however, that the failure of the holder
hereof to make such a notation or any error in such a notation shall not affect
the obligations of the Borrower under this Note.

          This Note is one of the Notes referred to in the Credit Agreement,
which, among other things, contains provisions for the acceleration of the
maturity hereof upon the happening of certain events, for optional and mandatory
prepayment of the principal hereof prior to the maturity hereof and for the
amendment or waiver of certain provisions of the Credit Agreement, all upon the
terms and conditions therein specified. This Note shall be construed in
accordance with and governed by the laws of the State of New York and any
applicable laws of the United States of America.


                                   AVISTA CORPORATION

                                   by
                                      ----------------------------
                                      Name:
                                      Title:



                                       89
   200

                               Loans and Payments





              Amount                                           Unpaid      Name of
               and                          Payments          Principal     Person
            Type/Class     Maturity    -------------------   Balance of     Making
 Date         of Loan        Date       Principal Interest       Note      Notation
- -----       -----------    --------    -------------------   ----------   ---------
                                                           








                                       90
   201

                                                                       EXHIBIT B




                                    [FORM OF]

                            ASSIGNMENT AND ACCEPTANCE


          Reference is made to the $140,000,000 Amended and Restated Credit
Agreement dated as of June 26, 2000 (as in effect from time to time, the "Credit
Agreement"), among Avista Corporation, a Washington corporation (the
"Borrower"), the banks listed on Schedule 2.01 thereto (the "Banks") and Toronto
Dominion (Texas), Inc., as agent for the Banks (in such capacity, the "Agent").
Terms defined in the Credit Agreement are used herein with the same meanings.

          1. The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse, from
the Assignor, effective as of the Effective Date set forth on the reverse
hereof, the interests set forth on the reverse hereof (the "Assigned Interest")
in the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the interests set forth on the reverse hereof in the
Commitment of the Assignor on the Effective Date and Revolving Loans [and
Auction Loans] owing to the Assignor which are outstanding on the Effective
Date, together with unpaid interest accrued on the assigned Revolving Loans [and
Auction Loans] to the Effective Date, and the amount, if any, set forth on the
reverse hereof of the Fees accrued to the Effective Date for the account of the
Assignor. Each of the Assignor and the Assignee hereby makes and agrees to be
bound by all the representations, warranties and agreements set forth in Section
9.04(c) of the Credit Agreement, a copy of which has been received by each such
party. From and after the Effective Date (i) the Assignee shall be a party to
and be bound by the provisions of the Credit Agreement and, to the extent of the
interests assigned by this Assignment and Acceptance, have the rights and
obligations of a Bank thereunder and under the Loan Documents and (ii) the
Assignor shall, to the extent of the interests assigned by this Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Credit Agreement.

          2. This Assignment and Acceptance is being delivered to the Agent
together with (i) if the Assignee is



                                       91
   202

organized under the laws of a jurisdiction outside the United States, the forms
specified in Section 2.18(f) of the Credit Agreement, duly completed and
executed by such Assignee, (ii) if the Assignee is not already a Bank under the
Credit Agreement, an Administrative Questionnaire in the form of Exhibit C to
the Credit Agreement and (iii) a processing and recordation fee of $5,000.

          3. This Assignment and Acceptance shall be governed by and construed
in accordance with the laws of the State of New York.


Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee's Address for Notices:

Effective Date of Assignment
(may not be fewer than 5 Business
Days after the Date of Assignment):


                                       92
   203



                                                            Percentage
                                                            Assigned of
                                                            Facility and
                                                            Commitment
                                                            Thereunder (set
                                                            forth, to at
                                                            least 8 decimals,
                              Principal Amount              as a percentage
                              Assigned (and                 of the Facility
                              identifying                   and the aggregate
                              information as                Commitments of
                              to individual                 all Banks
Facility                      Auction Loans)                thereunder)
- ----------------              -----------------             ------------------
                                                      
Commitment Assigned:                $                               %
Revolving Loans:                    $                               %
Auction Loans:                      $                               %
Fees Assigned (if any):             $                               %



The terms set forth above and on
the reverse side hereof are
hereby agreed to:                                 Accepted:


_________________________, as Assignor            TORONTO DOMINION (TEXAS),
                                                  INC., as Agent

By:____________________________                   By:_________________________
   Name:                                             Name:
   Title:                                            Title:


________________________, as Assignee                Title:



By:____________________________
   Name:


                                       93
   204

AVISTA CORPORATION


By:_________________________
   Name:
   Title:



                                       94
   205

                                                                       EXHIBIT C





                          Administrative Questionnaire



                                       95
   206

                                                                     EXHIBIT D-1





                       Opinion of Counsel for the Borrower





                                       96
   207

                                                                     EXHIBIT D-2

                   Opinion of Special Counsel to the Borrower




                                       97
   208

                                                                   SCHEDULE 2.01





                                      Banks



Bank                                                     Commitment
- ----                                                     ----------
                                                     
Toronto Dominion (Texas), Inc.                          $21,550,000.00
909 Fanning
Suite 1700
Houston, TX 77010
Attention: Ms. Kimberly Burleson

Telecopy:  (713) 951-9921

   With copies to:

   Toronto-Dominion Bank U.S.A. Division
   31 West 52nd Street
   New York, NY 10019-6101

   Attention:  Mr. Peter Cody
   Telecopy:  (212) 262-1929

Bank of America, N.A.                                  $21,550,000.00
555 California Street
41st Floor
San Francisco, CA 94104

Attention:  Gary Tsuyuki
Telecopy:  (415) 622-0632

The Bank of New York                                   $21,550,000.00
One Wall Street
New York, NY 10286

Attention:  Ms. Trisha E. Hardy
Telecopy:  (212) 635-7923

First Security Bank, N.A.                              $8,075,000.00
119 North 9th Street
Boise, ID 83730

Attention:  Mr. Brian Cook
Telecopy:  (509) 353-2472

Fleet National Bank                                    $13,475,000.00
100 Federal Street
Boston, MA 02110




                                       98
   209

                                                    
Attention: Leroy Gayle
Telecopy: (617) 434-3652

Morgan Guaranty Trust Company of New York              $13,475,000.00
60 Wall Street
New York, NY 10261

Attention:  Mr. Robert Bottamedi
Telecopy:  (212) 640-5010

U.S. Bank                                              $10,750,000.00
1420 Fifth Avenue
11th Floor
WWH276
Seattle, WA 98101

Attention:  Mr. Wilfred Jack
Telecopy:  (206) 344-3654

Wells Fargo Bank, National Association                 $10,750,000.00
524 W. Riverside Avenue
Suite 800
8th Floor
Spokane, WA 99210

Attention:  Mr. Tom Beil
Telecopy:  (509) 455-5762

                                                       ---------------
                                                       $121,175,000.00



                                       99
   210
                                                                   SCHEDULE 3.14





                            Significant Subsidiaries




   Name                       Percent Ownership
   ----                       -----------------
                           
Avista Capital, Inc.               100%



                                      100
   211

                                SCHEDULE 4.02(b)





       Statutes and Orders of Governmental Authorities


1. Statute of Washington authorizing borrowings of one year or less without
approval and/or Order(s) of the Washington Utilities and Transportation
Commission.

2. Statute of Oregon authorizing borrowings of one year or less without approval
and/or Order(s) of the Oregon Public Utility Commission.

3. Statute of Idaho authorizing borrowings of one year or less without approval
and/or Order(s) of the Idaho Public Utilities Commission.

4. Statute of California authorizing borrowings of one year or less without
approval and/or Order(s) of the California Public Utilities Commission.



                                      101

   1
                                                                      EXHIBIT 12

                               AVISTA CORPORATION

         Computation of Ratio of Earnings to Fixed Charges and Preferred
                              Dividend Requirements
                                  Consolidated
                             (Thousands of Dollars)





                                                                 Years Ended December 31
                                              ----------------------------------------------------------------
                                                2000          1999          1998          1997          1996
                                              --------      --------      --------      --------      --------
                                                                                       
Fixed charges, as defined:
     Interest on long-term debt               $ 65,314      $ 62,032      $ 66,218      $ 63,413      $ 60,256
     Amortization of debt expense
       and premium - net                         3,409         3,044         2,859         2,862         2,998
     Interest portion of rentals                 4,324         4,645         4,301         4,354         4,311
                                              --------      --------      --------      --------      --------

         Total fixed charges                  $ 73,047      $ 69,721      $ 73,378      $ 70,629      $ 67,565
                                              ========      ========      ========      ========      ========


Earnings, as defined:
     Net income                               $ 91,679      $ 26,031      $ 78,139      $114,797      $ 83,453
     Add (deduct):
       Income tax expense                       73,461        16,740        43,335        61,075        49,509
       Total fixed charges above                73,047        69,721        73,378        70,629        67,565
                                              --------      --------      --------      --------      --------

         Total earnings                       $238,187      $112,492      $194,852      $246,501      $200,527
                                              ========      ========      ========      ========      ========


Ratio of earnings to fixed charges                3.26          1.61          2.66          3.49          2.97


Fixed charges and preferred
   dividend requirements:
     Fixed charges above                      $ 73,047      $ 69,721      $ 73,378      $ 70,629      $ 67,565
     Preferred dividend requirements (1)        42,753        35,149        13,057         8,261        12,711
                                              --------      --------      --------      --------      --------

         Total                                $115,800      $104,870      $ 86,435      $ 78,890      $ 80,276
                                              ========      ========      ========      ========      ========



Ratio of earnings to fixed charges
  and preferred dividend requirements             2.06          1.07          2.25          3.12          2.50



(1) Preferred dividend requirements have been grossed up to their pre-tax level.

   1
                                                                      Exhibit 21


                               Avista Corporation

                           SUBSIDIARIES OF REGISTRANT




           Subsidiary                                    State of Incorporation
- -----------------------------------                      -----------------------
                                                      
Avista Capital, Inc.                                     Washington

Avista Advantage, Inc.                                   Washington

Avista Communications, Inc.                              Washington

Avista Development, Inc.                                 Washington

Avista Energy, Inc.                                      Washington

Avista Laboratories, Inc.                                Washington

Avista Power, Inc.                                       Washington

Avista Services, Inc.                                    Washington

Avista Turbine Power, Inc.                               Washington

Avista Ventures, Inc.                                    Washington

Pentzer Corporation                                      Washington

WWP Receivables Corp.                                    Washington