AVISTA CORP

Resource Optimization

We engage in resource optimization, which involves the selection from available energy resources to serve our load obligations and the use of these resources to capture economic value through wholesale market transactions, which is ultimately intended to lower net power and natural gas supply costs. Our resource optimization transactions can take the form of physical sales and purchases of electric capacity and energy and fuel for electric generation, as well as financial derivative contracts related to capacity, energy, fuel and fuel transportation. See Item 1. "Business - Avista Utilities - Electric Operations - General".

We typically enter into multiple transactions simultaneously to capture value. Even though these transactions are considered together when determining the net impact, they are recorded in separate items within components of utility operating revenue and resource costs and can cause fluctuations in each item. This was experienced in 2023, which included gains and losses on financial derivative contracts in certain line items below (such as wholesale sales and purchases of power and natural gas, sales of fuel, and other fuel costs). The ERM, PCA and PGAs are based on net supply costs and consider all transactions related to resource procurement and optimization (both physical and financial).

Utility Operating Revenues

The following graphs present Avista Utilities' electric operating revenues and MWh sales for 2023 and 2022, respectively (dollars in millions and MWhs in thousands):

(1)

This balance includes public street and highway lighting, which is considered part of retail electric revenues, and deferrals/amortizations to customers related to federal income tax law changes.

Total electric operating revenues in the graph above include intracompany sales of $6.5 million and $11.7 million for 2023 and 2022, respectively.

The following table presents the current year deferrals and the amortization of prior year decoupling balances reflected in utility electric operating revenues for the years ended December 31 (dollars in thousands):

(a)

Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.

(b)

Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.

Total electric revenues increased $25.3 million for 2023 as compared to 2022. The primary differences in the results for these periods were as follows:

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a $17.7 million increase in retail electric revenues due to an increase in revenue per MWh (increased revenues $38.0 million), partially offset by a decrease in total MWhs sold (decreased revenues $20.3 million).

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The decrease in total retail MWhs sold was primarily the result of decreased customer use in the winter months due to weather that was warmer than the prior year. Heating degree days in Spokane during 2023 were 8 percent below historical average, compared to 4 percent above historical average in 2022. This was partially offset by increased usage in summer months as the weather was warmer than the prior year, with Spokane cooling degree days at 39 percent above historical average compared to 33 percent above historical average in the prior year. Compared to 2022, total use per residential customer decreased 4.5 percent, and total use per commercial customer decreased 3.0 percent.

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The increase in revenue per MWh was primarily due to our general rate cases, as well as the ERM surcharge to customers that started in 2023.

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a $70.5 million increase in wholesale electric revenues due to an increase in sales prices (increased revenues $43.6 million), and an increase in sales volumes (increased revenues $26.9 million). The increase in volumes was due to resource optimization activities.

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a $110.2 million decrease in sales of fuel due to thermal generation resource optimization activities, including net financial losses on derivative instruments resulting from commodity price volatility early in the year.

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a $44.3 million increase in electric decoupling revenue. Rebates decreased in 2023 due to lower usage by residential customers compared to the prior year, and amortizations of the prior year rebate balances in 2023 compared to amortizing a surcharge balance in 2022 increased revenues.

The following graphs present Avista Utilities' natural gas operating revenues and therms delivered for 2023 and 2022, respectively (dollars in millions and therms in thousands):

(1)

This balance includes interruptible and industrial revenues, which are considered part of retail natural gas revenues, and deferrals/amortizations to customers related to federal income tax law changes.

Total natural gas operating revenues in the graph above include intracompany sales of $33.4 million and $54.8 million for 2023 and 2022, respectively.

The following table presents the current year deferrals and the amortization of prior year decoupling balances reflected in natural gas operating revenues for the years ended December 31 (dollars in thousands):

(a)

Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.

(b)

Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.

Total natural gas revenues decreased $12.9 million for 2023 as compared to 2022. The primary differences in the results for these periods were as follows:

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a $72.1 million increase in retail natural gas revenues (including industrial, which is included in other) due to increased retail rates (increased revenues $97.9 million), partially offset by decreased sales volumes (decreased revenues $25.8 million).

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Retail rates increased due to PGA rate increases (which do not impact utility margin), as well as the effects of our general rate cases.

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Retail natural gas sales decreased primarily due to lower residential and commercial usage due to warmer weather. Compared to 2022, residential use per customer decreased 7.9 percent and commercial use per customer decreased 6.8 percent. Heating degree days in Spokane during 2023 were 8 percent below historical average, compared to 4 percent above historical average in 2022.

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a $77.9 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues $74.1 million) and a decrease in volumes (decreased revenues $3.8 million). The decrease in prices includes the impact of losses on financial derivative instruments associated with our hedging activities, which nets with our wholesale revenues. Differences between revenues and costs from sales of resources in excess of retail load requirements and from resource optimization are accounted for through the PGA mechanisms.

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a $6.0 million decrease in decoupling revenues due to a rebate recognized in 2023 related to increased customer usage during the first quarter of 2023, compared to a surcharge recognized in 2022. In 2023 we also recognized higher amortizations of previous surcharges balances.

Utility Resource Costs

The following graph presents Avista Utilities' electric resource costs for 2023 and 2022, respectively (dollars in millions):

Total electric resource costs in the graph above include intracompany resource costs of $33.4 million and $54.8 million for 2023 and 2022, respectively.

Total electric resource costs decreased $34.6 million for 2023 as compared to 2022. The primary differences in the results for these periods were as follows:

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a $26.5 million increase in power purchased due to an increase in wholesale prices (increased costs by $25.6 million), and an increase in the volume of power purchases (increased costs by $0.9 million).

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a $52.0 million decrease in fuel for generation primarily due to decreased natural gas prices. This was partially offset by an increase in thermal generation volumes due in part to decreased hydroelectric generation during the year.

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a $57.2 million decrease in other fuel costs, including gains on financial derivative instruments associated with our hedging activities. This represents fuel and the related derivative instruments that were purchased for generation but later sold when conditions indicated that it was more economical to sell the fuel as part of the resource optimization process. When the fuel or related derivative instruments are sold, that revenue is included in sales of fuel.

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a $48.1 million increase in other electric resource costs, primarily related to a decrease in the deferral of power supply costs above those authorized under the ERM and PCA mechanisms, as well as increased amortizations of surcharge balances.

The following graph presents Avista Utilities' natural gas resource costs for 2023 and 2022, respectively (dollars in millions):

Total natural gas resource costs in the graph above include intracompany resource costs of $6.5 million and $11.7 million for 2023 and 2022, respectively.

Total natural gas resource costs decreased $25.7 million for 2023 as compared to 2022. The primary differences in the results for these periods were as follows:

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a $63.5 million decrease in natural gas purchased due to a decrease in the price of natural gas (decreased costs by $47.0 million) and a decrease in total therms purchased (decreased costs $16.5 million).

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a $37.8 million increase in other costs, primarily due to the amortization of previously deferred costs.

Utility Margin

The following table reconciles Avista Utilities' operating revenues, as presented in “Note 24 of the Notes to Consolidated Financial Statements” to the Non-GAAP financial measure utility margin for the years ended December 31 (dollars in thousands):

Electric utility margin increased $60.0 million and natural gas utility margin increased $12.8 million.

Electric utility margin increased primarily due to our general rate cases, as well as customer growth. A small portion of the increase was due to lower net power supply costs. In 2023, we had a $8.4 million pre-tax expense under the ERM, compared to a $10.9 million pre-tax expense in 2022.

Natural gas utility margin increased primarily due to customer growth and our general rate cases.

Intracompany revenues and resource costs represent purchases and sales of natural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation of total results for Avista Utilities and in the consolidated financial statements but are included in the separate results for electric and natural gas presented above.