Avista Energy had a difficult second quarter, bringing in abouthalf the net income ($8.5 million) it posted in the second quarterof last year ($15.6 million), mainly because of an $11.6 millionnet loss in its marketing and trading division and costs associatedwith expanding its non-regulated businesses. But CEO T. M. Matthewssaid he’s comfortable that earnings this year will fall within therange of securities analysts’ current estimates, which are between$1.25 and $1.35 per share. He also predicted the company is in forsome significant changes ahead.

“We are in a multi-year process of transforming our company froma regional utility into a national energy, information andtechnology company,” he said. “In meeting our objectives, we willlikely continue to see some quarter-to-quarter earnings volatilityin the near term.”

“Whether the analysts like it or not, I cannot be worried aboutquarter-to-quarter earnings, but I am worried about where I’m goingto be in three years,” he added in a recent interview with NGI.

Since he came over from Dynegy last summer, Matthews has helpedthe Avista board make some tough decisions, such as chopping thecompany’s dividend and sinking lots of cash into expensivenon-regulated endeavors.

Matthews said he recently terminated merger discussions withfour potential partners in the Pacific Northwest region but expectsto complete a merger with another regional utility in the nearfuture. The current premiums are still a little too rich forAvista, he said. “Unless it makes fundamental economic sense, don’tdo a deal just to do one. So we decided to back off and acceleratethe growth of the technology companies.”

He noted that Avista’s utility operations are some of the bestin the nation. “We’re the lowest cost provider in gas and power.[We have] the highest customer service ratings, the lowest prices,the best customer call centers, but we cover the inland empire andthat area is not growing. So we have to do something to transformthe company for both growth and survival.

“Our utility is very healthy but we’re using cash to grow thesenew businesses – about eight to 10 cents a share for research anddevelopment in four major ventures: Internet, fiber optics,telecommunications and distributed generation fuel cells.”

The utility division posted income available to common stock of$15.9 million during the second quarter compared with $9.5 millionin 2Q95. But improvements in energy delivery and generation wereoffset by continued losses in marketing and trading. Avista’strading and marketing division had a $19.2 million net loss for thefirst half of the year compared to $6.1 million in net incomeduring the same period last year. Avista attributed the losses to”weak energy prices and the lack of volatility within virtually allcommodities.” It saw improvements near the end of the secondquarter and expects improvements for the remainder of 1999. Despitethe division’s setback, Matthews said marketing and trading is”fundamental to our company’s ultimate goal of becoming afull-service energy services provider.”

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