Like any decent sports team, Spokane, WA-based Avista Corp. posted more wins than losses this month in the wake of selling its trading/marketing arm, Avista Energy, to Shell’s Coral Energy Holding LP. Nevertheless, on a preliminary basis, Avista Energy showed a loss of 14 cents/diluted share for the first quarter this year, compared to 10 cents/diluted share in profits for the same period last year, the parent company reported last Wednesday. The Avista utility unit also lost a state of Washington court fight over a proposed new electric transmission line.

In the win column, Avista Corp. overall showed net income of 26 cents/diluted share for the quarter, compared to 64 cents/diluted share for the same period in 2006. In addition, its outlook was raised to “positive” by Standard & Poor’s Ratings Services on news of the Coral sale, and S&P found there would be no change in either firms’ ratings (Coral at “A-” and Avista at “BB+”).

“An exit from energy and trading operations is expected to reduce Avista’s consolidated business risks and could result in an improvement in the company’s business profile score,” said S&P credit analyst Anne Selting, in the credit rating agency’s San Francisco office. Selting noted that “meaningful improvement” in Avista’s financial profile is not expected before next year, but the Coral sale should help the “ratings trajectory.”

Earnings were off at Avista Utilities, too (37 cents/diluted share this quarter vs. 53 cents/diluted share in the first quarter last year). Nevertheless, CEO Gary Ely said the earnings for the other segments met his expectations and “are on track to meet the earnings targets for the rest of the year,” while Avista Energy’s preliminary results for the first quarter are “below our expectations.” The utility earnings drop was attributed primarily to “a decrease in gross electricity margin” due to higher fuel costs than what was assumed in the utility’s retail rates.

Ultimately, the Coral sale will allow for more investment in Avista’s core natural gas and electricity utility business with the injection of the net proceeds from the sale, Ely said. “Shareholders should benefit from a lower-risk profile and less earnings variability than we have experienced in the past few years.” Investments will be in areas such as automated meter reading technology in the state of Washington, multiple power transmission investments and renewable energy projects, Avista officials said.

Coral Energy, one of the top energy marketers in NGI‘s quarterly surveys, will buy substantially all of Avista Energy’s contracts and ongoing operations. Formed 10 years ago, Avista Energy “over the long run has performed very well for us,” Ely said. “We know the markets in the Pacific Northwest exceptionally well, and have long-standing agreements with other utilities and businesses as key customers and perform an important role in the marketplace [that includes essentially the 11-state and two-Canadian province Western Electricity Coordinating Council].”

Ely said the energy markets have changed in recent years to become more national in scope, which fits Shell’s Coral better than his Pacific Northwest utility holding company. “Large financial players have entered the energy markets, and credit is harder to come by and the importance of a large, strong balance sheet is more important in order to properly conduct the business,” the Avista CEO said.

“All of these issues caused us to reexamine our strategic alternatives, and that led to the conclusion that we should sell Avista Energy.” Ely called Coral “the right partner” to purchase Avista Energy, which he expects to continue operating from three western offices — Spokane; Vancouver, BC; and Great Falls, MT. He said Coral is already active in the Pacific Northwest and wants to expand in the region.

Ely reiterated what the company announced last Tuesday — namely, it expects the cash sale to close at or close to book value of the assets, which at the end of the first quarter ended March 31 was $202 million. The close will be in the end of the second quarter or early part of the third quarter this year, he said.

The two companies said the sale also included the operating assets of Avista Energy Canada Ltd., which will be acquired by Coral Energy Canada Inc., a Coral Energy subsidiary. Avista will sell other assets not sold or transferred to Coral, including receivables, restricted cash and deposits with counterparties.

The day before the Coral announcement (April 16), Avista Utilities lost a legal fight with a farmer objecting to the utility’s transmission power line upgrade going across his wheat field in eastern Washington state near Colfax, WA. The farmer convinced the court that the transmission line work violated a decades-old easement and would drive up his farm costs. The utility wants to build a $45 million Palouse transmission project to bolster the reliability of its grid in the southeast corner of the state near the Idaho border.

A Whitman County Superior Court judge found that the easements granted to the utility in the 1920s did not authorize it to construct new steel towers on the right-of-way in which existing high-voltage lines cross the Colfax farm. Local news reports speculated that the judge’s ruling may cause other farmers to similarly challenge the power line upgrade with higher towers, which the farmers argue prevent aerial crop dusters from spraying fertilizers and pesticides.

A company spokesperson expressed deep disappointment in the court ruling. Avista said it would look at its options, but the spokesperson said it most likely will proceed with condemnation rather than a legal appeal. Avista has the right to eminent domain in the case, but it will have to pay a fair market price for the right-of-way. The project fits within the width of the existing easement, but raises the profile, replacing 60-foot-high poles with 120-foot-high structures, and floating what is called a lightening shield wire far above the heavy duty transmission lines.

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