On a preliminary basis, Avista Corp.'s trading/marketing arm, 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 Wednesday in the wake of announcing Tuesday it has sold essentially all of its marketing/trading assets to Shell's Coral Energy Holding LP.
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.
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 their 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 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, WA; Vancourver, 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 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 (see Power Market Today, April 18). The close will be in the end of the second quarter or early part of the third quarter this year, he said.
On Tuesday, 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.
Avista's interest in a long-term purchased power agreement (PPA) from an Idaho coal-fired power plant and its interest in the Jackson Prairie natural gas storage project -- both part of the Avista Energy assets -- will return to Avista from Coral after a 2.5- to three-year period.
"Over the next two years, we'll decide what we are going to do with the PPA, but we believe it will be a valuable asset given some of the legislation that has passed and the inability to build coal [plants], we think that will be a very valuable asset in the Northwest," said Malyn Malquist, Avista CFO. Along with new renewables, this contract will keep Avista Utilities from having to build new generation beyond the 2010-12 time frame, Ely said.
Coral ranked third in NGI's 4Q2006 ranking of top North American natural gas marketers.
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