WWP Increases Asset Base, Breaks into the Top 10 in Power

Washington Water Power's (WWP) energy marketing affiliate, Avista Energy, embarked on a two-day expansion spree last week by acquiring Vitol Gas and Electric Co. and Coast Pacific Management Co., and in the process became a top-10 power marketer. Supporting these additions is WWP's joint venture with Cogentrix Energy Inc., announced Dec. 11, to build or buy gas-fired electric generation projects in the Pacific Northwest. Terms for deals were not disclosed.

Pat Lynch, a WWP spokesman said, "Avista Energy has become a known player on a national level, which was the idea all along."

Tom Matthews, who moved over from NGC Corp. (Dynegy) six months ago to become CEO of WWP, viewed the acquisitions as a strong move toward attaining the company's goal of becoming an asset-backed national energy marketing company, "The deals give us additional size and scope.They'll also provide us with a higher national profile and the additional attention will allow more deals to come our way."

Jim Bellessa, an analyst with D.A. Davidson &amp Co., agreed with Matthews that the energy company needs more growth. "They're (Avista Energy) eating instead of being eaten. Starting last August, they cut their dividends and said that they wanted to quadruple their size. This is a move in that direction, but they have a long way to go." Bellessa added that Matthews was hired with the expansion strategy in mind, and "If he doesn't grow the company fast enough, somebody else will." Matthews was hired over the summer after being President of NGC Corp. for less than two years. "He is the expansion strategy" Bellessa said.

BT Alex Brown analyst Ed Tirello said that the strategy became a necessity because WWP's regulated utility business is not growing fast enough, "Everything you've read about that can be done to help a utility grow, they've done. They've upgraded computer systems and everything. Its utility business still grows at a small 1-2% annually. So the move makes perfect sense. By expanding its nonregulated energy marketing, WWP has given itself a good chance to increase net income."

Vitol Adds Eastern Presence

The Vitol acquisition is Avista's largest move this year, a company spokesman said. In NGI's Power Marketer Rankings for 1998's third quarter, Vitol ranked 16th and Avista Energy ranked 18th in volume production. For that quarter, the two companies' combined output equaled 30.7 MWh, which would have placed this alliance in the top ten. The spokesman added the combined gas volumes sold would amount to 2.8 Bcf/d after the deal is finished.

The acquisition made sense, said Matthews, because Avista's marketing operations are focused on the West and Vitol's business takes place east of the Rocky Mountains. "The fact that there was minimal overlap in the markets our two companies serve was critically important and made the deal a perfect fit," he said.

According to Lynch, "Overall, from an earnings standpoint, Mr. Matthews has made it very clear that he wants all of WWP's branches to increase their earnings by 8% to 10% annually. This acquisition will help Avista attain that goal." Lynch added that in 1999, WWP will invest $130 to $150 million in Avista Energy. The utility expects a 15% return from that investment.

Neil Kelly, chairman of Boston-based Vitol, cited Avista's experience with gas and electric infrastructures and its ability to control physical assets as reasons for the deal. "We recognized that success in the long term would require partnering with a larger, customer-focused company. We found the right partner in Avista Energy," he said. Kelly will become chairman of Avista Energy once the deal is finished. Michael Kutsch, currently president of Vitol, will become Avista Energy's president. The current president of Avista, Lloyd Myers, will become Avista Power's president.

Canadian Move

Avista Energy Canada, Avista Energy's Canadian arm, last week announced it was acquiring Coast Pacific Management, a gas manager for industrials throughout British Columbia. Coast Pacific will be incorporated into Avista's Vancouver operations, the company said. The deal became effective at the time of the announcement.

Matthews said the move represents Avista's desire to increase its presence north of the border, and to reach a new pool of end-users."[This acquisition] presents us with the opportunity to serve more customers, provide those customers with more choices and enhances our access to Canadian natural gas supplies that may help us in the development of future business opportunities, such as power generation projects." he said. Coast Pacific Management, located in Vancouver, acts as gas manager and marketer for more than 40% of the large industrial market in BC. It manages and transports 70,000 MMBtu/d to 70 large and medium-sized industrial customers throughout the region.

Cogentrix, Avista Join

Two weeks ago, Avista Energy's sister company, Avista Power Inc., and Cogentrix Energy Inc. agreed to jointly build and/or buy interests in gas-fired electric generation plants in the Pacific Northwest states of Washington, Oregon and Idaho. The first project under the new agreement is a 270 MW facility to be located in Rathdrum, ID. A power purchase agreement for the Rathdrum project was signed simultaneously with the development agreement.

"The Cogentrix joint venture is a starting point in acquiring additional generation assets-first in the Pacific Northwest and then in strategic locations across the country," Matthews said. "We may also be able to gain access to generation that Cogentrix already owns in support of our marketing and trading efforts nationally."

Cogentrix will have the lead role for the development, construction and operation of the facility. Commercial operation is expected in the third quarter of 2001. Avista Energy will deliver gas to the plant and purchase the electrical output of the facility under a long-term power purchase agreement. The installed cost of the Rathdrum facility is anticipated to be about $150 million.

John Norris

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