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Avista Targeting Growth Through Technology

Avista Targeting Growth Through Technology

Avista Corp. is counting on technology businesses for growth and sees its Internet-based bill consolidation business as the front door to a nationwide marketing presence. During press briefings last week in Houston and Washington, DC, executives outlined Avista's continuing evolution.

"Avista [formerly Washington Water Power] was the typical mid-sized utility that existed for many years paying a nice dividend, but the problem is 11 of the last 12 years it paid out more in dividend than it earned, and we had to restructure the company," said Avista Corp. CEO Thomas M. Matthews. Growth has been constricted in some measure by location. In the future, however, he said growth will come from technology nationwide, including its Internet bill consolidation business Avista Advantage, telecommunications in Avista Fiber and Avista Communications, and fuel cell and distributed power technology in Avista Labs. Matthews is considering spinning off some of the new technology units in IPOs to get their so-far unrecognized value on the books. The new unregulated businesses should double the $1 billion value of the company in three years, he predicted.

"I don't want to be a utility company. We want to be known as a trading and technology company leveraging our expertise across the country," Matthews said.

By signing up multiple-site end users for bill consolidation through Avista Advantage, the company is building a list of customers Avista Energy plans to target for sales of gas, power, and other commodities and services. The cmopany currently manages 15,000 sites and is targeting 50,000 by the end of the year.

"It's all your bills, your water, your sewer, your electric, your telephone, your gas," said Neil E. Kelley, chairman of Avista affiliate Avista Energy. "You go to the CFO of the company and you say, 'let me manage all of your bills for your 29 sites or 2,900 sites around the country,' and it's a no-brainer. It's overhead savings. Then we're in the door and the next step is we go to them and say, 'now that we're managing your bills, why don't we manage your purchases for you also.....'" Not only will Avista be approaching prospects with whom it already has a relationship, but by having managed prospects' commodity and services billing, the company will be on the inside track with information on customer energy consumption and costs. "We're in a race to establish customer relationships and branding," said Avista Energy President Michael R. Kutsch. The idea is to sell things "to establish brand recognition, anything, 'place holders' to get in the que."

Avista Energy began doing business in July 1997 and had 1998 power trading volume of 54.4 million MWh, making it about the 13th largest power marketing company. Gas volumes at the end of 1998 averaged 1.6 Bcf/d. The company had electric and gas revenues of $2.4 billion for the year. Earlier this year Avista Energy completed the purchase of Vitol Gas &amp Electric, expanding its presence in the eastern United States and giving the company a place in the emerging coal marketing arena. Avista Energy also picked up its chairman and president, Kelley and Kutsch, from Vitol.

Manage Now, Acquire Later

Avista has stepped back from the asset acquisition race after seeing assets going for three to four times book value. Instead Avista will take the opportunity now to help those new asset holders who may not have the necessary expertise or infrastructure to manage their purchases. Later, the company plans to take ownership positions in assets themselves, but not in a manner that would put it in competition with its existing asset optimization clients, Kutsch said. For instance Avista has no competing properties in the East where a number of power generation plants have been sold off to absentee owners.

"Our view of where the business is going is that many of the new at-risk asset owners lack commercial involvement capability," Kutsch said. "Everyone is rushing out to be involved in the asset side of the business, buying other peoples' assets.

"A power plant is an upside-down oil refinery. An oil refinery takes in one product, crude oil, and produces a bunch of other products. The value of that machine is determined by the inputs and the outputs. What's different in a power plant?

"You take in a bunch of input - natural gas, oil, coal - and you put out an output. The only difference is in the oil business you never had ratepayers. In businesses where you have these sorts of relationships between the inputs and the outputs, historically what we've seen is cyclical..... We don't see a reason that isn't going to happen in electricity. The approach that we're taking at Avista is to build the commercial capability and then look at opportunities to make direct investments."

Avista Power was formed in November to develop and own generation and gas storage assets throughout North America, mainly in support of Avista Energy's gas and power marketing efforts. Its initial generation development is focused on the western and southeastern United States. Avista executives also are excited about opportunities for distributed generation. Avista Labs in April selected Logan Industries as its initial contract manufacturing partner for fuel cells.

Hiring Talent

To put its strategy in motion, Avista has acquired a bundle of talent from some big name energy players. Avista Energy last week announced six new vice presidents, picking up talent from Illinois Power/Illinova Energy and Enron Capital and Trade among others.

Kelley, formerly chairman of Vitol Gas &amp Electric, announced the new hires, saying the company was attracting talent by offering a chance to create value and participate in the company's success with incentives and options.

Joining Avista Energy, David Dickson, working out of the Spokane, WA, office, will manage gas trading and marketing-western region. Dickson was the managing director for energy trading at Illinois Power. In Houston, Brent Friedman will become vice president, risk management. He was managing director for commodity risk for both Illinois Power and marketing affiliate Illinova Energy. From Enron Capital and Trade Avista picked up Darren Lobell to run the Midwest electric desk as vice president, trading-Midwest. Lobell had been director of trading for ECT's Midwest regions. Another recruit from Enron, Sean P. O'Neal, will be Avista's vice president, trading-Southeast, moving over from managing ECT's trading at the Entergy and TVA hubs. In addition, Mark T. Stugart has been named vice president, trading, to oversee coal, SO2 and oil activities. Stugart had co-founded and managed Soundview Energy, a petroleum marketing company in Boston. And Eric J. Melvin, who had established the structured marketing program at Hess Energy Trading in New York, will be in charge of the same area for Avista as vice president.

Joe Fisher, Houston; Ellen Beswick, Washington

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