NGI The Weekly Gas Market Report
A handful of law firms have filed class action lawsuits onbehalf of Avista Corp.’s stockholders after the company reported aloss of $22.1 million or $0.47 per share in the second quarter,stemming from unhedged power trades in the forward market.
In late June, Avista executives revealed that one of their energytraders entered into excessive levels of short-term, fixed-price powercontracts. The trader allegedly committed suicide after thetransactions were discovered, (see Daily GPI, June 22).
The loss compared to the second quarter results in 1999, whenAvistasaw a gain of $3.1 million or $0.08 per share. Cauley &Geller, LLP became the latest law firm to join the rush torepresent stockholders who purchased Avista stock between April 7and June 21.
The firms charge that during the class period despite assurancesby Avista that it would only enter into derivative contracts as ameans to “limit the exposure to market risk,” the company enteredinto massive amounts of forward contracts in a gamble thatelectricity prices would decrease in the future. Prices did notdrop, and shareholders suffered large losses. The day before theclass period, Avista’s shares were trading at $37 11/16 per share.After the trading revelations came to light on June 21, they closedat $19 per share.
The class action complaints were filed after Avista posted itssecond quarter results last week. Of the company’s divisions,Avista Utilities posted the largest loss per share at $1.33,followed by the Information Technology segment with a loss of 13cents, and Avista Ventures posting a one cent decrease. On thepositive side, Avista Energy, the trading and marketing arm,reported a dollar gain per share on the quarter.
The loss was worse than expected due to the late June powerprice spikes, which drove the average monthly prices up to $182 perMWh from the $120 per MWh that was expected. “Despite the utilityfinancial results of the second quarter, Avista Energy isperforming well in their market and our growth businesses intelecom, Internet and technology continue to meet significantmilestones. We remain committed to our overall strategy for growthin these dynamic growth sectors,” said Tom Matthews, Avista Corp.’schairman.
The utilities division was struck hardest by higher purchasedpower costs, which forced the gross margin $126 million lower thanthe company previously estimated. The company attributed the othercosts to a string of factors, including extraordinary hot weather,plant outages during the last week of June, exposure to indexprices and index prices being higher than preliminary estimates.
Avista Energy business in California offset some of the lossesof the utility segment in the Pacific Northwest by earning $47.8million after taxes during the second quarter, but price spikeswere not the only problem.
Avista executives disclosed in June that Senior Energy TraderRoger W. Scholten exceeded company guidelines by entering intoexcessive levels of short-term, fixed-price contracts for wholesalesales for delivery of power through October 2000, without makingmatching purchases at the same time. Matthews said that he did notfind out about the problems until mid-May. He also said that thetrader’s manager told Scholten to stop. Instead of ceasing,Scholten continued selling more of the contracts on April 14. Thefollowing day Scholten killed himself at his home in Post Falls,WA, according to the Coeur d’ Alene Memorial Funeral Home.
Matthews said an audit done the following week revealed thatScholten’s initial damage was a little less than $15 million, butthe damage quickly grew when the company attempted to reduce itsexposure to the poor trades gradually.
Realizing the main problem lies within its utility segment,Avista has recently acquired the services of Williams EnergyMarketing &Trading to consult on risk management, risk analysisand resource optimization for Avista Utilities. The contract willcommence on Aug. 1, and run through June 30, 2002.
Avista Utilities now expects a total of $160 million in excesspurchased power costs for the full year of 2000. It is a $20million increase from previous estimates. “We have taken thenecessary steps to address the issues that led to this situationand with favorable rate relief we believe this problem will belimited to the year 2000,” said Matthews. “The fundamentals ofpower pricing in this region of the country have changed as aresult of various factors including the restructuring of theelectric utility business in California, shortage of generatingcapacity in the Northwest, and reductions in hydro generation.Therefore, we’ve changed our approach to the utility business,” heexplained.
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