The acquisition agreement also includes the operating assets of Avista Energy Canada, which will be integrated into Coral Energy Canada. The transaction is expected to close by late second quarter or early in the third quarter of 2007.
Avista Energy will receive cash for the assets acquired by Coral at approximately the book value of the assets at closing. Avista Energy’s 31 March book value was $202 million. In addition, Avista Energy will liquidate other assets not sold or transferred to Coral, including receivables, restricted cash and deposits with counterparties.
The proceeds of the deal are expected to be reinvested in Avista’s utility business. Analysts at ratings agency Fitch observe: “The asset sale would lower Avista‘s cash flow volatility and business risk. In addition, proceeds of approximately $185 million are expected to be used to reduce debt and support capital investment. Importantly, the transaction is a significant milestone in Avista's back-to-basics strategy, which is focused on its core electric and natural gas distribution utility operations and Advantage IQ.” Avista subsidiary Advantage IQ is a provider of expense management and facility intelligence tools designed to cut costs in utility, telecom and waste services.
Reducing trading risk was clearly a strong motivator for the sale. “Volatility in natural gas and electricity prices inconsistent with our forecasts can result in significant variability in Avista Energy’s earnings,” says Gary Ely, chairman of the board and CEO of Avista Corporation. “Unfortunately, this occurred during the first quarter and this business incurred a net loss.”
Avista Energy attributes its poor performance to: underperformance on the power side of the business; losses on a power purchase agreement related to a natural gas-fired combined cycle combustion turbine plant in northern Idaho; and the difference between the estimated market value and the required accounting for certain contracts and physical assets under management, which accounted for almost one-half of Avista Energy’s net loss.
Though exact details have yet to be clarified, acquisition plans call for Avista Energy offices in Spokane, Washington, Great Falls, Montana and Vancouver, British Columbia, to remain in their current locations, with most of the employees being kept on by Coral. Avista Energy employs around 50 people.
“Integrating our talented employees into a similar culture within Coral will benefit our existing customers and our employees. Combined with the financial resources of Coral, this is a transaction that is well aligned in terms of operations and strategy,” said Ely.
Coral Energy markets and trades natural gas, wholesale power and risk products with counterparties and customers across North America. Its customers include commercial and industrial end users, utilities, producers, generators and aggregators. Avista Energy provides electricity, natural gas and hydroelectric portfolio optimisation and management, as well as risk management services, with its focus on Western US energy markets.
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