Avista Corp., which has a long history of buying and selling energy, wants to sell its Avista Energy trading subsidiary.


While Avista Corp. hasnt said that in its press releases, it has talked with securities analysts about its desire to divest itself of the subsidiary, says James L. Bellessa Jr., an analyst with Great Falls, Mont.-based D.A. Davidson & Co.


In conference calls and meetings with analysts, theyve pointed this out, says Bellessa.


In such a call on Aug. 2, Avista Chairman and CEO Gary G. Ely said, I think Ive been pretty candid with (Wall Street) over the past couple of years that its probably not a business that is long term for our portfolio, and certainly as we move forward here, we are looking harder at what strategies might be in place to exit this business. In fact, its a good business, and it serves a very needed function in the marketplace, but its one which creates us nothing but a lot of sleepless nights.


Those sleepless nights stem from strict accounting rules that require the company to report the value of energy-trading contracts in terms of current market prices, which can make it seem as though the company incurred a loss when it really hasnt, Ely said.


He said its difficult to explain that Avista Energy is doing well financially after it has bought gas, stored it, and sold it forward on the futures market, only to have the market change.


In such a case, the company reports the stored gas and the market value of futures contracts under different sets of accounting rules, and it looks like a loss when it really isnt, he says.


Kelly Norwood, Avistas vice president of state and federal regulation, says such a situation would occur if Avista bought natural gas at an average cost of $6 a decatherm and stored it, then agreed to sell it in the futures market later for $7 a decatherm. If the price goes up to $8, and then you have a sale, the accounting rules assume you have to buy the gas at $8, and that you have a loss. The economic reality is that you have gas in storage that youre going to sell it at $7and will make a profit on the sale, he says.


In the conference call, Ely said Avista Energy was doing quite well, and he was satisfied with its results. Yet, he said that when accounting rules distort Avista Corp.s results, it becomes very frustrating, and I think as a management team, weve decided to look at alternatives going forward. We still support the business at this point, but you can expect at some point in the future, we probably will no longer be in the business.


Energy-trading activity at Avista Energy, which was founded in 1997, is separate from such activity at Avista Utilities, says Norwood. Many utilities, including Avista Utilities, sell surplus electricity or natural gas when they can and buy energy when they need it to serve ratepayers, he says. Avista Energys activities, however, also include buying and selling energy solely to make a profit and making trades to optimize energy resources for other companies, Norwood says.


Jessie Wuerst, Avista Corp.s communications manager, says Avista Energy employs about 50 people, almost all of whom work in Spokane.


Malyn Malquist, Avista Corp.s executive vice president and chief financial officer, said in the Aug. 2 conference call that Avista Corp. doesnt have a big enough balance sheet to maximize the potential of Avista Energys trading business.


We end up every year, I think, not able to transact some business that actually would create some very significant value for us in the long term because of the balance sheet of the overall company, Malquist said. Historically to date, weve earned around a 15 percent ROE (return on equity) since the inception of the business, but the last couple of years its been earning less than that. This year if we hit our targets, it will probably earn a 6 percent or 7 percent return. Thats not enough on a risk-adjusted basis for this business. If we were to keep it, wed want to do better.


Added Ely, Wed have to do better.


In a report issued last week, Bellessa said concerns about the possible loss of near-term corporate earnings from the conceptual sale of Avista Energy, about which management has spoken, was one reason he was reducing his estimates of Avistas earnings in 2007 and 2008.


If the company sold Avista Energy, it would be some time before it could invest the proceeds from the sale into Avista Utilities and receive the rate of return allowed by the state, Bellessa says. Until such an investment was made, Avista Corp.s earnings could take a hit, he says.


Norwood says Avistas allowed before-tax return on debt and equity is 9.11 percent. Allowed return on equity is 10.4 percent.


Contact Richard Ripley at (509) 344-1261 or via e-mail at editor@spokanejournal.com.