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Aquila Exits Tolling, Prepaid Gas Supply Deals

Aquila Exits Tolling, Prepaid Gas Supply Deals

Aquila Inc. tossed overboard a significant amount of excess baggage last Tuesday by exiting a power purchase agreement in Batesville, MS, and terminating another long-term prepaid natural gas supply contract. Both of the deals were a drain on liquidity and exiting them is part of the company's ongoing repositioning program aimed at getting out of the merchant energy business.

The exit from the Batesville power purchase and sale arrangement involves two agreements. Under the first, Aquila will assign its obligation to purchase power under a long-term contract from LSP Energy Partnership, owner of the Batesville facility, to South Mississippi Electric Power Association (SMEPA). Under the second, Aquila and SMEPA will terminate a contract under which Aquila sold to SMEPA the power it purchased from LSP Energy.

Essentially, these agreements will remove Aquila from the middle of an arrangement pursuant to which LSP Energy sold power to SMEPA. SMEPA will pay Aquila $16.25 million, subject to certain adjustments. The agreements must receive approval from the Federal Energy Regulatory Commission (FERC), the Kansas Corporation Commission and the U.S. Department of Agriculture's Rural Utilities Service.

Aquila also completed the termination of its fourth long-term prepaid natural gas supply contract with Lincoln, NE-based American Public Energy Agency (APEA), a supplier of natural gas to municipalities principally in Nebraska. In connection with the termination, Aquila paid a termination fee of $139 million. The payment had previously been placed on deposit by Aquila for the benefit of the surety on the contract.

Termination of the contract completes Aquila's previously announced plan to terminate four long-term prepaid natural gas supply contracts, which represented about 92% of the company's prepaid gas supply obligations (see Daily GPI, July 26). The contracts were costing the company about $38 million per year and would have extended out to 2012, said spokesman Al Butkus. While APEA had prepaid for the gas supply, Aquila was having to go into the market to buy the gas at a substantial loss given today's high gas prices.

Butkus said there are two other prepaid gas supply deals that Aquila plans to let run out over the next two years. The company also has a tolling arrangement with Elwood Energy in the Chicago area covering two power plants, and it owns three merchant power plants. Aquila plans to sell those plants and exit the remaining tolling agreements when the market is right, said Butkus.

After about $4 billion in asset sales over the last few years and the exit of these prepaid gas supply and tolling power arrangements, Aquila is no longer in danger of a liquidity crisis, according to analysts. It has refinanced most of its debt and has very few maturities over the next few years. But all the company is left with today is mainly the small slow-growth Missouri-based utility operation that it started with a decade ago.

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