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Aquila Looking for Generation Partner

Aquila Looking for Generation Partner

Break out a top gas and power marketer, like for instance, Aquila Energy, from its regulated brethren at UtiliCorp United, and partner it with an aggressive, hard-charging independent power producer (IPP), like for instance, Calpine, and you could create a dynamic front-runner in the energy market.

Add some broadband assets and an extra measure of bandwidth trading, and you would have a triple crown contender in the reassembled, competitive utilities business.

So far UtiliCorp executives aren't saying who their partner might be --- "we're talking with a number of companies" --- but they have acknowledged they are getting close to a deal with a company holding generating assets.

"We see Aquila right now as very marketing rich and a bit asset light," Edward Mills, president and COO of Aquila Energy, told NGI. "We see generation fleets coming on, and they are basically asset rich and marketing light. Put those two types of organizations together and it becomes more of a pure-play in terms of Wall Street's perception, and I think it's valued differently than the way a conglomerate utility is valued today. We think a lot of value is trapped in UtiliCorp right now, and for whatever reason, the market is not recognizing the value of Aquila."

The disaggregation of the electric utility industry is providing potential partners, Mills said, following up on remarks made by UtiliCorp COO Robert Green, who revealed the plan to add generation assets during the company's second quarter earnings conference call. (see NGI, Aug. 7) The idea would be for UtiliCorp to put Aquila Energy into the new company and hold a "cornerstone" of the joint venture, with the generator holding another cornerstone. Eventually, shares could be sold to the public.

Mills said UtiliCorp is looking for a company with between 4,000 and 10,000 MW for a "first combination. We would look to grow after that through other combinations. We are looking for a non-regulated generation fleet, or at least a fleet that is being pulled away from regulation so that we have the opportunity to take the excess energy from those units and sell into markets where energy is most needed."

"The other thing we would look for is a fleet that is strategically located so we could get access to a number of different markets," Mills added.

One rumor picked up in Kansas City last week shown the spotlight on Calpine Corp., an IPP, that currently has interests in 44 power plants with an aggregate 4,273 MW of capacity. The San Jose, CA-based IPP has projects underway to add 5,935 MW and plans for additional facilities. When current projects are completed Calpine will have interests in 54 power plants in 17 states.

The possibility makes sense, according to Ed Tirello, analyst with Deutsche Banc Alex. Brown, who noted that Calpine is looking to beef up its marketing. "It would be a good, natural fit."

Aquila recently completed the process of moving its 400 employees into new downtown Kansas City office space and held a grand opening ceremony, which included Kansas City Mayor Kay Barnes cutting the ribbon for a new trading floor. The 15-year old energy marketing arm led the company's earnings last quarter at $49.5 million, gaining 113% from the same period a year ago. For the first half of 2000 Aquila has increased sales 39% and profits by 141% over last year.

The number of employees is due to be expanded as Aquila adds bandwidth trading to its gas and power marketing. Aquila ranked third last year in natural gas trading and second in power trading. It is now aggressively building a bandwidth trading unit under the direction of Sushil Nelson, general manager of Aquila Broadband Services.

Nelson believes the bandwidth market will grow to be twice the size of electricity in four years. By the end of the year he expects it to be traded along 10 to 14 city-pairs. "We are preparing for this increase and are looking to increase our bandwidth trading staff tenfold by the end of the year," Nelson told NGI. Aquila currently is working with the Bandwidth Trading Organization on a standard contract.

In other action, Aquila Energy last week announced it will make an initial investment of $50 million to develop its e-business portfolio, including an interactive web site for its GuaranteedWeather products. Aimed at providing risk managers with the best available weather-related tools as well as wholesale weather trading, the website features a contest for the best long-term weather forecasting. A $100,000 per year prize for the next three years will be awarded to the weather forecasting firm for the forecaster that most accurately forecasts weather variables during summer and winter periods. "This is directed at getting better weather data oriented to business," said Al Butkis, vice president corporate communications. Even a 10% difference in accuracy can mean a big difference to businesses.

Ravi Nathan, portfolio manager for Aquila's weather desk pointed out, "Today there is no objective way for businesses to measure the relative accuracy of the different forecast products available."

Dexter Steis, Kansas City; Ellen Beswick, Washington

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