In a surprise announcement last Wednesday, UtiliCorp United said it plans to buy back the 20% of its trading and risk management arm, Aquila Inc., that it sold to the public earlier this year and adopt Aquila as its corporate name. The move comes as a strategic reversal apparently prompted by the weakening economy and industry changes. Executives dodged questions as to whether the move was spurred by the financial troubles at the energy industry’s largest trading house, Enron Corp.
On the same day, UtiliCorp also released its earnings, and reported that it has entered into an acquisition agreement with a FirstEnergy Corp. subsidiary.
UtiliCorp said its board of directors voted to make an exchange offer to acquire all of the outstanding publicly held common shares of its 80%-owned Aquila Inc. subsidiary due to the “recent significant changes in the merchant energy sector, the general economy and the impact of these changes on the capital markets.”
“The most significant influence, however, was the realization that greater shareholder value could be obtained by recombining the financial strength of UtiliCorp with the growth opportunities that lie ahead for Aquila,” said Richard C. Green, Jr., chairman and CEO of UtiliCorp. “With its larger asset base, earnings potential and cash flow, the combined company will have more efficient access to capital to execute its ambitious plans. Industry-watchers questioned whether some of the spark for the recombining of the trading operation with the hard-asset backed parent, could have been prompted by Enron’s current debacle.
When asked during the conference call if the Enron turmoil factored in the decision to combine UtiliCorp and Aquila, Robert Green said, “The decision evolved over the recent few weeks as we evaluated the opportunities in front of Aquila, and the current conditions in the capital market. [We] effectively came to the conclusion that if we are going to put Aquila in a position to execute on these opportunities, it is essential that we recombine the businesses and the balance sheets to execute on the opportunities that we see in the marketplace that are precipitated by the decline in the capital markets, and the fact that the equity markets are shutdown.”
“The merchant strategy behind Aquila’s rapid growth has been a key driver behind UtiliCorp’s achievement of aggressive earnings targets,” Richard Green said. “We decided that UtiliCorp shareholders would be better served by embracing the Aquila energy merchant strategy as the company’s core strategy, rather than spinning the business off as a separate entity. To symbolize that change in thinking, we intend to adopt ‘Aquila’ as our corporate name after our exchange offer is completed.” The company said in its conference call that it expects to complete the reacquisition of Aquila by “early January.”
Richard Green also said he will take on a new role, effective Jan. 1, 2002, initially as chairman of UtiliCorp and later of the new company that will be formed from UtiliCorp United and Aquila, Inc. Robert K. Green, president and COO of UtiliCorp, will be elevated to president and CEO of the new Aquila.
UtiliCorp said all public Aquila shareholders will be offered 0.6896 shares of UtiliCorp common stock in a tax-free exchange for each outstanding share of Aquila Class A common stock. Based on last Wednesday’s closing price of $17.99 per share for Aquila Class A common stock and $30 per share for UtiliCorp common stock, the offer represents a value of $20.69 per Class A share of Aquila and a 15% premium to Wednesday’s closing price of those shares. “Aquila shareholders will have the opportunity to continue to participate in Aquila’s growth through their ongoing ownership of UtiliCorp shares, and to receive cash dividends as UtiliCorp shareholders,” Richard Green said.
The offer requires that at least a majority of Aquila’s publicly held Class A shares are tendered. After successful completion of the exchange offer, UtiliCorp has committed to complete a ‘short-form’ merger of Aquila with a UtiliCorp subsidiary. In the merger, each remaining Aquila Class A share will be converted (subject to the exercise of appraisal rights) into the same number of shares of UtiliCorp common stock as are paid in the exchange offer. UtiliCorp plans to file its offering materials with the Securities and Exchange Commission and commence the exchange offer as soon as possible.
“Over the past year, I have devoted an increasing amount of time and energy to raising other chief executives’ awareness of Aquila’s broad capabilities,” Richard Green said. “We have a unique position in the emerging market that is being created by the convergence of the insurance, capital and energy businesses, combining our expertise in risk management, wholesale energy, structured financing, generation assets and other related activities. We can help clients in countless industries in ways they’ve never thought of, and that opportunity is largely driving this change in executive roles.”
Following the news, Ronald Barone of UBS Warburg, said that he was lowering the price target of UtiliCorp from $30 per share to $29 because the deal changes the company’s valuation assumptions. UBS Warburg currently rates UtiliCorp shares as a ‘hold.’
The company also reported Wednesday that it expects to enter into an acquisition agreement with FirstEnergy Corp. under which UtiliCorp and a financial partner will purchase FirstEnergy’s wholly owned Avon Energy Partners Holdings subsidiary, the holding company for Midlands Electricity plc. Midlands Electricity is the fourth-largest regional electricity company in the United Kingdom and serves 2.3 million network customers. UtiliCorp said the transaction is expected to close in the first quarter of 2002 after receipt of regulatory approvals. In the company’s conference call, Robert Green said the acquisition would likely be “strongly accretive” in 2002.
In releasing its earnings, UtiliCorp followed the strong third quarter results from its Aquila subsidiary and reported earnings per share for the third quarter 2001 were $0.58, up 16% from last year’s third quarter after adjusting for the $0.30 gain from the 2000 initial public offering of Uecomm, Ltd. in Australia. The company posted earnings for the quarter of $68.9 million, a decrease from the $74.9 million mark for the same quarter of 2000. UtiliCorp said energy sales for the quarter were $9.3 billion, up 16% from $8 billion during the third quarter of 2000.
“At Aquila, we continue to see increasing client demand for our risk management solutions,” said Robert Green. “In addition, our recent capacity acquisitions are performing beyond our expectations. Our network businesses continue to help fuel our core growth in earnings before interest and taxes (EBIT). Combining that with the solid results from Aquila, UtiliCorp continues to be on track to deliver at least 15% earnings growth this year.”
UtiliCorp CFO Dan Streek said during the conference call that the company expects 2001 EPS to be in the area of $2.95. The CFO added that this “far exceeds” the company’s 15% growth target. For 2002 guidance, Streek said the combined EPS for UtiliCorp and Aquila would be around $2.92.
Earnings before income taxes (EBIT) for the quarter UtiliCorp were led by strong contributions from Aquila as well as the international business segment. Aquila’s operations increased from $40.8 million to $44.2 million (net of minority interests of $7.4 million) in the 2001 third quarter, marking a 26% increase. UtiliCorp attributed some of Aquila’s growth to the fact that gas and power commodity markets are slowing down, forcing Aquila’s clients to focus more on risk and how they can minimize exposure. As a result, Aquila has seen an increase in its client-focused businesses. Additionally, Aquila’s December 2000 acquisition of interests in six power plants through its purchase of GPU International have provided stronger-than-expected operating results.
The company said gas trading volumes in the third quarter increased 11%, from 12.1 Bcf/d during the third quarter 2000 to 13.4 Bcf/d. Power volumes increased 98%, from 44 million MWh to 87 million MWh.
EBIT from international networks increased 57% to $48.5 million from $30.9 million in the 2000 third quarter, excluding last year’s gain of $44 million or $.30 per share from the initial public offering of Uecomm, Ltd. The company said EBIT from Canada and Australia increased, primarily due to the full quarter contribution of electric properties in Alberta, purchased on Aug. 31, 2000, and strong performance in Australia related to continued strength in the United Energy business and the addition of AlintaGas, which was purchased in October 2000.
In the United States, UtiliCorp’s networks had EBIT of $47.4 million in the third quarter of 2001, compared to $45.3 million in the 2000 period. The company said the contribution from the St. Joseph Light & Power division, acquired at the end of 2000, was partially offset by higher operating costs.
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