Unable to find a suitable generation partner for its high flyingtrading arm UtiliCorp United Inc. instead will make an initialpublic offering for a portion of subsidiary Aquila Energy Corp. andthen spin off the remaining shares next year to its shareholders ina tax-free distribution. The result will be two stand-alonepublicly traded companies, both based in Kansas City.

The company’s board of directors approved a two-stage plan thisweek to make an IPO for about 19.9% interest in Aquila, UtiliCorp’swholesale energy merchant, and then spin off the rest toshareholders. Proceeds from the IPO would be used by Aquila torepay debts it owes to UtiliCorp, the company said. The value isestimated to be up to $425 million of Aquila Class A shares.

“First and foremost, these transactions will increase Aquila’scapital financing flexibility by allowing Aquila to independentlyaccess the capital markets on an efficient basis,” UtiliCorp CEORichard C. Green Jr. said. “The separation also will increaseAquila’s strategic focus and provide a targeted investment for ourshareholders.”

Robert K. Green, COO of UtiliCorp and chairman of Aquila, saidthat Aquila’s marketing and risk management business and itselectricity and natural gas asset management business were “allquite different in nature from UtiliCorp’s regulated utilitybusiness.” He said one of the goals from the IPO would be to”increase the speed at which Aquila can respond to the needs of itscustomers and to changes in the marketplace.”

When the transactions are completed, shareholders of UtiliCorpwill hold the shares of the two stand-alone, publicly tradedcompanies. Underwriting will be led by Lehman Brothers and MerrillLynch & Co. Additional underwriters include Salomon SmithBarney, Chase H&Q and Credit Lyonnais Securities Inc.

In August, UtiliCorp said it was shopping around for a generator topartner with Aquila, and said it wanted to announce a deal before theend of summer (see Daily GPI, Aug. 14, Aug. 3). CEO Richard Green said at the timethat the company was “especially pleased” with the overall health ofUtiliCorp, which he said was on a pace to grow at least 8% through theyear. Most of the company’s improved performance has come this pastyear from Aquila’s gas and power trading.

Wednesday, Fitch affirmed the credit rating for UtiliCorp,placing it on a Rating Watch Evolving following the Aquilaannouncement. Fitch said that UtiliCorp’s “credit measures havebeen stressed recently by the ongoing requirement to supportAquila’s aggressive capital spending to acquire merchant generationassets and the working capital demands occasioned by the energytrading and marketing business.”

Fitch said the planned spinoff would relieve the “pressures” onUtiliCorp’s ratings, but said that the company would “lose theongoing earnings contributions of this subsidiary. Further debtreductions will be required at UtiliCorp to prevent a decline incredit rating measures and to retain the current credit ratings.”

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