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[IMAGE] In an exclusive SCIENTECH PowerHitters Interview, Cody Graves, CEO of Automated Energy, Inc. and former Chairman of the Oklahoma Corporation Commission, discusses the status of restructuring in Oklahoma and nationwide. Graves also discusses the role Automated Energy is playing in providing an essential piece of the restructuring pie. Read more at: www.scientech.com [IMAGE] [IMAGE] April 12, 2001 Aquila's Pending IPO Looks Strong by Will McNamara Director, Electric Industry Analysis [News item from Reuters] Aquila Inc., a wholly owned subsidiary of gas and electricity company UtiliCorp United Inc. (NYSE: UCU), said that the price range for an initial public offering (IPO) it is planning rose to a new range of $21 to $23 a share from $17 to $22, an increase of about 5 percent. Aquila reported the increase in a filing with the Securities and Exchange Commission (SEC). It still plans to offer 16.5 million common shares to the public, 12.25 of which are being sold by Aquila and the other 4.25 by UtiliCorp. In raising the high end of the price range, Aquila could raise up to $380 million (compared to a previous $363 million). Analysis: Aquila's IPO, which is scheduled to take place later this month, is part of a major restructuring effort that is unfolding at UtiliCorp. In addition to a recently completed merger with St. Joseph Light & Power Company, UtiliCorp has been planning the spin-off of the highly successful Aquila subsidiary for some time. The IPO will make Aquila a stand-alone, publicly traded company that can attract its own set of investors, along with allowing parent company UtiliCorp to continue attracting its own funding. Aquila is scheduled to debut on the New York Stock Exchange under the symbol "ILA" the week of April 23. Based in Kansas City, Aquila is a provider of risk management services and a leading wholesaler of electricity and natural gas in North America. It also provides wholesale energy services in the United Kingdom and has a presence in Scandinavia, Germany and Spain. Aquila has about 4 million customers across the United States and in Canada, Great Britain, New Zealand, and Australia. The company has been on an aggressive expansion mode for most of the last year. In October, Aquila announced plans to acquire GPU's wholly owned subsidiary GPU International for $225 million. The purchase includes six independent U.S.-based generating plants and a development generation project, representing about 500 MW of capacity. With that purchase, Aquila will own or control more than 3,500 MW of generation. Parent company UtiliCorp had $14.1 billion in assets at the end of 2000 and sales of $29 billion. Aquila has maintained that it plans to use proceeds earned from the IPO to repay debt to UtiliCorp, as well as for working capital and "general corporate purposes." Aquila has said that it will not be receiving any of the money from the shares sold by UtiliCorp. If the IPO is completed, UtiliCorp will own approximately 98 percent of Aquila Inc.'s outstanding capital stock. Aquila's pending IPO got a jumpstart recently when UtiliCorp announced that its first-quarter earnings would be 15 to 17 percent higher than last year's comparable results. UtiliCorp attributed the estimated rise in profits to the "continued strong performance" of Aquila. Specifically, UtiliCorp is expected to make 68 cents per share in the first quarter compared to 59 cents in last year's prior period, according to two analysts polled by First Call/Thomson Financial. The motives for spinning off Aquila are fairly clear. UtiliCorp follows a growing list of other companies (Southern Company and Xcel Energy, for example) that have spun off high-risk or high-growth businesses into stand-alone entities. Aquila's anticipated IPO price range of $21 to $23 compares strongly to Southern Energy's (now Mirant's) IPO price of $22 and NRG's IPO price of $15. Spinning off a high-risk independent power producing subsidiary is a wise move, as the end result will be two public companies with dramatically different risk / reward profiles. Traditional utility investors have tended to be fairly risk averse, preferring to invest in the regulated activities of a conservative utility company. As Aquila continues to penetrate new competitive markets, it will now have the freedom to transform itself into an appealing investment opportunity for investors who are more growth oriented and tolerant of risk. Consequently, the most practical way to maximize shareholder interest and boost stock value is for UtiliCorp to bifurcate its operations, offering two options for capital investment. The second reason to spin off Aquila is that UtiliCorp has invested a great deal of capital in Aquila in order to grow that business, and all the proceeds from the IPO are expected to be used by Aquila to repay amounts it owes to its parent company. UtiliCorp stands as an example of what is perhaps the new model for energy companies. On one hand, UtiliCorp remains a conservative and methodical operation, which very strategically is gaining scale throughout its service territory in the Midwest and beyond. The company attempted two mergers last year, one with Empire District Electric Company and the other with St. Joseph & Power Light Co. The merger attempt with Empire failed due to regulatory obstacles, but as noted UtiliCorp did complete the $190 million merger with St. Joseph about a month ago. However, the real emphasis coming from the company seems to be clearly placed on Aquila, an aggressive and ambitious energy operation that I project will dramatically expand its trading and telecom (bandwidth) operations over the next year. The IPO of Aquila should elevate its stature considerably, as new funding opportunities should enable the company to expand its scope into new markets. Aquila clearly acknowledges that it is attempting to take advantage of opportunities associated with ongoing electric deregulation in the United States and abroad. "As regulated utilities continue to unbundle their generation, transmission and distribution services, we expect to continue capitalizing on opportunities to create value," Aquila said in its SEC filing. This has always been a good complement to its parent company UtiliCorp, which as noted remains rather conservative and steeped in the distribution side of the energy business. The earnings profiles for both the parent company and its wholly owned subsidiary are strong and, since both companies should continue to attract separate sets of investors, the timing appears to be right for a spin-off of Aquila. In early February 2001, UtiliCorp announced record results for 2000, including a 26-percent increase in earnings per share and a 56-percent increase in sales. Earnings available for common shares were $206.8 million, reflecting in large part the increased contributions from Aquila. In fact, Aquila's earnings before interest and taxes reached $191.1 million, a 140-percent increase over 1999. Aquila's Wholesale Services earned $144.2 million, a 424-percent increase over 1999. As of mid-morning on April 12, UtiliCorp shares were priced at about $33.15. The company has a market capitalization of $3.75 billion and a P/E ratio of 15.16. The average P/E ratio for a standard utility operation is around 12.00. Once the spin-off from its parent occurs, Aquila's P/E ratio will most likely be in the range of 25.00 to 30.00 (on par with Mirant and NRG). An archive list of previous IssueAlerts is available at www.scientech.com Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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