UCU: Energy Merchant Drives Strong 3Q Earnings; Aquila Transaction By Year
End

* This morning, UtiliCorp reported recurring operating EPS of $0.50,
in-line with our estimate, and a 8.7% increase from $0.46 in the year ago
quarter.
* Results exclude a $44 million or $0.30 per share gain from the IPO
of Uecomm, the telecom arm of their Australian subsidiary United Energy.
* Aquila energy merchant segment remains growth driver; EBIT up 87%
yr./yr., and now contributes 42.1% of UtiliCorp's earnings.
* Aquila expects to begin transacting in the high-growth bandwidth
commodity market in Q4:00 or Q1:01; we see Aquila as one of the
first-movers, behind  Enron and Dynegy (both rated 1H) in this nascent
market.
* We reiterate our 1H (Buy, High Risk) rating and $36 price target for
UtiliCorp.   We feel that a strategic transaction involving Aquila (i.e.
IPO, joint venture)-- expected by the end of the year-- will enable
UtiliCorp to extract Aquila's value as a leading Energy Merchant.
 <<trc75567.pdf>>

Raymond C. Niles
Power/Natural Gas Research
Salomon Smith Barney
(212) 816-2807
ray.niles@ssmb.com

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 - trc75567.pdf