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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).  

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