Post-IPO Aquila drops search for asset rich partner

With return on equity at 45% and net income up 350% for the first quarter, energy marketer and trader Aquila Inc. has all but abandoned its feverish search for a megawatt rich partner.

First quarter income was $49.3 million or 57&cent/share compared with $10.8 million or 13&cent/share for the comparable quarter last year on an adjusted basis. The company expects continued growth of 25%/year in earnings by pursuing its “client focused and asset light” strategy.

Aquila, which sold 20% of its equity to the public last month in an initial public offering, said volatility in the markets is creating more opportunities and demand for highly structured long-term energy supply products.

“The volatility in the commodity markets creates a sensitivity in industry that lasts longer than the volatility,” said Keith Stamm, CEO of Aquila in a conference call. “Companies are threatened by high energy costs, and that is driving demand for highly structured products.”

Aquila, 80% owned by Kansas City, Kan.-based UtiliCorp United Inc., seeks to grow not by increasing volumes of energy trades but by “deepening” its relationships with core energy intensive clients, executives said. Going forward Aquila is focused on providing these longer-term products and does not factor in lasting extreme volatility.

“We don’t budget for this going forward,” said Stamm. “But we will see it [volatility] pop up in other regions.” But the energy merchant, among the largest in North America, hasn’t completely given up owning and controlling assets.

“We won’t be partnering in the original way thought. We are past that now. We will grow our own portfolio in a number of ways,” said Ethan Hirsh, spokesman for UtiliCorp. Hirsh said Aquila will contract for output of power plants, arrange for tolling agreements to move fuel to a plant, and receive megawatt hours for a fee, and build and buy its own power plants.

At the end of 2000, Aquila owned or controlled 4,100 Mw and the company ordered 11 new gas turbines for gas peaking plants.

“The only surprise we have is earnings will be on the upside going forward,” said Bob Green, chairman of Aquila.

UtiliCorp’s 2001 first quarter benefited from Aquila’s wholesale services business. UtiliCorp earned $73.5 million, or 69&centcents/share on $11.9 billion in sales compared to $54.4 million, or 59&centcents/share on $4.6 billion for the first quarter last year. Earnings before income and taxes for the delivery services or transmission and distribution of electricity increased 3%.

“We won’t have the drag on earnings from this business as in past years,” said Richard Green, CEO of UtiliCorp. “We have now managed fuel costs going forward.”

But UtiliCorp’s earnings were dragged down by the services business. Services include the telecom business and UtiliCorp’s equity interest in Quanta Services Inc., a contractor for utilities and telecommunications companies. Services reported a decrease in earnings before income taxes of $6.7 million attributed to start-up costs associated with the build-out of the broadband telecom business to serve Kansas City suburbs.

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