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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2001
or
/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-16315
AQUILA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 47-0683480 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1100 Walnut Street, Suite 3300, Kansas City, Missouri (Address of principal executive offices) | 64106 (Zip Code) |
Registrant's telephone number, including area code: 816-527-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class | Outstanding at August 10, 2001 | |
---|---|---|
Class A Common Stock, $0.01 par value | 19,975,000 | |
Class B Common Stock, $0.01 par value | 80,025,000 |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Information regarding the combined financial statements can be found on pages 3 through 10.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations can be found on pages 11 through 17.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk as described on pages 45 and 46 of the prospectus included in our Registration Statement on Form S-1 (File No. 333-51718). There have not been any material changes in our market risk since December 31, 2000.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information on changes in securities can be found on page 18.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information on submission of matters to a vote of security holders can be found on page 18.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits and reports on Form 8-K can be found on page 18.
2
Aquila, Inc.
Combined Statements of Income—Unaudited
| Three Months Ended June 30, | |||||||
---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | ||||||||
2001 | 2000 | |||||||
Sales | ||||||||
Natural Gas | $ | 4,824.6 | $ | 3,525.2 | ||||
Electricity | 4,800.4 | 1,637.3 | ||||||
Other | 279.0 | 151.6 | ||||||
Total Sales | 9,904.0 | 5,314.1 | ||||||
Cost of sales | ||||||||
Natural Gas | 4,604.3 | 3,460.9 | ||||||
Electricity | 4,770.9 | 1,606.1 | ||||||
Other | 187.2 | 124.2 | ||||||
Total Cost of sales | 9,562.4 | 5,191.2 | ||||||
Equity in earnings of investments and partnerships | 5.5 | 4.1 | ||||||
Gross profit | 347.1 | 127.0 | ||||||
Administrative expenses | 159.1 | 79.2 | ||||||
Depreciation and amortization expense | 13.6 | 12.9 | ||||||
Other income | (15.2 | ) | (5.8 | ) | ||||
Earnings before interest and taxes | 189.6 | 40.7 | ||||||
Interest expense | 1.1 | 5.6 | ||||||
Earnings before income taxes | 188.5 | 35.1 | ||||||
Provision in lieu of income taxes | 87.2 | 13.4 | ||||||
Net Income | $ | 101.3 | $ | 21.7 | ||||
Earnings per common share: | ||||||||
Basic Earnings Per Common Share | $ | 1.05 | $ | .25 | ||||
Diluted Earnings Per Common Share | $ | 1.05 | $ | .25 | ||||
See accompanying notes to combined financial statements.
3
Aquila, Inc.
Combined Statements of Income—Unaudited
| Six Months Ended June 30, | |||||||
---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | ||||||||
2001 | 2000 | |||||||
Sales | ||||||||
Natural Gas | $ | 12,390.8 | $ | 6,094.1 | ||||
Electricity | 7,981.3 | 2,927.6 | ||||||
Other | 512.9 | 314.0 | ||||||
Total Sales | 20,885.0 | 9,335.7 | ||||||
Cost of sales | ||||||||
Natural Gas | 12,020.9 | 5,968.6 | ||||||
Electricity | 7,900.5 | 2,889.9 | ||||||
Other | 377.0 | 266.2 | ||||||
Total Cost of sales | 20,298.4 | 9,124.7 | ||||||
Equity in earnings of investments and partnerships | 11.7 | 8.5 | ||||||
Gross profit | 598.3 | 219.5 | ||||||
Administrative expenses | 313.6 | 141.7 | ||||||
Depreciation and amortization expense | 26.4 | 24.0 | ||||||
Other income | (20.8 | ) | (10.6 | ) | ||||
Earnings before interest and taxes | 279.1 | 64.4 | ||||||
Interest expense | 2.8 | 11.0 | ||||||
Earnings before income taxes | 276.3 | 53.4 | ||||||
Provision in lieu of income taxes | 125.7 | 20.9 | ||||||
Net Income | $ | 150.6 | $ | 32.5 | ||||
Earnings per common share: | ||||||||
Basic Earnings Per Common Share | $ | 1.65 | $ | .38 | ||||
Diluted Earnings Per Common Share | $ | 1.65 | $ | .38 | ||||
See accompanying notes to combined financial statements.
4
Aquila, Inc.
Combined Balance Sheets
Dollars in millions | June 30, 2001 | December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
| (Unaudited) | | ||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 254.7 | $ | 9.0 | ||||
Funds on deposit | 288.6 | 149.5 | ||||||
Accounts receivable, net | 3,408.9 | 3,959.9 | ||||||
Accounts and notes receivable from UtiliCorp | — | 11.8 | ||||||
Inventories | 164.3 | 63.6 | ||||||
Price risk management assets | 931.5 | 1,452.6 | ||||||
Other | 89.6 | 39.7 | ||||||
Total current assets | 5,137.6 | 5,686.1 | ||||||
Property, plant and equipment, net | 574.2 | 559.0 | ||||||
Investments in subsidiaries and partnerships | 454.0 | 408.0 | ||||||
Price risk management assets | 561.5 | 744.5 | ||||||
Notes receivable | 295.0 | 313.2 | ||||||
Other | 118.0 | 176.4 | ||||||
Total Assets | $ | 7,140.3 | $ | 7,887.2 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt | $ | 12.5 | $ | 12.5 | ||||
Short-term debt | 12.2 | 25.7 | ||||||
Accounts payable | 3,716.7 | 4,144.0 | ||||||
Accrued liabilities | 367.3 | 316.0 | ||||||
Accounts and notes payable to UtiliCorp | 26.6 | 6.0 | ||||||
Price risk management liabilities | 628.8 | 1,290.5 | ||||||
Customer deposits | 276.5 | 362.4 | ||||||
Total current liabilities | 5,040.6 | 6,157.1 | ||||||
Long-term Liabilities: | ||||||||
Long-term debt, net | 12.5 | 12.5 | ||||||
Notes payable to UtiliCorp | — | 47.6 | ||||||
Price risk management liabilities | 1,144.8 | 1,252.4 | ||||||
Deferred income taxes and credits | 88.2 | 105.2 | ||||||
Other deferred credits | 112.8 | 57.2 | ||||||
Total long-term liabilities | 1,358.3 | 1,474.9 | ||||||
Shareholders' Equity: | ||||||||
Preference stock, $.68 par value; 200,000,000 shares authorized, 28,380,000 and 8,000,000 issued and outstanding, respectively | 19.3 | 5.4 | ||||||
Class A common stock, $.01 par value; 550,000,000 shares authorized, 19,975,000 and none issued and outstanding, respectively | .2 | — | ||||||
Class B common stock, $.01 par value; 250,000,000 shares authorized, 80,025,000 and 85,775,000 shares issued and outstanding, respectively | .8 | .9 | ||||||
Additional paid-in capital | 567.6 | 241.0 | ||||||
Accumulated other comprehensive losses | (6.7 | ) | (1.7 | ) | ||||
Retained earnings | 160.2 | 9.6 | ||||||
Total shareholders' equity | 741.4 | 255.2 | ||||||
Total Liabilities and Shareholders' Equity | $ | 7,140.3 | $ | 7,887.2 | ||||
See accompanying notes to combined financial statements.
5
Aquila, Inc.
Combined Statements of Comprehensive Income—Unaudited
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Net Income | $ | 101.3 | $ | 21.7 | $ | 150.6 | $ | 32.5 | ||||||
Other comprehensive income (loss): | ||||||||||||||
Unrealized translation adjustments | (7.5 | ) | (1.3 | ) | (6.2 | ) | (.5 | ) | ||||||
Unrealized cash flow hedge | 3.6 | — | 1.2 | — | ||||||||||
Comprehensive Income | $ | 97.4 | $ | 20.4 | $ | 145.6 | $ | 32.0 | ||||||
See accompanying notes to combined financial statements.
6
Aquila, Inc.
Combined Statements of Cash Flows—Unaudited
| Six Months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | |||||||||||
2001 | 2000 | ||||||||||
Cash Flows From Operating Activities: | |||||||||||
Net income | $ | 150.6 | $ | 32.5 | |||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
Depreciation and amortization expense | 26.4 | 24.0 | |||||||||
Net change in price risk management assets and liabilities | (69.9 | ) | (88.2 | ) | |||||||
Deferred income taxes and credits | (16.9 | ) | 10.3 | ||||||||
Equity in earnings of investments and partnerships | (11.7 | ) | (8.5 | ) | |||||||
Dividends from investments and partnerships | 13.1 | 7.8 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 552.2 | (968.4 | ) | ||||||||
Accounts payable and receivable to/from UtiliCorp, net | (4.5 | ) | 34.8 | ||||||||
Inventories | (99.7 | ) | 77.2 | ||||||||
Accounts payable and accrued liabilities | (377.6 | ) | 1,011.1 | ||||||||
Other | 52.9 | 41.8 | |||||||||
Sub-total | 214.9 | 174.4 | |||||||||
Funds on deposit, net | (225.0 | ) | 4.6 | ||||||||
Net cash (used in) provided by operating activities | (10.1 | ) | 179.0 | ||||||||
Cash Flows From Investing Activities: | |||||||||||
Capital expenditures | (48.7 | ) | (32.4 | ) | |||||||
Investments in subsidiaries and partnerships | (6.9 | ) | (5.0 | ) | |||||||
Repayments of (additions to) notes receivable, net | 18.2 | (79.3 | ) | ||||||||
Cash received on sale of related party investments | 26.1 | — | |||||||||
Other | 12.2 | — | |||||||||
Net cash provided by (used in) investing activities | 0.9 | (116.7 | ) | ||||||||
Cash Flows From Financing Activities: | |||||||||||
Short-term borrowings, net | (13.5 | ) | — | ||||||||
Repayment of notes payable to UtiliCorp, net | (47.6 | ) | (37.8 | ) | |||||||
Issuance of common stock, net | 316.0 | — | |||||||||
Cash dividends paid | — | (10.7 | ) | ||||||||
Net cash provided by (used in) financing activities | 254.9 | (48.5 | ) | ||||||||
Net increase in cash and cash equivalents | 245.7 | 13.8 | |||||||||
Cash and cash equivalents at beginning of period | 9.0 | 6.0 | |||||||||
Cash and cash equivalents at end of period | $ | 254.7 | $ | 19.8 | |||||||
See accompanying notes to combined financial statements.
7
AQUILA, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited combined financial statements have been prepared in accordance with the accounting policies described in the combined financial statements and related notes included in our Registration Statements on Form S-1, as amended. We believe it is best to read this report in conjunction with our S-1 Registration Statements. The accompanying Balance Sheet as of December 31, 2000 was derived from our audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In our opinion, the accompanying combined financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair representation of our financial position and the results of our operations. Certain estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods shown have been made in preparing the combined financial statements. Actual results could differ from these estimates.
Certain prior year amounts in the combined financial statements have been reclassified where necessary to conform to the 2001 presentation.
New Accounting Pronouncements
Business Combinations
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. SFAS 141 also requires certain additional disclosures regarding material business combinations. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that, beginning on January 1, 2002, goodwill will no longer be systematically amortized against earnings over an estimated useful life. This statement will require that, no less than annually, goodwill be tested for impairment and if impaired, be written off against earnings at that time. We expect that the adoption of this standard in 2002 will result in discontinuing annual goodwill amortization of approximately $4.4 million. As of June 30, 2001, we had total goodwill of $100.7 million. We are currently assessing the potential impact, if any, that a goodwill impairment test could have on our financial position or results of operations.
Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity will capitalize a cost by increasing the carrying amount of the related asset. The liability will be accreted to its present value each subsequent period and the capitalized cost will be depreciated over the useful life of the related asset. Upon settlement of the liability, the company will record a gain or loss for the difference between the settled liability and the recorded amount. This standard will be in effect for us on January 1, 2003, although earlier application is encouraged. We have not yet completed our estimate of the effect of the adoption of this standard on our financial position or results of operations at this time.
8
2. Earnings per Common Share
The following table shows the amounts used in computing basic and diluted earnings per common share for the three and six-month periods ended June 30, 2001 and 2000.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions, except per share amounts | |||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||
Earnings available for common shares | $ | 101.3 | $ | 21.7 | $ | 150.6 | $ | 32.5 | |||||
Earnings per share: | |||||||||||||
Basic | $ | 1.05 | $ | .25 | $ | 1.65 | $ | .38 | |||||
Diluted | $ | 1.05 | $ | .25 | $ | 1.65 | $ | .38 | |||||
Weighted average number of common shares used in basic earnings per share | 96.3 | 85.8 | 91.1 | 85.8 | |||||||||
Per share effect of dilutive securities: | |||||||||||||
Stock options | .3 | — | .2 | — | |||||||||
Weighted number of common shares and dilutive potential common shares used in diluted earnings per share | 96.6 | 85.8 | 91.3 | 85.8 |
3. Initial Public Offering
In April 2001, we issued 14,225,000 shares of Class A common stock to the public in an initial public offering at $24.00 a share. We received net proceeds of approximately $316 million after deducting underwriting discounts, commissions and other offering expenses. We have used a portion of the proceeds to repay debt owed to UtiliCorp and have placed the remaining proceeds into short-term investments to be used for working capital and general corporate purposes.
In connection with the offering, UtiliCorp sold 5,750,000 shares of our Class A common stock at $24.00 a share. We did not receive any of the proceeds from the shares of stock sold by UtiliCorp.
As a result of our initial public offering, UtiliCorp owns Class B common stock representing approximately 80% of our outstanding shares, but approximately 98% of the combined voting power.
4. Related Party Transactions
During the second quarter of 2001, we completed three transactions with UtiliCorp in relation to our Canadian operations. Those transactions were as follows:
- 1.
- We purchased the workforce of Aquila Canada Corp. (ACC) (a wholly owned subsidiary of UtiliCorp) for $4.3 million. As ACC is included in the combined financial statements, this transaction has been eliminated.
- 2.
- We received $12.9 million from UtiliCorp for our preferred stock investment in a Canadian UtiliCorp subsidiary. The preferred stock was repurchased at the original issuance price.
- 3.
- We sold back to UtiliCorp our 5% ownership of their Canadian investments. We received $13.2 million which approximates the gain connected with the sale.
As the above transactions were all transactions with a related party, the related net gain of $10.7 million was recorded as a capital transaction and credited to additional paid in capital.
9
5. Reportable Segment Reconciliation
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in Millions | ||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||
Sales: | ||||||||||||
Wholesale Services | $ | 9,631.0 | $ | 5,165.6 | $ | 20,268.8 | $ | 9,083.4 | ||||
Capacity Services | 273.0 | 148.5 | 616.2 | 252.3 | ||||||||
Total | $ | 9,904.0 | $ | 5,314.1 | $ | 20,885.0 | $ | 9,335.7 | ||||
EBIT: | ||||||||||||
Wholesale Services | $ | 148.5 | $ | 25.3 | $ | 210.9 | $ | 40.6 | ||||
Capacity Services | 41.1 | 15.4 | 68.2 | 23.8 | ||||||||
Total | $ | 189.6 | $ | 40.7 | $ | 279.1 | $ | 64.4 | ||||
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
AQUILA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except where noted, the following discussion refers to the combined entity, Aquila, Inc. We conduct our business through two principal segments—Wholesale Services and Capacity Services. Wholesale Services consists of Client Services; our structured capital, custom risk products and consultative services business and Commodity Services; where we manage risk. Capacity Services consists of our power generation assets, natural gas assets and coal assets. We service clients throughout North America, the United Kingdom and parts of continental Europe.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. These statements involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, assumptions, and other statements that are not historical facts. We generally intend the words "may," "will," "should," "expect," "intend," "plan," "believe," "seek," "estimate," "continue," "announced," or the negative of these terms or similar expressions to identify forward-looking statements. Our actual results could differ materially from the forward-looking statements as a result of various factors. Some of these factors include:
- •
- political conditions in our regional, national and international markets, including legislative and regulatory initiatives regarding deregulation and restructuring of the energy industry;
- •
- changes in commodity prices and interest rates that could impact the value of our commodity portfolio;
- •
- unusual changes in weather and other natural phenomena, such as hurricanes, floods and unexpected changes in temperature, could dramatically affect commodity prices and thus the value of our commodity portfolio;
- •
- competition in the markets in which our businesses operate could decrease our profitability;
- •
- the success of our growth strategy, including our acquisition, control and disposition of assets;
- •
- economic and financial market conditions and the results of our financing efforts could affect our growth efforts and thus our profitability;
- •
- our successful development of new structured products and services which will provide new sources of revenue;
- •
- the pace of well connections to our gas gathering system that could affect the sales generated by our Capacity Services segment;
- •
- the value of the U.S. dollar relative to the British pound and Canadian dollar could affect financial results from foreign operations; and
- •
- additional state, federal and other regulations in the United States and in foreign countries in which we operate, including environmental regulations, that could cause us to incur additional expenses to comply with such regulation.
Forward-looking statements are only predictions and involve risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements. We, however, cannot guarantee future results, events, performance or achievements.
11
All forward-looking statements in this filing reflect our current views about future events and are based on assumptions we believe are reasonable. Except as required by law, including the securities law of the United States, we do not intend to update or revise any forward-looking statements.
RESULTS OF OPERATIONS
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in Millions | |||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||
Earnings Before Interest and Taxes: | |||||||||||||
Wholesale Services | $ | 148.5 | $ | 25.3 | $ | 210.9 | $ | 40.6 | |||||
Capacity Services | 41.1 | 15.4 | 68.2 | 23.8 | |||||||||
Total EBIT | 189.6 | 40.7 | 279.1 | 64.4 | |||||||||
Interest expense | 1.1 | 5.6 | 2.8 | 11.0 | |||||||||
Provision in lieu of income taxes | 87.2 | 13.4 | 125.7 | 20.9 | |||||||||
Net Income | $ | 101.3 | $ | 21.7 | $ | 150.6 | $ | 32.5 | |||||
Diluted Earnings per share | $ | 1.05 | $ | .25 | $ | 1.65 | $ | .38 | |||||
The second quarter of 2001 was our strongest financial earnings quarter to date. All business units posted marked increases over prior quarters. Net income for the 2001 second quarter and year-to-date grew at 367% and 363%, respectively, over 2000. These strong results were driven by the following:
- •
- Commodity Services continues to perform well in both gas and power and was well balanced between products and regions. Our Wholesale Services business segment's EBIT for the quarter and year-to date was up 487% and 419%, respectively, over the corresponding 2000 results.
- •
- Strong client demand for products and physical delivery capabilities increased deal flow by 21% and 25% for the quarter and year to date, respectively.
- •
- Successfully optimized new generation assets by securing prices at above current market rates, which reflects on our ability to capture market opportunities. Our GPU International acquisition in December 2000 continues to perform stronger than expected. Our Capacity Services business segment's EBIT for the quarter and year-to-date was up 167% and 187%, respectively, over the corresponding 2000 financial periods.
These strong achievements resulted in a trailing twelve-month return on equity of 56%.
12
WHOLESALE SERVICES
The table below summarizes the operations of our Wholesale Services business segment for the three and six months periods of each year.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Sales | $ | 9,631.0 | $ | 5,165.6 | $ | 20,268.8 | $ | 9,083.4 | ||||||
Cost of sales | 9,366.6 | 5,076.4 | 19,809.9 | 8,934.1 | ||||||||||
Gross profit | 264.4 | 89.2 | 458.9 | 149.3 | ||||||||||
Operating expenses: | ||||||||||||||
Administrative expenses | 128.3 | 63.5 | 262.0 | 109.8 | ||||||||||
Depreciation and amortization expense | 3.0 | 4.8 | 6.6 | 7.9 | ||||||||||
Other income | (15.4 | ) | (4.4 | ) | (20.6 | ) | (9.0 | ) | ||||||
Earnings before interest and taxes (EBIT) | $ | 148.5 | $ | 25.3 | $ | 210.9 | $ | 40.6 | ||||||
Sub-unit breakdown: | ||||||||||||||
Commodity Services EBIT | $ | 116.2 | $ | 8.4 | $ | 161.8 | $ | $16.5 | ||||||
Client Services EBIT | 32.3 | 16.9 | 49.1 | 24.1 | ||||||||||
Total EBIT for Wholesale Services | $ | 148.5 | $ | 25.3 | $ | 210.9 | $ | 40.6 | ||||||
Operating Statistics: | ||||||||||||||
Physical gas volumes marketed per day (Bcf/d) | 11.3 | 10.9 | 12.3 | 11.4 | ||||||||||
Electricity marketing volumes (MMWhs) | 77.4 | 40.0 | 132.5 | 84.6 | ||||||||||
Volumes delivered (Tbtue/d) | 21.2 | 16.3 | 20.9 | 17.1 | ||||||||||
Average transactions per month (000's) | 44.5 | 33.8 | 41.8 | 32.7 | ||||||||||
Electricity prices MWh (average) | $ | 61.98 | $ | 40.97 | $ | 60.23 | $ | 34.58 | ||||||
Natural gas price per Mcf (average) | $ | 4.70 | $ | 3.55 | $ | 5.58 | $ | 2.93 | ||||||
Quarter Ended June 30, 2001 as Compared to Quarter Ended June 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Wholesale Services business segment increased 86% and 85%, respectively, in 2001 compared to second quarter 2000 resulting in a gross profit increase of $175.2 million. These increases were primarily due to the following factors:
- •
- A volatile pricing environment combined with strong client demand provided increased opportunity to execute our strategy and deliver products and services to our clients. Our commodity group was able to capture significant value while only consuming an average value at risk of $12.8 million.
- •
- An increase of 94% and 4% in electricity and gas volumes marketed, respectively, a combined 30% increase on a Tbtue/d basis and a 32% increase in the average number of transactions per month also contributed to an increase in gross profit, sales and cost of sales.
- •
- A 21% increase in term deal flow contributed to a 23% increase in gross profit stemming from our origination deals and our more highly structured products we refer to as our Client Services business. These include our GuaranteedWeather® and GuaranteedGenerationSM products as well as our longer duration gas and electric transactions.
- •
- Higher natural gas and electricity prices significantly increased both sales and cost of sales in the 2001 quarter compared to 2000.
13
Administrative Expenses
Administrative expenses increased $64.8 million, or 102% in 2001 compared to 2000 due to our continued expansion, payroll associated with additional employees and higher incentive expenses directly linked to our improved financial performance in 2001.
Other Income
Other income has increased by $11 million, or 250%, as earnings from our Capital Services group continues to grow due to our portfolio size increasing by 14% and a strong return mix comprised of both interest and equity.
Six Months Ended June 30, 2001 as Compared to Six Months Ended June 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Wholesale Services business segment increased 123% and 122%, respectively, in 2001 compared to 2000 resulting in a gross profit increase of $309.6 million. These increases were primarily due to the following:
- •
- A robust and volatile pricing environment provided increased opportunities to execute our strategy and deliver products and services to our clients.
- •
- An increase of 57% and 8% in electricity and gas volumes marketed, respectively, a 22% increase on a Tbtue/d basis and a 28% increase in the average number of transactions per month also contributed to an increase in gross profit, sales and cost of sales.
- •
- A 25% increase in term deal flow contributed to a 47% increase in gross profit stemming from our origination deals and are more highly structured products we call our Client Services business. These include our GuaranteedWeather® and GuaranteedGenerationSM products as well as our longer duration gas and electric transactions.
- •
- Higher natural gas and electricity prices significantly increased both sales and cost of sales in 2001 compared to 2000.
Administrative Expenses
Administrative expenses increased $152.2 million, or 139% in 2001 compared to 2000 due to our continued expansion, payroll associated with approximately 169 additional employees and higher incentive expenses directly linked to our improved financial performance in 2001.
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CAPACITY SERVICES
The table below summarizes the operations of our Capacity Services business segment for the three and six month periods of each year.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Sales | $ | 273.0 | $ | 148.5 | $ | 616.2 | $ | 252.3 | ||||||
Cost of sales | 195.8 | 114.8 | 488.5 | 190.6 | ||||||||||
Equity in earnings of investments and partnerships | 5.5 | 4.1 | 11.7 | 8.5 | ||||||||||
Gross profit | 82.7 | 37.8 | 139.4 | 70.2 | ||||||||||
Operating expenses: | ||||||||||||||
Administrative expenses | 30.8 | 15.7 | 51.6 | 31.9 | ||||||||||
Depreciation and amortization expense | 10.6 | 8.1 | 19.8 | 16.1 | ||||||||||
Other expense/(income) | 0.2 | (1.4 | ) | (0.2 | ) | (1.6 | ) | |||||||
Earnings before interest and taxes (EBIT) | $ | 41.1 | $ | 15.4 | $ | 68.2 | $ | 23.8 | ||||||
Operating Statistics: | ||||||||||||||
Gas throughput volumes (Mcf/d) | 378.0 | 475.9 | 398.9 | 479.9 | ||||||||||
Natural gas liquids produced (MBbls/d) | 21.6 | 23.3 | 18.4 | 22.4 | ||||||||||
Natural gas liquids price per gallon | $ | .47 | $ | .44 | $ | .49 | $ | .44 | ||||||
MW owned or controlled | 4,357 | 1,096 | 4,357 | 1,096 | ||||||||||
Quarter Ended June 30, 2001 as Compared to Quarter Ended June 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Capacity Services businesses increased $124.5 million and $81.0 million, or 84% and 71%, respectively, in 2001 compared to second quarter 2000 representing $43.5 million of the gross profit increase. The strong results were primarily due to the following factors:
- •
- The impact of the GPU International acquisition in December 2000 added approximately $16.3 million to gross profit in the 2001 quarter while adding $21.8 million and $5.5 million to sales and costs of sales, respectively.
- •
- We successfully optimized new generation assets by securing prices at above current market rates that significantly improved our margins for the 2001 quarter. We attempt to optimize asset positions with forward positions that can create earnings volatility from time to time. Generally, when we optimize asset positions with derivative instruments they are recorded at fair market value while the underlying asset position is reflected at historical cost. This tends to produce some earnings volatility.
Administrative Expenses
Administrative expenses increased $15.1 million or 96% in the 2001 quarter compared to 2000. The majority of this increase is directly related to the effects of our GPU International acquisition in December 2000.
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Six Months Ended June 30, 2001 as Compared to Six Months Ended June 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Capacity Services businesses increased $363.9 million and $297.9 million, respectively, in the six months ending June 30, 2001 compared to 2000 representing $66.0 million of the gross profit increase. The stronger results were primarily due to the following factors:
- •
- The GPU International acquisition in December 2000 added approximately $35.4 million to gross profit in 2001 while adding $47.2 million and $11.8 million to sales and costs of sales, respectively.
- •
- We successfully optimized new generation assets by securing prices at above current market rates that significantly improved our margins in the 2001 year-to-date results. We attempt to optimize asset positions with forward positions that can create earnings volatility from time to time. Generally, when we optimize asset positions with derivative instruments they are recorded at fair market value while the underlying asset position is reflected at historical cost. This tends to produce some earnings volatility.
- •
- Stronger natural gas prices favorably impacted our gas storage operations as we were able to capitalize on larger spreads between injection and withdrawal prices.
Equity in Earnings of Investments and Partnerships
Improved earnings in 2001 over 2000 relates to our 50% equity interest in the Oasis Pipeline. In December 2000, we obtained an additional 15% interest in the Oasis Pipeline Company that brought our total ownership up to 50%. The additional earnings mainly stem from the increase in ownership and transportation opportunities that existed due to high demand in the West.
Administrative Expenses
Administrative expenses increased $19.7 million or 62% in 2001 compared to 2000. The majority of this increase is directly related to the effects of our GPU International acquisition in December 2000.
SIGNIFICANT BALANCE SHEET MOVEMENTS
Total assets at June 30, 2001 decreased by $746.9 million compared to December 31, 2000. This decrease is primarily attributable to the following:
- •
- Cash increased by $245.7 million primarily related to the $316 million of net proceeds received from the initial public offering that was completed in April 2001.
- •
- Funds on deposit increased $139.1 million due to price fluctuations and our over-all position in our gas and power trading business.
- •
- Accounts receivable decreased $551.0 million primarily due to the seasonality and price fluctuations of our gas and power trading business.
- •
- Inventories increased by $100.7 million as storage facilities were replenished at higher prices with a total of 16.9 BCF being added since December 31, 2000.
- •
- Price risk management assets decreased by $704.1 million due to a change in market prices of gas and power which can fluctuate significantly.
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Total liabilities at June 30, 2001 decreased by $1,233.1 million compared to December 31, 2000. This decrease is primarily attributable to the following:
- •
- Accounts payable decreased by $427.3 million primarily due to the seasonality and price fluctuations of our gas and power trading business.
- •
- Price risk management liabilities decreased by $769.3 million due to a change in market prices of gas and power which can fluctuate significantly.
- •
- Customer deposits decreased by $85.9 million due to price fluctuations and our customers' over-all position in our gas and power trading business.
LIQUIDITY AND CAPITAL RESOURCES
We are subject to various demands on cash stemming from price changes of commodities and the resultant impact on cash requirements. We have managed our liquidity needs through a variety of methods that include a credit facility, borrowings from UtiliCorp, selling accounts receivable through a bank facility and commodity sales contracts. Our Wholesale Services business relies on our ability to manage liquidity and cash. At June 30, 2001, our total cash and cash equivalents was $254.7 million, an increase of $245.7 million from December 31, 2000. The increase in cash is primarily due to our initial public offering that was completed in April 2001 that raised a net $316 million. Cash flows from operations were fairly flat as strong operating results before margin deposits were offset by $225 million of customer deposit refunds and additional cash deposits required from us due to price fluctuations and our over-all position in our gas and power trading business. Cash flows from investing activities were also fairly flat as capital expenditures were offset by cash received on note receivable repayments and on the sale of certain investments to UtiliCorp. We also reduced our notes payable to UtiliCorp by $47.6 million during the year.
We have a $125 million letter of credit facility with a group of banks that is used to support our trading and other activities. At June 30, 2001, approximately $58 million was outstanding against this facility. This facility expires in December 2001. We anticipate that this facility will become part of a larger corporate revolver that we plan to put in place in the fourth quarter. As part of the transition agreement with UtiliCorp, we can borrow needed funds from UtiliCorp until it completes the distribution of our stock. UtiliCorp intends to distribute our shares to its shareholders after it receives a favorable letter ruling from the Internal Revenue Service that such a distribution will be tax-free to its shareholders and providing that market conditions warrant the distribution. We also have a $275 million accounts receivable sales program (all of which is used) to help fund short-term cash needs.
We are in the process of completing the financing of a power plant in Clay County, Illinois for approximately $150 million and the financing of ten additional GE turbines secured last January. Our financing strategy with respect to our power plant development program is to first finance these assets using an off-balance sheet structure and then permanently finance the projects with non-recourse project-level debt. We generally do not intend to hold 100% ownership positions in these plants long-term, meaning we will monetize or repackage assets to take advantage of market opportunities.
Effects of Our Separation From UtiliCorp
Under agreements between UtiliCorp and us, we are required to indemnify UtiliCorp for taxation costs, including taxes payable by UtiliCorp on the indemnification amounts paid by us, if we cause the distribution of our stock by UtiliCorp to fail to be tax-free. We do not currently maintain capital resources to fund potential indemnification payments to UtiliCorp for this purpose. We believe the probability of an event occurring that would require us to make these payments is sufficiently low and sufficiently under our control that we do not allocate liquidity for this contingency. If, however, the contingency should occur, we believe we could fund the indemnification payments through cash flows from operations, new borrowings and, if necessary, asset sales. Payment of this obligation could materially affect our financial condition and our earnings and impair our ability to achieve our growth strategy.
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Item 2. Changes in Securities and Use of Proceeds
Our registration statements for the sale of our common stock (Registration Statement Nos. 333-51718 and 333-59412) were declared effective by the Securities and Exchange Commission on April 23, 2001. We registered a total of 19,975,000 shares of our Class A common stock under the registration statements with 14,225,000 being offered by us and the remaining 5,750,000 offered by UtiliCorp. The managing underwriters in the offering were Lehman Brothers Inc., Merrill Lynch Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., Credit Lyonnais Securities (USA) Inc., and J.P. Morgan Securities Inc.
The initial public offering commenced on April 24, 2001 and was completed with all shares sold on April 27, 2001. A total of 19,975,000 shares were sold at a per share public price offering of $24.00. This included 2,475,000 shares that were sold upon exercise of the underwriters' over-allotment option. Of the total shares sold, we received net proceeds of $316.0 million, after deducting approximately $19.6 million of underwriter discounts and commissions and $5.7 million of other expenses. UtiliCorp received net proceeds of $130.1 million, after deducting approximately $7.9 million of underwriter discounts. Expenses of the offering were direct payments to persons other than officers, directors, affiliates or persons owning 10% or more of our securities.
We have used a portion of the proceeds to repay debt owed to UtiliCorp and have placed the net remaining proceeds of the offering into short-term investments to be used for working capital and general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
On April 5, 2001, UtiliCorp, acting in its capacity as our sold shareholder, executed a written consent in lieu of a special meeting of our sole shareholder approving our 2001 incentive plan and the amended and restated certificate of incorporation in the form outlined in our prospectus dated April 23, 2001.
- (a)
- List of exhibits
- 3.1
- Restated Certificate of Incorporation.
- (b)
- Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2001
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AQUILA, INC.
By: | /s/ DAN STREEK | |||
Dan Streek Chief Financial Officer | ||||
Signing on behalf of the registrant and as principal financial and accounting officer. |
Date: August 13, 2001
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PART II—OTHER INFORMATION
- Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits