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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 September 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 code816-527-1000
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 November 13, 2001 | |
Class A Common Stock, $0.01 par value | 19,975,000 | |
Class B Common Stock, $0.01 par value | 80,025,000 |
ITEM 1. FINANCIAL STATEMENTS
Information regarding the combined financial statements can be found on pages 3 through 11.
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 12 through 19.
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.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Other information can be found on page 20.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits and reports on Form 8-K can be found on page 20.
2
Aquila, Inc.
Combined Statements of Income—Unaudited
| Three Months Ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | ||||||||
2001 | 2000 | |||||||
Sales | ||||||||
Natural Gas | $ | 3,504.7 | $ | 4,394.5 | ||||
Electricity | 5,067.3 | 3,475.9 | ||||||
Other | 220.2 | 126.1 | ||||||
Total Sales | 8,792.2 | 7,996.5 | ||||||
Cost of sales | ||||||||
Natural Gas | 3,499.6 | 4,374.3 | ||||||
Electricity | 5,003.0 | 3,429.3 | ||||||
Other | 176.0 | 106.6 | ||||||
Total Cost of sales | 8,678.6 | 7,910.2 | ||||||
Equity in earnings of investments and partnerships | 11.8 | 4.7 | ||||||
Gross profit | 125.4 | 91.0 | ||||||
Administrative expenses | 68.9 | 60.0 | ||||||
Depreciation and amortization expense | 18.0 | 10.6 | ||||||
Other income | (13.2 | ) | (20.4 | ) | ||||
Earnings before interest and taxes | 51.7 | 40.8 | ||||||
Interest expense | .1 | 6.2 | ||||||
Earnings before income taxes | 51.6 | 34.6 | ||||||
Provision in lieu of income taxes | 14.4 | 11.6 | ||||||
Net Income | $ | 37.2 | $ | 23.0 | ||||
Earnings per common share: | ||||||||
Basic Earnings Per Common Share | $ | .37 | $ | .27 | ||||
Diluted Earnings Per Common Share | $ | .37 | $ | .27 | ||||
See accompanying notes to combined financial statements.
3
Aquila, Inc.
Combined Statements of Income—Unaudited
| Nine Months Ended September 30, | |||||||
---|---|---|---|---|---|---|---|---|
Dollars in millions, except per share amounts | ||||||||
2001 | 2000 | |||||||
Sales | ||||||||
Natural Gas | $ | 15,895.5 | $ | 10,488.6 | ||||
Electricity | 13,048.6 | 6,403.5 | ||||||
Other | 733.1 | 440.1 | ||||||
Total Sales | 29,677.2 | 17,332.2 | ||||||
Cost of sales | ||||||||
Natural Gas | 15,520.5 | 10,342.9 | ||||||
Electricity | 12,903.5 | 6,319.2 | ||||||
Other | 553.0 | 372.8 | ||||||
Total Cost of sales | 28,977.0 | 17,034.9 | ||||||
Equity in earnings of investments and partnerships | 23.5 | 13.2 | ||||||
Gross profit | 723.7 | 310.5 | ||||||
Administrative expenses | 382.5 | 201.7 | ||||||
Depreciation and amortization expense | 44.4 | 34.6 | ||||||
Other income | (34.0 | ) | (31.0 | ) | ||||
Earnings before interest and taxes | 330.8 | 105.2 | ||||||
Interest expense | 2.9 | 17.2 | ||||||
Earnings before income taxes | 327.9 | 88.0 | ||||||
Provision in lieu of income taxes | 140.1 | 32.5 | ||||||
Net Income | $ | 187.8 | $ | 55.5 | ||||
Earnings per common share: | ||||||||
Basic Earnings Per Common Share | $ | 2.00 | $ | .65 | ||||
Diluted Earnings Per Common Share | $ | 1.99 | $ | .65 | ||||
See accompanying notes to combined financial statements.
4
Aquila, Inc.
Combined Balance Sheets
Dollars in millions | September 30, 2001 | December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
| (Unaudited) | | ||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 160.0 | $ | 9.0 | ||||
Funds on deposit | 221.1 | 149.5 | ||||||
Accounts receivable, net | 2,536.4 | 3,959.9 | ||||||
Accounts and notes receivable from UtiliCorp | — | 11.8 | ||||||
Inventories | 189.6 | 63.6 | ||||||
Price risk management assets | 872.8 | 1,452.6 | ||||||
Other | 98.4 | 39.7 | ||||||
Total current assets | 4,078.3 | 5,686.1 | ||||||
Property, plant and equipment, net | 625.5 | 559.0 | ||||||
Investments in subsidiaries and partnerships | 466.2 | 408.0 | ||||||
Price risk management assets | 562.0 | 744.5 | ||||||
Notes receivable | 300.9 | 313.2 | ||||||
Other | 103.5 | 176.4 | ||||||
Total Assets | $ | 6,136.4 | $ | 7,887.2 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt | $ | 12.5 | $ | 12.5 | ||||
Short-term debt | — | 25.7 | ||||||
Accounts payable | 3,004.8 | 4,144.0 | ||||||
Accrued liabilities | 285.6 | 316.0 | ||||||
Accounts and line of credit payable to UtiliCorp | 136.2 | 6.0 | ||||||
Price risk management liabilities | 617.1 | 1,290.5 | ||||||
Customer deposits | 76.1 | 362.4 | ||||||
Total current liabilities | 4,132.3 | 6,157.1 | ||||||
Long-term Liabilities: | ||||||||
Long-term debt, net | — | 12.5 | ||||||
Notes payable to UtiliCorp | — | 47.6 | ||||||
Price risk management liabilities | 1,051.9 | 1,252.4 | ||||||
Deferred income taxes and credits | 76.7 | 105.2 | ||||||
Other deferred credits | 95.8 | 57.2 | ||||||
Total long-term liabilities | 1,224.4 | 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 | 566.8 | 241.0 | ||||||
Accumulated other comprehensive losses | (4.8 | ) | (1.7 | ) | ||||
Retained earnings | 197.4 | 9.6 | ||||||
Total shareholders' equity | 779.7 | 255.2 | ||||||
Total Liabilities and Shareholders' Equity | $ | 6,136.4 | $ | 7,887.2 | ||||
See accompanying notes to combined financial statements.
5
Aquila, Inc.
Combined Statements of Comprehensive Income—Unaudited
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Net Income | $ | 37.2 | $ | 23.0 | $ | 187.8 | $ | 55.5 | ||||||
Other comprehensive income (loss): | ||||||||||||||
Unrealized translation adjustments | 2.9 | (4.0 | ) | (3.3 | ) | (4.5 | ) | |||||||
Unrealized cash flow hedge | (1.0 | ) | — | .2 | — | |||||||||
Comprehensive Income | $ | 39.1 | $ | 19.0 | $ | 184.7 | $ | 51.0 | ||||||
See accompanying notes to combined financial statements.
6
Aquila, Inc.
Combined Statements of Cash Flows—Unaudited
| Nine Months Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | |||||||||||
2001 | 2000 | ||||||||||
Cash Flows From Operating Activities: | |||||||||||
Net income | $ | 187.8 | $ | 55.5 | |||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
Depreciation and amortization expense | 44.4 | 34.6 | |||||||||
Net change in price risk management assets and liabilities | (116.3 | ) | 216.8 | ||||||||
Deferred income taxes and credits | (29.5 | ) | 36.0 | ||||||||
Equity in earnings of investments and partnerships | (23.5 | ) | (13.2 | ) | |||||||
Dividends from investments and partnerships | 16.0 | 10.3 | |||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 1,424.7 | (1,279.2 | ) | ||||||||
Accounts payable and receivable to/from UtiliCorp, net | (19.9 | ) | 12.9 | ||||||||
Inventories | (125.0 | ) | 68.1 | ||||||||
Accounts payable and accrued liabilities | (1,170.5 | ) | 1,375.9 | ||||||||
Other | 40.6 | 17.4 | |||||||||
Sub-total | 228.8 | 535.1 | |||||||||
Funds on deposit, net | (357.9 | ) | (123.5 | ) | |||||||
Net cash (used in) provided by operating activities | (129.1 | ) | 411.6 | ||||||||
Cash Flows From Investing Activities: | |||||||||||
Capital expenditures | (112.3 | ) | (43.4 | ) | |||||||
Investments in subsidiaries and partnerships | (13.0 | ) | (22.4 | ) | |||||||
Repayments of (additions to) notes receivable, net | 12.3 | (146.4 | ) | ||||||||
Cash received on sale of related party investments | 26.1 | — | |||||||||
Other | 12.2 | — | |||||||||
Net cash used in investing activities | (74.7 | ) | (212.2 | ) | |||||||
Cash Flows From Financing Activities: | |||||||||||
Repayment of short-term debt | (25.7 | ) | — | ||||||||
Line of Credit with UtiliCorp | 125.0 | — | |||||||||
Repayment of notes payable to UtiliCorp, net | (47.6 | ) | (187.5 | ) | |||||||
Retirement of long-term debt | (12.5 | ) | (12.5 | ) | |||||||
Issuance of common stock, net | 315.6 | 5.5 | |||||||||
Cash dividends paid | — | (10.9 | ) | ||||||||
Net cash provided by (used in) financing activities | 354.8 | (205.4 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 151.0 | (6.0 | ) | ||||||||
Cash and cash equivalents at beginning of period | 9.0 | 6.0 | |||||||||
Cash and cash equivalents at end of period | $ | 160.0 | $ | — | |||||||
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 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 September 30, 2001, we had total goodwill of $99.8 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 not be in effect until
8
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.
Impairment or Disposal of Long Lived Assets
In August 2001, the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation, which resulted in two accounting models for long-lived assets to be disposed of. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We have not yet completed our estimate of the effect of the adoption of this standard on our financial position or results of operations.
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 nine-month periods ended September 30, 2001 and 2000.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions, except per share amounts | |||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||
Earnings available for common shares | $ | 37.2 | $ | 23.0 | $ | 187.8 | $ | 55.5 | |||||
Earnings per share: | |||||||||||||
Basic | $ | .37 | $ | .27 | $ | 2.00 | $ | .65 | |||||
Diluted | $ | .37 | $ | .27 | $ | 1.99 | $ | .65 | |||||
Weighted average number of common shares used in basic earnings per share | 100.0 | 85.8 | 94.1 | 85.8 | |||||||||
Per share effect of dilutive securities: | |||||||||||||
Stock options | .1 | — | .3 | — | |||||||||
Weighted number of common shares and dilutive common shares used in diluted earnings per share | 100.1 | 85.8 | 94.4 | 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 $315.6 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 used the remaining proceeds for working capital, fixed assets 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. Western Hub Properties
On August 23, 2001, we formed a partnership with ArcLight Energy Partners Fund I, L.P. to buy Western Hub Properties, a Houston-based developer of underground natural gas storage. Western Hub owns a gas storage facility under construction approximately 35 miles South of Sacramento, near Lodi, California. The cost to acquire Western Hub and to complete the facility is approximately $220 million. The majority of the acquisition will be funded at the project level, however we are expected to contribute approximately $25 million of equity. The California Public Utilities Commission must still approve the acquisition.
9
Investments
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 $10.3 million was recorded as a capital transaction and credited to additional paid in capital.
UtiliCorp Revolving Credit Agreement
We entered into a $250 million revolving credit agreement with UtiliCorp United Inc. on August 13, 2001. The revolver is a one-year agreement with borrowing rates based on one month LIBOR plus 0.4% to 2.725%. The specific rate depends upon our credit rating and the outstanding balance under the revolver. Our effective rate at September 30, 2001 was 3.64%. At September 30, 2001, $125 million was outstanding under the facility and is included within accounts and line of credit payable to UtiliCorp on the combined balance sheet. UtiliCorp may demand repayment of all outstanding amounts under the revolver if any of the following events were to occur:
- 1.
- The sale, transfer, assignment, disposition or securitization or monetization of all or substantially all of UtiliCorp's assets;
- 2.
- The occurrence of any default by UtiliCorp on any of its outstanding debt obligations;
- 3.
- The occurrence of a spin-off by UtiliCorp to its shareholders of UtiliCorp's outstanding voting shares of Aquila; or
- 4.
- Aquila obtains a third-party committed credit facility in an amount greater than or equal to the aggregate principal amounts of the commitment to UtiliCorp at such time.
The credit agreement also contains customary restrictions as well as covenants relating to the use of proceeds and ratios for debt to total capital, as defined in the agreement.
10
6. Reportable Segment Reconciliation
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in Millions | ||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||
Sales: | ||||||||||||
Wholesale Services | $ | 8,463.0 | $ | 7,746.3 | $ | 28,731.8 | $ | 16,829.7 | ||||
Capacity Services | 329.2 | 250.2 | 945.4 | 502.5 | ||||||||
Total | $ | 8,792.2 | $ | 7,996.5 | $ | 29,677.2 | $ | 17,332.2 | ||||
EBIT: | ||||||||||||
Wholesale Services | $ | 30.7 | $ | 29.5 | $ | 241.6 | $ | 70.1 | ||||
Capacity Services | 21.0 | 11.3 | 89.2 | 35.1 | ||||||||
Total | $ | 51.7 | $ | 40.8 | $ | 330.8 | $ | 105.2 | ||||
7. Subsequent Events
On November 7, 2001, UtiliCorp announced that it will make an exchange offer by which UtiliCorp would acquire all of our outstanding publicly held shares. According to UtiliCorp, all of our public shareholders will be offered .6896 shares of UtiliCorp common stock in a tax-free exchange for each outstanding share of our Class A common stock. UtiliCorp has stated that it will require that at least a majority of our publicly held Class A shares are tendered and this condition will not be waived. UtiliCorp has committed that, if the exchange offer is successfully completed, UtiliCorp will effect a "short-form" merger of us with a UtiliCorp subsidiary. In that merger, each remaining share of our Class A stock would be converted (subject to the exercise of appraisal rights) into the same number of shares of UtiliCorp common stock as paid in the exchange offer.
We are currently aware of ten class action complaints with allegations regarding the proposed exchange offer that have been filed against Aquila, UtiliCorp, and certain officers and directors of Aquila. Generally, the actions challenge the announced plan for the exchange offer, seek to enjoin the exchange offer or, should the exchange offer be consummated, and award of an unspecified amount of damages, and other relief. The plaintiffs in these actions allege breaches of fiduciary and other common law duties owned to them. We are in the process of reviewing the claims and have not yet answered the allegations or made an assessment of the likely outcome of the litigation.
11
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.
12
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 September 30, | Nine Months Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in Millions | |||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||
Earnings Before Interest and Taxes: | |||||||||||||
Wholesale Services | $ | 30.7 | $ | 29.5 | $ | 241.6 | $ | 70.1 | |||||
Capacity Services | 21.0 | 11.3 | 89.2 | 35.1 | |||||||||
Total EBIT | 51.7 | 40.8 | 330.8 | 105.2 | |||||||||
Interest expense | .1 | 6.2 | 2.9 | 17.2 | |||||||||
Provision in lieu of income taxes | 14.4 | 11.6 | 140.1 | 32.5 | |||||||||
Net Income | $ | 37.2 | $ | 23.0 | $ | 187.8 | $ | 55.5 | |||||
Diluted Earnings per share | $ | .37 | $ | .27 | $ | 1.99 | $ | .65 | |||||
Net income increased $14.2 million, or 62%, in the 2001 third quarter and $132.3 million, or 238%, for the nine months ended September 30, 2001 when compared to the same periods in the prior year. The growth for the quarter comes from stronger earnings in Client Services and Capacity Services, with earnings before interest and taxes up 60% and 86%, respectively, over the prior year. On a year-to-date basis, earnings growth is strong, as all business units have posted marked increases. These strong results were driven by the following:
- •
- Strong client demand for structured products and physical delivery capabilities increased the number of client transactions by 48% and 32% for the quarter and year to date, respectively.
- •
- The average number of monthly commodity transactions during the quarter and on a year-to-date basis has increased 25% and 27%, respectively, over prior year.
- •
- Strong results from our interest in six power plants acquired in December 2000 from GPU International.
- •
- Successful optimization of new generation assets by securing prices at above current market rates, reflecting on our ability to capture market opportunities.
- •
- A robust pricing environment that provided increased pricing opportunities to execute our strategy.
These strong achievements resulted in a trailing twelve-month return on equity of 45%.
13
WHOLESALE SERVICES
The table below summarizes the operations of our Wholesale Services business segment for the three and nine month periods ended September 30, 2001 and 2000.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Sales | $ | 8,463.0 | $ | 7,746.3 | $ | 28,731.8 | $ | 16,829.7 | ||||||
Cost of sales | 8,388.6 | 7,690.7 | 28,198.5 | 16,624.8 | ||||||||||
Equity in earnings of investments and partnerships | .2 | — | .2 | — | ||||||||||
�� | ||||||||||||||
Gross profit | 74.6 | 55.6 | 533.5 | 204.9 | ||||||||||
Operating expenses: | ||||||||||||||
Administrative expenses | 47.0 | 43.5 | 309.0 | 153.3 | ||||||||||
Depreciation and amortization expense | 8.5 | 2.9 | 15.1 | 10.8 | ||||||||||
Other income | (11.6 | ) | (20.3 | ) | (32.2 | ) | (29.3 | ) | ||||||
Earnings before interest and taxes (EBIT) | $ | 30.7 | $ | 29.5 | $ | 241.6 | $ | 70.1 | ||||||
Sub-unit breakdown: | ||||||||||||||
Commodity Services EBIT | $ | 7.4 | $ | 14.9 | $ | 169.2 | $ | 31.4 | ||||||
Client Services EBIT | 23.3 | 14.6 | 72.4 | 38.7 | ||||||||||
Total EBIT for Wholesale Services | $ | 30.7 | $ | 29.5 | $ | 241.6 | $ | 70.1 | ||||||
Operating Statistics: | ||||||||||||||
Physical gas volumes marketed per day (Bcf/d) | 13.4 | 12.1 | 12.7 | 11.7 | ||||||||||
Electricity marketing volumes (MMWhs) | 87.2 | 44.1 | 219.7 | 128.8 | ||||||||||
Volumes delivered (Tbtue/d) | 24.4 | 18.0 | 22.1 | 17.4 | ||||||||||
Average transactions per month (000's) | 49.3 | 39.4 | 44.2 | 34.9 | ||||||||||
Electricity prices MWh (average) | $ | 58.09 | $ | 78.78 | $ | 59.38 | $ | 49.72 | ||||||
Natural gas price per Mcf (average) | $ | 2.84 | $ | 3.95 | $ | 4.60 | $ | 3.30 | ||||||
Quarter Ended September 30, 2001 versus Quarter Ended September 30, 2000
Sales and Cost of Sales
Both our sales and cost of sales for our Wholesale Services business segment increased 9% in the third quarter of 2001 compared to the third quarter of 2000, resulting in a gross profit increase of $18.8 million. This increase was primarily due to the following factors:
- •
- Improved margins resulted from a decline in power prices and our ability to take advantage of those pricing opportunities within the market. Partially offsetting improved margins for the quarter was lower volatility in gas prices and approximately a $10 million loss associated with the errant American Gas Association report that listed inventory levels at lower levels than the market expected. The report caused gas prices to increase causing our fixed price sales to decrease in value on a mark-to-market basis. The report was subsequently restated, however, our positions were already closed.
- •
- An increase of 98% and 11% in electricity and gas volumes marketed, respectively, a combined 36% increase on an equivalent Tbtue/d basis and a 25% increase in the average number of commodity transactions per month also contributed to an increase in gross profit, sales and cost of sales for the quarter over prior years.
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- •
- A 48% increase in the number of client transactions contributed to a 26% increase in gross profit 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.
Administrative Expenses
Administrative expenses increased $3.5 million, or 8%, in the third quarter of 2001 compared to 2000 due to our continued expansion and payroll associated with additional employees.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $5.6 million in 2001 over the comparable 2000 quarter. The majority of the increase relates to the write-off of certain interactive web-based assets whose future net realizable value was considered to be minimal.
Other Income
Other income decreased by $8.7 million, or 43%, in the third quarter of 2001, primarily as a result of a non-recurring $9 million gain related to the sale of an equity security connected to our Capital Services business in 2000.
Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Wholesale Services business segment increased 71% and 70%, respectively, in the nine-months ended September 30, 2001 compared to the same period in 2000, resulting in a gross profit increase of $328.4 million. These increases were primarily due to the following:
- •
- A robust pricing environment that provided increased opportunities to execute our strategy and deliver products and services to our clients.
- •
- An increase of 71% and 9% in electricity and gas volumes marketed, respectively, a combined 27% increase on an equivalent Tbtue/d basis and a 27% increase in the average number of commodity transactions per month also contributed to an increase in gross profit, sales and cost of sales.
- •
- A 32% increase in the number of client transactions contributed to a 57% increase in gross profit from our origination deals and our 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 $155.7 million, or 102%, in 2001 over the comparable nine month period in 2000 due to our continued expansion, payroll associated with approximately 170 additional employees and higher incentive expenses directly linked to our improved financial performance in 2001.
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Depreciation and Amortization Expense
Depreciation and amortization expense increased $4.3 million in 2001 over the comparable 2000 nine month period. The majority of the increase relates to the write-off of certain interactive web-based assets whose future net realizable value was considered to be minimal.
CAPACITY SERVICES
The table below summarizes the operations of our Capacity Services business segment for the three and nine month periods ended September 30, 2001 and 2000.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dollars in millions | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Sales | $ | 329.2 | $ | 250.2 | $ | 945.4 | $ | 502.5 | ||||||
Cost of sales | 290.0 | 219.5 | 778.5 | 410.1 | ||||||||||
Equity in earnings of investments and partnerships | 11.6 | 4.7 | 23.3 | 13.2 | ||||||||||
Gross profit | 50.8 | 35.4 | 190.2 | 105.6 | ||||||||||
Operating expenses: | ||||||||||||||
Administrative expenses | 21.9 | 16.5 | 73.5 | 48.4 | ||||||||||
Depreciation and amortization expense | 9.5 | 7.7 | 29.3 | 23.8 | ||||||||||
Other income | (1.6 | ) | (.1 | ) | (1.8 | ) | (1.7 | ) | ||||||
Earnings before interest and taxes (EBIT) | $ | 21.0 | $ | 11.3 | $ | 89.2 | $ | 35.1 | ||||||
Operating Statistics: | ||||||||||||||
Gas throughput volumes (Mcf/d) | 363.0 | 423.0 | 386.0 | 460.0 | ||||||||||
Natural gas liquids produced (MBbls/d) | 22.1 | 22.5 | 19.6 | 22.4 | ||||||||||
Natural gas liquids price per gallon | $ | .40 | $ | .48 | $ | .46 | $ | .46 | ||||||
MW owned or controlled | 4,357 | 1,398 | 4,357 | 1,398 | ||||||||||
Quarter Ended September 30, 2001 versus Quarter Ended September 30, 2000
Sales and Cost of Sales
Sales and cost of sales for our Capacity Services business segment increased $79.0 million and $70.5 million, respectively, in the third quarter of 2001 compared to the third quarter of 2000, representing $8.5 million of the gross profit increase. The strong results were primarily due to the following factors:
- •
- The GPU International acquisition in December 2000 added approximately $9.2 million to gross profit in the 2001 quarter while adding $17.9 million to sales and $8.7 million to costs of sales.
- •
- The additional sales and cost of sales represents additional capacity and related trading where over-all margins were slightly down when compared to the prior year.
Equity in Earnings of Investments and Partnerships
Improved earnings of $6.9 million in the third quarter of 2001 over the same period in 2000 relates to our equity investments that were part of the GPU International acquisition that was made in December 2000. Earnings from these investments are mainly realized over the summer period where the related power plants create the majority of their earnings.
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Administrative Expenses
Administrative expenses increased $5.4 million, or 33%, in the 2001 quarter compared to the 2000 quarter. The majority of this increase is directly related to the effects of our GPU International acquisition in December 2000.
Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000
Sales and Cost of Sales
For the nine months ended September 30, 2001, sales and cost of sales for our Capacity Services business segment increased $442.9 million and $368.4 million, respectively, over prior year, representing a $74.5 million increase in gross profit. The stronger results were primarily due to the following factors:
- •
- The GPU International acquisition in December 2000 added approximately $44.6 million to gross profit in 2001 while adding $65.1 million and $20.5 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 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.
- •
- Partially offsetting the above increases were lower margins from our pipeline business as volumes were significantly down compared to the prior year period.
- •
- The additional sales and cost of sales represents additional capacity, higher prices and related trading where over-all margins were slightly down when compared to the prior year.
Equity in Earnings of Investments and Partnerships
Improved earnings in 2001 over 2000 were related to our 50% equity interest in the Oasis Pipeline and our GPU International acquisition that was made in December 2000. The additional earnings from the Oasis Pipeline mainly stem from a 15% increase in ownership that occurred in the fourth quarter of 2000 and transportation opportunities that existed due to high demand in the West.
Administrative Expenses
Administrative expenses increased $25.1 million, or 52%, in 2001 compared to 2000. The majority of this increase is related to the effects of our GPU International acquisition in December 2000.
SIGNIFICANT BALANCE SHEET MOVEMENTS
Total assets at September 30, 2001 decreased by $1,750.8 million compared to December 31, 2000. This decrease is primarily attributable to the following:
- •
- Accounts receivable decreased $1,423.5 million primarily due to the seasonality and price fluctuations of our gas and power trading business.
- •
- Inventories increased by $126.0 million as our storage facilities were replenished at higher prices and additional volumes in anticipation of the winter season.
- •
- Price risk management assets decreased by $762.3 million due to a change in market prices of gas and power which can fluctuate significantly.
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Total liabilities at September 30, 2001 decreased by $2,275.3 million compared to December 31, 2000. This decrease is primarily attributable to the following:
- •
- Accounts payable decreased by $1,139.2 million primarily due to the seasonality and price fluctuations of our gas and power trading business.
- •
- Accounts and line of credit payable to UtiliCorp increased by $130.2 million, primarily as a result of a $125 million draw down on our line of credit that was established with UtiliCorp in the third quarter of 2001.
- •
- Price risk management liabilities decreased by $873.9 million due to a change in market prices of gas and power which can fluctuate significantly.
- •
- Customer deposits decreased by $286.3 million due to price fluctuations and our customers' over-all positions in our gas and power trading business.
LIQUIDITY AND CAPITAL RESOURCES
We are subject to various demands on cash resulting from cash flows generated and used by operations, margin deposits and continued investments in power plants, gas storage facilities, and our investment portfolio. We have managed our liquidity and capital needs through a variety of methods that include accessing public equity markets, cash generated from operations, borrowings from UtiliCorp, selling accounts receivable, and posting letters of credit. At September 30, 2001, our total cash and cash equivalents were $160.0 million, an increase of $151.0 million from December 31, 2000. The increase in cash is primarily due to financing activities related to our initial public offering that was completed in April 2001 that raised a net $315.6 million and $125 million of borrowings under a line of credit with UtiliCorp. Cash flows from operations were negative by $129.1 million as strong operating results before margin deposits were offset by $357.9 million of negative cash flow from net margin deposit activity. Cash flows from investing activities used net cash of $74.7 million as capital expenditures for plant development and expansion were partially offset by cash received on notes 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.
Under a series of master agreements with our customers, we are required to post, and require our customers to post, either cash or a letter of credit when certain agreed-upon credit limits are exceeded. We have a $125 million letter of credit facility with a group of banks that is used to support our operating and margining activities. At September 30, 2001, approximately $89.3 million of letters of credit were issued under this facility. This facility expires in December 2001, though we expect to extend this facility.
On August 13, 2001, we entered into a $250 million revolving credit agreement with UtiliCorp United Inc. The revolver is a one year agreement with borrowing rates based on one month LIBOR plus 0.4% to 2.725%. The specific rate depends upon our credit rating and the outstanding balance under the revolver. Our effective rate at September 30, 2001 was 3.64%. At September 30, 2001, $125 million was outstanding under the facility and is included within accounts and line of credit payable to UtiliCorp on the combined balance sheet. UtiliCorp may demand repayment if any of the following events were to occur:
- 1.
- The sale, transfer, assignment, disposition or securitization or monetization of all or substantially all of UtiliCorp's assets;
- 2.
- The occurrence of any default by UtiliCorp on any of its outstanding debt obligations;
- 3.
- The occurrence of a spin-off by UtiliCorp to its shareholders of UtiliCorp's outstanding voting shares of Aquila; or
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- 4.
- Aquila obtains a third-party committed credit facility in an amount greater than or equal to the aggregate principal amounts of the commitment to UtiliCorp at such time.
The credit agreement also contains customary restrictions as well as covenants relating to the use of proceeds and ratios for debt to total capital, as defined in the agreement.
In addition, we have sold $275 million of accounts receivable under a Receivables Sale Agreement and have used the proceeds to help fund our short-term cash needs. As this program was in place prior to 2001, additional net proceeds have not been received in the current year. We intend to increase the potential sales amount under a revised Receivables Sale Agreement to $400 million in the fourth quarter of 2001 and reserve the additional capacity as a source of liquidity.
In November 2000, we closed on a $145 million lease to finance a 340-megawatt power plant, currently under construction. The lease has a term of seven years with a variable interest component of the lease tied to changes in UtiliCorp's credit rating and LIBOR. We expect the plant to be completed by May 2002. If UtiliCorp's interest in Aquila falls below 75%, certain provisions in the lease will need to be renegotiated.
In addition, we are constructing a 340-megawatt power plant in Mississippi. This project will be financed with cash flow from operations and various financing activities. The project is estimated to cost $145 million with $63 million being spent as of September 30, 2001.
In May of 2001, we entered into an operating lease for ten GE turbines plus related equipment associated with future development. Up to $265 million in turbines and equipment can be leased under this agreement. Under the terms of the turbine and equipment lease, we must collateralize cumulative expenditures by the lessor above $43 million with cash. As of September 30, 2001, our outstanding collateral balance was $31 million.
In August, Aquila and a partner agreed to purchase a gas storage facility under development in Lodi, California for $220 million. The facility will be partially financed with non-recourse project level debt. Our equity investment in this project is estimated be around $25 million.
Our financing strategy with respect to these investment activities will include a combination of financings through leasing or partnership structures as well as on balance sheet financing with funds provided by accessing public debt and equity markets.
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Subsequent Events
On November 7, 2001, UtiliCorp announced that it will make an exchange offer by which UtiliCorp would acquire all of our outstanding publicly held shares. According to UtiliCorp, all of our public shareholders will be offered .6896 shares of UtiliCorp common stock in a tax-free exchange for each outstanding share of our Class A common stock. UtiliCorp has stated that it will require that at least a majority of our publicly held Class A shares are tendered and this condition will not be waived. UtiliCorp has committed that, if the exchange offer is successfully completed, UtiliCorp will effect a "short-term" merger of us with a UtiliCorp subsidiary. In that merger, each remaining share of our Class A stock would be converted (subject to the exercise of appraisal rights) into the same number of shares of UtiliCorp common stock as paid in the exchange offer.
As of the time of this filing, we are aware of ten stockholder class action complaints with allegations regarding UtiliCorp's proposed exchange offer that have been filed against us, UtiliCorp, Messrs. Richard C. Green, Jr., Robert K. Green, and Keith G. Stamm. Nine of the actions were filed in the Delaware Court of Chancery and were captioned, respectively, Francine Pluck v. Aquila Inc., UtiliCorp United, Inc., Richard C. Green, Jr., Robert K. Green, and Keith G. Stamm, Civil Action No. 19236 (filed November 7, 2001), Joyce Sarsik v. Robert K. Green; Richard C. Green, Jr.; Keith G. Stamm; UtiliCorp United Inc., and Aquila, Inc., Civil Action No. 19237 (filed November 7, 2001), Charles Zimmer v. Richard C. Green, Jr., Robert K. Green, Keith G. Stamm, Aquila Inc., and UtiliCorp United Inc., Civil Action No. 19238NC (filed November 7, 2001), Darren Pinnock v. UtiliCorp Utd., Aquila, Inc., Robert K. Green, Richard C. Green Jr., and Keith Stamm, Civil Action No. 19243 (filed November 8, 2001), Roseanne Caruso v. Aquila Inc., UtiliCorp United, Inc., Richard C. Green Jr., Robert K. Green, and Keith G. Stamm, Civil Action No. 19244NC (filed November 8, 2001), George Siemers v. UtiliCorp Utd., Aquila, Inc., Robert K. Green, Richard C. Green, Jr. and Keith Stamm, Civil Action No. 19246 (filed November 8, 2001), James Hanson v. UtiliCorp Utd., Aquila, Inc., Robert K. Green, Richard C. Green, Jr. and Keith Stamm, Civil Action No. 19247 (filed November 8, 2001), Jason Greene v. Robert K. Green; Richard C. Green, Jr.; Keith G. Stamm; UtiliCorp United Inc., and Aquila, Inc., Civil Action No. 19250NC (filed November 9, 2001), and Nicholas Ruhland v. Robert K. Green; Richard C. Green, Jr.; Keith G. Stamm; UtiliCorp United Inc., and Aquila, Inc.; Civil Action No. 19251NC (filed November 9, 2001). One of the actions was filed in the Circuit Court of Jackson County, Missouri, and was captioned Edward Shlomovich v. Robert K. Green, Richard C. Green, Jr., Keith G. Stamm, Aquila, Inc., and UtiliCorp United, Inc. (filed November 8, 2001). The actions challenge UtiliCorp's announced plan for the exchange offer, seek to enjoin the exchange offer or, should the exchange offer be consummated, an award of an unspecified amount of damages, and other relief. The plaintiffs in these actions allege breaches of fiduciary and other common law duties owed to them by the defendants.
- (a)
- List of Exhibits:
- 3.1
- Corrected Restated Certificate of Incorporation.
- 10.1
- Revolving Credit Agreement with UtiliCorp United Inc.
- 10.2
- Amended & Restated Revolving Credit Agreement with UtiliCorp United Inc.
- (b)
- Reports on Form 8-K
No reports on Form 8-K were filed during the third 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: November 13, 2001
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Aquila, Inc. Combined Statements of Comprehensive Income—Unaudited
Aquila, Inc. Combined Statements of Cash Flows—Unaudited
AQUILA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited)
Signatures