Aquila seeks generation partner

Cheap stock prices are pressuring more electric utility companies to consider divesting their faster-growing deregulated units as a means of realizing immediate value from them. But is there a market? It's a proposition more companies will be testing during the next several months.

Cheap stock prices are pressuring more electric utility companies to consider divesting their faster-growing deregulated units as a means of realizing immediate value from them. But is there a market? It's a proposition more companies will be testing during the next several months.

Atlanta-based Southern Co. is planning to spin off to the public a 19.9% stake in it Southern Energy Co. subsidiary, an independent marketer and power producer.

To bolster its generation portfolio, Southern Energy reported last week it will buy 5,154 Mw of capacity from Potomac Electric Power Co. for $2.65 billion, bringing Southern Energy's total generating capacity to some 15,000 Mw. With trading operations backed by generating capacity, companies can access the cheapest power and sell it at the best price.

Now, UtiliCorp United Inc., Kansas City, Mo., is considering a similar strategy for its marketing arm, Aquila Energy Corp., but first the company must find a generation partner. Marketing-rich but light on generation assets, Aquila is "looking to partner with a nonregulated generation fleet," says CEO Keith G. Stamm.

Strong performer
As the second largest US wholesaler of electricity and the third largest US wholesaler of natural gas, Aquila was a strong performer for its parent UtiliCorp in the 2000 first quarter. Earnings of $34.4 million before interest and taxes were nearly triple results in the 1999 first quarter, helping offset weak returns from UtiliCorp.'s US energy networks.

The marketing and trading operations earned $21.3 million in the 2000 first quarter, a 142% increase over the same period a year earlier. UtiliCorp values Aquila at about $2 billion.

With more generation being separated from its host native load, more is becoming available to the marketplace. "We have seen quite a bit of interest in the industry," Stamm says. Rather than buying generation, Aquila would like to find a like-minded partner willing to contribute the generation assets to a separate company. UtiliCorp and its partners each would retain an interest in the company, and the balance could be sold in an initial public offering.

Compared to arrangements in which companies have pooled assets and trading operations and continued to jointly operate the new entity, creating a separate company "makes it easier for the market to digest," Stamm says. And, compared to buying or building generating capacity, he says, "Partnering gets you there quicker." Ideally, the company will begin life with 5,000-10,000 Mw, which can then be scaled up, he says.

But companies could face disappointment in the market. After an energetic run-up, Duke Energy Field Services (DEFS), Denver, postponed plans for an IPO of common stock May 25, citing volatile market conditions.

The wholly owned subsidiary of Duke Energy Corp., Charlotte, NC, and Phillips Petroleum Co., Bartlesville, Okla., said shares of DEFS, one of the nation's largest natural gas gatherers and one of the largest producers and marketers of NGL, will be offered to the public when market conditions improve.

If a company of Duke Energy Field Services' size had to pull back, the time could be difficult for other energy firms, says Donato Eassey, first vice-president, research, Merrill Lynch & Co.

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