Company Profile: UtiliCorp United

OGJ Online Senior Power Writer Ann de Rouffignac interviewed Bob Green, president of UtiliCorp United Inc., about the company and its search for a partner for its Aquila trading unit at the company's headquarters Aug. 9.

OGJ Online Senior Power Writer Ann de Rouffignac interviewed Bob Green, president of UtiliCorp United Inc., about the company and its search for a partner for its Aquila trading unit at the company's headquarters Aug. 9.

KANSAS CITY, KAN.�Bob Green, president and chief operating officer of UtiliCorp United Inc., didn�t plan on working in the family utility business.

When he graduated from the university, his older brother, Rick Green, was already well entrenched (now chairman and CEO) and his aunt sat on UtiliCorp�s board of directors. Bob knew well the stories about how his great grandfather, Lemuel Green started the company with a rigged up generator to run a flour mill in Kansas about 1907.

He also know how Lemuel, later his grandfather Ralph, and then his father Richard all worked hard to build a modern electricity utility from those humble beginnings.

Like the Greens before him, Bob�s coming of age meant working on a line crew in the summers. But there were more reasons for the hot grueling work on a transmission line than pocket money� money that a teenage son of the wealthy Green family really didn�t need. Greens were expected to be ingrained with a traditional Midwest work ethic and self-discipline.

No problem there. Green, 38 years old, earned an engineering degree at Princeton University and a law degree at Vanderbilt University.

What he didn�t get out of the summer jobs was a desire to continue in the family utility business.

�It was downright unappealing to be a part of the regulated utility business,� Green says.

His family didn�t pressure him to stay in the business, he says.

Green instead became an investment banker for Shearson Lehman Hutton in New York from 1984 to 1987.

Return to Kansas
Then he returned to his roots in Kansas and joined the Kansas City law firm of Blackwell, Sanders, Matheny, Weary & Lombardi. In late 1988, he finally plunged into the utility business like the Greens before him, when he became a vice-president at Missouri Public Service, an operating division of UtiliCorp. Subsequently, he began his rapid ascent to become the number two at the utility working side by side with his brother Rick.

UtiliCorp is probably the only large publicly traded US utility with fourth generation family members still running the company. The Green family holds about a 4% equity stake in the company.

Green says he returned to the family business because of the excitement generated by deregulation and the fact that a market had developed for trading natural gas and power.

�Without deregulation, I wouldn�t be here,� he says.

Yet, Kansas is one of the few states that has absolutely no legislative plans for electric deregulation, according to the Energy Information Administration. Green says its clear that the federal government will have to take charge and pass federal legislation to move deregulation forward. Electricity shortages and price spikes that surfaced in the newly deregulated California market have politicized and slowed down deregulation elsewhere, he says.

While the federal government decides what to do, the confusion has created opportunity for the merchant energy industry. UtiliCorp owns one of the biggest players in marketing and trading of energy. Its Aquila Energy subsidiary was the third largest natural gas wholesaler and second largest power wholesaler in North America in 999.

Unlocking value
Aquila holds the key to unlocking and boosting UtiliCorp�s value, says Green. UtiliCorp�s stock price to earnings ratio multiple is only about 12. Most merchant energy companies trade at a multiple of 20. Improving recognition of the company's performance has become Green's number one priority.

Last spring, the company announced that Aquila was looking for a partner with physical assets to back up its large trading and marketing operation conducted from a new trading floor in downtown Kansas City.

While no takers have emerged so far, the executive team, including Green has redoubled its efforts and is telling its story to analysts during a mid-August road show.

�We have a business with value. We intend to unlock that value,� Green says.

The company is seeking a partner with electric generation assets similar to the merger deal struck by Dynegy Corp. and Illinova, he says. UtiliCorp envisions a separate company for Aquila with the equity split one-third for Aquila, one-third the new partner, and one-third publicly owned.

Whether they get that ownership arrangement and keep control remains to be seen, analysts say. It will depend on what size company fills up the company dance card. Indeed, UtiliCorp has been entertaining potential partners lately in its elegantly restored 19th Century headquarters in downtown Kansas City, sources close to the company say.

Green would not speculate on possible suitors. But observers suggest that NRG Energy Inc. is a potential partner. Other names that have been suggested include CMS Energy Corp. or even AES Corp.

�There are a lot of them [companies with generation assets] with assets out there that don�t have a trading organization. There are not a lot of large trading shops without assets,� he says.

Getting the partner right�and the valuation for Aquila right�might delay this transaction for some time, analysts suggest.

Besides prowling for a partner for Aquila, UtiliCorp�s road show is also designed to improve the investment community�s perception of the parent company.

Wall Street perceives UtiliCorp as a land-locked regulated utility and its price-to-earnings multiple reflect that perception. Last year, despite its best year ever, UtiliCorp's common shares hit a 2-year low in December.

Frustrated by its poor market showing, the company is trying to highlight why it should be valued differently from most regional mid-sized utilities. International expansion and bandwidth communications activities are the heart of UtiliCorp�s growth strategy.

Even though the company is small compared to other international players such TXU Corp. or Duke Energy Corp., it continues to march forward with acquisitions in locations far from Kansas City. UtiliCorp has purchased distribution companies in Australia, New Zealand, and most recently, Canada.

Green, who led the charge overseas, says the investments have been worth it.

�We invested $258 million in 1995 in United Energy, an Australian utility. Today the rate of return on that investment has turned out to be 30%,� he says.

UtiliCorp has already unbundled the Australian utility and plans an initial public offering of its telecommunications business.

�We took a lot of heat for buying distribution businesses,� says Green. �But United Energy is the next Montana Power story.�

Montana Power Co. pursued its telecommunications business almost to the exclusion of its traditional utility business and was handsomely rewarded by Wall Street.

Broadband strategy
UtiliCorp�s broadband strategy differs from other industry players such as Enron Corp., he says. In 1999, UtiliCorp bought a 30% stake in Quanta Services Inc. Quanta, one of the largest utility installation firms in the US, installs, maintains, and contracts services for the utility, telecommunications, and cable television industries. The market in the US for these types of services is about $55 billion, according to that company.

�UtiliCorp is building a broadband distribution business,� says Green. �The final mile to the home is the bottleneck out there. We are one of the first to market this �fiber to the home� concept.�

Green is trying to sell these ideas and build awareness of what the company is doing with the road show. Recently, the stock has gotten a little bounce from the show, coupled with a solid earnings performance for this year's second quarter. UtiliCorp earned $29.3 million or 31�/share on $5.8 billion in revenue. Sales were up 45% in the second quarter of 2000, compared to the year earlier period. Earnings were up 15% this year over the same period a year ago. Since the road show began, the stock has bounced to a little more than $23/share, up from about $20/share earlier in the summer.

What's not clear is whether it is the Green family traditions or the firm's relatively isolated midwestern location that's limited the company's search for a partner. Whatever the reason, an analyst with a large Dallas investment firm suggests UtiliCorp's management may fear losing control to a much bigger company.

Green, however, is noticeably aware of the structural changes occurring in the industry. Just this summer Entergy Corp. and FPL Group Inc. reported plans to combine in a multibillion dollar merger and AES Corp. announced it will buy IPALCO Enterprise Inc. in a $2.5 billion deal.

�Clearly scale has its advantages,� says Green. �There will be consolidation of utilities into super regional utilities. Overtime, it�s inevitable to be a larger utility.�

Whether UtiliCorp will survive today�s wave of consolidation among utilities or quietly grow into a so-called �super regional� utility remains to be seen.

But Green is adamant that his responsibility is ultimately to the shareholders.

�There are no absolutes here,� he says.

Robert K. Green, president and COO of UtiliCorp United Inc. is leading the utility in its international endeavors and searching for a partner with physical assets for Aquila, its electricity and gas trading and marketing unit. Utilicorp is also pursuing its own version of a telecommunications or broadband strategy designed to jump start earnings growth.

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