Aquila's repositioning plan: lessons learned, mission not yet accomplished

Rick Dobson
Aquila, Inc.
Kansas City, Mo.

On more than one occasion, I have been asked: “What have you learned in the past two-plus years from executing Aquila’s repositioning plan?” When I look at what we’ve accomplished and how the capital markets have responded, I’d say there were three lessons:

(1) Do what you say you are going to do.

(2) Remain flexible, seek out others’ views, and listen.

(3) Communicate, communicate, communicate.

In the fall of 2002 when the company’s leadership team began to study and build its strategy, some felt our best step forward was a step backward - some type of reorganization and bankruptcy filing.

The numbers and the circumstances pretty much told the story. Aquila had total debt and long-term contract obligations of more than $4 billion in debt and long-term gas contract payments coming due in the next three years of $1.4 billion, annual cash flows from our remaining businesses that were not adequate to service the obligations, and a stock price that reflected the market’s bankruptcy concerns.

We did have a stable core business of 10 domestic utilities in seven states, as well as some valuable assets in Australia, New Zealand, and Canada. But we also knew that the market for unregulated energy assets was not particularly good because other entities with significant merchant activities would be also selling these off to generate cash and to stabilize core operations.

Wall Street, as always, wanted to know exactly how we were going to solve our obvious cash problem. At that point it was decided that without fail we would “do what we say we are going to do.” What’s more, until we had decided exactly what we were going to do, we would remain silent.

The capital markets were okay with that idea, but there was one proviso. The advice we received was clear: “When you’ve decided what you are going to do, communicate it, and then be sure you do it!”

Besides exiting the energy merchant and trading business, it became apparent that Aquila also would need to sell all of its international businesses. These were, for the most part, valuable businesses that would help bring in the cash the company needed to reduce debt and strengthen our balance sheet.

During all of 2003 and 2004 we stayed focused on selling assets. We were successful in selling more than $3 billion in assets, which in turn brought our debt down to a more manageable level.

We also used some of that cash to help us exit four of six long-term, gas contracts. The remaining two contracts are relatively small and will roll off the balance sheet in a few years. In 2005, we will continue removing the other assets not core to our seven-state utility business.

Along the way we did not forget to let our shareholders and the capital markets know about our plans and the progress we were making. In fact, we made communications a top priority because we wanted to make sure everyone knew that we were doing exactly what we said we would do.

This effort went way beyond just holding the quarterly updates with analysts via a web cast and other typical financial public relations efforts. Senior officers held small and large group meetings with retail shareholders all around the country, and one-on-one meetings were held with analysts that wanted to talk to us personally.

In addition, we reached out to our own employees, community leaders, regulators, state legislators, and interested institutional holders, including the management teams of various hedge funds that now held a significant share of our stock. This effort took a great deal of senior officer time, but it was well worth it.

We didn’t just tell our story in these meetings. We listened to what everyone had to say. We heard their frustration over the elimination of the dividend and their questioning of management’s commitment to return the company to profitability and credit worthiness. But we also heard some good advice. We learned that we had more options than just selling assets.

Like any other company in need of cash, we thought about issuing new equity. But the questions that always throb in the back of your mind are: “How fragile is our stock price, will the dilution harm the company in the long-term, or will the stockholders and the capital markets accept such an action?”

What we were hearing, especially from the capital markets is that issuing equity was possible and that there was definitely an appetite for our equity in the marketplace. We knew from our economic analysis that we had solid plans for the equity proceeds that would yield the appropriate returns far beyond just the coupon on the debt we would eliminate (i.e., paying debt and obligations, accelerating the return of collateral, and ratcheting down various interest rates).

So, what we decided to do was to be flexible and act based on what we were hearing and seeing. We not only issued equity (46 million shares netting $112.4 million), but we also issued 13.8 million mandatorily convertible senior notes (PIES) that netted another $334.3 million.

We completed a number of other financial market transactions in a short period of time, including prepaying a $430 million, three-year secured term loan due in 2006; securing a $220 million, 364-day unsecured term loan and a $110 million 364-day unsecured revolving credit facility; and closing a $125 million secured revolving credit facility (accounts receivable facility).

By being flexible, if not unconventional, these financial transactions and the planned extension of the maturity of on a $220 million unsecured term loan to 2009 removed any significant maturities until 2009.

What was the reaction from shareholders and the capital markets? A few numbers tell that story. Prior to issuing the equity and the PIES, our stock was around $3.11. As expected, there was downward pressure during the equity and PIES offering, and the stock price dropped to $2.55. But by the end of 2004, Aquila’s stock was in the $3.70-plus range.

Even so, we still have more to do. Our long-term debt is still higher than can be supported by our seven-state utility distribution business. As a utility, our capital needs will never remain stagnant. Transmission lines and power facilities always require updating and expansion. Integrating technology into our business is an ongoing challenge. And continually developing new ways to improve customer service is a must in our business.

We will continue to do all of this, making the most of the lessons learned over the past two years: do what you say you will do; be flexible and listen to other views; and communicate, communicate, communicate. Just as important, we now have momentum and plenty of energy to keep moving forward. OGFJ

The author
Rick Dobson has been senior vice president and CFO of Aquila, Inc. since May 2003, after serving as interim CFO since November 2002. Previously, he was vice president - risk management and accounting, and before that vice president and controller for Aquila’s merchant services subsidiary. Prior to joining Aquila, Dobson served as an audit manager with Arthur Andersen. He has a bachelor’s degree in business administration from the University of Wisconsin and an MBA in finance from the University of Nebraska. He is also a Certified Public Accountant. Based in Kansas City, Mo., Aquila operates electricity and natural gas utilities serving customers in Colorado, Iowa, Kansas, Michigan, Minnesota, Missouri, and Nebraska. The company also owns power generation assets.