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Posted on July 2, 2008
By STEVE EVERLY
The Kansas City Star

Regulators Say Yes to Purchase of Aquila

Missouri regulators on Tuesday approved Great Plains Energy Inc.'s purchase of Aquila Inc. in a deal that would reshape the region's electric utility market.

The 2-1 decision by the Missouri Public Service Commission removed the last regulatory obstacle to closing the deal, which would create a company with about 800,000 customers covering much of western Missouri. A tentative closing date for the $1.5 billion transaction has been set for July 14.

Critics of the deal have argued that it is likely to mean higher rates for customers of both companies. But Aquila and Great Plains, the parent company of Kansas City Power & Light, countered that savings from the merger would keep rates from climbing as high as they would if the companies remained separate.

The deal also is likely to eliminate 100 of the remaining 325 Aquila employees in downtown Kansas City. At its peak in 2001, Aquila had 1,800 employees working downtown.

The regulatory decision could be appealed by parties who opposed the merger, and one of them, the Missouri Office of the Public Counsel, said it was "very possibly going to appeal." But Lewis Mills, the head of that agency, said it would be difficult to get a restraining order stopping the deal from being closed while the appeal was heard.

Besides Mills' office, which represents customers in utility cases, the acquisition faced opposition from several parties, including the commission's own staff and several industrial customers. Opponents argued that Great Plains had paid too much for Aquila and was risking a credit downgrade, which could lead to higher electricity rates.

The two regulators approving the acquisition, Connie Murray and Terry Jarrett, rejected those concerns and said that any detriment to the public interest was speculation.

"The commission is not faced with any good reason to disapprove the request," said their order approving the merger.

The commission also imposed a handful of conditions. The major one would prevent Great Plains from pushing the cost of any credit downgrade onto its customers. That condition, however, would be in effect only if the downgrade was caused by the acquisition of Aquila, which might be difficult to demonstrate once the companies were joined.

Great Plains said that it was "obviously pleased with the decision" but wanted to review the order and the conditions in detail before making a more definitive comment. Matt Tidwell, a spokesman for the company, said that could take a day or two.

Aquila said it was also pleased with the decision.

"We've been waiting for this order since January and now will move forward," said Al Butkus, a spokesman for Aquila.

The decision was greeted with dismay by others, including Commissioner Robert Clayton, who voted against the acquisition. Great Plains had argued that among the benefits would be an upgrade for Aquila's debt rating, which would shave the amount of interest that would have to be paid.

But Clayton, in an interview, said a compelling case had been made that the acquisition was being made at a bad time, when Great Plains and its subsidiary KCPL also were involved in completing one of the biggest energy construction programs undertaken in the state. The program includes the coal-fired Iatan 2 power plant near Weston.

"I think this is the wrong transaction at the wrong time," he said, adding that a credit downgrade and higher rates were possible if the companies merge.

Clayton also said he was dismayed that testimony from the commission's career staff was rejected by the two commissioners who approved the deal. He added that the condition preventing the company from passing on any costs because of a credit downgrade was not sufficient. The potential problem for Great Plains in a downgrade is insufficient cash flow, and the utility probably would approach regulators for a rate increase if that occurred.

Mills, of the public counsel's office, said he continued to believe that the merger was risky for consumers. He noted that there were several procedural errors in the commission's proceeding, including private meetings by Great Plains and Aquila with some of the commissioners before the hearings started.

The plan to purchase Aquila was announced by Great Plains in January 2007.

Great Plains is to keep Aquila's Missouri utilities while Aquila's gas and electric utilities in Kansas, Nebraska, Colorado and Iowa will be purchased by Black Hills Corp. The deal at the time it was announced was valued at $1.7 billion in cash and stock. That value has declined to about $1.5 billion because of a drop in Great Plains' stock price, which closed Tuesday at $25.37, up 9 cents.

If the deal closes, it will come seven years after Aquila's financial problems began in the wake of Enron Corp.'s bankruptcy.

For most of its corporate life, Aquila's predecessor companies were home to quiet, steady utilities. But in the 1980s, with Richard Green Jr. at the helm, things began to change. A holding company was formed and it began to buy up utilities in states such as Michigan and West Virginia. A Canadian utility, its first international venture, was added in 1987.

In the 1990s, the company was transformed. It still had utilities, but deregulation was seen as the future. Energy trading, independent power plants and other unregulated businesses took center stage. Its international presence also grew to Australia, New Zealand and the United Kingdom.

The company sought to recover by selling its unregulated businesses and some of its regulated utilities.

For shareholders, Aquila's stock price reached a high of $37.55 in May 2001. The deal with Great Plains will give them $3.97 a share. Aquila shares closed Tuesday at $3.92, up 15 cents.

Many shareholders blame Aquila's management for what has happened to their investment, but they are also resigned that it's time to move on.

"It's highway robbery, but it's going on all over America," Richard Hull, an Aquila shareholder in Johnson, Neb., said Tuesday after the regulators ruled.

To reach Steve Everly, call 816-234-4455 or send e-mail to severly@kcstar.com.

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