Aquila, Inc. - Company Profile, Information, Business Description, History, Background Information on Aquila, Inc.

20 West Ninth Street
Kansas City, Missouri 64105

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History of Aquila, Inc.

Aquila, Inc. is an international electricity and natural gas utility. It operates power generation facilities, distribution networks, and trading ventures in seven U.S. states and in Canada, the United Kingdom, New Zealand, and Australia. With more than six million customers throughout the world, Aquila ranks 33 on the Fortune 500.

1902-40: From a Single Generator to a Major Utility

Aquila's history began at the turn of the century in rural Kansas, where a farmer and miller named Lemuel K. Green began dabbling in property and banking transactions. In the waning years of the 1890s, he traded a collection of homestead and timber claims in Graham County for a flour mill in Lenora, Kansas. Within three years, Green had amassed sufficient capital to purchase the water-powered Alton Roller Mills that had employed him some years before, and turn over the Lenora flour mill to his father and uncle.

In 1902 Green sold the Alton mill, using the proceeds to establish a modern, steam-powered milling complex called the Solomon Valley Milling Company in the more populous locale of Osborne, Kansas. This new mill was equipped with an electric power generator, which enabled Green to produce and sell electricity, an enterprise that had long fascinated him.

By 1908, at the age of 48, Green decided to pursue the rapidly growing power generation business. He sold the Solomon mill and purchased the H.M. Spalding Electric Light Plant, a poorly run power company in nearby Concordia, Kansas, for $21,500.

At the time it was purchased, the Spalding company operated only from dawn to midnight--the power supply was flickered at 11:45 to warn customers of the impending blackout--and remained closed on Sundays. In order to provide electricity around the clock, Green negotiated a deal to buy power from a nearby flour mill that was equipped with an electrical generator. Meanwhile, Green put his sons, Ralph and Lawrence, to work in the company, setting utility poles and stringing power lines.

At this time an important advance was made in electrical lighting equipment. The traditional carbon filament light bulb, fragile and inefficient, was replaced by a new kind of bulb with a filament made of tungsten. As these bulbs became widely available to customers, the demand for electricity greatly increased.

Soon, dozens of towns near Concordia were asking for electric service. Green organized the community leaders and offered to string transmission lines to their towns if they would fund the construction. The communities issued bonds to cover these costs and before long the Spalding plant was serving 22 communities throughout northern Kansas. In addition, Green's success in securing large supplies of water required for running the generating facilities enabled him to sell the surplus in the city of Concordia. Still, with plenty of excess generating capacity, Green began a series of publicity campaigns to increase customer purchases of electrical appliances.

In 1916, sensing an opportunity to capitalize on his investment, Green sold the Spalding plant to a New York investment group headed by A.E. Fitkin & Company for $550,000. A short time later, during a visit to Pleasant Hill, Missouri, about 20 miles southeast of Kansas City, Green discovered yet another untapped market for electricity.

The local power company, the Reeder Light, Ice & Fuel Company, served Pleasant Hill, but had not yet penetrated the areas surrounding the growing town. Green purchased the company, naming it the Green Power & Light Company, and set out to expand the operation.

Adding generators and stringing new power lines were elementary problems. An expanded plant, however, would require vast quantities of water. Not wishing to use the low-grade, iron-rich well water prevalent in the area, Green purchased a tract of land that included a small river and dammed it to create Lake Baldwin. The lake not only fed the plant, it also provided surplus quantities of water to the residents of Pleasant Hill.

In 1922, searching for new opportunities to expand, Green constructed a second generating station near Clinton, about 50 miles south of Pleasant Hill. Additional expansion, however, would require financial resources that were not only beyond the means of the family, but also the local banks, and even the Kansas City loan company they had retained. The only alternative was to take the company public. Green Power & Light became the West Missouri Power Company in 1922, with shares sold to the public and a variety of other interests.

The company and its rival in the area, Kansas City Power & Light, settled on service boundaries in 1922. This arrangement cleared the way for additional acquisitions by West Missouri Power Company, including a franchise to serve the city of Nevada, Missouri, and its electric street railway in 1924. Within the next few years, the company was serving 56 communities south and east of Kansas City, and had an interest in the Ozark Utility Company, itself serving 35 towns in southwestern Missouri. In addition to generating electric power, the company now also provided manufactured gas.

In a dramatic move in late 1926, however, Lemuel Green negotiated the sale once again to the Fitkin group of West Missouri Power Company, which was to be merged with the Missouri Public Service Company (MPS). During this same time period, Green purchased 2,000 acres of orange grove property near Escondido, California.

Green died in 1930, at the beginning of the Great Depression. Ralph Green, principal inheritor of the family business, sold the family interest in the Ozark Utility Company that year to focus on the citrus business his father had started. However, he remained deeply interested in the companies the family had built in Missouri. It was with much disappointment that he watched them deteriorate under increasingly difficult circumstances.

1940-92: Expansion Domestically and Internationally

In 1940 Ralph Green saw an opportunity to take back the Missouri Public Service Company, which had absorbed the West Missouri Power Company. The Public Utilities Act of 1935 mandated that the enormous holding companies that owned all U.S. utilities divest them. Green, whose assets remained well protected during the Depression, was able to acquire a controlling interest in MPS, which was serving 100 communities in Western Missouri from the Middle West Corporation.

In 1943 Green also gained control of the Missouri Gas & Electric Service Company, which served about 40 communities. Two years later, he added the City Light and Traction Company of Sedalia, Missouri, to his growing system of utility companies. With service levels restored and the company once again financially sound, MPS absorbed Missouri Gas & Electric in 1952. Also, after several years of providing manufactured gas at a substantial loss to only two communities, MPS converted to natural gas and expanded its gas business into 12 new communities.

During the 1950s, the company faced nearly threefold population growth in its service territory, fueled by suburban growth, new industrial parks, the baby boom, and the development of the new Mid-Continent International Airport. New demand for gas and electricity was easily met through an ambitious and carefully researched expansion plan that more than doubled the company's capacity.

Ralph Green died in 1962, passing leadership of the corporation to his son Richard Green, who was named chairman of MPS in April 1963. Under his leadership the company saw somewhat slower, but steady growth, remaining a primarily suburban and rural power utility. During the 1960s MPS as well as other utility companies became increasingly encumbered by mounting state and federal regulations. In what would become a fortunate strategic move, MPS steered clear of adding the nuclear-powered facilities that promised such tremendous returns on investment despite high start-up and regulatory costs.

MPS entered a turbulent period beginning in the early 1970s. Battered by high interest rates and inflation and an adversarial, if not hostile, relationship with regulators, MPS found itself unable to exercise control over its markets or effectively manage its risks. The virtual end of OPEC control over world energy markets in 1979, however, brought about more favorable economic conditions, while the 1980s heralded an era of probusiness regulation under the administration of President Ronald Reagan.

In 1982 Green's son, Richard, Jr., assumed the position of chief executive officer. Demonstrating a fiery entrepreneurial spirit, the younger Green made an unsuccessful bid to acquire the Kansas-based Gas Service Company in 1983. Deciding to postpone his acquisition plans, Green instead formulated a business strategy that clearly identified the company's regulatory, weather, and general economic risks. Rick Green also asserted that MPS would concentrate solely on energy generation and related businesses; diversification into nonenergy assets was to be strictly avoided. By 1985, a reorganization was in order. The Missouri Public Service Company shed its geographically specific name and was reborn as UtiliCorp United Inc.

While he was opposed to diversifying UtiliCorp's business, Green did, however, seek to diversify the company's regulatory risks and boost its winter sales. In 1985, UtiliCorp purchased People's Natural Gas with operations in five states. In 1986, it bought the gas distribution company Northern Minnesota Utilities. In 1987, it purchased West Virginia Power and West Kootenay Power and Light in British Columbia. In 1989, it acquired Michigan Gas Utilities, and in 1990, the company bought a West Virginia gas distribution network.

Thus, in five years UtiliCorp expanded its operations into eight states and British Columbia. Moreover, these properties diversified UtiliCorp's operations into natural gas distribution and marketing, as well as its traditional electricity generation and distribution businesses.

In 1989, the company assigned its unregulated gas operations to a newly created subsidiary, Aquila Energy Corp. In addition to its marketing functions, Aquila was responsible for such related, but unregulated, areas as natural gas storage and transmission. By 1990 Aquila was responsible for 21 percent of UtiliCorp's earnings.

UtiliCorp achieved its expansion while avoiding a substantial increase in debt or customer rates by continually offering shares of stock for sale, although it did reduce the Green family's stake in the company. Initially the offerings were made through local markets because the company was considered too small to interest Wall Street investors. As the company expanded, however, it also developed greater financial clout that enabled its shares to be traded on the New York Stock Exchange and allowed it to more easily secure backing for new projects. UtiliCorp also began an effort to increase employee ownership of the company to 25 percent, in the belief that it would increase employees' stake in the success of the company.

In 1991 UtiliCorp made its largest acquisition to date. Further pursuing its expansion strategy, the company engineered the takeover of additional electrical utility operations in Kansas and Colorado from Centel, a local telephone company that sought to concentrate on its core business. The addition of these operations boosted the number of UtiliCorp customers to nearly a million and increased the company's assets by almost $260 million. Other areas of growth included entrance into European markets. In 1992, UtiliCorp entered into a joint venture to distribute and market natural gas in the United Kingdom.

1992-2002: Deregulation Presents Opportunities and Perils

Congress had begun to deregulate the electrical industry in 1978. In 1992, it enacted the Energy Policy Act. This legislation allowed utilities and other entities to build electric generators and to sell the power produced at unregulated prices on the wholesale market. In doing so, it unleashed a series of changes in the previously staid utility industry unmatched since its birth about a century previously.

Many utilities, comfortable with the traditional regulatory regime that allowed them to collect guaranteed, if modest, profits yet saddled with large investments that might never be fully paid for under a competitive pricing regime, opposed this change. UtiliCorp, in contrast, adapted enthusiastically to the new rules. Its gas acquisitions gave it experience in that industry, which had successfully deregulated during the preceding decade. Its acquisition of utility operations in other states and in Canada and Great Britain gave it the kind of geographic diversification that deregulation encouraged. The company was free of the kinds of past investments that might inhibit its competitiveness.

During the 1990s, UtiliCorp aggressively pursued the business opportunities that deregulation permitted. It continued its international expansion. In 1993, UtiliCorp acquired a minority interest in a rural New Zealand utility. In 1995, it bought an interest in another New Zealand utility. In that same year, it purchased a 49.9 percent interest in an Australian electric distribution utility. In 1999, the company added gas businesses to its Australian portfolio. The year 2000 saw the company's Canadian operations expand with the acquisition of power distribution assets in Alberta. The company expanded its British operations in 2002.

At the same time, UtiliCorp diversified functionally, testing the new business opportunities opened by deregulation. The company's Aquila Energy unit expanded from managing the company's unregulated gas business to managing its unregulated wholesale power sales. It became one of the nation's major traders of electricity, arranging with other producers to deliver power to wholesale customers.

In 1996, UtiliCorp sold the first weather risk-hedging product, which allowed a customer to collect a premium if a specified weather event occurred that would have adverse consequences for its business. The company developed additional hedging products to help businesses manage financial risks resulting from such factors as the volatility in crop yields, inaccurate weather forecasts, and power supply blackouts.

UtiliCorp undertook a failed initiative to bundle power supply, telephone, and home security services into a package with a single bill. It also initiated telecommunications services in Australia and Kansas City.

In 2001, UtiliCorp spun off part of its Aquila unit, stating that it would divest the rest of the unit sometime in the future. The market for shares of unregulated power marketers, however, deteriorated. In 2002, less than a year later, UtiliCorp purchased all the shares it had sold. It then renamed the entire company Aquila, Inc.

By the beginning of the 21st century, the massive changes that had affected the utility industry during the preceding decade came into question. The deregulation of the California retail market in 1998, the large price increases and blackouts that followed, and the bankruptcy of one California utility and near-bankruptcy of another brought electrical utility deregulation into question. The fall of the nation's largest electricity trader, Enron, amid questions about the appropriateness and legality of its accounting practices, and subsequent suggestions that Enron may have engaged in fraudulent trading practices that contributed to California's power woes, raised additional questions about the wisdom of electricity deregulation. This occurred in a broader context of stock market decline and economic recession.

Aquila was not immune to these pressures. In May 2001, UtiliCorp/Aquila's stock price peaked at $37.55. By July 2002, it had declined to $6.75. Its debt ratings were reexamined. Management initiated a program including asset sales, a dividend reduction, and the sale of debt and equity securities aimed at improving the company's financial condition. Time would tell whether Aquila and many other electric utilities would regain financial health.

Principal Subsidiaries:Aquila Merchant Services, Inc. (100%); MEP Holdings, Inc. (100%); UtiliCorp Asia Pacific, Inc. (100%); UtiliCorp Asia Pacific Pty Ltd (100%); UtiliCorp Australia, Inc. (100%); UtilCo Group, Inc. (100%); UtiliCorp South Pacific, Inc. (100%); UtiliCorp Networks Canada Ltd. (100%); UtiliCorp Networks Canada (Alberta) Ltd. (100%).

Principal Competitors:AEP; Reliant Energy; Duke Energy; Mirant; Dynergy.


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