Aquila Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

Aquila Inc. (ILA)

Q1 2008 Earnings Call

May 8, 2008 9:30 am ET

Executives

Jason Ketchum – Manager IR

Richard Green – CEO

Beth Armstrong – Sr. VP & CAO

Jon Empson – Sr. VP of Regulated Operations

Analysts

Unidentified Analyst – Hadron Capital

Presentation

Operator

Welcome to the Aquila, Inc. first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Jason Ketchum with Aquila Investor Relations; please go ahead.

Jason Ketchum

Good morning everyone. Before we get into the presentation, I would like to point your attention to slide two, the Safe Harbor Statement. This presentation and comments we will make contain forward-looking information concerning earnings growth, capital expenditures, litigation, tax losses and our pending transactions with Great Plains Energy Incorporated and Black Hills Corporation. Important factors that could cause actual results to differ materially from these forward-looking statements are located on Page 39 of our Form 10-Q for the quarter ended March 31, 2008. Additional risk factors that should be considered are located on Pages 18 through 21 of our Form 10-K for the year ended December 31, 2007.

I will now turn the call over to Aquila CEO, Richard Green.

Richard Green

Thanks Jason. Good morning and thank you for taking time to listen to our first quarter financial results. I am here with morning with Jon Empson, our Senior Vice President of Regulated Operations and Beth Armstrong, our Senior Vice President and Chief Accounting Officer.

On slide three as I have mentioned in the past when this merger closes we are committed to turning over a high performing and efficiently run business. With a first quarter EBITDA increase of 93% we are off to a great start in 2008. Performance in the quarter improved due to rate relief, increased customer demand and a continued implementation of the Missouri fuel adjustment clause.

Aquila was recently recognized as one of the top three Midwest utilities by JD Power and Associates for the 2008 Electric Utility Business Customer Satisfaction Study. Also even though many of the Aquila employees are working towards a smooth transition of our business we continue our momentum on Six Sigma projects and training. Additionally we have continued to work towards a resolution in regards to our South Harper Peaking facilities in Cass County and recently reached an agreement with Cass County to resolve our dispute. Through the terms of the settlement Aquila will pay the county $1.8 million, apply for a special use permit and work with the neighboring land owners in a good-faith effort.

Aquila is also working with Missouri legislators to pass a Bill that would amend state statutes to allow the Missouri Public Service Commission to grant approval after construction of utility facilities.

Before I turn the call over to Beth for the financial review I am aware that the market is extremely interested in the next steps of the merger. To address that interest, I would like to provide you with a brief update. On slide four, remember that a little over a year ago, we announced the Great Plains and Black Hills transaction with the expectation that we would close within 12 to 18 months. While staying focused on improving our utility operations we have made a tremendous amount of progress in gaining the necessary regulatory and shareholder approvals as well as working towards a smooth transition with both companies.

On October 9, Aquila shareholders approved the merger proposal by 88%. We have received regulatory approvals in Colorado, Iowa, Nebraska, Kansas and the FERC. Hearings for the Missouri merger application started on April 21 and got over earlier than expected on May 1. We expect a decision from the Missouri Public Service Commission in late June or early July.

I will now turn the call over to Beth Armstrong for the financial review.

Beth Armstrong

Thank you Richard and good morning. I’m going to begin with slide number six. Net income from continuing operations was $8.5 million which is favorable to 2007 by $35.7 million. The favorable result was largely due to improved utility earnings driven by rate relief and improved fuel recovery in Missouri Electric and lower corporate costs. We reported no earnings from discontinued operations in 2008 due to the sale of Kansas Electric operations on April 1, 2007.

The income tax benefit of $3.6 million for the quarter resulted from the recognition of $24.4 million of previously unrecognized tax benefits due to the settlement of an IRS examination for tax years 1998 through 2002. This recognition of tax benefits was offset by $15.6 million of valuation allowance provided against the net deferred tax assets.

Interest expense for the first quarter 2008 was $32 million reflecting a decrease of $2.7 million. The interest costs for 2008 reflects savings of $6.9 million resulting from liability management steps taken in the prior year offset by decreased interest expense allocations of $4.1 million to discontinued operations in the first quarter of 2007.

EBITDA for 2008 of $66 million was favorable to the prior year by $45.1 million. I will speak to the EBITDA performance by segment on slide number seven. The $66 million of EBITDA in the first quarter 2008 was comprised primarily of $68.1 million of utility EBITDA offset in part by $2.1 million of EBITDA loss in the merchant and corporate segments. The $68.1 million of 2008 utility EBITDA compares to $35.3 million in 2007 reflecting a $32.8 million improvement. I will discuss the variances in more detail on the following slides.

On slide eight electric continuing operations EBITDA of $32.9 million was favorable by $26.7 million compared to 2007. The increase in EBITDA is primarily due to $21.3 million in increased rate relief and improved fuel recovery in Missouri Electric, $5.9 million of unfavorable derivative settlements in the first quarter of 2007 that did not reoccur in 2008 and favorable weather and other volume variances of $2.6 million offset by a $7.1 million reserve established in the first quarter of 2008 related to the South Harper litigation.

Gas continuing operations EBITDA was $35.2 million for the first quarter of 2008 which was favorable to the prior year by $6.1 million. This was favorable primarily due rate relief in Nebraska and Kansas of $3.2 million and favorable weather and volume variances of $1.9 million.

Moving to slide nine merchant, corporate and other EBITDA losses of $2.1 million was favorable to prior year by $12.3 million primarily due to lower advisor fees and restructuring costs and the continued roll off of the merchant trade book. The total variance from continuing operations for the quarter compared to the prior year was favorable $45.1 million. Discontinued operations EBITDA decreased $8.8 million due to the sale of Kansas Electric on April 1, 2007.

Now I will turn the call back to Richard.

Richard Green

And I believe now we are ready to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Unidentified Analyst – Hadron Capital

Unidentified Analyst – Hadron Capital

Just a quick question, given the moves that Great Plains has done in terms of the concessions that they’ve made recently, does that change your confidence at all in terms of getting a transaction done now that the Missouri [inaudible] pends?

Richard Green

There’s no question that I think the moves that Great Plains has made have been positive toward the transaction and we’re very supportive of that and think Great Plains have done a great job with that and we’re working on the reply briefs now that will go in on June 2. And then the Commission will start to consider the case and of course we are hopeful that we will get a favorable decision out of them.

Unidentified Analyst – Hadron Capital

And I assume at this point that settlement discussions are completely over and it’s just a matter of getting through the process of doing the reply briefs and a kind of verdict at this point?

Richard Green

I think you’re always open to that but right now people are focusing on the reply briefs.

Unidentified Analyst – Hadron Capital

Okay thank you.

Operator

And it appears that we have no further questions.

Richard Green

Thank you for listening this morning and if any questions occur to you later, don’t hesitate to give us a call.

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