-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HIzxIxOpzsbkTiqFgovuQHFP3y26Z/bLy1H/5kkpO5npl6ozq5gpVtfOw6AbWE1W 7CBHWeYKAOEH+g+s7ngZlg== 0000912057-99-005422.txt : 19991115 0000912057-99-005422.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005422 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTILICORP UNITED INC CENTRAL INDEX KEY: 0000066960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 440541877 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03562 FILM NUMBER: 99751010 BUSINESS ADDRESS: STREET 1: 20 WEST NINTH STREET STREET 2: 911 MAIN STE 3000 CITY: KANSAS CITY STATE: MO ZIP: 64105-1711 BUSINESS PHONE: 8164216600 MAIL ADDRESS: STREET 1: PO BOX 13287 CITY: KANSAS CITY STATE: MO ZIP: 64199-3287 FORMER COMPANY: FORMER CONFORMED NAME: MISSOURI PUBLIC SERVICE CO DATE OF NAME CHANGE: 19850516 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 1-3562
UTILICORP UNITED INC. (Exact name of registrant as specified in its charter) Delaware 44-0541877 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
20 West Ninth Street, Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 816-421-6600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at November 8, 1999 - ----- Common Stock, $1 par value 92,921,474 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS - ----------------------------- Information regarding the consolidated condensed financial statements is set forth on pages 3 through 13. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- Management's discussion and analysis of financial condition and results of operations can be found on pages 14 through 24. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ Quantitative and qualitative disclosures regarding market risk can be found on page 9. PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------- None. ITEM 2. CHANGES IN SECURITIES - ------------------------------ None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - -------------------------------------------------------------- None. ITEM 5. OTHER INFORMATION - -------------------------- None. ITEM 6. EXHIBITS - ----------------- Exhibits and Reports on Form 8K can be found on page 25. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UTILICORP UNITED INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME--UNAUDITED
Three Months Ended September 30, - ------------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 - ------------------------------------------------------------------------------------------------------------- Sales $6,464.2 $3,808.6 Cost of sales 6,175.1 3,560.9 - ------------------------------------------------------------------------------------------------------------- GROSS PROFIT 289.1 247.7 - ------------------------------------------------------------------------------------------------------------- Operating, administrative and maintenance expense 149.1 149.6 Depreciation and amortization 47.4 37.2 OTHER INCOME (EXPENSE): Equity in earnings from investments and partnerships 14.0 24.1 Other income 17.1 3.9 Minority interest and other expense (9.1) (3.3) - ------------------------------------------------------------------------------------------------------------- Total other income 22.0 24.7 - ------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INTEREST AND TAXES 114.6 85.6 - ------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest expense - long-term debt 44.3 27.7 Interest expense - short-term debt 3.9 6.9 Minority interest in income of partnership and trust holdings 2.4 2.2 - ------------------------------------------------------------------------------------------------------------- Total interest expense 50.6 36.8 - ------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 64.0 48.8 Income taxes 21.5 20.3 - ------------------------------------------------------------------------------------------------------------- NET INCOME $ 42.5 $ 28.5 ============================================================================================================= EARNINGS PER SHARE: Basic $.46 $.36 Diluted $.46 $.36 ============================================================================================================= DIVIDENDS PER SHARE $.30 $.30 =============================================================================================================
See accompanying notes to consolidated condensed financial statements. 3 UTILICORP UNITED INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME--UNAUDITED
Nine Months Ended September 30, DOLLARS IN MILLIONS 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Sales $14,235.4 $9,269.0 Cost of sales 13,390.2 8,557.6 - --------------------------------------------------------------------------- ---------------- ------------------- GROSS PROFIT 845.2 711.4 - --------------------------------------------------------------------------- ---------------- ------------------- Operating, administrative and maintenance expense 435.2 412.4 Depreciation and amortization 141.9 110.3 Provision for asset impairments --- 27.7 OTHER INCOME (EXPENSE): Equity in earnings from investments and partnerships 34.7 107.3 Other income 34.5 15.3 Minority interest and other expense (25.5) (23.0) - --------------------------------------------------------------------------- ---------------- ------------------- Total other income 43.7 99.6 - --------------------------------------------------------------------------- ---------------- ------------------- EARNINGS BEFORE INTEREST AND TAXES 311.8 260.6 - --------------------------------------------------------------------------- ---------------- ------------------- INTEREST EXPENSE: Interest expense - long-term debt 122.1 88.9 Interest expense - short-term debt 5.3 10.8 Minority interest in income of partnership and trust holdings 6.8 6.7 - --------------------------------------------------------------------------- ---------------- ------------------- Total interest expense 134.2 106.4 - --------------------------------------------------------------------------- ---------------- ------------------- EARNINGS BEFORE INCOME TAXES 177.6 154.2 Income taxes 58.4 58.9 - --------------------------------------------------------------------------- ---------------- ------------------- NET INCOME $ 119.2 $ 95.3 =========================================================================== ================ =================== EARNINGS PER SHARE: Basic $1.30 $1.20 Diluted $1.30 $1.18 =========================================================================== ================= ================== DIVIDENDS PER SHARE $.90 $.90 ================================================================================================================
See accompanying notes to consolidated condensed financial statements. 4 UTILICORP UNITED INC. CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31, DOLLARS IN MILLIONS 1999 1998 - --------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 181.2 $ 120.5 Funds on deposit 52.6 13.4 Accounts receivable, net 2,587.6 1,276.9 Inventories and supplies, at average cost 255.5 235.1 Price risk management assets 169.7 173.1 Prepayments and other 55.4 85.8 - --------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 3,302.0 1,904.8 - --------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 3,672.0 3,313.9 Investments in subsidiaries and partnerships 1,002.2 519.8 Price risk management assets 209.5 215.5 Merchant notes receivable 166.7 20.1 Deferred charges 145.2 156.8 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 8,497.6 $ 6,130.9 ================================================================================================================ LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 20.2 $ 248.8 Short-term debt 290.3 235.6 Accounts payable 2,854.6 1,415.3 Accrued liabilities 87.2 49.7 Price risk management liabilities 162.5 192.2 Other current liabilities 95.2 89.6 - --------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 3,510.0 2,231.2 - --------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Long-term debt, net 2,234.2 1,376.6 Deferred income taxes and credits 432.6 429.5 Price risk management liabilities 296.1 308.4 Minority interest 109.2 151.6 Other deferred credits 57.9 87.3 - --------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 3,130.0 2,353.4 - --------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of partnership 100.0 100.0 Company-obligated mandatorily redeemable security of trust holding solely parent company senior deferrable notes 250.0 -- Common shareowners' equity 1,507.6 1,446.3 Commitments and contingencies - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 8,497.6 $6,130.9 ================================================================================================================
See accompanying notes to consolidated condensed financial statements. 5 UTILICORP UNITED INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME--UNAUDITED
Three Months Nine Months Ended Ended September 30, September 30, - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - ------------------------------------------------------ ------------ ------------- ------------- ------------- Net Income $42.5 $28.5 $119.2 $95.3 Other comprehensive income (loss): Unrealized translation adjustments .7 (10.3) -- (26.5) - ------------------------------------------------------ ------------ ------------- ------------- ------------- Comprehensive Income $43.2 $18.2 $119.2 $68.8 =============================================================================================================
CONSOLIDATED CONDENSED STATEMENTS OF COMMON SHAREOWNERS' EQUITY
September 30, December 31, DOLLARS IN MILLIONS 1999 1998 - --------------------------------------------------------------------------------------------------------------- (Unaudited) Common Stock: authorized 200,000,000 shares, par value $1 per share; 93,603,434 shares outstanding at September 30, 1999 and 93,574,853 shares outstanding at December 31, 1998; authorized 20,000,000 shares of Class Acommon stock, par value $1 per share, none issued $ 93.6 $ 93.6 Premium on Capital Stock 1,238.6 1,253.5 Retained Earnings 225.8 190.0 Treasury Stock, at cost (501,843 and 2,159,330 shares at September 30, 1999 and December 31, 1998, respectively) (12.8) (53.2) Accumulated Other Comprehensive Losses (37.6) (37.6) - --------------------------------------------------------------------------------------------------------------- TOTAL COMMON SHAREOWNERS' EQUITY $1,507.6 $1,446.3 ===============================================================================================================
See accompanying notes to consolidated condensed financial statements. 6 UTILICORP UNITED INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS--UNAUDITED
Nine Months Ended September 30, - ----------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 119.2 $ 95.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 141.9 110.3 Provision for asset impairments -- 27.7 Net changes in price risk management assets and liabilities (32.5) (30.7) Deferred income taxes and credits 3.2 17.6 Equity in earnings from investments and partnerships (34.7) (81.8) Dividends from investments and partnerships 28.0 25.3 Merchant notes receivable (146.6) -- Minority interests 8.0 2.0 Gain on sale of subsidiary stock -- (25.5) Changes in certain assets and liabilities: Accounts receivable/payable, net 6.1 32.1 Accounts receivable, sold 122.8 -- Inventories and supplies (20.4) (82.8) Prepayments and other 7.4 27.7 Deferred charges, net 11.7 7.9 Accrued liabilities, net 43.0 93.1 Other (32.6) 6.7 - ----------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 224.5 224.9 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (93.3) (89.4) Repayment of debt securities -- 101.1 Investments in international businesses (487.0) (82.6) Purchase of minority interest in Aquila Gas Pipeline (44.0) -- Investment in gas storage and gathering assets (111.0) -- Investment in Quanta Services, Inc. (208.3) -- Other (102.6) (44.3) - ----------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES $(1,046.2) $(115.2) - -----------------------------------------------------------------------------------------------------------
7 UTILICORP UNITED INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS--UNAUDITED, CONTINUED
Nine Months Ended September 30, - -------------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock (acquired)/sold $ 40.4 $ (52.5) Issuance of company-obligated mandatorily redeemable preferred securities of trust holdings 250.0 -- Issuance of long-term debt 885.2 26.4 Retirement of long-term debt (250.3) (179.7) Short-term borrowings (repayments), net 54.7 257.8 Cash dividends paid (83.3) (72.7) Other (14.3) (12.3) - -------------------------------------------------------------------------------------------------------------- CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 882.4 (33.0) - -------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 60.7 76.7 Cash and cash equivalents at beginning of period 120.5 89.5 - -------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181.2 $ 166.2 ==============================================================================================================
See accompanying notes to consolidated condensed financial statements. 8 UTILICORP UNITED INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the accounting policies described in the consolidated financial statements and related notes included in our 1998 Annual Report on Form 10-K. We believe it is best to read our year-end consolidated financial statements in conjunction with this report. The year-end financial statements presented were derived from our audited financial statements, but do not include all disclosures required by generally accepted accounting principles. In our opinion, the accompanying consolidated condensed financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair representation of our financial position and the results of our operations. Certain estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods shown have been made in preparing the consolidated condensed financial statements. Actual results could differ from these estimates. Certain prior year amounts in the consolidated financial statements have been reclassified where necessary to conform to the 1999 presentation. FINANCIAL INSTRUMENTS TRADING OPERATIONS We use a variety of financial instruments in connection with price risk management services provided by Aquila Energy Corporation, a wholly-owned subsidiary. These financial instruments include forward contracts that commit us to purchase or sell energy in the future; swap agreements which require payment to (or receipt of payments from) counterparties based on the differential between specific prices for the related commodity; futures and options contracts traded on the New York Mercantile Exchange and other contractual arrangements. The value of all the financial instruments used for price risk management activities are recorded at market value with changes in value reflected in the statement of income. NON-TRADING ACTIVITIES FOR COMMODITY OPERATIONS We use various exchange-traded and over-the-counter financial instrument contracts to hedge anticipated purchases and sales of natural gas and natural gas liquids. The financial instruments used are futures, options, forward contracts and price and basis swaps. Financial instruments used for non-trading activities are designated as a hedge at inception where there is a direct relationship to the price risk associated with our future sales and purchases of commodities used in our operations. Financial instruments used to hedge anticipated transactions are accounted for under the deferral method with gains and losses on these transactions recognized in sales when the hedged transaction occurs. 9 UTILICORP UNITED INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--CONTINUED (UNAUDITED) 2. EARNINGS PER COMMON SHARE The following table shows the amounts used in computing basic and diluted earnings per share and the effect on income and weighted average number of shares of dilutive potential common stock for the three- and nine-month periods ended September 30, 1999 and 1998.
Three Months Ended Nine Months Ended IN MILLIONS, EXCEPT PER SHARE AMOUNTS September 30, September 30, ---------------------------- --------------------------- - --------------------------------------------------------- -------------- ------------- ------------- ------------- 1999 1998 1999 1998 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Earnings available for common shares $42.5 $28.5 $119.2 $95.3 Interest expense on convertible bonds .1 .1 .2 .2 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Earnings available for common shares after assumed conversion of dilutive securities $42.6 $28.6 $119.4 $95.5 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Earnings per share: Basic $ .46 $ .36 $ 1.30 $ 1.20 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Diluted $ .46 $ .36 $ 1.30 $ 1.18 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Weighted average number of common shares used in basic EPS 91.7 79.2 91.3 79.7 Share effect of dilutive securities: Stock options .5 .8 .5 .9 Convertible bonds .3 .3 .3 .4 - --------------------------------------------------------- -------------- ------------- ------------- ------------- Weighted number of common shares and dilutive potential common shares used in diluted EPS 92.5 80.3 92.1 81.0 - --------------------------------------------------------- -------------- ------------- ------------- -------------
3. MERGER AND ACQUISITION ACTIVITIES AQUILA TENDER OFFER On May 7, 1999, approximately 3.4 million shares of Aquila Gas Pipeline Corporation (AQP) were tendered to UtiliCorp at $8.00. The 3.4 million shares together with the 24.0 million shares already held represented 93% of AQP's total shares outstanding. All remaining shares not tendered were converted in a "short-form" merger into a right to receive $8.00 per share. The short-form merger was completed on May 14, 1999, and AQP is no longer a publicly traded company. NATURAL GAS STORAGE FACILITY Our Aquila Energy subsidiary agreed on March 29, 1999, to purchase Western Gas Resources Storage Inc. The $100 million cash transaction increases Aquila's ownership and control of strategically located natural gas storage assets. The 2,200 acre subsurface facility in Katy, Texas, has a storage capacity of 20 billion cubic feet. The purchase closed in the second quarter. 10 UTILICORP UNITED INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--CONTINUED (UNAUDITED) TRUSTPOWER ACQUISITION Effective January 31, 1999, we closed the purchase of New Zealand based TrustPower. Working through our 78.8% owned New Zealand utility, UnitedNetworks Limited, completion of this transaction made us New Zealand's largest electricity distribution company, adding approximately 96,000 TrustPower customers to UnitedNetworks' system. AUSTRALIAN MULTINET GAS ACQUISITION On March 12, 1999, we acquired a 25.5% interest in Multinet/Ikon, a natural gas network and retailer in Victoria, Australia, for $224 million. This investment doubles our customer base in Australia ST. JOSEPH LIGHT & POWER COMPANY On October 19, 1999, St. Joseph Light & Power Company (SJL&P) and UtiliCorp filed a joint application with the Missouri Public Service Commission (MPSC) requesting approval of the companies' plans to merge in a transaction valued at approximately $270 million. SJL&P shareholders approved the combination in June and will receive $23 worth of UtiliCorp common stock for each share of SJL&P common stock. The transaction, which is subject to approval by various state and federal regulatory agencies, will be accounted for as a purchase. We expect to close this transaction by mid-2000. EMPIRE DISTRICT ELECTRIC COMPANY On May 10, 1999, The Empire District Electric Company (Empire) agreed to merge into UtiliCorp. Upon closing, Empire's shareholders will be entitled to receive $29.50 for each share of Empire common stock they hold, payable in either cash or UtiliCorp common stock. The value of the merger consideration per share will decrease if UtiliCorp's common stock is trading below $22 per share at closing and will increase if UtiliCorp's common stock is trading above $26 per share at closing. The consideration paid to Empire shareholders, estimated to be $800 million, including assumption of debt, is subject to certain conditions, such as cash and stock maximums, as well as certain regulatory approvals. The shareholders of Empire voted to approve the merger on September 3, 1999. We expect this merger to be completed by mid-2000. SALE OF WEST VIRGINIA POWER DIVISION On September 9, 1999, we agreed to sell our West Virginia Power division to Allegheny Energy, Inc. for $75 million. In addition to the sale of West Virginia Power's electric and natural gas distribution assets, separate transactions include a 20-year supply agreement for our Aquila Energy unit to provide natural gas to Allegheny and an agreement for Allegheny to purchase Appalachian Electric Heating, our heating and air conditioning service operations in West Virginia. The sale of the assets is subject to the approvals of several governmental bodies. It is expected that all required approvals will be received and the transaction will close in 1999. 11 QUANTA SERVICES, INC. On September 23, 1999, we invested $186 million in Quanta Services, Inc. (Quanta) Preferred Stock. Quanta is a provider of specialized construction services to electric utilities, telecommunications and cable television companies, and governmental entities. The preferred stock is convertible into 6.2 million common shares based on a strike price of $30. This investment will be accounted for by the equity method of accounting. We received a $3.7 million advisory fee from Quanta during the third quarter. In addition, we have purchased approximately 4.9 million shares of Quanta's Common Stock on the open market and in privately negotiated transactions through November 1, 1999, bringing our total investment in Quanta to approximately $312 million. 4. DEBT REFINANCING EXCHANGE OFFER In the first quarter of 1999, approximately $131.8 million of our 9% senior notes were exchanged for 8.27% senior notes and $20.2 million of our 10.5% senior notes were exchanged for 9.03% senior notes. These exchanges effectively lowered our interest rate on the two senior note issues. 5. ISSUANCE OF SENIOR NOTES In July 1999, we issued $250 million of 7% senior notes due July 15, 2004. We used the proceeds to reduce our short-term debt. On November 15, 1999, we plan to issue $200 million of 7.625% senior notes due November 15, 2009. We will use the proceeds to retire $100 million of senior notes maturing on November 15, 1999, and to reduce short-term debt. The September 30, 1999, balance sheet reflects a $200 million reclassification from short-term debt and current maturities of long-term debt to long-term debt to reflecting the subsequent financing of that short-term debt. 6. PREMIUM EQUITY PARTICIPATING SECURITIES In September 1999, we issued 10,000,000 9.75% Premium Equity Participating Security Units ("PEPS Units") for $250 million. Each PEPS Unit had an issue price of $25 and consists of a contract to purchase shares of UtiliCorp common stock on or prior to November 16, 2002 and a preferred security of UCU Capital Trust I. The sole asset of UCU Capital Trust I consists of $257.7 million of 7.35% senior deferrable notes due November 16, 2004 of UtiliCorp. Each purchase contract yields 2.40% per year, paid quarterly, on the $25 stated amount of the PEPS Unit. Each trust preferred security yields 7.35% per year, paid quarterly on the $25 stated amount of the PEPS unit, until November 16, 2002. On November 16, 2002, following a remarketing of the trust preferred securities, the yield will be reset at a rate that will be equal to or greater than 7.35%. 7. PLANT EXPLOSION On July 1, 1999, the Unit # 3 exhaust duct of our Greenwood peaking generating facility in Missouri exploded. The unit's gas-fired turbine suffered minimal damage but its exhaust duct was destroyed and is being rebuilt at a cost of about $2.0 million. While the plant was down for this rebuild, we also carried out a major overhaul that had been scheduled for next spring. The plant is estimated to be back on-line by mid-November. 8. INDEPENDENT POWER PROJECT On September 1, 1999, Fort James-Pennington, Inc. exercised its contractual right to call our 50% partnership interest in the Naheola cogeneration project in Pennington, Alabama. On October 19, 1999, the purchase price for that interest was determined by the parties to be approximately 12 $83.7 million which will result in a pre-tax gain of between $5-$8 million. The transaction is expected to close by December 31, 1999. 9. REPORTABLE SEGMENT RECONCILIATION
Three Months Ended Nine Months Ended September 30, September 30, - ----------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - ------------------------------------- ---------------- ----------------- ---------------- ----------------- Sales: U.S. Utilities $ 356.3 $ 331.5 $ 1,132.3 $1,111.7 Aquila Energy 5,919.4 3,399.8 12,388.0 7,877.9 International 188.3 78.8 714.2 280.7 Other .2 (1.5) .9 (1.3) - ------------------------------------- ---------------- ----------------- ---------------- ----------------- - ------------------------------------- ---------------- ----------------- ---------------- ----------------- Total $ 6,464.2 $ 3,808.6 $ 14,235.4 $9,269.0 - ------------------------------------- ---------------- ----------------- ---------------- ----------------- - ------------------------------------- ---------------- ----------------- ---------------- ----------------- EBIT: U. S. Utilities $ 44.3 $ 54.0 $ 147.8 $ 156.7 Aquila Energy 28.2 24.7 57.3 46.3 International 39.0 14.1 101.5 75.9 Other 3.1 (7.2) 5.2 (18.3) - ------------------------------------- ---------------- ----------------- ---------------- ----------------- - ------------------------------------- ---------------- ----------------- ---------------- ----------------- Total $ 114.6 $ 85.6 $ 311.8 $ 260.6 - ------------------------------------- ---------------- ----------------- ---------------- ----------------- - ------------------------------------- ---------------- ----------------- ---------------- -----------------
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. UTILICORP UNITED INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT WHERE NOTED, THE FOLLOWING DISCUSSION REFERS TO THE CONSOLIDATED ENTITY, UTILICORP UNITED INC. OUR BUSINESS SEGMENTS INCLUDE THE FOLLOWING BUSINESS GROUPS: U.S. UTILITIES, CONSISTING PRIMARILY OF TRANSMISSION, DISTRIBUTION AND GENERATION UTILITY OPERATIONS IN THE U.S., AQUILA ENERGY CORPORATION (AQUILA), CONSISTING PRIMARILY OF ENERGY MARKETING (BOTH GAS AND ELECTRIC), INDEPENDENT POWER PROJECTS AND GAS PROCESSING, GATHERING AND TRANSMISSION AND INTERNATIONAL, CONSISTING OF VARIOUS OPERATIONS THAT INCLUDE GENERATION, GAS MARKETING, ELECTRIC DISTRIBUTION AND VARIOUS EQUITY INVESTMENTS. THE LIQUIDITY AND CAPITAL RESOURCES SECTION IS PREPARED ON A CONSOLIDATED BASIS. FORWARD-LOOKING INFORMATION This report contains forward-looking information. These statements involve risks and uncertainties, and there are certain important factors that can cause actual results to differ materially from those anticipated. Some of the important factors that can cause actual results to differ materially from those anticipated include: - Both our utility and energy merchant businesses are weather-sensitive.Weather, which can affect results significantly to the extent that temperatures differ from normal. - We are exposed to market risk and may incur losses from our marketing and trading operations. - We may not be able to implement our strategy if we are unable to access or generate capital at competitive rates. - The timing and extent of changes in interest rates. - We may not be able to successfully integrate acquired businesses into our operations. - The volatility of natural gas and natural gas liquids prices can significantly affect the earnings contribution from the Energy Assets segment of our Aquila Energy business group. - The pace of well connections to our gas gathering system. - Our development of a merchant power plant may not be successful or profitable. - The pace and degree of regulatory changes in the U.S. and abroad. - The value of the U.S. dollar relative to the British pound, Canadian dollar, Australian dollar, and New Zealand dollar. - The earnings contribution from our Australian operations may decrease in the near future. - The continued expansion of the electric power markets and development of liquid term markets. - Pending rate proceedings. - Expansion of electric markets in the United Kingdom and Europe. 14 LIQUIDITY AND CAPITAL RESOURCES We believe our liquidity and capital resources are sufficient and provide adequate financial flexibility. Our operations have historically generated strong positive cash flow, which, along with our credit lines, accounts receivable sales programs, common stock offerings and ability to issue public debt, have provided adequate liquidity to meet our short-term and long-term cash requirements, including requirements for acquisitions. We utilize accounts receivable sales programs to efficiently manage our working capital and provide immediate liquidity. In September 1999, due to growth in the trading business, we increased our total capacity under these programs by $125 million to $405 million. At September 30, 1999, we had sold approximately $370.8 million of receivables under these programs. In addition to the accounts receivable sales program, we can issue up to $150 million of commercial paper which is supported by a $250 million revolving credit agreement. We had no commercial paper borrowings at September 30, 1999. We completed an exchange offer that effectively lowered the interest rates to be paid on two issues of senior notes. Approximately $131.8 million of our 9% senior notes were exchanged for 8.27% senior notes and $20.2 million of our 10.5% senior notes were exchanged for 9.03% senior notes. In July 1999, we issued $250 million of 7% senior notes due July 15, 2004. We used the proceeds to reduce our short-term debt. On November 15, 1999, we plan to issue $200 million of 7.625% senior notes due November 15, 2009. We used the proceeds to retire $100 million of senior notes maturing on November 15, 1999, and to reduce short-term debt. The September 30, 1999, balance sheet reflects a $200 million reclassification from short-term debt and current maturities of long-term debt to long-term debt to reflecting the subsequent financing of that short-term debt. In September 1999, we issued 10,000,000 9.75% Premium Equity Participating Security Units ("PEPS Units") for $250 million. Each PEPS Unit had an issue price of $25 and consists of a contract to purchase shares of UtiliCorp common stock on or prior to November 16, 2002 and a preferred security of UCU Capital Trust I. The sole asset of UCU Capital Trust I consists of $257.7 million of 7.35% senior deferrable notes due November 16, 2004 of UtiliCorp. Each purchase contract yields 2.40% per year, paid quarterly, on the $25 stated amount of the PEPS Unit. Each trust preferred security yields 7.35% per year, paid quarterly on the $25 stated amount of the PEPS unit, until November 16, 2002. On November 16, 2002, following a remarketing of the trust preferred securities, the yield will be reset at a rate that will be equal to or greater than 7.35%. While there are no definitive plans, we are evaluating the potential of selling a partial interest in our New Zealand investments to reduce our ownership from 78.8% to less than 50%. The impact of this sell down will deconsolidate New Zealand and return this investment to an equity investment. If New Zealand is sold down to below 50%, approximately $500 million of long-term debt would be removed from our balance sheet. The income from our New Zealand investments would also decrease reflective of the reduced ownership interest. SIGNIFICANT BALANCE SHEET MOVEMENTS Total assets increased by $2,366.7 million since December 31, 1998. This increase is primarily attributable to the following: - Cash and cash equivalents increased by $60.7 million. This increase primarily relates to the sale of the retail business by a subsidiary of UnitedNetworks. - Accounts receivable, net increased $1,310.7 million. Increased volumes in the trading business was the primary contributor. - Net property, plant and equipment increased $358.1 million. This increase is due primarily to the acquisition of TrustPower network assets in New Zealand and the acquisition of the gas storage facility by Aquila. - Investments in subsidiaries and partnerships increased $482.4 million primarily due to the acquisition of Multinet/Ikon Energy in March 1999 and the Quanta investment in September 1999. 15 - Merchant notes receivable increased $146.6 million. This results from increased energy related loan activity by Aquila Energy. This is a new line of business for Aquila started in October 1998. Total liabilities increased by $2,055.4 million and common shareholders' equity increased by $311.3 million since December 31, 1998. These increases are primarily attributable to the following: - Short-term and long-term debt together increased $683.7 million. This increase is primarily due to the acquisition activity in New Zealand, the Multinet/Ikon acquisition in Australia and the Quanta investment in September 1999. - Accounts payable increased by $1,439.3 million. Increased activity in the trading business was the primary contributor. - Company-obligated mandatorily redeemable security of trust holding solely parent company senior deferred notes increased $250.0 million. These were issued in September 1999. - Common shareholders' equity increased by $61.3 million primarily due to a decrease of $40.4 million in treasury stock, an increase of $35.8 million in retained earnings, and an offsetting decrease of $14.9 in the premium on capital stock. RESULTS OF OPERATIONS The results of operations for the 1998 period were impacted by several items which do not have a continuing effect on our financial position or results of operations. The consolidated table below summarizes the impact of the non-recurring items on earnings before interest and taxes (EBIT) and diluted earnings per share (EPS).
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, - ----------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS EBIT EPS EBIT EPS EBIT EPS EBIT EPS - ----------------------------------------------------------------------------------------------------------------------- As reported $114.6 $.46 $85.6 $.36 $311.8 $1.30 $260.6 $1.18 Non-recurring items: Provision for asset impairments (a) -- -- -- -- -- -- 27.7 .20 UK contract settlements (b) -- -- -- -- -- -- 13.4 .10 Australia initial public offering (c) -- -- -- -- -- -- (45.3) (.31) - ----------------------------------------------------------------------------------------------------------------------- Normalized $114.6 $.46 $85.6 $.36 $311.8 $1.30 $256.4 $1.17 =======================================================================================================================
a) In 1998, we recorded a $27.7 million provision for impaired assets relating to certain retail gas marketing assets, termination of EnergyOne L.L.C., and the write-off of an independent power project. b) In 1998, we settled two above-market gas contracts at a net loss of $6.6 million. In addition, a court ruled against us on a disputed gas supply contract requiring us to record $6.8 million in interest related to the contract. c) United Energy Limited (UEL) sold to the public in the second quarter of 1998 42% of its common stock resulting in a $45.3 million gain. Normalized earnings or normalized income are terms used by management to describe the recurring earnings or income. These terms are not meant to replace net income or other measures under generally accepted accounting principles. 16 U.S. UTILITIES The table below summarizes the operations of our U. S. utilities for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - --------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- Sales: Electric $225.8 $205.9 $ 513.4 $ 492.6 Gas 79.5 65.4 450.6 445.4 Other 51.0 60.2 168.3 173.7 - --------------------------------------------------------------------------------------------------------- Total sales 356.3 331.5 1,132.3 1,111.7 - --------------------------------------------------------------------------------------------------------- Cost of sales: Electric 109.0 75.4 223.7 186.2 Gas 37.3 28.1 257.4 262.0 Other 44.5 48.5 143.7 144.9 - --------------------------------------------------------------------------------------------------------- Total cost of sales 190.8 152.0 624.8 593.1 - --------------------------------------------------------------------------------------------------------- Gross profit 165.5 179.5 507.5 518.6 - --------------------------------------------------------------------------------------------------------- Operating expenses: Other operating 66.9 70.3 196.6 200.8 Maintenance 12.7 12.2 38.9 34.7 Taxes, other than income taxes 17.1 16.2 45.2 45.7 Depreciation and amortization 28.6 27.1 86.7 81.8 - --------------------------------------------------------------------------------------------------------- Total operating expenses 125.3 125.8 367.4 363.0 - --------------------------------------------------------------------------------------------------------- Other income 4.1 .3 7.7 1.1 - --------------------------------------------------------------------------------------------------------- EBIT $ 44.3 $ 54.0 $ 147.8 $ 156.7 =========================================================================================================
QUARTER-TO-QUARTER EBIT for our U.S. Utilities decreased $9.7 million when comparing 1999 to 1998. This decrease is primarily due to higher purchase power costs (approximately $5.5 million) stemming from open market purchases of power to meet high demands during a heat wave in July. Our need to supplement our power resources was heightened by the unavailability of Greenwood Unit No. 3. EBIT was also reduced because of higher depreciation expenses from additional information technology expenditures and higher allocated operating expenses. YEAR- TO-DATE (FACTORS DISCUSSED IN THE QUARTER-TO-QUARTER COMPARISON ALSO AFFECTED THE YEAR-TO-DATE COMPARISONS.) EBIT for the nine months ended September 30, 1999, was $8.9 million less than the same period in 1998. Weather for the nine-month period in 1999 was milder than the same period in 1998, reducing EBIT by about $2.0 million. The Missouri rate case, which became effective in April 1998, reduced 1999 EBIT by $6.4 million when compared to the 1998 period. Additionally, the increased purchased power costs and depreciation expense discussed above impacted the nine month period, but were offset by increased customer usage and growth. REGULATORY MATTERS Electric and gas rate cases in West Virginia were settled during the third quarter. The settlement in the electric case resulted in a $.7 million increase in rates based on the 1997 information filed. However, since that time, purchased power contracts have been re-negotiated, reducing the costs of purchased power by about $1.7 million. Accordingly, the rates charged to our electric 17 customers in West Virginia will be reduced by about $1.0 million annually. The gas case resulted in an increase in gas rates of $2.5 million. In response to a show-cause motion by the Staff of the Kansas Corporation Commission, we filed a revenue requirement report that validated that our rates are just and reasonable. This report indicated that rates could be increased $3.6 million. However, we deferred making a formal request due to a negotiation of a purchased power contract. The Staff of the Kansas Corporation Commission has responded to our filing and recommended to the Commission that our electric rates be reduced by $19.9 million annually. This recommended reduction relates to four primary areas, the Jeffrey Energy Center lease, off-system sales, a new purchase power agreement and the book depreciation rates on new systems and equipment. We filed rebuttal testimony on October 22. Hearings are scheduled for December 1999 and we expect a final decision by the Commission in January 2000. We filed for gas rate increases in Nebraska Rate Area 2 and 3 requesting $3.3 million and $2.8 million, respectively. In addition, we have filed for a gas rate increase in Kansas for $5.9 million. ST. JOSEPH LIGHT & POWER COMPANY On March 4, 1999, St. Joseph Light & Power Company (SJL&P) agreed to merge into UtiliCorp. Under the agreement, SJL&P shareholders will receive UtiliCorp common shares equal to $23.00 per SJL&P common share. We will account for the transaction as a purchase. The merger was approved by SJL&P shareholders on June 16, 1999, and is subject to approval by state and federal regulatory agencies. The total purchase price is approximately $270 million, including the assumption of about $80 million in debt. On October 19, 1999, we filed a joint application with SJLP requesting approval by the Missouri Public Service Commission of the merger transaction. Key matters contained in that filing were: - Significant synergies are anticipated from generation, economies of scale and elimination of duplicate positions. - Rates are proposed to be frozen for 5 years - We will retain financial benefits from the merger during the five year freeze, in the sixth year we begin sharing the savings with the ratepayer. - The merger of two Missouri utilities avoids out-of-state job migration. It is expected that approval for the SJLP transaction will be obtained in mid-2000. EMPIRE DISTRICT ELECTRIC COMPANY On May 10, 1999, The Empire District Electric Company (Empire) agreed to merge into UtiliCorp. Upon closing, Empire's shareholders will be entitled to receive $29.50 for each share of Empire common stock they hold, payable in either cash or UtiliCorp common stock. The value of the merger consideration per share will decrease if UtiliCorp's common stock is trading below $22 per share at closing and will increase if UtiliCorp's common stock is trading above $26 per share at closing. The consideration paid to Empire shareholders, estimated to be $800 million, including assumption of debt, is subject to certain conditions, such as cash and stock maximums. The merger was voted on by Empire shareholders on September 3, 1999, and is subject to approval by certain state and federal regulatory agencies. We expect this merger to be completed by mid-2000. QUANTA SERVICES, INC. On September 23, 1999, we invested $186 million in Quanta Services, Inc. (Quanta) Preferred Stock. Quanta is a provider of specialized construction services to electric utilities, telecommunications and cable television companies, and governmental entities. The preferred stock is convertible into 6.2 million common shares based on a strike price of $30. This investment 18 will be accounted for by the equity method of accounting. We received a $3.7 million advisory fee from Quanta during the third quarter. In addition, we have purchased approximately 4.9 million shares of Quanta's Common Stock on the open market and in privately negotiated transactions through November 1, 1999, bringing our total investment in Quanta to approximately $312 million. AQUILA ENERGY The table below summarizes the operations of Aquila Energy for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - --------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- Sales: Marketing and trading $5,612.0 $3,197.1 $11,622.3 $7,172.0 Energy assets 307.4 202.7 765.7 705.9 - --------------------------------------------------------------------------------------------------------- Total sales 5,919.4 3,399.8 12,388.0 7,877.9 - --------------------------------------------------------------------------------------------------------- Cost of sales: Cost of marketing and trading 5,576.8 3,162.5 11,533.4 7,080.7 Energy assets 277.3 184.6 689.0 643.5 - --------------------------------------------------------------------------------------------------------- Total cost of sales 5,854.1 3,347.1 12,222.4 7,724.2 - --------------------------------------------------------------------------------------------------------- Gross profit 65.3 52.7 165.6 153.7 - --------------------------------------------------------------------------------------------------------- Operating expenses: Operating and maintenance 38.3 32.2 108.9 89.5 Provision for asset impairments --- --- --- 17.2 Depreciation, depletion and amortization 8.8 7.3 25.5 22.4 - --------------------------------------------------------------------------------------------------------- Total operating expenses 47.1 39.5 134.4 129.1 - --------------------------------------------------------------------------------------------------------- Other income, net 10.0 11.5 26.1 21.7 - --------------------------------------------------------------------------------------------------------- Reported EBIT 28.2 24.7 57.3 46.3 Non-recurring items: Provision for asset impairments --- --- --- 17.2 - --------------------------------------------------------------------------------------------------------- Normalized EBIT 28.2 24.7 57.3 63.5 - --------------------------------------------------------------------------------------------------------- EBIT by business subunit: Marketing and trading 10.6 11.5 17.8 22.1 Energy assets 17.6 13.2 39.5 41.4 ========================================================================================================= Total $ 28.2 $ 24.7 $ 57.3 $ 63.5 =========================================================================================================
QUARTER-TO-QUARTER MARKETING AND TRADING EBIT for Marketing and Trading was $.9 million less than the prior year primarily due to $2.7 million of moving costs associated with the relocation of its Omaha operation to Kansas City. Gas and power trading volumes were up over the prior year by 7% and 78%, respectively. Strong energy term and gas trading results were offset by lower power trading performance stemming from less favorable market opportunities in 1999 compared to 1998 and the move of traders to Kansas City from Omaha. Included in the strong term results was income of $20 million associated with a gas sales contract and a favorable change in estimate relating to the discount rate used to value certain long-term contracts. ENERGY ASSETS The increase in EBIT was due to the following factors: - A 12% increase in gas throughput volumes which increased EBIT by $4.9 million. 19 - A 61% increase in natural gas liquids (NGLs) prices which increased EBIT by $3.8 million. - Favorable impact from the first quarter's restructuring efforts which reduced operating expenses by $1.3 million. Partially offsetting the above favorable factors were the following: - The non-recurrence of a $3.6 million gain recorded in the 1998 quarter related to the partial sale of an IPP project. - Lower EBIT results related to various IPP projects between quarters. YEAR-TO-DATE (FACTORS DISCUSSED IN THE QUARTER-TO-QUARTER COMPARISON ALSO AFFECTED THE YEAR-TO-DATE COMPARISONS.) MARKETING AND TRADING Marketing and trading EBIT decreased $4.3 million on a year-to-date basis compared to 1998. Gas and power trading volumes for the nine-month periods increased 15% and 94%, respectively. As mentioned above, market opportunities in power were not as great in 1999 as in 1998 and the move to Kansas City has resulted in distractions impacting trading performance. Also, gas storage levels remained high earlier in the year, limiting our earnings opportunities in 1999. In addition to the favorable impact of large gas sales contracts, the year-to-date results include an enhancement of the contract portfolio resulting from improvements in regulatory risks associated with certain long-term contracts. ENERGY ASSETS Energy Assets EBIT decreased $1.9 million on a year-to-date basis compared to 1998. In the first quarter of 1999, although throughput volumes increased 24%, NGL prices and production volumes decreased 19% and 25%, respectively, resulting in a net reduction of EBIT. Since the first quarter, throughput volumes and NGL prices have improved helping offset the EBIT reduction from the first quarter. When these factors are combined with a restructuring charge of $2.8 million, costs associated with the evaluation of the tender offer for AQP shares and the absence of the $3.6 million gain on the sale of an interest in an IPP, EBIT has declined by $1.9 million on a year-to-date basis. AQUILA GAS PIPELINE TENDER OFFER On May 7, 1999, approximately 3.4 million shares of Aquila Gas Pipeline Corporation (AQP) were tendered to UtiliCorp at $8.00. The 3.4 million shares, together with the 24.0 million shares already held, represented 93% of AQP's total shares outstanding. All remaining shares not tendered were converted in a "short-form" merger into a right to receive $8.00 per share. The short-form merger was completed on May 14, 1999. As a result, AQP is no longer a publicly traded company. NATURAL GAS STORAGE FACILITY On March 29, 1999, we agreed to purchase Western Gas Resources Storage, Inc. for $100 million in cash. This storage facility will provide access to 20 BCF of natural gas in a strategic location to enhance physical and trading activities. The 2,200 acre subsurface facility is located in Katy, Texas. The purchase closed in the second quarter of 1999. 20 MERCHANT GAS-FIRED POWER PLANT A subsidiary of Aquila is building a 580-megawatt gas-fired power plant that will sell its output into the central U.S. wholesale market and to a regulated utility division of UtiliCorp. The power plant is expected to be completed in phases with simple-cycle operation starting in June 2001 and a combined-cycle operation starting in January 2002. Total estimated construction cost is $277 million and we expect to complete negotiations with a potential partner sometime during the fourth quarter. INDEPENDENT POWER PROJECT On September 1, 1999, Fort James-Pennington, Inc. exercised its contractual right to call our 50% partnership interest in the Naheola cogeneration project in Pennington, Alabama. On October 19, 1999, the purchase price for that interest was determined by the parties to be $83.7 million which will result in a pre-tax gain of $5-$8 million. Closing is expected to occur by December 31, 1999. This IPP currently provides $9-$10 million of annual EBIT. INTERNATIONAL The table below summarizes the operations of our international business for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - --------------------------------------------------------------------------------------------------------------- DOLLARS IN MILLIONS 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------- Sales $188.3 $ 78.8 $714.2 $280.7 - --------------------------------------------------------------------------------------------------------------- Cost of sales 129.8 61.5 542.7 238.0 - --------------------------------------------------------------------------------------------------------------- Gross profit 58.5 17.3 171.5 42.7 - --------------------------------------------------------------------------------------------------------------- Operating expenses: Other operating 14.8 7.3 41.6 21.5 Maintenance .5 --- 2.7 --- Taxes, other than income taxes 2.9 3.0 8.7 9.2 Depreciation and amortization 10.6 2.7 33.3 8.6 - --------------------------------------------------------------------------------------------------------------- Total operating expense 28.8 13.0 86.3 39.3 - --------------------------------------------------------------------------------------------------------------- Equity earnings in subsidiaries and partnerships 6.7 8.9 14.9 77.2 Other income (expense) 2.6 .9 1.4 (4.7) - --------------------------------------------------------------------------------------------------------------- Reported EBIT 39.0 14.1 101.5 75.9 - --------------------------------------------------------------------------------------------------------------- Non-recurring items: Gain on sale --- --- --- (45.3) UK gas contracts reserve --- --- --- 13.4 - --------------------------------------------------------------------------------------------------------------- Normalized EBIT $ 39.0 $ 14.1 $101.5 $ 44.0 - --------------------------------------------------------------------------------------------------------------- EBIT by business subunit: Australia $ 10.3 $ 4.9 $ 21.9 $ 19.4 New Zealand 23.9 2.9 60.0 8.1 United Kingdom (.4) 1.2 6.9 .4 Canada 5.2 5.1 12.7 16.1 =============================================================================================================== Normalized EBIT $ 39.0 $ 14.1 $101.5 $ 44.0 ===============================================================================================================
QUARTER-TO-QUARTER DELIVERY NETWORKS (AUSTRALIA, NEW ZEALAND AND CANADA) In Australia, the operational integration of our purchase earlier this year of the Multinet/Ikon gas distribution system has been completed and provided a $4.8 million contribution to EBIT when compared to the prior year. 21 EBIT from New Zealand increased $21.0 million to $23.9 million in 1999 compared to 1998. This increase is due to the additional $744 million we invested in New Zealand over the last twelve months and the successful integration of those purchases into our existing operations. As a result of these investments, our ownership interest in UnitedNetworks increased to 78.8% from 37.5%. We consequently reflect New Zealand's activities on a consolidated basis in 1999, but in 1998 New Zealand investments were reflected on the equity method. This change impacts quarter-to-quarter comparisons and is a key reason for increases in sales, cost of sales, and operating expense and the decrease in equity earnings in 1999 compared to 1998. ENERGY MERCHANT (UNITED KINGDOM) EBIT from our international energy merchant business decreased $1.6 million compared to the prior year. This decrease is primarily due to higher operating expenses stemming from the expansion costs associated with opening offices in Spain, Norway and Germany. On October 1, 1999, a gas sales contract expired and was not renewed. This will reduce our indirect customer count by about .5 million or about 45%. The loss of this customer base is not expected to have a material impact on our total consolidated EBIT. YEAR-TO-DATE (FACTORS DISCUSSED IN THE QUARTER-TO-QUARTER COMPARISON ALSO AFFECTED THE YEAR-TO-DATE COMPARISONS.) DELIVERY NETWORKS (AUSTRALIA, NEW ZEALAND AND CANADA) EBIT from Australia increased $2.5 million on a year-to-date basis. Offsetting the $6.8 million contribution of our Multinet/Ikon acquisition in the second and third quarters was the impact of our reduced ownership in the electric distribution business resulting from the initial public offering in the second quarter of 1998. New Zealand EBIT increased $51.9 million on a year-to-date basis due to increased ownership, full consolidation of the investment and a successful integration of our investments, as discussed above. EBIT from Canada was down $3.4 million year-to-date in 1999 primarily due to warmer than expected weather, a change in regulatory accounting requirements, and the timing of capital projects. ENERGY MERCHANT (UNITED KINGDOM) EBIT increased $6.5 million in our international energy merchant business on a year-to-date basis. Trading results improved and we had a substantial increase in our indirect customers when compared to the prior year. EBIT in 1999 was also enhanced by the settlement of non-economic gas supply contracts in the 1998 second quarter. AUSTRALIAN MULTINET/IKON ACQUISITION On March 30, 1999, we acquired a 25.5% interest in Multinet Gas/Ikon Energy, a natural gas network and retailer in Victoria, Australia, for $224.0 million. TRUSTPOWER ACQUISITION Effective January 31, 1999, we closed the purchase of New Zealand based TrustPower. Working through our 78.8% owned New Zealand utility, UnitedNetworks Limited, completion of this 22 transaction makes us the country's largest electricity distribution company. The $261 million deal added approximately 96,000 TrustPower customers to UnitedNetworks' system. EUROPEAN EXPANSION In a strategic move toward developing significant positions in key European markets, we have opened offices in Norway and Germany. These offices will offer energy-related and risk management services which will be directed toward industrial and energy groups, with a focus on both physical and financial energy trading. We previously announced the opening of an office in Spain. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued a new standard on derivatives that requires companies to declare each derivative as either a fair value or cash flow hedge and record the derivative and the underlying instrument at fair value. The income statement impact depends on whether the derivative is a fair value or cash flow hedge. This new standard will have an impact on certain interest rate financial instruments currently being used in some of the international business units and may impact certain commodity contracts. The financial impact of this standard, which is effective January 1, 2001, is not known at this time. YEAR 2000 STATUS STATUS OF KEY PROCEDURE AREAS We have addressed Year 2000 readiness in our information and operational systems. Prior to June 30 we completed remediation of mission critical systems and development of local contingency plans to utilize in the unlikely event of a Year 2000 interruption in our systems or one of our key suppliers. We are currently completing post-remediation testing and verification of upgrades. We are also integrating, arranging for resources, and finalizing staff assignments for the contingency plans. Certain non-critical systems that are not Year 2000 ready may not be replaced or remediated by year end. These systems are not critical to UtiliCorp and will not impact our ability to provide energy services to our customers, bill and collect receivables or provide financial information. A more detailed update on our Year 2000 program is described below. INFORMATION SYSTEMS AND TECHNOLOGY Many of our information systems and related software are already Year 2000 ready. We installed several new software systems, including financial, customer information (in certain locations), and various support systems through a company-wide reengineering project that began in 1994. The final portions of our customer information system will be implemented in 2000, but the existing system which these portions will replace is currently Year 2000 ready. We expect to spend approximately $145.4 million in new information technology. Of this amount, to date we have spent $139.2 million. OPERATIONS AND EMBEDDED SYSTEMS We identified, inventoried, and assessed all potentially affected equipment, systems, and software. We have completed certain system replacements that affect our ability to serve customers and manage operations. Our estimated cost of remediation is approximately $2.8 23 million. Certain non-mission critical systems that do not affect energy flow or management will be remediated as needed, some after December 31, 1999. We prepared contingency plans for our businesses that includes procedures to operate our energy networks under conditions arising from possible Year 2000 issues. We are integrating these local level plans into a uniform whole and coordinating our contingency plans with other utilities and suppliers. 24 PART II OTHER INFORMATION ITEM 6. EXHIBITS (a) LIST OF EXHIBITS: 10 Dwayne L. Hart Employment Contract 27 Financial Data Schedule--For the nine months ended September 30, 1999. (b) REPORT ON FORM 8-K We filed reports on Form 8-K for the quarter ended September 30, 1999, as follows:
DATE Description ---- ------------------------------------------------ September 23, 1999 Supplemental Indenture and Other Documents in Support of Issuance of Premium Equity Participating Securities October 6, 1999 Underwriting Agreement, the Remarketing Agreement, and the Twelfth Supplemental Indenture entered into in connection with the Premium Equity Participating Security November 5, 1999 Reporting results of operations for the period ending September 30, 1999
25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UTILICORP UNITED INC. By: /s/ Dwayne L. Hart -------------------------------- Dwayne L. Hart Senior Vice President and Chief Financial Officer Date: November 12, 1999 By: /s/ Daniel J. Streek -------------------------------- Daniel J. Streek Vice President & Assistant Controller Date: November 12, 1999 26 EX-10 2 EXHIBIT 10 [LETTERHEAD] February 2, 1999 Mr. Dwayne Hart 4119 Purdue St. Houston, TX 77005 Dear Dwayne, I am pleased to extend an offer to you to join UtiliCorp United as Senior Vice President and Chief Financial Officer. This position reports to me and is located in Kansas City, Missouri. This offer is firm, and you can accept it at anytime within the next 180 days as soon as your employment with UtiliCorp will not materially violate any obligations you have with your current or former employer. The time period, of course, can be extended by mutual consent. The key elements of your employment are summarized below: OVERVIEW OF COMPENSATION ------------------------ Base Annual Salary $350,000 Sign-on Bonus 150,000 Initial reporting incentive payable in cash on signing and reporting to work. Thereafter, three payments of $150,000 payable on your service anniversary date. You will have the option of receiving this special annual retention bonus in cash, restricted stock or other available forms of deferred income. 1999 Annual Incentive Plan (% of base-$350,000) Target 55% 192,500 Maximum 85% 297,500 Additional bonus (restricted stock election) You may elect to take any part of your annual incentive plan in UCU three year restricted stock. You will receive a bonus of 33 percent of the value of shares taken in restricted stock and the bonus shares are also awarded in restricted stock. For example: Assume you receive an incentive award of $200,000 and elect to take 100% in restricted stock. You receive a "bonus" of additional restricted stock worth $66,000 ($200,000 x 33 percent). Long Term Incentive Plan: The UtiliCorp Long Term Incentive Plan consists of annual grants of Non-Qualified Stock Options and Performance Units. The actual size of the grants are determined each year by the Compensation Committee of the Board on advice from their consultant. Stock Options: For 1999 you will receive a grant of 70,500 (Post-Split) non-qualified stock options, vesting over four years with the "strike price" to be established by the UCU Compensation Committee at its next meeting following your accession. Performance Unit Plan: (3 year cycle) Actual Performance unit awards are determined based on UCU's Total Shareholder Return (TSR) performance over a three year period relative to a specified peer group of 12 companies. Your number of units:
Target Maximum 97-99 cycle 2,000 4,000 (one year pro rata) 98-00 cycle 8,000 16,000 (two years pro rata) 99-01 cycle 16,000 32,000
Payout examples: 99-01 cycle Assumptions: UCU is ranked 7th Award matrix = 110% of target Dividends paid over 3 years = $5/share 12/31/01 UCU stock value = $36 (16,000 units x 110%) x ($36 + $5) = $ 721,600 UCU is ranked 1st, 2nd, or 3rd Award matrix = 200% of target (16,000 units x 200%) x ($36 + $5) = $1,312,000 Ownership Targets and Restricted Stock Bonus Election: Any payments made under the Performance Unit Plan are one year restricted stock until such time that you have accumulated shareholdings of the Company from any source, excluding unexercised stock options, of at least TWO TIMES your annual base salary. Once you have met the targeted share ownership, compensation from this plan will be paid in cash. If eligible for payment in cash, you may elect to take any portion of your award in restricted stock and receive a bonus of 25 percent in one year restricted stock. 2 Employment Agreement: UCU will enter into an employment agreement that in the event you are terminated without cause, the Company will continue salary payments at your base salary rate for two years following the date of termination. In addition, the Company will pay a lump sum equal to two times the targeted incentive compensation benefit that would be paid to you for the year during which the termination occurs if all the targeted goals in effect on the date of termination were exceeded. (Note: The initial agreement will be a two year Change-In-Control agreement -- Employment Agreements are under development.) ELIGIBILITY TO PARTICIPATE IN UTILICORP UNITED'S EMPLOYEE BENEFIT PROGRAMS WHICH INCLUDE: - Executive perquisites package including: - $5,000 after tax payment; - $5,300 after tax payment per year financial planning services; - Participation in Executive Life Insurance Plan of one times base salary in addition to the standard company paid two times base salary - Long term disability insurance paid a 100% of base salary - You will be eligible to participate in UtiliCorp's 401(k) Savings Plan the first of the month following date of hire. The 401(k) Plan has a dollar for dollar employer match up to 6% of your pre-tax and/or after-tax contributions. Employer contributions are made in UtiliCorp stock and vested over five years at 20% per year. You may make total contributions up to 15% of pay subject to IRS limitations. - You will be eligible to participate in the non-qualified Capital Accumulation Program. This includes the excess 401(k) program (Supplemental Contributory Retirement Plan) of up to 15% of base salary with the same UCU match of $1 for $1 up to 6% of base salary. You may elect to defer base salary and incentive compensation into the Deferred Compensation Plan and have the same 401(k) investment options with an additional election to select an annualized investment rate of return equal to 130% of Moody's Corporate Bond Yield. In addition, you will participate in the Supplemental Executive Retirement Plan to receive the full Defined Pension Plan formula that is limited by government limitation to highly paid executives. - Eligible for four weeks vacation annually with one week carryover to the next calendar year. - Defined Benefit Pension Plan - Eligible immediately; 100% employer sponsored, 0% vested until 5 years of employment with a minimum of 1,000 hours worked per calendar year, then 100% vested. - The Employee Stock Purchase Plan allows you to purchase stock at 15% discount up to 20% of your base salary in any calendar year up to a maximum of $25,000. - The company contributes 3% of your pay in the Employee Stock Contribution Plan, in corporate stock, vesting at 20% per year with 1,000 hours service. 3 - Eligibility under the terms of the Beneflex plan to select medical, dental, vision, life insurance, AD&D and disability coverage. You will receive benefit credits to apply to your selections. - A copy of our relocation policy is enclosed. The last page of the policy must be signed and returned to Human Resources for relocation reimbursement to become effective. - Ten paid holidays per year. This offer is contingent upon passing a pre-employment drug test which must be completed within 2 business days after accepting the position. Please contact Donna Gavin at (800) 941-6271 to arrange. This offer is also contingent upon a satisfactory background investigation which will be completed upon acceptance of this offer. It should be understood that all the preceding benefit plans are subject to change during the normal course of UtiliCorp-wide plan re-designs. If you decide to accept the offer of employment, PLEASE COMPLETE THE PERSONAL DATA FORM ENCLOSED WITH THIS LETTER AND RETURN IT ALONG WITH YOUR WRITTEN CONFIRMATION. In order for UtiliCorp United to comply with the Immigration Reform and Control Act of 1986, you must provide documentation of your identity and legal eligibility for employment in the United States. You must bring this documentation with you on your first day of employment for your orientation. A complete list of acceptable documents is enclosed. In addition to the I-9, please complete as many of the forms as possible, (eg. W-4's, direct deposit, etc.) and bring everything with you to orientation. I will await your written confirmation by February 5, 1999. If you have any questions, please do not hesitate to call me at (816) 467-3507. Sincerely, /s/ Rick Green Enclosure cc: Leo Morton Donna Gavin 4 X Offer Accepted Offer Declined - ----- ----- I understand and agree that, in the event I am terminated for cause or voluntarily resign within twelve months after the date of hire, the Company may withhold and retain from any compensation due me, any amount up to and including the total amount of the reporting bonus and relocation expenses paid to date on my behalf to the maximum extent permitted by applicable law. I also understand that if the total amount of the reporting bonus and relocation expenses paid to date on my behalf has not been repaid in full to the Company within thirty days following my termination for cause or voluntary termination that I will be responsible for all Company costs and expenses, including attorney's fees and other legal costs incurred by the Company in seeking to enforce this repayment provision. By accepting this offer I acknowledge that you have instructed me and I have agreed that I will not use any confidential information of any prior employer and that my duties will be different from the duties I perform for my present employer. /s/ Dwayne L. Hart 2/15/99 - -------------------------------------------------------------------------------- Signature/Date 5 [LETTERHEAD] February 9, 1999 Mr. Dwayne Hart 4119 Purdue St. Houston, TX 77005 Dear Dwayne: I was pleased to learn that you have accepted our offer to join UtiliCorp as Senior Vice President and Chief Financial Officer, in accordance with the terms of our recent offer letter. While I understand that you may not be able to join us immediately, I also understand that you will be making every effort to join us as soon as you can. I look forward to receiving your signed acceptance. For the period between your announcement and your confirmed employment start date, UtiliCorp is prepared to advance to you a sum up to an amount equivalent to the sign-on bonus. You may use that money for your interim living expenses prior to beginning employment. You should check on the availability of COBRA continuation coverage through ENRON and the possibility of converting to an individual life insurance policy through the current carrier. You may also want to consider coverage under your wife's group policy in this interim period. Once you are able to begin employment, your 1999 Annual Incentive Plan payout, scheduled for March, 2000, will not be affected. For the purpose of determining plan payout, you will be treated as if you were on payroll for the entire year. UtiliCorp is also prepared to support you by reimbursing you for any legal expenses associated with your defense of any alleged violation of your employment agreement with ENRON should such action be taken by your former employer. We will also coordinate with you on any internal or external announcements of your new position at UtiliCorp. I hope this letter provides you with the assurance you need to move forward to the next significant step. I wish you well and offer the assistance of UtiliCorp in any way that would be prudent and productive. Sincerely, /s/ Rick Green cc: Leo Morton Dwayne Hart Rick Green April 30, 1999 PERFORMANCE UNIT PLAN Page 2 of your February 2, 1999 offer letter contained the following reference to the Performance Unit element of your Long Term Incentive Plan: PERFORMANCE UNIT PLAN: (3 YEAR CYCLE) ACTUAL PERFORMANCE UNIT AWARDS ARE DETERMINED BASED ON UCU's TOTAL SHAREHOLDER RETURN (TSR) PERFORMANCE OVER A THREE YEAR PERIOD RELATIVE TO A SPECIFIED PEER GROUP OF 12 COMPANIES. YOUR NUMBER OF UNITS:
TARGET MAXIMUM 97-99 CYCLE 2,000 4,000 (ONE YEAR PRO RATA) 98-00 CYCLE 8,000 16,000 (TWO YEARS PRO RATA) 99-01 CYCLE 16,000 32,000
As we have discussed, we have modified the target and maximum number of units you will receive for the cycles ending in 1999 and 2000 as well as dropped references to pro rata treatment. The units indicated above are also pre-split units. This was taken into account in the modification. The referenced section is hereby amended to read as follows: PERFORMANCE UNIT PLAN: (3 YEAR CYCLE) ACTUAL PERFORMANCE UNIT AWARDS ARE DETERMINED BASED ON UCU's TOTAL SHAREHOLDER RETURN (TSR) PERFORMANCE OVER A THREE YEAR PERIOD RELATIVE TO A SPECIFIED PEER GROUP OF 12 COMPANIES. YOUR NUMBER OF UNITS:
TARGET MAXIMUM 97-99 CYCLE 11,000 22,000 98-00 CYCLE 17,587 35,174 99-01 CYCLE 24,000 48,000
Should you have questions regarding this modification, Please contact Leo Morton. UCU LTIP
- ------------------------------------------------------------------------------------------------- PERFORMANCE UNITS 1997-99 1998-00 1999-01 TARGET TARGET TARGET TARGET TARGET TARGET (PRE-SPLIT) (POST-SPLIT) (PRE-SPLIT) (POST-SPLIT) (PRE-SPLIT) (POST-SPLIT) - ------------------------------------------------------------------------------------------------- BAND Ia 23,000 34,500 32,000 48,000 44,000 66,000 - ------------------------------------------------------------------------------------------------- BAND Ib 18,400 27,600 25,600 38,400 35,200 52,800 - ------------------------------------------------------------------------------------------------- BAND II 6,000 9,000 12,000 18,000 16,000 24,000 - ------------------------------------------------------------------------------------------------- BAND III 4,000 6,000 5,000 7,500 7,000 10,500 - ------------------------------------------------------------------------------------------------- BAND IV 2,000 3,000 2,500 3,750 5,000 7,500 - -------------------------------------------------------------------------------------------------
- ------------------------------------------------------------- STOCK OPTIONS - ------------------------------------------------------------- GRANTED 2/98 GRANTED 2/99 YEAR 2000* BAND Ia 90,000 130,000 195,000 BAND Ib 72,000 104,000 156,000 BAND II 35,000 47,000 70,500 BAND III 15,000 20,000 30,000 BAND IV 7,500 13,500 20,250 BAND V 3,750 5,000 7,500 - -------------------------------------------------------------
* Post-split number. Calculation = 2/99 Option grant x 1.5 EX-27 3 EXHIBIT 27/FDS
5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ENDING SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 181 0 2,588 0 256 3,302 5,259 1,587 8,498 3,510 2,234 350 0 94 1,414 8,498 14,235 14,235 13,390 577 26 0 134 178 59 119 0 0 0 119 1.30 1.30
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