UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number: 1-03562 |
AQUILA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
44-0541877
(IRS Employer Identification No.) |
20 West Ninth Street, Kansas City, Missouri (Address of principal executive offices) |
64105 (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 ý No o
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class
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Outstanding at November 5, 2002
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Common Stock, $1 par value | 181,622,890 |
ITEM 1. FINANCIAL STATEMENTS
Information regarding the consolidated condensed financial statements is set forth on pages 3 through 24.
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 25 through 51.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk as described on pages 34 through 36 of our 2001 Annual Report to Shareholders. See discussion on pages 50 through 51 for changes in market risk since December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
Information regarding disclosure controls and procedures can be found on page 52.
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings can be found on page 53.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Information regarding Corporate Governance and Management Restructuring can be found on page 53.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits and Reports on Form 8-K can be found on pages 54 through 55.
2
Aquila, Inc.
Consolidated Condensed Statements of IncomeUnaudited
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Three Months Ended September 30,
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2002
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2001
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Dollars in millions,
except per share amounts |
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Sales: | |||||||||
Natural gasnon-regulated | $ | 60.5 | $ | 108.6 | |||||
Electricitynon-regulated | 117.0 | 267.7 | |||||||
Natural gasregulated | 77.3 | 85.4 | |||||||
Electricityregulated | 315.5 | 307.8 | |||||||
Other | 6.2 | 34.5 | |||||||
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Total sales | 576.5 | 804.0 | |||||||
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Cost of sales: | |||||||||
Natural gasnon-regulated | 80.8 | 87.0 | |||||||
Electricitynon-regulated | 188.3 | 202.4 | |||||||
Natural gasregulated | 41.9 | 50.2 | |||||||
Electricityregulated | 131.6 | 134.5 | |||||||
Other | 5.6 | 8.6 | |||||||
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Total cost of sales | 448.2 | 482.7 | |||||||
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Gross profit | 128.3 | 321.3 | |||||||
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Operating expenses: | |||||||||
Operating expense | 202.5 | 198.2 | |||||||
Restructuring charges | 116.2 | | |||||||
Impairment charges and net loss on sale of assets | 39.0 | | |||||||
Depreciation and amortization expense | 54.3 | 64.0 | |||||||
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Total operating expenses | 412.0 | 262.2 | |||||||
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Other income (expense): | |||||||||
Equity in earnings of investments | 60.1 | 47.5 | |||||||
Minority interest | 2.4 | (6.5 | ) | ||||||
Other | 19.4 | 31.0 | |||||||
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Total other income (expense) | 81.9 | 72.0 | |||||||
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Interest expense | 68.4 | 45.4 | |||||||
Minority interest in income of partnership and trusts | 4.6 | 5.3 | |||||||
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Total interest expense | 73.0 | 50.7 | |||||||
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Earnings (loss) from continuing operations before income taxes | (274.8 | ) | 80.4 | ||||||
Income tax expense (benefit) | (94.2 | ) | 15.6 | ||||||
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Earnings (loss) from continuing operations | (180.6 | ) | 64.8 | ||||||
Earnings (loss) from discontinued operations, net of tax | (151.0 | ) | 4.1 | ||||||
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Net income (loss) | $ | (331.6 | ) | $ | 68.9 | ||||
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Basic earnings (loss) per common share: | |||||||||
Continuing operations | $ | (1.01 | ) | $ | .56 | ||||
Discontinued operations | (.84 | ) | .04 | ||||||
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Net income (loss) | $ | (1.85 | ) | $ | .60 | ||||
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Diluted earnings (loss) per common share: | |||||||||
Continuing operations | $ | (1.01 | ) | $ | .55 | ||||
Discontinued operations | (.84 | ) | .03 | ||||||
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Net income (loss) | $ | (1.85 | ) | $ | .58 | ||||
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Dividends per common share | $ | .175 | $ | .30 | |||||
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See accompanying notes to consolidated condensed financial statements.
3
Aquila, Inc.
Consolidated Condensed Statements of IncomeUnaudited
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Nine Months Ended September 30,
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2002
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2001
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Dollars in millions,
except per share amounts |
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Sales: | |||||||||
Natural gasnon-regulated | $ | 353.2 | $ | 789.5 | |||||
Electricitynon-regulated | 351.2 | 669.5 | |||||||
Natural gasregulated | 503.2 | 769.1 | |||||||
Electricityregulated | 815.7 | 817.9 | |||||||
Other | 44.0 | 38.5 | |||||||
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Total sales | 2,067.3 | 3,084.5 | |||||||
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Cost of sales: | |||||||||
Natural gasnon-regulated | 286.3 | 382.7 | |||||||
Electricitynon-regulated | 305.0 | 393.5 | |||||||
Natural gasregulated | 322.0 | 588.3 | |||||||
Electricityregulated | 358.6 | 357.5 | |||||||
Other | 17.7 | 21.5 | |||||||
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Total cost of sales | 1,289.6 | 1,743.5 | |||||||
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Gross profit | 777.7 | 1,341.0 | |||||||
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Operating expenses: | |||||||||
Operating expense | 614.9 | 765.1 | |||||||
Restructuring charges | 188.0 | | |||||||
Impairment charges and net loss on sale of assets | 933.6 | | |||||||
Depreciation and amortization expense | 162.1 | 184.6 | |||||||
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Total operating expenses | 1,898.6 | 949.7 | |||||||
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Other income (expense): | |||||||||
Equity in earnings of investments | 128.5 | 100.4 | |||||||
Minority interest | 6.5 | (20.1 | ) | ||||||
Other | 47.0 | 66.0 | |||||||
Gain on sale of subsidiary stock | | 110.8 | |||||||
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Total other income (expense) | 182.0 | 257.1 | |||||||
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Interest expense | 162.9 | 146.9 | |||||||
Minority interest in income of partnership and trusts | 15.6 | 22.8 | |||||||
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Total interest expense | 178.5 | 169.7 | |||||||
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Earnings (loss) from continuing operations before income taxes | (1,117.4 | ) | 478.7 | ||||||
Income tax expense (benefit) | (168.8 | ) | 200.5 | ||||||
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Earnings (loss) from continuing operations | (948.6 | ) | 278.2 | ||||||
Earnings (loss) from discontinued operations, net of tax | (148.6 | ) | 7.4 | ||||||
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Net income (loss) | $ | (1,097.2 | ) | $ | 285.6 | ||||
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Basic earnings (loss) per common share: | |||||||||
Continuing operations | $ | (6.20 | ) | $ | 2.51 | ||||
Discontinued operations | (.97 | ) | .07 | ||||||
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Net income (loss) | $ | (7.17 | ) | $ | 2.58 | ||||
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Diluted earnings (loss) per common share: | |||||||||
Continuing operations | $ | (6.20 | ) | $ | 2.43 | ||||
Discontinued operations | (.97 | ) | .07 | ||||||
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Net income (loss) | $ | (7.17 | ) | $ | 2.50 | ||||
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Dividends per common share | $ | .775 | $ | .90 | |||||
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See accompanying notes to consolidated condensed financial statements.
4
Aquila, Inc.
Consolidated Condensed Balance Sheets
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September 30,
2002 |
December 31,
2001 |
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(Unaudited)
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(See Note 1)
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Dollars in millions
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ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 514.9 | $ | 262.9 | |||
Restricted cash | 131.2 | | |||||
Funds on deposit | 190.6 | 168.2 | |||||
Accounts receivable, net | 2,063.4 | 2,926.8 | |||||
Inventories and supplies | 207.6 | 289.4 | |||||
Price risk management assets | 350.0 | 824.4 | |||||
Prepayments and other | 452.3 | 320.9 | |||||
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Total current assets | 3,910.0 | 4,792.6 | |||||
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Property, plant and equipment, net | 2,993.2 | 2,907.8 | |||||
Investments in unconsolidated subsidiaries | 1,578.9 | 2,045.6 | |||||
Price risk management assets | 619.1 | 436.5 | |||||
Notes receivable, net | 463.0 | 415.6 | |||||
Goodwill, net | 335.4 | 337.7 | |||||
Deferred charges and other assets | 365.6 | 394.1 | |||||
Non-current assets of discontinued operations | 412.6 | 618.4 | |||||
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Total Assets | $ | 10,677.8 | $ | 11,948.3 | |||
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LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities: | |||||||
Current maturities of long-term debt | $ | 546.9 | $ | 679.1 | |||
Short-term debt | 597.5 | 548.6 | |||||
Accounts payable | 1,981.7 | 3,156.2 | |||||
Accrued liabilities | 383.2 | 598.5 | |||||
Price risk management liabilities | 448.9 | 573.2 | |||||
Customer funds on deposit | 177.3 | 122.0 | |||||
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Total current liabilities | 4,135.5 | 5,677.6 | |||||
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Long-term liabilities: | |||||||
Long-term debt, net | 2,423.5 | 1,747.9 | |||||
Deferred income taxes and credits | 414.2 | 347.9 | |||||
Price risk management liabilities | 1,004.4 | 929.3 | |||||
Minority interest | 1.5 | 157.6 | |||||
Deferred credits | 197.4 | 286.4 | |||||
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Total long-term liabilities | 4,041.0 | 3,469.1 | |||||
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Company-obligated preferred securities | 250.0 | 250.0 | |||||
Common shareholders' equity | 2,251.3 | 2,551.6 | |||||
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Total Liabilities and Shareholders' Equity | $ | 10,677.8 | $ | 11,948.3 | |||
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See accompanying notes to consolidated condensed financial statements.
5
Aquila, Inc.
Consolidated Condensed Statements of Comprehensive IncomeUnaudited
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2002
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2001
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2002
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2001
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Dollars in millions
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Net income (loss) | $ | (331.6 | ) | $ | 68.9 | $ | (1,097.2 | ) | $ | 285.6 | ||||
Other comprehensive income (loss): | ||||||||||||||
Unrealized currency translation adjustments | (13.4 | ) | (16.7 | ) | 8.2 | (16.8 | ) | |||||||
Unrealized cash flow hedges | (19.4 | ) | (1.5 | ) | (30.0 | ) | (1.2 | ) | ||||||
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Comprehensive Income (Loss) | $ | (364.4 | ) | $ | 50.7 | $ | (1,119.0 | ) | $ | 267.6 | ||||
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Consolidated Condensed Statements of Common Shareholders' Equity
|
September 30,
2002 |
December 31,
2001 |
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---|---|---|---|---|---|---|---|
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(Unaudited)
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(See Note 1)
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Dollars in millions
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Common Stock: authorized 400 million shares at September 30, 2002 and December 31, 2001, par value $1 per share; 181,299,947 shares issued at September 30, 2002 and 115,941,120 shares issued at December 31, 2001; authorized 20 million shares of Class A common stock, par value $1 per share, none issued | $ | 181.3 | $ | 115.9 | |||
Premium on Capital Stock | 2,916.1 | 2,047.0 | |||||
Retained (Deficit) Earnings | (733.6 | ) | 479.3 | ||||
Treasury Stock, at cost (16,704 and 447 shares at September 30, 2002 and December 31, 2001, respectively) | (.1 | ) | | ||||
Accumulated Other Comprehensive Losses | (112.4 | ) | (90.6 | ) | |||
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Total Common Shareholders' Equity | $ | 2,251.3 | $ | 2,551.6 | |||
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See accompanying notes to consolidated condensed financial statements.
6
Aquila, Inc.
Consolidated Condensed Statements of Cash FlowsUnaudited
|
Nine Months Ended
September 30, |
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2002
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2001
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Dollars in millions
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Cash Flows From Operating Activities: | ||||||||||
Net income (loss) | $ | (1,097.2 | ) | $ | 285.6 | |||||
Adjustments to reconcile net income (loss) to net cash used for operating activities: | ||||||||||
Depreciation and amortization expense | 184.8 | 207.6 | ||||||||
Restructuring charges | 188.0 | | ||||||||
Impairment charges and net loss on sale of assets | 1,170.2 | | ||||||||
Cash payments for restructuring | (59.6 | ) | | |||||||
Provision for uncollectible notes receivable | 20.0 | | ||||||||
Gain on sale of subsidiary stock | | (110.8 | ) | |||||||
Net changes in price risk management assets and liabilities | 242.6 | (111.6 | ) | |||||||
Deferred income taxes and credits | (15.9 | ) | (13.6 | ) | ||||||
Equity in earnings of investments | (133.3 | ) | (103.0 | ) | ||||||
Dividends from investments | 74.5 | 30.6 | ||||||||
Minority interest | (6.5 | ) | 20.1 | |||||||
Changes in certain assets and liabilities: | ||||||||||
Accounts receivable/payable, net | (76.6 | ) | 201.5 | |||||||
Accounts receivable sold, net | (14.5 | ) | (130.0 | ) | ||||||
Termination of Merchant accounts receivable sales program | (220.0 | ) | | |||||||
Restricted cash | (131.2 | ) | | |||||||
Funds on deposit | (22.4 | ) | (66.8 | ) | ||||||
Inventories and supplies | 81.8 | (144.5 | ) | |||||||
Prepayments and other | (98.2 | ) | (79.8 | ) | ||||||
Accrued liabilities | (246.3 | ) | 90.3 | |||||||
Customer funds on deposit | 55.3 | (285.4 | ) | |||||||
Deferred credits | (52.1 | ) | 18.7 | |||||||
Deferred charges and other assets | (9.6 | ) | 65.4 | |||||||
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Cash used for operating activities | (166.2 | ) | (125.7 | ) | ||||||
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Cash Flows From Investing Activities: | ||||||||||
Additions to utility plant | (193.5 | ) | (171.6 | ) | ||||||
Merchant capital expenditures | (142.7 | ) | (112.3 | ) | ||||||
(Increase) decrease in notes receivable, net | (67.4 | ) | 12.3 | |||||||
Investments in international businesses | (193.0 | ) | (8.7 | ) | ||||||
Investment in communication services | (46.5 | ) | (46.7 | ) | ||||||
Cash generated on sale of assets | 127.7 | 129.9 | ||||||||
Other | 21.0 | (22.5 | ) | |||||||
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Cash used for investing activities | (494.4 | ) | (219.6 | ) | ||||||
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Cash Flows From Financing Activities: | ||||||||||
Issuance of common stock | 549.8 | 332.6 | ||||||||
Issuance of subsidiary common stock | | 316.0 | ||||||||
Issuance of long-term debt | 1,106.4 | 798.8 | ||||||||
Retirement of long-term debt | (600.3 | ) | (733.8 | ) | ||||||
Retirement of company-obligated preferred securities | (100.0 | ) | (100.0 | ) | ||||||
Short-term borrowings (repayments), net | 62.0 | (408.8 | ) | |||||||
Cash dividends paid | (115.7 | ) | (99.6 | ) | ||||||
Other | 10.4 | 75.3 | ||||||||
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Cash provided from financing activities | 912.6 | 180.5 | ||||||||
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Increase (decrease) in cash and cash equivalents | 252.0 | (164.8 | ) | |||||||
Cash and cash equivalents at beginning of period | 262.9 | 392.6 | ||||||||
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Cash and cash equivalents at end of period | $ | 514.9 | $ | 227.8 | ||||||
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See accompanying notes to consolidated condensed financial statements.
7
AQUILA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
1.1 Basis of Presentation
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 2001 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on August 14, 2002. We believe it is best to read our year-end consolidated financial statements in conjunction with this report. The accompanying Balance Sheet and Statement of Common Shareholders' Equity as of December 31, 2001, were derived from our audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States. 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 condensed financial statements have been reclassified where necessary to conform to the 2002 presentation. In particular, sales and cost of sales have been reclassified to report energy trading gains and losses on a net basis pursuant to Emerging Issues Task Force Issue No. 02-3 (EITF 02-3) as discussed under the caption "Energy Trading Activities." Also, as discussed in Note 4, "Discontinued Operations," the assets to be sold and results of operations from those assets have been reclassified as discontinued operations in the accompanying balance sheets and statements of income for all periods presented.
As a result of the reclassification associated with the discontinued operations and reclassification of sales and cost of sales discussed above, combined with our former auditor's, Arthur Andersen LLP, inability to attest to these adjustments due to their demise, we are required to have our financial statements for the years ended December 31, 2000 and 2001 re-audited by our newly engaged auditors. We do not anticipate any changes to our audited 2000 and 2001 financial statements filed with our Annual Report on Form 10-K/A on August 14, 2002, except the reclassifications necessary to reflect the discontinuation of certain operations and reclassification of sales and cost of sales under EITF No. 02-3. We expect the re-audits to be completed in early 2003.
1.2 Change in Accounting Principle
Effective January 1, 2002, we changed our method of accounting for our Merchant Services gas storage inventory (inventory used in daily trading activities) from the lower of cost or market method to a fair value method. This method facilitates a better matching of inventory value to the related revenues from future contract commitments that are also carried at fair value. This method consists of recording the fair value of this gas storage inventory using the gas daily index price from the last day of the reporting period for the applicable storage location. We had $71.3 million of gas storage inventory as of December 31, 2001, consisting of 27.4 Bcf at $2.61/mmbtu. In connection with the exit of our wholesale trading activities, we sold our entire gas storage inventory used in daily trading activities during the third quarter of 2002.
The cumulative effect of this change at January 1, 2002, was a reduction in income before income taxes of $643,000 and net income of $386,000, or less than one cent per share. The effect of this change is included in Natural gas non-regulated sales and is not separately identified in our
8
Statement of Income. However, had this change been in effect for the three- and nine-month periods ended September 30, 2001, net income and diluted earnings per share would have been affected as follows:
|
Three Months Ended
September 30, 2001 |
Nine Months Ended
September 30, 2001 |
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---|---|---|---|---|---|---|---|---|---|---|---|---|
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As Reported
|
Pro Forma
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As Reported
|
Pro Forma
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In millions, except per share amounts
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Net income | $ | 68.9 | $ | 52.0 | $ | 285.6 | $ | 236.4 | ||||
Diluted earnings per share | $ | .58 | $ | .44 | $ | 2.50 | $ | 2.07 |
In October 2002, the EITF reached a consensus to rescind EITF Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." All new contracts that would otherwise have been accounted for under Issue 98-10, and that do not fall within the scope of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133), should no longer be marked-to-market through earnings beginning on October 25, 2002. This rescission would have resulted in a change from carrying these inventories at market to carrying these inventories at cost, however, as we have sold our inventory as of September 30, 2002, there will be no impact on our results of operations or financial position.
1.3 New Accounting Pronouncements
1.3.1 Goodwill and Other Intangible Assets
On January 1, 2002, we were required to adopt Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that goodwill no longer be amortized to expense. Rather, this statement requires that goodwill be tested for impairment at least annually and, if impaired, be written off against earnings at that time. We completed an initial assessment of the realizability of our goodwill and determined that as of January 1, 2002, no goodwill impairments existed.
Amortization expense for the three- and nine-month periods ended September 30, 2001 totaled $5.2 million and $17.5 million, respectively. In addition, our earnings from equity method investments included $4.4 million and $13.1 million of amortization expense, for the three- and nine-months ended September 30, 2001, respectively.
As discussed in Note 6, $218.7 million of goodwill was recorded in the repurchase of Aquila Merchant Services, Inc. on January 7, 2002. We allocated $175.0 million of this goodwill to our Wholesale Services segment and $43.7 million to our Capacity Services segment based upon future expected cash flows. As a result of our second quarter decision to exit the wholesale energy trading business, we determined that all of the goodwill in our Wholesale Services business was impaired. Therefore, we recorded an impairment charge of $178.6 million in the second quarter of 2002. In addition, as further discussed in Note 3, we recorded a total impairment charge related to our investment in Quanta Services, Inc. of $692.9 million, which included a $328.0 million goodwill impairment charge related to this investment.
In connection with the sale of our interest in Lockport Energy and our plan to sell Aquila Gas Pipeline, allocated goodwill of $14.0 million and $19.0 million, respectively, was included in the basis used in determining the Impairment Charges and Net Loss on Sale of Assets in the third quarter of 2002. Also, approximately $26.7 million of goodwill related to Katy Storage and $73.3 million of goodwill in investments in unconsolidated subsidiaries related to our investment in the Oasis Pipe Line Company has been reclassified to "Non-current Assets of Discontinued Operations" in the Consolidated Condensed Balance Sheet. See Note 4 for further discussion.
9
Our goodwill allocated to each segment at September 30, 2002 and December 31, 2001 is as follows:
|
September 30,
2002 |
December 31,
2001 |
|||||
---|---|---|---|---|---|---|---|
|
Dollars in millions
|
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Goodwill, net: | |||||||
Wholesale Services | $ | | $ | 3.6 | |||
Capacity Services | 10.3 | 10.3 | |||||
Domestic Networks | 132.6 | 130.7 | |||||
International Networks | 192.5 | 193.1 | |||||
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335.4 | 337.7 | ||||||
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Goodwill in Investments in Unconsolidated Subsidiaries | | 328.0 | |||||
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Total | $ | 335.4 | $ | 665.7 | |||
|
|
Following are disclosures of net income and earnings per share for the three- and nine-month periods ended September 30, 2001, had SFAS 142 been in effect at the beginning of those periods:
|
Three Months Ended
September 30, 2001 |
Nine Months Ended
September 30, 2001 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Continuing
Operations |
Discontinued
Operations |
Continuing
Operations |
Discontinued
Operations |
||||||||
|
Dollars in millions, except per share amounts
|
|||||||||||
Reported net income | $ | 64.8 | $ | 4.1 | $ | 278.2 | $ | 7.4 | ||||
Goodwill amortization | 4.3 | .9 | 14.4 | 3.1 | ||||||||
Goodwill amortization in equity in earnings | 4.4 | | 13.1 | | ||||||||
|
|
|
|
|||||||||
Adjusted net income | $ | 73.5 | $ | 5.0 | $ | 305.7 | $ | 10.5 | ||||
|
|
|
|
|||||||||
Adjusted earnings per share: | ||||||||||||
Basic | $ | .63 | $ | .05 | $ | 2.75 | $ | .10 | ||||
Diluted | $ | .62 | $ | .04 | $ | 2.66 | $ | .10 | ||||
|
|
|
|
1.3.2 Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred. When the liability is initially recorded, we will include the fair value of the estimated cost of removal as an addition to the asset purchase cost, with an offsetting liability related to the estimated cost of removal. The liability will be increased to the nominal value over time. Upon settlement of the liability, we will record a gain or loss for the difference between the settled liability and the recorded amount. This standard will become effective for us on January 1, 2003, and will be recorded as a cumulative effect of an accounting change. We are in the process of identifying our assets that are subject to a retirement obligation and assessing the impact that the adoption of this standard will have on our financial position and results of operations.
1.3.3 Energy Trading Activities
In June 2002, the EITF reached a consensus on a topic discussed in EITF No. 02-3, "Recognition and Reporting of Gains and Losses on Energy Trading Contracts under EITF No. 98-10, 'Accounting for Contracts Involved in Energy Trading Risk Management Activities."' EITF No. 02-3 requires that gains and losses on energy trading contracts be shown net on the income statement whether or not they are settled physically. The adoption of this standard requires the reclassification of all prior period sales
10
and cost of sales to reflect the net gains and losses on energy trading contracts. This new standard became effective beginning in the third quarter of 2002. The adoption of this requirement had no impact on our gross profit, but it did result in a reduction of sales and cost of sales.
In October 2002, the EITF met again regarding EITF No. 02-3 and reached a consensus to rescind EITF No. 98-10 and require that all new contracts that would otherwise have been accounted for under EITF 98-10 and that do not fall within the scope of SFAS 133, no longer be marked-to-market through earnings beginning on October 25, 2002. This provision is effective for the first fiscal quarter beginning after December 15, 2002. Accordingly, a cumulative effect of a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20 will be recorded in the first quarter of 2003 for all of those contracts affected as of October 25, 2002. The adoption of this requirement would reduce net income by approximately $13.9 million if adopted as of September 30, 2002.
The following table reconciles gross sales and cost of sales to sales and cost of sales reported after the effects of EITF 02-3 and the reclassification of discontinued operations discussed in Note 4:
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
||||||||||
|
In millions
|
|||||||||||||
Sales: | ||||||||||||||
Gross sales | $ | 11,057.1 | $ | 9,315.5 | $ | 29,572.7 | $ | 31,736.9 | ||||||
Sales netted per EITF 02-3 | (10,402.2 | ) | (8,433.3 | ) | (27,284.8 | ) | (28,269.2 | ) | ||||||
Sales reclassified to discontinued operations | (78.4 | ) | (78.2 | ) | (220.6 | ) | (383.2 | ) | ||||||
|
|
|
|
|||||||||||
Reported net sales | $ | 576.5 | $ | 804.0 | $ | 2,067.3 | $ | 3,084.5 | ||||||
|
|
|
|
|||||||||||
Cost of Sales: | ||||||||||||||
Gross cost of sales | $ | 10,907.5 | $ | 8,971.7 | $ | 28,739.2 | $ | 30,327.4 | ||||||
Cost of sales netted per EITF 02-3 | (10,402.2 | ) | (8,433.3 | ) | (27,284.8 | ) | (28,269.2 | ) | ||||||
Cost of sales reclassified to discontinued operations | (57.1 | ) | (55.7 | ) | (164.8 | ) | (314.7 | ) | ||||||
|
|
|
|
|||||||||||
Reported net cost of sales | $ | 448.2 | $ | 482.7 | $ | 1,289.6 | $ | 1,743.5 | ||||||
|
|
|
|
1.3.4 Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. Additionally, this statement expands the scope of discontinued operations and requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. SFAS 144 also requires that the respective income statements for current and prior periods for components of an entity that have been disposed of, or that are carried as held for sale, be shown as the results from discontinued operations, less applicable income taxes, as a separate component of income in the Consolidated Condensed Income Statement. In addition, assets held for sale shall be presented separately in the Consolidated Condensed Balance Sheet. This standard became effective for us on January 1, 2002. See Footnote 4, "Discontinued Operations," for additional information.
1.3.5 Costs Associated with Exit or Disposal Activities
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). The primary effect of applying SFAS 146 will be on the timing of recognizing costs associated with exit or disposal activities. This standard requires companies to recognize certain costs associated with exit or disposal costs when they are incurred rather than at the
11
date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.
2. Restructuring Charges
During the second and third quarters of 2002, we restructured our Domestic Networks Group to more closely align itself with its regulatory service areas and exited our wholesale energy trading business. The reductions in employees that resulted from the restructuring, including employees transferred with the sale of businesses, consisted of approximately 1,120 Merchant Services employees, 80 Corporate employees, and 430 Domestic Networks employees.
Because of these decisions, we recorded severance costs of $13.4 million in the third quarter of 2002 and $54.1 million in the nine months of 2002. Certain employees of the wholesale energy trading operations had retention agreements to ensure an orderly exit of the business. During the third quarter, we paid approximately $28.9 million of retention payments to these employees.
As a result of these actions, we recorded restructuring charges of $116.2 million and $188.0 million, respectively, for the three- and nine-month periods ended September 30, 2002 that consisted of the following:
|
Three Months
Ended September 30, 2002 |
Nine Months
Ended September 30, 2002 |
|||||
---|---|---|---|---|---|---|---|
|
In millions
|
||||||
Severance costs | $ | 13.4 | $ | 54.1 | |||
Retention payments | 28.9 | 28.9 | |||||
Lease agreements | 36.7 | 36.7 | |||||
Write-down of leasehold improvements and equipment | 36.4 | 59.2 | |||||
Disposition of corporate aircraft | .3 | 7.1 | |||||
Other restructuring costs | .5 | 2.0 | |||||
|
|
||||||
Total restructuring charges | $ | 116.2 | $ | 188.0 | |||
|
|
Severance costs were accrued and charged to expense, but will be paid bi-weekly over the term of the severance benefit. The amount of severance costs paid for the three and nine months ended September 30, 2002, was $14.0 million and $15.4 million, respectively. The remaining liability for severance costs as of September 30, 2002, was $38.7 million.
During the second and third quarters, we also wrote-down certain leasehold improvements and equipment in our wholesale energy trading business that were no longer realizable based on management's best estimate of their fair value. The disposition of the corporate aircraft primarily included the termination of applicable lease agreements and losses associated with the sale of our corporate aircraft. We also have operating leases for various office facilities used in the wholesale energy trading operations with future lease commitments including estimated maintenance and building restoration costs of $86.7 million. During the third quarter, we determined that $36.7 million of these leases would no longer be used and therefore recorded a restructuring charge for the estimated future net lease cost after estimated sublease recoveries. Approximately $3.1 million of these excess lease costs were paid in the third quarter.
We continue to evaluate our staffing levels and expect to incur additional severance and retention costs as we reduce staff by approximately 200 positions in the fourth quarter of 2002.
12
3. Impairment Charges and Net Loss on Sale of Assets
We recorded the following impairment charges and net loss on sale of assets for the three and nine months ended September 30, 2002:
|
Three Months
Ended September 30, 2002 |
Nine Months
Ended September 30, 2002 |
||||||
---|---|---|---|---|---|---|---|---|
|
In millions
|
|||||||
Investment in Quanta Services | $ | 5.2 | $ | 698.1 | ||||
Wholesale Services goodwill | | 178.6 | ||||||
Communications technology investments | | 23.1 | ||||||
Exit from Lodi gas storage investment | 21.9 | 21.9 | ||||||
Termination of Cogentrix acquisition | 12.2 | 12.2 | ||||||
Other | (.3 | ) | (.3 | ) | ||||
|
|
|||||||
Total impairment charges and net loss on sale of assets | $ | 39.0 | $ | 933.6 | ||||
|
|
We also incurred a $236.6 million loss on the sale of Aquila Gas Pipeline that is reflected in discontinued operations. See Footnote 4, "Discontinued Operations," for further discussion.
3.1 Quanta Services
At June 30, 2002, our cost basis in our 38% equity investment in Quanta of approximately $26.69 per share was significantly above the trading price of Quanta's stock. On July 1, 2002, Quanta announced that it had reduced its earnings forecast due to a continued decline in the telecommunications industry, reduced utility construction spending, and the financial difficulties of Quanta's two largest customers. Quanta's share price had dropped to approximately $3.00 per share after this announcement. Because of these factors, and the termination of our proxy contest for control of Quanta in May 2002, we concluded that there was an other than temporary decline in the fair value of this investment. Accordingly, in the second quarter of 2002, we wrote the investment down by $692.9 million to its estimated fair value of $3.00 a share, or $87.7 million in total.
In the third quarter of 2002, we sold approximately 8.4 million shares of Quanta stock at an average price of $2.38 per share for an additional loss of $5.2 million, reducing our ownership percentage from 38% to approximately 27%. In October 2002, we sold an additional 8.0 million Quanta shares at a price of $3.00 per share. After this sale, our ownership percentage is approximately 14%. As a result, we will account for this asset as a cost method investment in future periods. We continue to evaluate our remaining holdings of 12.8 million Quanta shares and expect to dispose of these shares prior to December 31, 2002.
3.2 Wholesale Services
In connection with our decision to exit our wholesale energy trading operations, we assessed our ability to realize the goodwill associated with our Wholesale Services business. This assessment was based on our best estimate of the value of this business in a liquidation, which we determined was less than the carrying value of its net assets. Because future earnings or sufficient sales proceeds could no longer support this asset, we wrote off the entire unamortized goodwill balance in the second quarter of 2002.
3.3 Communications Technology Investments
During the quarter ended June 30, 2002, we determined that certain cost and equity method investments in our communications technology-related businesses were impaired based on continuing losses in these businesses, their continued failure to achieve operational goals, the inability of these
13
businesses to obtain additional capital, and our assessment of the long-term prospects of these businesses. Accordingly, we wrote off $23.1 million of these investments.
In addition, we are in the process of reviewing the strategic initiatives for Everest Connections. If we decide not to continue to fund or otherwise support Everest Connections, and it is unable to obtain separate third party debt or equity funding, our current investment of approximately $210 million would be impaired in part or in its entirety.
3.4 Lodi Gas Storage
On October 31, 2002, we announced that we had exited our investment in the Lodi gas storage project in California due to our exit from the wholesale energy trading business. We owned 50% of WHP Acquisition Company LLC, a company jointly established with an affiliate of ArcLight Energy Partners Fund I, L.P. in 2001 to purchase Western Hub Properties LLC, the developer of the Lodi gas storage project. Under the settlement, WHP Acquisition Company LLC redeemed Aquila's ownership interest for cash payments totaling $5 million over a five-year period. We were also released from all of our guarantee obligations relating to this transaction. We recorded a $21.9 million pre-tax and after-tax loss on this transaction.
3.5 Cogentrix Transaction Termination
On August 2, 2002, we agreed to terminate our purchase agreement signed in April 2002 to acquire Cogentrix Energy, Inc., a leading independent power producer. We agreed with Cogentrix that due to the current uncertainty of the electric power market, the deterioration of the creditworthiness of some of Cogentrix's customers and our exit from the wholesale energy trading business, proceeding with the transaction was impractical and not in either company's interest. In connection with the termination of this transaction we expensed legal, consulting and termination fees of $12.2 million.
3.6 Notes Receivable and Royalty Interests
We are in the process of evaluating the best way to monetize our investment in notes receivable and associated royalty interests in our Aquila Energy Capital Corporation portfolio of loans to energy-related businesses. As part of this evaluation, we will determine if a loan-by-loan sale or sale of the entire portfolio maximizes value and liquidity to us. If we decide to execute a sale of the entire portfolio, we would expect to incur substantial losses on its disposition.
4. Discontinued Operations
Consistent with our announced intention to sell $1 billion of assets, we have announced the sale of the following assets from our Capacity Services segment which were considered discontinued operations in accordance with SFAS 144.
4.1 Sale of Katy Storage
On August 8, 2002, we signed an agreement to sell our Texas natural gas storage facility for approximately $180 million. This transaction is expected to close in the fourth quarter of 2002.
4.2 Sale of Aquila Gas Pipeline
On August 19, 2002, we signed an agreement to sell our Texas and Mid-Continent natural gas pipeline systems, including our natural gas and natural gas liquids processing assets, and our ownership percentage in Oasis Pipe Line Company, for $265 million. The transaction closed on October 1, 2002. In connection with this sale, we recorded an estimated pre-tax loss of $236.6 million, or $156.0 million after tax, to reduce the carrying value of the assets to be sold to their fair value less estimated selling costs.
14
In connection with our plan to sell these assets, we have reported the results of operations of Katy Storage and Aquila Gas Pipeline in discontinued operations for the three- and nine-month periods ended September 30, 2002 and 2001 in the Consolidated Condensed Statements of Income. The related assets held for sale have been reclassified as assets of discontinued operations on the September 30, 2002 and December 31, 2001 Consolidated Condensed Balance Sheets. The Non-current Assets of Discontinued Operations at September 30, 2002 were made up of property, plant and equipment of $285.7 million, investments in unconsolidated subsidiaries of $100.2 million and goodwill of $26.7 million.
Unaudited operating results of Katy Storage and Aquila Gas Pipeline for the three- and nine-month periods ended September 30, 2002 and 2001 are as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
In millions
|
||||||||||||
Sales | $ | 78.4 | $ | 78.2 | $ | 220.6 | $ | 383.2 | |||||
Cost of sales | (57.1 | ) | (55.7 | ) | (164.8 | ) | (314.7 | ) | |||||
|
|
|
|
||||||||||
Gross profit | 21.3 | 22.5 | 55.8 | 68.5 | |||||||||
|
|
|
|
||||||||||
Operating expense | 7.3 | 9.3 | 25.0 | 33.4 | |||||||||
Impairment charges and net loss on sale of assets | 236.6 | | 236.6 | | |||||||||
Depreciation and amortization expense | 7.6 | 7.6 | 22.7 | 23.0 | |||||||||
Equity in earnings of investments | (1.9 | ) | (.7 | ) | (4.8 | ) | (2.6 | ) | |||||
Other (income) expense | | (1.3 | ) | | (1.1 | ) | |||||||
|
|
|
|
||||||||||
Total operating and other (income) expense | 249.6 | 14.9 | 279.5 | 52.7 | |||||||||
|
|
|
|
||||||||||
Earnings (loss) before interest and taxes | (228.3 | ) | 7.6 | (223.7 | ) | 15.8 | |||||||
Interest expense | 1.2 | 1.2 | 3.8 | 5.1 | |||||||||
|
|
|
|
||||||||||
Earnings (loss) before taxes | (229.5 | ) | 6.4 | (227.5 | ) | 10.7 | |||||||
Income tax expense (benefit) | (78.5 | ) | 2.3 | (78.9 | ) | 3.3 | |||||||
|
|
|
|
||||||||||
Earnings (loss) from discontinued operations | $ | (151.0 | ) | $ | 4.1 | $ | (148.6 | ) | $ | 7.4 | |||
|
|
|
|
5. Earnings (Loss) per Common Share
The following table shows the amounts used in computing basic and diluted earnings (loss) per common share and the effect on income and weighted average number of shares of dilutive securities for the three- and nine-month periods ended September 30, 2002 and 2001. As a result of the net loss
15
for the three-month and nine-month periods ended September 30, 2002, the potential issuances of common stock were anti-dilutive and therefore not included in those periods.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
In millions, except per share amounts
|
||||||||||||
Earnings (loss) available for common shares | $ | (331.6 | ) | $ | 68.9 | $ | (1,097.2 | ) | $ | 285.6 | |||
Interest on convertible bonds | | | | .1 | |||||||||
|
|
|
|
||||||||||
Earnings (loss) available for common shares after assumed conversion of dilutive securities | $ | (331.6 | ) | $ | 68.9 | $ | (1,097.2 | ) | $ | 285.7 | |||
|
|
|
|
||||||||||
Earnings (loss) per share: | |||||||||||||
Basic | $ | (1.85 | ) | $ | .60 | $ | (7.17 | ) | $ | 2.58 | |||
Diluted | $ | (1.85 | ) | $ | .58 | $ | (7.17 | ) | $ | 2.50 | |||
|
|
|
|
||||||||||
Weighted average number of common shares used in basic earnings per share used in basic earnings per share | 179.6 | 115.4 | 153.1 | 110.9 | |||||||||
Per share effect of dilutive securities: | |||||||||||||
Company-obligated preferred securities | | 2.0 | | 2.2 | |||||||||
Stock options and restricted stock | | 1.1 | | 1.1 | |||||||||
Convertible bonds | | .2 | | .2 | |||||||||
|
|
|
|
||||||||||
Weighted average number of common shares and dilutive common shares used in diluted earnings per share | 179.6 | 118.7 | 153.1 | 114.4 | |||||||||
|
|
|
|
6. Financings, Mergers, Acquisitions and Divestitures
6.1 Exchange Offer
On January 7, 2002, we completed an offer to acquire all of the outstanding publicly held shares of Aquila Merchant Services, Inc. (Aquila Merchant) in exchange for shares of Aquila common stock. The public shareholders of Aquila Merchant received .6896 shares of Aquila common stock in a tax-free exchange for each outstanding share of Aquila Merchant Class A common stock. Approximately 76% of the outstanding public shares of Aquila Merchant were tendered in the offer. Aquila Merchant shareholders holding approximately 1.8 million shares of Aquila Merchant Class A shares exercised dissenters' rights with respect to the merger.
We accounted for this transaction as a purchase. The total purchase price of $369.7 million was determined based upon the market price of the approximately 12.6 million Aquila common shares issued in the tender offer and merger, an estimated liability to dissenting shareholders at the same market price and transaction costs. The purchase price was in excess of our proportionate interest in the fair value of the net assets of Aquila Merchant acquired by approximately $218.7 million. This excess was classified as goodwill and allocated as $175.0 million to our Wholesale Services segment and $43.7 million to our Capacity Services segment based on future expected cash flows. Due to our decision to exit the wholesale energy trading operations, we subsequently wrote off the goodwill that was allocated to the Wholesale Services segment based upon the lack of expected future cash flows.
6.2 Equity and Senior Notes Offerings
On January 30, 2002, we sold 12.5 million shares of our common stock to the public at a price of $23 per share, which raised approximately $277.7 million in net proceeds. Net proceeds from the sale were used to reduce short-term debt and for general corporate purposes.
16
On February 28, 2002, we issued $287.5 million of 7.875% senior notes due in February 2032. These bonds are callable by us at par after February 28, 2007. Net proceeds from the sale were used to replace liquidity of $220 million previously provided under Aquila Merchant's accounts receivable sales program and to retire short-term debt incurred for general corporate purposes.
On July 3, 2002, we completed our concurrent offerings of 37.5 million shares of our common stock to the public at a price of $7.50 per share and $500 million of 11.875% senior unsecured notes due in July 2012, raising total proceeds of approximately $764 million. We used the proceeds from these offerings to repay $417 million of borrowings under the revolving credit facility, to retire $100 million of current maturities of company-obligated preferred securities and to increase liquidity. On September 2, 2002, Moody's lowered our credit rating from Baa3 to Ba2. As a result, the interest rate on these senior notes has increased to 13.125%.
6.3 Pipeline Operations
In January 2002, we completed the sale of an intrastate pipeline for our net book value of approximately $65.9 million, including a $5 million deposit received in 2001.
6.4 Midlands Electricity Acquisition
On May 8, 2002, we completed our purchase of a 79.9% economic interest in Midlands Electricity plc (Midlands), a United Kingdom electricity network, from FirstEnergy Corp. The gross price of this acquisition was approximately $262 million. The purchase price consists of an initial payment of $155 million, which was financed through a short-term acquisition facility, transaction costs of $19 million, and a promissory note to be paid in six equal annual payments of $19 million each (with an initial present value of approximately $88 million). Midlands is the fourth-largest regional electricity company in the United Kingdom, serving approximately 2.3 million customers through a 38,000-mile distribution network. Midlands also owns 886 megawatts of net generating capacity in the U.K., Turkey and Pakistan. Pursuant to an operating services agreement, we provide management and operating services to Midlands in exchange for a management fee.
In connection with the acquisition, FirstEnergy retained substantive participating and protective rights as the minority partner. We and FirstEnergy each have 50% voting power and an equal number of representatives on the Midlands board of directors. Although we have the majority economic interest, FirstEnergy's participation in the ordinary course of making business decisions is significant; including approval of senior management compensation, additional capital contributions, distributions other than as provided in the agreement, budgets and financial plans and the dissolution of the company. As such, we are required to account for this acquisition using the equity method of accounting. FirstEnergy has the right to sell its interest in Midlands to us at fair market value if, at any time during the 30-day period prior to May 8, 2008, the fair value of FirstEnergy's holdings is less than $72.8 million.
The continuation of recognizing equity earnings from our Midlands investment is dependent on an assumption that the investment will be realized in cash dividends or cash proceeds from the possible sale of the investment. Although the current forecast supports the recognition of equity earnings, we may be precluded from recognizing equity earnings if we conclude that those earnings cannot be realized in cash. Additionally, if Midlands' credit rating is downgraded below investment grade, Midlands may be prohibited from paying dividends or may require additional cash funding to stabilize its financial condition. Midlands is committed to maintaining its investment grade rating and has taken such steps as reducing the level of dividends paid and eliminating discretionary cash expenditures. However, we may not be in a financial position to provide such support to Midlands, if required, which may eliminate our ability to recognize equity earnings and potentially impair a portion of our investment.
17
A summary income statement for Midlands for the year ended December 31, 2001, is as follows:
|
In millions
|
|||
---|---|---|---|---|
Operating Results: | ||||
Sales | $ | 568.2 | ||
Costs and expenses | 469.7 | |||
|
||||
Net income | $ | 98.5 | ||
|
On August 7, 2002, we initiated a bid process for the sale of our interest in Midlands. We expect to receive binding offers in late November and will make a determination regarding the acceptance of any of the offers in December.
6.5 New Zealand
On October 11, 2002, 100% of the outstanding shares of UnitedNetworks Limited (UNL), in which we had a 70.2% indirect interest, were acquired by VECTOR Limited for a purchase price of NZ$9.90 per share. The sale resulted in $362 million of net cash proceeds to us which will be utilized to retire debt. Prior to closing this transaction, we repurchased our minority partner's 14.7% stake in UNL for approximately $38.5 million. We expect to record a $120 million pre-tax gain, or $28 million after-tax gain, in the fourth quarter of 2002 as a result of this sale.
6.6 Pulse Energy
On July 2, 2002, we announced that United Energy and Multinet Gas had reached an agreement to sell their combined 50% interest in Pulse Energy, a retail electric and gas company. Through our 34% ownership in United Energy and our 25.5% ownership in Multinet Gas, we had an approximate 15% ownership in Pulse. United Energy also announced the sale of its interests in EdgeCap, a marketing and trading business, and Utili-Mode, a provider of back office support services for United Energy and others. The sales of these three businesses closed in the third quarter and resulted in a $3.0 million pre-tax and after-tax gain.
6.7 Power Plant Lease
In February of 2002, we entered into an agreement to lease from a special purpose entity a $235 million, 510-megawatt power plant which is being constructed in Piatt County, Illinois. We expect construction to be completed in June 2003. Under the lease, which is a five-year operating lease that begins after construction is completed, we guarantee up to 89.99% of the construction costs prior to completion. We also guarantee that the residual value at the end of the lease will equal at least 83% of construction costs. As of September 30, 2002, $178.0 million of construction costs had been funded. We are required to cash collateralize all future construction costs in excess of the $178.0 million spent to date. We have deposited $45.3 million of cash collateral as of September 30, 2002. See Footnote 9, "Credit FacilitiesDebt Covenants," for further discussion.
18
On October 15, 2002, we sold our Hole House natural gas storage assets in the United Kingdom for $34.9 million. In connection with this sale, we recorded an estimated pre-tax and after-tax loss on disposal of $1.8 million to reduce the carrying value of the assets to their fair value less estimated selling costs.
6.9 Lockport Energy
On September 30, 2002, we completed the sale of our 16.58% interest in the Lockport Energy facility for $37.5 million that was comprised of $27.0 million in cash and a $10.5 million note due in November 2002. We recorded a minimal pre-tax gain and a $5.3 million after-tax loss on this sale.
See Footnote 3, "Impairments and Net Loss on Sale of Assets," and Footnote 4, "Discontinued Operations," for discussion of other asset sales.
7. Finance Subsidiaries' Securities
Aquila Networks Canada Finance Corporation and UtiliCorp Capital Trust I are wholly-owned consolidated finance subsidiaries of Aquila. We have fully and unconditionally guaranteed the $200 million of long-term debt and $250 million of company-obligated preferred securities issued by these subsidiaries, respectively.
19
8. Reportable Segment Reconciliation
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||||
|
Dollars in millions
|
||||||||||||||
Sales: | |||||||||||||||
Wholesale Services | $ | (89.2 | ) | $ | 74.5 | $ | 43.9 | $ | 549.4 | ||||||
Capacity Services | 172.9 | 219.2 | 343.5 | 492.0 | |||||||||||
|
|
|
|
||||||||||||
Total Merchant Services | 83.7 | 293.7 | 387.4 | 1,041.4 | |||||||||||
|
|
|
|
||||||||||||
International Networks | 84.5 | 85.0 | 267.1 | 262.5 | |||||||||||
Domestic Networks | 408.3 | 425.3 | 1,412.8 | 1,780.6 | |||||||||||
|
|
|
|
||||||||||||
Total Global Networks Group | 492.8 | 510.3 | 1,679.9 | 2,043.1 | |||||||||||
|
|
|
|
||||||||||||
Total | $ | 576.5 | $ | 804.0 | $ | 2,067.3 | $ | 3,084.5 | |||||||
|
|
|
|
||||||||||||
EBIT: | |||||||||||||||
Wholesale Services | $ | (241.3 | ) | $ | 30.7 | $ | (394.6 | ) | $ | 241.5 | |||||
Capacity Services | (40.8 | ) | 13.3 | (17.1 | ) | 73.4 | |||||||||
Minority interest | | (7.4 | ) | | (23.9 | ) | |||||||||
Gain on sale of subsidiary stock* | | | | 110.8 | |||||||||||
|
|
|
|
||||||||||||
Total Merchant Services | (282.1 | ) | 36.6 | (411.7 | ) | 401.8 | |||||||||
|
|
|
|
||||||||||||
International Networks | 60.8 | 48.9 | 138.9 | 117.3 | |||||||||||
Domestic Networks | 32.0 | 45.0 | (640.1 | ) | 131.8 | ||||||||||
|
|
|
|
||||||||||||
Total Global Networks Group | 92.8 | 93.9 | (501.2 | ) | 249.1 | ||||||||||
|
|
|
|
||||||||||||
Corporate and other | (12.5 | ) | .6 | (26.0 | ) | (2.5 | ) | ||||||||
|
|
|
|
||||||||||||
Total EBIT | (201.8 | ) | 131.1 | (938.9 | ) | 648.4 | |||||||||
Interest expense | 73.0 | 50.7 | 178.5 | 169.7 | |||||||||||
|
|
|
|
||||||||||||
Earnings (loss) from continuing operations before income taxes | $ | (274.8 | ) | $ | 80.4 | $ | (1,117.4 | ) | $ | 478.7 | |||||
|
|
|
|
|
September 30,
2002 |
December 31,
2001 |
||||||
---|---|---|---|---|---|---|---|---|
|
Dollars in millions
|
|||||||
Assets: | ||||||||
Wholesale Services | $ | 3,722.9 | $ | 4,655.2 | ||||
Capacity Services* | 1,400.5 | 1,593.4 | ||||||
|
|
|||||||
Total Merchant Services | 5,123.4 | 6,248.6 | ||||||
|
|
|||||||
International Networks | 2,126.8 | 1,867.2 | ||||||
Domestic Networks | 2,813.4 | 3,512.5 | ||||||
|
|
|||||||
Total Global Networks Group | 4,940.2 | 5,379.7 | ||||||
|
|
|||||||
Corporate and other | 614.2 | 320.0 | ||||||
|
|
|||||||
Total | $ | 10,677.8 | $ | 11,948.3 | ||||
|
|
20
9. Credit Facilities
9.1 Revolving Credit Agreement
On April 12, 2002, we entered into a new revolving credit facility totaling $650 million that replaced a $400 million credit facility. The new credit facility consists of two $325 million credit agreements, one with a maturity date of 364 days, the other three years. As of September 30, 2002, $400 million of borrowings were outstanding under this facility in addition to $139.8 million of letters of credit.
9.2 Debt Covenants
Certain of our finance arrangements (including our $650 million revolving credit facility and our guarantees related to three synthetic leases) require that, subject to certain exclusions of non-cash gains or losses, our earnings before interest, taxes, depreciation and amortization during the previous four quarters must be at least 2.25 times our interest expense during that same period. We refer to this as our interest coverage ratio. As a result of our operating performance, the winding down of our wholesale energy trading business and our asset sales program, we are not in compliance with our interest coverage ratio for the period ended September 30, 2002. Because of the "trailing" 12-month nature of the financial covenant, we do not expect to be in compliance with our required interest coverage ratio as it is currently defined until at least December 31, 2003.
We obtained waivers from the affected lenders from the requirement to comply with our interest coverage ratio from September 30, 2002, until April 12, 2003. In exchange, we paid down obligations of approximately $158.6 million to those lenders and agreed that 50% of any net cash proceeds under $1 billion dollars and 100% of any net cash proceeds above $1 billion dollars received prior to April 12, 2003, from any further sales of our North American assets would be used to reduce our obligations to those lenders on a pro rata basis. Any cash proceeds that are used to reduce borrowings under these financing arrangements permanently reduce, on a dollar for dollar basis, the amount of credit available to us under those agreements. We also agreed to make reasonable efforts to obtain approvals that would allow us to pledge certain of our regulated assets as security for the benefit of our lenders. In addition, we were required to pay fees of approximately $2.4 million to the lenders in connection with these waivers.
As of September 30, 2002, our revolving credit agreement is the only obligation on our balance sheet that contains these interest coverage ratio provisions. This debt, as well as approximately $112.6 million of other debt that could be declared due under cross default provisions, has been classified as a current liability on the September 30, 2002 balance sheet. Should the waiver not be extended beyond April 12, 2003, and the above lenders demand payment in full, substantially all of our remaining debt would become due and payable. We would not have adequate liquidity to meet these obligations should they become due. We will continue to work with our lenders and expect to reach an agreement that is acceptable to both us and the banks before the expiration of the current waivers.
In our negotiations to obtain waivers of our interest coverage ratio breach and consents with respect to asset dispositions, we agreed to purchase notes from the lessors in the two power plant leases and the turbine lease. The amount of notes that we will purchase will be determined by the pro rata distribution of the cash proceeds we receive from our asset sales. We therefore expect to consolidate these assets and the related debt on our books in the fourth quarter of 2002 as they will no longer qualify for off-balance sheet treatment. Based on balances outstanding as of November 11, 2002, we would consolidate approximately $324 million of assets and debt on to our balance sheet during the fourth quarter of 2002. The debt may be further reduced by applying cash collateral deposits of approximately $82 million to the outstanding notes.
21
9.3 Current Credit Ratings
Credit ratings impact our ability to obtain short and long-term financing, the cost of such financing and the execution of our commercial strategies. Our financial flexibility is likewise dependent on the absence of restrictive covenants and other terms that are typically imposed on non-investment grade borrowers. As of November 13, 2002, our senior unsecured long-term debt ratings, as assessed by the three major credit rating agencies, were as follows:
Agency |
|
Rating |
|
Outlook |
---|---|---|---|---|
Moody's Investor Service (Moody's) | Ba2 | Stable | ||
Standard & Poor's Corporation (S&P) | BBB- | Negative | ||
Fitch Ratings (Fitch) | BBB- | Negative |
On September 3, 2002, Moody's lowered our credit rating from investment grade of Baa3 to Ba2 stable outlook, a non-investment grade. Additionally, on September 4, 2002, S&P downgraded us to BBB-, their lowest investment grade rating, from BBB, and placed us on negative outlook. As a result of the Moody's downgrade, our interest costs have increased and we were required to post collateral to support certain loan and operating contracts discussed below.
9.4 Interest Rate Adjustment Based on Our Credit Rating
Because of the downgrade of our credit rating to Ba2 by Moody's, the interest rate on $500 million of our senior notes due 2012 has increased from 11.875% to 13.125% and the interest rate on $250 million of our senior notes due 2011 increased from 7.95% to 8.70%.
If Moody's downgrades us below Ba2, the interest on both series of senior notes will increase an additional .25%. If S&P downgrades us further, the interest rate on these senior notes will increase as follows:
S&P Rating |
|
$500 Million 2012 Senior Notes Adjustment Amount |
|
$250 Million 2011 Senior Notes Adjustment Amount |
---|---|---|---|---|
BB+ | 1.00% | .50% | ||
BB | 1.25% | .75% | ||
BB- or lower | 1.50% | 1.00% |
9.5 Ratings Triggers
We do not have any trigger events (e.g. an acceleration of repayment of outstanding indebtedness, an increase in interest costs or the posting of cash collateral) tied to our stock price and have not executed any transactions that require us to issue equity based on our credit ratings or other trigger events. Certain of our subsidiaries have trigger events tied to specified credit ratings. Because of guarantee and cross default provisions between Aquila, Inc. and these subsidiaries, the ratings triggers of our subsidiaries discussed below should be viewed as if they are directly applicable to Aquila, Inc.
In October 2002, we retired $81.4 million of Australian denominated bonds at their maturity date. Our Australian subsidiaries have four other outstanding series of Australian denominated bonds, guaranteed by us, that contain provisions that could require us to repurchase the bonds (i.e. a put right). The put right (aggregating approximately $84.1 million as of September 30, 2002) can be exercised on the next scheduled quarterly or semi-annual interest payment date if we are rated below investment grade by S&P.
Our Merchant Services subsidiary also has three "tolling agreements," a construction loan and certain margining agreements that have trigger events tied to Aquila's credit ratings. Under the tolling agreements, our subsidiary uses a third party's generation assets to convert fuel into electric power for its subsequent resale. We posted collateral in the third quarter relating to these agreements due to our
22
downgrade by Moody's. The amounts posted included $45.0 million related to one of the tolling agreements, $27.5 million related to the construction loan, and $39.8 million related to standard margining agreements. The maximum aggregate amount of additional collateral that could be required to be posted in the event of a downgrade by S&P under the remaining tolling agreements is $37.0 million. We could be required to post this amount within 70 days to eight months of the date we are rated below investment grade by S&P. Based on our current view, the standard margining agreements would require us to post an additional $22.9 million if we were downgraded by S&P.
9.6 Other Potential Demands for Collateral
Although we have substantially exited the wholesale energy trading business of our Merchant Services subsidiary, a number of energy trading agreements remain to be settled or liquidated. These contracts consist of various long-term gas contracts, weather derivatives, alternative risk contracts, and European coal and other commodity trading contracts that are difficult to liquidate. These contracts typically include provisions which allow counterparties to request additional collateral to support underlying transactions if events occur that cause counterparties to believe that there has been deterioration in our creditworthiness. In connection with our exit from the wholesale energy trading business and the support requirements of our networks businesses, we have identified key commercial relationships that are essential to our ongoing business. As a result of the Moody's downgrade, we provided collateral to certain counterparties in the form of cash deposits or letters of credit totaling $41.0 million. While it is difficult to predict how many additional parties may successfully demand some form of collateral, we currently estimate that the amount of additional cash collateral if S&P were to downgrade us to BB would be no more than $94.0 million.
The following table summarizes the collateral posted through November 11, 2002, and additional collateral which may be required to be posted in the future:
|
Potential Collateral
Disclosed in Second Quarter 10-Q |
Amounts Posted/
Paid to Date |
Potential Additional
Amounts to be Posted on S&P Downgrade |
||||||
---|---|---|---|---|---|---|---|---|---|
|
In millions
|
||||||||
Australian denominated bonds | $ | 177.0 | $ | 81.4 | $ | 84.1 | |||
Tolling agreements | 82.0 | 45.0 | 37.0 | ||||||
Construction loan | 28.0 | 27.5 | | ||||||
Standard margining agreements | 62.0 | 39.8 | 22.9 | ||||||
Other collateral demands | 135.0 | 41.0 | 94.0 | ||||||
|
|
|
|||||||
Total | $ | 484.0 | $ | 234.7 | $ | 238.0 | |||
|
|
|
If Moody's were to downgrade us below Ba3 and/or if S&P were to downgrade us below BB-, we may need to post additional collateral amounts of up to $73 million above the amounts stated above.
9.7 Legal Proceeding
On February 19, 2002, we filed a suit against Chubb Insurance Group, the issuer of surety bonds in support of certain of our long-term gas supply contracts. Previously, Chubb had demanded that it be released from its up to $554 million surety obligation or, alternatively, that we post collateral to secure its obligation. We do not believe that Chubb is entitled to be released from its surety obligations or that we are obligated to post collateral to secure its obligations unless it is likely we will default on the contracts. Chubb has not alleged that we are likely to default on the contracts. If Chubb were to prevail, it would have a material adverse impact on our liquidity and financial position. We rely on other sureties in support of long-term gas supply contracts similar to those described above. There can be no assurance that these sureties will not make claims similar to those raised by Chubb. We have
23
performed under these contracts since their inception and intend to continue to fully perform on the contracts.
10. Suspension of Dividend
On November 13, 2002, the Board of Directors suspended the annual dividend on common stock for an undetermined time. This decision stems from a detailed analysis of the company's current financial condition, its liquidity forecast and its earnings prospects after completion of the asset sales program discussed above. Based on this analysis, the Board of Directors decided that the most prudent course of action was to suspend the dividend until the company's financial condition and stability is clarified. At this time we cannot predict when or if the Board of Directors will reinstate the dividend or, if reinstated, what the annualized dividend rate will be in the future.
11. Restricted Cash
As reported in our last Form 10-Q, during the third quarter, one of our counterparties required us to segregate the margin cash deposits they have advanced to us from our daily cash accounts. This amount is considered "restricted cash" and not considered available for day-to-day operations. The amount of this restricted cash at September 30, 2002 was $131.2 million and is included in "Restricted cash" in the accompanying Consolidated Condensed Balance Sheets.
12. Income Taxes
The 2002 income tax benefit was reduced primarily as a result of two factors. First, the tax benefit from the $698.1 million pre-tax write-down and loss on sale of a portion of our investment in Quanta Services is limited to available capital gains in the preceding three years and subsequent five years. Because capital gains within the carryback period were less than the loss and significant capital gains could not be assured in the foreseeable future, a $197 million valuation allowance was established. Second, the $178.6 million impairment charge related to Wholesale Services goodwill is considered a permanent difference between book and taxable income and does not result in the recognition of a tax benefit. These adjustments, as well as other adjustments in the first quarter of 2002, have had a significant impact on the 2002 effective tax rate for the nine months ended September 30, 2002.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
AQUILA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except where noted, the following discussion refers to the consolidated entity, Aquila, Inc. Although we recently announced our exit from our Wholesale Services business, during the periods covered by this report, our businesses were structured as follows: (a) Merchant Services, consisting primarily of two segments, (i) Wholesale Services, our North American and European commodity and client services businesses (including our capital business), and (ii) Capacity Services, our power generation, natural gas gathering and processing operations (currently classified as discontinued operations), and investments in independent power projects, and (b) Global Networks Group, consisting of two segments, (i) International Networks, our Canadian, Australian, United Kingdom and New Zealand electricity and gas utility businesses, and (ii) Domestic Networks, our electricity and gas utilities in seven mid-continent states. Domestic Networks also includes our communications business and our investment in Quanta Services, Inc.
13. FORWARD-LOOKING INFORMATION AND RISK FACTORS
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. We generally intend the words "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "continue," "presently determined" or the negative of these terms or similar expressions to identify forward-looking statements. Similarly, statements that describe our objectives, plans and goals may be forward-looking statements. Some of the important factors and risks that could cause actual results or liquidity to differ materially from those anticipated include:
25
14. RESULTS OF OPERATIONS
14.1 Executive Summary
This review of performance is organized by business segment, reflecting the way we managed our business during the periods covered by this report. Each business group leader is responsible for operating results down to earnings before interest and taxes (EBIT). Corporate management is responsible for making all financing decisions. Therefore, each segment discussion focuses on the factors affecting EBIT, while financing and income taxes are separately discussed at the corporate level.
We use the term "Operating EBIT" to describe our recurring earnings from continuing operations before interest and taxes excluding items we deem to be non-recurring. The term is not meant to replace actual EBIT, or be considered as an alternative to net income or cash flows from operating activities, which are determined in accordance with generally accepted accounting principles (GAAP), as an indicator of operating performance or as a measure of liquidity, or other performance measures
26
used under GAAP. In addition, the term may not be comparable to similarly titled measures used by other entities.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||||
|
Dollars in millions
|
||||||||||||||
Operating Earnings (Loss) From Continuing Operations Before Interest and Taxes: | |||||||||||||||
Wholesale Services | $ | (60.4 | ) | $ | 30.7 | $ | 16.2 | $ | 241.5 | ||||||
Capacity Services | (5.9 | ) | 13.3 | 18.4 | 73.4 | ||||||||||
Minority interest | | (7.4 | ) | | (23.9 | ) | |||||||||
|
|
|
|
||||||||||||
Total Merchant Services | (66.3 | ) | 36.6 | 34.6 | 291.0 | ||||||||||
|
|
|
|
||||||||||||
International Networks | 57.8 | 48.9 | 135.9 | 117.3 | |||||||||||
Domestic Networks | 37.2 | 45.0 | 101.0 | 131.8 | |||||||||||
|
|
|
|
||||||||||||
Total Global Networks Group | 95.0 | 93.9 | 236.9 | 249.1 | |||||||||||
|
|
|
|
||||||||||||
Corporate and other | (4.5 | ) | .6 | (18.0 | ) | (2.5 | ) | ||||||||
|
|
|
|
||||||||||||
Total Operating EBIT | 24.2 | 131.1 | 253.5 | 537.6 | |||||||||||
|
|
|
|
||||||||||||
Non-recurring items: | |||||||||||||||
Restructuring charges | (116.2 | ) | | (188.0 | ) | | |||||||||
Impairment and loss on sale of Quanta investment | (5.2 | ) | | (698.1 | ) | | |||||||||
Impairment of Wholesale Services goodwill | | | (178.6 | ) | | ||||||||||
Impairment of communications investments | | | (23.1 | ) | | ||||||||||
Loss on exit from Lodi gas storage interest | (21.9 | ) | | (21.9 | ) | | |||||||||
Termination of Cogentrix acquisition | (12.2 | ) | | (12.2 | ) | | |||||||||
Wholesale energy trading margin losses | (70.8 | ) | | (70.8 | ) | | |||||||||
Gain on sale of Aquila Merchant shares | | | | 110.8 | |||||||||||
Other | .3 | | .3 | | |||||||||||
|
|
|
|
||||||||||||
Actual EBIT | (201.8 | ) | 131.1 | (938.9 | ) | 648.4 | |||||||||
|
|
|
|
||||||||||||
Interest expense | 73.0 | 50.7 | 178.5 | 169.7 | |||||||||||
Income tax expense (benefit) | (94.2 | ) | 15.6 | (168.8 | ) | 200.5 | |||||||||
|
|
|
|
||||||||||||
Earnings (loss) from continuing operations | (180.6 | ) | 64.8 | (948.6 | ) | 278.2 | |||||||||
|
|
|
|
||||||||||||
Earnings (loss) from discontinued operations, net of tax | (151.0 | ) | 4.1 | (148.6 | ) | 7.4 | |||||||||
|
|
|
|
||||||||||||
Net income (loss) | $ | (331.6 | ) | $ | 68.9 | $ | (1,097.2 | ) | $ | 285.6 | |||||
|
|
|
|
||||||||||||
Diluted earnings (loss) per share: | |||||||||||||||
Continuing operations | $ | (1.01 | ) | $ | .55 | $ | (6.20 | ) | $ | 2.43 | |||||
Discontinued operations | (.84 | ) | .03 | (.97 | ) | .07 | |||||||||
|
|
|
|
||||||||||||
Net income (loss) | $ | (1.85 | ) | $ | .58 | $ | (7.17 | ) | $ | 2.50 | |||||
|
|
|
|
27
14.1.1 Key Factors Impacting Operating EBIT
Our total Operating EBIT decreased in 2002 compared to 2001. Key factors affecting 2002 results were as follows:
Also impacting the 2002 results was the adoption of a new accounting standard, SFAS 142, which discontinued the amortization of goodwill effective January 1, 2002. We recorded goodwill amortization expense of $9.6 and $30.6 million for the three- and nine-month periods ended September 30, 2001, respectively. Amortization expense was not recorded in the three-and nine-month periods ended September 30, 2002.
In 2002, we changed our method of accounting for our Merchant Services gas storage inventory from the lower of cost or market method to a fair value method. This change had little impact on 2002 results. However, third quarter and nine-month earnings before tax in 2001 would have been $28.2 million and $82.0 million lower, respectively, if this change had been in effect for those periods.
In the first four months of 2001, we owned 100% of Aquila Merchant. In April 2001, approximately 20% of Aquila Merchant was sold to the public. For the remainder of 2001, Aquila Merchant was consolidated with a minority interest reflected in the financial statements. In January 2002, we acquired the outstanding public shares of Aquila Merchant in an exchange offer and merger. The following Wholesale Services and Capacity Services financial information includes 100% of Aquila Merchant before minority interest, which totaled $7.4 million and $23.9 million for the three and nine months ended September 30, 2001.
28
14.1.2 Restructuring Charges
As further discussed in Footnote 2, "Restructuring Charges," we recorded restructuring charges of $116.2 million and $188.0 million, respectively, for the three- and nine-month periods ended September 30, 2002 that consisted of the following:
|
Three Months
Ended September 30, 2002 |
Nine Months
Ended September 30, 2002 |
|||||
---|---|---|---|---|---|---|---|
|
In millions
|
||||||
Severance costs | $ | 13.4 | $ | 54.1 | |||
Retention payments | 28.9 | 28.9 | |||||
Lease agreements | 36.7 | 36.7 | |||||
Write-down of leasehold improvements and equipment | 36.4 | 59.2 | |||||
Disposition of corporate aircraft | .3 | 7.1 | |||||
Other restructuring costs | .5 | 2.0 | |||||
|
|
||||||
Total restructuring charges | $ | 116.2 | $ | 188.0 | |||
|
|
We continue to evaluate our staffing levels and expect to incur additional severance costs to further reduce our staff by approximately 200 positions in the fourth quarter of 2002.
14.1.3 Impairment Charges and Net Loss on Sale of Assets
As further discussed in Footnote 3, "Impairment Charges and Net Loss on Sale of Assets," we recorded the following impairment charges and net loss on sale of assets for the three and nine months ended September 30, 2002:
|
Three Months
Ended September 30, 2002 |
Nine Months
Ended September 30, 2002 |
||||||
---|---|---|---|---|---|---|---|---|
|
In millions
|
|||||||
Investment in Quanta Services | $ | 5.2 | $ | 698.1 | ||||
Wholesale Services goodwill | | 178.6 | ||||||
Communications technology investments | | 23.1 | ||||||
Exit from Lodi gas storage investment | 21.9 | 21.9 | ||||||
Termination of Cogentrix acquisition | 12.2 | 12.2 | ||||||
Other | (.3 | ) | (.3 | ) | ||||
|
|
|||||||
Total impairment charges and net loss on sale of assets | $ | 39.0 | $ | 933.6 | ||||
|
|
We also incurred a $236.6 million loss on the sale of Aquila Gas Pipeline that is reflected in discontinued operations. See Footnote 4, "Discontinued Operations," for further discussion.
We are in the process of evaluating the best way to monetize our Aquila Energy Capital Corporation portfolio of loans to energy-related businesses. As part of this evaluation, we will determine if a loan-by-loan sale or sale of the entire portfolio maximizes value and provides liquidity to us. If we decide to execute a sale of the entire portfolio, we would expect to incur substantial losses on its disposition.
In addition, we are in the process of reviewing the strategic initiatives for Everest Connections. If we decide not to continue to fund or otherwise support Everest Connections, and it is unable to obtain separate third party debt or equity funding, the current recorded investment of approximately $210 million would be impaired in part or in its entirety.
29
14.1.4 Discontinued Operations
As further discussed in Footnote 4, "Discontinued Operations," in connection with our plan to sell Katy Storage and Aquila Gas Pipeline, we have reported the results of these businesses in discontinued operations for the three and nine month periods ended September 30, 2002 and 2001 in the Consolidated Condensed Statements of Income.
Unaudited operating results of Katy Storage and Aquila Gas Pipeline for the three and nine month periods ended September 30, 2002 and 2001 are as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
In millions
|
||||||||||||
Sales | $ | 78.4 | $ | 78.2 | $ | 220.6 | $ | 383.2 | |||||
Cost of sales | (57.1 | ) | (55.7 | ) | (164.8 | ) | (314.7 | ) | |||||
|
|
|
|
||||||||||
Gross profit | 21.3 | 22.5 | 55.8 | 68.5 | |||||||||
|
|
|
|
||||||||||
Operating expense | 7.3 | 9.3 | 25.0 | 33.4 | |||||||||
Impairment charges and net loss on sale of assets | 236.6 | | 236.6 | | |||||||||
Depreciation and amortization expense | 7.6 | 7.6 | 22.7 | 23.0 | |||||||||
Equity in earnings of investments | (1.9 | ) | (.7 | ) | (4.8 | ) | (2.6 | ) | |||||
Other (income) expense | | (1.3 | ) | | (1.1 | ) | |||||||
|
|
|
|
||||||||||
Total operating and other (income) expense | 249.6 | 14.9 | 279.5 | 52.7 | |||||||||
|
|
|
|
||||||||||
Earnings (loss) before interest and taxes | (228.3 | ) | 7.6 | (223.7 | ) | 15.8 | |||||||
Interest expense | 1.2 | 1.2 | 3.8 | 5.1 | |||||||||
|
|
|
|
||||||||||
Earnings (loss) before taxes | (229.5 | ) | 6.4 | (227.5 | ) | 10.7 | |||||||
Income tax expense (benefit) | (78.5 | ) | 2.3 | (78.9 | ) | 3.3 | |||||||
|
|
|
|
||||||||||
Earnings (loss) from discontinued operations | $ | (151.0 | ) | $ | 4.1 | $ | (148.6 | ) | $ | 7.4 | |||
|
|
|
|
We incurred a significant loss on discontinued operations in the three and nine month periods ended September 30, 2002, primarily as the result of the loss relating to the sale of Aquila Gas Pipeline.
Sales, cost of sales and margin decreased for the nine months ended September 30, 2002 due to decreased natural gas liquids prices and throughput volumes from 2001.
14.1.5 Gain on Sale of Subsidiary Stock
In connection with the initial public offering of Aquila Merchant in April 2001, we sold 5.75 million previously issued shares and realized a non-recurring pre-tax gain of approximately $110.8 million.
14.1.6 Re-Audit of Financial Statements
As a result of the reclassification associated with the discontinued operations and the reclassification of sales and cost of sales discussed in Footnote 1, combined with the inability of our former auditor, Arthur Andersen LLP, to attest to these adjustments due to that firm's demise, we are required to have our financial statements for the years ended December 31, 2000 and 2001 re-audited by our newly engaged auditors. We do not anticipate any changes to our audited 2000 and 2001 financial statements filed with our Annual Report on Form 10-K/A on August 14, 2002, except the reclassifications necessary to reflect the discontinuation of certain operations and reclassification of sales and cost of sales under EITF No. 02-3. We expect the re-audits to be completed in early 2003.
30
14.2 WHOLESALE SERVICES
The table below summarizes the operations of our domestic and international Wholesale Services businesses for the three and nine month periods ended September 30, 2002 and 2001.
|
Three Months Ended
September 30, |
Nine Months
Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
Dollars in millions
|
||||||||||||
Sales | $ | (89.2 | ) | $ | 74.5 | $ | 43.9 | $ | 549.4 | ||||
Cost of sales | | .2 | | 16.2 | |||||||||
|
|
|
|
||||||||||
Gross profit | (89.2 | ) | 74.3 | 43.9 | 533.2 | ||||||||
|
|
|
|
||||||||||
Operating expenses: | |||||||||||||
Operating expense | 57.5 | 46.9 | 133.9 | 309.0 | |||||||||
Restructuring charges | 108.8 | | 160.1 | | |||||||||
Impairment charges and net loss on sale of assets | 1.3 | | 179.9 | | |||||||||
Depreciation and amortization expense | 1.0 | 8.6 | 5.8 | 15.2 | |||||||||
|
|
|
|
||||||||||
Total operating expenses | 168.6 | 55.5 | 479.7 | 324.2 | |||||||||
|
|
|
|
||||||||||
Other income: | |||||||||||||
Equity in earnings of investments | | | | .2 | |||||||||
Other income | 16.5 | 11.9 | 41.2 | 32.3 | |||||||||
|
|
|
|
||||||||||
Earnings before interest and taxes (EBIT)* | (241.3 | ) | 30.7 | (394.6 | ) | 241.5 | |||||||
|
|
|
|
||||||||||
Non-recurring items: | |||||||||||||
Restructuring charges | 108.8 | | 160.1 | | |||||||||
Impairment of Wholesale Services goodwill | | | 178.6 | | |||||||||
Wholesale energy trading margin losses | 70.8 | | 70.8 | | |||||||||
Other | 1.3 | | 1.3 | | |||||||||
|
|
|
|
||||||||||
Operating EBIT | $ | (60.4 | ) | $ | 30.7 | $ | 16.2 | $ | 241.5 | ||||
|
|
|
|
As a result of the implementation of EITF 02-3, gains and losses on energy trading contracts are reported net in sales. As a result, substantially all of Wholesale Services' sales are reported net for all periods presented.
14.2.1 Quarter-to-Quarter
14.2.1.1 Sales and Gross Profit
Sales for our Wholesale Services operations decreased by $163.7 million. This decrease was primarily due to the following factors:
31
of our decision to exit the wholesale energy trading business. In contrast, we had substantial earnings from trading activity in the third quarter of 2001.
14.2.1.2 Operating Expense
Operating expense increased $10.6 million primarily due to an additional $20.0 million provision for uncollectible notes receivable resulting from the creditworthiness of one of our note holders, offset in part by a $13.3 million decrease in compensation expense caused by staff reductions and the elimination of all incentive compensation in 2002.
14.2.1.3 Depreciation and Amortization Expense
Depreciation and amortization expense decreased $7.6 million due to the elimination of goodwill amortization, the write-off in 2001 of certain interactive web-based assets and the write-off of leasehold improvements and equipment used in our wholesale energy trading business.
14.2.1.4 Other Income
Other income increased by $4.6 million primarily due to additional interest resulting from increased merchant notes receivable in 2002 and from a decrease in merchant accounts receivable sale program fees due to the cancellation of this program.
14.2.2 Year-to-Date
14.2.2.1 Sales and Gross Profit
Sales and gross profit for our Wholesale Services operations decreased approximately $505.5 million and $489.3 million respectively, in 2002 compared to 2001. These decreases were primarily due to the following factors:
32
14.2.2.2 Operating Expense
Operating expense decreased $175.1 million primarily due to the elimination of incentive compensation expense in 2002 resulting from the decline in operating results and lower compensation expense due to staff reductions.
14.2.2.3 Depreciation and Amortization Expense
Depreciation and amortization expense decreased $9.4 million due to the elimination of goodwill amortization, the write-off in 2001 of certain interactive web-based assets and the write-off of leasehold improvements and equipment used in our wholesale energy trading business.
14.2.2.4 Other Income
Other income increased by $8.9 million primarily due to additional interest resulting from an increase in the notes receivable portfolio balance, and a decrease in accounts receivable sale program fees due to the cancellation of this program in early 2002.
33
14.3 CAPACITY SERVICES
The table below summarizes the operations of our Capacity Services businesses for the three and nine month periods ending September 30, 2002 and 2001.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
Dollars in millions
|
||||||||||||
Sales | $ | 172.9 | $ | 219.2 | $ | 343.5 | $ | 492.0 | |||||
Cost of sales | 188.3 | 202.3 | 305.0 | 393.5 | |||||||||
|
|
|
|
||||||||||
Gross profit | (15.4 | ) | 16.9 | 38.5 | 98.5 | ||||||||
|
|
|
|
||||||||||
Operating expenses: | |||||||||||||
Operating expense | 9.1 | 13.0 | 58.5 | 40.0 | |||||||||
Restructuring charges | (.6 | ) | | | | ||||||||
Impairment charges and net loss on sale of assets | 35.5 | | 35.5 | | |||||||||
Depreciation and amortization expense | 2.3 | 1.8 | 6.6 | 6.2 | |||||||||
|
|
|
|
||||||||||
Total operating expenses | 46.3 | 14.8 | 100.6 | 46.2 | |||||||||
|
|
|
|
||||||||||
Other income: | |||||||||||||
Equity in earnings of investments | 20.2 | 11.0 | 43.5 | 20.6 | |||||||||
Other income | .7 | .2 | 1.5 | .5 | |||||||||
|
|
|
|
||||||||||
Earnings before interest and taxes (EBIT)* | (40.8 | ) | 13.3 | (17.1 | ) | 73.4 | |||||||
|
|
|
|
||||||||||
Non-recurring charges: | |||||||||||||
Restructuring charges | (.6 | ) | | | | ||||||||
Impairment charges and net loss on sale of assets | 35.5 | | 35.5 | | |||||||||
|
|
|
|
||||||||||
Operating EBIT | $ | (5.9 | ) | $ | 13.3 | $ | 18.4 | $ | 73.4 | ||||
|
|
|
|
14.3.1 Quarter-to-Quarter
14.3.1.1 Sales, Cost of Sales, and Gross Profit
Sales and cost of sales for our Capacity Services operations decreased approximately 21% and 7%, respectively, in 2002 compared to 2001, resulting in a decrease in gross profit of $32.3 million. These decreases were primarily due to the following factors:
34
14.3.1.2 Operating Expense
Operating expense decreased $3.9 million primarily due to the elimination of incentive compensation in 2002.
14.3.1.3 Equity in Earnings of Investments
Equity in earnings of investments increased $9.2 million due primarily to $6.3 million of increased earnings resulting from the recovery of accounts receivable written off in 2001 at certain independent power plants.
14.3.2 Year-to-Date
14.3.2.1 Sales, Cost of Sales, and Gross Profit
Sales and cost of sales for our Capacity Services operations decreased approximately 30% and 22%, respectively, in 2002 compared to 2001, resulting in a decrease in gross profit of $60.0 million. These decreases were primarily due to the following factors:
35
14.3.2.2 Operating Expense
Operating expense increased $18.5 million due to increased plant operating costs in our power generation business for regulatory compliance and the start-up of a synthetic fuel plant at our coal dock. This was partially offset by lower compensation expense resulting from the elimination of incentive compensation in 2002.
14.3.2.3 Equity in Earnings of Investments
Equity in earnings of investments increased $22.9 million mainly due to favorable price movements on certain long-term contracts and $7.1 million of increased earnings resulting from the recovery of accounts receivable written off in 2001 at certain independent power plants, as well as the continued strong operating performance of various independent power projects.
14.3.3 Merchant Power Capacity Payments
We have cash obligations of approximately $118.2 million in 2003 under long-term fixed capacity contracts or leases that entitle us to generate power at power plants owned by others. Due to the relatively low price of power and high price of natural gas that are expected to continue for the foreseeable future, it is unlikely that we will be able to sell power and recover these capacity payments in 2003. Using current forecasted spark spreads for 2003, we expect to generate revenue of approximately $3 million (before considering hedges and previous forward sales of $19.8 million) to offset these capacity payments. These losses and cash outflows negatively impact our financial condition and liquidity position. Because of our limited resources and because these arrangements are inconsistent with our long-term strategy, we are attempting to restructure or terminate certain of these contractual obligations on terms mutually acceptable to us and our counterparties. The power capacity or lease payments for 2003 are summarized below:
|
In millions
|
||
---|---|---|---|
Annual capacity/lease payments | $ | 118.2 | |
Pre-tax income statement expected loss | $ | 95.4 | |
Amount capacity/lease payments exceed cash inflows | $ | 75.5 |
14.3.4 Earnings Trend and Impact of Changing Business Environment
The merchant energy sector has been negatively impacted by the increase in generation capacity that became operational in 2002 and by the continued construction of additional power plants over the next 18-month horizon. This increase in supply has placed downward pressure on power prices and subsequently the value of merchant generation. In addition, many market participants like Aquila have reduced or exited the commodity trading business that has reduced liquidity and market depth shifting merchant generation to a price taker role. As a result of the above factors and Aquila's change in strategy, we do not expect our Capacity Service's unit to be profitable in the foreseeable future.
36
14.4 INTERNATIONAL NETWORKS
The table below summarizes the operations of our International Networks for the three and nine month periods ended September 30, 2002 and 2001.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
Dollars in millions
|
||||||||||||
Sales | $ | 84.5 | $ | 85.0 | $ | 267.1 | $ | 262.5 | |||||
Cost of sales | 26.2 | 34.7 | 98.0 | 106.7 | |||||||||
|
|
|
|
||||||||||
Gross profit | 58.3 | 50.3 | 169.1 | 155.8 | |||||||||
|
|
|
|
||||||||||
Operating expenses: | |||||||||||||
Operating expense | 32.0 | 25.4 | 82.2 | 69.4 | |||||||||
Impairment charges and net loss on sale of assets | (3.0 | ) | | (3.0 | ) | | |||||||
Depreciation and amortization expense | 14.5 | 13.6 | 43.4 | 41.6 | |||||||||
|
|
|
|
||||||||||
Total operating expenses | 43.5 | 39.0 | 122.6 | 111.0 | |||||||||
|
|
|
|
||||||||||
Other income: | |||||||||||||
Equity in earnings of investments | 42.6 | 28.0 | 83.0 | 53.6 | |||||||||
Other income | 3.4 | 9.6 | 9.4 | 18.9 | |||||||||
|
|
|
|
||||||||||
Earnings before interest and taxes (EBIT) | 60.8 | 48.9 | 138.9 | 117.3 | |||||||||
|
|
|
|
||||||||||
Non-recurring items: | |||||||||||||
Gain on sale of Pulse interests | (3.0 | ) | | (3.0 | ) | | |||||||
|
|
|
|
||||||||||
Operating EBIT | $ | 57.8 | $ | 48.9 | $ | 135.9 | $ | 117.3 | |||||
|
|
|
|
||||||||||
Operating Statistics: | |||||||||||||
Electric sales and transportation volumes (MMWh) | 6,281 | 6,357 | 19,220 | 19,510 | |||||||||
|
|
|
|
14.4.1 Quarter-to-Quarter
14.4.1.1 Sales, Cost of Sales and Gross Profit
Cost of sales decreased $8.5 million primarily due to the deferral of additional amounts of excess Alberta purchased power costs in the third quarter that regulatory authorities have allowed for recovery in future periods.
14.4.1.2 Operating Expense
Operating expense increased $6.6 million in 2002 compared to 2001. This increase was primarily due to business development costs and increased costs of technology services in our Canadian networks.
14.4.1.3 Equity in Earnings of Investments
Equity in earnings of investments increased $14.6 million in 2002 compared to 2001. Midlands Electricity, acquired in May 2002 and currently under consideration for a possible sale, contributed $16.7 million to the increase in equity earnings. Approximately $2.1 million of the increase in equity in earnings was due to goodwill no longer being amortized in the financial statements of our equity method investments.
14.4.1.4 Other Income
Other income decreased $6.2 million primarily as a result of reduced cost of capital recoveries on deferred purchased power balances in our Alberta networks. These reduced recoveries resulted from lower rates and balances in 2002.
37
14.4.2 Year-to-Date
14.4.2.1 Sales, Cost of Sales and Gross Profit
Sales increased $4.6 million while cost of sales decreased $8.7 million in 2002 compared to 2001. The net increase in gross profit of $13.3 million was primarily due to a 4.5% rate increase in British Columbia and an interim rate increase in Alberta. Cost of sales decreased due to the deferral of additional amounts of excess Alberta purchased power costs discussed above. The first quarter of 2001 also included sales and cost of sales associated with the Alberta retail operations that were sold in January 2001.
14.4.2.2 Operating Expense
Operating expense increased $12.8 million in 2002 compared to 2001. This increase was primarily due to business development costs, increased costs for technology services, severance costs in our Canadian networks and transition costs related to our Midlands Electricity acquisition.
14.4.2.3 Equity in Earnings of Investments
Equity in earnings of investments increased $29.4 million in 2002 compared to 2001. Midlands Electricity, acquired in May 2002, contributed $25.1 million of the increase. Approximately $6.2 million of the increase was due to goodwill no longer being amortized in the financial statements of our equity method investments.
14.4.2.4 Other Income
Other income decreased $9.5 million primarily as a result of reduced cost of capital recoveries on deferred purchased power in our Alberta network. These reduced recoveries resulted from lower rates and balances in 2002.
38
14.5 DOMESTIC NETWORKS
The table below summarizes the operations of our Domestic Networks for the three and nine month periods ended September 30, 2002 and 2001.
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2002
|
2001
|
2002
|
2001
|
|||||||||
|
|
Dollars in millions
|
|
||||||||||
Sales | $ | 408.3 | $ | 425.3 | $ | 1,412.8 | $ | 1,780.6 | |||||
Cost of sales | 233.7 | 245.5 | 886.6 | 1,227.1 | |||||||||
|
|
|
|
||||||||||
Gross profit | 174.6 | 179.8 | 526.2 | 553.5 | |||||||||
|
|
|
|
||||||||||
Operating expenses: | |||||||||||||
Operating expense | 99.2 | 107.0 | 331.2 | 338.3 | |||||||||
Restructuring charges | | | 19.9 | | |||||||||
Impairment charges and net loss on sale of assets | 5.2 | | 721.2 | | |||||||||
Depreciation and amortization expense | 36.8 | 39.9 | 106.5 | 121.2 | |||||||||
|
|
|
|
||||||||||
Total operating expenses | 141.2 | 146.9 | 1,178.8 | 459.5 | |||||||||
|
|
|
|
||||||||||
Other income: | |||||||||||||
Equity in earnings of investments | (2.8 | ) | 8.5 | 1.8 | 25.9 | ||||||||
Minority interest | 2.4 | .9 | 6.5 | 3.8 | |||||||||
Other income (expense) | (1.0 | ) | 2.7 | 4.2 | 8.1 | ||||||||
|
|
|
|
||||||||||
Earnings before interest and taxes (EBIT) | 32.0 | 45.0 | (640.1 | ) | 131.8 | ||||||||
|
|
|
|
||||||||||
Non-recurring items: | |||||||||||||
Impairment and loss on sale of Quanta investment | 5.2 | | 698.1 | | |||||||||
Impairment of communications investments | | | 23.1 | | |||||||||
Restructuring charges | | | 19.9 | | |||||||||
|
|
|
|
||||||||||
Operating EBIT | $ | 37.2 | $ | 45.0 | $ | 101.0 | $ | 131.8 | |||||
|
|
|
|
||||||||||
Operating Statistics: | |||||||||||||
Electric sales and transportation volumes (MMWh) | 3,889.3 | 3,732.3 | 10,322.1 | 10,117.7 | |||||||||
Gas sales and transportation volumes (Bcf) | 38.0 | 37.1 | 166.5 | 160.0 | |||||||||
|
|
|
|
14.5.1 Quarter-to-Quarter
14.5.1.1 Sales, Cost of Sales and Gross Profit
Sales and cost of sales for the Domestic Networks businesses decreased $17.0 million and $11.8 million, respectively, in 2002 compared to 2001. These decreases were primarily the result of reduced gas prices in 2002. Gross profit decreased $5.2 million primarily as the result of the decrease in off-system sales to the Western market.
14.5.1.2 Operating Expense
Operating expense decreased $7.8 million in 2002 compared to 2001. The decrease in operating expenses was primarily due to a $13.6 million decrease in labor costs. This decrease resulted from the suspension of payments under the long-term incentive plan and reduced annual incentives expected to be earned. In addition, personnel reductions contributed to lower labor costs. Partially offsetting these savings were increased pension costs resulting from reduced interest rates and lower market performance of plan assets.
39
14.5.1.3 Depreciation and Amortization Expense
Depreciation and amortization expense decreased $3.1 million due to the elimination of goodwill amortization and a $3.3 million decrease in depreciation related to our recent Missouri electric rate case. These decreases were offset in part by increased depreciation expense on communication networks placed in service in 2002.
14.5.1.4 Equity in Earnings of Investments
Equity in earnings of investments decreased $11.3 million in 2002 compared to 2001. The decrease was primarily due to a decrease in equity earnings from our Quanta investment resulting from Quanta's lower earnings for 2002 and a reduction of our ownership percentage from 38% to 27% in the third quarter of 2002. Partially offsetting the lower Quanta earnings is the elimination of approximately $2.3 million of goodwill amortization.
In October 2002, we sold 8.0 million additional Quanta shares, which reduced our ownership percentage to 14%. As a result we will account for this investment using the cost method in future periods.
14.5.2 Year-to-Date
14.5.2.1 Sales, Cost of Sales and Gross Profit
Sales and cost of sales for the Domestic Networks businesses decreased $367.8 million and $340.5 million, respectively, in 2002 compared to 2001. These decreases were primarily the result of reduced gas prices and mild winter weather in 2002. Gross profit decreased $27.3 million primarily as the result of the decrease in off-system sales to the Western market that were at record levels in 2001.
14.5.2.2 Operating Expense
Operating expense decreased $7.1 million in 2002 compared to 2001. The decrease in operating expenses was primarily due to a $12.4 million decrease in labor costs. This decrease resulted from the suspension of payments under the long-term incentive plan and reduced annual incentives expected to be earned. In addition, personnel reductions contributed to lower labor costs. Partially offsetting these savings were increased pension costs resulting from reduced interest rates and lower market performance of plan assets.
14.5.2.3 Depreciation and Amortization Expense
Depreciation and amortization expense decreased $14.7 million due to the elimination of goodwill amortization and a $10.2 million decrease in depreciation due to our recent Missouri electric rate case. These decreases were offset in part by increased depreciation expense on communication networks placed in service in 2002.
14.5.2.4 Equity in Earnings of Investments
Equity in earnings of investments decreased $24.1 million in 2002 compared to 2001. The decrease was primarily due to a decrease in equity earnings from our Quanta investment resulting from Quanta's lower earnings for 2002 and a reduction of our ownership percentage from 38% to 27% in the third quarter of 2002. Partially offsetting the lower Quanta earnings is the elimination of approximately $6.9 million of goodwill amortization.
40
14.5.3 Regulatory Matters
The following is a summary of our pending rate case activity:
Rate Case Designation
|
Type of service
|
Date Requested
|
Amount Requested
|
||||
---|---|---|---|---|---|---|---|
|
|
|
(In millions)
|
||||
Minnesota | Gas | 8/2000 | $ | 9.8 | |||
Alberta | Electric | 12/2001 | $ | 12.7 | |||
Iowa | Gas | 6/2002 | $ | 9.3 | |||
Michigan | Gas | 8/2002 | $ | 14.3 | |||
Colorado | Electric | 10/2002 | $ | 23.4 |
We filed a Minnesota gas rate case in August 2000 for $9.8 million. The case is pending before the Minnesota Utilities Commission with an interim rate increase of approximately $5.2 million in effect at this time.
In December 2001, we filed for an annual rate increase in Alberta of about $30 million along with an application for a performance-based rate-setting mechanism. We have subsequently modified this request and are seeking a $12.7 million increase for 2002 and a $6.0 million increase for 2003. On July 2, 2002, we were approved for an interim rate increase of approximately $9.6 million. Hearings were held in September and October 2002 and a final order is expected in early 2003.
In June 2002, we filed for a general rate increase in Iowa for $9.3 million. We received approval to place interim rates into effect subject to refund in the amount of $5.6 million effective in September 2002. The rate case hearing is scheduled to start in December 2002.
In August 2002, we filed for a general rate increase in Michigan for $14.3 million. We have requested authority to place interim rates into effect subject to refund in the amount of $9.3 million. The interim rate hearing is scheduled for November 2002. Briefs on interim rates will also be filed in November 2002.
On October 15, 2002, we filed for a $23.4 million increase in our Colorado electric rates. There is no interim rate process in Colorado. We expect a hearing to be held for this rate increase in April or May of 2003.
In June 2001, we filed for a $49.4 million increase in our Missouri electric rates. Approximately $39 million of the requested increase related to anticipated increased fuel and purchased power costs that did not materialize. In February 2002, we reached a negotiated settlement with the commission staff and all interveners that resulted in a $4.3 million annual rate reduction.
In Missouri, we do not have the ability to adjust the rates we charge for electric service to offset all or part of any increase in prices we pay for natural gas, coal or other fuel we use in generating electricity (i.e. a fuel adjustment mechanism). As a result our electric earnings can fluctuate more in Missouri than in other rate jurisdictions within our service territory.
14.6 CORPORATE AND OTHER
14.6.1 Quarter-To-Quarter
14.6.1.1 Earnings Before Interest and Taxes
Earnings before interest and taxes decreased $13.1 million in 2002 when compared to the same quarter in 2001. This decrease was primarily the result of $7.6 million of executive severance in connection with the separation agreement with our former Chief Executive Officer. In addition, we incurred $1.7 million and $2.0 million, respectively, to retire debt and company-obligated preferred securities.
41
14.6.1.2 Interest Expense
Interest expense and minority interest in income of partnerships and trusts increased $22.3 million in the third quarter of 2002 compared to 2001. The increase was primarily the result of the issuance of $287.5 million of senior notes on February 28, 2002, interest on debt relating to the acquisition of our interest in Midlands Electricity in May 2002 and the issuance of $500 million of 11.875% senior notes in July 2002, which were used to refinance short-term debt borrowings and current maturities bearing interest at lower floating rates. As a result of the downgrade of our credit rating by Moody's on September 3, 2002, the interest rate on the $500 million senior notes discussed above was increased to 13.125%. The interest rate on an additional $250 million of debt increased by .75%. These rates will be increased again if we are further downgraded by S&P or Moody's as discussed in Footnote 9, "Credit Facilities."
14.6.1.3 Income Tax Expense (Benefit)
Income taxes decreased $109.8 million in 2002 compared to 2001 primarily as a result of a loss before income taxes in 2002.
14.6.2 Year-to-date
14.6.2.1 Earnings Before Interest and Taxes
Earnings before interest and taxes decreased $23.5 million in 2002 when compared to the same period in 2001. This decrease was primarily the result of $9.8 million of executive severance in connection with the separation agreement with our former Chief Executive Officer and other executives. In addition, we incurred $1.7 million and $2.0 million, respectively, to retire debt and company-obligated preferred securities. This decrease was also the result of $5.9 million of foreign exchange and interest rate hedge losses relating to our planned financing structure that was not consummated in connection with the Midlands acquisition. In addition, we incurred approximately $4.4 million in losses on investments in the cash surrender value of life insurance policies due to market performance.
14.6.2.2 Interest Expense
Interest expense and minority interest in income of partnership and trusts increased $8.8 million in 2002 compared to 2001. Interest expense was higher primarily as a result of the issuance of $287.5 million of senior notes on February 28, 2002, interest on debt relating to the acquisition of our interest in Midlands Electricity in May 2002 and the issuance of $500 million of 11.875% senior notes in July 2002 which were used to refinance short-term debt borrowings and current maturities bearing interest at lower floating rates. These increases were offset in part by lower rates on variable rate short-term and long-term debt. Average short-term borrowings outstanding in 2002 were also lower as a result of the retirement of short-term debt with the proceeds of the issuance of 12.5 million shares of our common stock in January 2002. In addition, we retired $100 million of company-obligated preferred securities and $204.1 million of other long-term notes in June 2001.
14.6.2.3 Income Tax Expense (Benefit)
Income taxes decreased $369.3 million in 2002 compared to 2001 primarily as a result of a loss before income taxes in 2002. The 2002 income tax benefit was reduced primarily as a result of two factors. First, the tax benefit from the $698.1 million pre-tax loss on our investment in Quanta Services was limited to available capital gains in the preceding three years and subsequent five years. Because capital gains within the carryback period were less than the loss and significant capital gains could not be assured in the foreseeable future, a $197 million valuation allowance was established. Second, the $178.6 million impairment charge related to Wholesale Services goodwill is considered a permanent difference between book and taxable income and does not result in the recognition of a tax benefit.
42
These adjustments, as well as other adjustments in the first quarter of 2002, have a significant impact on the 2002 effective tax rate driven by the lower earnings performance discussed earlier.
14.6.3 Pension Plan
In September 2002, we contributed approximately $35 million to our domestic defined benefit pension plan to maintain the fully funded status of the plan. Over the last few years the returns on plan investments have not been as high as in the prior decade. In addition, we have decreased the discount rates used to compute our pension obligations. As a result, we expect to record pension expense in 2003 of approximately $8.8 million as compared to pension income in prior years.
14.7 SIGNIFICANT BALANCE SHEET MOVEMENTS
Total assets decreased by $1,270.5 million since December 31, 2001. This decrease is primarily attributable to the following:
Total liabilities decreased by $970.2 million and common shareholders' equity decreased by $300.3 million since December 31, 2001. These changes are primarily attributable to the following:
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15. LIQUIDITY AND CAPITAL RESOURCES
15.1 Overall
We are currently operating in a business environment that has substantially limited our ability to raise capital through access to the bank and capital markets in order to furnish our liquidity needs. As of November 11, 2002, our liquidity is summarized in the table below.
Description
|
$ Millions
|
|||
---|---|---|---|---|
Cash on hand, at November 11 | $ | 785 | ||
Unused revolving credit capacity | 112 | |||
|
||||
Total | $ | 897 | ||
|
Our forecasted short-term liquidity (defined as the next six months) includes the following items:
The company's liquidity beyond the short-term horizon is dependent on renewed access to capital markets and the elimination of certain fixed generation capacity obligations discussed in the "Long-term Gas Contract and Merchant Power Plant Capacity Obligations" section.
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15.2 Financing and Debt Covenants
We have utilized a $130 million accounts receivable sales program to manage our working capital and provide immediate liquidity. Due to Moody's downgrade of our credit rating to non-investment grade, the purchaser of our accounts receivable can no longer participate in this program. As a result, we have been required to reduce the amount of receivables sold by approximately $15 million per week until the balance utilized is eliminated. We are attempting to replace this program and expect a new program to be in place prior to year-end. However, we can give no assurance that this attempt will be successful. At September 30, 2002, approximately $63 million had been utilized under the program, all of which has been eliminated as of November 11, 2002. On April 12, 2002, we entered into a new revolving credit facility totaling $650 million that replaced a $400 million credit facility. The new credit facility consists of two $325 million agreements, one with a maturity date of 364 days, the other three years. At September 30, 2002, we had $400 million of revolving bank loan borrowings outstanding and $139.8 million of letters of credit issued against the remaining capacity.
As explained in Footnote 9, "Credit FacilitiesDebt Covenants," we have received waivers from the lenders under our revolving credit facilities and other credit arrangements from the requirement that we maintain a certain interest coverage ratio. In exchange, we have agreed to use a portion of the proceeds we have received (and will receive) from certain asset sales to reduce our obligations to those lenders. Such prepayments on our revolving credit agreements will reduce, on a dollar for dollar basis, the lenders' commitment to extend credit to us under those agreements. The waiver granted by our lenders expires on April 12, 2003. If the waiver is not extended, our obligations to these lenders may be declared by them to be due on April 12, 2003. Should that occur, our remaining long-term debt would be due and payable as well under the cross default provisions of those agreements. We would be unable to meet these obligations if the lenders exercised their remedies in the event of our default. We will continue to work with our lenders and expect to reach an agreement that is acceptable to both us and the banks before the expiration of the current waivers.
We have various short-term bank facilities supporting our international operations with outstanding borrowings of $197.5 million at September 30, 2002, including a $193.8 million bridge acquisition facility in connection with our acquisition of Midlands Electricity that matures in December 2002. During the third quarter, one of our counterparties required us to segregate cash deposited with us from our daily cash accounts. This amount is considered "restricted cash" and is not considered available for day-to-day operations. The amount of this restricted cash at September 30, 2002, was $131.2 million and is included in "Restricted Cash" in the accompanying Balance Sheet.
45
15.3 Asset Sales Program
Earlier this year we initiated an extensive asset sales program to enhance our liquidity and, in light of our change in business strategy, dispose of non-core assets. Following is a table of asset sales through November 11, 2002.
|
Estimated Proceeds
|
Estimated After Tax
Gain (Loss) |
||||||
---|---|---|---|---|---|---|---|---|
|
In millions
|
|||||||
Aquila Gas Pipeline | $ | 265.0 | $ | (156.0 | ) | |||
Lockport Energy | 37.5 | (5.3 | ) | |||||
New Zealand | 362.0 | 28.0 | ||||||
Hole House Storage | 34.9 | (1.8 | ) | |||||
Quanta | 44.0 | (5.2 | ) | |||||
Other assets | 53.2 | (3.8 | ) | |||||
|
|
|||||||
Total closed through November 11, 2002 | $ | 796.6 | $ | (144.1 | ) | |||
|
|
|||||||
Katy Storage | 180.0 | |||||||
|
||||||||
Total announced | $ | 976.6 | ||||||
|
15.4 Suspension of Dividend
On November 13, 2002, the Board of Directors suspended the annual dividend on common stock for an undetermined time. This decision stems from a detailed analysis of the company's current financial condition, its liquidity forecast and its earnings prospects after completion of the asset sales program discussed above. Based on this analysis, the Board of Directors decided that the most prudent course of action was to suspend the dividend until the company's financial condition and stability is clarified. At this time we cannot predict when or if the Board of Directors will reinstate the dividend or, if reinstated, what the annualized dividend rate will be in the future.
15.5 Current Credit Ratings
Credit ratings impact our ability to obtain short and long-term financing, the cost of such financing and the execution of our commercial strategies. Our financial flexibility is likewise dependent on the absence of restrictive covenants and other terms that are typically imposed on non-investment grade borrowers. As of November 13, 2002, our senior unsecured long-term debt ratings, as assessed by the three major credit rating agencies, were as follows:
Agency |
|
Rating |
|
Outlook |
---|---|---|---|---|
Moody's Investor Service (Moody's) | Ba2 | Stable | ||
Standard & Poor's Corporation (S&P) | BBB- | Negative | ||
Fitch Ratings (Fitch) | BBB- | Negative |
On September 3, 2002, Moody's lowered our credit rating from investment grade of Baa3 to Ba2 stable outlook, a non-investment grade. Additionally, on September 4, 2002, S&P downgraded us to BBB-, their lowest investment grade rating, from BBB, and placed us on negative outlook. As a result of the Moody's downgrade, our interest costs have increased and we were required to post collateral to support certain loan and operating contracts (discussed below).
15.6 Interest Rate Adjustment Based on Our Credit Rating
Because of the downgrade of our credit rating to Ba2 by Moody's, the interest rate on $500 million of our senior notes due 2012 has increased from 11.875% to 13.125% and the interest rate on $250 million of our senior notes due 2011 increased from 7.95% to 8.70%.
46
If Moody's downgrades us below Ba2, the interest on both series of senior notes will increase an additional .25%. If S&P downgrades us further, the interest rate on these senior notes will increase as follows:
S&P Rating |
|
$500 Million 2012 Senior Notes Adjustment Amount |
|
$250 Million 2011 Senior Notes Adjustment Amount |
---|---|---|---|---|
BB+ | 1.00% | .50% | ||
BB | 1.25% | .75% | ||
BB- or lower | 1.50% | 1.00% |
15.7 Ratings Triggers
We do not have any trigger events (e.g. an acceleration of repayments of outstanding indebtedness, an increase in interest rates costs or the posting of cash collateral) tied to our stock price and have not executed any transactions that require us to issue equity based on our credit ratings or other trigger events. As discussed below, certain of our subsidiaries have trigger events tied to specified credit ratings. Because of guarantee and cross default provisions between Aquila, Inc. and these subsidiaries, the ratings triggers of our subsidiaries discussed below should be viewed as if they are directly applicable to Aquila, Inc.
In October 2002, we retired $81.4 million of our Australian denominated bonds at their maturity. Our Australian subsidiaries have four other outstanding series of Australian denominated bonds, guaranteed by us, that contain provisions that could require us to repurchase the bonds (i.e. a put right). The put right (aggregating approximately $84.1 million as of September 30, 2002) can be exercised on the next scheduled quarterly or semi-annual interest payment date if we are rated below investment grade by S&P.
Our Merchant Services subsidiary also has three "tolling agreements," a construction loan and certain margining agreements that have trigger events tied to Aquila's credit ratings. Under the tolling agreements, our subsidiary uses a third party's generation assets to convert fuel into electric power for its subsequent resale. We posted collateral in the third quarter relating to these agreements due to our downgrade by Moody's. The amounts posted included $45.0 million related to one of the tolling agreements, $27.5 million related to the construction loan, and $39.8 million related to standard margining agreements. The maximum aggregate amount of additional collateral that could be required to be posted in the event of a downgrade by S&P under the tolling agreements is $37.0 million. We could be required to post this amount within 70 days to eight months of the date we are rated below investment grade by S&P. Based on our current view, the standard margining agreements would require us to post an additional $22.9 million if we were downgraded by S&P.
15.8 Other Potential Demands for Collateral
Although we have substantially exited the wholesale energy trading business of our Merchant Services subsidiary, a number of energy trading agreements remain to be settled or liquidated. These contracts consist of various long-term gas contracts, weather derivatives, alternative risk contracts and European coal and other commodity trading contracts that are difficult to liquidate. These contracts typically include provisions which allow counterparties to request additional collateral to support underlying transactions if events occur that cause counterparties to believe that there has been deterioration in our creditworthiness. In connection with our exit from the wholesale energy trading business and the support requirements of our networks business, we have identified key commercial relationships that are essential to our ongoing business. As a result of the Moody's downgrade, we provided collateral to certain counterparties in the form of cash deposits or letters of credit totaling $41.0 million. While it is difficult to predict how many additional parties may successfully demand some
47
form of collateral, we currently estimate that the amount of additional cash collateral if S&P were to downgrade us to BB would be no more than $94.0 million.
The following table summarizes the collateral posted to date and additional collateral which may be required to be posted in the future:
|
Potential Collateral
Disclosed in Second Quarter 10-Q |
Amounts Posted/Paid to Date
|
Potential Additional Amounts to be
Posted on S&P Downgrade |
||||||
---|---|---|---|---|---|---|---|---|---|
|
In millions
|
||||||||
Australian denominated bonds | $ | 177.0 | $ | 81.4 | $ | 84.1 | |||
Tolling agreements | 82.0 | 45.0 | 37.0 | ||||||
Construction loan | 28.0 | 27.5 | | ||||||
Standard margining agreements | 62.0 | 39.8 | 22.9 | ||||||
Other collateral demands | 135.0 | 41.0 | 94.0 | ||||||
|
|
|
|||||||
Total | $ | 484.0 | $ | 234.7 | $ | 238.0 | |||
|
|
|
If Moody's were to downgrade us below Ba3 and/or S&P were to downgrade us below BB, we may need to post additional collateral amounts of $73 million over and above the stated amounts above.
15.9 Long-Term Gas Contracts and Merchant Power Plant Capacity Obligations
Our obligations under our long-term gas delivery contracts which were paid in advance will result in cash outflows and losses as outlined in the table below. We are committed to meeting these obligations.
Years
|
Long-Term Gas
Contract Amortization (1) |
Long-Term Gas
Contract Margin Loss (2) |
Total Long-Term
Gas Contract Cash Payments (3) |
||||||
---|---|---|---|---|---|---|---|---|---|
Remaining 2002 | $ | 21.1 | $ | 11.9 | $ | 33.0 | |||
2003 | 81.5 | 45.9 | 127.4 | ||||||
2004 | 85.1 | 48.1 | 133.2 | ||||||
2005 | 87.8 | 49.8 | 137.6 | ||||||
Thereafter | 498.4 | 301.7 | 800.1 | ||||||
|
|
|
|||||||
Total | $ | 773.9 | $ | 457.4 | $ | 1,231.3 | |||
|
|
|
Our scheduled capacity and lease payments for power generation in our Capacity Services business during 2003 aggregate approximately $118.2 million. Because it is generally expected that the fuel and start up costs of operating merchant power plants will exceed the revenues that would be generated from the power sales, we believe that our capacity to generate power will largely be unutilized. If our tolling agreements that comprise a substantial portion of our capacity payments are not terminated or restructured on terms acceptable to us, our earnings and liquidity will be severely impacted. We have communicated to certain counterparties the necessity that these agreements be terminated or restructured on terms acceptable to us. Furthermore, if pricing conditions continue for an extended
48
period, we may be required to record a provision for the estimated loss contracts. The relative lack of pricing data beyond the next two years makes this determination difficult.
Years
|
Capacity/ Lease Payments
|
||
---|---|---|---|
Remaining 2002 | $ | 25.2 | |
2003 | 118.2 | ||
2004 | 126.7 |
We also provide a guarantee relating to our lease of the Clay County power plant that $113.5 million of the debt of the lessor will be repaid by November 2003.
15.10 Gas Pipeline Capacity Obligations
We have approximately eight contracts aggregating approximately $40 million in fixed cash obligations in 2003. We fully intend to sell these contracts into the commodity market in the fourth quarter of 2002. The liquidation of these contracts may result in a loss that will be recorded in the fourth quarter of 2002.
15.11 Legal Proceeding
On February 19, 2002, we filed a suit against Chubb Insurance Group, the issuer of surety bonds in support of certain of our long-term gas supply contracts. Previously, Chubb had demanded that it be released from its up to $554 million surety obligation or, alternatively, that we post collateral to secure its obligation. We do not believe that Chubb is entitled to be released from its surety obligations or that we are obligated to post collateral to secure its obligations unless it is likely we will default on the contracts. Chubb has not alleged that we are likely to default on the contracts. If Chubb were to prevail, it would have a material adverse impact on our liquidity and financial position. We rely on other sureties in support of long-term gas supply contracts similar to those described above. There can be no assurance that these sureties will not make claims similar to those raised by Chubb. We have performed under the contracts since their inception and intend to continue to fully perform on the contracts.
15.12 Cash Flows
Cash Flows from Operating Activities Cash flows from operating activities were lower in the nine months ended September 30, 2002, as compared to the same period in 2001 primarily due to the termination of the Merchant Services accounts receivable sales program. As of December 31, 2001, a total of $220 million of Merchant Services accounts receivable had been sold under the program. In the first quarter of 2002, we did not sell new receivables. Instead, we replaced this source of working capital by using the proceeds of the senior note issue sold to the public. Also impacting cash flows from operating activities was the payment of higher annual and long-term incentive compensation based on the record earnings in 2001 and miscellaneous regulatory and other deferrals in 2002. In addition, we made additional funding payments to our defined benefit pension plan to offset declines in plan asset values due to market performance. Partially offsetting decreased cash flows in 2002 was cash collections related to price risk management assets. Lastly, in 2001, because of changes in open positions and market prices and the removal of corporate guaranties in connection with the Merchant Services initial public offering, we were required to make additional margin deposits.
Cash Flows from Investing Activities Cash flows used for investing activities included increased capital expenditures for utility plant additions and merchant power generation construction. In addition, the acquisition of our interest in Midlands Electricity in May 2002 increased cash used for investing activities.
Cash Flows from Financing Activities Cash flows from financing activities came primarily from our issuance of common stock and senior notes. On January 30, 2002, we issued 12.5 million shares of our
49
common stock to the public, which raised approximately $277.7 million in net proceeds. We also sold $287.5 million of 7.875% senior notes due in February 2032. The issuance of 37.5 million common shares and $500 million of senior notes in July 2002 raised approximately $764 million.
15.13 Premium Equity Participating Securities
Our Premium Equity Participating Securities units totaling $250 million (units issued at $25 a unit) include a contract to purchase shares of our common stock on or before November 18, 2002, and a 7.35% trust preferred security. We expect to settle the purchase contracts on November 16, 2002 by issuing 11.7 million shares of our common stock and canceling the trust preferred securities.
15.14 Market RiskTrading
During the second quarter, we decided to exit our wholesale energy trading business. We will no longer be a market maker. Since that time, we have liquidated a substantial portion of the wholesale trading portfolio. Because of these actions, we have significantly reduced our market risk exposure as we have eliminated open trading positions and have liquidated most of our wholesale energy trading contracts. However, for some contracts, there is not a market available to easily liquidate our positions. These contracts consist of various long-term gas contracts, weather derivatives, alternative risk contracts and European coal derivatives and other commodity trading contracts which will wind down over time.
15.15 Certain Trading Activities
Transactions carried out in connection with trading activities are accounted for under the mark-to-market method of accounting. Under this method, our energy commodity trading contracts, including physical transactions (mainly gas and power) and financial instruments, are recorded at fair value. We primarily use quoted market prices from published sources or comparable transactions in liquid markets to value our contracts. If actively quoted market prices are not available, we contact brokers and other external sources or use comparable transactions to estimate current values of our contracts. When market prices are not readily available or determinable, certain contracts are valued at fair value using an alternative approach such as model pricing. The adoption of EITF 02-3 will eliminate the use of model pricing going forward. Because our price risk management liabilities are discounted at rates at which those liabilities could be settled in an arm's length transaction, which is affected by our credit rating, the widening of credit spreads resulted in a mark-to-market adjustment that increased gross profit by approximately $38.0 million for the nine months ended September 30, 2002. These adjustments are included in fair value generated during the period. The non-cash increase in gross profits will be reversed in later periods.
The changes in fair value of our trading and other contracts for the nine months ended September 30, 2002 are summarized below:
|
Wholesale
Services |
Capacity Services
and other |
Total
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
In millions
|
|||||||||
Fair value at December 31, 2001 | $ | 415.2 | $ | 175.7 | $ | 590.9 | ||||
Fair value generated during the period | 50.8 | (1.7 | ) | 49.1 | ||||||
Contracts realized or settledentered into in 2002 | (125.4 | ) | 42.7 | (82.7 | ) | |||||
Contracts realized or settledentered into in prior years | (204.9 | ) | (62.7 | ) | (267.6 | ) | ||||
|
|
|
||||||||
Fair value at September 30, 2002 | 135.7 | 154.0 | 289.7 | |||||||
Long-term gas contracts | | (773.9 | ) | (773.9 | ) | |||||
|
|
|
||||||||
Total | $ | 135.7 | $ | (619.9 | ) | $ | (484.2 | ) | ||
|
|
|
50
The fair value of contracts maturing in each of the next three years and thereafter are shown below:
|
Wholesale
Services |
Capacity Services
and other |
Long-Term
Gas Contracts |
Total
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
In millions
|
||||||||||||
2002 | $ | (40.9 | ) | $ | 2.7 | $ | (21.1 | ) | $ | (59.3 | ) | ||
2003 | 47.3 | 51.7 | (81.5 | ) | 17.5 | ||||||||
2004 | 31.9 | 34.7 | (85.1 | ) | (18.5 | ) | |||||||
2005 | 26.7 | 16.1 | (87.8 | ) | (45.0 | ) | |||||||
Thereafter (a) | 70.7 | 48.8 | (498.4 | ) | (378.9 | ) | |||||||
|
|
|
|
||||||||||
Total Fair Value | $ | 135.7 | $ | 154.0 | $ | (773.9 | ) | $ | (484.2 | ) | |||
|
|
|
|
51
16. EARNINGS OUTLOOK
Aquila is transitioning from an energy merchant to an integrated utility. The various asset sales, deteriorating credit profile and lower electricity prices have significantly changed our earnings profile when compared to historical financial statements. In order to complete the transition and begin our new strategy, we expect to record in the fourth quarter of 2002 significant charges to our income statement relating to contract renegotiations, the continued exit of wholesale commodity positions, potential losses on sale or impairment of assets and additional severance costs. Given the nature of these items we cannot forecast earnings per share for the full year at this time with accuracy.
Item 4. Disclosure Controls and Procedures
Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining the company's disclosure controls and procedures. These controls and procedures were designed to ensure that material information relating to the company and its subsidiaries are communicated to the CEO and the CFO. We evaluated these disclosure controls and procedures within the last 90 days under the supervision of our CEO and CFO. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. There have been no significant changes in our internal controls and procedures or in other factors that could significantly affect these controls and procedures subsequent to the date of this evaluation.
52
In response to admissions by certain gas marketers that they reported inaccurate gas trade information to various trade publications, the Federal Energy Regulatory Commission (FERC) has commenced an investigation into the practices of the largest North American gas marketers, as measured by 2001 physical sales volumes, in reporting natural gas trade data to these publications. Aquila is one of a number of companies that received the FERC's request and will respond to the FERC's request.
Corporate Governance and Management Restructuring
Corporate Governance
Our board of directors met on November 6, 2002, to consider, among other things, enhancements to our corporate governance practices. At that meeting, Aquila's independent directors met in a separate session and appointed independent director Herman Cain, as the presiding independent director of the board of directors. The directors then formed a new Corporate Governance/Nominating Committee, chaired by independent director Stan Ikenberry. This committee:
In light of our increased focus on the fair, complete and accurate reporting of our financial information, our completely independent Audit Committee, chaired by independent director Gerald Shaheen:
Management Restructuring
Our management team was substantially restructured at all levels since the second quarter of 2002. The executive changes were:
53
Other members of executive management continuing in office are Leo Morton, Senior Vice President and Chief Administrative Officer, Les Parrette, Senior Vice President, General Counsel and Corporate Secretary, and Cal Payne, Senior Vice President and Chief Risk Officer.
Item 6. Exhibits and Reports on Form 8-K
Exhibit No.
|
Description
|
|
---|---|---|
10.1 |
|
Employment Agreement dated October 1, 2002, by and between the company and Richard C. Green, Jr. |
10.2 |
|
Agreement dated October 1, 2002, by and between the company and Robert K. Green. |
10.3 |
|
Aquila, Inc. 2002 Omnibus Incentive Compensation Plan. |
10.4 |
|
Second Amendment to the Amended and Restated Capital Accumulation Plan. |
10.5 |
|
UtiliCorp United Inc. Executive Benefit Security Trust Amended and Restated as of April 4, 2002. |
99.1 |
|
Certification of Chief Executive Officer. |
99.2 |
|
Certification of Chief Financial Officer. |
54
We filed Current Reports on Form 8-K during the third quarter ended September 30, 2002, as follows:
Date Filed
|
Item No.
|
|
---|---|---|
July 3, 2002 |
|
Item 5Announcement of Quanta Services revised earnings guidance. |
Item 7Press release dated July 2, 2002. | ||
July 11, 2002 |
|
Item 5Announcement of the closing of 37.5 million shares of common stock at $7.50 per share and $500 million of senior unsecured notes with an adjusted rate of 11.875%. |
Item 7Press release dated July 3, 2002. | ||
July 31, 2002 |
|
Item 5Announcement of decreased likelihood of closing of the Cogentrix acquisition as planned. |
Item 7Press release dated July 31, 2002. | ||
August 2, 2002 |
|
Item 5Announcement of termination of the Cogentrix acquisition. |
Item 7Press release dated August 2, 2002. | ||
August 14, 2002 |
|
Item 5Notice of Robert K. Green, President and Chief Executive Officer, and Dan Streek, Chief Financial Officer of delivering for filing a "Statement Under Oath Regarding Facts and Circumstances Relating to Exchange Act Filings" to the Securities and Exchange Commission. |
Item 7Statement Under Oath of Principal Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings as executed by Robert K. Green, President and Chief Executive Officer and Statement Under Oath of Financial Executive Officer Regarding Facts and Circumstances Relating to Exchange Act Filings as executed by Dan Streek, Chief Financial Officer. | ||
September 3, 2002 |
|
Item 5Announcement of response to downgrade of senior unsecured debt by Moody's Investor Service. |
Item 7Press release dated September 3, 2002. | ||
September 4, 2002 |
|
Item 5Announcement of response to investment grade rating by Standard & Poor's Ratings Services. |
Item 7Press Release dated September 4, 2002. |
55
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.
AQUILA, INC.
By: |
/s/
DAN STREEK
Dan Streek Chief Financial Officer |
|||
|
|
Signing on behalf of the registrant and as principal financial and accounting officer |
|
|
Date: |
|
November 13, 2002 |
|
|
56
Aquila, Inc.
Chief Executive Officer
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard C. Green, Jr., certify that:
|
/s/ RICHARD C. GREEN, JR. Richard C. Green, Jr. Chairman, President and Chief Executive Officer, Aquila, Inc. |
57
Aquila, Inc.
Chief Financial Officer
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dan Streek, certify that:
|
/s/ DAN STREEK Dan Streek Chief Financial Officer, Aquila, Inc. |
58
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made and entered into as of the 1st day of October, 2002, by and between Aquila, Inc. (the "Company"), a Delaware corporation, and Richard C. Green, Jr. (the "Executive") (certain capitalized terms used herein being defined in Section 12).
WHEREAS, the Executive is currently serving as Chairman of the Company, and the Company desires to secure the continued employment of the Executive as Chairman, Chief Executive Officer of the Company in accordance herewith;
WHEREAS, the Executive is willing to commit himself to be employed by the Company on the terms and conditions herein set forth and thus to forego opportunities elsewhere; and
WHEREAS, the parties desire to enter into this Agreement, as of the Effective Date, setting forth the terms and conditions for the employment relationship of the Executive with the Company during the Employment Period.
NOW, THEREFORE, IN CONSIDERATION of the mutual premises, covenants and agreements set forth below, it is hereby agreed as follows:
(a) Employment . The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, in accordance with the terms and provisions of this Agreement during the Employment Period.
(b) Term . The term of this Agreement shall commence as of the date hereof (the "Effective Date") and, subject to earlier termination pursuant to Section 4, shall continue until the date that is the third anniversary of the Effective Date (the "Initial Term"); provided, however, that on each anniversary of the Effective Date the term of this Agreement shall automatically be extended by one year (the Initial Term and each such three-year period commencing after each such anniversary, subject to such earlier termination, the "Employment Period"), unless at least sixty days prior to such anniversary the Company or the Executive shall have given written notice that this Agreement shall not be extended, in which case the Employment Period shall terminate on the date that is two years following such anniversary.
(a) Position; Location . During the Employment Period, the Board shall use its best efforts to elect the Executive as Chairman of the Board and the Executive shall serve as Chairman of the Board (if so elected) and as Chief Executive Officer and President of the Company and perform such duties and services appertaining to such positions as reasonably directed by the Board. The Executive's services shall be performed primarily at the Company's headquarters which shall be located in the Kansas City metropolitan area.
(b) Board Membership . The Executive is currently a member of the Board, and the Board shall propose the Executive for re-election to the Board throughout the Employment Period.
(c) Attention . During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, shall use his reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to serve on corporate, industry, civic or charitable boards or committees, so long as such activities do not significantly interfere
1
with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement.
(a) Salary . Executive's annual base salary ("Annual Base Salary") will initially be his annual base salary as in effect immediately prior to the Effective Date, payable in accordance with the Company's general payroll practices in effect from time to time. During the Employment Term the Committee shall review the Annual Base Salary at least annually for possible discretionary adjustment. Any increase or decrease in the Annual Base Salary shall not serve to limit or reduce, or to increase, any other obligation of the Company under this Agreement.
(b) Incentive Compensation . During the Employment Period, the Executive shall participate in the Company's short-term incentive compensation plans and long-term incentive compensation plans in accordance with the terms thereof and on the same basis as other senior executive officers of the Company.
(c) Retirement and Welfare Benefit Plans . In addition to the benefits available under Section 3(b), during the Employment Period the Executive shall be eligible to participate in all other savings, retirement and welfare plans, practices, policies and programs applicable generally to employees and/or senior executive officers of the Company and its subsidiaries in accordance with the terms thereof, except with respect to any benefits under any plan, practice, policy or program to which the Executive has waived his rights in writing.
(d) Insurance . During the Employment Period, the Company shall provide the Executive with life insurance coverage providing a death benefit to such beneficiary or beneficiaries as the Executive may designate of three times his Annual Base Salary.
(e) Expenses . The Company shall reimburse the Executive for all documented expenses, including those for travel and entertainment, properly incurred by him in the performance of his duties hereunder, subject to any reasonable policies established from time to time by the Board.
(f) Fringe Benefits . During the Employment Period and so long as the Executive is employed by the Company, he shall be entitled to receive fringe benefits in accordance with the plans, practices, programs and policies of the Company from time to time in effect, commensurate with his position and in accordance with the terms thereof, on the same basis as other senior executive officers of the Company.
(a) Death . The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period.
(b) By the Company for Cause. The Company may terminate the Executive's employment during the Employment Period for Cause.
(c) By the Company without Cause . Notwithstanding any other provision of this Agreement, the Company may terminate the Executive's employment for any reason other than for Cause during the Employment Period, but only upon the affirmative vote of two-thirds of the membership of the Board.
(d) By the Executive for Good Reason . The Executive may terminate his employment during the Employment Period for Good Reason.
(e) By the Executive without Good Reason. The Executive may terminate his employment for any reason other than Good Reason during the Employment Period.
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(f) Notice of Termination . Any termination of Executive's employment during the Employment Period by the Company for any reason, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the Date of Termination is other than the date of receipt of such notice, specifies the termination date (which date shall not be more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(a) Right to Certain Awards . (i) In the event that a Change Separation Event, a Separation Event or other termination of employment occurs during the Employment Period, Executive shall be entitled to receive from the Company the relevant benefits as described in Section 5(b), (c) or (d), as the case may be.
(ii) (A) In the event that a Change in Control occurs during the Employment Period all stock options, stock appreciation rights, restricted stock, or other awards (collectively, "Awards") then held by Executive pursuant to the provisions of any of the Company's stock or option plans or any successor plans (each, a "Stock Plan") shall become immediately vested, nonforfeitable and exercisable as of the date of the Change in Control and remain exercisable until the expiration date of such award, any termination of employment notwithstanding.
(B) In the event that a Separation Event occurs during the Employment Period all Awards held by Executive shall continue to vest as if Executive continued to be employed and may be exercised, to the extent exercisable, through, and shall terminate on the earlier of (x) the expiration date of such Award, any termination of employment notwithstanding, and (y) if applicable, the third anniversary of the last day of the Employment Period .
(b) Benefits upon a Change Separation Event . Executive shall be entitled to the following benefits upon a Change Separation Event:
(i) the Accrued Benefits;
(ii) the Accrued Compensation;
(iii) the Severance Benefits, payable in a lump sum within 30 days of the Date of Termination;
(iv) the Basic Bonus Amount;
(v) the Long-Term Incentive Amount;
(vi) except to the extent provided in Section 7 (b), the Additional Benefits; and
(vii) the Outplacement Services.
(c) Benefits upon a Separation Event . Executive shall be entitled to the following benefits upon a Constructive or Separation Event:
(i) the Accrued Benefits;
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(ii) the Accrued Compensation;
(iii) the Severance Benefits, payable in equal installments over the Payment Period in accordance with the Company's general payroll practices;
(iv) the Basic Bonus Amount;
(v) the Long-Term Incentive Amount;
(vi) except to the extent provided in Section 7 (b), the Additional Benefits; and
(d) Upon Executive's voluntary termination of employment other than for Good Reason, or upon termination of the Executive's employment for Cause, death or Disability, Executive shall be entitled to:
(i) the Accrued Compensation; and
(ii) the Accrued Benefits.
6. Nonexclusivity of Rights . Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, plan, program, policy or practice provided by the Company and for which the Executive may qualify (except with respect to any benefit to which the Executive has waived his rights in writing), nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement entered into after the Effective Date with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any benefit, plan, policy, practice or program of, or any contract or agreement entered into with, the Company shall be payable in accordance with such benefit, plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
7. Full Settlement; Mitigation; Legal Fees; Arbitration . The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts (including amounts for damages for breach) payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 7(b) hereof, such amounts shall not be reduced whether or not the Executive obtains other employment.
(b) In the event that following the Employment Period the Executive becomes eligible for health and welfare plan benefits under the plans of another employer, the Company health and welfare benefits provided as Additional Benefits under Section 5 hereof shall be secondary.
(c) In the event of a Change Separation Event, the Company shall pay all legal fees, costs of litigation, prejudgment interest, and other expenses which are reasonably incurred by the Executive as a result of the Company's refusal to provide any benefits or other amounts payable in accordance herewith, unless Executive's claim has been determined by a court of competent jurisdiction to have been frivolous. In addition to the foregoing, the Company shall reimburse Executive for his legal fees reasonably incurred in the negotiation of this Agreement in an amount not to exceed $8,000.
(d) Executive and the Company agree that if a dispute arises out of or is related to this Agreement or Executive's employment by the Company, other than a dispute regarding the obligations under Sections 8 or 9, such dispute shall, if not earlier resolved by negotiations of the parties, be submitted to binding arbitration under the Employment Section Rules of the American Arbitration Association, or the mutually agreed equivalent. Either party may provide written notice
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to the other party that the dispute is not able to be resolved by negotiation and such notifying party shall then contact the American Arbitration Association for appointment of an arbitrator to resolve such dispute. Any arbitration hearing shall take place in Kansas City, Missouri. In addition to all other remedies otherwise available to the Company or Executive, the Company and Executive shall have the right to injunctive relief to restrain and enjoin any actual or threatened breach by the other party of any provisions of Sections 7(d), 8 or 9.
8. Confidential Information . The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and that shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). During the Employment Period and thereafter, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.
9. Non-Competition and Non-Solicitation . Executive acknowledges that he will forfeit all rights under this Agreement if, during the Employment Period, and for a period of three years thereafter: (x) Executive directly or indirectly, owns, manages, operates, controls, is employed by, performs services for, consults with, solicits business for, participates in, or is connected with the ownership, management, operation, or control of any business that is either directly or indirectly competitive with the products or services of the Company; or (y) Executive, directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, induce employees, customers or suppliers of the Company or any affiliate thereof, to terminate their relationships with the Company or attempt to enter into any contractual arrangement with any employee, former employee, customer or former customer of the Company or any affiliate thereof.
10. Successors .
(a) Assignment by Executive . This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
(b) Successors and Assigns of Company . This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns.
(c) Assumption . The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its businesses and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise.
11. Certain Tax Reimbursement Payments. (a) Gross-Up Payment . Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution to or for the benefit of the Executive whether paid or payable or distributed or distributable pursuant to the terms of this Agreement (other than any payment under this Section 11) or otherwise would be subject to the excise tax imposed by Section 4999 of the Code or a similar section (such payment, a "Change in Control Payment" and such excise tax on all such Change in Control Payments, together with any interest and penalties thereon, collectively the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount determined by the Accounting
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Firm such that after payment by the Executive of any tax thereon the Executive retains an amount of the Gross-Up Payment equal to the amount of the Excise Tax; provided, however, that if the aggregate value (as determined under Section 280G of the Code) of Change in Control Payments is less than 110% of the product of "3 times" the Executive's "base amount" (as defined in Section 280G(b)(3) of the Code) (such product, the "Golden Parachute Threshold"), then the Executive shall not be entitled to any Gross-Up Payment and, instead, the Change in Control Payments shall be reduced so that their aggregate value (as so determined) is equal to $1.00 less than the Golden Parachute Threshold.
For purposes of this Section 11(a), Executive's applicable Federal, state and local taxes shall be computed at the maximum marginal rates, taking into account the effect of any loss of personal exemptions resulting from receipt of the Gross-Up Payment.
(b) Determinations . All determinations required to be made under this Section 11, including whether a Gross-Up Payment is required under Section 11(a), and the assumptions to be used in determining the Gross-Up Payment, shall be made by KPMG LLP, or such other firm as the Company may designate in writing prior to a Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within twenty business days of the receipt of notice from Executive that there has been a Change in Control, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the Person effecting the Change in Control or is otherwise unavailable, Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company.
(c) Subsequent Redeterminations . Executive agrees (unless requested otherwise by the Company) to use reasonable efforts to contest in good faith any subsequent determination by the Internal Revenue Service that Executive owes an amount of Excise Tax greater than the amount determined pursuant to Section 11(b) provided, that Executive shall be entitled to reimbursement by the Company of all fees and expenses reasonably incurred by Executive in contesting such determination. In the event the Internal Revenue Service or any court of competent jurisdiction determines that Executive owes an amount of Excise Tax that is either greater or less than the amount previously taken into account and paid under this Section 11, the Company shall promptly reimburse Executive, or Executive shall promptly reimburse the Company, as the case may be, the amount of such excess or shortfall. In the case of any payment that the Company is required to make to Executive pursuant to the preceding sentence (a "Later Payment"), the Company shall also reimburse Executive an additional amount such that after payment by Executive of all of Executive's applicable Federal, state and local taxes, including any interest and penalties assessed by any taxing authority, on such additional amount, Executive will retain an amount equal to the total of Executive's applicable Federal, state and local taxes, including any interest and penalties assessed by any taxing authority, arising due to the Later Payment. In the case of any reimbursement of Excise Tax that Executive is required to make to the Company pursuant to the second sentence of this Section 11(c), Executive shall also reimburse the Company the amount of any additional payment received by Executive from the Company in respect of applicable Federal, state and local taxes on such repaid Excise Tax, to the extent Executive is entitled to a refund of (or has not yet paid) such Federal, state or local taxes.
12. Certain Definitions.
" Accounting Firm " has the meaning accorded such term in Section 11 hereof.
" Accrued Benefits " means any benefits earned or accrued by Executive for the period through and including the Date of Termination under any employee benefit plans and arrangements maintained by the Company, in accordance with the terms of such plans and arrangements, except as modified herein, including, without limitation, his accrued and vested benefits under the Company's qualified and non-qualified pension and retirement plans.
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" Accrued Compensation " means a lump sum in cash payable within 30 days after the Date of Termination in an amount equal to Executive's earned but unpaid Annual Base Salary and other earned but unpaid cash entitlements for the period through and including the Date of Termination, including any previously deferred cash compensation, unused earned and accrued vacation pay and unreimbursed documented business expenses.
" Additional Benefits " means continued participation in the Company's Medical Plans for three years following the Date of Termination on the terms and conditions in effect immediately prior to such Date.
" Affiliate " and " Associate " have the respective meanings accorded to such terms in Rule 12b-2 under the Exchange Act as in effect on the Effective Date.
" Annual Base Salary " has the meaning accorded such term in Section 3 hereof.
" Awards " has the meaning accorded such term in Section 5 hereof.
" Award Termination Date " has the meaning accorded such term in Section 5 hereof.
" Basic Bonus Amount " means an amount payable within 30 days after the Date of Termination, equal to Executive's target annual bonus opportunity for the year in which Executive's employment terminates times a fraction, the numerator of which is the number of days in such year ending on the Date of Termination and the denominator of which is 365.
" Beneficial Ownership ". A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own" securities pursuant to Rule 13d-3 under the Exchange Act as in effect on the Effective Date.
" Board " means the Board of Directors of the Company.
" Cause " means Executive's:
(i) conviction of a (x) felony or (y) crime involving, fraud or dishonesty;
(ii) material failure to perform substantially all of his duties;
(iii) willful misconduct in the performance of his duties; or any
(iv) material breach of the Employment Agreement by the executive;
provided, however, in the case of (ii)-(iv) Executive shall be entitled to prior written notice of any such breach and the opportunity to cure or rebut any such breach during the 30 days following such notice.
" Change in Control " means, and shall be deemed to have occurred upon any occurrence of any of the following events:
(a) Any Person (other than an Excluded Person) acquires, together with all Affiliates and Associates of such Person, Beneficial Ownership of securities representing 20% or more of the combined voting power of the Securities of the Company entitled to vote for members of the Board the Voting Stock then outstanding, unless such Person acquires Beneficial Ownership of 20% or more of the combined voting power of the Voting Stock then outstanding solely as a result of an acquisition of Voting Stock by the Company which, by reducing the Voting Stock outstanding, increases the proportionate Voting Stock beneficially owned by such Person (together with all Affiliates and Associates of such Person) to 20% or more of the combined voting power of the Voting Stock then outstanding; provided , that if a Person shall become the Beneficial Owner of 20% or more of the combined voting power of the Voting Stock then outstanding by reason of such Voting Stock acquisition by the Company and shall thereafter become the Beneficial Owner of any additional Voting Stock which causes the proportionate voting power of Voting Stock beneficially owned by such Person to increase to 20% or more of the combined voting power of
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the Voting Stock then outstanding, such Person shall, upon becoming the Beneficial Owner of such additional Voting Stock, be deemed to have become the Beneficial Owner of 20% or more of the combined voting power of the Voting Stock then outstanding other than solely as a result of such Voting Stock acquisition by the Company;
(b) During any period of 36 consecutive months (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board (and any new Director, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was so approved), cease for any reason to constitute a majority of Directors then constituting the Board;
(c) A reorganization, merger or consolidation of the Company is consummated, in each case, unless, immediately following such reorganization, merger or consolidation, (i) more than 50% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Voting Stock outstanding immediately prior to such reorganization, merger or consolidation, (ii) no Person (but excluding for this purpose any Excluded Person and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the voting power of the outstanding Voting Stock) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or
(d) The shareholders of the Company approve (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of more than 50% of all of the assets of the Company, other than to any corporation with respect to which, immediately following such sale or other disposition, (A) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the Voting Stock outstanding immediately prior to such sale or other disposition of assets, (B) no Person (but excluding for this purpose any Excluded Person and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the voting power of the outstanding Voting Stock) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors of such corporation were members of the Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company.
Notwithstanding the foregoing, in no event shall a "Change in Control" be deemed to have occurred (i) as a result of the formation of a Holding Company, or (ii) with respect to Executive, if Executive is part of a "group," within the meaning of Section 13(d)(3) of the Exchange Act as in effect on the Effective Date, which consummates the Change in Control transaction. In addition, for purposes of the definition of "Change in Control" a Person engaged in business as an underwriter of securities shall
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not be deemed to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition.
" Change in Control Payment " has the meaning accorded such term in Section 11 hereof.
" Change Separation Event " means any of the following events:
(A) The involuntary termination of Executive's employment by the Company during the 24-month period following a Change in Control other than (x) for Cause, or (y) by reason of Executive's death or Disability; or
(B) Executive's voluntary termination of employment for Good Reason during the 24-month period following a Change in Control provided that Executive's termination occurs within 90 days after the occurrence of the event constituting Good Reason.
" Code " means the Internal Revenue Code of 1986, as amended.
" Committee " means the Compensation Committee of the Board.
" Company " has the meaning accorded such term in the introductory clause hereof.
" Date of Termination " means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date specified in the Notice of Termination in accordance with the requirements of the applicable reason for such termination, (ii) if the Executive's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive's termination is voluntary and without Good Reason, the Date of Termination shall be the date on which the Executive notifies the Company of such termination, and (iv) if the Executive's employment is terminated by reason of death, the Date of Termination shall be the date of death.
" Disability " means the Executive's long-term disability as determined under the Disability Plan.
" Disability Plan " means the long-term disability plan (or any successor disability and/or survivorship plan adopted by the Company) in which Executive participates, as in effect immediately prior to the relevant event (subject to changes in coverage levels applicable to all employees generally covered by such Plan).
" Effective Date " has the meaning accorded such term in Section 1 hereof.
" Employment Period " has the meaning accorded such term in Section 1 hereof.
" Exchange Act " means the Securities Exchange Act of 1934, as amended.
" Excise Tax " has the meaning accorded such term in Section 11 hereof.
" Excluded Person " means (i) the Company; (ii) any of the Company's Subsidiaries; (iii) any Holding Company; (iv) any employee benefit plan of the Company, any of its Subsidiaries or a Holding Company; or (v) any Person organized, appointed or established by the Company, any of its Subsidiaries or a Holding Company or pursuant to the terms of any plan described in clause (iv).
" Executive " has the meaning accorded such term in Section 1 hereof.
" Golden Parachute Threshold " has the meaning accorded such term in Section 11 hereof.
" Good Reason " means, without the Executive's written consent:
(i) a material, adverse reduction in the nature or scope of the Executive's office, position, duties, functions, responsibilities or authority from those offices, positions, duties, functions, responsibilities or authority he occupies and enjoys as of the Effective Date;
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(ii) a material reduction of the executive's Annual Base Salary, incentive compensation opportunities or aggregate benefits unless such reduction is part of a policy, program or arrangement applicable to other senior executives;
(iii) a relocation of more than 35 miles of the Company's by principal offices; provided such new location is farther from Executive's residence than the prior location;
(iv) the failure of a successor to assume, whether by operation of law or otherwise, the Company's obligations hereunder;
provided, however, that Good Reason shall not occur until the Executive shall have given the Company written notice of any claimed Good Reason and the Company shall have failed to cure the same during the 30 days following such notice.
" Gross-Up Payment " has the meaning accorded such term in Section 11 hereof.
" Holding Company " means an entity that becomes a holding company for the Company or its businesses as a part of any reorganization, merger, consolidation or other transaction, provided that the outstanding shares of common stock of such entity and the combined voting power of the then outstanding voting securities of such entity entitled to vote generally in the election of directors is, immediately after such reorganization, merger, consolidation or other transaction, beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Voting Stock outstanding immediately prior to such reorganization, merger, consolidation or other transaction in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or other transaction, of such outstanding Voting Stock.
" Initial Term " has the meaning accorded such term in Section 1 hereof.
" Later Payment " shall have the meaning accorded such term in Section 11 hereof.
" Long Term Incentive Amount " means an amount payable within 30 days after the Date of Termination equal to Executive's target long-term incentive opportunity for the incentive or performance period in which Executive's employment terminates times a fraction, the numerator of which is the number of days in such period ending on the Date of Termination, and the denominator of which is the total number of days in such period.
" Medical Plans " means the medical care plans (or any successor medical plans adopted by the Company) in which Executive participates, as in effect immediately prior to the relevant event (subject to changes in coverage levels applicable to all employees generally covered by such Plans).
" Notice of Termination " has the meaning accorded such term in Section 4 hereof.
" Outplacement Services " means the services of a national executive outplacement service firm, the aggregate cost to the Company of which shall not exceed $50,000
" Payment Period " means the 36 month period commencing on the Date of Termination.
" Pension Benefits " means benefits attributable to 3 years of additional credit for both age and service under the Company's tax-qualified and non-qualified pension plans; provided that if applicable provisions of the Code prevent payments in respect of such credit under the Company's tax-qualified pension plan, such payments shall be made under the Company's non-qualified pension plan.
" Person " means any individual, corporation, partnership, association, trust or any other entity or organization.
" Previous Contract " means the Employment Agreement between UtiliCorp United, Inc. dated November 6, 1996 and amended September 11, 1998.
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" Separation Event " means, other than during the 24-month period following a Change in Control, (A) the involuntary termination of Executive's employment by the Company other than (x) for Cause or (y) by reason of Executive's death or Disability or (B) Executive's voluntary termination of employment for Good Reason within 90 days after the occurrence of an event constituting Good Reason.
" Severance Benefits " means cash compensation equal to three (3) times the sum of the amounts set forth in clauses (A) and (B) below:
(A) Executive's Base Salary as in effect immediately prior to a Change Separation Event or Separation Event, as the case may be; and
(B) the Executive's target annual bonus opportunity for the calendar year in which such Change Separation Event or Separation Event occurs, as the case may be.
" Stock Plan " has the meaning accorded such term in Section 5 hereof.
" Total Payments " has the meaning accorded such term in Section 11 hereof.
" Voting Stock " means the combined voting power of the securities of the Company entitled to vote for members of the Board.
13. Miscellaneous .
(a) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, without reference to its principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended, modified, repealed, waived, extended or discharged except by an agreement in writing signed by the party against whom enforcement of such amendment, modification, repeal, waiver, extension or discharge is sought. No person, other than pursuant to a resolution of the Board or a committee thereof, shall have authority on behalf of the Company to agree to amend, modify, repeal, waive, extend or discharge any provision of this Agreement or anything in reference thereto.
(b) Notices . All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return-receipt requested, postage prepaid, addressed, in either case, at the Company's headquarters or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee.
(c) Severability . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) Withholding . The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) No Waiver . The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4(d) of this Agreement, or the right of the Company to terminate the Executive's employment for Cause pursuant to Section 4(b) of this Agreement shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) Equitable Remedies . Executive agrees that it would be impossible or inadequate to measure and calculate the Company's damages from any breach of the covenants set forth in
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Sections 8 and 9. Accordingly, Executive agrees that if he breaches or threatens to breach any of such covenants, the Company will have available, in addition to any other right or remedy available, the right to obtain an injunction from any court of competent jurisdiction restraining such breach or threatened breach and to specific performance of any such provision of this Agreement. Executive further agrees that no bond or other security will be required in obtaining such equitable relief, and hereby consents to the issuance of such injunction and to the ordering of specific performance. Executive hereby acknowledges that any breach of any of such covenants shall entitle the Company to cease (i) the payment to him of any amounts otherwise required to be paid and (ii) the vesting of any equity interest that Executive may have in the Company.
(g) Entire Agreement . This instrument contains the entire agreement of the Executive, the Company or any predecessor or subsidiary thereof with respect to the subject matter hereof, and may be modified only by a writing signed by the parties hereto. Except to the extent provided by Section 6, all promises, representations, understandings, arrangements and prior agreements including, without limitation, the Previous Contracts between the Executive and the Company, are merged herein and superseded hereby.
IN WITNESS WHEREOF, the Executive and, pursuant to due authorization from its Board of Directors, the Company have caused this Agreement to be executed as of the day and year first above written.
AQUILA, INC. | |||
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By: |
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/s/
HERMAN CAIN
Name: Herman Cain Title: Chairman of Compensation Committee |
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/s/
RICHARD C. GREEN, JR.
Richard C. Green, Jr. |
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AGREEMENT
This AGREEMENT (the " Agreement ") is entered into as of the 1 st day of October, 2002 by and between Aquila, Inc., a Delaware corporation (" Aquila "; unless otherwise specifically indicated to the contrary, the term "Aquila" shall be deemed to include each of Aquila's subsidiaries, other Affiliates (as the term "Affiliates" is defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended, and any other entity in which Aquila has a direct or indirect ownership interest); the execution of this Agreement by Aquila shall be deemed to be legally binding upon Aquila and each of Aquila's subsidiaries and other Affiliates)) and Robert K. Green ("You") (Aquila and You are sometimes referred to herein individually as a "Party" and collectively as the "Parties").
Recitals
WHEREAS, major changes have taken place in the operating environment in which Aquila conducts its business that were not caused by Aquila or You but which nevertheless required Aquila to exit the wholesale energy marketing and trading business, sell significant assets and make other fundamental changes in its business in order to enhance its liquidity, improve its access to capital resources and stabilize and improve its results of operations through, among other actions, taking steps to reduce costs, streamline the organizational structure and obtain efficiencies in its operations generally;
WHEREAS, You became Aquila's Chief Executive Officer on January 1, 2002, and You have been willing to continue to be employed by Aquila as an officer through the Resignation Date (as hereinafter defined) in order to guide Aquila through these difficult changes and have been instrumental in preserving the highest credit rating realistically available to Aquila while undergoing these changes and conducting its business in the present highly challenging operating environment;
WHEREAS, there has been a mutual recognition by You and Aquila of the need to reorganize and streamline Aquila's executive management structure to address the changes to Aquila's business and achieve a significant reduction in operating expenses and, in consideration of this Agreement, You will resign Your positions with Aquila as provided in Section 1 hereof and forego your rights under Your existing employment agreement with Aquila, dated November 6, 1996 and amended on September 4, 1998 (the "Prior Agreement"), in order to assist Aquila in realizing these goals;
WHEREAS, Aquila desires to retain the benefit of Your knowledge of Aquila's business and industry and Your management and other skills for a period of eighteen months following the Resignation Date (as hereafter defined) by establishing the arrangement set forth in this Agreement in order to facilitate a successful transition to the new management structure, assist with various initiatives, special projects and challenges, in each case, upon the terms and conditions of this Agreement;
WHEREAS, Section 9 of Your Employment Agreement provides for a forfeiture of benefits thereunder if you engage in certain competitive activities and you are willing to extend the length of your non-competition covenant for an additional three years;
WHEREAS, in consideration for the respective benefits to be received by the Parties under this Agreement, (i) You desire to release Aquila from any and all current or potential liability arising out of or in connection with Your employment with Aquila and Your Prior Agreement and the termination of your employment as provided herein, and (ii) Aquila desires to release You from any and all current or potential liability to Aquila arising out of or in connection with Your service as an officer and director of Aquila, Your ownership of Aquila securities, Your employment with Aquila and the termination
1
thereof and of Your Prior Employment Agreement, in each case upon the terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing premises and the legally binding obligations hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties represent, warrant and agree as follows:
1. Resignation . You agree to resign as a director, member of board committees, and officer of Aquila effective October 1, 2002 (the "Resignation Date") and to resign your employment with Aquila effective April 1, 2004. You further agree to execute all documents that are reasonably necessary to implement Your resignations, provided that all such documents are consistent with the terms and conditions of this Agreement and do not impose any greater duties or obligations on You than those contemplated by this Agreement.
2. Consideration . As consideration for Your execution of this Agreement, Aquila agrees to make the payments and provide the benefits set forth in Exhibit A (whenever any reference to Exhibit A is made in this Agreement such Exhibit A shall be deemed to have been incorporated by reference therein and made a part of the provision in which such reference is made), provide the release and waiver in Section 5 of this Agreement and the other rights and obligations set forth in this Agreement.
3. Employee Benefits . Subject to the terms hereof, the benefits provided under any Aquila-sponsored employee benefit plan (each an "Aquila Benefit Plan") shall be in accordance with all terms and conditions set forth therein. In the event of any inconsistency between any Aquila Benefit Plan and this Agreement, then this Agreement shall control. No amendment shall be made to any Aquila Benefit Plan after the date first set forth above ("Execution Date") that shall have any material adverse effect on You unless, notwithstanding any such amendment, You shall be entitled to receive at least the same benefits either thereunder or pursuant to any other plan established to provide such benefits.
4. Services and Cooperation .
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attorney's fees incurred by you in connection with the Legal Support Services, travel expenses (including food and lodging), phone bills, and delivery charges.
5. Release and Waiver of Claims . In exchange for this Agreement, You (on behalf of You and anyone claiming through or on behalf of You), release Aquila and each of Aquila's subsidiaries and other Affiliates (as the term "Affiliates" is defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended), its successors and assigns, and all of their past and present employees, officers, directors, attorneys, stockholders, and agents from any and all claims and potential claims, whether known or unknown and whether or not matured or contingent, demands and causes of action You have or may have had against any of them arising out of Your service or employment with, Aquila and the termination thereof, as well as all future employment-related claims, including claims not currently known to or contemplated by the Parties, to the maximum extent permitted by law. This release includes, but is not limited to, any and all claims, demands and causes of action which are related to or concern: Your Prior Agreement; service as a director and officer of Aquila, Your ownership of Aquila securities, Your employment and the termination thereof; attorneys' fees or costs; the Aquila Workforce Transition Program; discrimination under local, state or federal law; the Missouri Service Letter Statute; the Age Discrimination in Employment Act; Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Americans With Disabilities Act; the Employee Retirement Income Security Act; the Family and Medical Leave Act; severance pay; tort claims including invasion or privacy, defamation, fraud and infliction of emotional distress; disputed wage claims; and all other claims, demands, and causes of action, whether they arise in the United States of America or elsewhere, to the maximum extent permitted by law. This Release does not include (a) any rights or benefits as set forth in this Agreement (including Exhibit A) or (b) any rights to indemnification under Aquila's Certificate of Incorporation, Bylaws or any agreement relating to indemnification or any policy of Directors and Officers Insurance. In exchange for this Agreement, Aquila, its successors and assigns (on behalf of Aquila and Aquila's subsidiaries and other Affiliates, their successors and assigns and anyone claiming through or on behalf of Aquila or any of Aquila's subsidiaries or other Affiliates, their successors and assigns), release You, Your heirs, executors, personal representatives, attorneys, agents, successors and assigns, from any and all claims and potential claims, known or unknown and whether or not matured or contingent, demands and causes of action which they have or may have against You or them, including claims, demands and causes of action not currently known or contemplated by the parties, in each case, to the maximum extent permitted by law. This release includes, but is not limited to, any and all claims, demands and causes of action which are related to or concern: Your service as a director or officer of Aquila, Your ownership of Aquila securities, Your Prior Agreement, and Your employment and the termination thereof, except that this Release does not release You of the obligation to perform the Continued Services and Legal Support Services and to comply with Your other obligations under this Agreement.
6. No Admission of Wrongdoing . This Agreement is not an admission of wrongdoing or liability by You, Aquila, or any of the individuals or entities referenced in Section 5, above and any and all such wrongdoing or liability is expressly denied. Neither of the Parties nor any of the individuals or entities referenced in Section 5 are currently aware of any wrongdoing in liability by the other Party and, instead, this Agreement reflects current business and industry conditions which are unrelated to Your performance prior to entering into this Agreement.
7. Return of Company Property . Except as otherwise provided by a specific agreement between you and Aquila, You represent that You will have returned all of Aquila's and Aquila's affiliates' files,
3
records, documents, plans, drawings, specifications, equipment, software, pictures, videotapes, or any property or other items of Aquila or Aquila's affiliates in Your possession or concerning the business of Aquila, whether prepared by You or otherwise coming into Your possession or control as of the date you sign this Agreement. This section does not apply to data or information that is in the public domain, or to property, data or information that You and Aquila agree is immaterial.
8. Proprietary Information . You agree that You shall not at any time, except as authorized by the Chairman of Aquila or his authorized designee, communicate, divulge or use, for Your own benefit or for the benefit of any other person, firm, or corporation, any confidential or proprietary information concerning Aquila's business, including but not limited to Aquila's operations, services, materials, policies, and the manner in which they are developed, marketed, priced or provided, and such other information regarded as trade secrets or confidential or proprietary information under any applicable law, including without limitation information that is attorney work product or attorney-client privileged. These provisions do not apply to data or information that are compelled to be released by law or judicial process, or to data or information that are in the public domain other than as a result of a breach by You of the terms hereof, or are subsequently released by Aquila to the public domain.
9. Non-disparagement . Aquila (on behalf of itself and its subsidiaries, other Affiliates and their respective officers, directors, employees and agents) and You each agree not to disparage each other in any way. Further, Aquila (on behalf of itself and its subsidiaries and other Affiliates, officers, directors, employees and agents) and You each agree not to make nor solicit any comments, statements, or the like to the media or to third parties that may be considered defamatory, derogatory or detrimental to the good name or business reputation of the other.
10. Indemnification . Aquila agrees, to the maximum extent permitted by applicable law, to defend and indemnify You (including Your heirs, executors, personal representatives, successors and assigns) and pay all costs and expenses as they become due (including, without limitation, any reasonable attorneys' fees and other legal costs) in any action, suit or proceeding threatened or pending against You as of the Resignation Date or asserted thereafter, and to further defend and indemnify You and pay all costs and expenses as they become due (including, without limitation, any reasonable attorneys' fees and other legal costs) in any action, suit or proceeding threatened or pending in the future, so long as in each case Your actions which are or may be the subject of such action, suit or proceeding were taken: (i) within the course and scope of Your employment with Aquila or as a director, member of board committees, or officer of Aquila (or pursuant to this Agreement, including, but not limited to, the Continued Services and Legal Support Services); (ii) in good faith and in a manner You reasonably believed to be in or not opposed to the best interests of Aquila; and (iii) with respect to any criminal action or proceeding, without any reasonable cause by You to believe Your actions were unlawful; provided, however, that the standard referenced in clause (ii) or (iii) of this provision shall be deemed to have been satisfied if you shall have acted or refrained from acting in accordance with advice provided to You by inside or outside legal counsel to Aquila, or any other employee or agent of Aquila reasonably believed by You to be competent to give such advice. As a condition to the foregoing, You agree to notify Aquila of any written claims made against You within fifteen (15) calendar days after You receive personal service by hand delivery of such claims and agree to otherwise reasonably cooperate and assist Aquila and its agents in any defense. In accordance with Section 145(e) of the Delaware Corporation Law, You agree to promptly repay to Aquila any expenses advanced by Aquila in connection with all indemnified matters if it shall ultimately be determined that You are not entitled to be indemnified against such expenses. In addition, to the same extent provided to other officers and directors, Aquila shall maintain, at its cost and expense, officers' and directors' liability insurance covering You with respect to the time period that you served as an officer or director of Aquila or any subsidiary or other Affiliate of Aquila, (i) with a scope of coverage (including any exclusions of coverage) at least equivalent to that in effect on the date of this Agreement, and (ii) with a dollar
4
amount of coverage at least equivalent to that in effect on the date of this Agreement (including no greater deductibles or retention amounts).
11. Confidentiality . The content of this Agreement, and Your discussions with Aquila pertaining to it, are confidential. Until such time as Aquila files this Agreement with the Securities and Exchange Commission, You agree not to communicate or allow communication in any manner with respect to the content of this Agreement, and the discussions pertaining to it, except that this Agreement, and the discussions pertaining to it, may be disclosed by You to Your immediate family members, to Your attorneys and accountants, tax consultants, financial planners, governmental taxing authorities or regulatory agencies, and in any litigation, arbitration, or other proceeding relating to this Agreement or any of the provisions hereof, or as may otherwise be required by law or judicial process or arbitration. Aquila (on behalf of itself and its Affiliates), agrees that the contents of this Agreement will not be disclosed to anyone other than those persons and entities with a need to know for legitimate business purposes, unless otherwise required by a regulatory agency or by law. Any publication or disclosure by You, or by Aquila or its Affiliates, officers, directors, employees or agents, of this Agreement, other than as allowed by this Section, shall be considered a material breach of this Agreement.
12. Remedies for Breach of this Agreement . If either You or Aquila believes that the other Party to this Agreement has breached its obligations under this Agreement, then the Party claiming a breach will provide notice to the other Party, in writing, including a statement of the specific manner in which the Party believes that this Agreement has been breached. If the breach is not cured, or cannot reasonably be cured, within thirty (30) days following notice, then the Parties, subject to Section 15, and at their respective options, will be entitled to proceed as follows:
13. Tax Considerations . You acknowledge that no representations have been made to You by Aquila, Aquila's Affiliates, or other agents or legal counsel regarding the tax implications of any payments made pursuant to this Agreement. All liability for the employee's share of federal, state, and local taxes (including FICA) remains with You, unless otherwise agreed to in writing by Aquila, and Aquila shall deduct withholdings in the minimum amount required under applicable tax laws, rules or regulations from the consideration payable under this Agreement.
14. Choice of Law . This Agreement shall be construed in accordance with the laws of the State of Missouri without regard to the choice of law principles thereof.
15. Knowing Execution/Binding Arbitration . You acknowledge that You knowingly and voluntarily executed this Agreement. You have had the opportunity to review the Agreement and consult with an attorney. Aquila has made no other promise, inducement or agreement not expressed in this Agreement. You and Aquila agree that if a dispute arises out of or is related to this Agreement or Your employment by Aquila, other than a dispute regarding the obligations under Sections 8, 9 or 11, such dispute shall, if not earlier resolved by negotiations of the parties or in accordance with
5
Paragraph 12, be submitted to binding arbitration under the Employment Section Rules of the American Arbitration Association, or the mutually agreed equivalent. Following the 30-day period described in Section 12, above, either party may provide written notice to the other party that the dispute is not able to be resolved by negotiation and such notifying party shall then contact the American Arbitration Association for appointment of an arbitrator to resolve such dispute. Any arbitration hearing shall take place in Kansas City, Missouri. In addition to all other remedies otherwise available to Aquila or to You, Aquila and You shall have the right to injunctive relief to restrain and enjoin any actual or threatened breach by the other party of any provisions of Sections 8, 9 or 16.
16. Non-Competition . You agree to forfeit all rights to compensation and benefits payable under Sections 2 and 3 of this Agreement if, during the period commencing on the Resignation Date and ending five years thereafter ("Non-Compete Period"), You directly or indirectly, own, manage, operate, control, become employed by, perform services for, consult with, solicit business for, participate in, or become connected with the ownership, management, operation, or control of any business that is either directly or indirectly competitive with the products or services of Aquila.
17. Entire Agreement . This Agreement, including Exhibit A, contains the entire agreement of the parties with respect to the matters contemplated by this Agreement, and supersedes, cancels and replaces the Prior Agreement.
18. Authorship . This Agreement will not be construed against either party due to authorship.
19. Severability . If any provision of this Agreement or the application thereof to any party or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
20. Successors and Assigns . This Agreement is binding on and inures to the benefit of Aquila and its subsidiaries and other Affiliates and their successors and assigns and You and Your heirs, executors, personal representatives, and assigns, except that any services to be provided by You under this Agreement shall only be performed by You.
21. Notice . Any notice required by this Agreement shall be duly given if delivered, in writing, in person or by certified, first-class mail (a) if to Aquila, Inc., to the Chief Administrative Officer at 20 West 9 th Street, Kansas City, Missouri 64105, and (b) if to You, at Your current residence address. Either party shall give notice to the other party of any change of address for purposes of notices to such party under this Agreement.
22. Amendment and Waivers . Except as otherwise expressly set forth in this Agreement, (a) any term of this Agreement may be amended only with the written consent of each Party, and (b) a Party's observance of any term of this Agreement may be waived (either generally or in a particular instance and whether retroactively or prospectively) only by written consent of all the other parties. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition, or provision.
23. Press Releases and Other Public Disclosures . Aquila agrees to provide you with a draft of any press release, report or other disclosure to be filed or furnished to the Securities and Exchange Commission or any other governmental authority, or any other public disclosure to be made by Aquila, any subsidiary or other Affiliate of Aquila or any of their respective directors, officers, employees or agents which addresses, directly or directly, this Agreement, the subject matter thereof, the background leading thereto and any matter related to any of the foregoing Public Disclosure in order to enable You to review and comment on the form and content thereof.
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24. No Mitigation . You shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking or obtaining other employment, consulting work or other work of any type, and You shall not be required to pay Aquila any amounts You may receive from such alternative employment, consulting or other work.
25. Due Authorization . The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action. This agreement has been duly executed and delivered by Aquila and its subsidiaries and other Affiliates and constitutes a binding obligation of Aquila and its subsidiaries and other Affiliates enforceable against Aquila and its subsidiaries and other Affiliates in accordance with its terms.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES.
* * * * * *
Remainder of Page Left Intentionally Blank
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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be signed as of the day and year first above written.
Robert K. Green | Aquila, Inc. (for itself and on behalf of its subsidiaries and other Affiliates) | |||
Signature: |
/s/ ROBERT K. GREEN |
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By: |
/s/ HERMAN CAIN Name: Herman Cain Title: Chairman of Compensation |
Date: |
October 1, 2002 |
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Date: |
October 1, 2002 |
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Comp. / Benefit
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Action
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Compensation | A lump sum payment of $6,639,869 shall be paid in cash to You on the eighth day following the Resignation Date, provided that you have not revoked this Agreement as provided in Section 25. In addition, an amount equal to $25,952.08 shall be paid to You on a biweekly basis for a period of 18 months following the Resignation Date, with the first such payment due on October 25, 2002 (includes 39 pay periods). | |
Stock Options |
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Vest all unvested options for the purchase of a total of 303,154 shares of Aquila common stock. All options, regardless of their terms under the individual award agreements or relevant plan documents, shall remain exercisable and not expire until the sixth (6 th ) anniversary of Your Resignation Date, as defined in this Agreement. You may choose to exercise options at any time prior to such options' expiration date. |
Restricted Stock |
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Restrictions lifted. Full Release of all shares of Restricted stock granted pursuant to Award Numbers: R00040, R00153, R00183, R01313 and R01351. A total of 356,734 shares. |
Capital Accumulation Plan |
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Plan provisions apply, subject to the provisions of Sections 3 of this Agreement. |
Pension |
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Plan provisions apply, subject to the provisions of Sections 3 of this Agreement. |
SERP |
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Plan provisions apply, subject to the provisions of Sections 3 of this Agreement. Three years age and service added to coincide with the above three years of compensation. SERP payment of $24,681.35/month commencing 1/1/2024 |
401(k)/ESCP |
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Plan provisions apply, subject to the provisions of Sections 3 of this Agreement. May maintain account until age 70 1 / 2 or rollover to IRA. |
ESPP |
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Plan provisions apply, subject to the provisions of Sections 3 of this Agreement. |
Medical, Dental and Vision |
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Aquila will provide continuing coverage for five years or until covered by a plan with at least equivalent benefits provided by another employer for which You are a Full-Time Employee. The term "Full-Time Employee" means that You are an employee, and not an "independent contractor," of an employer other than Aquila, are working for that same employer at least 40 hours per week, and have been so working for that same employer for a period of at least 12 consecutive months. Coverage will be equivalent to the current plan. |
Accidental Death and Dismemberment Insurance |
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Continued coverage for five years or until covered by a policy with at least equivalent benefits provided by another employer for which you are a Full-Time Employee (as defined above). |
Long Term Disability |
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Continued coverage for five years or until covered by another employer of a plan with a least equivalent benefits provided by another employer for which You are a Full-Time Employee (as defined above). |
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Annual Detailed Health Examination |
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Continued support by Aquila (including one annual physical examination at Aquila's expense) for five years or until covered by a policy with at least equivalent benefits provided by another employer for which You are a Full-Time Employee (as defined above). |
Life Insurance Policy |
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Aquila will take the steps necessary to fully pay and release outright to You a universal life insurance policy with the same amount of death benefit at the time of release that You currently have (i.e. $2 Million). |
Office Space and Support |
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Aquila will make available to You office space and support through October 1, 2005 or until provided by another employer for which You are a Full-Time Employee (as defined above). |
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AQUILA, INC.
2002 OMNIBUS INCENTIVE
COMPENSATION PLAN
CONTENTS
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Page
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ARTICLE I. |
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ESTABLISHMENT, OBJECTIVES, AND DURATION |
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1 |
ARTICLE II. |
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DEFINITIONS |
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1 |
ARTICLE III. |
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ADMINISTRATION |
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4 |
ARTICLE VI. |
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STOCK OPTIONS |
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7 |
ARTICLE VII. |
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STOCK APPRECIATION RIGHTS |
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8 |
ARTICLE VIII. |
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RESTRICTED STOCK AND RESTRICTED STOCK UNITS |
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9 |
ARTICLE IX. |
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PERFORMANCE UNITS/PERFORMANCE SHARES |
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10 |
ARTICLE X. |
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CASH-BASED AWARDS AND STOCK AWARDS |
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11 |
ARTICLE XI. |
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PERFORMANCE MEASURES |
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12 |
ARTICLE XII. |
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ANNUAL INCENTIVE AWARDS |
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13 |
ARTICLE XIII. |
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BENEFICIARY DESIGNATION |
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14 |
ARTICLE XIV. |
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DEFERRALS |
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14 |
ARTICLE XV. |
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RIGHTS OF PARTICIPANTS |
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14 |
ARTICLE XVI. |
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CHANGE IN CONTROL |
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15 |
ARTICLE XVII. |
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AMENDMENT, MODIFICATION, SUSPENSION, AND TERMINATION |
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15 |
ARTICLE XVIII. |
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WITHHOLDING |
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15 |
ARTICLE XIX. |
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INDEMNIFICATION |
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16 |
ARTICLE XX. |
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SUCCESSORS |
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16 |
ARTICLE XXI. |
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GENERAL PROVISIONS |
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16 |
ii
AQUILA, INC.
2002 OMNIBUS INCENTIVE COMPENSATION PLAN
Article I. Establishment, Objectives, and Duration
1.1 Establishment . Aquila, Inc., a Delaware corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as the "Aquila, Inc. 2002 Omnibus Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Stock Awards, Cash-Based Awards, and Annual Incentive Awards.
Subject to approval by the Company's stockholders, the Plan shall become effective as of May 1, 2002 (the "Effective Date") and shall remain in effect as provided in Section 1.3 hereof.
1.2 Objectives of the Plan. The purpose of the Plan is to promote the interests of the Company and its stockholders by strengthening the Company's ability to attract, motivate and retain officers, employees, consultants, advisors and Directors of the Company and its Subsidiaries and Affiliates upon whose judgment, initiative and efforts the financial success and growth of the business of the Company largely depend, and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of the Company.
1.3 Duration of the Plan. The Plan shall commence as of the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 17 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. Notwithstanding the foregoing, in no event shall Incentive Stock Options be awarded to Participants following the tenth anniversary of the Effective Date of this Plan unless and until the stockholders of the Company re-approve the adoption of this Plan prior to such date.
Article II. Definitions
Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized:
2.1 "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.
2.2 "Annual Incentive Award" means an Award granted to a Participant, as described in Article 12 herein.
2.3 "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, Stock Awards, Cash-Based Awards, or Annual Incentive Awards.
2.4 "Award Agreement" means either (i) an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to Awards granted under this Plan, or (ii) a statement issued by the Company to a Participant describing the terms and provisions of such Award.
2.5 "Beneficial Owner" or "Beneficial Ownership" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
2.6 "Board" or "Board of Directors" means the Board of Directors of the Company.
2.7 "Cash-Based Award" means an Award granted to a Participant, as described in Article 10 herein.
2.8 "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied:
Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the voting securities of the Company immediately prior to such transaction or series
2
of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.
Furthermore, notwithstanding the foregoing, a Change in Control will not be deemed to have occurred by reason of a distribution of the voting securities of any of the Company's Subsidiaries to the stockholders of the Company, or by means of an initial public offering of such securities.
2.9 "Code" means the Internal Revenue Code of 1986, as amended from time to time.
2.10 "Committee" means any committee appointed by the Board to administer Awards, as specified in Article 3 herein.
2.11 "Company" means Aquila, Inc., a Delaware corporation, and any successor thereto as provided in Article 20 herein.
2.12 "Covered Employee" means a Participant who, as of the anticipated date of vesting and/or payout of an Award, as applicable, is reasonably believed to be one of the group of "covered employees," as defined in Code Section 162(m), or any successor statute, and the regulations promulgated under Code Section 162(m).
2.13 "Director" means any individual who is a member of the Board of Directors of the Company.
2.14 "Employee" means any employee of the Company or any of its Subsidiaries or Affiliates.
2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
2.16 "Fair Market Value" means with respect to a Share as of a given date, the mean between the high and low prices of Shares on the New York Stock Exchange Composite Tape on the date in question (or, if there should be no sale on that date, on the next preceding day on which there was a sale). 1
1 This definition was amended as set forth above by resolution of the Compensation Committee of the Board of Directors on November 5, 2002.
2.17 "Fiscal Year" means the year commencing on January 1 and ending December 31.
2.18 "Freestanding SAR" means an SAR that is granted independently of any Options, as described in Article 7 herein.
2.19 "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 herein and that is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422, or any successor provision.
2.20 "Insider" shall mean an individual who is, on the relevant date, an officer, director, or more than ten percent (10%) Beneficial Owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as determined by the Board in accordance with Section 16 of the Exchange Act.
2.21 "Nonqualified Stock Option" or "NQSO" means an Option that is not intended to meet the requirements of Code Section 422, or that otherwise does not meet such requirements.
2.22 "Option" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein.
2.23 "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option.
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2.24 "Participant" means an Employee, Director, officer, consultant or advisor who has been selected to receive an Award or who has an outstanding Award granted under the Plan.
2.25 "Performance-Based Compensation" means an Award that qualifies as performance-based compensation under Code Section 162(m).
2.26 "Performance Measures" means measures as described in Article 11, the attainment of which may determine the degree of payout and/or vesting with respect to Awards to Covered Employees that are designated to qualify as Performance-Based Compensation.
2.27 "Performance Period" means the period of time during which specified performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award.
2.28 "Performance Share" means an Award granted to a Participant, as described in Article 9 herein.
2.29 "Performance Unit" means an Award granted to a Participant, as described in Article 9 herein.
2.30 "Period of Restriction" means the period when Restricted Stock or Restricted Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Board, at its discretion), as provided in Article 8 herein.
2.31 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof.
2.32 "Restricted Stock" means an Award granted to a Participant, as described in Article 8 herein.
2.33 "Restricted Stock Unit" means an Award granted to a Participant, as described in Article 8 herein.
2.34 "Shares" means the common stock of the Company, $1.00 par value per share.
2.35 "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 7 herein.
2.36 "Stock Award" means an Award granted to a Participant, as described in Article 10 herein.
2.37 "Subsidiary" means any corporation, partnership, joint venture, limited liability company, or other entity (other than the Company) in an unbroken chain of entities beginning with the Company if, at the time of the granting of an Award, each of the entities other than the last entity in the unbroken chain owns at least fifty percent (50%) of the total combined voting power in one of the other entities in such chain.
2.38 "Tandem SAR" means an SAR that is granted in connection with a related Option pursuant to Article 7 herein, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled).
Article III. Administration
3.1 General. Subject to the terms and conditions of the Plan, the Plan shall be administered by the Board or by the Committee which, to the extent deemed necessary or appropriate by the Board, will consist of two or more persons who satisfy the requirements for a "non-employee director" under Rule 16b-3 promulgated under the Exchange Act and/or the requirements for an "outside director" under Section 162(m) of the Code. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. The Board may delegate to the Committee any
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or all of the administration of the Plan; provided, however, that the administration of the Plan with respect to Awards granted to Directors who are not Employees may not be so delegated. To the extent that the Board has delegated to the Committee any authority and responsibility under the Plan, all applicable references to the Board in the Plan shall be to the Committee.
3.2 Authority of the Board. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Board shall have full power to select Employees, Directors, officers, consultants and advisors who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; and establish, amend, or waive rules and regulations for the Plan's administration. Further, the Board shall make all other determinations that may be necessary or advisable for the administration of the Plan.
3.3 Delegation to Officers. Except as limited by law, the Board or the Committee may authorize one or more officers of the Company to do one or both of the following: (i) designate officers, Employees, consultants and advisors of the Company or any of its Subsidiaries to be recipients of Awards, and (ii) determine the size, terms and conditions of any Award; provided, however, that no such authority may be delegated with respect to Awards made to any Insider, Covered Employee, or Director who is not an Employee.
3.4 Decisions Binding. All determinations and decisions made by the Board pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company, its stockholders, Directors, Employees, Participants, and their estates and beneficiaries.
Article IV. Shares Subject to the Plan and Maximum Awards
4.1 Number of Shares Available for Awards. Subject to adjustment as provided in Section 4.2 herein, the number of Shares hereby reserved for issuance to Participants under the Plan shall be Nine Million (9,000,000), no more than Two Million, Five Hundred Thousand (2,500,000) of which may be granted in the form of Awards other than in the form of Options or SARs. Unless determined otherwise by the Board, Shares related to Awards that are forfeited, terminated, expire unexercised, tendered by a Participant to the Company in connection with the exercise of an Award, withheld from issuance in connection with a Participant's payment of tax withholding liability, settled in cash in lieu of Shares, or settled in such other manner so that a portion or all of the Shares included in an Award are not issued to a Participant shall be available for other Awards. The following rules ("Award Limits") shall apply to grants of such Awards under the Plan:
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4.2 Adjustments in Authorized Share . In the event of any corporate event or transaction such as a merger, consolidation, reorganization, recapitalization, separation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company, or any similar corporate event or transaction, the Board, in its sole discretion, in order to prevent dilution or enlargement of Participants' rights under the Plan, shall substitute or adjust, in an equitable manner, as applicable, the number and kind of Shares that may be issued under the Plan, the number and kind of Shares subject to outstanding Awards, the exercise price applicable to outstanding Awards, the Award Limits, the Fair Market Value of the Shares, and other value determinations applicable to outstanding Awards.
Appropriate adjustments may also be made by the Board in the terms of any Awards under the Plan to reflect such changes or distributions and to modify any other terms of outstanding Awards on an equitable basis, including modifications of performance targets and changes in the length of Performance Periods.
In addition, other than with respect to Options, Stock Appreciation Rights, and Awards to Covered Employees intended to constitute Performance-Based Compensation, the Board is authorized to make adjustments to the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles. The determination of the Board as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.
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Article V. Eligibility and Participation
5.1 Eligibility. Persons eligible to participate in this Plan include all Employees, Directors, officers, consultants and advisors of the Company and its Affiliates and Subsidiaries.
5.2 Actual Participation. Subject to the provisions of the Plan, the Board may, from time to time, select from all eligible persons, those to whom Awards shall be granted and shall determine the nature and amount of each Award. Such Awards need not be made in a uniform manner and may be selectively awarded among otherwise eligible persons, whether or not such persons are similarly situated.
Article VI. Stock Options
6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Board, provided that ISOs shall not be granted to persons who are not Employees.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Board shall determine which are not inconsistent with the terms of the Plan. The Award Agreement also shall specify whether the Option is intended to be an ISO or an NQSO.
6.3 Option Price . The Option Price for each grant of an Option under this Plan shall be as determined by the Board; provided, however, the Option Price shall not be less than one hundred percent (100%) of the Fair Market Value of the Shares on the date the Option is granted.
6.4 Duration of Options. Each Option granted to a Participant shall expire at such time as the Board shall determine at the time of grant; provided, however, no Option shall be exercisable later than the tenth (10th) anniversary of its date of grant.
6.5 Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Board shall in each instance approve, which need not be the same for each grant or for each Participant.
6.6 Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares that are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price or have been purchased on the open market); (c) by a combination of (a) and (b); or (d) any other method approved by the Board in its sole discretion at the time of grant and as set forth in the Award Agreement.
The Board also may allow cashless exercise as permitted under the Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Board determines to be consistent with the Plan's purpose and applicable law.
Subject to any governing rules or regulations, as soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s).
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Unless otherwise determined by the Board, all payments under all of the methods indicated above shall be paid in United States dollars.
6.7 Termination of Employment/Service Relationship. Each Participant's Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment or service relationship with the Company, its Affiliates and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination.
6.8 Transferability of Options.
6.9 Notification of Disqualifying Disposition. If any Participant shall make any disposition of Shares issued pursuant to the exercise of an Incentive Stock Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof.
Article VII. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Board. The Board may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SAR.
Subject to the terms and conditions of the Plan, the Board shall have complete discretion in determining the number of SARs granted to each Participant and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs.
The grant price of a Freestanding SAR shall be no less than the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem SARs shall equal the Option Price of the related Option.
7.2 SAR Agreement . Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Board shall determine.
7.3 Term of SARs. The term of an SAR granted under the Plan shall be determined by the Board, in its sole discretion; provided, however, that no SAR shall be exercisable later than the tenth (10th) anniversary of its date of grant.
7.4 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Board, in its sole discretion, imposes upon them.
7.5 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable.
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7.6 Payment of SAR Amount . Upon the exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
At the discretion of the Board, the payment upon SAR exercise may be in cash, in Shares of equivalent value, in some combination thereof, or in any other manner approved by the Board at its sole discretion. The Board's determination regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR.
7.7 Termination of Employment/Service Relationship. Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant's employment or service relationship with the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.
7.8 Nontransferability. Except as otherwise provided in a Participant's Award Agreement, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant.
Article VIII. Restricted Stock and Restricted Stock Units
8.1 Grant of Restricted Stock/Units. Subject to the terms and provisions of the Plan, the Board, at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Board shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no Shares are actually awarded to the Participant on the date of grant.
8.2 Restricted Stock Agreement. Each Restricted Stock and/or Restricted Stock Unit grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock (or the number of Restricted Stock Units) granted, and such other provisions as the Board shall determine.
8.3 Nontransferability. Except as otherwise provided in a Participant's Award Agreement, the Shares of Restricted Stock and/or Restricted Stock Units granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Board and specified in the Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Board in its sole discretion and set forth in the Award Agreement.
8.4 Other Restrictions. The Board shall impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, time-based restrictions on vesting following the attainment of the performance goals or Performance Measures, time-based restrictions, and/or restrictions under applicable federal or state securities laws.
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To the extent deemed appropriate by the Board, the Company may retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse.
Except as otherwise provided in a Participant's Award Agreement, Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been satisfied or lapse, and Restricted Stock Units shall be paid in cash, Shares, or a combination of cash and Shares as the Board, in its sole discretion, shall determine.
8.5 Voting Rights. To the extent permitted, or required by law, as determined by the Board, Participants holding Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder.
8.6 Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock or Restricted Stock Units granted hereunder may, if the Board so determines, be credited with dividends paid with respect to the underlying Shares or dividend equivalents while they are so held in a manner determined by the Board in its sole discretion. The Board may apply any restrictions to the dividends that the Board deems appropriate. The Board, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including cash, Shares, Restricted Stock, or Restricted Stock Units.
8.7 Termination of Employment/Service Relationship. In the event a Participant's employment or service relationship terminates for any reason, including by reason of death, disability, or retirement, all Shares of Restricted Stock and/or Restricted Stock Units shall be forfeited by the Participant unless determined otherwise by the Board, as set forth in the Participant's Award Agreement. Any such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock or Restricted Stock Units issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.
8.8 Section 83(b) Election. The Board may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning a Restricted Stock Award, the Participant shall be required to promptly file a copy of such election with the Company.
Article IX. Performance Units/Performance Shares
9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan, Performance Units and/or Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Board.
9.2 Value of Performance Units/Shares. Each Performance Unit shall have an initial value that is established by the Board at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Board shall set performance goals or Performance Measures in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participant.
9.3 Earning of Performance Units/Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive payout on the number and value of Performance Units/Shares earned by the Participant over the
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Performance Period, to be determined as a function of the extent to which the corresponding performance goals or Performance Measures have been achieved.
9.4 Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares shall be as determined by the Board and as evidenced in the Award Agreement. Subject to the terms of the Plan the Board, in its sole discretion, may pay earned Performance Units/Shares in the form of cash or in Shares (or in a combination thereof) equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period. Any Shares may be granted subject to any restrictions deemed appropriate by the Board. The determination of the Board with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.
9.5 Dividends and Other Distributions. At the discretion of the Board, Participants holding Performance Units/Shares may be entitled to receive dividend equivalents with respect to dividends declared with respect to the Shares. Such dividends may be subject to the accrual, forfeiture, or payout restrictions as determined by the Board in its sole discretion.
9.6 Termination of Employment/Service Relationship. In the event a Participant's employment or service relationship terminates for any reason, including by reason of death, disability, or retirement, all Performance Units/Shares shall be forfeited by the Participant unless determined otherwise by the Board, as set forth in the Participant's Award Agreement. Any such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Performance Units/Shares issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.
9.7 Nontransferability. Except as otherwise provided in a Participant's Award Agreement, Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.
Article X. Cash-Based Awards and Stock Awards
10.1 Grant of Cash-Based Awards. Subject to the terms of the Plan, Cash-Based Awards may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Board.
10.2 Value of Cash-Based Awards. Each Cash-Based Award shall have a value as may be determined by the Board. The Board shall set performance goals or Performance Measures in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Cash-Based Awards that will be paid out to the Participant.
10.3 Earning of Cash-Based Awards. Subject to the terms of this Plan, the holder of Cash-Based Awards shall be entitled to receive payout on the number and value of Cash-Based Awards earned by the Participant, to be determined as a function of the extent to which the corresponding performance goals have been achieved.
10.4 Form and Timing of Payment of Cash-Based Awards. Payment of earned Cash-Based Awards shall be as determined by the Board and as evidenced in the Award Agreement. Subject to the terms of the Plan, the Board, in its sole discretion, may pay earned Cash-Based Awards in the form of cash or in Shares (or in a combination thereof) that have an aggregate Fair Market Value equal to the value of the earned Cash-Based Awards. Such Shares may be granted subject to any restrictions deemed appropriate by the Board. The determination of the Board with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.
10.5 Termination of Employment/Service Relationship. In the event a Participant's employment or service relationship terminates for any reason, including by reason of death, disability, or retirement,
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all Cash-Based Awards and Stock Awards shall be forfeited by the Participant to the Company unless determined otherwise by the Board, as set forth in the Participant's Award Agreement Any such provisions shall be determined in the sole discretion of the Board, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Cash-Based Awards and Stock Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.
10.6 Nontransferability . Except as otherwise provided in a Participant's Award Agreement, Cash-Based Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.
10.7 Stock Awards. The Board may grant other types of equity-based or equity-related Awards (including the grant or offer for sale of unrestricted Shares) in such amounts and subject to such terms and conditions, as the Board shall determine. Such Awards may entail the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of Shares and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
Article XI. Performance Measures
Unless and until the Board proposes for stockholder vote and the stockholders approve a change in the general Performance Measures set forth under this Article 11, the performance criteria upon which the payment or vesting of an Award to a Covered Employee (other than an Annual Incentive Award awarded or credited pursuant to Section 12.1) that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:
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For purposes of this Plan, EVA® means the positive or negative value determined by net operating profits after taxes over a charge for capital, or any other financial measure, as determined by the Board in its sole discretion. (EVA® is a registered trademark of Stern Stewart & Co.).
Any Performance Measures may be used to measure the performance of the Company as a whole or any business unit of the Company or any combination thereof, as the Board may deem appropriate, or any of the above goals as compared to the performance of a group of comparator companies, or published or special index that the Board, in its sole discretion deems appropriate.
Awards that are designed to qualify as Performance-Based Compensation, and that are held by Covered Employees, may not be adjusted upward. The Board shall retain the discretion to adjust such Awards downward.
In the event that applicable tax and/or securities laws change to permit Board discretion to alter the governing Performance Measures without obtaining stockholder approval of such changes, the Board shall have sole discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Board determines that it is advisable to grant Awards that shall not qualify as Performance Based Compensation, the Board may make such grants without satisfying the requirements of Code Section 162(m).
Article XII. Annual Incentive Awards
12.1 Incentive Awards for Covered Employees. For each Fiscal Year of the Company, an incentive pool equal to seven percent (7%) of the Company's consolidated operating earnings for such year shall be available for award to Covered Employees. The Board shall determine at the beginning of each Fiscal Year a percentage of the total incentive pool to be allocated to each designated Covered Employee for such year, provided that in no event shall the incentive pool percentage for any one Covered Employee exceed forty percent (40%) of the total pool. Consolidated operating earnings shall mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Extraordinary Items. Extraordinary Items shall mean (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes or Management Discussion and Analysis section of the Company's annual report.
As soon as possible after the determination of the incentive pool for a Fiscal Year, the Board shall calculate each Covered Employee's allocated portion of the incentive pool based upon the percentage established at the beginning of the Fiscal Year. The Covered Employee's incentive award then shall be determined by the Board based on the Covered Employee's allocated portion of the incentive pool subject to adjustment in the sole discretion of the Board. In no event may the portion of the incentive
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pool allocated to a Covered Employee be increased in any way, including as a result of the reduction of any other Covered Employee's allocated portion.
12.2 Award for Other Participants. For each Fiscal Year of the Company, the Board may direct the establishment of an incentive pool or other incentive structure with respect to Participants who are not Covered Employees. Any such incentive program, policy or arrangement shall be separately communicated to eligible Participants and shall be subject to such terms, restrictions and conditions determined by the Board or any authorized officer or other delegate of the Board.
12.3 Form of Payment of Annual Incentive Awards. Subject to the terms of the Plan, the Board, in its sole discretion, may pay earned Annual Incentive Awards in the form of cash or in Shares (or in a combination thereof) that have an aggregate Fair Market Value equal to the value of the earned Annual Incentive Awards. Such Shares may be granted subject to any restrictions deemed appropriate by the Board. The determination of the Board with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.
Article XIII. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate.
Article XIV. Deferrals
The Board may permit or require a Participant to defer such Participant' s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock/Units, or the satisfaction of any requirements or goals with respect to Performance Units/Shares, Cash-Based Awards, and Stock Awards. If any such deferral election is required or permitted, the Board shall, in its sole discretion, establish rules and procedures for such payment deferrals.
Article XV. Rights of Participants
15.1 Employment. Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the Company to terminate any Participant's employment or other service relationship at any time, nor confer upon any Participant any right to continue in the capacity in which he is employed or otherwise serves the Company.
Neither an Award nor any benefits arising under this Plan shall constitute part of an employment contract with the Company or any Subsidiary or Affiliate, and, accordingly, subject to Sections 17.1, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Board without giving rise to liability on the part of the Company or any Subsidiary or Affiliate for severance payments.
15.2 Participation. No person shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.
15.3 Rights as a Stockholder. A Participant shall have none of the rights of a stockholder with respect to Shares covered by any Award until the Participant becomes the record holder of such shares.
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Article XVI. Change in Control
Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges, or unless the Board shall determine otherwise in the Award Agreement:
Article XVII. Amendment, Modification, Suspension, and Termination
17.1 Amendment, Modification, Suspension, and Termination. Subject to the terms of the Plan, the Board may at any time and from time to time, alter, amend, modify, suspend, or terminate the Plan in whole or in part. Notwithstanding anything herein to the contrary, without the prior approval of the Company's stockholders, Options issued under the Plan will not be repriced, replaced, or regranted through cancellation, or by lowering the exercise price of a previously granted Option.
17.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Board may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Board determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
17.3 Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary, no termination, amendment, suspension, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award.
Article XVIII. Withholding
18.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, the minimum statutory amount to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.
18.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock and Restricted Stock Units, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Board, to satisfy the withholding requirement, in whole or in part, by having the
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Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. All such elections shall be irrevocable, made in writing and signed by the Participant, and shall be subject to any restrictions or limitations that the Board, in its sole discretion, deems appropriate.
Article XIX. Indemnification
Each person who is or shall have been a member of the Committee, or of the Board, or an officer of the Company to whom authority was delegated in accordance with Article 3 shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgement in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or expense is a result of his or her own willful misconduct or except as expressly provided by statute.
The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
Article XX. Successors
All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
Article XXI. General Provisions
21.1 Forfeiture Events. The Board may specify in an Award Agreement that the Participant's rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events shall include, but shall not be limited to, termination of employment for cause, violation of material Company or Affiliate policies, breach of noncompetition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company or any Affiliate.
21.2 Legend. The Board may require each person receiving Shares pursuant to an Award under this Plan to represent to and agree with the Company in writing that the Participant is acquiring the Shares without a view to distribution thereof. In addition, to any legend required by this Plan, the certificates for such Shares may include any legend which the Board deems appropriate to reflect any restrictions on transfer of such Shares.
21.3 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.
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21.4 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
21.5 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. The Company shall receive the consideration required by law for the issuance of Awards under the Plan.
21.6 Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor under the Exchange Act, unless determined otherwise by the Board. To the extent any provision of the Plan or action by the Board fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board.
21.7 Restrictions on Share Transferability. The Board may impose such restrictions on any Shares acquired pursuant to an Award granted under this Plan as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.
21.8 Listing. The Company may use reasonable endeavors to register Shares allotted pursuant to the exercise of an Award with the United States Securities and Exchange Commission or to effect compliance with the registration, qualification, and listing requirements of any national securities laws, stock exchange, or automated quotation system.
21.9 Delivery of Title. The Company shall have no obligation to issue or deliver evidence of title for Shares awarded under the Plan prior to:
21.10 Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
21.11 Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
21.12 Employees Based Outside of the United States. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company, its Affiliates, and its Subsidiaries operate or have Employees, the Board, in their sole discretion, shall have the power and authority to:
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Notwithstanding the above, the Board may not take any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act, the Code, any securities law or governing statute or any other applicable law.
21.13 Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.
21.14 Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments that the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan.
The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974.
21.15 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Board shall determine whether cash, or Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
21.16 Governing Law. The Plan and each Award Agreement shall be governed by the laws of the state of Missouri, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Missouri, county of Jackson, to resolve any and all issues that may arise out of or relate to the Plan or any related Award Agreement.
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SECOND AMENDMENT
UTILICORP UNITED INC.
CAPITAL ACCUMULATION PLAN
THIS AMENDMENT is made by Aquila, Inc. (the "Company").
WHEREAS, the Company adopted the UtiliCorp United Capital Accumulation Plan (the "Plan"), effective as of January 1, 1995, to provide specified benefits to a select group of management and highly compensated employees; and
WHEREAS, the Plan was amended and restated in its entirety effective as of January 1, 2001 (the "Restated Plan") and wasthereafter amended by the First Amendment effective January 1, 2001;
WHEREAS, the Company desires to further amend the Restated Plan in the manner hereinafter set forth.
NOW, THEREFORE, the Restated Plan is amended to read as follows:
A. Section 1.9 is amended to read in its entirety as follows:
1.9 "Company" shall mean Aquila, Inc., a Delaware corporation, and any successor to all or substantially all of the Company's assets or liabilities.
B. Section 1.26 is amended to read in its entirety as follows:
1.26 "Plan" shall mean the Aquila, Inc. Capital Accumulation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time.
C. Section 1.30 is amended to read in its entirety as follows:
1.30 "Retirement", "Retire(s)", or "Retired" shall mean (i) with respect to any Participant who is an Employee, severance from employment with all Employers for any reason other than a leave of absence, death, Disability or involuntary termination of employment on or after the attainment of age fifty-five (55); and (ii) with respect to any Participant who is a Director, the date on which such Participant ceases to be a director of the Board for any reason other than death.
D. Section 4.3 is amended to read in its entirety as follows:
4.3 Withdrawal Election . A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time to withdraw either (i) the balance of his or her Account, calculated as if there had occurred a Termination of Employment as of the day of the election, or (ii) the balance of his or her Deferral Contribution Account, calculated as if there had occurred a Termination of Employment as of the day of the election, in either case less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount as soon as reasonably practicable following his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan for eighteen (18) months in the future. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation.
E. This Amendment is effective as of June 1, 2002. Except as set forth herein, all other provisions of the Plan shall remain in effect.
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IN WITNESS WHEREOF, the Company has caused this Amendment to be executed this 19th day of June, 2002.
AQUILA, INC. | |||
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By: |
/s/ LEO E. MORTON Leo E. Morton Title: Senior Vice President and Chief Administrative Officer |
ATTEST:
By: /s/ Fortunato L. Lucido
UTILICORP UNITED INC.
EXECUTIVE BENEFIT SECURITY TRUST
Amended and Restated as of April 4, 2002
UTILICORP UNITED INC.
EXECUTIVE BENEFIT SECURITY TRUST
THIS AMENDED AND RESTATED TRUST AGREEMENT ("AGREEMENT") is made and entered into as of this 4th day of April, 2002 by UtiliCorp United Inc., a Delaware corporation, (the "Company"), and The Northern Trust Company, and its successor or successors and assigns in the trust hereby evidenced, as trustee (the "Trustee").
WITNESSETH:
WHEREAS, the Company has adopted the non-qualified deferred compensation plans listed on Appendix A, which may be revised by the Company from time to time to add more Plans by delivering to the Trustee a new Appendix A without requiring an amendment of this Trust Agreement (the "Plans") for the benefit of a select group of management and/or highly compensated employees; and
WHEREAS, the Company has incurred or expects to incur liability under the terms of such Plans with respect to the individuals participating in such Plans; and
WHEREAS, the Company established a trust with LaSalle National Trust, N.A. (the "Prior Trustee") on January 1, 1997 (hereinafter called the "Trust"); and
WHEREAS, the Company wishes to appoint The Northern Trust Company as successor trustee effective as of the date set forth above; and
WHEREAS, the Company wishes to continue to contribute to the Trust assets to be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to participants of the Plans and their beneficiaries in such manner and at such times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plans;
NOW, THEREFORE, the parties do hereby amend and restate the Trust Agreement and agree that the Trust shall be comprised, held and disposed of as follows:
ARTICLE I
INTRODUCTION
1.01. The Trust, the Plans, Participants. This Agreement and the Trust hereby evidenced shall be known as the "UtiliCorp United Inc. Executive Benefit Security Trust." The Trust is established for the benefit of employees of the Company who are or become covered under the Plans and their beneficiaries, as determined in accordance with the provisions of the Plans, which employees and beneficiaries are referred to as "Participants." However, the Participants shall not have any right or security interest in any specific asset of the Trust or beneficial ownership in or preferred claim on the assets of the Trust, it being understood that the assets of the Trust shall be available for the claims of the Company's creditors as provided in Article V and all rights created under the Plans or the Trust shall be unsecured contractual rights against the Company.
1.02. Status of Trust. The Trust is intended to constitute a grantor trust under Sections 671-678 of the Internal Revenue Code, as amended, and shall be construed accordingly.
(a) The Trustee shall receive such cash and other assets acceptable to the Trustee, as delivered to it by the Prior Trustee, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Agreement. At any time or from time to time thereafter the Company, in its sole discretion, may deliver to the Trustee additional funds or other
property to be held, invested and distributed by the Trustee in accordance with the provisions of this Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of the Participants and general creditors as herein set forth. Participants shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Agreement shall be mere unsecured contractual rights of the Participants against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in paragraph 5.01 herein.
(e) Upon a Change of Control (as defined in the Plans), the Company shall as soon as administratively possible, but in no event later than ten (10) days following such Change of Control, make an irrevocable contribution to the Trust, in cash or other readily marketable property acceptable to the Trustee, equal to the sum of (i) an amount which, when added to the fair market value of the assets then held in the Trust, shall cause the fair market value of the assets of the Trust to equal the present value of the accrued benefits under the Plans as of the date of such Change of Control, and (ii) an amount equal to a reasonable estimate of the present value of the administrative, Trustee's, legal and/or consulting fees to be incurred during the life of the Trust on and after the Change of Control. The amount of the Company's contribution paid or payable to the Trust pursuant to the preceding sentence shall be determined by a Benefits Consultant (as defined in paragraph 4.05(b) hereof.) The Company shall immediately notify the Trustee in writing of any Change of Control. The Trustee may conclusively rely upon such notice and shall have no duty to determine whether a Change of Control has occurred.
1.03. Acceptance. The Trustee accepts the duties and obligations of the Trustee hereunder, agrees to accept delivery of property delivered to it by the Prior Trustee and the Company pursuant to paragraph 1.02, and agrees to hold such property (and any proceeds from the investment of such property) in trust in accordance with this Agreement. The Trustee shall have no duty to enforce any funding obligations of the Company, and the duties of the Trustee shall be governed solely by the terms of this Trust Agreement without reference to the terms of any Plan.
1.04. The Committee. The "Committee" means the committee appointed by the Company to administer the Plans pursuant to the terms of such Plans. The Committee has certain powers, rights and duties under this Agreement as described below. The Company shall from time to time certify to the Trustee the person or persons who are acting as the members of the Committee or who have been delegated the authority to act on behalf of the Committee. The Trustee may rely on the latest certificate received without further inquiry or verification.
1.05. Participating Affiliates. Any subsidiary or affiliated entity of the Company may adopt this Trust and, thus, become a "Participating Affiliate" under this Trust Agreement. Notwithstanding any provision of this Agreement to the contrary, to the extent the Trust benefits employees of Company's Participating Affiliate, the assets of the Trust shall be subject to the claims of the general creditors of both the Company and its Participating Affiliates. The Company shall immediately notify the Trustee in writing when an entity becomes a Participating Affiliate in accordance with this section, and the Trustee shall not be deemed to have any knowledge of such adoption until it receives such written notice from the Company. When the Trust has been adopted by a Participating Affiliate, such Participating Affiliate shall be bound by the decisions, instructions, actions and directions of the Company under or affecting this Agreement. The Trustee shall not be required to give notice to or to obtain the consent of any Participating Affiliate with respect to any action to be taken by the Trustee pursuant to this Agreement,
and the Company shall have the sole authority to enforce this Agreement on behalf of any Participating Affiliate. Participating Affiliates as of the date hereof are set forth in Appendix B.
1.06. Merger of Trusts. At the direction of the Company, the Trustee shall have the authority to merge at any time all the Trust assets with the assets of any other trust held by the same Trustee or another trustee for the benefit of the same beneficiaries or beneficiaries of other deferred compensation plans established by the Company or its Participating Affiliates and upon substantially the same terms and conditions as those set forth herein and, at the Company's direction, either to administer the merged assets as a single trust hereunder or transfer the Trust property to that other trust, to be administered under the instrument governing that other trust, and thereafter to terminate the Trust hereunder as a separate entity. Notwithstanding the preceding sentence, the assets attributable to the interest of a beneficiary under any such deferred compensation plan held under the trust with which this Trust is merged, as determined immediately after the merger, shall not, as a result of the merger, be less than the assets attributable to the interest of such beneficiary under the trust immediately prior to the effective date of the merger.
ARTICLE II
MANAGEMENT OF THE TRUST FUND
2.01. The Trust Fund. Unless the context clearly implies or indicates otherwise, the term "Trust Fund" as of any date means all property of every kind then held under this Agreement by the Trustee or any custodian.
2.02. Trustee's General Powers, Rights and Duties. With respect to the Trust Fund and subject only to the limitations expressly provided in this Agreement (including the powers reserved to the Committee or the Company) and subject to such written investment guidelines as may be issued to the Trustee from time to time by the Company or Committee, the Trustee shall have the following powers, rights and duties in addition to those vested in it elsewhere in this Agreement or by law:
(a) To invest and reinvest part or all of the Trust Fund in any real or personal property (including investments in any stocks, bonds, debentures, mutual fund shares, notes, commercial paper, treasury bills, any commingled trust funds or pooled investment funds described in paragraph 2.03, any interest bearing deposits held by any bank or similar financial institution, and any other real or personal property).
(b) To apply for, pay premiums on and maintain in force on the lives of some or all of the Participants, individual, group term, universal or other life insurance policies ("Policies" or "Policy") to fund benefits under the Plans for Participants on whose lives the Policies are issued and containing such provisions as the Committee may approve or direct; to receive or acquire such a Policy from the Company or from the Participant on whose life the Policy is issued, but the Trustee may purchase a Policy from the Company or from the Participant only if the Trustee pays, transfers or otherwise exchanges for the Policy no more than the cash surrender value of the Policy and the Policy is not subject to a mortgage or similar lien which the Trustee would be required to assume; and to have with respect to Policies any rights, powers, options, privileges and benefits usually comprised in the term "incidents of ownership" and normally vested in an insured or owner of such Policies.
(c) To retain in cash such amounts and to deposit any cash so retained in any depository (including any bank acting as or affiliated with the Trustee) which the Trustee may select.
(d) To manage, sell, insure and otherwise deal with all real and personal property held by the Trustee on such terms and conditions as the Trustee shall decide.
(e) To vote stock and other voting securities personally or by proxy, to exercise subscription, conversion and other rights and options, to take any action and to abstain from taking any action with respect to any reorganization, consolidation, merger, dissolution, recapitalization, refinancing and any other program or change affecting any property constituting a part of the Trust Fund, to hold or register any property from time to time in the Trustee's name or in the name of a nominee
or to hold it unregistered or in such form that title shall pass by delivery and, with the approval of the Committee, to borrow from any lender, including any bank acting as Trustee, to the extent permitted by law, such amounts from time to time as the Trustee considers desirable to carry out this Trust (and to mortgage or pledge all or part of the Trust Fund as security).
(f) To make payments from the Trust Fund to provide benefits that have become payable under the Plans pursuant to paragraph 4.05 or that are required to be made to the creditors of the Company pursuant to paragraph 5.02.
(g) To maintain in the Trustee's discretion any litigation the Trustee considers necessary in connection with the Trust Fund, subject to paragraph 4.03.
(h) To withhold, if the Trustee considers it advisable, all or any part of any payment required to be made hereunder as may be necessary and proper to protect the Trustee or the Trust Fund against any liability or claim on account of any estate, inheritance, income or other tax or assessment attributable to any amount payable hereunder, and to discharge any such liability with any part or all of such payment so withheld, provided that at least ten (10) days prior to discharging any such liability with any amount so withheld the Trustee shall notify the Committee in writing of the Trustee's intent to do so.
(i) To maintain accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such other records as the Committee specifies and the Trustee agrees to, which records may be audited from time to time by the Committee or anyone named by the Committee during regular business hours with prior written notice.
(j) To furnish periodic accounts to the Committee for such periods as the Committee may specify, showing all investments, receipts, disbursements and other transactions involving the Trust during the applicable period. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. The Committee or the Company may approve such accounting by written notice of approval delivered to the Trustee or by failure to express objection to such accounting in writing delivered to the Trustee within six (6) months from the date upon which the accounting was delivered to the Committee or the Company. Upon the receipt of a written approval of the accounting, or upon the passage of the period of time within which objection may be filed without written objections having been delivered to the Trustee, such accounting shall be deemed to be approved, and the trustee shall be released and discharged as to all items, matters and things set forth in such account, as fully as if such accounting had been settled and allowed by decree of a court of competent jurisdiction in an action or proceeding in which the Trustee, the Company and all persons having or claiming to have any interest in the Trust Fund or under the Plans were parties.
(k) To furnish the Company with such information in the Trustee's possession as the Company may need for tax or other purposes.
(l) To employ agents, attorneys, accountants, and other persons (who also may be employed by the Company or the Committee), to delegate discretionary powers to such persons, to reasonably rely upon information and advice furnished by such persons; provided that each such delegation and the acceptance thereof by each such person shall be in writing; and provided further that the Trustee may not delegate its responsibilities specifically allocated to it herein as to the management or control of the assets of the Trust Fund.
(m) To perform all other acts which in the Trustee's judgment are appropriate for the proper management, investment and distribution of the Trust Fund.
(n) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company, the Committee or a delegate of the Company or Committee which is contemplated by, and in conformity with, the terms of this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(o) Notwithstanding any powers granted to the Trustee pursuant to this Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code.
2.03. Commingled Investment Trusts. The Trustee may invest Trust assets in any commingled trust fund or pooled investment fund that is maintained by a bank or trust company (including a bank or trust company acting as Trustee) provided such investments are consistent with the investment guidelines, if any, issued to the Trustee in writing by the Company or Committee. To the extent that any Trust assets are invested in any such fund, the provisions of the documents under which such commingled trust fund or pooled investment fund are maintained shall govern any investments therein and such provisions are hereby incorporated herein and made a part of this Agreement.
2.04. Investment Responsibility. Except as provided below, the Committee shall have sole investment responsibility for the Trust assets and shall provide the Trustee with all investment directions. The Trustee shall neither effect nor change any of the investments of Trust assets for which the Committee has investment responsibility, except as instructed by the Committee, and shall have no right, duty or responsibility to recommend or review investments or investment changes; provided, however, that the Trustee may deposit cash on hand from time to time in any account in its own banking department without prior directions and provided further that if the Trustee shall not have received contrary instructions from the Committee, the Trustee shall invest for short term purposes any cash consisting of U.S. dollars in its custody in bonds, notes and other evidence of indebtedness having a maturity date not beyond five years from date of purchase, United States Treasury bills, commercial paper, bankers' acceptances and certificates of deposit and undivided interests or participations therein and (if subject to withdrawal on a daily or weekly basis) participations in regulated investment companies (including those for which The Northern Trust Company or any of its affiliates acts as advisor). Notwithstanding the foregoing, the Committee may allocate investment responsibility for certain Trust assets to the Trustee from time to time, but only if the Trustee accepts such investment responsibility in writing. The Committee may revoke such allocation in writing at any time.
Upon notice from the Company to the Trustee of a Change in Control, the authority of the Committee to direct the investment of the Trust's assets shall cease, and the Trustee shall have complete authority to direct those investments for which it accepts investment responsibility therefor in writing, subject to such investment guidelines that shall be issued by the Company to the Trustee from time to time; provided, however, that the Company shall have investment responsibility for any investments for which the Trustee does not accept investment responsibility in writing.
2.05. Separate Accounts. The Trustee shall establish such separate accounts under the Trust as directed by the Committee. The Committee shall designate assets of the Trust to be allocated to each separate account and shall direct the Trustee with respect to any transfer of assets between the separate accounts.
ARTICLE III
MANNER OF ACTION OF THE COMMITTEE
The Company shall certify to the Trustee in writing the names of the members of the Committee acting from time to time, and the Trustee shall not be charged with knowledge of a change in the membership of the Committee until so notified in writing by the Company. Any action required or permitted to be taken by the Committee shall be by direction of such person or persons as shall be designated in writing by the Committee to act for the Committee. The Trustee may rely upon an instrument of designation received from the Committee appointing a designee to act for the Committee which it believes has been signed by the secretary or chairman of the Committee and filed with the Trustee. The Trustee shall have no responsibility for any action taken by it in accordance with any such direction it believes to have been given as provided above. Notwithstanding anything herein to the contrary, the Committee may delegate any of its responsibilities hereunder to a representative by giving to the Trustee in writing a letter which identifies the representative and sets forth the list of its responsibilities under this agreement that it has authorized the representative to carry out.
ARTICLE IV
GENERAL PROVISIONS
4.01. Restrictions on Reversion. The Company shall not have any right, title or interest in the assets of the Trust Fund, nor will any part of the assets of the Trust Fund revert or be repaid to the Company until all benefits due under the Plans have been paid pursuant to the terms of the Plans and in accordance with the provisions of paragraph 4.05, except as follows:
(a) The assets of the Trust shall be available for the claims of the Company's creditors under the circumstances specified in Article V.
(b) If the Company ceases to maintain the Plans, any balance remaining in the Trust after all benefits have been paid pursuant to the terms of the Plans and in accordance with the provisions of paragraph 4.05 shall revert to the Company and its participating affiliates, except that any assets (including employer stock) contributed by UtiliCorp United Inc. to the Trust for the benefit of employees or service providers of such participating affiliates shall revert exclusively to the Company.
(c) Except in the event of a Change in Control (as defined in the Plans), upon the written direction of the Committee at any time, the Trustee shall repay to the Company any excess assets (as defined below) in the Trust, provided that the Committee furnishes to the Trustee a statement in the form acceptable to the Trustee as to the then value of accrued benefits under the Plans. For this purpose, "excess assets" means any amount by which the sum of the cash surrender value of Policies held in the Trust and the fair market value of all other assets in the Trust, as determined by the Trustee, exceeds the value of accrued benefits under the Plans. In the event of a Change in Control, no assets of the Trust Fund shall revert or be repaid to the Company, under any circumstances, until all benefits due under the Plans have been paid pursuant to the terms of the Plans and in accordance with the provisions of paragraph 4.05.
4.02. Nonalienation of Trust Assets. To the extent permitted by law, the rights or interests of any Participants to any benefits or future payments hereunder shall not be subject to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of any such Participant, nor shall any such Participant have any right to alienate, anticipate, commute, pledge, encumber or assign (either at law or in equity) any of the benefits or rights which he/she may expect to receive (contingently or otherwise) under this Agreement, except as may be required by the tax withholding provisions of the Internal Revenue Code or of a state's income tax act.
4.03. Litigation. Any final judgment that is not appealed or appealable and which may be entered in any suit or legal proceeding regarding this Trust shall be binding and conclusive on the parties hereto and all persons having or claiming to have an interest in the Trust. If the Trustee undertakes or defends any litigation arising in connection with the Trust, the Company agrees to
indemnify the Trustee on a current basis against the Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments provided that the Trustee has notified the Company of such litigation and has provided the Company with the right to defend with counsel reasonably satisfactory to the Trustee. Notwithstanding the foregoing, the Trustee shall have the right to employ its own counsel, and the reasonable fees and expenses of such counsel shall be paid by the Company as they are incurred, if (i) the Trustee has been advised by such counsel that there may be legal defenses available to it which are different from and in addition to defenses available to the Company or the Trust which may reasonably cause a conflict between the parties (in which case the Company shall not have the right to assume the defense on behalf of the Trustee), (ii) the Trustee has been advised by such counsel that there is or could reasonably be expected to be a conflict of interest by reason of having common counsel, (iii) the Company shall not have assumed the defense and employed counsel reasonably satisfactory to the Trustee within fifteen (15) days after the receipt by the Company of notice of commencement of an action, or (iv) the employment of such counsel has been authorized in writing by the Company in connection with the defense. If the Company does not pay such costs, expenses and liabilities within sixty (60) days of presentation, the Trustee may obtain payment of such items from the Trust. The Trustee shall be under no obligation to take or defend any legal action of whatever nature unless it is first indemnified against expenses by the Company or there shall be sufficient property in the Trust to indemnify the Trustee with respect to the expenses or losses to which it may be subjected as a result of taking or defending such action.
4.04. Trustee's Actions Conclusive. Except as otherwise provided by law, the Trustee's exercise or non-exercise of its powers and discretion in good faith shall be conclusive on all persons. No one shall be obliged to see to the application of any money paid or property delivered to the Trustee. The certificate of the Trustee that it is acting in accordance with this Agreement will fully protect all persons dealing with the Trustee. If there is a disagreement between the Trustee and anyone as to any act or transaction reported in any accounting, the Trustee shall have the right to a settlement of its account by any proper court.
4.05. Benefit Payments. The Trustee shall make distributions of benefits in accordance with the following:
(a) Subject to paragraph 4.05(b), the Committee shall direct the Trustee in writing to make distributions of benefits from the Trust Fund that have become payable, but that have not been paid by the Company, under the Plans to Participants, including the amount and manner of payment of any such benefit. If a payment required under the terms of the Plans has not been made to a Participant (whether due to the failure of the Committee to notify the Trustee as required by this paragraph or otherwise), then the Participant may notify the Trustee in writing of the amount (or a reasonable estimate of the amount) owed to him/her pursuant to the Plans, and the date or dates such amount was due and payable. The Trustee shall notify the Committee and the Company in writing within fifteen (15) calendar days of the receipt of such payment request. If the Committee or the Company does not provide the Trustee with a written statement, in the form acceptable to the Trustee, of the amount due and payable within sixty (60) days of the date of the notice from the Trustee to the Committee and the Company of the payment request, the Trustee shall make the payment or payments requested by the Participant from the Trust Fund and may conclusively rely on such payment or payments being the appropriate amount. The Trustee shall also notify the Committee and the Company in writing of any such payments. Payment shall be made to a Participant from the Trust Fund. If the Committee or Company thereafter provides the Trustee a statement of the amount due and payable to any such Participant, an appropriate adjustment in the amount paid and to be paid to the Participant shall be made to the extent necessary. The Trustee shall be fully protected in acting without Committee direction under this paragraph and shall be indemnified and saved harmless as provided in paragraph 4.08. The Trustee shall make such distributions from the Trust Fund in accordance with the provisions of this paragraph 4.05(a), subject to the provisions of Article V. If Trust assets are not sufficient to pay the benefits from the Plans, the Company shall make the balance of each such payment when due.
(b) Notwithstanding paragraph 4.05(a), prior to or promptly upon the occurrence of a Change of Control (as defined in the Plans), the Company shall appoint an independent third party consultant or consulting firm (referred to herein as a "Benefits Consultant") which shall have the authority to determine the amount and manner of payment of benefits pursuant to the terms of the Plans and the Trustee shall be obligated to make distributions of benefits in conformity with such Benefit Consultant's determination. Following a Change of Control, the designated Benefits Consultant may be removed and a new Benefits Consultant appointed by action of the Chief Executive Officer of the Company serving in that capacity immediately prior to such Change of Control.
4.06. Missing Persons. If any payment directed to be made by the Trustee from the
Trust Fund is not claimed by the person entitled thereto, the Trustee shall notify the Committee of that fact and shall dispose of the distribution as the Committee or its designee shall direct. Neither the Company, the Committee nor the Trustee shall have any obligation to search for or ascertain the whereabouts of any payee under this Trust.
4.07. Liabilities Mutually Exclusive. The Company, the Trustee, the Committee and each member thereof shall be responsible only for their own acts or omissions.
4.08. Indemnification. To the extent permitted by law, neither the Trustee, any present or former Committee member, nor any person who is or was a director, officer, or employee of the Company, shall be personally liable for any act done, or omitted to be done, in good faith in the administration of this Trust. Any person to whom the Committee or the Company has delegated any portion of its responsibilities under the Trust, any person who is or was a director or officer of the Company, members and former members of the Committee, and each of them, shall, to the extent permitted by law, be indemnified and saved harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with respect to this Trust) from and against any and all liability or claim of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in connection with the administration of the Trust or the investment of the Trust Fund, including all expenses reasonably incurred in their defense if the Company fails to provide such defense after having been requested to do so in writing. The Company (which has the authority to do so under the laws of its state of incorporation) shall indemnify The Northern Trust Company, and defend it and hold it harmless from and against any and all liabilities, losses, claims, suits or expenses (including attorney's fees) of whatsoever kind and nature which may be imposed upon, asserted against or incurred by it at any time (1) by reason of its carrying out its responsibilities or providing services under this Agreement, or its status as Trustee, or by reason of any act or failure to act under the Agreement, except to the extent that any such liability, loss, claim, suit or expense arises from the Trustee's negligence or willful misconduct or breach of its responsibilities allocated to it by the terms of this Agreement or (2) by reason of the Trust's failure to qualify as a grantor trust under the IRS grantor trust rules or the Plan's failure to qualify as an excess benefit or top-hat plan exempt from all or Parts 2, 3, and 4 of Title I of the Employee Retirement Income Security Act, as amended ("ERISA"). This paragraph shall survive the termination of this Agreement.
4.09. Compensation and Expenses. All reasonable costs, charges and expenses incurred by the Trustee pursuant to subparagraph 2.02(g) shall be paid from the Trust Fund to the extent not paid by the Company, and all other reasonable compensation, costs, charges and expenses incurred in the administration of this Trust, as agreed upon between the Committee and the Trustee, will, to the extent not paid by the Company be paid from the Trust Fund.
4.10. Action by the Company. Any action with respect to this Trust required or permitted to be taken by the Company shall be by resolution of its Board of Directors, by a duly authorized committee of its Board of Directors, or by written direction of a person or persons authorized by resolution of its Board of Directors or such committee. The Trustee may rely upon a resolution or direction filed with the Trustee and shall no responsibility for any action taken by the Trustee in accordance with any such resolution or direction.
4.11. Warranty. The Company warrants that all directions or authorizations by the Committee, whether for the payment of money or otherwise, will comply with the provisions of the Plans and this Trust.
4.12. Evidence. Evidence required of anyone under this Agreement shall be signed, made or presented by the proper party or parties and may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable.
4.13. Waiver of Notice. Any notice required under this Agreement may be waived in writing by the person entitled to such notice.
4.14. Counterparts. This Agreement may be executed in two or more counterparts, any one of which will be an original without reference to the others.
4.15. Gender and Number. Where the context admits, words denoting the masculine gender shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular.
4.16. Scope of this Agreement. The Plans and this Trust will be binding on all persons entitled to benefits hereunder and their respective heirs and legal representatives, and upon the Company, the Committee, the Trustee (with respect to the Trust only), and their successors and assigns.
4.17. Severability. If any provision of this Agreement is held to be illegal or invalid, such illegality or invalidity shall not affect the remaining provisions of this Agreement, and they shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
4.18. Statutory References. Any references to this Agreement to a section of the Internal Revenue Code or the Employee Retirement Income Security Act shall include any comparable section or sections of any future legislation that amends, supplements or supersedes that section.
4.19. Applicable Law. The Trust shall be construed in accordance with the laws of the State of Missouri.
ARTICLE V
INSOLVENCY
5.01. Insolvency. The Company or Participating Affiliate shall be considered "Insolvent" for purposes of this Trust if the Company's or Participating Affiliate's debts are not paid as they mature or if its affairs become the subject of reorganization or liquidation proceedings as a debtor under federal bankruptcy laws.
5.02. Payments During Insolvency. At all times during the existence of this Trust, assets and rights of the Trust shall be subject to the claims of the Company's or Participating Affiliate's general creditors. Therefore, if the Trustee knows that the Company or Participating Affiliate is Insolvent (as defined in paragraph 5.01), the Trustee shall discontinue benefit payments that otherwise would be paid and will deliver or otherwise make available assets of the Trust to satisfy the claims of the Company's or Participating Affiliate's creditors as directed by a court of competent jurisdiction. If the Company or Participating Affiliate becomes Insolvent, its Board of Directors and its Chief Executive Officer shall have the duty to promptly inform the Trustee of the Company's or Participating Affiliate's Insolvency. The Committee shall have the same duty if and when it becomes aware that the Company or Participating Affiliate has become Insolvent or upon an inquiry of the Company's or Participating Affiliate's solvency by the Trustee. Participants shall not be granted greater rights to the Trust Fund by virtue of their rights under the Plans than other general creditors of the Company or Participating Affiliate, but no provision of the Trust shall diminish the rights of a Participant to pursue his/her rights as a general creditor of the Company or Participating Affiliate with respect to any benefits he/she is entitled to under the Plans, or otherwise. The Trustee shall resume payments of benefits in accordance with this Trust Agreement after the Trustee has been notified by the Board of Directors or the Chief Executive Officer of the Company that the Company or Participating Affiliate is no longer Insolvent.
5.03. Trustee's Reliance. Unless the Trustee has actual knowledge of the Company's or Participating Affiliate's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that the Company or Participating Affiliate is Insolvent, the Trustee shall have no duty to inquire whether the Company or Participating Affiliate is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's or Participating Affiliate's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. In no event shall "actual knowledge" be deemed to include knowledge of Company's or Participating Affiliate's credit status held by banking officers or banking employees of The Northern Trust Company which has not been communicated to the administrative staff assigned to the Trust. The Trustee may appoint an independent accounting, consulting or law firm to make any determination of solvency required by the Trustee under this Article V. In such event, the Trustee may conclusively rely upon the determination by such firm and shall be responsible only for the prudent selection of such firm.
ARTICLE VI
RESIGNATION OR REMOVAL OF TRUSTEE
6.01. Resignation or Removal of Trustee. The Trustee may resign at any time by giving sixty (60) days advance written notice to the Company and the Committee. The Company or the Committee may remove the Trustee; provided that such removal shall not become effective until the time immediately proceeding the appointment of a successor Trustee pursuant to paragraph 6.02; and provided further that in the event of a Change of Control (as defined in the Plans), the Trustee may only be removed by action of the Chief Executive Officer of Company employed in the capacity immediately prior to such Change of Control, by giving sixty (60) days advance written notice to the Trustee or such shorter notice accepted by the Trustee.
6.02. Successor Trustees. In the event of the resignation or removal of the Trustee, a successor Trustee shall be appointed by the Company or the Committee in writing as soon as practicable. Written notice of such appointment shall be given by the Company or the Committee to the predecessor Trustee. If no such appointment has been made by the effective date of the resignation or removal of the Trustee, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust and paid from the Trust if not paid by the Company.
6.03. Duties of Predecessor Trustee and Successor Trustee. A Trustee that resigns or is removed shall furnish to the Committee and the successor Trustee a final account of its administration of the Trust in accordance with Section 2.02(j). A successor Trustee shall succeed to the right and title of the predecessor Trustee in the assets of the Trust Fund and the predecessor Trustee shall deliver the property comprising the Trust Fund to the successor Trustee together with any instruments of transfer, conveyance, assignment and further assurances as the successor Trustee may reasonably require. Each successor Trustee shall have all the powers, rights and duties conferred by this Agreement as if named the initial Trustee. No successor Trustee shall be personally liable for any act or failure to act of a predecessor Trustee.
ARTICLE VII
AMENDMENT AND TERMINATION
7.01. Amendment. This Trust may be amended from time to time by the Company, except as follows:
(a) The duties and liabilities of the Committee and the Trustee under this Agreement cannot be changed without their consent.
(b) Under no condition shall any amendment result in the return or repayment to the Company of any portion of the Trust Fund or the income therefrom except to the extent permitted under paragraph 4.01, or result in the distribution of the Trust Fund for any purposes other than payment of obligations of the Company to its creditors, including Participants.
(c) This Trust may not be amended so as to cause the reduction or cessation of any benefits a Participant would receive under the terms of the Plans nor may the Trust be amended to make the Trust revocable.
7.02. Termination. This Trust shall not terminate, and all rights, titles, powers, duties, discretions and immunities on or reserved to the Trustee, the Company and the Committee shall continue in effect with respect to the Trust, until all benefits payable to Participants under the Plans have been paid or there are no longer any assets held in the Trust. Notwithstanding any other provision of this Trust, the Trust shall terminate one day prior to the expiration of a period of twenty-one (21) years after the death of the last to die of employees of the Company who are Participants in the Plans on the day and year first above written. Upon termination of the Trust, any assets remaining in the Trust shall be returned to the Company and its Participating Affiliates, except that any assets (including company stock) contributed by UtiliCorp United Inc. to the Trust for the benefit of employees or service providers of any its participating affiliates shall revert exclusively to UtiliCorp United Inc., all as directed by the Company.
IN WITNESS WHEREOF, the Company and the Trustee have caused this Agreement to be executed on their behalf and by their respective officers thereunto duly authorized, as of the day and year first above written.
ATTEST/WITNESS |
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UtiliCorp United Inc. |
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By: |
/s/ RANDAL MILLER Print Name: Randal Miller Its: Vice President Finance and Treasurer |
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The Northern Trust Company |
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By: |
/s/ CAROL F. RANSOM Print Name: Carol F. Ransom Its: Vice President |
Aquila, Inc.
Chief Executive Officer
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Richard C. Green, Jr., certify that, to my knowledge:
Dated: November 13, 2002
/s/
RICHARD C. GREEN, JR.
Richard C. Green, Jr. Chairman, President and Chief Executive Officer Aquila, Inc. |
Aquila, Inc.
Chief Financial Officer
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Dan Streek, certify that, to my knowledge:
Dated: November 13, 2002
/s/
DAN STREEK
Dan Streek Chief Financial Officer Aquila, Inc. |