Executive Compensation at Aquila

Executive Compensation at AquilaGroup 9

Brief History of Aquila1908 - Lemuel Green purchased electric generator for his mill in Osbourne, Kansas and sold excess power to surrounding community1917 - Given to his liking to utility business, built a generator in Pleasant Hill, Missouri that became Missouri Public Services1940 - Lemuel's son Ralph bought the controlling interest in Missouri Public Services to become its CEO1962 - Ralph's son Richard became the CEO upon Ralph's death1982 - Upon Richard's death, Richard Jr. became the CEO who had to steer the business through challenging times of high interest rates, rising inflation, high utility prices and regulators adversity1985 - Revenues of $260 million and served 200,000 electric and gas customers in western Missouri

Expansion for Regional DiversificationIn order to transform the company from state-specific utility to one with broader ambitions, Green purchased few companies and changed the name of Missouri Public Service to UtiliCorp1985 - Peoples Natural Gas with operations in five Midwestern statesUtilites in Minnesota (1986), West Virginia (1986), British Columbia (1986), Michigan (1987)

Energy Policy Act - 1992The act allowed utility operators to own unregulated power plants outside their monopoly areas and to sell excess energy into the wholesale marketTo grab the growth opportunity, UtiliCorp purchased additional energy assets in Nebraska, Kansas, Missouri, Ohio, Texas and AlabamaAttempt to turn UtiliCorp into the "first truly national utility in the US"Falied investment of $50 million in marketing program called EnergyOne to promote homeowners to choose UtiliCorp as the energy provider

International Expansion1992 - Joint venture to distribute natural gas in UK1993 - Acquired minority interest in a New Zealand utility1995 - Boldest move of taking a 49.9 percent interest in United Energy Limited of AustraliaThis $1.5 billion deal gave UtiliCorp access to over 500,000 consumers, increasing customer base by nearly 40% over 1.2 million customers it served in the US.

2000 - Alongside, in US UtiliCorp purchased 38 percent stake in Quanta Service, a contract provider that dug specialized ditches for laying optic-fiber cables, for $700 million

Through their aggressive approach they expected growth of 8-10 percent from 2-5 percent and had gas and electric operations in seven states providing service to nearly 4 million customers.

Aquila Energy Merchant OperationsIn the mid-1990s UtiliCorp moved beyond the traditional utility model through aggressive growth in trading subsidiary Aquila EnergyEnergy Policy Act and subsequent decisions of Federal Energy Regulatory Commission gave vast opportunities in wholesale energy trading to energy merchants such as AquilaPrices being very volatile in energy trading, utilities hedge their exposure through futures, operations or swaps traded on public exchangesBy 1999, Aquila had grown immensely and had become third largest marketer of both wholesale power and wholesale gasRobert Green, the new chairman of Aquila, conceptualized "asset lite strategy" where Aquila would provide power and natural gas to third-party plantsUnder Robert's leadership, Aquila's growth was explosive and by 2000 revenues had grown by 340 percent to $26.4 billion

Growth & Decline in Energy Trading businessUnder Robert's leadership, Aquila's growth was explosive and by 2000 revenues had grown by 340 percent to $26.4 billionIn March 2002, the company changed its name from UtiliCorp to Aquila to emphasize its commitment to energy trading.Robert Green, as a reward for repositioning Aquila as a major player in the energy trading industry, would be awarded discretionary bonus of $4.5 million, comprising $3 million of cash and $1.5 million of restricted stock.With weakening US economy, energy demand plummeted.

To retain adequate working capital company took following steps:- Cut costs by $100 million- Sell over $1 billion in assets, majorly international energy assets.- Eliminate 1100 jobs or 15% of its workforce including 150 traders in European trading.- 42 percent reduction in annual dividend from $1.2 to $0.70 per share.

Exit of Robert GreenRobert finally decided to concentrate on restoring its core utility business.In August 2002 after a second quarter loss of $810 million, Aquila decided to completely exit wholesale energy trading business. It was eventually graded down to junk status of BA2 by Moody.Robert Green resigned in October and Richard Green took his place to substantially reduce the scale and scope of the business.Aquila aggressively sold its assets to raise capital including utilities and gas systems in Texas, Canada, UK, Australia, and New Zealand.Aqila stock that was prices at $25 when Robert took as CEO just 10 months ago had crashed down to $2.

Robert Green Severance AgreementRobert Green had been CEO of Aquila for just 3 monthsAs per the agreement, Robert Green was supposed to receive $7.6 million as severance benefits which received intense flak from shareholdersCompensation would include 3 times his base salary + average annual incentive value paid over the past 3 yearsThe compensation was said to be appropriately reviewed and benchmarked against 15 other companies in the same industryIt was said the Robert was responsible for huge profits but had no control over the collapse of Aquilas energy trading operations

Implications of Aquila FailureInvestors were not satisfied with the kind of compensation provided to Robert as per severance agreementStaff was furious as they were not sure about their future in the company whereas exiting CEO was receiving huge amount of compensationDecline in compensation as company returned to traditional utility based model Between 2002 and 2004 company did not pay any bonuses and held disastrous financial results accountable for the same.In 2005 the company paid bonuses to executives in the multiples of their salary stating retention of executive officers as the motive behind it.

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