Forum Archive Index - September 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Hans,

 
>
>As an alternative strategy, I sold my UNL shortly after the sale was
>announced and bought Aquila (US:ILA) in the US at $2.41. They last
>traded at $3.83. 
>
>


It is good to see people thinking outside the square in this forum.  
That is certainly a novel way to approach things Hans


>
>
>I missed out on a bit with the UNL shares, but have
>gained a lot more on the ILA. {The sale of}
>(which I expect to be of shares in UNL not the assets of UNL),
>
>


Even if Aquila sell the shares and not the assets, small shareholders 
will not lose out.  This is because someone else will have to buy the 
shares.  If the company that does the buying buys the Auckland 
network as one unit then this will mean bidding for over 20% of UNL.  
 Effectively this 'buying' company will go over the trigger threshold 
for making a full bid, and will have to make an equivalent offer to 
small shareholders.

Thanks to our takeover code, I don't think there is any way small UNL
shareholders can lose out in the Aquila sell off, however it is 
handled. 


>
>Following the announcement of a sale
>Aquila's liquidity problems will be well sorted out. I'm not sure
>how they account for their UNL stake but if they consolidate
>everything as you would expect, then the Aquila balance sheet should
>look a lot better after the sale 
>


Hmmm, I don't like the logic of this bit.   You say that the Aquila 
debt 'should' be well sorted, yet you aren't even sure if the UNL 
debt is even consolidated into the balance sheet?   Because Aquila 
own something like 75% of UNL I do think your assumption is correct 
though, in this instance.

>
>then the Aquila balance sheet should look a lot better after the 
>sale because UNL trades at a very high price/NTA ratio and has quite 
>a lot of debt in its own right. When I
> last calculated it, Aquila should get in the range of US$475m in
> cash, lose about 10% of that in assets, and lose their share of
> UNL's debt from their own balance sheet.
> 
>

I don't follow the logic in this bit Hans. 

What does the fact that UNL 'trades at a high price to NTA ratio' 
have to do with the Aquila balance sheet?  Isn't it the price Aquila 
get for the shares, regardless of asset backing, that matters?

What does the fact that UNL has quite a lot of debt in its own right 
have to do with it?   Isn't the important fact the amount of debt 
that is consolidated into the Aquila accounts in total, *relative* to 
the consolidated UNL debt?

According to your reference Aquila had $US9,396.7m in debt as at 
December 31st 2001.   If your figure of $US475mm comes off that, then 
debt goes down to $US8,921.7m.  Moving in the right direction, but I 
wouldn't call it very significant.

>
>
>Remember that Aquila used to be safe boring old Utilicorp from
>Kansas, power lines and gas pipes, with a share price of around $30,
>which is where they want to get back to. They have obviously lost
>some value and credibility that with the foray into energy trading (
>a write down of $5 odd per share) but there is clearly a lot of room
>for upside, 
>
>

You said it yourself Hans, 'used to be'.

Far from still being a safe boring company, Aquila is now a heavily 
indebted critical patient with plunging asset values in intensive 
care.  Last week Moody's Investors Service downgraded the energy 
company to junk status. That meant the company has to come up with 
$192 million to cover financial triggers tied to its credit ratings.  

An S&P downgrade to junk status would have triggered  another $292 
million of payments, which would wipe out all of the proceeds of the 
sale of it's New Zealnd investments for this year for no gain and 
create an ongoing liability of that magnitude ad-infinitum!   With an 
equity to debt ratio of only 21%, Aquila have no room to move.  The 
dividend has been slashed.  Aquila looks to me like a desperately sick 
company.  But I guess when you are teetering on the brink of Chapter 
11 bankruptcy you are right Hank, in that the only way to go, and 
survive, is up!  If you are going to hang out for $30 per share 
though, you might have to get your grandchild's grandchild to do the 
selling for you.

>
>
>certainly more than you could reasonably expect to get
>from hanging onto UNL.
> 
>

But you also have a far greater chance of hanging onto your money by 
sticking with UNL.  The play for UNL is in the end game.  I'd still 
say hang on to see what comes out of it.  UNL is a low risk yield 
investment.   To suggest that it should be swapped for a no yield 
highly leveraged investment in the US is something I can't agree 
with, unless the UNL shares you own are only 'play money' (it 
wouldn't bother you if you lost the lot).  

Nevertheless if you pick a recovery stock like hopefully Aquila might 
be, and get the timing right then you can make a killing.   All the 
best for your own investment Hank and good on you for doing well so 
far.   But I don't think your strategy is the type of thing that a 
UNL investor who holds his shares for income should contemplate.

SNOOPY



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