Kansas
seal of the State of Kansas  
Citizens' Utility Ratepayer Board (CURB)

Press Release

December 19, 2007

CURB Raises Objections to Terms of Aquila Sale

CURB recently filed testimony with the KCC, recommending that the Commission reject Black Hills Corporation's proposal to purchase Aquila's gas utility properties in Kansas, and recommending that the Commission suspend consideration of KCPL's proposed purchase of Aquila's Missouri electric utility until the parties have had an opportunity to review upcoming revisions of the proposal that the Applicants plan to file in January.

CURB's accounting witness, Andrea Crane, stated that Aquila and Black Hills "have not demonstrated that the proposed acquisition . . . is in the public interest." She found that most of the supposed "benefits" of the $940 million transaction identified by the Applicants were simply "factors that support a finding that customers will be no worse off" if Black Hills acquires Aquila.

Crane opposes Black Hills' proposal that customers pay for 50% of the $48.5 million acquisition premium. An acquisition premium is the amount paid for a utility over and above the book value of the utility's assets. Utilities often claim that mergers result in operational synergies that reduce costs sufficiently to justify paying the premium. Crane emphasized that any claims of operational synergies that might accrue as the result of a merger of Black Hills' and Aquila's operations is entirely speculative.

Purchase of the Aquila properties will transform Black Hills' retail utility operations from a small operation that serves customers in three states to a large operation that serves customers in seven states. Black Hills and its subsidiaries currently serve only 33,000 retail gas customers in and around Cheyenne, Wyoming, and a total of 104,000 retail electric customers in South Dakota, Wyoming and Montana. In addition to purchasing the 106,000 customers of Aquila's Kansas gas utility, Black Hills will be acquiring 404,000 Aquila gas customers in Colorado, Iowa and Nebraska—plus 92,000 electric customers in Colorado.

Increasing its number of gas customers by more than tenfold over a wide geographical area is a massive undertaking for Black Hills. Add in the new electric customers, and Black Hills will more than quadruple its total number of customers. Regardless of Black Hills' assurances that it is well-qualified to operate Aquila's utilities, the acquisition is an ambitious undertaking that will transform Black Hills from a small regional utility that serves mostly electric customers to a large utility that serves mostly gas customers. Black Hills' ability to efficiently operate such a large, widespread operation is untested, as yet. Asking the ratepayers to fund an acquisition premium on the basis of speculation that Aquila will experience operational savings as a result of the purchase by Black Hills is simply not good policy.

Crane also expressed her reservations about the proposed purchase of Aquila's Missouri electric utility by the parent company of Kansas City Power and Light, Great Plains Energy. Of greatest concern is the fact that Aquila's shaky financial condition will negatively impact GPE's, to the detriment of KCPL's retail customers. The merger will increase KCPL's customer base from approximately 500,000 customers to 800,000, creating another concern for how KCPL will allocate corporate costs among Kansas and Missouri customers.

Of further concern is that KCPL's expenditure for Aquila's electric utility was not anticipated by the five-year regulatory plan, which was designed by Missouri and Kansas regulators to provide KCPL regulatory certainty during a period of aggressive construction of a new plant. Crane recommends that the Commission rescind provisions of the regulatory plan that required ratepayers to advance funds to KCPL to maintain its credit rating during the construction so that its debt costs remained reasonable during a time of heavy borrowing for construction. Crane pointed out that the regulatory plan was not intended to provide KCPL a good credit rating so that it could afford to purchase a financially-troubled utility, and noted that the KCC could revise the plan or rescind it altogether, based on the changed circumstances brought about by the proposed merger.

Crane also recommends rejecting KCPL's request for $130 million from ratepayers identified as "shareholder savings," and for $95 million in transaction costs. She said granting the company's request would guarantee that all of the risk of the transaction would be shifted from shareholders to ratepayers, without any guarantee that KCPL's customers would benefit from the transaction.

Crane noted that a recent suspension of the approval proceedings in Missouri prompted KCPL and Aquila to announce that they would be submitting a revised proposal to Missouri regulators in January. She recommended that the KCC also suspend its consideration of the acquisition until the parties have had an opportunity to review the new proposal.

The KCC will conduct an evidentiary hearing on the applications beginning January 22, 2008, at 9:00 a.m. The hearing will be held on the first floor hearing room at the KCC's Topeka office, located at 1500 S.W. Arrowhead Road, Topeka, Kansas. At this hearing KCC Staff, CURB, Aquila, Black Hills, GPE, KCPL, and any intervening parties will present testimony to the Commissioners. The KCC is expected to decide before the end of the first quarter of 2008.

The KCC will accept written comments from the public regarding these dockets through January 15, 2008. Comments regarding the sale of Aquila's Kansas gas utility should refer to KCC Docket No. 07-BHCG-1063-ACQ. Comments regarding the impact to KCPL's Kansas electric utility customers regarding the sale of Aquila's Missouri electric utility to GPE should refer to Docket No. 07-KCPE-1064-ACQ. Comments can be sent to the KCC office of Public Affairs, 1500 SW Arrowhead Road, Topeka, Kansas 66604-4027 or e-mailed to . Additional information about the case may be obtained by calling the KCC Office of Public Affairs at 1-800-662-0027 or through the KCC home page at http://kcc.ks.gov/ under the Docket Filings heading.

The KCC will conduct three public hearings regarding this case at the following places and dates:

January 8, 2008
7:00 p.m.
Hilton Wichita Airport Executive Conf. Center, Salon 4
2098 Airport Road
Wichita, Kansas 67209

January 10, 2008
7:00 p.m.
Dodge City Civic Center, VIP Room
2100 First Avenue
Dodge City, Kansas 67801

January 15, 2008
7:00 p.m.
Overland Park City Hall Council Chamber
8500 Santa Fe Drive
Overland Park, Kansas 66212