Roxane Richter, Energy Marketing Editor
Amid much Kansas City-bred hoopla and press paparazzi, Aquila Energy Inc. unveiled its spacious new 22,000-square-foot trading floor last month, along with ambitious plans for growth in e-business and broadband trading.
Kevin Fox, senior vice president & general manager, Commodity Services Group for Aquila Energy, spoke with civic leaders, media and customers on Aquila’s trading floor.
A wholly owned subsidiary of UtiliCorp United (NYSE:UCU), Aquila Energy in 1999 ranked as the second-largest wholesaler of electricity and third-largest wholesaler of natural gas in North America. Today, the company completes about 20,000 transactions a month-about $60,000 dollars in business every minute. And, if Aquila continues on its current record-breaking rate of 140 percent profit increase, it will best its six-month performance of $83.7 million on sales of $9.5 billion.
“Aquila is our fastest-growing business unit,” said Robert K. Green, president and chief operating officer of parent company, UtiliCorp United. “For the first two quarters of this year, Aquila has turned in record financial results. We’ve also committed to an initial investment of $50 million to develop our e-business portfolio, including an interactive Web site for our GuaranteedWeather product line and an ongoing effort to create an Internet trading platform for natural gas, electric power and other related energy commodities.”
But when strategic push came to fiscal shove, Green revealed that Utilicorp attained its cash-healthy position via three key objectives: “Our important steps were a move into power trading that leverages our position in the natural gas marketing and trading businessellipsethen expanding that into capital and actuarial products like Guaranteed Generationellipseand finally, and most recently, our initiative to Web-enable the entire business and move away from phones and faxes to develop a trading platform with this consortium and to conduct Aquila’s business through the Internet.”
Recognized among the top risk management companies in energy today, Aquila continues to pursue a growing portion of the emerging weather risk market pie.
‘Come Rain or Shine’
Weather risk gurus alongside Enron, Southern Company and Koch, Aquila is among the top market makers in the estimated $2 billion to $3 billion dollar weather derivatives market.
“In weather, what’s changed for the better are people’s expectations. They’re beginning to see that weather is not going to be like gas or power,” explained Wholesale Weather Portfolio Manager Ravi Nathan, “It’s like the story of four blind guys who are feeling around an elephant-everyone sees something different. It’s the same story. The commodity guy looks at the weather business and he sees commodity trading; the insurance people look at the business and he sees an insurance contract. But this is a very different product and must be treated very differently.”
During the opening of its new trading floor, the company also announced the beginning of a contest offering $300,000 in prizes over three years to a forecasting firm or forecaster that most accurately predicts weather variables in summer and winter periods in 13 cities. A $50,000 prize is to be awarded for the two best forecasts each year.
But rather than just giving money away, Aquila continues to pursue other emerging and converging industry moneymakers.
The fatted cash cow
Aquila officials also revealed that the most promising “cash cow” on its fiscal horizon is one of its new businesses: trading bandwidth. The huge market-estimates run anywhere from double the U.S. power market to six times that number worldwide-will be traded much like capacity on pipes and wires. According to Sushil Nelson, senior vice president, general manager and head of Aquila’s newly formed broadband services group, the bandwidth market could, in a few short years, dwarf the $20 billion wholesale electricity market.
“Power was bigger than gas. Bandwidth, conceptually, will be much larger than power because you can transport it globally. If you look at the rate of bandwidth demand and supply growth, it will quickly outstrip energy,” Utilicorp’s Green explained, “In the trading of bandwidth, much like the trading of natural gas, you need to own capacity on fiber. But you don’t necessarily need to buy the company to get the capacity on the fiber.” Green added that analysts believe the U.S. will invest $250 billion in fiber networking in order to bring about “the information utility for the information age.”
To solidify its presence in broadband, Utilicorp is forging a strategic partnership with Houston-based Quanta Services, a constructor of fiber networks. (Quanta’s 1999 revenues burst the coffers at $1.1 billion, boasting an internal growth rate 40 percent. To date, Utilicorp owns 36 percent of the company and has three seats on the board; in return the fiber constructor will “build out” the company’s broadband network. Positioning itself a tad differently than Enron and other energy companies making a foray into bandwidth, Green explained that Utilicorp is doing “an ‘asset-light’ approach as we build out the business, where we’ll contractually control capacity on fiber.”
As for the company’s smartest venture to date? Well, according to Green, the company made its first investment, a $650 million fiscal dip, in Quanta in September of last year. “It’s worth double than that now,” he revealed with a smile.
And so apparently, Aquila’s creation, implementation (and most importantly) disciplined adherence to its high-tech science of risk management favorably “stacks the deck” in favor of energy gambles.