Aquila, FirstEnergy Try To Save UK Deal

The sale hinges on whether Aquila can persuade FirstEnergy to reduce a 95 million pound debt, deferred from when Aquila purchased its Midlands interest from FirstEnergy and payable if Midlands is sold, the sources said.

"There has been an issue between the shareholders about the deferred payment... That needs to be sorted before a deal can be executed," said one source close to the talks.

Aquila initiated the sale of Midlands as part of a plan to raise $1 billion through asset sales. Scottish & Southern Energy, Malaysian YTL Corp and Australia's Macquarie Bank are all vying for Midlands, the sources said.

Midlands has an enterprise value of around 1.2 billion pounds ($1.93 billion) but its high debt means Aquila is unlikely to get above $70 million for its 79 per cent stake in Midlands holding company Avon Energy, bankers said.

In August 2002, Aquila chief executive Robert Green said he expected the sale of Midlands to take Aquila beyond its $1 billion target but if Aquila cannot renegotiate the debt, the sale of Midlands could drain rather than raise cash.

"(Paying the full $95 million) would be quite painful for them and they are very much trying to avoid that," said another source close to the Midlands sale process.

Spokespeople for both Aquila and FirstEnergy would not comment on details of the negotiations but said they were continuing to work toward a sale of Midlands.

When it bought its Avon Energy stake in March 2002, Aquila paid $150 million up front and agreed to make six future annual payments of $19 million to FirstEnergy.

The deferred nature of the payment was not announced at the time of the deal but Aquila later disclosed the obligations in an SEC filing.

The sources close to the deal said failure to agree a compromise on the outstanding $95 million due could scupper the Midlands sale altogether but that so far talks with bidders on the sale had not yet been terminated.