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May 18, 2005.

AQUILA, INC., Defendant.

The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge


Defendant Aquila, Inc. ("Aquila" or the "Borrower") has moved under Rule 12(b) (6), Fed.R.Civ.P., to dismiss the complaint of plaintiffs Citadel Equity Fund Ltd. and Citadel Credit Trading Ltd. (collectively, "the Citadel Funds"), which seeks to enforce a particular prepayment premium under a credit agreement entered into by Aquila. For the reasons set forth below, the motion is granted.

At issue is the $27 million prepayment amount sought by the Citadel Funds on behalf of certain of Aquila's creditors and the differing interpretations of the carefully negotiated credit agreement under which Aquila obtained approximately $430 million of financing. The parties are sophisticated and well advised. This dispute demonstrates that the disposition of substantial sums of money can result in surprisingly different views of the most carefully contemplated contract.

  The Parties

  Aquila is a Missouri-based corporation that operates electricity and natural gas distribution utilities and owns and operates power generation assets. In April 2003, Aquila entered into a credit agreement pursuant to which a syndicate of lenders extended $430 million in credit to Aquila, apparently in the form of term loans and letters of credit (the "Credit Agreement" and the "Loans").

  The Citadel Funds are private investment funds, both Cayman Island entities. The Citadel Funds hold $62,826,095.22 of loans subject to the Credit Agreement.

  Prior Proceedings

  The Citadel Funds' complaint was filed on October 15, 2004. The first two counts allege breach of contract, and the third count seeks a declaratory judgment that, pursuant to the Credit Agreement, they are entitled to a pro rata share of funds currently held in escrow. Aquila's motion to dismiss the complaint was heard and marked fully submitted on February 4, 2005.

  The Facts

  The following facts are drawn from the complaint, which includes "any documents incorporated in it by reference, annexed to it as an exhibit, or `integral' to it because it `relies heavily upon [such document's] terms and effect.'" Pollock v. Ridge, 310 F. Supp. 2d 519, 524 (W.D.N.Y. 2004) (quoting Chambers v. Time Warner, Inc., 282 F. 3d 147, 153 (2d Cir. 2002) (internal quotations omitted)). All well-pleaded allegations are accepted as true for the purpose of this motion. See Chambers, 282 F.3d at 152. The following statements do not constitute findings of the Court.

  A. The Credit Agreement

  On or about April 9, 2003, Aquila entered into the Credit Agreement with a syndicate of lenders. This Agreement provided credit to Aquila in the form of term loans and letters of credit in an aggregate principal amount not in excess of $430,000,000. The Credit Agreement was negotiated by Credit Suisse First Boston ("CSFB") as the administrative agent of the credit facility.*fn1 The scheduled maturity date of the loans under the Credit Agreement was May 15, 2006.

  At the time Aquila entered into the Credit Agreement, it had debt obligations with preexisting creditors. In particular, Aquila owed $250 million under a series of 7.00% Senior Notes (the "7.00% Senior Notes") due on July 15, 2004, and it owed $150 million under a series of 6.875% Senior Notes (the "6.875% Senior Notes") due on October 1, 2004 (collectively, the "Senior Notes").

  The Credit Agreement required Aquila to prepay its obligations pursuant to the Credit Agreement if it failed to take specified actions relating to timely payment of the Senior Notes. Specifically, Section 2.7(d) of the Credit Agreement, entitled "SPECIAL MANDATORY PREPAYMENT," provided in pertinent part as follows:
If (a) the Borrower does not consummate an exchange offer, tender offer, refinancing or otherwise consummate retirement transactions with respect to, or otherwise economically or legally defease (i) at least 80% in aggregate principal amount outstanding on March 21, 2003 of the 7.00% Senior Notes on or before July 1, 2004 or (ii) at least 80% in aggregate principal amount outstanding on March 21, 2003 of the 6.875% Senior Notes on or before September 15, 2004, . . . then . . . the Loans shall become due and payable in full on July 1, 2004 or September 15, 2004, as applicable. . . .
(Compl. Ex. A at 40.)

  In the event that mandatory prepayment was triggered pursuant to Section 2.7(d), Aquila was required to pay a fee equivalent to "two percent (2%) of the aggregate principal amount of the Loans and the Total Credit-Linked Deposits then outstanding." (Id.) Section 2.7(d) further provided that "[n]o other Make Whole Premium [would] be due as a result of such mandatory prepayment." (Id.)

  According to Citadel, the purpose of Section 2.7(d) was to protect the lenders against the risk that Aquila would fail to pay, refinance, retire, or otherwise defease the Senior Notes in a timely manner. Citadel and the other lenders had an interest in seeing that Aquila met its obligations under the Senior Notes in order to protect the lenders from a cross-default that could interfere with their economic interest in the outstanding loans under the Credit Agreement.

  Pursuant to Section 9.1 of the Credit Agreement, Aquila's lenders had the power to waive the requirements imposed on Aquila pursuant to Section 2.7(d). Entitled "AMENDMENTS AND WAIVERS," Section 9.1 provides in pertinent part as follows:
The Required Lenders*fn2 may, . . . from time to time, (a) enter into with [Aquila] written amendments, supplements or modifications hereto for the purpose of adding any provisions to this Agreement or changing in any manner the rights of the Lenders or [Aquila] hereunder, . . . or (c) waive . . . any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; PROVIDED that no such waiver . . . (i) shall reduce the principal amount or extend the scheduled date of maturity of the Loan or [Letter of Credit] Disbursement of any Lender or of any installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitment, in each case, without the consent of such Lender. . . .
(Id. Ex. A at 81.)
  The Credit Agreement also contained a term governing Aquila's obligations in the event that it opted to voluntarily prepay its loan obligations. Entitled "OPTIONAL PREPAYMENT," Section 2.7(a) of the Credit Agreement provided in pertinent part as follows:
The Borrower may, at any time and from time to time prepay the Loans or direct the Administrative Agent to reduce the then unused portion of the Total Credit-Linked Deposits, upon at least three Business Days' irrevocable written notice, to the Administrative Agent. . . . If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with the Make-Whole Premium, if any, due with respect thereto.
(Id. Ex. A at 36.)

  Pursuant to Section 2.7(a), if Aquila opted to effect optional prepayment, it was required to pay a "Make Whole Premium." (Id.) Pursuant to Section 1.1 of the Credit Agreement, the Section 2.7(a) Make Whole Premium was calculated as the discounted present value of the remaining principal and interest payments owing under the Credit Agreement through the maturity date less the amount of the principal being repaid. (See id. Ex. A at 18.)

  B. The Events Giving Rise To The Dispute

  In the quarterly financial statement*fn3 signed by its chief financial officer on August 4, 2004, Aquila stated that on June 30, 2004, it had irrevocably deposited $258.8 million with the trustee for the 7.00% Senior Notes due on July 15, 2004, thereby economically defeasing this obligation. (See Aquila Inc. Form 10-Q for the Quarterly Period ended June 30, 2004 ("the June 30, 2004 10-Q"), at 18.) Aquila further stated that the 7.00% Senior Notes were retired on July 15, 2004. (See id.)

  On or about August 2, 2004, Aquila initiated two securities offerings, one involving shares of common stock and the other involving premium equity securities (PIES). In an August 18, 2004 supplement to the prospectus for the common stock offering, Aquila stated that it "intend[ed] to use the net proceeds from this offering and our concurrent offering of the PIES to . . . fund the retirement of the $250.0 million of 7.00% senior ...

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