Aquila Inc. announced an "accelerated repositioning" plan last week that will involve selling some of its utility assets in order to collect funds for an investment program designed to achieve 3-5%/year earnings growth and eventually return the company's credit to investment grade status.
The Kansas City-based company operates utilities in seven states. The utilities under consideration for divestiture are its natural gas operations in Michigan, Minnesota, and Missouri; its electric operations in Colorado and Kansas; and St. Joseph Light & Power in Missouri. It estimates that these assets are worth about $874 million; they serve more than 632,000 customers. The other utilities Aquila operates are electric properties in Missouri (formerly Missouri Public Service) and natural gas properties in Iowa, Nebraska, Kansas and Colorado.
The non-core assets considered for sale include three merchant peaking plants and Everest Connections. The company also plans a settlement of its Elwood tolling contracts. The proceeds from the sale of select utility and non-core assets will be used to retire debt and other liabilities. The company has targeted up to $700 million of debt obligations to pay down.
CEO Richard C. Green noted that over the last two years Aquila has executed more than 30 major initiatives to stabilize its financial condition and improve its utility performance. Among those were the exit from the merchant energy business; the sale of assets and investments in gas storage, gas gathering, telecommunications, independent power generation and international utilities (Australia, Canada, United Kingdom); and the termination of tolling agreements and obligations under several gas supply contracts.
"With these advances, Aquila now has the opportunity to accelerate its repositioning plan, which will significantly improve our credit metrics and increase investment in the years ahead to meet the needs of our customers.
"This accelerated repositioning effort will include the selective divestiture of regulated utility assets to raise funds to further strengthen the company's balance sheet and provide the catalyst for future investment in regulated capital projects."
He said the company has an opportunity to invest in power generation, transmission and electric and natural gas distribution capacity, as well as certain environmental upgrades, all of which could strengthen Aquila's utility business and improve its returns and earnings.
"We believe the incremental investment opportunity is approximately $650 million over the next five years," said Green. "By pursuing this course, our goal is to put Aquila on a clear path to achieve an average annual EBIT growth rate on post-divestiture rate base of 3% to 5% and move further toward investment grade credit metrics."
Green said despite the repositioning, the company intends to remain an integrated, multi-state utility. However, it does plan to consider selling select utility and non-core assets. Its goal is to significantly reduce its debt and strengthen its credit profile in order to gain better access to the capital markets on improved terms, which would allow it to more cost-effectively fund investments in its rate base to meet customer needs.
Through this process it intends to improve operational efficiency and lower earnings variability. It also plans to actively work with regulators and legislators to address rate and fuel cost issues.
"Our decision on whether to sell an asset will be based on a comparison of the value the market offers versus the value we can build by continuing to own and operate that business," Green said.
"Our repositioning plan opens the way for Aquila to make significant, prudent investments in our rate base that can fuel our future growth," he added. "In adopting this strategy, we're encouraged by current trends. There is widespread understanding of the country's need to invest in utility infrastructure. At the same time, financial markets regard this trend as an investment opportunity and increasingly value utilities for their relative earnings stability and growth potential."
Standard & Poor's Ratings Services affirmed Aquila's "B-" corporate credit rating but maintained a negative outlook on the company. As of December 2004, the company had about $2.4 billion in total debt outstanding, including long-term gas contracts.
"The negative outlook may be revised to stable once the executed sale agreements provide evidence that proceeds from planned divestitures will contribute to meaningful debt reduction and improved credit measures," said Standard & Poor's credit analyst Jeanny Silva.
S&P said the ratings reflect the company's "onerous debt burden, nonregulated legacy operations, and marginal, albeit improving, liquidity. These risks outweigh the cash flow stability of the company's regulated utilities. The negative outlook on Aquila reflects concerns that credit measures could weaken if the company is unable to reduce cash losses at its nonregulated operations, utility cash flows decline, or the company is unable to maintain adequate levels of liquidity."
Aquila reported a 2004 net loss from continuing operations of $562.5 million before taxes. The net loss included a $156.2 million loss related to the termination of four long-term pre-paid gas sales agreements, a $26.5 million civil penalty paid to the Commodity Futures Trading Commission to cover a false price reporting settlement charge, $38 million to settle an appraisal rights lawsuit and $25.6 million in tax payments related to the sale of Canadian utility assets.
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