Kansas City, MO-based Aquila Inc. struck a deal for the long-awaited sale of its heartland utility businesses to Black Hills Corp. Once that's done, Aquila and its Missouri-based electric utility will be acquired by Kansas City Power & Light (KCP&L) parent Great Plains Energy Inc. for about $1.7 billion in cash and stock plus assumption of $1 billion of Aquila debt.
When completed, the two transactions will significantly increase the size and scope of Kansas City, MO-based Great Plains' and Rapid City, SD-based Black Hills' operations.
Great Plains will be the parent of Aquila and have revenues of more than $3 billion and approximately 800,000 customers. Aquila will continue to own its Missouri-based utilities and its merchant services operations, primarily consisting of the 340 MW Crossroads power generating facility and residual natural gas contracts. By acquiring Aquila's Missouri-based utilities -- Missouri Public Service Co. and St. Joseph Light & Power -- Great Plains will expand its utility service territory around the Kansas City metro area. The Aquila transaction will add about 300,000 electric utility customers to the existing base of about 500,000 customers. The combined generating capacity will consist of approximately 5,800 MW.
Proceeds from the utilities sale to Black Hills will be used to fund the cash portion of the Great Plains acquisition and to reduce existing Aquila debt. Aquila shareholders will own approximately 27% of Great Plains common stock.
The combined Black Hills/Aquila regulated utility and other operations will have a total of approximately 750,000 retail and wholesale customers in 12 states. Black Hills plans to acquire Aquila's gas utilities in Nebraska, Colorado, Iowa and Kansas and its electric utility in southeastern Colorado for $940 million in cash and debt assumption. The assets being sold include the following operations:
There will be no change to Great Plains or Black Hills senior management teams or boards of directors.
"We have made tremendous progress since 2002 executing our repositioning strategies," said Aquila CEO Richard C. Green. "Having improved our financial condition significantly, we believe this transaction provides the best overall, long-term value for Aquila shareholders by accelerating their return on investment. Following the combination, our utilities will have access to lower-cost capital to fund investments to meet customer growth projections, environmental upgrades and improvements to utility infrastructure. In addition, Aquila investors will receive a significant ownership stake in Great Plains Energy and resulting dividends."
Aquila shares closed down more than 7% Wednesday at $4.34 in heavy trading. Great Plains and Black Hills were unchanged at $32.05 and $39.08, respectively.
Standard & Poor's Ratings Services placed Aquila's short-term corporate credit on watch, positive; the long-term corporate credit was already on watch, positive.
The long-term corporate credits of Great Plains and its subsidiary KCP&L were placed on watch, negative.
"The rating actions reflect our concerns that the transaction, which comes as KCP&L begins to implement its $1.5 billion comprehensive energy plan, will stress the company's cash flows and add to leverage, at least until its capital expenditure plant is complete and the Aquila integration under way," said S&P credit analyst Jeanny Silva.
S&P affirmed its rating on Black Hills, with a continuing negative outlook. "If finalized, the proposed transaction could stabilize the company's ratings at 'BBB-'," said Silva. "The outlook revision would be predicated on lower business risk post-transaction, offset by acquisition-related assimilation risk, higher leverage, and a lack of history in maintaining a business mix at the lower-risk levels contemplated in this transaction."
Great Plains Energy expects the transaction to deliver financial and operational benefits in several areas. Total pre-tax synergies are estimated to reach about $500 million over a five-year period, with costs to achieve, including transaction costs, of approximately $185 million, the company said.
"Combining Aquila's many strengths with our own will result in superior customer service, enhanced reliability, and an even greater investment in environmental stewardship and energy efficiency," said Great Plains CEO Michael J. Chesser. "Moreover, our complementary service territories and generation portfolios provide the opportunity to realize significant synergies."
Operational synergies over the same five-year period are expected to total about $310 million. These synergies are expected to result from:
Following the transaction, Aquila's credit rating is anticipated to be investment grade. The improved credit rating is expected to lower interest costs on a substantial portion of existing high-interest rate debt through rate step-down provisions while also lowering rates on new debt planned to help fund ongoing capital investments. Aquila interest rate savings are estimated to be about $190 million over five years following the closing of the transactions.
The transaction is expected to be modestly dilutive to Great Plains Energy earnings in 2008 with per-share earnings accretion beginning in 2009. Great Plains said it expects to fully utilize Aquila's substantial net operating loss tax benefits over the next several years following transaction close.
Great Plains' acquisition of Aquila is subject to the approval of both Great Plains Energy and Aquila shareholders; regulatory approvals from the Missouri Public Service Commission, the Kansas Corporation Commission and the Federal Energy Regulatory Commission; Hart-Scott-Rodino antitrust review; as well as other customary conditions.
Black Hills currently provides electric utility service 101,500 customers in South Dakota, Wyoming and Montana, and gas utility service to another 32,000 customers in Wyoming. Black Hills will acquire one regulated electric utility owned by Aquila in Colorado (where Black Hills currently has various independent power generation, oil and gas, and other nonregulated operations) and Aquila's regulated gas utilities in Colorado, Kansas, Nebraska and Iowa. The acquisition will add about 616,000 utility customers (93,000 electric and 523,000 gas) to the 133,500 utility customers Black Hills currently serves. Other assets included are a customer service center and centralized natural gas operation in Nebraska. Black Hills will then have approximately 750,000 gas and electric customers in seven contiguous Midwestern and Rocky Mountain states.
"Our acquisition of these utility properties and related assets has great industrial logic for Black Hills strategically, operationally and financially," said Black Hills CEO David R. Emery. "It will significantly enhance our existing footprint in Colorado, enabling us to serve retail utility customers and communities in that state and to do so on an efficient basis. It will also give us, for the first time, a significant presence in the three neighboring states of Kansas, Nebraska and Iowa...
"We expect the transaction to provide positive cash flow immediately. We also expect that, after some earnings dilution in the first post-completion year related to transition costs, the transaction will be earnings accretive beginning in the second full post-completion year."
Black Hills has entered into a binding agreement with a group of lenders including ABN Amro Bank as administrative agent for a committed acquisition credit facility to finance the transaction. Black Hills said it expects the permanent financing that will replace this bridge facility to be a combination of new equity, mandatory convertible securities, unsecured debt at the holding company level and internally generated cash resources.
Black Hills' purchase of the Aquila assets is subject to regulatory approvals from the Missouri Public Service Commission, the Kansas Corporation Commission, the Colorado Public Utilities Commission, the Nebraska Public Service Commission, the Iowa Utilities Board and the Federal Energy Regulatory Commission; Hart-Scott-Rodino antitrust review; as well as other customary conditions.
Each of the two transactions is conditioned on the completion of the other transaction. Both are expected to close in about a year.
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