Aquila Inc. completed a $630 million refinancing package on Friday, including a one-year $200 million loan to its Australian subsidiary, UtiliCorp Australia Inc., but its corporate credit rating was downgraded to “B” from “B+” by Standard and Poor’s (S&P), reflecting concerns about the company’s heavy reliance on asset sales to reduce debt levels and its projected weak cash flows from operations. S&P assigned a “B+” rating to Aquila’s three-year $430 million senior secured credit facility.
The new financing agreement replaces its short-term credit facilities with two secured loans. Aquila said the initial amount drawn under the one-year loan will be $100 million, and the company will have an option to draw another $100 million within the next 30 days.
“Completing this financing package is a key component of the overall plan we’ve been pursuing to achieve financial stability and return Aquila to its regulated utility roots,” said Rick Dobson, Aquila’s interim CFO. “We clearly have more work ahead, but with this financing in place, plus our existing cash and cash flow from operations, the company should have sufficient liquidity to execute the remainder of its restructuring plan.”
Proceeds from the loan package will be used to terminate the company’s existing 364-day senior bank facility, repay synthetic leases associated with two power plants in Illinois, and cash collateralized outstanding letters of credit. Initial interest rates on the loans are 7% for the one-year loan and 8.75% for the three-year term loan.
Collateral for the one-year loan includes the company’s interests in its Australian investments, interests in its portfolio of U.S.-based independent power plants and two nonregulated power plants in Illinois. Collateral for the three-year term loan will include a combination of the company’s non-regulated and regulated utility assets. Later this month, Aquila will initiate regulatory proceedings to secure the three-year loan with additional U.S.-based regulated utility assets. Upon regulatory approval, the interest rate on the three-year loan will be reduced to 8%.
While the loans improve Aquila’s financial stability, S&P said it is still maintaining a negative outlook on the company, which has about $3 billion of outstanding debt. S&P credit analyst Rajeev Sharma said the credit rating downgrade was in reaction to Aquila’s restructuring plan, which is dependent on continued asset sales in an environment fraught with execution risks.
“Due to weak cash flow generation from operations, asset sales will be necessary for Aquila to reduce its debt levels and shore up the company’s balance sheet,” S&P said. “However, cash flow generation relative to total debt is likely to remain weak and not exceed 15% in the near term.”
Utility cash flow is expected to be stable, but cash flow from nonregulated operations will be diminished by depressed power prices and negative spark spreads. “Overall cash flow will be strained, as the company faces restructuring charges in 2003 and debt maturities in 2004,” S&P said. “Expected cash flow from the company’s reconstituted business plan is insufficient to fully offset Aquila’s massive amount of debt leverage.
“Aquila’s liquidity will be highly dependent on continued asset sales as the company faces $400 million in debt maturities in 2004 ($250 million in senior notes due in July and $150 million in senior notes due in October),” the agency added. “Aquila’s liquidity will be further strained by the cash outflows associated with its prepaid gas delivery contracts and tolling agreements. The aggregate cash flows for these commitments are estimated to be $245 million in 2003 and $263 million in 2004. In addition, substantial projected capital expenditures of $316 million in 2003 and $210 million in 2004 and working capital needs will continue to be a drain on cash flows.”
S&P said it may cut Aquila’s ratings even further if the company is unable to execute asset sales, significantly reduce debt leverage, or stabilize credit measures in the next nine months. “Maintaining current ratings is dependent on Aquila’s ability to successfully restructure its business, develop a new tolling strategy, and attain additional cost reductions,” S&P said.
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