Aquila to shop assets, cut $700 million debt, eyes eventual investment-grade status

By Paul Deckelman

New York, March 14 - Aquila Inc. announced plans to put a number of its utility assets and some other non-core assets up for sale in hopes of generating enough cash to repurchase or redeem about $700 million of debt coming due or becoming callable through 2007. The Kansas City, Mo.-based power generation company and utility operator then hopes to be in a better position to go to the capital markets to finance its long-term growth.

"Over the last two years, we have made significant progress on Aquila's repositioning and have successfully executed more than 30 major initiatives to stabilize the company's financial condition and improve the financial performance of our regulated utility business," the company's chairman and chief executive officer, Richard C. Green, told analysts on a conference call.

"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."

Green and chief financial officer Rick Dobson outlined a multi-step plan, the first part of which consists of putting certain of the company's assets up for sale with the help of The Blackstone Group, which served as Aquila's advisor in devising the repositioning plan, and Lehman Brothers, which along with Blackstone will act as advisors for the execution of the plan. Aquila is also getting help from Evercore Partners, which is serving as the independent advisor to Aquila's board of directors.

Aquila will shop around its natural gas operations in Michigan, Minnesota and Missouri; its electric operations in Colorado and Kansas; and its St. Joseph Light & Power unit in Missouri. The non-core assets considered for sale include three merchant peaking plants and Everest Connections. The company also plans a settlement of its Elwood toll contracts.

During the conference call, the Aquila executives estimated the net plant worth of Michigan Gas, Minnesota Gas, Missouri Gas, Colorado Electric and St. Joseph L&P as totaling approximately $874 million. They did not estimate the value of the other assets being considered for sale. Green said that "most likely, we will sell a subset of these properties" - meaning some of them, but not necessarily all of them - depending upon the kind of offers they hear for the individual properties, or for groups of the individual properties.

"We'll just have to wait and see what the market says for each of these pieces, and how that compares to what value we can build, before we make a decision as to which subset will be able to be sold," the CEO said.

Upcoming maturities and calls

The company envisions using the proceeds from the sale of the properties to paying off $141.9 million in three issues debt scheduled to mature in the next two years - $19.1 million of outstanding 9.03% notes scheduled to come due on Dec. 1 of this year, $85.9 million of 6.70% notes due on Oct. 15, 2006 and $36.9 million of 8.20% notes due on Jan. 15, 2007. It would also use asset-sale proceeds to call for redemption several series of debt totaling $559 million scheduled to become callable during that same time-frame - $287.5 million of outstanding 7 7/8% quarterly interest bonds (QUIBS) due 2032, $220 million on senior unsecured term loan debt and $51.5 million of 8% notes due March 1, 2023.

In answer to an analyst's question, Dobson said that these were the only debt issues in the company's "line of sight" right now, and when asked whether Aquila might contemplate taking out other issues, he said that "we're probably not too excited about paying market prices or make-whole prices for debt that is not in that line of sight." The company said in materials released in conjunction with its presentation that its plans did not contemplate calling any instruments carrying a make-whole call provision.

Dobson said that, while nothing is off the table from a financial re-engineering perspective in terms of potential debt transactions, "right now, we're focused on this process."

Green said that there was "no flexibility" in terms of the company possibly entertaining offers for any of its other regulated utilities which are not a part of the stated divestiture process - its electric properties in Missouri (formerly Missouri Public Service) and natural gas properties in Iowa, Nebraska, Kansas and Colorado. Aquila considers these to be its core utility holdings.

Marketing to start in weeks

Green said that Aquila would have marketing books out on the properties it is potentially selling "in the next few weeks," with an eye toward getting the deals done so that it could then seek approval of utility regulators in the affected states by about August or September.

"Our expectation is that we will have a very healthy competition [among potential buyers] for these six properties." He agreed with an analysts' assessment that it would take a year and a half to complete any sale deals it enters into, although he held out the prospect that some of the sales could be done before that, since different state regulators would impose differing amounts of red tape.

When Aquila was refinancing its debt last fall, Standard & Poor's attached a B- rating to its bank facility, and said the rating would "reflect the company's marginal credit measures and insufficient cash flow from operations to offset a burdensome debt level." Moody's Investors Service currently rates the company's unsecured debt at B2.

Aiming for double-B when sales close

Dobson said that while the ultimate goal is a return to investment-grade status - Moody's cut its ratings to junk level in September 2002 and S&P did likewise in November that year - before that could happen, "we have some mile markers to get through, and we'd like to begin producing some BB metrics shortly after the closure and the application of those proceeds from the utility sale, and then strive for higher metrics after that."

Dobson said that the company has to get to a BB metric "in order to be more financeable" so that it can then go to the capital markets to seek financing for some $650 million of supplemental capital expenditures it has identified on its remaining core properties to boost their earnings value.

"We probably wouldn't start any financing until we get through the divestiture process," he said, which would likely be "somewhere in the 2007 time frame." He said the company's capex needs would not intensify until the 2007-2009 period.

The executives refused to be pinned down by their questioners to firm answers as to whether the funding that would then be sought at that time would consist of secured or unsecured debt, or how much of it might be in the form of new equity to be issued.

In the meantime, said Dobson, Aquila has "a reasonable amount of liquidity and revolver capacity" to get the company through the sale process period.

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