Reduces dividend, earnings guidance and wholesale activity, plans to raise $900 million
KANSAS CITY, Mo., June 17, 2002 — Aquila Inc. recently announced a comprehensive strategic and financial repositioning designed to address the current dynamic conditions in both the energy and capital markets.
The three-part plan includes: (1) a reduction in exposure to its wholesale energy services business in response to the increased cost of capital for that business; (2) an anticipated $.50 per share reduction in the annual common dividend to a new rate of $.70 per share in order to appropriately match fixed charges with regulated and asset-based earnings; and (3) the issuance of $900 million of new equity and debt securities in order to balance the capital structure and satisfy the company’s remaining 2002 liquidity needs, including the funding of previously announced acquisitions.
As a result of the repositioning, Aquila is reducing its guidance for full year 2002 operating earnings to a range of $1.30 – $1.40 per share (excluding anticipated non-recurring charges), with more than 95 percent of these earnings expected from regulated and asset-based businesses.
Reducing exposure to wholesale energy services
Aquila has changed the focus of its wholesale energy services business in response to the current high cost of capital for that business. The company is reducing its Value at Risk (VaR) from $15 million to less than $5 million, limiting the overall targeted capital allocation to that business to less than $150 million and resizing the workforce. The company remains optimistic regarding the long-term value creation opportunities for its restructured wholesale energy services. Aquila is actively pursuing several strategic alternatives in order to maximize the shareholder value of this platform.
To carry out this part of its repositioning, Aquila has retained The Blackstone Group to identify potential transactions and partners for its wholesale energy services business. Blackstone is a leading global investment and advisory firm based in New York.
“In the current environment, we believe the best way to preserve and increase value for our shareholders is to pursue a new structure for our wholesale energy services business with a much lower risk profile,” said Robert K. Green, Aquila president and chief executive officer.
Restructuring the dividend
Aquila’s Board of Directors has indicated that it expects to reduce the annual common dividend payable to shareholders by $.50 per share, from $1.20 per share to $.70 per share.
“This is a difficult decision,” Green said, “and while we appreciate the importance of current income to our shareholders, within the context of this repositioning the reduced earnings projection reflects the decline in earnings from the wholesale energy services business, as well as anticipated dilution from the issuance of additional common shares and interest costs on the issuance of debt.”
The board’s action results from its examination of data on Aquila’s increasing capital and liquidity demands and the impact of those demands on the company’s credit ratings, balance sheet, earnings, risk profile and dividend policy. Aquila believes that resizing the dividend to better match fixed charges to its stable base of earnings from regulated and asset-based businesses is the prudent course of action. The restructured dividend will enable the company to continue offering an attractive current return to its common shareholders while sizing its payout of regulated and asset-based earnings in a manner consistent with industry norms.
Balancing the capital structure and satisfying liquidity needs
Aquila plans to announce securities offerings totaling $900 million of equity and debt. The offerings will complete all of the company’s 2002 capital market funding requirements. Proceeds of the offerings are intended to be used to refinance 2002 debt maturities and provide permanent funding for the Midlands and Cogentrix acquisitions.
Guidance for the repositioned enterprise
As a result of the repositioning, Aquila is reducing its guidance for full-year 2002 operating earnings to $1.30 – $1.40 per share (excluding anticipated non-recurring charges). The reduction in guidance reflects lower expected earnings from the wholesale energy services business, anticipated dilution from the issuance of additional common shares and higher interest expense on the issuance of debt. Aquila expects that more than 95 percent of 2002 operating earnings will come from stable regulated and asset-based businesses.
Update on project BBB+/Baa1
Aquila has been aggressively focusing its efforts on reducing costs and pursuing the sale of non-strategic assets as part of its “Project BBB+/Baa1,” which is a program begun early this year to improve its credit rating and strengthen its balance sheet and more recently to meet credit rating agencies’ more stringent credit metrics requirements. Aquila’s strategic and financial repositioning plans were fully discussed with each of its rating agencies on June 14, 2002 and reflect a significant step towards enhancing the company’s credit standing and future prospects.
“We remain steadfastly committed to maintaining investment grade ratings while supporting a recovery in our stock price,” said Green. “All of our recent actions to improve the balance sheet and strengthen liquidity have been based on that commitment. Our balance sheet and cash flow from asset-based businesses remain very strong,” Green said. “We expect our new posture concerning the wholesale energy services business to improve our credit rating picture.”
To date more than $101 million in cost savings have been identified and secured and the company has announced plans to sell $1 billion in non-strategic assets by year-end to reduce debt and operating costs. Last week Aquila initiated a sale process for New Zealand-based UnitedNetworks, the largest distribution company in New Zealand, 55 percent-owned by Aquila.
Based in Kansas City, Missouri, Aquila operates electricity and natural gas distribution networks serving more than six million customers in seven states and in Canada, the United Kingdom, New Zealand and Australia. It also provides risk management products and wholesale energy services. At March 31, 2002, Aquila had total assets of $12.3 billion. More information is available at www.aquila.com.