Chicago, Feb. 27, 2002 — Fitch Ratings has downgraded and removed from Rating Watch Negative the debt ratings of UtiliCorp United, Inc. (UCU), UtiliCorp Capital (UCU Capital), UtiliCorp Canada Finance (UCU Finance) and UtiliCorp Asia Pacific (UCU Asia Pacific).
UCU guarantees the debt of UCU Capital, UCU Canada Finance and UCU Asia Pacific. Approximately $2.8 billion of debt is affected. The Rating Outlook for all entities is Stable. The rating changes are detailed below.
These rating actions are a result of Fitch’s global review of UCU initiated in December 2001, when the ratings of UCU, UCU Capital, UCU Canada Finance and UCU Asia Pacific were placed on Rating Watch Negative. The rating downgrades primarily reflect the increasing dependence upon cash flows derived from the merchant energy business, housed in subsidiary Aquila, and take into consideration Aquila’s reliance on UCU for funding, the ongoing integral growth of Aquila’s business, and high capital expenditures related to merchant generation and gas storage.
Potential capital spending of around $600 million per annum for 2002-2004 and the commitment to acquire Avon Energy in the U.K., will make UCU dependent on additional long-term debt and equity financing over the next several years. UCU has not ruled out the possibility of additional acquisitions that would enhance the merchant energy business.
The Stable Rating Outlook reflects UCU’s improved financial condition, in particular its increased equity to debt ratio. Over the past year, UCU has reduced its debt leverage and strengthened its credit protection measures. In 2001 and 2002, the company has raised approximately $1 billion through common equity issuance and repaid about $300 million of debt.
Consequently, UCU’s consolidated debt-to-total capitalization has decreased from a high of nearly 60% at year-end 2000, to a current adjusted level of 46%. UCU’s financial performance and credit protection measures have steadily improved over the past three years, with EBIT/interest at 3.1 times (x) and EBITDA/interest at 4.3x at year-end 2001. These ratios support an investment-grade rating for a wholesale energy merchant.
In early 2001, UCU sold to the public shares representing 20% ownership of Aquila, and announced it intended to spin off the remaining 80% of Aquila common to UCU shareholders within one year. However, with the change in market conditions by November 2001, UCU announced that it no longer intended to spin off 80% of Aquila and initiated an offer to repurchase the 20% of Aquila that had been sold to the public.
UCU cited that a primary reason for its actions was that given the current market climate, Aquila would not have sufficient access to capital to meet its growth aspirations unless it remained combined with UCU and benefited from UCU’s more stable cash flow and access to capital. The transaction was completed in January 2001 via a stock for stock exchange. The company plans to adopt ‘Aquila’ as its corporate name later in the first quarter.
Aquila is the largest factor in UCU’s cash flow available to service debt. Positively, Aquila operates the merchant energy trading business with controls and risk management policies and procedures to mitigate market risk, liquidity risk, credit risk, human error, and operations risks. The tenor of Aquila’s portfolio is relatively short (average under two years) and there is a consistent pattern of profitability and positive cash flow over the past several years.
Other business segments are the U.S. utilities, divisions within UCU that provide reasonably stable cash flow albeit with very low growth, and the international networks sector. UCU’s investments in international networks companies produce upstream dividends or distributions to UCU that are structurally subordinate to the direct, non-recourse debt of the international subsidiaries. UCU has used local currency debt and equity from local shareholders to mitigate its currency exposure and to minimize UCU’s level of international investment. In 2001, UCU announced a contract to acquire a majority interest in Avon Energy, a U.K. subsidiary of First Energy. The cash price of that acquisition will be funded under a committed bank bridge facility. UCU is working with First Energy to complete this transaction.
UCU is an electric and gas company that directly serves approximately 1.3 million domestic customers and indirectly serves 2.7 million international customers in New Zealand, Australia, Canada, and the UK through subsidiaries. UCU’s subsidiary, ILA, is a wholesale energy merchant whose activities include electric generation, natural gas gathering and processing, natural gas storage, coal blending and storage. The company markets and trades commodities such as natural gas, electricity, coal, and emissions allowances. ILA also offers risk management products and services. UCU Asia Pacific is the holding company for UCU’s interests in Australia. UCU Canada Finance Co., a wholly owned subsidiary of UCU, was the financing conduit UCU’s acquisition of TransAlta’s Alberta distribution assets in 2000.