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15 Jul 2008
Moody's Upgrades Aquila; Affirms Great Plains Energy and KCPL
New York, July 15, 2008 -- Moody's Investors Service today upgraded Aquila Inc.'s
("Aquila") senior unsecured rating to Baa2 from Ba3.
At the same time, Moody's affirmed all ratings of Great Plains
Energy Incorporated ("Great Plains") and its operating subsidiary
Kansas City Power & Light Company ("KCPL"). The
rating outlook for all three issuers is negative. The rating action
on Aquila concludes the review for possible upgrade initiated on February
7, 2007, following an announcement that Great Plains signed
a definitive agreement to acquire all the outstanding shares of Aquila's
Today's rating actions reflect the closing of the acquisition on
July 14, 2008, following an earlier approval by the Missouri
Public Service Commission. The upgrade of Aquila reflects the potential
for an improved financial profile as part of the larger Great Plains corporate
family and, more importantly, an understanding that Great
Plains will extend guarantees for all rated debt obligations at Aquila
that survive the transaction. Going forward we expect Aquila's
Missouri electric utility business will operate under the brand name of
Although Great Plains has acquired Aquila, it retains only the Missouri
based electric utility business and merchant energy operations.
The balance of the company, including the non-Missouri electric
and gas utility businesses were immediately sold to Black Hills Corporation
("Black Hills") for approximately $909 million.
Great Plains utilized approximately $677 million of this amount
to fund the cash portion of the Aquila purchase price; the balance
will be used by Aquila to repay short term debt and for general corporate
purposes. Taking into account the Black Hills carve out,
Great Plains acquired assets that generated approximately $190
million of EBITDA for the LTM period ended March 31, 2008.
The transaction is a transforming event for both Aquila and Great Plains
as a new significant stand-alone regulated operating subsidiary
was created to hold the Aquila assets. Great Plains will guarantee
approximately $1.1 billion of existing net debt at Aquila
(a/o March 31, 2008).
In upgrading Aquila's rating Moody's recognizes the additional
financial and operational benefits to Aquila's risk profile as part
of a larger utility family. Additionally, Moody's acknowledges
that Great Plains has imminent plans to extend absolute unconditional
and irrevocable downstream guarantees to the existing debt of Aquila.
As a result, Aquila's senior unsecured rating is in effect
a function of the rating of Great Plains. Aquila's rating
also reflects the longer-term challenges that will need to be addressed
before further upgrades would likely be considered including careful management
of the sizeable capital program through 2010 and improvement in credit
The affirmation of Great Plains ratings with a negative outlook reflects
Moody's view that while the Aquila transaction is likely to result
in a modest amount of incremental leverage (Aquila's pro-forma
debt to EBITDA at March 31, 2008 was approximately 5.8X),
the dual challenges of efficiently integrating Aquila's operations
and the cash flow pressure associated with the large capital spending
programs through 2010 at both Aquila and KCPL, will likely lead
to credit metrics that are weak for the rating category. One key
metric for Great Plains, consolidated CFO (pre-w/c) to adjusted
debt, historically greater than 20%, is likely to fall
to the mid-teens percentage range over the next 12-18 months.
Moody's also expects all of the rated entities will be free cash
flow negative over the next several years due to the current capital spending
program, primarily centered around the Iatan I and II generating
Somewhat offsetting these pressures are the potential benefits to be realized
by combining the operations which already have commonly owned facilities
and contiguous service areas. We expect that Aquila, and
KCPL, will file for several rate increases over the next several
years and should benefit from any synergies derived from this transaction
until they begin to be shared with ratepayers as new rates go into effect
While KCPL's credit metrics are not expected to be initially affected
by the Aquila transaction, the outlook also remains negative due
to expected softening in certain key credit metrics, the large capital
spending program at the utility, and the increased reliance that
Great Plains will have on KCPL for up-streamed cash dividends while
it absorbs Aquila. We expect rate increases at KCPL to follow a
schedule in line with that of Aquila over the next several years.
A critical consideration in the rating going forward are the expectations
that assets are successfully integrated into rate base, at Aquila
and KCPL, and that Great Plains continues to raise equity in support
of the build-out over the next several years.
At this time, Moody's has also affirmed KCPL's P-2 short-term
commercial paper rating. KCPL's $600 million commercial
paper program is fully backstopped by a $600 million credit facility
expiring in May 2011. It has been KCPL's strategy to borrow short-term
to meet capital spending needs and refinance with periodic common equity
infusions from Great Plains and the issuance of long-term debt.
We expect that shortly after closing, Great Plains will also seek
to refinance the bank facilities of Aquila.
Moody's has also affirmed Aquila's senior secured delayed
draw term loan at Baa2 and will withdraw the corporate family and probability
of default ratings for Aquila.
Downward pressure on Great Plains' rating could result if consolidated
credit metrics deteriorate to a level where the company's CFO (pre w/c)
to adjusted debt ratio declines below the mid-to-high teens
percentage range. The rating at KCPL could have similar pressure
should this metric weaken to below the low 20% range for an extended
period. For the trailing twelve month period ended March 31,
2008, Great Plains' CFO (pre w/c) to adjusted debt was approximately
19% while the same metric at KCPL was approximately 22%.
Headquartered in Kansas City, Missouri, Great Plains Energy
is an electric utility holding company. Through its primary operating
subsidiary, Kansas City Power and Light Company, it is primarily
engaged in providing the generation, transmission, distribution
and supply of electricity to approximately 507,000 customers in
Missouri and Kansas. The Missouri electric operations of Aquila,
Inc. provide integrated electric utility services to approximately
Corporate Finance Group
Moody's Investors Service
William L. Hess
Corporate Finance Group
Moody's Investors Service
No Related Data.
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