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Regulatory Staff Recommends Aquila Sell Its Kansas Gas Utility Assets

Given Aquila's inability to achieve an investment-grade credit rating, the staff of the Kansas Corporation Commission (KCC) is recommending that the commission order the company to either divest its Kansas gas utility or establish a corporate structure with ring fencing that protects the utility and its ratepayers in the event of an adverse regulatory action in another state. Aquila has requested that it be allowed to file a response to the staff report by May 1.

The Kansas City-based company failed to meet a Feb. 9 KCC deadline to reach investment-grade status and isn't expected to be investment-grade for some time. The sale of its Kansas utility assets is inevitable given the company's poor financial condition, KCC staff said.

Staff noted that the Kansas utility operations account for about 5% of Aquila's assets after the recent sale of four utilities and some power generation assets in other states. On Sept. 21, 2005, Aquila signed agreements to sell its natural gas operations in Michigan, Minnesota and Missouri, as well as its electric operations in Kansas. On April 1, 2006, Aquila sold its Michigan utility operations.

"However, regulatory decisions made for Aquila's other remaining utilities outside Kansas..., especially for Aquila's substantial utility businesses in the state of Missouri, can have a significant impact on the overhead costs attributed to and the survival of Aquila's natural gas business in Kansas. Therefore, staff does not believe it is in the best interest of Kansas' ratepayers for Aquila to subject them to the risks associated with extending the commission deadline for Aquila to achieve investment-grade metrics beyond February 2006."

Staff said it believes divestiture of the Kansas utility assets "is in the best interests of shareholders and ratepayers." It said the divestiture process should start within 60 days after the KCC issues an order on the matter. It also recommended that the commission require the company to submit a status report within 30 days of an order and meet with staff on that report. The report, staff said, should include an update on the status of all pending and planned utility asset divestitures. Furthermore, the company should be required to meet with staff at least every 90 days thereafter for updates.

Still suffering from continuing losses by its now-defunct energy merchant division, Aquila reported a net loss of $230 million, or 60 cents/diluted share, last year, compared to a loss of $292.5 million, or $1.13/diluted share, in 2004, despite overall sales rising to $1.3 billion from $971 million the previous year. Losses continued to grow in the fourth quarter last year ($127.8 million, or 34 cents/share, compared to $81 million, or 21 cents/share in the fourth quarter of 2004) due mostly to a $159.5 million impairment charge at Illinois peaking plants.

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