Kansas City-based Aquila Inc. late last month completed a stock offering and debt placement considered crucial to completing its acquisition of Cogentrix Energy Inc., and last week agreed to sell its 16.58% stake in the Lockport Energy facility north of Buffalo, NY to Fortistar Capital Inc. LLC for $37.5 million in cash. The sale and stock offerings are part of Aquila’s plan to shed about $1 billion in assets and build up its liquidity in the face of credit downgrades and market turmoil.

The stock sale was at a deep discount to the utility’s historic trading prices. On June 27, Aquila completed a $280 million common stock offering that will increase its outstanding shares by about 25%. The 37.5 million shares were priced at $7.50 each, the lowest price since the early 1990s, and just one-third of Aquila’s stock price less than three months ago.

The company fell short of securing the $900 million it had targeted, mostly because its stock price continued to decline in the days before the offering. Investors participating in the debt placement of unsecured notes received an interest rate of 10.9%, reflecting the continuing problems within the energy industry, especially those involved in energy marketing and trading. The rate was between 3-4% higher than the company would have paid last year.

Aquila has an option to sell an additional 5.6 million shares this month, that, if exercised, would add around $77 million. Part of the proceeds from the stock and debt will be used to secure independent power producer Cogentrix, which Aquila hopes to finalize in September. Cogentrix sells most of its power under long-term contracts, which would stabilize some of Aquila’s cash flow.

Aquila said the balance of the proceeds from the stock offering and debt placement will be used to finance its recent purchase of Midlands Electricity, a United Kingdom electric network, and for other corporate purposes. Aquila’s announced sale last week of the 180 MW gas-fired Lockport power plant, which has been in operation since 1992, is another key for the company to restore liquidity as it sheds non-strategic assets. The plant is managed by Fortistar.

In recent weeks Aquila has announced major cutbacks within its energy trading unit, and has lowered its 2002 earnings guidance by 30% (see NGI, June 24). The company’s energy trading profits totaled $270 million in 2001, and they are expected to drop to around $55 million this year, and to around $10 million or less in 2003.

Following the debt and stock offerings, Standard & Poor’s assigned its “BBB” rating to Aquila’s $500 million senior unsecured notes. At the same time, S&P affirmed the “BBB” corporate credit rating on Aquila. All ratings remain on “CreditWatch with negative implications.”

“The ratings on energy company Aquila are on CreditWatch with negative implications, due in part to uncertainties surrounding the company’s intent to acquire power producer Cogentrix Energy Inc.,” said S&P credit analyst Todd Shipman. On balance, the transaction is expected to lower the company’s overall credit quality, he said.

“While the addition of Cogentrix’s high-quality generating asset portfolio with little exposure to electricity market swings will marginally improve Aquila’s overall business risk, the transaction is expected to negatively affect the company’s coverage ratios and other credit protection measures. Managing the acquisition process and integrating the Cogentrix assets will offer challenges to Aquila at a time when the energy and capital market conditions are exerting added pressure on the company’s creditworthiness,” the analyst noted.

“Aquila’s credit quality is closely tied to its stable, regulated utility operations, with less emphasis on its volatile energy trading and marketing operations. The relative strength of the regulated utilities and the stable Cogentrix cash flows should lower overall business risk of Aquila. The degree to which the improvement in the business profile overcomes the weakness in the company’s future ability to generate cash flow and earnings will determine whether the current rating is sustainable,” said Shipman.

The S&P analyst said that the negative listing “reflects the risks in the Cogentrix transaction and the overall stress of energy market and capital market conditions on the company’s credit profile. Resolution of the CreditWatch listing is expected when the closing of the Cogentrix transaction nears and more clarity is reached as to the strategic direction of the company.”

Also in conjunction with Aquila’s recent news, Fitch Ratings assigned a rating of “BBB-” to Aquila’s $500 million issuance of 10.875% senior unsecured notes due July 1, 2012, offered under Rule 144A. The rating outlook for Aquila is “stable.” Fitch said Aquila’s consolidated business risk has been lowered with its recent repositioning of its wholesale energy trading and marketing business, noting the company had already implemented nearly $101 million of recurring cost savings, mostly through employee reductions.

“Further debt reduction at Aquila is possible, as the company has targeted $1 billion worth of asset sales, including its investments in New Zealand; however, the planned asset dispositions are subject to execution risk, as Aquila does not have any signed agreements in place,” wrote Fitch. “Additionally, the elimination of cash flow from the businesses sold could potentially reduce Aquila’s earnings and cash flow available to service debt.”

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