Aquila Inc.’s financial struggles are far from over, according to a report published Thursday by Standard & Poor’s Ratings Services (S&P). Analysts noted that the Kansas City-based utility has several serious concerns ahead, including the maturity of its credit facility in mid-April and a cash drain from natural gas prepay contracts and tolling agreements.

The company’s current liquidity stands at about $300 million.

“The next few weeks are crucial for Aquila and its credit standing. The company faces an April 12 deadline to renew a $650 million credit agreement. If this credit facility is not renewed or other sources of financing are not developed, Aquila will not have the liquidity to meet the maturities. S&P is closely monitoring developments as Aquila seeks to refinance its maturing debt obligations.”

S&P noted that liquidity at Aquila will be “highly dependent on continued asset divestiture” because it faces $400 million in debt maturities in 2004.

“Depressed power prices and negative spark spreads continue to be a drag on Aquila’s cash flow from operations,” noted S&P. “Aquila’s credit profile depends on the successful and timely execution of asset sales, the refinancing of the company’s secured credit facility on a secured basis and the successful restructuring of its tolling contracts and gas prepay liabilities.”

S&P found that Aquila’s liquidity position had “rapidly deteriorated” after it began restructuring itself back into a traditional utility business last summer (see NGI, June 24, 2002). Analysts noted that Aquila ended the third quarter of 2002 with an estimated $650 million of liquidity, consisting of $515 million in cash and $135 million of availability under its revolving credit facility.

“The company continued to divest assets as part of its restructuring initiative and has managed to raise about $950 million in asset sales proceeds,” said Rajeev Sharma, an S&P credit analyst. “However, asset sales proceeds have mostly been used to repay bank debt and post collateral due to ratings downgrades.”

Aquila’s credit facility consists of two $325 million credit agreements, one with a maturity date of 364 days, the other three years. S&P said Aquila had violated an interest coverage ratio requirement that was part of the bank credit agreement in the second quarter of 2002; however, the company managed to attain waivers from the affected lenders to comply with the ratio from Sept. 30, 2002 until April 12, 2003.

As a provision of the waiver, Aquila was required to reduce its bank debt using North American asset sales proceeds, said analysts. The current utilization under the credit facility is about $392 million. “If the waiver is not extended beyond April 12, 2003, the lenders could declare borrowings immediately due and payable, thus triggering cross defaults to Aquila’s other debt. Aquila does not have adequate liquidity to meet these obligations. Therefore, the refinancing of the existing unsecured credit facility is critical.”

S&P noted that Aquila’s liquidity is “seriously strained” by its commitments related to its prepaid gas contracts and payments associated with its tolling agreements. The aggregate cash outflows from these commitments are estimated to be $245 million in 2003 and $263 million in 2004, said S&P. Supplemented by projected capital expenditures of $316 million in 2003 and $210 million in 2004, “capital needs are substantial and weaken expected operating cash flows.”

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