Citing current uncertainty in the electric power market, Aquila Inc. and Cogentrix Energy Inc. on Friday jointly agreed to drop the planned acquisition of Cogentrix by Aquila. The companies said that currently “the transaction impractical and not in either company’s best interest.” The transaction between Aquila and the Charlotte, NC-based company was announced in April (see Power Market Today, May 1). Aquila said it did not consider the termination part of its “ongoing efforts” to sell $1 billion in non-strategic assets.

“We remain impressed by the Cogentrix operations, employees and management team,” said Aquila CEO Robert K. Green. “Yet it’s clear, given current market conditions, that combining our operations is not in the best interest of our shareholders.”

David J. Lewis, Cogentrix’s CEO, said that although his company had “felt from the beginning that the merger of Cogentrix into the Aquila organization held the promise of yielding a company far greater than the sum of the individual strengths of each, it has become apparent that the uncertainty of today’s electric power market is not conducive to the transaction going forward.” Cogentrix acquires, develops, owns and operates electric generation and other power assets in the United States and internationally. Cogentrix has, in whole or in part, equity interests in 28 facilities in 14 states with a total generating capability of approximately 7,800 MW.

Aquila had claimed late Wednesday that the recent credit ratings downgrades of Dynegy Inc., “together with other adverse circumstances and events, have decreased the likelihood” that its Congentrix acquisition would be completed as planned (see Power Market Today, Aug. 1). Aquila charged that the downgrades by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service “are expected to cause a Dynegy subsidiary to default under a sizeable agreement to purchase power from a Cogentrix subsidiary, calling into question the Aquila-Cogentrix agreement.” The transaction was expected to close in the third quarter.

Dynegy’s agreement is with a 816 MW plant in Louisiana that is scheduled to be completed this month. Dynegy was to deliver natural gas to power the unit’s turbines and accept all of the output. Cogentrix owns 50% of the Louisiana plant. However, another problem arose last week involving another Cogentrix customer, PG&E National Energy Group (NEG) Inc., which had its credit downgraded to “junk” by S&P.

NEG, like Dynegy, had signed two long-term agreements to deliver gas and accept the entire output of two Cogentrix plants now being built in Mississippi and scheduled to open in mid-2003. The two Mississippi plants, in which Cogentrix owns 100%, would each generate 810 MW, and could become a third of its business. With the Louisiana plant having Dynegy as a customer, the three plants could contribute 40% of Congentrix’s business.

When the Kansas City-based Aquila first announced the Cogentrix acquisition, it was not universally applauded. Noting that it would add both positive and negative elements to Aquila’s credit profile, “on balance, it has a greater potential to lower the company’s overall credit quality,” S&P wrote in mid-May following an analysis.

“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. Ultimate resolution of the CreditWatch listing for Aquila will rest on the successful completion of the Cogentrix purchase and the company’s strategic response to the credit concerns raised by the deal and other developments that have placed greater stress on Aquila’s credit profile,” S&P said in May.

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