Although its credit ratings remain in the “junk” category, Aquila Inc. received some welcome news Wednesday from Standard & Poor’s Ratings Services (S&P) after it upgraded the Kansas City, MO-based company’s corporate credit rating to “B-” from “CCC+” and removed it from CreditWatch. The outlook remains negative.

According to S&P, an insurer rated “B” is “more vulnerable” than those rated “BB,” but the “insurer currently has the capacity to meet its financial commitments. Adverse business, financial or economic conditions will likely impair the insurer’s capacity or willingness to meet its financial commitments.” When it carried the “CCC+” rating, Aquila was considered “very weak” and vulnerable and was “dependent upon favorable business, financial and economic conditions to meet its financial commitments.

Credit analyst Rajeev Sharma said the upgrade was based on Aquila’s termination of most of its long-term prepaid natural gas contracts, including one with the Municipal Gas Authority of Mississippi (MGAM) and two with the American Public Energy Agency (APEA) by Sept. 30 (see Daily GPI, July 20) . Aquila is carrying about $2.5 billion in debt, Sharma said.

“The termination allows the company to regain access to a substantial portion of its liquidity and alleviates credit concerns associated with the onerous impact of the gas prepay transactions on the company’s financial profile,” said Sharma. “Furthermore, these contracts represent 75% of Aquila’s prepaid natural gas supply contract obligations, which have been a major rating concern.”

As of June 30, the total obligation of the gas prepay contracts was $574 million, and by eliminating them, Aquila will “move closer to fully exiting the energy merchant business and focus on its domestic utility operations.”

However, even though Aquila has made significant progress toward repositioning itself as a domestic utility business, concerns remain over the company’s burdensome debt level and lack of cash flow generation, said Sharma. “Rating stabilization is predicated on Aquila’s ability to achieve further debt reduction, successful rate increases, and cost reductions.”

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