Depending on how you look at it, there was good news and bad news for Aquila Inc. last week. Moody’s Investors Service and Standard & Poor’s (S&P) Ratings Services both cut the Kansas City-based company’s credit rating, with Moody’s dropping it to “junk” status. However, S&P kept its investment-grade rating, which may ease credit concerns in the near term.

The downgrade by Moody’s will require Aquila to cover about $192 million in financial triggers that are tied to its credit ratings. However, a downgrade by S&P to “junk” would have triggered the call for another $292 million in payments, according to Aquila.

S&P kept the utility’s rating at the lowest investment grade because, said analyst Todd Shipman, the credit profile had been “stressed,” but “management has taken and is expected to continue to take steps that will preserve credit quality in the triple ‘B’ area.”

The rating change to “BBB-” from “BBB,” said Shipman, “reflects a markedly changed business profile that is expected to emerge from Aquila’s ongoing asset sales program and the strategic shift away from unregulated energy merchant activities.”

S&P also removed Aquila from its CreditWatch, where it had been placed with “negative implications” on April 30. The company’s outlook is “negative,” Shipman wrote. “Achieving financial performance that is consistent with the new rating level will require a continuing effort by Aquila to accomplish needed asset sales, further reduce business risk, and improve its utility operations.”

Despite the “deteriorating energy and capital markets that have developed in 2002, Aquila has progressively and proactively responded with a series of steps designed to stabilize its creditworthiness,” according to S&P. “Most important, the company has committed itself to effectively exit the energy marketing and trading business that in 2001 constituted Aquila ‘s largest business segment. The drop in cash flow and earnings from the move has hurt near-term financial measures, but it will ultimately be beneficial for credit quality as the company’s shrinking exposure to market and credit risk is coupled with the efforts to resize and strengthen the balance sheet through asset sales.”

There is the risk that Aquila “may fall short of the amount of asset sales necessary to restore the balance sheet to appropriate levels of debt and equity,” hence the outlook of “negative,” said Shipman. ” The company’s future business profile is expected to consist mainly of regulated utility operations in the U.S., Canada and Australia, with a residual portfolio of unregulated electric generating assets that will not be strategically important to Aquila.”

“We’re extremely encouraged by Standard & Poor’s decision to preserve our investment-grade credit rating,” said CEO Robert K. Green. “Their action is confirmation that we’re taking the right steps. We’ll continue to focus on executing our asset sales program and exiting the wholesale energy marketing and trading business as part of our continuing commitment to a stronger credit profile.”

Despite a downgrade to “Ba2”, Moody’s retained its “stable” outlook because it expects Aquila’s planned assets to occur. Moody’s noted that Aquila’s “poor returns from investments outside the regulated utility business in the U.S. have resulted in a significant deterioration of operating cash flows.” The investments were financed almost exclusively with a “high level of debt,” including international utilities, a telecommunications and utility-related construction company, communications technology, five long-term gas delivery contracts, merchant energy wholesale services and non-related investments.

To meet liquidity “pressures,” Aquila is relying on asset sales this year and into 2003, and has already completed more than $480 million in sales. It hopes to complete up to $1 billion in asset sales by year’s end. Although Moody’s expects Aquila to achieve its needed asset sales, analysts noted that “proceeds below expectations could negatively impact the company’s liquidity and outlook.” However, “a supportive rating factor” is Aquila’s “unencumbered asset base of mostly regulated utilities,” which could give it some financial flexibility.

“While we’re naturally disappointed by the news, we’ve been preparing to conduct business operations under this possible scenario and will continue to deliver safe, reliable and economical energy to our customers,” said CEO Green. “We’re committed to achieving a stronger credit profile and will remain focused on executing our asset sale program and exiting the wholesale energy marketing and trading business.”

An Aquila spokesman told NGI last week that it will be “two months or so” before the company “does what it needs to do to make things right,” and bring about needed investor confidence and corporate stability. “Things have dramatically changed in just the last two months,” he said. “There’s just no business out there.” The company has begun its exit from the wholesale marketing and trading sector, and has cut hundreds of employees from the headquarters, as well as Houston and London, as it prepares to focus on regulated utilities.

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