After studying Kansas City-based Aquila Inc.’s finances exhaustively, the Kansas Corporation Commission (KCC) said last week that the debt-burdened company may have no other choice than to divest some or all of its domestic utilities in order to fix its balance sheet.

The commission said in its report that Aquila — a public utility doing business in Kansas — is facing “extraordinary financial distress,” largely as a result of “ill-advised investments” in unregulated lines of business beginning in the 1990s and continuing through early 2002. “The significant amount of losses from negative earnings, asset impairment charges, asset sales and discontinued operations since the beginning of 2002 that have occurred in Aquila’s noncore, nonregulated businesses have resulted in a considerably less healthy financial condition for the company,” the KCC said in its report.

“Aquila’s divestiture of investments in domestic utilities and unregulated business arrangements is in the best interest of ratepayers and shareholders alike,” the commission added. “Aquila’s only realistic choice to raise enough cash to payoff excessive nonutility debt is to undertake divestitures of its remaining unregulated investments and contractual arrangements, and to divest most, if not all, of its domestic utility businesses.”

However, the commission said it is concerned with just how much Aquila could gain by selling its utilities, which are located in seven states. The report pointed out that the buyer of Aquila’s utility assets will not have an incentive to pay substantial premiums to Aquila unless it believes the premium paid can be recovered through increased utility rates charged to ratepayers, a provision the commission likely would not allow.

The KCC added that it also has the authority to prevent a “sub-optimal successor,” chosen by Aquila, from obtaining a certificate and taking over the incumbent’s utility business in Kansas.

Just last week, Aquila announced an “accelerated repositioning” plan that will involve selling some utility assets in order to collect funds for an investment program designed to achieve 3-5%/year earnings growth and eventually return the company’s credit to investment grade status (see NGI, March 21). The KCC has given the company until Feb. 9, 2006 to move the company’s credit from its current “junk” rating to an “investment grade” status.

Aquila had said that the utilities under consideration for divestiture are its natural gas operations in Michigan, Minnesota, and Missouri; its electric operations in Colorado and Kansas; and St. Joseph Light & Power in Missouri. It estimates that these assets are worth about $874 million; they serve more than 632,000 customers. The other utilities Aquila operates are electric properties in Missouri (formerly Missouri Public Service) and natural gas properties in Iowa, Nebraska, Kansas and Colorado.

The noncore assets considered for sale include three merchant peaking plants and Everest Connections. The company also plans a settlement of its Elwood tolling contracts. The proceeds from the sale of select utility and noncore assets will be used to retire debt and other liabilities. The company has targeted up to $700 million of debt obligations to pay down. As of December 2004, the company had about $2.4 billion in total debt outstanding, including long-term gas contracts.

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