Standard & Poor’s Ratings Services on Wednesday kept Aquila Inc.’s credit rating at investment grade, albeit one notch above “junk” status. Analyst Todd Shipman said Aquila’s credit profile had been “stressed,” but found that “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.” The move to keep Aquila at investment grade contradicted the ratings a day earlier by Moody’s Investors Service, which cut the Kansas City-based company to “junk” status (see Daily GPI, Sept. 4). The downgrade by Moody’s requires 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 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.”

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