New York, September 03, 2002 — Moody’s Investors Service downgraded the debt of Aquila, Inc. and the issuer rating of Aquila Merchant Services to Ba2, concluding the rating review instituted on May 20th. The rating outlook is stable.
Aquila, Inc.’s ratings downgraded include: Short term rating for Commercial Paper, from Prime-3 to Not Prime Senior Unsecured Debt from Baa3 to Ba2 Issuer Rating from Baa3 to Ba2 Subordinated Debt from Ba1 to Ba3 Preferred Stock from Ba2 to B1 Moody’s also assigned a senior implied rating of Ba2.
Moody’s downgraded Aquila Merchant Services’ Issuer Rating from Baa2 to Ba2.
Aquila Inc. responded that it is prepared to respond to the potential effects resulting from today’s downgrade.
“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 Robert K. Green, president and chief executive officer of Aquila.
“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,” Green said.
This reflects an expectation that its obligations will carry the guarantee of Aquila, Inc. going forward. The rating downgrades reflect Moody’s view that poor returns from investments outside the regulated utility business in the U.S. have resulted in a significant deterioration of operating cash flows.
These investments, financed almost exclusively with a high level of debt, include 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.
The poor performance of some of these investments resulted in impairment charges of $895 million and restructuring charges of $ 71.8 million for the financial period ended June 30, 2002. Market conditions and the results of the company’s business segments have forced it to sell assets to meet liquidity pressures. The company relies on asset sales to shore up its liquidity position this year and next.
Announced asset sales total approximately $400 million, and could reach $1 billion by year-end. The Ba2 rating incorporates the execution risk associated with completion of the asset sales as the company transitions from a diversified merchant energy company into a mostly regulated utility company with some unregulated generation assets.
The new rating also considers the on-going cash impact of gas pre-pay agreements, which will be a substantial drain on cash flow over the next several years.
With about 95% of projected future earnings coming from regulated assets, the restructured Aquila generates cash from operations which supports its capital spending and dividends, but leaves little cash flow to service debt. In short, the asset sales expected in the near term do not generate enough proceeds to appropriately capitalize the company at the former rating level.
The rating outlook is stable, reflecting Moody’s expectation that the asset sales will occur, and that the proceeds will be used to repay a significant level of debt. Proceeds below expectations could negatively impact the company’s liquidity and outlook.
A supportive rating factor is the company’s unencumbered asset base of mostly regulated utilities, which could provide some financial flexibility.
Moody’s assigned a senior implied rating at the level of the senior unsecured debt, reflecting the modest level of structural subordination, as well as the lack of significant secured debt.
Aquila, Inc. is a diversified energy company, whose core operations include gas and electric distribution networks, headquartered in Kansas City, Missouri.
Source: Moody’s Investors Service