Moody’s downgrades Aquila, as project BBB+/Baa1 backfires

Moody's Investors Service yesterday lowered Aquila’s senior unsecured debt rating to non-investment grade with a stable outlook, from Baa3 to Ba2. The troubled Missouri-based energy company had hoped to maintain its investment grade rating, exiting the energy trading business and selling assets as part of its plan to stave off any downgrade.

The plan has seemingly backfired, however, and Aquila shares fell nearly 4% yesterday following the news. The company launched an initiative, known internally as Project BBB+/Baa1, in March to reduce costs by $100 million and sell $500 million in non-core, non-strategic assets in an effort to improve its credit standing.

"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 Green, Aquila’s president and chief executive. "We're committed to achieving a stronger credit profile and will remain focused on executing our asset sale programme and exiting the wholesale energy marketing and trading business.”

“The rating downgrades reflect Moody's view that poor returns from investments outside the regulated utility business in the US have resulted in a significant deterioration of operating cashflows,” Moody’s said. “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. “

But the asset sales expected in the near term do not generate enough proceeds to appropriately capitalise the company at the former rating level, Moody’s added.Furthermore, proceeds below expectations could negatively impact the company's liquidity and outlook.