Aquila finally buries energy trading business

Missouri-based energy trader Aquila today said that it has put the lid on the coffin of its energy trading division, following almost two months of speculation. In June, Aquila unveiled plans to wind down its trading book, but said it was looking for a strongly rated institution to take over or buy into the business.

Although Aquila brought in New York-based private investment bank Blackstone Group to find a partner, talks with potentially interested partners apparently amounted to nothing. “While we had explored the idea of securing a partner, we believe it is in the best interest of our shareholders to completely exit the wholesale energy marketing and trading business,” said Robert Green, Aquila president and chief executive. "Our focus now is to ensure a co-ordinated and seamless exit.”

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 as part of an effort to improve its credit standing. Accordingly, Aquila said it would reduce its exposure to energy trading in response to the increased cost of capital for that business, cut jobs and issue $900 million of new debt and equity to strengthen its balance sheet. The company continued to trade energy to hedge its own generation units, but eliminated all market-making activity and speculative trading.

As a result of today's announcement, Aquila Merchant Services' 500-strong North American and European workforce “will be significantly reduced”, said an Aquila spokeswoman. She told RiskNews that the redundancies would occur in phases over the next few months, but could not specify how many jobs would go. Since May, Aquila has shed about 550 positions across all risk management operations.

But the spokeswoman stressed that Aquila has reached an agreement with Chicago-based hedge fund Citadel Investment Group to provide “potential career opportunities” for those Aquila employees directly affected.

Citadel is believed to be interested in building up its energy trading operations, and hired Vince Kaminski, former head of Enron’s Houston research group, at the end of May.Market participants had originally thought that Citadel may have bought into Aquila’s Merchant Services division. Citigroup and French commodities company Louis Dreyfus were also rumoured to have been in talks with Blackstone and Aquila.

Aquila's abandonment of energy trading may not bode well for Houston-based energy company Dynegy. Like Aquila, mounting credit concerns have forced the company to re-evaluate its trading business. Last week, Dynegy said it was exploring “strategic options” for its risk management business, including the creation of an independently rated joint venture with a strong investment-grade credit-rated company. A Dynegy spokesman told RiskNews today that the company has not changed its strategy, and hopes to finalise a deal before the end of the year. But he added: "We have no drop dead date."