Aquila's latest plan leaves credit analyst wanting

By Ronda Fears

Nashville, Tenn., June 18 - Aquila's latest plan leaves Carol Levenson, director of research with Gimme Credit, wanting and with so much uncertainty in the merchant energy business she does not recommend the credit.

"We realize energy merchant Aquila (Baa3/BBB) had the best intentions when it announced its 'strategic and financial repositioning' yesterday," Levenson said in a report Tuesday.

"However, setting aside the fact that we didn't detect a whole lot that was dramatically new in this plan, we're afraid the company's target audience, the rating agencies, Moody's in particular, may also find it wanting."

The analyst said she does not ever recall encountering a company that actually linked its management incentive program to achieving rating upgrades, Aquila's catchily-titled Project Baa1/BBB+, but embarking on nearly $2 billion in debt-financed acquisitions in a post-Enron world is probably not a surefire route to a ratings upgrade.

"Without these pending acquisitions, Aquila could just hunker down and wait out the sector storm instead of having to venture forth into the capital markets," Levenson said.

Although it's hard to keep track of all the old plans, new plans and revised plans in the energy sector, she said Aquila's plan contained only a few "new news" items.

The company will cut its dividend, saving a whopping $80 million annually.

It is reducing the capital allocated to its wholesale energy services business to less than $150 million and lowering the risk profile of this business by cutting back on trading and focusing on its owned assets.

Finally, Aquila lowered its earnings guidance for this year by over 40%, excluding non-recurring charges.

The rest of Aquila's plan, including cutting costs, completing $1 billion in asset sales, refinancing $500 million in short-term debt with a bond issue and issuing $400 million in equity, was already announced as part of its strategy to bolster credit quality and alleviate liquidity concerns.

"The business risk reduction is probably the best news, but many obstacles remain," Levenson said.

"Unlike others who have announced similar cutbacks in trading activities, Aquila did not claim its lowered earnings guidance would have no impact on its cash flow."

The company's cash flow projections for the rest of this year, even with the dividend cut and reduced capital spending plans, show it still generating negative free cash flow.

"In fact, unless Aquila is successful in executing its capital markets plans, which is far from a sure thing, it won't achieve its balance sheet target of lowering adjusted leverage below the 50% mark and it could have trouble funding its cash commitments, Levenson said.

Management's projections show all of Aquila's possible liquidity sources being tapped, including $900 million in debt and equity issuance, in order to fund its cash needs this year.

Should the capital markets prove unwelcome, she noted that Aquila will have to rely upon asset sales to raise the cash it needs.

Moreover, the company's cash flow projections do not take into account any loss of cash flow associated with asset sales and thus could prove overly optimistic.

The vicious circle is as follows: Aquila needs to demonstrate its capital markets access and financial flexibility, among other things, in order to keep from being downgraded to junk. But she would not expect, nor encourage, bond investors to participate in a new issue unless the company had already successfully issued stock.

Stock investors, on the other hand, might want to wait to see whether the company will remain investment grade before they purchase this dividend-depleted and lower growth stock.

"The stock market is probably Aquila's best hope, and this market reacted positively yesterday," Levenson said.

"Nevertheless, we feel there's too much uncertainty to recommend this name."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.