Coming as no surprise Thursday, Aquila Inc., which shut down its marketing and trading business earlier this week (see Daily GPI, Aug. 7), reported a loss of $5.69 per share for the second quarter, compared to earnings per share of $1.21 in the second quarter of 2001. The troubled Kansas City-based company took its lumps on its Quanta Services investment, company restructuring and lower commodity trading volumes and prices.

Excluding non-recurring charges of $966.4 million or $858.5 million after tax, the company posted second quarter operating earnings of 34 cents per share. For the first half of 2002, the company reported a loss of $5.49 per share, compared to earnings per share of $1.93 for the first half of 2001.

Shortly after releasing its second quarter earnings, Aquila announced that it has signed an agreement to sell its Texas natural gas storage operations for $180 million in cash to PacifiCorp Power Marketing, Inc. (PPM), ScottishPower’s Oregon-based competitive U.S. energy business. The move is in line with its previously announced effort to strengthen its balance sheet and credit ratings through the sale of $1 billion in non-strategic assets.

Aquila’s Global Networks Group contributed the most in the non-recurring charges category, posting one-time charges of $735.9 million ($692.9 million of which is attributable to Aquila’s Quanta investment). Including those charges, second quarter results before interest and taxes (EBIT) for the group added up to a loss of $673.7 million, down $725.7 million compared to the second quarter of 2001. Excluding non-recurring items, Aquila said operating EBIT was up $10.2 million compared to a year earlier. The company allowed that the majority of this increase relates to the suspension of Aquila’s long-term incentive plan until Aquila’s credit ratings are improved.

Of the non-recurring item charges in the quarter, Aquila’s restructuring accounted for $71.8 million. The company said that in addition to the June 17 decision to scale back the wholesale energy trading business, Aquila recently restructured its domestic regulated utility business (see Daily GPI, June 19). Of the $71.8 million, $19.9 million related to domestic networks and $51.9 million related to merchant services. Aquila said most of the costs related to employee separation costs and the write-off of office space improvements.

“This year’s second quarter was a very difficult one,” said CEO Robert K. Green. “The actions we have taken recently — such as exiting the wholesale energy trading business, reducing the dividend and writing down certain asset values — were painful, but necessary steps as we transition back to our roots as an operator of network and generation assets.”

In addition, the company said that an additional charge related to future severance, retention and lease termination costs is expected for the third quarter as a result of the Aug. 6 decision to exit the wholesale energy trading business completely.

Based on lower than expected power prices, higher interest costs and lower Quanta Services earnings, Aquila said it is reducing its full-year earnings guidance to $1 per share, down from previous guidance of $1.30-1.40. Green said the largest factor is the lower than expected power prices, reflecting reduced demand during the economic downturn, reduced liquidity in the energy market as players have exited and the current over-supply of electric generation capacity.

Aquila’s Merchant Services took a sizeable hit during the quarter. The segment’s second quarter loss before interest and taxes was down $440.5 million compared to the same period of 2001. About $99.2 million of the loss resulted mainly from less volatile and lower commodity prices in 2002, a change in the method of accounting for gas storage inventory, and the shorter period of full-scale operations resulting from the June 17 decision to cut back the wholesale energy marketing and trading business.

Capacity Services had operating EBIT of $25.6 million compared to $41.1 million a year earlier. Aquila said the main factors impacting the quarter were lower spark spreads when compared to levels experienced in 2001, lower power prices, and lower volumes and prices of natural gas liquids in the gas gathering and processing business.

Speaking on the Texas storage asset sale, Green said, “This announcement is part of our goal to sell $1 billion in non-strategic assets. While we are selling our Texas storage operations, we still remain committed to continuing the development of our western gas storage properties, which include Lodi in California and Red Lake in Arizona.”

The company’s Texas storage assets include the Katy storage facility near Houston, one of the largest operating storage facilities in the Southwest, two storage development opportunities and two other storage facilities in North Texas. The Katy facility has a working capacity of 21 Bcf and has connections with 13 different pipelines. Katy currently has 16 Bcf of the 21 Bcf of working gas capacity under firm contract.

In addition to the Texas deal, Aquila made numerous steps in its asset divestment plan over the last quarter. In July, the company announced the sale of its 16.58% interest in the Lockport Energy facility near Buffalo, NY for $37.5 million in cash (see Daily GPI, July 8). On Wednesday, Aquila announced it is also starting a formal bid process to sell its 79.9% interest in Midlands Electricity in the United Kingdom.

Updating the situation of UnitedNetworks (see Daily GPI, June 17), in which it owns a 55.5% stake, Aquila said that it has received bids from several interested buyers and named a short list of bidders that now are conducting due diligence. Bidders must have their final binding bids in by August, with a selection of the successful bidder targeted for the end of the month. UnitedNetworks is the largest electric and natural gas distribution utility in New Zealand.

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