The share price for Aquila, Inc. common stock dropped 74 cents or 24% to $2.34 after the company announced Monday a public offering of 40 million shares of its common stock, and 12 million of premium income equity securities (PIES). The PIES represent $300,000,000 aggregate principal amount of convertible senior notes, which will mandatorily convert into common stock no later than Sept. 15, 2007.

Aquila has granted the underwriters an option to purchase up to an additional 15% of the common stock and of the PIES to cover over-allotments, if any. Net proceeds from these offerings will be used to retire long-term debt and other liabilities, and strengthen the company’s balance sheet.

Earlier this month Aquila, based in Kansas City, MO, reported continued losses for the second quarter, although at a lesser rate than a year ago. The company reported a fully diluted loss of $.22 per share for the second quarter of 2004, or a net loss of $43.3 million, compared to a loss of $.41 per fully diluted share, or a net loss of $80.6 million, in the 2003 second quarter. The company, hit hard by the collapse of the gas and power merchant energy business, has been selling off properties in an effort to pay down debt.

Aquila also announced Monday it has reached an agreement with the American Public Energy Agency (APEA), a supplier of natural gas to communities principally in Nebraska, regarding the satisfaction of its claims upon the termination of two long-term natural gas supply contracts that will occur on Sept. 30. The APEA settlement, coupled with a settlement announced in July with the Municipal Gas Authority of Mississippi, represented 75% of Aquila’s long-term prepaid natural gas supply contract exposure.

On Sept. 30 APEA will receive a liquidated damages payment from the Chubb Group of Insurance Companies and a termination fee from Aquila’s merchant affiliate which it is phasing out. In July Aquila also announced that it had reached a final settlement with Chubb, which provided the surety bonds on the natural gas contracts.

Lehman Brothers Inc. is the sole book running manager for both of the public offerings announced Monday. Credit Suisse First Boston LLC is a joint-lead manager for both offerings. Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc. are co-managers for the common stock offering.

In its quarterly report Aquila said sales for the quarter totaled $335.3 million, compared to $367.4 million a year earlier. The quarterly results in 2004 included a net pretax gain on sale of assets of $10.4 million, compared to a net pretax loss on sale of assets of $103.0 million in the 2003 quarter. This positive change was partly offset by having no equity in earnings of investments in the 2004 second quarter, due to the sale of Aquila’s investments in independent power plants in March 2004 and its investment in Australia in 2003. In the second quarter of 2003, the company reported $36.6 million of equity in earnings of investments.

“We’ve made steady progress advancing the long-term financial repositioning strategy we began in 2002,” said Richard C. Green, Aquila chairman and CEO, told analysts in a second quarter conference call. “Aquila today is largely refocused on its domestic, regulated utility business as we continue to wind down the energy merchant portfolio and settle or terminate the various contracts that have been causing negative cash flows for far too many quarters.

“With our exit from Canada in this year’s second quarter, we completed the sale of the last of our international utility assets,” Green said. “However, we still have plenty of challenging work ahead of us to meet our goal of reestablishing Aquila as a stable, financially strong domestic utility.”

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