As it continues its efforts to exit the wholesale marketing arena, sell assets and restructure, Aquila Inc.’s CEO last week warned that the losses will continue through this year and into 2004 as the rebuilding utility repairs its damaged balance sheet.

Fourth quarter losses were $5.22 per share, with a net loss of $977.9 million on sales of $411.3 million. In 4Q02, Aquila lost 5 cents a share, or $6.2 million. Aquila’s CEO Richard C. Green Jr. said during a conference call that Aquila will not provide earnings guidance this year because of the unpredictable timing of asset sales and debt paydowns. Aquila’s management has more important concerns than focusing on quarterly earnings goals, he said.

The news did not sit well with shareholders Tuesday, who sent the stock down about 10% in heavy trading to close at $1.99. Aquila has traded as high as $25.23 in the past year.

For the full year 2002, Aquila reported a fully diluted loss of $12.83 a share, or a net loss of $2.1 billion on sales of $2.4 billion for the year. Most of last year’s losses came from Aquila’s restructuring charges, impairment charges and net losses on asset sales and discontinued operations.

Most of last year’s charges mirrored the losses in the final quarter as Aquila refocuses on its core utility operations. During the year, Aquila reorganized its U.S. utility operations by state to improve efficiency and better align cost structures and services with specific state requirements.

“During the second half of 2002, we began our transition from being a major player in the energy trading sector to concentrating on being a service-oriented operator of electric and natural gas utilities located principally in the United States,” said Green. “We knew that we had a number of serious situations to address, and the necessary action steps we have taken are clearly reflected in the 2002 results.

“We will continue following our restructuring plan throughout 2003,” Green said. “Our underlying utility operations are valuable assets and we will stay focused on maximizing the potential of that business.”

Aquila recorded restructuring charges of $22.4 million for the fourth quarter and $210.2 million for the year. The fourth quarter restructuring charges consisted primarily of a loss on the termination of certain aggregator loans to substantially complete Aquila’s exit from that business; losses on the exit from certain unfavorable interest rate swaps resulting from the early repayment of debt due to the restructuring of the business; and additional severance and retention payments to employees.

Several significant impairment charges impacted earnings after Aquila changed its strategic focus within its communications business, Everest Connections. The company decided to halt the build-out of Everest Connections’ network to allow that business to become self-funding, and as a result, Aquila recorded an impairment charge of $204.5 million.

Meanwhile, because of liquidity constraints, Aquila also changed its strategy on international investments, resulting in impairment charges of $247.5 million for United Kingdom investments and $127.2 million against Australian investments.

Like other former energy merchant heavyweights, Aquila experienced significant net losses and negative cash flows from operations last year. Because of credit downgrades, it had to post a substantial amount of cash or letters of credit as collateral on several collateral agreements. As a result, the company said it violated an interest ratio covenant as well as a covenant that requires maintaining a specified debt to capitalization ratio.

On April 11, Aquila closed on a new financing agreement that replaces its short-term credit facilities (see NGI, April 14). The package consists of two secured loan facilities — a one-year $200 million loan to UtiliCorp Australia Inc. and a $430 million three-year term loan to Aquila. The initial amount drawn under the one-year loan will be $100 million, and the company will have an option to draw another $100 million within 30 days. The one-year loan is non-recourse to Aquila.

Proceeds from the financings will be used to retire debt and eliminate the covenant violations. Also, the new financings are expected to be enough to cover operational needs through June 2004, the company said. Its next significant need for outside capital relates to senior debt that matures in 2004, and the company anticipates retiring those notes through additional asset sales.

Aquila also filed its Form 10-K last week, restating cash flow for 2001 and 2000. The changes, said the company, had no impact on earnings or losses.

By business unit, the report was grim. Domestic Networks reported a loss before interest and taxes of $829.6 million for 2002 compared to earnings before interest and taxes (EBIT) of $117.9 million for 2001. International Networks reported a loss before interest and taxes of $70.1 million for 2002 compared to EBIT of $125.4 million in 2001. Capacity Services reported a loss before interest and taxes of $105.0 million for 2002 compared to EBIT of $88.4 million for 2001.

Wholesale Services reported a loss before interest and taxes of $566.0 million in 2002 compared to EBIT of $224.9 million in 2001. This loss included impairment charges of $182.1 million, and restructuring charges of $173.8 million. In addition, the lack of price trends and lower volatility, the record earnings in 2001 and the exit from the wholesale trading business led to a decrease in gross profit for Wholesale Services operations of $726.3 million in 2002 compared to 2001.

The wholesale unit incurred $115.8 million in losses in 2002 as a result of actions to balance counter party positions, reduce open positions and terminate existing contracts. Also impacting results were unfavorable movements in credit, liquidity and interest reserves, unfavorable movements in trading positions that were not fully hedged, and unfavorable adjustments related to final settlements, said Aquila. These 2002 losses are in comparison to record earnings in 2001.

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