Aquila Inc.’s first quarter losses, though anticipated because of its decision to wind down its once mighty wholesale energy trading business, showed a glimmer of positive news Thursday, with the company’s domestic utility networks up more than 50% from a year ago.

Overall, the Kansas City, MO-based utility reported a fully diluted loss of 27 cents per share for the first quarter of 2003, or a net loss of $51.9 million on sales of $579.3 million. For the same period last year, Aquila had net income of 32 cents per share, or $44.4 million on sales of $767.4 million, including earnings of $4.4 million from discontinued operations, net of tax.

Losses for the first quarter mostly came from trading and contract losses after management decided last year to exit its once high flying energy trading business. The quarter also was hit by an increase in fixed capacity payments for merchant generation capacity, mark-to-market losses on some of its long-dated forward contracts, and higher interest cost reflecting additional borrowings and higher interest rates due to the company’s non-investment grade credit rating. Aquila also recorded $6.3 million in restructuring charges primarily connected with unfavorable interest rate swaps.

However, earnings before interest and taxes (EBIT) from Domestic Networks increased 53% in the first three months of the year, which the company attributed to cost control measures and rate adjustments that took effect in two states beginning in the second quarter of 2002. Lower results from International Networks reflected the October 2002 sale of all Aquila’s interests in New Zealand and an unfavorable regulatory decision regarding depreciation of its network assets in Alberta.

“As planned, in 2003 we are continuing our transition from being a major participant in the energy trading sector to concentrating on our core utility operations in the United States,” said CEO Richard C. Green Jr. “We will continue following our restructuring plan throughout 2003 and 2004.”

However, of concern to some analysts was what Green did not say during the analyst conference call that accompanied the earnings release on Thursday. He and CFO Rick Dobson both declined to offer any EBIT projections for this year, despite several questions about what’s ahead. Analysts also questioned whether the streamlined Aquila would be able to carry its debt burden after many of its non-U.S. utility assets are sold.

“No one questions whether the old UtiliCorp United utility business is a good one,” said CreditSights analysts Dot Matthews and Andy DeVries. “In fact, maybe ILA should consider changing its name back to give investors a bit more of a warm and fuzzy feeling after the massive egg the eagle has laid.”

CreditSights estimates that liquidity is adequate for the utility, but analysts were puzzled as to why Green and Dobson would not detail the company’s current cash position. “We found this mildly disturbing. We think the CEO and CFO ought to be able to tell an earnings call audience what the current cash position is, especially since they know they are almost 100% sure to be asked that question.”

Pulled up by interim rate increases in Michigan and Iowa, Aquila’s Domestic Networks reported first quarter EBIT of $70.6 million, compared with $46.1 million a year earlier. Operating expense also decreased $24.5 million year to year, primarily due to labor and benefit savings and lower administrative expenses as a result of Aquila’s 2002 restructuring. In addition, Everest Connections’ EBIT was $2.8 million higher in the 2003 quarter mostly because of a customer increase.

Capacity Services reported a loss of $48.7 million, compared to EBIT of $2.2 million in 1Q2002. The loss resulted primarily from a $21.4 million decrease in mark-to-market gains that occurred in 2002 but did not recur due to lower spark spreads in the forward market. In addition, there were $16.0 million of non-cash mark-to-market losses on long-dated forward contracts in the 2003 quarter.

In connection with its merchant power plants, Aquila makes fixed capacity payments evenly throughout the year. For the first quarter, capacity payments increased by $11.5 million as new plants became operational late in 2002. This additional capacity was utilized on a limited basis at prices that were not sufficient to cover the fixed capacity payments, the company said.

Wholesale Services also reported a loss of $52.6 million, compared with earnings of $21.5 million a year earlier, reflecting its exit fro whole trading. The $52.6 million loss included a non-cash loss of approximately $27 million related to the sale of all of the capacity under certain long-term gas transportation contracts at substantially less than Aquila’s future commitments. The remaining first quarter margin losses stem from mark-to-market losses and unfavorable settlements related to Aquila’s trading portfolio, including highly structured rainfall, stream flow and load base fixed price sale transactions.

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