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.”

Aquila recorded restructuring charges of $6.3 million in the first quarter, including a $5.3 million restructuring charge to exit portions of interest rate swaps related to construction financing arrangements for two merchant power plants. In conjunction with the company’s recent refinancing, debt related to these facilities was paid down and the interest rate swaps were no longer necessary. The company reduced its position and realized the loss associated with the cancelled portion of the unfavorable swaps. In April 2003, Aquila repaid the outstanding balances on the debt and incurred an additional $17.5 million of expense to exit the remaining swap positions, which will be recognized in the second quarter results.

In the quarter, Aquila also recorded $1 million in severance costs following the elimination of approximately 128 positions at its telecommunications business, Everest Connections. Because of the Everest restructuring, Aquila expects to incur approximately $1.3 million in additional restructuring charges for severance and other related costs in the second quarter of 2003.

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.

Everest recently has become self-funded and cash-flow positive, following a decision in the fourth quarter of 2002 to halt network expansion activities and focus solely on customer retention and new customer acquisition to the existing Everest network. Everest will meet its own cash flow needs going forward.

International Networks reported EBIT of $10.6 million, compared with $33.6 million a year ago. The drop reflects a $31.1 million decrease in sales due to a reduction in electric rates for 2002 and 2003, offset by a decrease of $16.8 million in depreciation and amortization related to the Alberta network assets due to a change in regulatory treatment.

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.

Within Discontinued operations, in 2002 and early 2003, Aquila sold its Texas natural gas storage facility, its Texas and Mid-Continent natural gas pipeline systems, including its natural gas and natural gas liquids processing assets and its ownership interest in the Oasis Pipe Line Co., its coal terminal and handling facility and its Merchant loan portfolio. The results of operations of those assets are now reported as discontinued operations. They had earned $4.4 million in 1Q2002.

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