Large losses continued during the second quarter at Aquila, but they were substantially smaller than in 2Q 2002 when the company reported a net loss of $810 million. Aquila, which is exiting energy trading and most of its merchant energy operations to focus on its core utility business, reported an $80.6 million net loss, or ($0.41)/share, during the second quarter of 2003.

The poor financial performance included a loss before interest and taxes of $164.3 million from Capacity Services, which includes the company’s tolling agreements and merchant generation operations and services. Aquila said it does not expect Capacity Services to be profitable for the next two to three years because of the industry’s excess generation capacity, the continued construction of additional power plants and the decreasing liquidity in the marketplace. The resulting downward pressure on power prices has reduced the value of its unsold merchant generation capacity.

What’s left of its energy trading business, which is being phased out, showed a $41.1 million loss before interest and taxes during the quarter. However, Aquila’s utility operations, which will be its core business going forward, showed substantial improvements, reporting earnings before interest and taxes (EBIT) of $85.9 million compared to $54.2 million in 2Q 2002.

Aquila noted that its losses during the quarter were due to restructuring and impairment charges related to last year’s decision to reshape its business to be a regulated utility. In addition, both operating costs and interest expense were higher in 2003 due to the company’s non-investment grade credit rating.

“While losses were anticipated, our transition plan to strengthen Aquila as a financially sound owner and operator of utilities in the United States is progressing very well,” said CEO Richard C. Green Jr. “We have achieved several major components of our plan by selling our Australian assets, exiting the Acadia tolling agreement and continuing to strengthen our domestic networks business.

“We will continue our restructuring through this year and next, especially our work to address our remaining long-term natural gas contracts and fixed capacity payments for merchant power plants,” he said.

During the second quarter, Aquila had impairment charges and a loss on the sale of assets totaling $103 million, primarily due to the termination of the Acadia tolling agreement, in which the company was obligated to buy the fuel for the 1,160 MW natural gas-fired power plant in Louisiana and then sell the resulting generation into the marketplace.

Aquila also recorded $20.8 million in restructuring charges, including $17.8 million related to unfavorable interest rate swaps from which the company fully exited in the second quarter. International Networks recorded a $2.6 million loss on the sale of Aquila’s interest in AlintaGas in Australia.

Including proceeds from the Australian asset sale, which closed in July, Aquila has generated total proceeds of $1.7 billion from the asset sale program it began in the second quarter of 2002. Proceeds from asset sales will continue to be used to reduce liabilities and fund working capital needs.

In the second quarter, the company began a process to solicit interested buyers for its Canadian utility business. Aquila expects to negotiate an agreement in the third quarter and close the sale in the first quarter of 2004.

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