KANSAS CITY, Mo., Aug. 12, 2002 — Aquila Inc. recently reported a fully diluted loss of $5.69 per share for the second quarter, compared to earnings per share of $1.21 in the second quarter of 2001.
Excluding non-recurring charges of $966.4 million or $858.5 million after tax, second quarter operating earnings were $.34 per fully diluted common share. For the first half of 2002, the company reported a fully diluted loss of $5.49 per share, compared to earnings per share of $1.93 for the first half of 2001.
“This year’s second quarter was a very difficult one,” said Robert K. Green, Aquila’s president and chief executive officer. “The actions we have taken recently — such as exiting the wholesale energy trading business, reducing the dividend and writing down certain asset values — were painful but necessary steps as we transition back to our roots as an operator of network and generation assets.”
Green said that based on lower than expected power prices, higher interest costs and lower Quanta Services earnings, Aquila is reducing its full-year earnings guidance to $1.00 per share, down from previous guidance of $1.30 – $1.40. He said the largest factor is the lower than expected power prices reflecting reduced demand during the economic downturn, reduced liquidity in the energy market as players have exited, and the current over-supply of electric generation capacity.
Merchant Services’ second quarter loss before interest and taxes was down $440.5 million compared to the same period of 2001. Approximately $341.3 million of this variance relates to non-recurring items that are discussed separately. The remaining decrease in 2002 of $99.2 million for the quarter resulted mainly from less volatile and lower commodity prices in 2002, a change in the method of accounting for gas storage inventory, and the shorter period of full-scale operations resulting from the June 17, 2002 decision to cut back the wholesale energy marketing and trading business.
Capacity Services had operating earnings before interest and taxes (EBIT) of $25.6 million for the quarter compared to $41.1 million a year earlier. The main factors impacting the quarter were lower “spark spreads” (the difference between the price of power and the fuel cost for its generation) when compared to levels experienced in 2001, lower power prices, and lower volumes and prices of natural gas liquids in the gas gathering and processing business.
Global Networks Group
Second quarter EBIT for Global Networks was a loss of $673.7 million, down $725.7 million compared to the second quarter of 2001. One-time charges (discussed later) accounted for $735.9 million of the variance. Excluding those non-recurring items, operating EBIT was up $10.2 million compared to a year earlier. The majority of this increase relates to the suspension of Aquila’s long-term incentive plan until Aquila’s credit ratings are improved.
Second quarter operating EBIT from Domestic Networks was $17.6 million, compared to $9.8 million in the 2001 quarter. The improved results primarily reflect lower expenses resulting from the suspension of Aquila’s long-term incentive plan, the reduction in bad-debt expense and the non-amortization of goodwill effective January 1, 2002. These were partially offset by Quanta Services’ lower earnings guidance during the quarter and reduced power sales to Western markets.
International Networks provided operating EBIT of $44.6 million for the second quarter compared to $42.2 million for the same period in 2001. The increase in earnings mainly reflects the acquisition of Midlands Electricity in the United Kingdom in early May 2002, which contributed $6.7 million during the second quarter, a strengthening of foreign currencies against the dollar, and the non-amortization of goodwill effective January 1, 2002. These positive factors were offset by a reduced level of carrying cost recovery on deferred purchased power balances in Canada.
Quanta Investment Impairment Charge
This non-cash impairment charge reflects Aquila’s assessment of the fair value of its investment in Quanta Services following Aquila’s decision in the second quarter to terminate its proxy contest for control of Quanta and the significant decline in the value of Quanta’s common stock, which reflected Quanta’s adjusted 2002 earnings outlook and the market’s concerns about the health of the overall industry.
Goodwill Impairment Charge
On June 17, 2002, Aquila began to scale back its wholesale energy trading business resulting in the impairment of the goodwill associated with that business. Accordingly, the company wrote off the goodwill balance allocated to Wholesale Services that had been generated when Aquila Merchant Services was recombined with the parent company in January 2002.
In addition to the June 17 decision to scale back the wholesale energy trading business, Aquila recently restructured its domestic regulated utility business. Restructuring costs in the second quarter for these two actions totaled $71.8 million. Of that, $19.9 million related to Domestic Networks and $51.9 million related to Merchant Services. Most of the costs related to employee separation costs and the write-off of office space improvements. An additional restructuring charge related to future severance, retention and lease termination costs is expected for the third quarter as a result of the August 6 decision to exit the wholesale energy trading business.
Communications Technology Investments Impairment Charge
Aquila wrote down certain minority investments in communications technology businesses by $23.1 million as these businesses failed to achieve certain operating goals, had continued losses and depletion of capital, and are being impacted by overall industry pressures.
Gain on Sale of Subsidiary Stock
In April 2001, simultaneously with the initial public offering of Aquila Merchant Services, Aquila, Inc. sold 5,750,000 Aquila Merchant Services shares directly to the public and recorded a gain of $110.8 million.
In an effort to strengthen its balance sheet and credit ratings, Aquila has targeted the sale of $1 billion in non-strategic assets. Last month the company announced the sale of its 16.58 percent interest in the Lockport Energy facility near Buffalo, New York for $37.5 million in cash.
UnitedNetworks, 55.5 percent-owned by Aquila, announced on June 11, 2002 that it would seek expressions of interest from potential buyers. In July, UnitedNetworks received indicative bids from several interested buyers and named a short list of bidders that now are conducting due diligence. Bidders must make their final binding bids in August, and selection of the successful bidder is currently targeted for the end of the month. UnitedNetworks is the largest electric and natural gas distribution utility in New Zealand.
Aquila has also announced it is also starting a formal bid process to sell its 79.9 percent interest in Midlands Electricity in the United Kingdom.
A replay of the live webcast will be available for a few days. To access the webcast via the Internet, go to Aquila’s website at www.aquila.com and click on “Investors” near the top of the screen, then click on “Presentations & Webcasts” at left for the link to the webcast.
Replay will also be available by telephone through August 15 at 800-405-2235 in the United States, and at 303-590-3000 for international callers. Callers must enter the access code 466647 when prompted.
Additional supplemental information including income statements by business segment, consolidated cash flow statement, consolidated balance sheet and statistical information is available at www.aquila.com. Click on “Investors” near the top of the screen, then “Investor Guide” in the middle of the page.
Based in Kansas City, Missouri, Aquila operates electricity and natural gas distribution networks serving more than six million customers in seven states and in Canada, the United Kingdom, New Zealand and Australia. The company also owns and operates power generation and mid-stream natural gas assets. At June 30, 2002, Aquila had total assets of $11.9 billion. More information is available at www.aquila.com.