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Williams, Aquila Hanging Right In

A year after separate brushes with insolvency, the energy firms show lurching progress.

These days, recovering gamblers like

Williams

(WMB) - Get Williams Companies, Inc. Report

and

Aquila

(ILA)

get their thrills by simply scraping by.

Neither of the energy companies reported the winning results Thursday that make hearts race with excitement. But nor did they deliver massive shocks, as they did a year ago, with big losses on their risky merchant energy bets.

This time around, Williams posted a modest third-quarter profit, totaling 4 cents a share from core operations, that matched Wall Street expectations. Meanwhile, Aquila weathered a third-quarter loss that -- while significant -- still paled in comparison with the bloodshed of a year ago.

Williams slipped 14 cents to $10.08 on its quarterly update, while Aquila actually inched up 2 cents to $3.98. But then, Williams had already enjoyed a strong run-up -- surging 270% in a year -- ahead of Thursday's report.

Fredric E. Russell, a Tulsa money manager who follows Williams closely, applauded the stock's rally. But he also viewed the company's latest results with some skepticism.

"Improvement from continued operations was unimpressive, anemic and subject to debate," said Russell, who has no position in the stock. "With businesses rapidly being sold from quarter to quarter and year to year, it's difficult to decide exactly what the continuing businesses actually are. ... Certainly, this is the mother of all reports for nonrecurring or discontinued items."

Strip Club

All told, Williams reported a third-quarter profit of 20 cents a share that reversed a 58-cent loss from a year ago. But ongoing earnings, stripped of noncore results, actually came in 80% lower than profits overall. The company pointed to its troubled power segment -- which it labeled both a continuing operation and a noncore business -- as the primary driver behind the year-over-year improvement.

In the latest quarter, the power segment swung to a $43.9 million profit by avoiding big mark-to-market losses -- which pushed the division $388 million into the red a year ago -- terminating an expensive derivative contract and cutting expenses. Indeed, the company's ability to shave interest costs, in particular, helped results overall.

The company in fact highlighted its debt reduction as a key third-quarter accomplishment before moving on to its "solid performance" from core business units.

"We've taken actions that have reduced our interest expense, and we are reducing our debt at a meaningful level," Williams CEO Steve Malcolm stated. "It should not be lost that, in the midst of this restructuring, our core businesses have continued to report solid performance, and we have seen positive results from our efforts to reduce the financial impact of our non-core power business."

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By selling assets and canceling trade contracts, Williams has this year managed to pick up $3.1 billion and, in turn, reduce debt and boost cash by a total of $2.8 billion. Perhaps most notably, Williams has paid off a lifesaving loan extended in part by

Berkshire Hathaway

(BRKA)

-- at what some called loan-shark interest rates last year -- and replaced it with cheaper financing.

Russell complimented senior management for "staying the course, keeping the ship afloat and actually charging ahead into rough seas" after last year's close brush with bankruptcy. But he's not convinced the company has reached smooth waters yet.

"A mountain of long-term debt still survives," he said. "At the same time, interest expense has already benefited greatly from

elimination of the Buffett albatross. I'm sure Williams was glad to get the hell out of Dodge -- or, more accurately, Omaha."

Although asset sales have helped the company's debt situation, they have also hurt its business results. The company's core natural gas units, for example, weathered a sharp slide in third-quarter earnings that was due in part to a smaller asset base. Gas-related profits spiraled 44% to $275 million, as a $144 million asset-sale gain disappeared along with production contributions from the assets that were shed. Profits in all three core segments -- gas pipeline, exploration and production, and midstream gas and liquids -- were in fact down from last year.

Red Ink

Meanwhile, Aquila continues to swim in red ink. The midwestern utility, still reeling from its disastrous foray into energy trading, posted a third-quarter loss of 87 cents a share that was at least better than the $1.85 loss of a year earlier. The company offered no core earnings figure for comparison to Wall Street estimates. But some observers said that the company had fallen 2 cents shy of expectations, with an ongoing quarterly loss of 11 cents a share.

Like Williams, Aquila focused more heavily on its restructuring efforts than on its business performance when releasing third-quarter results.

"Aquila has significant work ahead to ensure a firm foundation for the company," CEO Richard Green acknowledged. But "we're closer to our goal of again being a financially sound owner and operator of utilities in the United States as we benefit from asset sales that allow us to pay down obligations and refocus on our core domestic operations."

Still, Aquila has already taken some big impairment charges -- including $138 million in the latest quarter alone -- as it sells off overvalued assets. And it warned on Thursday that "future impairment charges are possible" as the restructuring process continues.

In the meantime, even Aquila's core utility operations struggled in the third period. Utility profits dropped 9.5% to $45.5 million because of "lower off-system sales and the increased cost of natural gas used to fuel generation plants."

But Aquila's wholesale and capacity services units weathered outright losses. The wholesale unit posted a third-quarter loss of $55.9 million that was, nevertheless, a clear improvement over the $236 million loss from a year earlier. At the same time, however, capacity services saw its third-quarter loss nearly double to $101 million, because of a big impairment charge.

"The 2003 loss resulted primarily from the $87.9 million impairment charge related to investments in independent power plants and lower gross profit from merchant power plants as well as higher natural gas prices that made them uneconomical to operate," the company explained. "Aquila does not expect capacity services to be profitable during the foreseeable future."

Teco Energy

(TE)

-- another company that gambled big on the glutted power industry -- welcomed some good news this week, however. Late Wednesday, Standard & Poor's left Teco's investment-grade rating intact after the Internal Revenue Service essentially cleared the way for the company to sell some valuable syn-fuel assets. But S&P, which still has a negative outlook on the company, also warned that the Teco's credit remains vulnerable.

"Standard & Poor's has doubts about management's commitment to carry out its

restructuring plan, as past actions have been inconsistent with stated intentions," the ratings agency wrote. "Continued interest in higher-risk businesses on the part of Teco Energy's management most likely would result in a downgrade of the corporate credit rating to the mid-BB range."

S&P currently rates Teco's credit at BBB-minus, its lowest investment-grade rating. The company's stock was unchanged at $12.93 after S&P's latest report.