The market continues to forgive, rather than punish, bad news in the merchant energy sector. Aquila ( ILA) on Thursday became the latest beneficiary of this mood swing. The Kansas City, Mo.-based utility swung to a first-quarter loss and handily missed Wall Street expectations for a slim operating profit. But the market quickly decided to focus on gains in the utility division -- now Aquila's "core" business -- instead of the lingering energy trading setbacks that continue to drag the company down. The stock took only a brief hit at the open, tumbling 7.8% to $2.60, before bouncing strongly into the green at $3 a share by midmorning. Karl Miller, an industry veteran who now leads an energy-related acquisitions firm, attributes the current industry rally to pure emotion. "The companies still have weak cash flow and excessive leverage," Miller said. "That's a formula for disaster. ... The stocks are trading on hope."
The market was clearly optimistic about Aquila on Thursday. Overlooking another poor quarter, investors instead jumped to embrace Aquila's promise -- being repeated like a mantra throughout the industry -- that it will eventually become a trading-free utility again. "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," Aquila CEO Richard Green said. "We will continue following our restructuring plan throughout 2003 and 2004." But for now, Aquila's core utility business has yet to overcome the ongoing drain from energy trading. The company's domestic utility, helped by cost cuts and recent rate hikes, reported a 53% surge in earnings before interest and taxes during the period. But rate cuts elsewhere slashed international utility profits by two-thirds. And the company's merchant energy business, hurt by unfavorable mark-to-market accounting changes, swung to a big loss that wiped out operating profits elsewhere.