Aquila Shot Leaves Wall Street Smiling

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."

Green Acres

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.

Meanwhile, higher interest expenses -- triggered by Aquila's junk credit rating -- gobbled up nice gains from foreign currency rates.

Overall, Aquila reported a first-quarter loss of $51.9 million, or 27 cents a share, reversing profits of $44.4 million, or 32 cents a share, a year ago. Excluding special items, it posted a first-quarter loss of 27 cents a share instead of the 2-cent profit most were expecting.

Fort Lee

But the company did offer up some upbeat news from an unlikely division. Everest Connections, a broadband company 90% owned by Aquila, should no longer be a drag on the company's results.

"The business recently has become self-funded and cash-flow positive," Aquila announced. "Everest will meet its own cash-flow needs going forward."

Aquila turned the division around by curtailing network expansion and instead focusing on customer growth for its existing network.

In contrast, many energy companies have scrambled to rid themselves of their broadband businesses altogether. Dynegy ( DYN) on Thursday proudly announced that it has now closed the sale of its own communications network to 360networks. The Houston-based energy company originally unveiled plans to sell the business -- as part of a big divestiture program -- in late March.

"Today's closing of the transaction with 360networks, coupled with the earlier sale of European communications, finalizes the exit from Dynegy's communications venture," CEO Bruce Williamson said. "The Dynegy you see now -- and into the future -- is one built around its core energy businesses."

News of the sale pushed Dynegy shares up 5.1% to $5.11 in heavy trading. This marks the first time Dynegy shares have topped $5 since an industrywide meltdown -- and the company's near-bankruptcy -- began burning away at the stock last summer.

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