Aquila Reports Third Quarter Net Loss, as Expected; Slight Improvements in Utility Operations Offset by Weather; Conference Call and Webcast Are Today at 9:30 a.m. Eastern

Business Wire, Nov 4, 2004

KANSAS CITY, Mo. -- Aquila, Inc. (NYSE:ILA) today reported a fully diluted loss of $.44 per share for the third quarter of 2004, or net loss of $116.4 million, compared to a loss of $.87 per fully diluted share, or net loss of $169.9 million, in the 2003 third quarter. The per-share results reflect the issuance of 46.0 million common shares and 13.8 million mandatorily convertible securities in late August 2004. Sales for this year's quarter totaled $322.4 million, compared to $322.0 million a year earlier.

"We're continuing to make significant progress toward completion of Aquila's comprehensive repositioning," said Richard C. Green, chairman and chief executive officer. "In the last three months we settled most of our long-term natural gas contracts, had a successful equity offering, and continued to see our credit profile and cash flow improve."

"Our main focus today is on our core utility operations in seven states," Green said. "Those businesses have opportunities to increase their rate base and earnings as we make further investments in service infrastructure. Our liquidity is adequate to provide the utilities with working capital and still continue to pay down other obligations."

The 2004 third quarter results included a net pretax loss on asset sales and other charges of $114.5 million, primarily related to the termination of three long-term natural gas contracts. Net loss on sale of assets was $90.9 million in the 2003 quarter. In addition, operating expense declined by more than 7 percent compared to a year earlier.

For the nine months ended September 30, 2004, the company reported a fully diluted loss of $.96 per share, or a net loss of $211.5 million. Results for the first nine months of 2003 were a fully diluted loss of $1.55 per share, or a net loss of $302.4 million. Sales totaled $1.21 billion in both periods.

Domestic Utilities

Domestic Utilities reported earnings before interest and taxes (EBIT) of $50.7 million in the third quarter of 2004, compared to $45.5 million in the third quarter of 2003. Gross profit rose $5.9 million, reflecting electric rate increases in Missouri and Colorado. The Missouri increase of $37.5 million per year went into effect in April 2004, and the Colorado increase of $8.2 million per year became effective in September 2004. An increase in electric customers produced $1.8 million of additional margin, and costs for fuel and purchased power were $1.6 million lower than in the same period of 2003.

These improvements in margin were partly offset by $8.1 million as a result of lower electric volumes due to unfavorable weather and other variances. Regulated gas margins decreased $.5 million in the 2004 third quarter compared to a year earlier.

In June 2004, the company filed for a rate increase totaling $19.2 million for its electric territories in Kansas in order to recover infrastructure improvements and increased maintenance and operating costs. Hearings are expected to be concluded in December 2004 with rates effective in February 2005. On November 1, 2004, Aquila filed a request for a $6.2 million natural gas rate increase in Kansas to recover gas system improvements as well as increased maintenance and operating costs. If approved, the new gas rates would go into effect in the early fall of 2005.

Merchant Services

Merchant Services recorded a loss before interest and taxes of $178.8 million for the 2004 third quarter, compared to a loss of $156.4 million for the 2003 quarter. Gross loss for the third quarter was $52.7 million in 2004 compared to a gross loss of $49.0 million in 2003.

This year's third quarter loss reflects the settlement of price risk management assets and liabilities associated with three long-term gas contracts, resulting in approximately $29.2 million of non-cash losses related to the discounting of Aquila's remaining trading portfolio; margin losses of $17.7 million related to reversal of margins previously recognized under long-term gas contracts and to payments for replacement gas when the company terminated those contracts. In addition, Merchant Services realized margin losses of $3.9 million resulting from the difference between revenue recognized on remaining long-term gas contracts and the net cost of gas delivered under the contracts; and net margin losses of $9.0 million related to fixed capacity payments that entitled Aquila to generate power at merchant power plants owned by others but brought minimal revenue because of current conditions in the generation market.

Operating expense decreased $7.8 million in the 2004 third quarter primarily due to reduced legal and other investigation fees, lower surety payments as a result of settling three long-term gas contracts, and reduced staffing needs to manage remaining trading positions and non-regulated generating assets.

In the 2004 third quarter, Aquila recorded pretax losses of $117.2 million on the termination of three long-term gas supply contracts. In September 2003, the company recorded an impairment loss of $87.9 million to write down its equity investments in independent power plants to their estimated fair value, which was less than their carrying value.