Aquila $300 million mandatory talked at 6.75%-7.25% yield, up 18%-22%

By Ronda Fears

Nashville, Aug. 16 - Aquila Inc. launched $300 million of three-year mandatory convertibles in the Premium Income Equity Securities (PIES) structure before Monday's opening bell rang. The issue, via sole bookrunner Lehman Brothers Inc., is talked to yield 6.75% to 7.25% with an 18% to 22% initial conversion premium.

Pricing is scheduled after Wednesday's close, concurrently with 40 million shares of common stock.

Joint lead manager is Credit Suisse First Boston.

The issue will be non-callable and has dividend protection in the way of a conversion ratio adjustment.

Standard & Poor's is expected to rate the issue at CCC+ and Moody's Investors Service at Caa1.

A $45 million greenshoe is available.

The Kansas City, Mo.-based electric and gas utility said proceeds would be used to retire its 6.875% and 7% long-term debt and other liabilities as well as strengthen the company's balance sheet.

Aquila shares closed Friday at $3.08.

Also Monday, Aquila announced that it has reached an agreement with the American Public Energy Agency, a natural gas supplier, regarding the satisfaction of its claims upon the termination of two long-term natural gas supply contracts on Sept. 30.

The contracts are between APEA and Aquila Merchant Services, an unregulated business that the company is exiting. APEA will receive a liquidated damages payment from the Chubb Group of Insurance Cos. and a termination fee from Aquila Merchant Services. The two contracts plus the contract with Municipal Gas Authority of Mississippi, terminated in July, represented 75% of Aquila's long-term prepaid natural gas supply contract exposure.

Earlier this month, the utility reported a second-quarter net loss of $43.3 million, or 22 cents a share, which was sharply narrower than the net loss of $80.6 million, or 41 cents a share, in second quarter 2003. Included was a one-time gain of $10.4 million from the sale of assets, chiefly its stake in the merchant energy company BAF Energy. The company also completed the $1.08 billion sale of its Canadian utility to Fortis Inc. A year ago, Aquila took a $103 million charge for impairment of assets and losses on asset sales.

Sales in second quarter fell 8.7% to $335.3 million from $367.4 million a year before. The company said extra cash flow from rate increases in Colorado and Missouri was undermined by higher natural gas costs.

"Aquila today is largely refocused on its domestic, regulated utility business as we continue to wind down the energy merchant portfolio and settle or terminate the various contracts that have been causing negative cash flows for far too many quarters," said Aquila chief executive Richard Green in the company's earnings announcement.

He pointed out that after recent asset sales, Aquila's remaining merchant energy businesses resulted in a pretax second-quarter loss of $39.6 million compared with a $126.7 million loss a year ago.

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