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The Finance Forum: Growth in a Back-to-Basics World

Thomas Fanning, executive vice president and CFO, Southern Co.
Fortnightly Magazine - October 15 2003

at the residential level or even the small [commercial and industrial] level. We are a viable and potentially attractive business with large customers," he says. The utility CFO believes these plans will translate into high single digit growth for the company. To date investors seem to be taking the CFO's promises of future growth at his word. The price earnings ratio based on 2003 earnings is 13 times compared to 11 times for the typical integrated company.

This higher price might signal a comeback.

Billion-Dollar Lesson:
Aquila's Rise, Fall and Rebirth

Richard C. Green Jr., chairman, president, and CEO, Aquila

Not more than three years ago, the company known as Aquila was at its apex, a highly sophisticated and innovative go-getter that was revered as a staple of what was to be the new breed of power companies.

But the tables would turn on this once great disciple and progenitor of open markets. Caught in the violent credit crunch of 2002 that followed the Enron debacle, Aquila has grappled with billions in debt and hundred of millions in losses. On the brink of bankruptcy in October 2002, Aquila's board of directors called Richard C. Green Jr. back to the post of CEO. His mission: Save the company. And it has been with this singularity in purpose that Green has made the grimmest of choices.

In June 2002, the company makes plans to exit the merchant energy trading business and return back to the company's utility roots, which go back to 1917. In an instant, a merchant business that took Aquila 16 years to build, which represented more than half of the company's earnings at one time, would be severed like a cancerous tumor. Looking back, Green says he viewed no middle ground and believes Aquila could ill afford to ride out the credit crisis with its merchant subsidiary intact, as some utilities have tried.

"We were not willing to take the risk of betting on that option, which is a huge risk, I mean, you're betting the company … You don't have one foot in and one foot out … we needed to create liquidity to work through this because the transition meant we were taking a balance sheet for what was a $40 billion company and were ripping out more than half the cash flow, more than half the earnings, and reducing and still reducing that down to a balance sheet that will live around a seven-state utility. So you just needed to liquidate to pay down debt and manage liquidity through the restructuring," he says.

Certainly, the company's financial problems have been quite serious. According to the company's 2002 annual report, Aquila's bottom line for 2002 was a fully diluted loss of $12.83 per share, or a net loss of $2.1 billion on sales of $2.4 billion. Restructuring charges, impairment charges and net losses of sales of assets, losses with discontinued operations, and margin losses incurred during the wind down of the company's merchant portfolio contributed to the majority of the loss, the report said. Not to mention, "the company's