Alliant Energy Corp (LNT) 2003 Q2 法說會逐字稿

Welcome to the Alliant Energy second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS). I would now like to turn the call over to your host, Mr. Eric Mott, Assistant Treasurer of Alliant Energy.

Good morning. Thank you for joining us today for Alliant Energy Corporation's second quarter 2003 earnings conference call. I would like to welcome those of you who are joining us on the phone today and those of you who are joining us on our Website as well. We certainly appreciate your participation.

With me today are Erroll Davis, Alliant Energy's Chairman, President and Chief Executive Officer, and Tom Walker, Executive Vice President and Chief Financial Officer, as well as various other senior executives of the organization.

Our call today is open to the general public and the media, but our content and answers are primarily designed for the financial community, including institutional investors and investment analysts. We will have a formal question-and-answer period followed by some prepared remarks by Erroll Davis and Tom Walker. We will take as many questions as we can within the one-hour time frame for today's call.

As most of you are aware, earlier this morning, we issued a news release announcing Alliant Energy's second quarter 2003 earnings, and affirming our 2003 earnings guidance for earnings from continued operations. If you haven't seen the release, it is available on our Website, at www.AlliantEnergy.com in the investor section.

Let me briefly point out the structure of today's news release. Just as we did in the first quarter, we are reporting earnings exclusively on a GAAP basis and are no longer reporting adjusted earnings. The year-to-date GAAP results consist of three components, earnings from continuing operations, earnings from discontinued operations and the cumulative effect of changes in accounting principles. As we previously stated, Alliant Energy's management believes earnings from continuing operations provide a more meaningful representation of the Company's fundamental earnings capacity, going forward.

Before we begin, I'd like to remind you that the remarks we make on this call and our answers to your questions include forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters discussed in Alliant Energy's press release issued this morning and in Alliant Energy's filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements.

With that said, I will now turn the call over to Erroll Davis.

Thank you, very much, Eric, and good morning to all of you. Let me join Eric by expressing my appreciation, both for your participation and this call, as well as your continuing interest in Alliant Energy. If you've read the release, you know that we reported income and earnings per share from our continuing operations for the second quarter of this year of 11.7 million and 13 cents, respectively. This compares quite favorably to our second quarter 2002 results, when we posted a loss in income from our continuing operations of 5.5 million, and earnings per share was at a loss of 6 cents per share. Thus, our result from continuing operations are up over 19 cents over the same period in 2002. Now, while not of the same strategic significance, of course, our results for discontinued operations improved as well. Our second quarter GAAP net income including discontinued operations stood at 32.2 million, and earnings per share were 35 cents. This compares, again, favorably to 6.3 million in net income, or 7 cents a share for the same period in 2002. But, as I said in our first quarter conference call, we are not going to focus on GAAP results; we continue to stress the results from our continuing operations.

And on a year-to-date basis, we are extremely pleased to note that we're 43 cents ahead of where we were at this time last year. For those of you who follow us closely, you understand that we are, and have been, a second half company when it comes to our earnings profile. In fact, in 2001 and 2002, approximately 67 percent of our utility earnings were realized in the second half of the year, and we expect that pattern to continue this year.

The second quarter is also historically our softest quarter for earnings, given the seasonal nature of our business; it's not prime heating or cooling season in our utility service territories. For example, back in the second quarter of 2001, when we generated $1.59 per share for the year in earnings from continuing operations, we only generated 11 cents in the second quarter of that year.

Now, additionally, we anticipate the positive effects of rate relief now in place, in addition to several additional modest increases expected to be implemented later in the second half of 2003 to further boost our utility earnings for the full year.

I also want to make you aware of another issue that may somewhat distort the comparisons of 2002 versus 2003 performance, when you're focusing on our utility earnings. When we implemented new rates for WP&L in Wisconsin in April of this year, we moved to seasonal rates, based on the Public Service Commission of Wisconsin's order. This is driven, of course, by the fact that it costs us more to provide utility service during our higher demand summer months than in the non-peak months. Now, rather than charging an average rate throughout the year as we did for all of 2002, we now will be charging a higher relative rate in our summer peak months, and a lower relative rate the remainder of the year. For the majority of the second quarter of 2003, our Wisconsin customers paid the lower non-summer rates as compared to an average rate throughout the entire second quarter of 2002.

The third quarter, however, of 2003, will be covered by the higher summer rates. Thus, all other things being equal, we would expect to see a pick up in third quarter utility earnings in 2003 compared to 2002. Again, I stress all other things being equal, which we, of course, understand they never are.

While not wanting to get into some long discussion of the nuances of utility tariffs (ph), the understanding of summer rates is an important consideration, and why we remain optimistic about our utility earnings for the remainder of the year.

As we look at our year-to-date earnings from continuing operations of 28 cents per share, and consider that our earnings from continuing operations for the last six months of 2002 and 2001 were $1.12 per share and $1.25 per share, respectively, this clearly suggests that we can post earnings from continuing operations for 2003 within the range of our current guidance. In addition, the 2002 figures included a loss from our non-regulated businesses of 87 cents per share. Given that our 2003 year-to-date loss from continuing operations for our non-regulated businesses is 14 cents per share, we currently expect a significant improvement in these results in 2003 compared to 2002.

As a result, this is gives me the comfort needed to once again as Eric noted, to affirm our 2003 earnings guidance of $1.45 to $1.65 from our continuing operations. Let me emphasize, while we are comfortable with our performance to date, we are very far from being satisfied. And, we will not be satisfied until we return to the level of financial performance that our shareowners expect. Therefore, we will continue to executed on the financial restructuring plan we announced last November; as you remember, this was a plan designed to narrow our strategic profile while at the same time, strengthening our financial performance, going forward. And we continue to make substantial progress on that plan.

Before I talk a bit about our SEDU (ph) ratio, and what we have accomplished on our financial plan, let me talk a bit more about our numbers. Because they continue to be the core, or the foundation of our business, let me start with our utilities. This quarter, our domestic-regulated utilities earned 25 cents per share. That compares to 30 cents per share in the second quarter of 2002. The primary reason for the decrease is straightforward. In fact, if you follow more than a couple of utilities here in the Upper Midwest, you may have already heard this recurring theme for the quarter. We simply experienced milder weather conditions in the second quarter of 2003 compared to the same period in 2002.

Now, while we positively benefited from the results of several rate increases throughout our service territory, and have some modest retail customer growth, our sales were simply not where we anticipated them to be based on typical summer weather conditions here in the Midwest. Additionally, despite a strong emphasis on cost containment, we also had higher utility operating expenses in the second quarter compared to the second quarter of last year. Obviously, we are going to spend what is necessary to provide our customers with the same reliable, and environmentally sound utility service they expect and deserve. But, I do hasten to point out that these were not unanticipated expenses. And, for the most part, these cost increases are baked into our rates, and we are recovering the majority of these costs. Thus, the lion's share of the increase in the electric margin reflects the higher revenues we are receiving to recover the increased costs that we are experiencing and that we did predict.

Before I move on and discuss our non-regulated results, I would like to emphasize that our utilities continue to perform well, and they continue to receive excellent ratings in national customer satisfaction surveys. Let me digress a bit, because we did have an event here last week that some of you may have heard about or some of you may have even experienced firsthand, and that was a rather devastating storm that tore through Iowa. These storms downed more than 2000 lines and 100 poles in the Cedar Rapids metropolitan area alone. Fortunately, they put about 35,000 or roughly half of our customers in that area out of power. Our crews worked around the clock to restore power to the area, once again proving their willingness to rise above the call of duty during catastrophic events. Storm restoration, of course, is a normal part of our business. And we also did not expect our activities in response to this storm to have a material impact on our 2003 financial results.

But, the real point is that even under the most demanding circumstances, our utility personnel came through for our customers. Now, this clearly provides some rather concrete evidence of the quality of utility operations, and that is good news for investors, as well as for customers.

This quarter, I am very pleased to report some rather substantial improvement in our international results. We've said previously that we expected improvement, and this quarter, we saw the improvement. Our international earnings increased 19 cents in the second quarter over the same period in 2003. This increase was driven by a 15 cent per share increase in the results from our Brazil operations. Let me provide some details on the factors that have resulted in that improved performance in the second quarter.

First, the Brazilian currency has strengthened, inflation is going down, and interest rates are also on the decline. As I noted on the road show, the macro/microeconomic factors that have been negative for the last three years have, in fact, turned positive. The impact of the strengthening of the currency accounted for 7 cents of the 15 cent improvement in the second quarter results.

Second, we also saw a 4.3 percent increase in electricity sales in Brazil in the second quarter as compared to the second quarter of 2002, which, again, illustrates that electricity demand continues to rebound from the drought (indiscernible) rationing conditions.

Third, we benefited from rate increases implemented at four of the five operating companies in Brazil in the first half of the year, and the fifth company is scheduled to get its increase in August.

Now clearly, we are not out of the woods yet, as our Brazil investment, on a fully-loaded basis, still lost approximately $1 million in the second quarter. But, that $1 million, of course, compares quite favorably to a loss of nearly $15 million in the second quarter of 2002.

Now, despite what you might have heard based on a very unfortunate Portuguese to English translation area in a recent wire story, our position on Brazil remains unchanged. As we stated in our last conference call, as we stated on our equity road shows, we have no intention to invest additional capital in this market, and, if we don't see sustained improvement in financial performance in the second half of this year, we will reevaluate our commitment to the Brazilian market at that time.

But, what has changes is that we are talking about sustaining performance, instead of looking for performance. And, that is very encouraging to us. Obviously, we are looking to see this good performance sustained, and we do believe that it is now headed in the right direction. I am also happy to report that we also saw favorable results from our other international markets during the second quarter of 2003 as well. Earnings from our New Zealand and China investments were up 3 cents and 1 cent per share, respectively.

Let me spend just a moment discussing asset valuation charges. In the second quarter of last year, our results from continuing operations included 11 cents per share of asset valuation charges. We did not have any such charges in the second quarter of 2003, which was a primary factor in our improved performance in the second quarter of 2003. We did, however, record $33 million in asset valuation charges in selling costs in the second quarter, related to the sales of our affordable housing and SmartEnergy businesses. This is included in our results from discontinued operations, and we do not expect to incur any additional material charges related to these divestitures in the third and fourth quarters of 2003.

I should also note that against this 33 million in asset valuation charges, we did record a $41 million after-tax gain from the sale of our Australian business.

Now, let me turn the call over to Tom Walker, our Chief Financial Officer, who is going to provide an update on various liquidity and capitalization issues.

Thanks, Erroll. Good morning to everybody listening. I want to take a few minutes to focus on our increasing financial strengths. As of July 25th, we had short-term debt outstanding at Alliant Energy Corp. of $121 million, all of which is commercial paper, leaving us with available facility of liquidity of $310 million. Our domestic utilities had 47 million of commercial paper outstanding with available facility liquidity of approximately $303 million. Let me offer an observation on our current facility and our current liquidity.

Unlike the difficult market conditions the energy industry experienced in 2002, we are now seeing more favorable conditions for the industry, in general, and certainly for Alliant Energy. Our existing credit facilities are scheduled to expire in October. However, we expect to renew all of them in the third quarter. Due to decreased needs, we expect to renew our parent facility, which is used to support our non-regulated businesses, but at a much-reduced level. We are in the preliminary stages of preparing our cash flow statements that will be included in our Form 10-Q filings in August. While these statements are not yet final, our targeted consolidated cash flows from continuing operations for 2003 is expected to be in a range of 500 to $550 million.

At the same time, capital expenditures for the first six months of 2003 for continuing operations were approximately $478 million. This is on target for our full-year expect capital spending of approximately $800 million; 220 million of this is for Power Iowa, which we are financing with both debt and equity; 110 million was for the Niham (ph) plant, which we closed on in the first quarter. Therefore, but for these generation growth initiatives, our cash flows from continuing operations will essentially cover off our capital expenditures in 2003.

Our consolidated, unadjusted capitalization ratio, at the end of the second quarter, was approximately 57 percent total debt to cap, down from 61 percent at the end of the first quarter. The 57 percent ratio does not reflect the impacts in July of our common equity offering, or debt reductions resulting from our sale of the affordable housing and SmartEnergy businesses. Our targeted, unadjusted capitalization ratio at year-end 2003, after completing all planned divestiture of assets, the corresponding debt reduction in excess of 800 million, and our recent common stock offering, is expected to be in the 50 to 55 percent range total debt to capital. We are obviously quite pleased with the progress we continue to make in this area.

I would like to touch on our recent common equity offering, as well. As part of our announcement last fall, we said we would issue additional common equity if market conditions were favorable. And at least for Alliant Energy, they were, and we did. Less than three weeks ago, we completed our equity offering by issuing 17.3 million shares of our common stock, which was priced at $19.25 a share to the public. We expected our original goal of raising between 200 and $300 million in the equity markets. However, in fact, we raised net proceeds in excess of $318 million. We (indiscernible) this capital into our two regulated utilities, with $200 million going into Wisconsin Power and Light Company, and $118 million going into Interstate Power and Light Company. And, with more certainty in our ability to get a fair return on our investments, we expect to achieve attractive, predictable and stable returns on our investments in our regulated domestic utilities. I will now turn it back to Erroll to discuss the other steps we are taking to strengthen our financial profile.

Thank you, very much, Tom. Let me spend just a few minutes updating you on the progress we have made in executing the plan we announced last November. If you remember in our earlier calls, we did note, based on our experience of last year, that we would be very focused on what we call our Say-Do Index, in terms of what we committed to do, and what we would do, for the year. If you remember back in November, we announced our intent to implement five strategic actions to improve our financial profile and our balance sheet, going forward. And we told you what we would do and we have done it. And I really could not be more proud of the team at what the team has accomplished in the last eight months as we announced these actions last November.

Let me go through in some detail, however briefly. First we said we would reduce our capital expenditure budget, primarily in non-regulated businesses. And we have done just that. Our capital budget this year of slightly in excess of $800 million is $400 million less than last year. Second, we said we would make a difficult, but, in retrospect, quite prudent decision to reduce our dividend to $1 per share. As difficult as it was, we took that action. The dividend is clearly sustainable at this level, and, we believe that the new tax treatment for dividend income will further enhance the appeal of this sustainable dividend.

Third, we committed to structural, not panic programs, to control costs. For example, we're implementing tried and true Six Sigma processes which we expect will yield significant cost savings, not only this year, but well into the future.

We also continue to focus on numerous other cost control initiatives, which is a normal part of our ongoing business. As a result, we probably will never be in a position to say that this component of our strategic actions is complete, but it will be an area of continuing focus and continuous improvement.

Fourth, as Tom discussed, we recently completed a successful common equity offering.

Finally, our plans call for us to divest certain noncore, non-strategic assets and achieve debt reduction in excess of $800 million with a significant portion of that debt reduction in place by year-end 2003. And, we are on track to meet this goal.

As we discussed in this forum last quarter, we sold our Australian assets to New Zealand-based Meridian Energy for $365 million, and we were able to reduce our debt levels by 320 million from that transaction. As I noted earlier, our second quarter 2003 results from discontinued operations include an after-tax gain of $41 million from that sale. Earlier this month, we closed on the sales of our affordable housing businesses, primarily made up of Heartland Properties, as well as our SmartEnergy business. With these sales, we were able to reduce our debt levels by about $110 million.

As you may know, we announced last Friday, that Whiting Petroleum Holdings Inc., a company that has been formed to service a holding company for our Whiting Petroleum Corp. oil and natural gas exploration and production subsidiary, filed a registration statement with the SEC relating to a proposed initial public offering of its common stock. All of the shares of common stock to be sold in the proposed initial public offering will be sold by Alliant Energy. We currently expect to sell 51 percent or more of our stock in Whiting Petroleum in the initial public offering, and this would permit us to de-consolidate $185 million of debt currently outstanding in Whiting. All proceeds from the initial offering will be used for debt reduction and outlined in our November plan.

Now, here is the sensitive issue, of course, due to SEC regulations, we cannot comment further at this time, on either Whiting Petroleum's business or the proposed initial public offering. Therefore, I will not -- and none of us -- will be able to answer questions during the Q&A session on the subject. We will simply refer you to the registration statement filed by Whiting Petroleum Holding Company. And that can be found at the SEC's Website at www.SEC.gov.

As Tom stated, with the completion of all these strategic actions, we expect to reduce our unadjusted debt to total capital ratio to the low 50 percent range. Now this obviously would be a significant improvement from where the ratio stood earlier this year.

In summary, five (ph) commitments to take action are being followed by successful execution in each of these five areas. We are doing what we said we would do. We have now successfully completed all of the strategic actions we announced in November, other than the divestiture of our Whiting business. We are proud of our achievements in that regard, but also fully recognize that we owe our investors nothing less than that. As we have said, our domestic utility operations are the foundation of Alliant Energy. We have sought fair and reasonable rate recovery, and, by and large, we have received it. We have committed to providing our customers with safe, reliable and environmentally sound utility service, and we live that commitment here each and every day. But, as I also noted, we are far from satisfied. While we are pleased with the successful execution of our November strategic actions, as well as our improved year-to-date financial performance, we recognize that we still have a lot of work to do. As a team, we are committed. We are committed to continuing to successfully execute our strategy. We are committed to successfully managing through the changing market realities of our industry. And, we are committed to returning to the strong, reliable results that shareowners have come to expect from Alliant Energy.

Now, having said all that, let me entertain your questions. So, let me turn the call back to Eric for the question and answer session.

Thanks, Erroll. At this time, we would like to open up the call to questions from members of the investment community, including institutional investors and investment analysts. We'll take as many questions as we can within the one-hour timeframe for this morning's call. Once again, I would like to remind you that due to SEC regulations, we cannot and will not comment further at this time on either Whiting Petroleum's business or the proposed initial public offering, and will not be answering questions during this Q&A session on these subjects.

I would now like to turn the call over to the conference call operator, who will guide us through the question and answer session.

(CALLER INSTRUCTIONS.) Theresa Ho (ph) with Banc of America Securities.

Thank you. Good morning. I just have a couple of questions regarding your Brazilian operations. It looks like a good inflection point in Brazil. But, I was curious why the interest expense at Brazil went up. And also, if you could comment on the Brazilian government new electricity model and how that would affect your assets down there?

Well, let me see whether I can talk about the model first, and get back to your interest question. The model is one under discussion. And, as in all democracies, what's under discussion is certainly not what you're going to see at the end, of course. And so, really, we will, as we do with legislation and regulatory suggested changes in the United States, we will have people monitoring this on a constant basis in country. And, again, I really won't speculate as to what will happen in regulatory models in the legislative and regulatory processes. We are no better predicting here than we are predicting there.

With respect to interest rates, as we noted earlier, they have historically been high in Brazil. They are, in fact, coming down. So, let me ask Tom to come in a little bit more specifically on the in-country interest rates.

Theresa, one of the things we've been managing against is the high interest rates in-country. In fact, we're going through -- and you're probably familiar with a lot of this -- debt restructuring in Brazil, so that we can bring our interest rates down, maybe a couple hundred basis points. We have gone through this process.

I think we disclosed it in our 10-Q last time. We now have agreement of the shareowners of the bank, and of the regulatory body with regard to the restructuring. The last approval we will need is the SEC. So, we are moving forward very well on that restructuring, and it should go to reducing interest rates as we go forward. And these restructurings are both with bank syndicates and the BNBS (ph), which is the federal bank in Brazil. And they are going to go out through -- the terms on these will be out through -- probably 2008 timeframe.

Okay. And actually, just another question regarding Brazil. You mentioned that you're expecting maybe one more rate increase in August. Could you give us an indication of your level of optimism?

This SI-Elba (ph) -- and again, we have no reason to believe that -- it's essentially a scheduled increase, and we have received four out of the five already; and it's just a matter of timing. It is scheduled for August. We have received increases from a low of 23 percent at one of the smaller utilities in February to a high of essentially 36 percent in June. And so we expect, candidly, that this will be within if not slightly above that range.

Mike Weinstein with Zimmer (ph) Lucas.

I have another question about the interest rate for Brazil. As I understood it, there was a coupon reduction from 7.5 percent down to 2.5 percent. And I'm just wondering why interest went up despite that?

This is Tom. I think what you're talking about, actually, is the interest on our investment in Brazil as opposed to what I might have inferred interest in Brazil on our business down there. So, let me focus on the interest that is charged to the company for its original investment in Brazil. We did do a so-called phone transaction, where the stated rate of interest for the first three years was in the 7 percent plus range. And, for the last seven years 27 years is at the 2.5 percent range. And, what we do from an accounting standpoint is smooth that over time. So, that interest rate would be in that range over, you know, the thirty-year period of time; but it would be smooth. Of course from a cash flow standpoint, you get significantly greater cash flows because you are paying a lower interest rate after the three years. And you can see all of that, of course, outlined in our 10-K, on pages 54 and 55.

Okay. Thanks a lot.

(CALLER INSTRUCTIONS). At this time, there are no further questions.

With no more questions, this concludes our call today. I'd like to take this time to thank you for your participation this morning and your continued support of Alliant Energy. A replay of the call will be available through August first, 2003 at 800-642-1687, domestically, and 706-645-9291, internationally. Callers should reference conference I.D.# 1313731. In addition, an archive of the conference call and a script of the prepared remarks on the call today will be available on the Investor section of the company's Website, at www.AlliantEnergy.com in the Investor section later today.

This concludes today's Alliant Energy second quarter 2003 earnings conference call. You may now disconnect.

(CONFERENCE CALL CONCLUDED)