Alliant Energy Corp (LNT) 2005 Q3 法說會逐字稿

Good morning and thank you for joining today's conference. Welcome to Alliant Energy's third quarter 2005 earnings conference call. At this time all lines are on an listen only mode. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to your host, Miss Becky Johnson, Manager of Investor Relations of Alliant Energy.

Good morning. Thank you for joining us today for Alliant Energy's conference call. We welcome those of you who are joining us on the phone and also those of you who are listening to the webcast. With me here today are Bill Harvey, President and Chief Executive Officer and Elliott Protsch our Chief Financial Officer, as well as other senior executives of the organization.

We issued a news release earlier this morning announcing Alliant Energy's third quarter 2005 earnings. If you haven't seen the release it is available on our website at www.alliantenergy.com in the investor section. Also, unless otherwise noted, all of our per share references on the call refer to diluted earnings per share. We have allotted a hour for the call this morning which includes time to take questions from the investment community, following some prepared remarks by Bill and Elliott.

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

With that said I will now turn the call over to Bill Harvey.

Thank you, Becky. Good morning, everyone and thanks for your continued interest in our company. To provide plenty of time to answer your questions we're not going to restate what has already been communicated in our earnings release. We do hope, however, that our remarks will assist you in understanding our reported results.

Third quarter 2005 earnings from continuing operations included some significant one-time items that are not related to the fundamental operations of our business. First, we incurred a $0.20 per share non-cash asset valuation charge related to our Brazilian investment. We reported the results from these investments in continuing operations, as required by the accounting rules.

Second, we continued our debt reduction efforts by retiring early a additional $204 million of long-term debt at Alliant Energy Resources which resulted in a $0.15 per share charge computed based on the average shares outstanding in 2005.

Lastly, our non-regulated results in the third quarter of 2005, included approximately $0.05 per share of income related to the adjustment of a deferred income tax valuation allowance. Excluding these items, our earnings from continuing operations would have been $1.15 per share compared to $0.81 per share in the same period in 2004.

Earnings from our domestic utility operations were $113 million or $0.97 per share. Compared to earnings of $91 million or $0.79 per share in the third quarter of 2004. Our core domestic utility business continued to post solid operational and financial performance in spite of significant challenges faced in the quarter. As noted in our earnings release, while our electric utility margins were up significantly in the third quarter of 2005, they were negatively impacted by higher fuel and purchase power costs at Wisconsin Power and Light Company which accounts for approximately 40% of our retail electric market on a kilowatt hour sales basis.

At Interstate Power and Ligh, t which accounts for the remaining 60% of our retail electric market on a kilowatt hour sales basis, any financial impacts from rising fuel costs flow through the energy adjustment clause. This is the largest reason for IP&L generating $0.17 of the $0.18 per share increase in utility earnings in the third quarter of 2005 compared to the same period in 2004. Increasing fuel prices, exacerbated by hurricane activity, continue to have a significant impact on WP&L's financial performance.

The current fuel monitoring levels for WP&L were established in our rate order this past summer. On August 31, WP&L filed for a $41 million increase in annual retail rates related to increased fuel and purchase power costs. And it received a interim increase in the same amount effective October 6. That interim rate is subject to a final fuel rate case order that we anticipate receiving in early 2006. At the time of our filing, the impacts of the hurricane activity were not fully reflected in the forward market prices ultimately used by WP&L and the Public Service Commission of Wisconsin to set the level of interim rate relief this past October. Consequently, today's forward market prices are considerably higher than what was reflected in those interim rates.

Accordingly, yesterday WP&L filed an application with the Public Service Commission of Wisconsin to revise its interim rates by a addition at $55 million to reflect the higher current and projected fuel costs for the remainder of the test year. We are urging the commission to act on this request in a expedited manner and grant us updated interim rates by the end of November. These interim rates will be subject to refund if the commission audit determines that our final fuel numbers are lower. We expect the commission to make a final determination on the combination of our fuel rate relief request early next year.

We estimate that under recovered retail fuel and purchase power costs at WP&L we're approximately $0.13 per share in the third quarter of 2005. Again, we have not experienced similar short falls at IP&L. I suspect you may have many questions on the fuel subject, so let me move on for now. Let me update you on the status of our generation plant.

Our recently updated generation plan calls for the addition of 600 megawatts of owned generation between 2006 and 2013 which includes 500 megawatts of clean coal technology generation. As we previously discussed we're planning for the addition of at least 250 megawatts of clean coal technology in Wisconsin which would begin commercial operation in 2012. We are conducting preliminary engineering studies at both our Nelson Dewey Station in Cassville, Wisconsin and at the Columbia Energy Center at Portage, Wisconsin. We expect to complete the studies in the first quarter of 2006 and to begin the regulatory approval process at that time.

We also plan to add at lease 250 megawatts of clean coal generation in Iowa in the 2012, 2013 time frame. During the fourth quarter of 2005 we will begin site assessments for that facility. We're also planning to have 100 megawatts of additional wind in service in 2007. Which will be the first wind farm owned by Alliant Energy. Our current analysis suggests that the wind capacity will be located in Wisconsin. New capacity in either Iowa or Wisconsin will be deployed under the auspices of progressive regulation in place in both states which provides valuable financial certainty to investors before the expenditures to build are incurred.

Switching over to our Transmission Business, as of September 30, 2005, WP&L's investment in the American Transmission Company was approximately $145 million. Interstate Power and Light continues to own its transmission assets. The book value of which was approximately $371 million as of December 2004. We are currently evaluating options for participation for our Iowa assets in an independent transmission entity. Be it the American Transmission Company or some other entity.

Let me shift gears for a moment and review the status of our larger asset sales. Starting with our Utility Business, the sale of IP&L's interest in the Duane Arnold Energy Center to FP&L Energy is progressing. We filed applications with the Iowa Utilities Board and various other regulatory agencies seeking approval of our sale agreement. In fact, hearing at the IUB are being held as we speak. IP&L has offered to use the anticipated again on the sale for the benefit of it's customers in an attempt to achieve regulatory approval of the DAEC sale to FP&L Energy. Assuming favorable regulatory treatment, we expect the transaction to be completed in the first quarter of 2006.

On the non-regulated side, we provided a brief update on our progress towards selling our interests in ten generating facilities in China. We have negotiated agreements for four of the ten plants in which we have investments. One deal has closed. Two are pending regulatory approval. And the fourth is in the documentation stages. In addition, with the assistance of our financial advisor we have received bids for five other plants that are being sold as a portfolio. The one remaining plant is still in the sale process. We have targeted completion of the sales process by the end of this year or early 2006. The carrying value of our China investments was approximately $120 million as of September 30, 2005.

The third quarter 2005 results from discontinued operations included the reversal of $0.11 per share of valuation charges that were recorded in the second quarter of 2005 based upon our receipt of updated market information. In addition, we are proceeding with the divestiture of our Laguna del Mar investment in Mexico. We have engaged Jones Lang LaSalle, a highly regarded real estate investment advisor to help us market that property. The information memorandum is prepared and Jones Lang LaSalle has begun soliciting targeted parties. The carrying value of this investment was approximately $90 million as of September 30, 2005. The accounting for this investment has been reclassified to discontinued operations in the third quarter of 2005. And we expect to sell the investment by no later than the third quarter of next year. Consistent with our actions since 2002, the majority of the proceeds from our non-regulated asset sales will be used to retire additional debt at Alliant Energy Resources.

Next, Brazil. We have made some progress towards resolving the issues related to our Brazilian investments. We've taken our claims regarding the violation of our shareholders agreement to the International Arbitration Courts, the Brazilian Courts, the Brazilian Securities Commission and the Brazilian Federal Power Regulator. The Brazilian Courts have issued orders enforcing payment to us of the arbitration awards that have been received to date. A cash settlement of the $13 million award issued last year has been received for a portion of the settlement of our claim over our share owner rights at the J.D.F. Generating Facility.

For the most recent award of $8 million U.S. relating to the claim over abuse of our share owner rights at the parent company,at Equasis. We expect settlement discussions will now proceed and that such discussions will hopefully lead to a broader resolution of our differences with our Brazilian partners. The carrying value of our investment in Brazil was $267 million at the end of the third quarter after foreign currency translation adjustments and the cumulative $136 million of impairment charges taken to date.

Lastly let me touch on New Zealand. Our New Zealand investments continue to perform very well. Based on the exchange rates and trading prices at September 30, 2005, our investment in trust power had a market value of $305 million compared to our carrying value of $91 million. In addition, we have recorded after tax unrealized gains of $13 million on our Infratil investment as of September 30, 2005. We continue to take steps to monetize our New Zealand investment as Elliott will discuss with you shortly. Our relationship with our partners in New Zealand remains very positive and constructive.

In closing let me summarize what I believe to be the major points of our communication with you this morning. Our domestic utility operations remain strong despite the current challenges at WP&L resulting from extraordinary natural gas prices. We benefit from the diversity of our domestic utility jurisdictions. We continue to successfully execute our asset sales and are determined to implement our plan to extract reasonable value from our remaining international businesses.

Let me now turn the call over to Elliott to provide us with a financial overview.

Thank you, Bill. I would also like to thank all of you on the phone for joining us today and for your continued interest in and support of Alliant Energy. Due to the volatile fuel market and its impact on our domestic utility operations and financial performance I'd like to take a few minutes to discuss the specific mechanics of the recovery mechanisms in our two primary jurisdictions. Both for the increased cost of purchase power and fuel for our generating plants as well as for the natural gas supply to our retail gas customers.

In Iowa IP&L's retail tariffs provide for flow through up changes in the cost of fuel and energy portion of our purchase power costs. For natural gas sold to retail customers IP&L has a traditional purchase gas adjustment clause. Both of these mechanisms result in timely flow through to customers of cost incurred. WP&L's retail rates are established based on forecasted fuel and purchase energy costs. WP&L can seek rate increases for increased electric fuel and purchase energy if our actual costs in a given month are more than 10% higher than that which was forecasted, and if the updated test year estimated fuel costs are more than 3% higher than the forecasted costs used to establish rates. We experienced that phenomena in both July and August of this year. July was also the first month of our 2005-2006 split test year.

I'd also like to take an minute to discuss the natural gas delivery side of our business. As we all know, natural gas commodity prices continue to receive attention by state and national political leaders, the media and our customers. Everyone is obviously very concerned and so are we. Line energy launched a natural gas communications campaign in early September and continues to be proactive with communications to our customers, employees, media and various regulatory agencies. Our objectives are to educate customers on what to expect with natural gas prices and explain the drivers of the increases we have seen nationwide. We want to provide our customers with tools and tips to manage and lessen the impact of higher natural gas prices.

We believe high awareness of this issue by our customers should also assist with the necessary actions by our elected officials to increase the supply of gas. We hedge our customer and share owners exposure to the price volatility of natural gas with an internally-developed plan that we share with both the Iowa and Wisconsin Regulatory Commissions staffs. Currently approximately 42% of the natural gas needs for the winter heat -- heating season for our system customers is hedged through a combination of storage, options and fixed price contracts. In addition we have hedged 100% of the expected usage through June 2006 for our Emory and Riverside gas-fired electric production facilities. WP&L sells gas to retail customers under a performance based rates PVR plan. In general, monthly commodity prices are set at market index levels. Under PVR we are incented to purchase gas at prices lower than the monthly established price as the savings are shared equally between our customers and shareholders. The adverse is also true, that savings targets have been exceed in the every year but one since the program was implemented in 1995.

Now I would like to review a few of the more noteworthy financings that we completed in the most recent quarter. In August we issued 140 million New Zealand dollars redeemable preference shares and remitted the approximately $97 million U.S. to Alliant Energy Resources for continued debt reduction. This was our second financing utilizing Alliant Energy's New Zealand investment as security. We have been able to partially monetize our New Zealand investment and capture the value of the historically high exchange rate.

As Bill indicated earlier, we continue with our debt reduction initiative in Alliant Energy Resources retiring $204 million of AER long-term debt in the third quarter of 2005. The incurred charges of $0.15 per share in the third quarter related to the early retirement of this debt. When added to the debt retired in February we have retired a total of $304 million of AER long-term debt thus far in 2005. With total debt premium charges incurred of approximately $0.24.

In addition, given our continued strong cash position, we recently gave notice of the redemption for another $75 million of AER long-term debt. Given the effect of the additional $75 million our revised guidance for the premiums incurred to retire early, $379 million of AER current debt is $0.28 to $0.30 per share.

Our 2005 financing plans included the issuance of approximately $30 million in new equity through our dividend reinvestment, 401K and Equity Incentive Plans. Through the end of the third quarter we have issued approximately $24 million of common equity through these plans. Our preliminary figures indicated our cash flows from continuing operations for the nine months ending September 30, 2005, were approximately $510 million compared to $327 million for the same period in 2004. I would note that $125 million of this increase relates solely to changes in the level of utility accounts receivable that we have sold. We continue to forecast that our 2005 cash flows will be in the range of $525 to $625 million.

As we have share with you in the past it is our long-term goal to have a dividend payout ratio of approximately 60 to 70% of our utility earnings. With our strong utility cash flows and liquidity profile combined with our continually improving balance sheet we believe that we continue to have flexibility with our dividend policy as our current payout ratio is currently below that range.

Finally, the last topic I will cover is our 2005 earnings guidance. Reflecting our strong year to date performance we have narrowed our guidance for our core domestic utility business to $1.90 to $2.05 per share. There are a number of material items that are or will be reflected in our earnings from continuing operations with respect to our non-regulated businesses that impact our guidance. These changes may not be representative of the ability of the company to generate earnings in the future.

Most significant items in 2005 include the following: $0.68 per share non-cash out asset valuation charges we have recorded relating to our Brazil investments. $0.28 to $0.30 per share debt retirement expense. And a estimated $0.15 per share of income from various non-recurring tax items we expect to realize this year. To assist you in your analysis we have broken out these items in the guidance section of our earnings release.

In closing, I would note that additional details on many of the topics we have discussed today will be included in our third quarter Form 10Q which we will file next week. We appreciate your continued interest in and support of our Company. And both Bill and I, as well as Becky, look forward to talking with many of you at the upcoming EEI Finance Conference next week. I will now turn the call back over to the operator to assist with the question and answer portion of our call.

Thank you, Mr. Protsch. At this time the Company will open up the call to questions from members of the investment community. Alliant Energy's management will take as many questions as they can within the one hour time frame for this mornings call. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Michael Gresens.

I'm wondering with the guidance with the restatement of Laguna del Mar into discontinued ops what kind of effect that had? What were you expecting?

We had reclassified Laguna del Mar to discontinued operations in Q2.

Okay.

For guidance purposes so you shouldn't expect it to have any impact.

Okay. And then secondly, with the Kawani plant from the WPS calls can imply almost that you guys make fixed payments somewhere around $15 million to Dominion. How does that break down in terms of the balance statement -- income statement right now versus what you would have done in the past?

When you think about what happened at Kawani as a consequence of the sale to Margins, let me try to explain it in this sort of general way and suggest that if you wish to probe deeper that maybe you can contact Becky after the call, Greg. But basically Kawani was accounted for when we owned it, as you might expect, at a fuel O.M. and depreciation item. And when the sale occurred, the P.P.A. would find its way -- P.P.A. costs would find its way up into electric margins.

The income statement effect of that, when you factor in the geography, is that our margins actually increase -- electric margins -- $0.15 over all for the quarter. But when you trace that back to the income statement after the effective of Kawani with those different geography issues. The net effect was $0.07, so I guess what I'm really saying is that you should think of it as a wash in terms of a effect on the income statement.

Okay.

Your next question comes from the line of Jeff [Covello].

Am I on?

Yes, sir. Go ahead.

Okay. My question was, just related to the China asset. I think you said that the carrying value was $120 million as of 9/30/05. Just trying to make that -- you're reversing then at least part of a write down you had taken earlier in the year, is is that correct?

That's correct.

And then as far as the Laguna del Mar asset, now it's at -- it's $90 million is the carrying value on that asset?

That's right.

Okay. And that's a little higher than it use to be -- it use to be at about $80?

Correct. Is that a little higher? Or is that just -- It used to be about $85, yeah.

Okay. And what made you raise the carrying value of the asset? Was it looking at the sale price with your advisor? Is that why the asset value is higher now?

It's a number of very modest additional investments we've made to maintain the property and improve it for sales purposes.

Got it.

Your next question comes from the line of David Grumhaus.

Good morning, guys. Congratulations on a nice quarter.

Thank you.

The fuel lag I think you said for the quarter it it was $0.13.

That's right.

What is it for the year to date?

For the year it's approximately $0.24. That includes, however, about $0.06 that was associated with the protracted outage we experienced at Kawani earlier in the Fiscal Year.

Okay. And do you have in your guidance is there a number for the year that you're expecting? I assume it's going to get worse in November.

The answer is we do not have a specific number for that in our guidance. Our expectation is that it may get modestly worse but not more than a cent or two.

Okay. And is it fair to say that if you were earning your allowed return that you would be earning that entire $0.24 or maybe it's $0.18?

I think that's a very appropriate assumptions.

Okay. That's helpful. Second question, in the guidance you give non-reg -- you break the non-reg into two different categories. Is the resources debt split between those two categories depending on where -- on how the debt is allocated?

As you look at the break down that you see here, you should assume that the predominance of the AER debt is allocated to the non-regulated businesses excluding transportation and RMT.

Okay. That's helpful. Thanks for the time.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Michael Weinstein.

Hi, guys. I was wondering if you could talk a little bit more about what's happening in terms of the plan to I guess exit the New Zealand investments.

We have, I think as we have disclosed publicly, we do have agreements in place with our partners in New Zealand that impose some constraints on our flexibility in terms of monetizing that investment. As you know, we have put in place a couple of redeemable preferred share offerings, the net effect of which has been to monetize approximately $160, $170 million of our New Zealand investment. When that exit will be affected is a matter of discussion and negotiation with our partners first and for most. But it is reasonable to assume that that exit will occur no later than 2007 and could possibly occur earlier.

Also I'm wondering, is there any possibility that you could move Brazil into discontinued operations in 2006?

I'm not a accountant, but I think the answer to that question, Mike, is no.

Accounted for on the equity method and research the rules there I think you would conclude that that is the right answer.

Gotcha. Okay. Thank you.

There are no further questions at this time. Miss Johnson, are there any further questions -- are there any closing remarks?

With no more questions this will conclude our call. Thank you for your participation this morning and for your continued support of Alliant Energy. A replay of the call will be available through November 11, at 1-800- 642-1687 for domestic callers. Callers should reference conference ID 114-4985. In addition, an archive of the conference call and the script of our prepared remarks made on the call will be available on the investor section of the Company's website at www.alliantenergy.com, later today. Thank you.