Alliant Energy Corp (LNT) 2006 Q1 法說會逐字稿

Thank you for holding ladies and gentlemen and welcome to the Alliant Energy’s First Quarter 2006 Earnings Conference Call. At this time, all lines are in a listen-only mode. I would now like to turn the call over to your host, Becky Johnson, Manager of Investor Relations at Alliant Energy.

Good morning. Thank you for joining our conference call today. We welcome those of you who are on the phone and also those of you who are listening to the webcast. With me here today are Bill Harvey, Chairman, President, and Chief Executive Officer and Eliot Protsch, our Chief Financial Officer as well as other members of our senior management team.

We issued the news release earlier this morning announcing our first quarter 2006 earnings. The release is available on our website at www.alliantenergy.com in the investors section. We have allotted an hour for the call this morning and will have time to take questions from the investment community following some prepared remarks from Bill and Eliot.

Before we begin, I need 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 our 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 Bill Harvey.

Thank you Becky. Good morning and thanks for your continued interest in our company. Our practice is not to restate what has already been communicated in our earnings release but rather to offer some assistance in interpreting our financial performance. We hope this will provide clear visibility to the strong results of our ongoing businesses.

We were satisfied with the financial performance of our utility business again this quarter. That said our total consolidated earnings were impacted by several items that are not related to the fundamental operations of our business going forward. I’ll point out the largest items for you.

We continued our debt reduction efforts in the first quarter by retiring an additional $358 million of long-term debt at Alliant Energy Resources. This resulted in a $0.48 per share charge. I’ll remind you that we also incurred $0.08 per share of debt reduction charges in the first quarter of 2005.

Eliot will be discussing our 2006 financial plans in more detail a little bit later. But with the transactions completed in the first quarter, we have retired all of the AER long-term debt at the holding company level other than the $403 million of exchangeable senior notes, which have a coupon of 2.5%. Our debt reduction efforts at AER are now complete.

In addition, our first quarter 2006 non-regulated results included $0.06 per share of foreign currency transaction gains associated with our New Zealand investment.

Turning to our domestic utility operations, we generated earnings of $65 million or $0.55 per share compared to $41.8 million or $0.36 per share in the first quarter of 2005. Please note that our first quarter 2006 utility results included approximately $0.06 per share of income associated with certain one-time tax benefits related to the sale of the Duane Arnold Energy Center, which we completed in January of this year. I’ll also remind you that our first quarter 2005 results included $0.05 per share of charges related to incremental purchased power as a result of the unplanned outage at our since sold Kewaunee nuclear power plant.

Adjusting the first quarter results were these two non-recurring nuclear related items. Our first quarter 2006 and 2005 utility earnings would have been $0.49 and $0.41 per share respectively.

Our earnings release provides some detail to assist you in sorting out what I would characterize as geography issues on our income statement resulting from the sale of our interest in the two nuclear plants and our corresponding execution of purchased power agreements with the new owners. Putting that aside, year over year the favorable variance in overall utility earnings was largely driven by rate increases and continued retail customer growth on both the electric and gas side.

Our electric and gas sales volumes in the first quarter of 2006 were impacted by the substantially milder than normal weather conditions we experienced in January. However, we were able to offset the lion’s share of the associated earnings impact through the use of weather hedges. We also saw a modest negative impact in our electric and gas sales volumes in the first quarter due to the impact of high gas and fuel prices on customer usage. The fact that these prices decreased significantly in the first quarter should help mitigate this effect going forward.

Turning to a few of our key strategic initiatives, we announced in April new developments relating to our Wisconsin generation plants. Let me call out what is new. First, WP&L signed an option to purchase the development rights to the Cedar Ridge Wind Farm near Fond du Lac, Wisconsin. We will decide by the end of July whether to exercise that option. Should we do so, we would expect the wind farm to be fully operational by the end of 2007 with a total capacity ranging between 80 and 99 megawatts. We would file the necessary regulatory applications this summer.

Longer term, I would note that we have also planned to add an additional 200 megawatts of wind generation to the WP&L integrated resource plan. In April, we also selected our Nelson Dewey Generating Station in Cassville, Wisconsin as our preferred site for WP&L’s base load capacity expansion.

In order to achieve maximum economies of scale with the chosen technology, we have increased the size of the proposed plant to 300 megawatts from the previously planned 250 megawatts. We concluded that Nelson Dewey would be the right site choice in no small measure because the transmission studies performed by the American Transmission Company suggest that an additional unit at this location could increase the state’s import capability by 25% or more.

We plan to file our regulatory applications for the base load expansion this summer. If approved, we anticipate beginning construction in late 2007 and expect the plant to begin commercial operation by the spring of 2012.

Our plans at Nelson Dewey also include the addition of new emission control technology on existing units 1 and 2, which will significantly decrease NOx and SOx emissions from this site. The environmental controls would be completed in 2010.

Finally, since Wisconsin law requires us to propose alternate sites for new generating facilities, our backup plan would be to build a 300 megawatt pulverized coal unit at WP&L’s Columbia Energy Center near Portage, Wisconsin. This too is an excellent site. Although it brings less transmission benefit than does the Cassville site.

The state of Wisconsin has recently enacted what is called Act 7 legislation, which provides for increased certainty for the recovery of generation investments by determining return of, return on, and the depreciable life of the investment prior to the commencement of construction. Act 7 is essentially the equivalent of the rate-making principles established in House File 577 in Iowa, which was applied to our Emory Generating Station, which we placed in service in 2004. We do plan to rely on this legislative format in seeking approval of both our new wind and new coal proposals.

Switching over to our transmission business, IP&L continues to own its transmission assets. The book value of which was approximately $442 million as of December 31, 2005. This value includes both high and low voltage assets. As we’ve stated in our previous calls and in our discussions with you, we are evaluating alternatives for including our IP&L assets in some form of regional independent transmission company be it the American Transmission Company or some other like entity.

As of March 31, 2006, WP&L’s investment in the American Transmission Company was approximately $157 million. This reflects a 20% ownership interest in that business. WP&L’s current plan is to invest approximately $11 to $12 million in ATC in both 2006 and 2007.

Finally, the divesture of our modest Illinois utility operations is moving through the regulatory process and we expect this transaction to be completed in late 2006.

Given Calpine’s bankruptcy, let me briefly discuss WP&L’s contracts with Calpine subsidiaries. WP&L has purchased power agreements with Calpine subsidiaries for the RockGen and Riverside generating facilities. Currently, the RockGen facility is part of the bankruptcy proceeding but Riverside is not. We are unable to predict whether that will change. We utilized RockGen primarily for capacity value and are evaluating our options should the RockGen PPA be rejected in the bankruptcy proceeding.

Many of you have asked how the Calpine bankruptcy may influence WP&L’s option to purchase these two facilities. There are a lot of variables that would affect that circumstance. But in general, we would have an interest in purchasing assuming a willing seller, assuming regulatory support, and of course assuming the right sales price.

Let me turn now to our non-regulated businesses and discuss our progress with our pending divestitures. Our success in rationalizing our portfolio of non-regulated businesses has contributed to the significant debt reduction efforts I touched on earlier. On the international front, as previously announced, we sold our investment in Brazil in early 2006. In China, we have sold our interest in seven of our ten plants. We have negotiated sales agreements for two others and we expect to complete all of our remaining China-asset divestures by the end of the second quarter. Completion of the Brazil and China sale transactions has added strategic clarity for us and has also reduced the volatility of our financial performance.

Last week, we announced the successful completion of the sale of our two gas gathering pipeline systems. Combined with the oil pipeline system divested in late 2005, we have received proceeds of approximately $25 million for the sale of this non-core business platform, which will be used for general corporate purposes. The sale last week was not reflected in our first quarter results, but will show up as an approximately $0.03 gain in the second quarter. The results for this business are recorded in discontinued operations.

We’ve received several bids to purchase our Laguna del Mar property in Mexico. We are currently evaluating the bids and will soon be negotiating sales agreements with the leading bidders. We expect to complete the sale no later then the third quarter of 2006. The results for this business are recorded in discontinued operations.

Lastly, let me touch on New Zealand. Our equity interest in TrustPower and Infratil have been successful investments. Based on the exchange rates and trading prices as of March 31, our investments in TrustPower and Infratil had an aggregate market value of $342 million compared to our carrying value of $111 million. We have a positive and constructive relationship with our partners and we continue to explore our options for monetizing this investment.

Our non-regulated business platform is evolving into a relatively small portfolio of lower risk, mature businesses which historically have been accretive to earnings but not significant consumers of capital.

In closing, let me summarize the key takeaways for the quarter. We made good progress in the execution of our planned divestitures and are nearing the finish line for that effort. We were able to retire early an additional $358 million of AER long-term debt completing our planned debt reduction efforts. We remain focused on operational excellence in our utility business and on earning our authorized returns. I would note that we are still not earning our authorized returns at WP&L for the trailing 12 months due to the under recovery of our fuel-related costs.

Next to meet increasing customer demand, we will be making generation investments in jurisdictions with progressive legislation. Finally, we are delivering on our commitment to you to become a lower risk and more predictable investment.

Let me now turn the call over to Eliot to provide you with a financial overview.

Thanks Bill. I’d also like to thank all of you on the phone today for joining us and for your continued support of our company. Bill has touched upon our financial highlights. Thus my focus here this morning will be on our financings and our 2006 financial guidance. We will have time in the Q&A session to cover specific questions about reported results.

As Bill mentioned, at the end of the first quarter, we retired all of our remaining non-regulated long-term debt at AER parent company other than our $403 million [phoned] senior notes, which have a coupon rate of 2.5% and mature in 2030. We are currently evaluating the best use for the cumulative proceeds from the divestiture of our China, Mexico, and pipeline investments.

Considering the improvements to our consolidated balance sheet as a result of these debt repurchases, we are well positioned for the upcoming generation build out. We plan to fund our forward utility CapEx with a combination of internally generated cash and external debt and equity infusions from the parent company. Based upon our current view of our forward plans, we do not contemplate any incremental common equity issuance by the parent company for the next three years other than the [minimus] amounts relative to our equity incentive plans. I would also note that in Q1 we converted our dividend reinvestment and 401k plans to open market purchases versus original equity issuance. Our targeted capital structure at the utility is a 50 to 50 debt-to-equity ratio including the impacts of imputed off-balance sheet items for operating leases and long-term purchased power agreements.

We are increasing our guidance for earnings from continuing operations by $0.05 per share this quarter. This is the result of the income realized from foreign currency transaction gains and land sales at our non-regulated businesses in the first quarter of 2006.

Our utility guidance remains unchanged at $2.05 per share to $2.25 per share. We are updating our cash flow guidance for 2006 consolidated guidance to $400 million to $450 million. This reflects a $77 million pension contribution that was made in Q1 with such contribution not being reflected in our initial guidance.

Our consolidated capital expenditure guidance remains unchanged at approximately $475 million for 2006.

With that said, let me point out a few other items that should be of interest to you. First, our commitment to strengthening the financial profile of the company was recognized by the credit rating agencies in the course of the quarter. Standard & Poor’s upgraded the senior unsecured, long-term debt of our utilities by one notch and Moody’s has placed us on review for possible upgrade.

Second I would like to touch upon the Wisconsin fuel and purchased power cost recovery mechanism. As we had discussed previously, our guidance assumes a level of under recovery of fuel-related costs in the second quarter of, second half rather, pardon me, of 2006 given our current forecast of kilowatt hour sales, hedging and other variables.

I’ll remind that in February the Wisconsin Public Service Commission changed WPL’s annual fuel cost monitoring ranges to +2% and -0.5% from the previously symmetric 2%. Commodity price levels and our ability to collect all of the associated costs are difficult to predict. Under the current rules, price volatility is detrimental to our shareowners. The Wisconsin investor-owned utilities continue their work with the commission staff and broader stakeholder groups to find a rate recovery solution for these costs that is fair to both customers and shareowners.

Hearings were held in March for our pending fuel case in Wisconsin. We submitted briefs last week and expect an order later this quarter. We have recorded a $17 million reserve for rate refund in the first quarter as we are projecting that actual fuel-related costs will be lower than the forecasted costs used to establish interim rates. However, I would like to point out that first quarter 2006 utility earnings do not reflect any over recovery of fuel-related costs.

In addition, the new asymmetrical fuel monitoring bands will become effective with the final order in this case. In March, WPL filed a retail electric and gas base rate case for $96 million using a 2007 test year. In this filing, we are seeking recovery for various deferred costs including those related to the protracted outage last spring at the Kewaunee nuclear power plant and coal conservation efforts due to delivery disruptions from the Powder River Basin. Other key drivers include wheeling expense, energy efficiency programs, and rate-based additions. We anticipate that new rates will be in effect in January 2007.

Given the profile of our company, we clearly expect our domestic utilities to be the primary driver of our future growth. But we also expect our remaining non-regulated businesses to continue modestly to the bottom line. Results of our non-regulated businesses should also be much less volatile as Bill has pointed out than they have been in the past given our continued rationalization of this portfolio and the nature of the businesses remaining.

Closing, we appreciate your continued support of our company and look forward to seeing you again this year in connection with our various investor relations activities. We will be at the AGA conference next week and also plan to attend the EEI investor conference later in May.

I will now turn the call back over to the operator to assist with any questions and answers that you might have.

Thank you Mr. Protsch. At this time the company will open the call to questions from members of the investment community. [OPERATOR INSTRUCTIONS] Your first question comes from Dave Parker of Robert W. Baird.

Hi good morning. Congratulations on another good quarter. Maybe you could refresh my memory on the complicated set of rules that go along with the fuel clause in Wisconsin. If I understand your comments, you took a reserve for $17 million for potential over collection but you still expect to under collect in the second half of ’06?

Yes David this is Eliot. As you might recall, we have posted a description of those complicated rules on our website. But in essence, the new band is likely to be asymmetrical in that it will have, it’s currently 3% plus or minus. So that’s what we’re operating under now. But we expect with the interim order for it go to 3% on the upside and 0.5% on the, or no 2% on the upside pardon me and 0.5% on the downside. So that will be a change from what we have experienced in the past.

And with respect to the comment about we expect to under earn going forward despite what has occurred in the first quarter, you know taking a look at those complex rules will give you some insights into that averaging concept etc. But we’re still operating under a split test year, number one, and when we, and when we look at the current case we have pending and not knowing what that order’s going to be as well as all the factors that roll up into the dispatch assumptions, maintenance assumptions, and volatility associated with commodity prices. That despite our hedging and all of that we believe that there’s going to be some under recovery in the remainder of the year.

Is it, so the way that you, the rules you use in establishing the reserve today then would take into the, account the new rules that were issued under the interim order? And when is the interim order effective?

Well the interim order has not yet been received.

Okay. So I guess--

The final order associated with the interim case has not yet been received. I’m sorry David.

Okay.

And I would also point out that cumulative effects of all of the above that we’ve been talking about here is fully reflected in our guidance.

Okay. Just understand the, so you were $17 million reserve in the first quarter was utilized in the new band which is the--

No the interim band, the band that we are collecting under at this moment.

Well that’s a 3% under or, the 3% band is what you utilized using the $17 million?

Yes, yes, as calculated given the formula reflecting some actuals and projections based on the world as we saw it back in November I believe when--

Right.

We filed that case.

Right.

The costs were clearly down in Q1.

Right. And that’s a three month look back, is that right Eliot, when you look at--?

Well for us in terms of establishing the reserve, yes.

Yes, okay. All right. I was just thinking the 3% band, it’s not a 12-month look forward or back.

No it’s again a complex formula. There is various aspects of the test. But yes on an annual basis, that’s a, that’s a 3% band based on combination of actual plus forecast.

Well my last question and hopefully the answer to this like Jeopardy style kind of questioning, you know bizarre, well anyways no more commentary there, what as we look at what the PUC is doing as far as changing the fuel rules here, any direction or, that you could comment on of that investigation?

David this is Bill and I’ll characterize it as best I can. I think the commission and all of the stakeholder groups that are involved in trying to better refine, in a fair fashion the functioning of the Wisconsin fuel clause, are doing so on the heels of an environment where everybody experienced unprecedented volatility in the costs that are attempted to be captured fairly in that process.

So in terms of I’m going to infer from your question do we see any kind of troublesome bias being reflected in that process or any sort of worrisome objective underlying the effort. My answer to that is no. I think it’s well intentioned people who have just been through an historically unprecedented trauma of volatility trying to come up with a way of better capturing costs on a forward-looking basis and resulting in a clause that will function faster and fairer for all parties concerned.

So I don’t read any ill wind or ill bias into what’s going on. I think well intentioned people are just trying to make something that has been relatively static and predictable over the years function better in a more dynamic environment.

I mean hopefully easier to understand.

I hope it’s easier to understand because then it’ll be a heck of a lot easier to explain.

Right and one last question just sort of the timing of the approval for your new proposed plants. When should we, what’s the timetable there I guess?

We are hopeful that we would see a completion of that regulatory process by the middle to late portion of 2007.

Okay, excellent. Thanks very much.

[OPERATOR INSTRUCTIONS] Your next question comes from David Grumhaus of Copia Capital.

Good morning guys.

Morning.

Morning David.

Congrats on a good quarter. A couple of questions for you. I hate to go back to the fuel, but--

But you have to do it, don’t you?

I have to do it, right. Last year you under recovered by $0.23. Any idea what the, and it sounds like for the first quarter you feel like you were breakeven on the recovery because of the reserve you took? Is that a fair way?

As reflected in the financial statements, yes.

Okay. And if we looked at first quarter of ’05 any sense of what the recovery or under recovery was then?

About $0.09.

Under or over? Under?

Under.

Okay, so you made up $0.09 of the $0.23. Is that a fair way to look at it, year over year?

There’s a lot of other factors that have against that. But in Kewaunee was wrapped up in $0.05--

End run, right.

So it being off, we tried to make that comparison for you.

Okay I guess I’m, what I’m trying to and maybe you, until the fuel case gets done, we don’t, do we have any more visibility on sort of where you think the fuel under recovery is going to be for the year?

As we said last time in our conference call, you should expect that that will be an item that we will speak to in future earnings calls as well. I think we’re reluctant David to get into this in any detail other then to affirm with you that our best assessment of where all this is going to net is reflected in our guidance. And when we get the final order which we expect in June for the current pending rate case. And of course we’ll have greater visibility in terms of all the other variables that wrap up into that equation that we should be able to give you greater insights into the remainder of the year in connection with our second quarter earnings call. Sorry to play dodge ball but it is fully reflected in our guidance and I think that’s where we have to be.

Okay. Nuclear it looks like the nuclear sales were about $0.03 negative from an operating expense point of view, if I take the operating expenses and then add back the operating savings and then add back and subtract out the capacity. Where do you sort of see that for the year coming out?

Well what I would point out there David is that there are a number of geography issues relating to our nuclear sales associated with Kewaunee and Duane Arnold because we’re obviously moving from an asset we own, where the costs hit the income statement a number of different places to a purchased power agreement. What needs to sort of look beyond that $0.21 to $0.18 and think in terms of we received $130 million or we used $130 million of these proceeds to reduce short-term debt. And there, and also to reduce some accounts receivable balances.

Right.

Sold, so interest expense was lower. And when you were to add it all up, we’re not seeing that that kind of $0.03 variance that you’re pointing to. But we wanted to refer to it because we anticipated that this would be a question because of the geography elements--

Okay.

That I cited above but in terms of where we see it going, the effect of those nuclear sales and any outage rates that occur and we’ve eliminated a lot of the risk associated with those outages both for our customers and our shareowners is fully reflected in our guidance for the year.

Okay. Laguna, you referred to a valuation charge. I couldn’t find that. I’m sure obviously being the, in the Q, did you take down the valuation of that? And if so, how much?

We did, we did record an impairment. It will be in the Q and frankly David we are engaged in negotiations with purchasers right now and we’d rather not provide any greater detail on that.

Okay. Lastly, you talked earlier about the 50/50 capital structure including imputed operating leases.

Yes.

And power purchased agreements, can you give us some idea what the magnitude of that is or maybe alternatively where you view the balance sheet right now, obviously from a debt-to-capital point of view.

Yes I can give you some numbers from the first quarter on a, on an unadjusted basis. Debt was about 40% of total cap as of 3/31. But when we make the various adjustments for the Kewaunee and DAEC PPAs and various other operating leases that, including no, the imputed effects of that, that adjusted cap structure goes to that 50% level for debt. So we’re ready to, about at the targeted level of all things considered at the moment.

And I’m guessing that that S&P has pushed very hard on that and I guess the follow-up to that is, is that going to hamstring you in terms of your ability--?

Well we’re committed to our investment bond grade ratings. And yes S&P and Moody’s to some extent do make those adjustments. But it’s just the world we live in and we operate our balance sheet in that way.

So are you feeling like your opportunities to increase the debt levels is mitigated by that?

Well we manage the balance sheet to preserve our investment bond grade rating. We are committed to that. And we have dropped our unadjusted debt to capital at the end of 2002 consolidated from 62% to 40%. So I think shareowners have been rewarded for that as well.

And we certainly applaud you on that I guess. All I’m trying to find out is--?

Yes, no I appreciate what you’re saying and I think again the answer is we’re committed to the metrics that retain our investment bond grade rating.

Okay. Okay. I appreciate the help and the time. Thanks.

Okay, very good David, thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Mike Weinstein from Zimmer Lucas Partners.

Hi. My question is about the D&A rate in Iowa. You know I seen it was a huge drop and you sort of drop as of January 1st. Can you explain that a little bit further? Thanks.

The depreciation study. I think we have a, some, a reference to that in our 10-K but the short answer is depreciation rates were reduced at IPL effective 1/1/06 about $20 million on an annual basis.

Okay so that’s permanent ongoing item?

That’s before various CapEx additions.

Right.

That reflects existing property.

Okay, thank you.

Your next question comes from David Grumhaus of Copia Capital.

Sorry one other quick follow-up. The Cedar Ridge Wind project, why would you not exercise that? What’s sort of the pros and cons of moving forward with that?

We are in the process David of evaluating the timely availability and appropriate pricing of equipment in the marketplace. And the, in my view, the only reason we wouldn’t exercise that option is if we found that the availability of turbines for example was, they were unavailable or were richly priced in a fashion that might cause us to wait. That’s the only reason we wouldn’t exercise it.

Okay, that’s helpful. Thank you.

Ms. Johnson, there are no further questions at this time. Are there any closing remarks?

Well with no more questions, this does 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 May 10th, 2006, at 800-642-1687. Callers should reference conference ID 7871388. In addition, an archive of the call and the script of the prepared remarks made on the call today will be available on the investors section of our website at www.alliantenergy.com later today. Thank you.