Alliant Energy Corp (LNT) 2006 Q2 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to your host, Becky Johnson, Manager of Investor Relations at Alliant Energy.

Good morning. I'd like to thank you for joining us today, those of you who are on the phone and also those listening to the webcast. We appreciate your participation. 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 the senior management team. We have allotted an hour for the call this morning. Following some prepared remarks from Bill and Eliot, we will have time to take questions from the investment community.

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 risk 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.

In addition, the presentation contains non-GAAP financial measures. The comparable GAAP measures and reconciliation between non-GAAP and GAAP measures are provided in our earnings release, which is available on our website at www.alliantenergy.com.

At this point, I'd like to turn the call over to Bill.

Good morning, everyone. We realize there are a lot of calls going on today, so we appreciate your taking a little time this morning to visit with us.

Our utility business delivered solid financial results again this quarter, and, as importantly, our operating facilities have performed extremely well during the peak loads that we've experienced so far in July, when temperatures often approached 100 degrees in our Iowa, Wisconsin and Minnesota service territories. Eliot will be discussing the puts and takes of our quarterly results and other financial matters in more detail later on in the call. I'd like to spend some time providing you with both an update on major initiatives as well as some of the operating highlights of our business.

Turning to those initiatives, we announced earlier today that our board of directors has approved a plan to repurchase up to $200 million of the Company's common stock by the end of 2007. That action is made possible by three things. First, the significant progress made in executing our asset divestitures. Second, our successful debt reduction program, which has both strengthened our balance sheet and greatly improved the overall financial condition of the Company. And, third, our expectation that the remaining divestitures and monetization efforts will be completed in a satisfactory manner and time frame. We intend to fund the share repurchase plan from available cash balances and proceeds from anticipated divestitures of non-regulated businesses. The pace of our execution of this repurchase will largely be a function of the available cash balances and asset proceeds. But our preference, of course, is to effect the repurchase sooner rather than later. We are pleased that we can return value to our shareowners through this share repurchase program. Eliot will discuss it in greater detail later in the call.

Let me turn next to an update of our utility generation plan. Last month, we announced that we had acquired the development rights to the Cedar Ridge Wind Farm near Fond du Lac, Wisconsin. Pending regulatory approval and the availability of carbons, we expect the project to be fully operational in late 2007 or early 2008 with a total capacity ranging from 80 to 100 megawatts. This will be our first owned wind generation. We plan to file the necessary regulatory applications for this project later this month. In addition to Cedar Ridge, WP&L plans to place an additional 200 megawatts of wind generation in service by 2009. This incremental wind will be sufficient to allow WP&L to meet future RPS requirements in Wisconsin.

In Iowa, our build out plan includes only 100 megawatts of additional wind generation, as IP&L already exceeds the RPS requirements in Iowa, with over 200 megawatts of wind generation already in the portfolio via contract.

We've also made progress on the baseload portion of our Wisconsin generation plant. Earlier this year, we selected our Nelson Dewey Generating Station in Cassville, Wisconsin as our preferred site for WP&L's 300 megawatt baseload capacity expansion. We plan to file our regulatory applications for this expansion later this quarter. If approved, we anticipate beginning construction in late 2007 and expect the plant to begin commercial operation in 2012. The cost estimates for the facility are increasing from those previously communicated. Those increases are driven primarily by escalations in construction labor and material costs. Our analysis continues, and we expect to have an updated cost estimate for this facility when we file for regulatory approvals.

The PSCW has recently completed the administrative rules implementing Wisconsin Act 7 legislation, which provides for increased certainty of fixed-rate making determinants for generation investments. The determinants include return-of/return-on and the depreciable life of the investment prior to the commencement of construction. We do plan to rely on this legislation for both the new wind and new baseload proposals at WP&L.

IP&L's longer term generation plan includes the addition of a baseload plant in the 2013 to 2014 time frame. We are in the preliminary stages of our planning efforts and expect to file with MISO for interconnection studies for that capacity addition by the end of this year.

Let me 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, RockGen, a 466 megawatt simple cycle gas peaking unit, is part of the bankruptcy proceedings, but Riverside, a 603 megawatt combined cycle gas unit, is not. We utilize RockGen primarily for capacity value. Given the uncertainties which attend the Calpine situation, we sought proposals for meeting WP&L's summer peaking needs for the years 2007 to 2009 to accommodate the possibility that the RockGen facility might become unavailable as a result of the Calpine bankruptcy. I would note that the RockGen facility has been available and has been dispatched by MISO during the recent heat wave in the Midwest. In addition, we've also requested proposals for the longer term period beginning in 2008 for either a purchased power agreement or the purchase of a facility to meet the peaking power supply needs of our operating utilities. We have received responses from interested parties but are awaiting additional clarity and action from the bankruptcy court and the FERC prior to taking any action associated with the solicitation. We're also working closely with the Public Service Commission of Wisconsin's staff on these matters.

The impact of weather, net of our cooling degree day hedging activities, was not significant in the second quarter of 2006. While we experienced slightly milder than normal weather for the quarter, we recorded income of approximately $4 million, or $0.02 per share, related to the terms of the summer weather hedge, which covers the period June through August 2006. This is the second summer that we've entered into a weather hedge to minimize the potential earnings volatility associated with our weather extremes. Overall, our weather normalized electric sales for the quarter were once again up, approximately 2%, versus the same period in 2005, which is indicative of a continued growing economy in our service territories. While our residential sales for the quarter and year to date were somewhat flat, I would note that this is largely a factor of the milder weather in 2006 and the fact that this is our most weather-sensitive customer class.

Switching over to our transmission business, the book value of IP&L's owned transmission assets 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 many of you, we are evaluating alternatives to include our IP&L assets in some form of regional independent transmission company. As of June 30, 2006, WP&L's investment in the Wisconsin-based American Transmission Company was approximately $161 million. This reflects an approximate 20% ownership interest in that business. WP&L's current plan is to invest about $11 to $12 million per year in ATC in both 2006 and 2007. I know all of you have an interest in our long term plans for this investment. As we previously stated, we are open to a range of alternatives with our ownership in ATC. The board of directors of ATC has the ultimate decision on what, if anything, might happen to the structure and ownership of ATC. We have one of ten seats on the board and will provide our input into any evaluation the ATC board may undertake.

Let me also briefly update you on our remaining regulated asset sales. We recently completed the sale of our small water utility business in Illinois, and the divestiture of our Illinois electric and gas utility assets is moving through the regulatory process, which we expect to be completed in late 2006.

Let's turn to our non-regulated business and discuss the progress we've made with our divestiture efforts. We continue to make great progress in rationalizing our portfolio of non-regulated businesses. This rationalization and the associated debt reduction have contributed to a significant savings in ongoing interest expense. On the international front, we sold our interest in one more plant in China in the second quarter. We are in the later stages of completing the remaining three sales transactions and have entered into agreements for the sale of two of the three remaining plants. As of June 30, the carrying value of our remaining investments in China is less than $10 million, and the results for this investment are recorded in discontinued operations. We expect to complete all of our remaining China divestitures this quarter. We have received and evaluated bids to purchase our Laguna del Mar property in Mexico, and we are currently negotiating a sales agreement with the preferred bidder. Although we can provide no assurance that these negotiations will be successful, absent unforeseen circumstances, we expect to complete the sale this quarter. The results of our Laguna del Mar investment are recorded in discontinued operations.

Next, let me touch on New Zealand. We continue to hold equity interests in TrustPower and Infratil, which have proven to be very successful investments. Based on the exchange rates and trading prices as of June 30, our investments in TrustPower and Infratil have an aggregate market value of $351 million compared to our carrying value of $106 million. We continue to explore alternatives to monetize our New Zealand investments. Maintaining or growing an international presence is not consistent with our long term business strategy.

Lastly, the sale of our gas gathering pipeline systems was completed in the second quarter for net proceeds of approximately $23 million, which represented a modest gain. The results for this business are recorded in discontinued operations. Those of you who have followed us for a few years have seen our non-regulated business platform steadily evolving into a relatively small portfolio of lower risk, mature businesses with much closer strategic ties to our regulated utility business.

In closing, let me summarize the key takeaways for this quarter. First, our utility performance was strong, both financially and operationally. Second, we are approaching the end of our planned divestitures and have completed our AER debt reduction plan. This has and will result in a significant decrease in ongoing interest expense. Third, we have announced plans for a share repurchase program for up to $200 million. Fourth, our operating facilities continue to perform well during an extended heat wave throughout our service territory. And, finally, all of us at Alliant Energy remain focused on operational excellence in our utility business and the implementation of our plan to expand our generation fleet in Wisconsin and Iowa to meet increasing customer demand.

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

I'd also like to thank all of you on the phone today for joining and for your continued support of our Company. As is our practice, I will highlight a few non-recurring items in our results. Our objective here is to provide visibility to the strong results of our ongoing business and to assist you with a quarter-to-quarter earnings comparison.

I will begin with a discussion of how we see the quarter-over-quarter comparison. There were no material one-time items in our second quarter 2006 results of $0.39 per share. The $0.39 earnings per share achievement represents a 26% increase in earnings per share as compared to the same period in 2005. We view our second quarter of 2005 earnings from continuing operations as $0.31 per share, after stripping out various non-recurring adjustments. This is how we get there. First, the 2005 results reflected a $0.48 per share asset valuation charge related to our Brazil investments. Second, the 2005 results also included $0.07 of income related to an adjustment of a previously accrued income tax valuation allowance. Third, subsequent to the second quarter of 2005, we have sold our Brazil and SynFuel investments, but the past results remain in earnings from continuing operations per applicable accounting rules. In other words, the results are not reclassified to discontinued operations as was the case for many of our other divestitures. As noted in the table on page 2 of the earnings release, our 2005 results included a total of $0.05 per share from these items. Lastly, our 2005 utility results included $0.02 per share of employee separation costs. Adjusting for the items that I've just outlined, second quarter 2005 earnings from continuing operations increased from a loss of $0.07 to earnings of $0.31 per share. From the perspective of the earnings power of our ongoing businesses and for the benefit of your analysis, we believe $0.31 per share is a more appropriate reference point to the second quarter of 2005. Thus, at the risk of being repetitive, we view our second quarter 2006 results of $0.39 per share as a 26% increase in earnings per share over the $0.31 second quarter of 2005. This is also what we consider to be representative of the business going forward.

As we will have time in the Q&A session to cover specific questions about reported results, I'd like to spend the remainder of my time on our financing plans and financial guidance. Looking ahead to the upcoming utility generation and build out plan described by Bill, we plan to use a combination of internally generated cash, external financings and equity infusions from the parent to fund our CapEx needs. Reflecting on our much improved balance sheet and cash balances, we do not see a need for incremental common equity until 2009 other than that needed for our equity incentive plans. However, as has been announced, we intend to purchase up to $200 million of existing common equity, which should more than offset share issuances in connection with our various equity incentive plans. As you might expect, when evaluating a share repurchase program, we considered a number of other alternatives for the use of these cash balances. Such alternatives included retiring the remaining series of AER senior notes, which have a coupon of 2.5%; additional equity infusions into our utility operations to fund our CapEx; continuing to hold and invest the cash; issuing a special dividend to shareowners; and/or increasing our regular dividend. We believe that a share repurchase program is the best alternative for our shareowners. I would note, however, that such decision will have no impact on the board's annual review of our regular dividend policy, which is scheduled to take place in the fourth quarter.

Turning to our financial guidance, we are increasing our 2006 earnings guidance from continuing operations by $0.10 per share. This is largely a reflection of two issues. First, it reflects our utility results for the first half of the year, as well as the fact that we experienced hotter than normal weather in our service territories in July. The cooling degree days for July were 72% and 16% above normal in Madison and Cedar Rapids respectively. However, I would remind you that our summer weather hedge will also impact our July and August results and that degree day comparisons do not capture the effects of humidity levels. Second, the increase in guidance reflects additional interest income at our parent company as a result of the buildup in our cash balances. I would also note that our updated guidance reflects the impact of our stock repurchase plans, which we expect will be minimal for 2006. We are reducing our 2006 capital expenditure plan to approximately $450 million, a $25 million reduction from previous guidance. In addition, we continue to anticipate that 2006 cash flow from operations will be in the range of $400 to $450 million.

With that said, let me point out a few other items that should be of interest to you. I will first provide a brief discussion of our two pending WPL rate cases, one being a fuel-related case and the other a 2007 base case. I would note that we did request increases of $96 million in each case but that the rate cases are separate and distinct, and it was purely a coincidence that the amounts being sought in each case were the same. Regarding our fuel-related case, fuel-related costs have declined relative to the forecast that was used to establish interim rates in fourth quarter of 2005. Our second quarter 2006 results reflect an additional $20 million reserve for an anticipated refund to customers, with such reserve totaling $37 million through June. We are hopeful that our work with all interested parties will bring this case to a close by the end of this quarter. Largely due to current forward prices, the split test year and the fuel recovery factor used to establish fuel-related rates, we are currently projecting an under recovery of our fuel-related costs at WPL of approximately $0.10 per share in the second half of 2006. This assumption is included in our 2006 earnings guidance. This could result in another request for a fuel-related rate increase some time this fall prior to the new rates being established in the 2007 base rate case.

Earlier this year, the PSCW changed WPL's annual fuel cost monitoring band to plus 2% and minus 0.5% from the previous symmetric 3%. As you know, commodity price levels and our ability to collect all of the associated costs are difficult to predict. As we have experienced under the current rules, price volatility has been detrimental to our shareowners. The Wisconsin investor-owned utilities continue their work with Commission staff and broader stakeholder groups to craft a rate recovery solution for recovery of these costs that is fair to both customers and shareowners. PSCW formally docketed a proceeding to review fuel rules in February. In June, they opened the administrate rulemaking docket to potentially revise these rules. We will continue to work with the other Wisconsin utilities and other stakeholders to ensure progress continues on this important issue.

I will now turn to our base rate case in Wisconsin, which was filed in March of this year. We filed for a retail electric and gas increase of $96 million utilizing a 2007 test year. The procedural schedule relating to this case is posted on our investors website. The hearings are expected to begin in September, and we anticipate that new rates will be in effect in January 2007. As a reminder, the $96 million request assumed no change in the interim fuel-related rates implemented in late 2005. Thus, given the decline in fuel-related costs since our interim fuel-related rates were established, one would expect the final increase in the base rates to be significantly less than the initial $96 million request. I would note that such decrease would not have a meaningful impact on our earnings, as revenues and cost would both be declining.

In closing, I would note that once again the rating agencies have noted our efforts to continue improving the financial strength of our Company. We are pleased to report that Moody's upgraded the credit ratings of IPL's and AER's senior unsecured long term debt by one notch in May of this year.

Finally, 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 visiting select markets over the next couple of months and also plan to attend the AGA and EEI finance conferences later this fall. We look forward to seeing many of you at these events. 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. [OPERATOR INSTRUCTIONS]. Your first question comes from Dave Parker with Robert Baird.

Congratulations on a great quarter. Maybe-- and thanks for your in-depth commentary, I guess, on the utility and non-reg and international stuff. You answered a lot of my questions. But, one question I'd like to explore a little bit is your hedges and how they work. I guess, first off, looked at second quarter weather impacts for some of the other utilities in the Midwest, and they seem to have a bigger impact on earnings per share than maybe what you talked about. Then, maybe, as we look at the third quarter, how favorable weather may be offset by that hedging strategy; if you could add a little color, that would be great.

Our 10-Q, which should be filed today or tomorrow, will have a table in there that will detail the effect on margins as well as hedges as separate line items. So I think you'll have a better picture of what was the case looking back. But, I guess I would call to your attention that we serve four states, and the weather in Iowa and Madison can be quite different as those degree day comparisons indicated. But, in the case of Q2'06, our weather effects compared to normal brought our margins down about $3 million, offset with a hedge that contributed $4 million - so a net effect of $1 million as compared to '05Q2, where the impact of weather was a plus $5 million on margins in terms of dollars - millions of dollars - with an offset on the hedge of $9 million for a net of negative $4 million. And the year to date numbers will be in there as well. But, I guess, what I'm trying to relay to you here is that those offsets are not significant when you compare Q'05 to Q'04 from a swing of plus $1 million to a negative $4 million for Q2 of '05.

Right. Okay. Good. I'd heard-- maybe an update just on the wholesale markets-- I'd heard with extreme weather that MISO had been running a lot of plants really hard. I don't know if that also provides you some maybe increased wholesale opportunities in the third quarter that we didn't realize last year.

There's a possibility of that, David. Certainly, in July, I think everybody that owns hardware in this business has been running them very, very hard. That's certainly been the case with our units. MISO has been dispatching us very aggressively. It's impossible for us to guess right now what the impact of that is going to be in the third quarter. It can't be bad, but how good it is I don't think we know today. The good news is that the weighted average availability of our plants over the course of this very hot period of time has just been extraordinary. It's been in the upper 90% across the property. I don't know if that means we're good or if it means we're lucky. But the outcome from that should be good as we look ahead to the third quarter. We just don't know enough right now to say any more than that.

Okay. Good and lucky is fine with me. Maybe one last question, which just slipped my mind, so I'll get back in the queue. When it pops back in my head, I'll get back to you.

Your next question comes from Todd Craig with [Lionhart & Mahoney].

Can you talk a little bit more about what impact, if any, the share repurchase program will have on your dividend, and will it in any way change your outlook as to what percentage of your base utility earnings you'll ultimately pay out in the dividend?

As Eliot tried to be explicit on that point in his prepared remarks, we don't expect the share repurchase activity to be a material factor at all in our board's review of our dividend policy or our dividend levels, nor do we expect it to have any kind of an impact on our objectives in terms of-- our goals in terms of payout levels. Those I would not expect to change as a consequence of the share repurchase program.

Thank you.

Your next question comes from [Stephen Gambuzzo] with Longbow Capital.

I was wondering if you could just comment on-- for the asset sales that you have announced but not yet completed-- I guess that would be the Illinois utility and perhaps China assets-- what you'd expect the after-tax proceeds realized during the balance of 2006 to be.

I don't think we disclose that, frankly because there are still some open-ended issues with respect to closing those transactions and I don't think we know that yet.

Okay. But, in terms of what additional proceeds will be coming in, it's Laguna del Mar, the Illinois utility and the China assets. Is that essentially what's on the table for 2006?

I think that's essentially correct, although we do continue to evaluate our options for monetizing our New Zealand investment as well.

Okay. And then, in terms of the share repurchase that you've announced, does that include, I'd say, kind of the balance sheet capacity that will be released by monetization of the New Zealand investment, or would that be incremental to your analysis on capital deployment?

I think our share repurchase program was motivated both by our strong existing cash balances as well as the collage of expectations we have about the realization of proceeds from remaining divestitures and monetization efforts. So, is something related to New Zealand relevant in some fashion to our judgments about share repurchase? Of course it is. Is it-- Is one conditioned upon the other? The answer is no.

Okay. And, as you've evaluated the various options, where would you expect to end up 2007 on a debt to capital basis?

Stephen, our unadjusted debt to capital targets remain in the 50 to 50 range, and then, of course, with off balance sheet adjustments, those numbers change. But, unadjusted-- Actually, unadjusted would be more like 40%; adjusted 50/50 after giving effect to OBS items.

Okay. And you mentioned in your remarks that you'd expect to put 200 megawatts of wind into service in Wisconsin by 2009. Is that correct?

Yes; in addition to the Cedar Ridge Wind Farm that we've announced.

Okay. Is that an acceleration of the spend? I guess I had previously thought that was kind of post 2010. Has that changed, or has that been the plan all along?

You're spot on. It does represent an acceleration of our anticipated investment in wind generation, driven largely by our desire to meet emerging RPS standards in Wisconsin prior to the time we're legally required to do so.

Okay. And you would anticipate taking advantage of the rate-making treatment in Wisconsin available for generation resources as opposed to a traditional rate case for that.

That is our present intent; yes.

Okay. And how-- in terms of-- When would you expect to actually get regulatory approval to go ahead and actually deploy that capital? What would the time period for that be?

Well, first things first. We're targeting the Cedar Ridge project first, which we will be filing for that investment later this month and would hope to get it approved by the end of this year and actually have the capital deployed and the equipment generating by the end of next year. There is less certainty with respect to the actual sequencing of the additional 200 megawatts.

Okay. And then, finally, I was wondering if you could just tell me how much valuation allowance you have built up against deferred tax assets currently on the balance sheet.

Stephen, I think I'd refer you to the 10-Q and K. The Q, of course, will be out in the next couple of days. Give Becky a call, and she can help you sort through that. Sorry; I don't have that number with me.

Okay. Thanks very much.

[OPERATOR INSTRUCTIONS]. Your next question comes from Dave Parker with Robert Baird.

Getting old is terrible. I finally remembered the question; sorry.

David, you're not getting old; you are old.

That's right - dirt and me; same age. The question happens to do with-- Sorry; I always beat this every quarter about the fuel rules. You reserved $20 million in the second quarter. I think Eliot talked about $37 million maybe being the total refund. So, was there also reserve in the first quarter? I don't know if you can refresh my memory there.

Yes, there was.

That total amount has been reserved already?

Yes. $37 through June; $17 in Q1.

Then you're projecting, given the way it sets now, that you'll under recover $0.10, but we've got a docket to revise that. I know it's an election year, but any hope that this whole issue can get put to the front burner and get resolved before we have to eat that under recovery again? What's your viewpoint there?

David, hope springs eternal. But, as we've looked ahead to the balance of the year, as Eliot indicated, we're looking at about a $0.10 under recovery in our guidance. That would suggest that we really don't expect the issue to be recast and resolved, at least not meaningfully, before the end of this calendar year. We'd be absolutely delighted if that happened, but we think the probability of that may be low.

Okay. And, one other question on the wind agenda. We've seen a couple projects be slid back because they can't get turbines. I don't know if that's any concern that you have or what your current thoughts are on wind availability.

In our prepared remarks, we did caveat those in-service dates with availability of turbines. You're as familiar with that marketplace as we are. Certainly turbines are a lot scarcer today than they were a year ago. But they can be found. The question is whether or not you can find them at what you view as a satisfying price. We're going to make very earnest efforts to do that; are guarded optimistic that we're going to be able to meet the schedule that we outlined for you.

Great. Thank you.

[OPERATOR INSTRUCTIONS]. Ms. Johnson, there are no further questions at this time.

Thank you. With no more questions, this concludes our call. Thank you for your continued support of Alliant Energy, and feel free to contact me with any of your follow-up questions. A replay of this call will be available through August 10 at 800.642.1687 for domestic callers or 706.645.9291 international. Callers should reference conference ID 3036077. In addition, an archive of the call and a script of our prepared remarks made on the call today will be available on the investor section of the Company's website later today. Thank you.

Thank you for participating in today's conference. You may now disconnect.