Alliant Energy Corp (LNT) 2007 Q1 法說會逐字稿

(audio begins in progress)-- the call over to your host, Becky Johnson, manager of Investor Relations at Alliant Energy.

Good morning. I would like to thank all of you on the call for joining us. We appreciate your participation on our first quarter 2007 conference call. With me 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. Following prepared remarks by Bill and Eliot, we will have time to take questions from the investment community. We issued a news release this morning announcing Alliant Energy's first quarter 2007 earnings. In addition, we have prepared supplemental slides regarding the proposed IP&L transmission asset sales and a reconciliation of GAAP to adjusted earnings per share. Both the release and the slides are available on the Investors page of our website at www.alliantenergy.com. Before we begin, I need to remind that you 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 actual results to be materially different. Those risks include among others matters discussed in Alliant Energy's press release issued this morning and in the filings with the Securities & Exchange Commission. We disclaim any obligation to update these forward-looking statements. At this point, I will turn the call over to Bill.

Thank you, Becky. Good morning. Thanks for your continued interest in our company. Despite the adverse weather in our first quarter, we're satisfied with the financial results produced by our utility and nonregulated businesses.

As expected, our utility earnings were negatively impacted by the extraordinary winter storms that we experienced in Iowa and Minnesota. However, we're working hard to rebound from this setback both financially and operationally. We believe we can. Let me summarize the effect of the storms we experienced in late February. I want to paint a picture for you of the challenges faced in the aftermath of these storms. 269,000 customers were out of service or almost 54% of IP&L's electric customers. 250 miles of transmission lines were down, and 6,000 poles were damaged. 800 communities were impacted. It was nothing short of an heroic effort by a massive team of employees and fellow utility companies to get the power back on for our customers. At the peak we had more than 1,500 people working on the restoration effort. I want to reiterate my thanks to that team and also to our customers for their cooperation, patience, and understanding during the restoration efforts. As outlined in the earnings release, we currently estimate that the total cost of the repairs to our electric system will be approximately $60 million.

Before going further, I want to emphasize that we reaffirm our earnings guidance range of $2.42 to $2.62 per share. As we see it today, the storm restoration costs and lost revenues are currently causing us to trend towards the lower half of that range, but there are many factors which we believe could offset that trend. First, as many of you know, the seasonality of our business has historically caused us to produce two-thirds of our utility earnings in the second half of the year. Second, the volatility of Midwestern weather in shoulder months where we are traditionally unhedged can create earnings opportunities or risks. And, finally, our employees have demonstrated in the past an ability to exert extra effort to meet our financial commitments to our shareowners. That said, we currently see ourselves leaning to the lower half of our guidance, but we remain focused on the midpoint or above. I would note that our annual incentive compensation program covering all employees is not in the money until we exceed the mid-point of our earnings guidance.

Let's move away from the storms and our annual guidance to focus on the quarter. As Becky mentioned, we have posted slides on our website to accompany our discussion with you this morning. If you have them, you may want to refer to slide number 2 at this point as I compare our Q1 '07 to Q1 '06. First quarter 2007 earnings from continuing operations of $0.56 per share included two items that we view as nonrecurring in nature. First, the results of our utility business reflect $0.05 per share of negative impact from the storms. This includes $0.04 per share of expense and about $0.01 per share due to lost sales. We incurred some of the unanticipated costs in the first quarter. However, our rebuilding effort continues and there will be additional costs incurred over the balance of this fiscal year. In our nonregulated portfolio we sold our interest in ReGENco, a company that repairs turbines and generators. That sale produced a nonrecurring gain of $0.02 per share. After making these adjustments, we view our first quarter operating results as $0.59 per share. When first quarter 2006 earnings are similarly adjusted, the earnings from continuing operations would have been $0.46 per share. Thus, the quarter over quarter comparison reflects a $0.13 per share or 28% improvement in 2007.

Now let me shift from the quarter to an update on the progress we're making on the execution of our generation buildout plan. Beginning in Wisconsin, on April 24th we received the oral decision from the Public Service Commission on the fixed financial parameters application for the Cedar Ridge wind farm. We have not received a written order, which will be the very first Act 7 ruling, but in its oral decision the Commission set an authorized return on common equity of 10.5%, a 53% common equity ratio, and a twenty-year fixed depreciation period. The ROE component of the decision was clearly a disappointment to us. Given our announced building programs, the equity ratio and the depreciation period were not. WP&L's current authorized ROE on rate base set in January for our 2007 test year is 10.8%. We believe that the decision by the Commission proposing a 10.5% return on equity is contrary to the intention of the Act 7 legislation. We believe the case was well presented and debated, and frankly are not sure we understand why the Commission ended up where it did on ROE. We have to see and evaluate the written order, which is legally the decision of the Commission, before we can comment further on the implications of that decision. That said, WP&L is committed to adding owned wind generation to its portfolio including the Cedar Ridge project. Whether that is done under fixed financial parameters or under traditional rate base will be decided after thoroughly reviewing the written order from the commission. Although traditional rate-based regulation in Wisconsin is not a bad choice, we had hoped -- no, we had expected an outcome superior to that, which is what we believe the legislature intended.

In addition to Cedar Ridge, WP&L continues to evaluate sites for an additional 200 megawatts of owned wind generation. We expect this capacity to be built outside of Wisconsin and to be online in 2009. As you know, WP&L is also in the early stages of developing a 300-megawatt coal plant intended for commercial operation in 2012. In February, WP&L filed to build a base load unit at its existing Nelson Dewey site in Cassville, Wisconsin. We anticipate approvals in 2008, and could begin construction as early as the second quarter of 2008. We currently anticipate the stand alone costs of this facility to be in the range of $740 million to $840 million, excluding AFUDC if applicable. In addition, as part of this expansion, WP&L plans to invest an additional $60 million for equipment to be utilized by existing units 1 and 2. In 2005, the Public Service Commission of Wisconsin approved WP&L's request to defer the retail portion of the precertification and preconstruction costs incurred for this new plant. WP&L also plans to make environmental upgrades to the two existing units at the Nelson Dewey site. We're currently preparing the regulatory application to request approval to add scrubbers and expect the total project cost to be approximately $115 million. In March, the Public Service Commission of Wisconsin approved our request to defer the retail portion of the incremental precertification and preconstruction costs incurred for these clean air compliance projects.

I will now turn to the status of our new IP&L generation projects. Last week, IP&L announced that it had entered into negotiations with Clipper Windpower to purchase the Eclipse Wind Farm which is well under development in western Iowa. The Eclipse site has the potential to host as much as 200 megawatts of wind generation. Subject to a successful outcome in our negotiations with Clipper, IP&L plans to file for approval of the Eclipse Wind Farm with the Iowa Utilities Board this summer. Pending regulatory approval, IP&L expects to complete the first 100 megawatts of this project in 2009. IP&L plans to equip the facility with Clipper's 2.5 megawatt turbines which are manufactured in Cedar Rapids, Iowa.

Turning to base load at IP&L, we have announced plans to build a 600 megawatt base load coal facility at our existing Sutherland generating site in Marshalltown, Iowa, with IP&L's share to be at least 250 megawatts. We expect to utilize supercritical pulverized coal boiler technology at this facility. We believe this technology offers IP&L's customers affordable and reliable electricity with substantially increased efficiencies over existing plants. Pending regulatory approvals, we currently expect this facility to begin commercial operation in 2013. We estimate that a 250-megawatt share will cost between $600 million and $700 million excluding AFUDC. We're planning to make our generation investments in Iowa under the provisions of House File 577, which allows increased regulatory certainty by determining the return of and return on prior to making certain generation investments. The good news is that House File 577 is working as intended in Iowa, where five generating facilities have been built with authorized returns on equity in the range of 11.9 to 12.3%.

Let me close my utility comments with an update on our announced sale of IP&L's transmission assets to ITC Holdings which is moving forward through the various regulatory processes. As I've stated in the past, this transaction will only close if the regulatory approvals from the IUB and others produce outcomes that ensure the sale will be in the best interest of our share owners. Eliot will review the status of the various regulatory applications related to this transaction. Suffice it to say that as of now there are no showstoppers. On the nonregulated side, in February we announced we entered into a definitive agreement to sell our Laguna del Mar investment in Mexico. Closing on the sale is scheduled to occur on May 15th for expected net proceeds of approximately $65 million, pending satisfaction of the closing conditions. The buyer group is formed by Salvago Mexico, which integrates the real estate subsidiary of the Spanish utility Iberdrola and the Spanish-based investment fund Global Loan and the Spanish developer Fiesta Promotiones. Alliant Energy does not expect any additional impairment charges as a result of this sale. The closing on the Laguna del Mar transaction will mark the end of our foreign investments.

The key takeaways from the first quarter of 2007: We're satisfied with the financial results despite the impacts of the winter storm. Our employees will meet our commitment to share owners just like they met our commitment to customers, which is why we have not changed our earnings guidance. We've made good progress on the various regulatory outcomes required to execute our generation buildout and the sale of our IP&L transmission assets, and we will keep you posted on further progress in that regard. We appreciate and thank you for your continued support of our company. I will now turn the call over to Eliot for a discussion of our pending regulatory matters and our updated financial guidance for 2007.

Thanks, Bill, and thanks to all of you for joining us today and for your continued support of our company. Our comprehensive earnings release is posted on our website. Bill has touched upon our quarterly financial highlights, thus my primary focus here this morning will be on our CapEx guidance and progress that we are making on our various regulatory matters. First, a review of the rate-making implications of the aforementioned storm. IP&L does not expect to file a rate case with the Iowa Utility Board in 2007 seeking recovery of costs associated with these storms. However, we may choose to address these extraordinary events as part of a currently contemplated 2008 rate case utilizing a 2007 test year. Moving on to our capital plans, in our earnings release today we updated our 2007 projected capital expenditures for the impacts of the IPL storm. We have increased the utility CapEx for transmission and distribution spending by $45 million to $310 million. Our recent application to the Public Service Commission of Wisconsin to transfer ownership of a 300-megawatt simple cycle gas-fired generating facility to WPL is not included in our 2008 capital expenditure guidance. This facility is currently owned by our nonregulated generation affiliate. The purchase by WP&L is intended to replace the output currently available under a purchase power agreement with Calpine's RockGen facility. WP&L plans to purchase the facility for the net book value of the plant, which is expected to be approximately $94 million at the projected time of closing. Pending regulatory approval, the purchase is expected to occur in 2008. Finally, related to CapEx, the timing of the capital spending for the various generation projects that is Bill outlined is dependent upon a number of variables, the most significant of which are the regulatory approval processes.

I would now like to address our future financing plans. As we have communicated in the past, we plan to fund utility capital expenditures in 2007 and 2008 with a combination of internally generated funds, asset sale proceeds, external debt financings and equity infusions from the parent. We're reaffirming our 2007 cash flow guidance of $525 million to $575 million. In February, we announced our decision to double the size of our share repurchase program, with the intent to repurchase up to $400 million of our common stock by the end of 2007. As noted in our earnings release, cumulatively we have purchased 6.3 million shares of our stock for $249 million. Currently plan to complete the remaining $151 million of repurchases in 2007. The common stock repurchase program has been and is expected to continue to be funded from available and anticipated cash balances.

Now to move onto a discussion of the proposed sale of IP&L's transmission assets to a subsidiary of ITC Holdings. First, an update regarding our regulatory filings for this proposed sale. We have made applications jointly with ITC in Illinois, Iowa, and Minnesota. In addition, both parties have made their Hart-Scott-Rodino filings with the Department of Justice and Federal Trade Commission. The remaining filings with with the FERC and the Missouri Public Service Commission. In Missouri, we own five miles of transmission line but do not serve any customers. We filed with the Iowa Utility Board on March 30th and expect a decision within 180 days. For your reference, we have posted the IUB procedural schedule relating to this transaction on the rates and regulatory matters section of our Investors website. The FERC and the other state commissions do not have a defined period within which to act. However, we expect to receive their decisions later this year.

In summary, we believe we are on track to complete the sale of IP&L's transmission assets by year end. Moving to the financial implications of the proposed sale, as we have stated previously, the transaction is not expected to impact earnings guidance, capital expenditures, or our share repurchase plans for 2007. Based on the assumption that the sale closes this year, our 2008 capital expenditure guidance does not include any transmission spending. During our 2006 year end earnings call, we provided you with information explaining the financial implications of this transaction. We have included an update slide in the material posted today. Slide number 3 provides an overview on what we would characterize as a hypothetical but not unreasonable scenario of the financial impacts arising out of the sale of these assets. At the time of the year end earnings call, our analysis estimated a net accretion resulting from this transaction, $0.09 per share. Due to the increase in the stock price since that time, our revised estimate of net accretion is now $0.06 per share. While our hypothetical example identifies share repurchase as the mechanism to achieve earnings accretion, such accretion is also possible as a consequence of reinvesting the proceeds in our core business in lieu of issuing new common equity. What we ultimately choose to do will be determined after receiving regulatory approvals, closing the sale, and evaluating the progress and timing of our generation buildout projects.

Moving onto Wisconsin retail rate matters, last month WP&L filed to reopen its 2007 base rate case filing. WPL is requesting to reopen this case to discontinue customer credits that will be fully amortized by the end of 2007. We filed to reopen this case because with the exception of discontinuing the credits, we do not anticipate a need for a change in base rates in 2008. It is also our desire to transition to a biannual based rate case schedule in Wisconsin for the 2009 to 2010 test years. We also plan to obtain clarification as to how the construction work in progress balances associated with our generation plan will be treated. Our purpose in seeking clarification on construction work in progress is that we do not intend to adversely impact the earnings on our new generation investments as a consequence of not filing a base rate case each year during the construction period.

Turning to fuel costs, earlier this week WP&L filed a notice with the Public Service Commission of Wisconsin indicating that its annual 2007 retail fuel related costs are projected to fall below the fuel monitoring level approved by the commission in January 2007. We would like the Commission to allow us time to attempt to negotiate a settlement agreement with Commission staff and other key stakeholders. To the extent this proceeding determines a retail electric rate reduction is warranted, WPL will refund the excess collected from rate payers subsequent to its May filing. Our 2007 earnings guidance reflects our expectation that WPL will fully recover its fuel related expenses under the current fuel rules. The Wisconsin investor owned utilities continue their work with Commission staff and broader stakeholder groups to craft a revised mechanism for recovery of fuel costs that is fair to both customers and shareowners. The Public Service Commission of Wisconsin formerly docketed a proceeding to review fuel rules in 2006. Since that time, both customer groups and investor-owned utilities have submitted proposals for the Commission's considerations after efforts to develop a consensus proposal fell short. At their open meeting yesterday the Public Service Commission of Wisconsin instructed staff to draft a proposed rule based on the proposal submitted by the joint utilities which uses an escrow mechanism to annually reconcile fuel costs with amounts collected in rates subject to a monitoring band of plus or minus 1%. The commission asked staff to examine alternatives to the 1% band and indicated that the draft rules should reflect certain other modifications to the joint proposal involving the definition of fuel costs and the mechanics of the escrow and reconciliation process. We are encouraged by the Commission's action and its express commitment to move forward with rule modifications, which would help stabilize rates for customers while better protecting utility shareowners from volatile fuel costs.

In closing, we look forward to the opportunity to meet with many of you in conjunction with our ongoing Investor Relations activities. We will be attending the Edison Electric Institute Conference in New York later this month. In addition, I will remind you of our annual shareowner's meeting on May 10th. We will be webcasting this event for those of you who would like to listen to Bill's presentation to our share owners. At this time I would like to turn the call back over to our operator, Marcus, to guide us through the Question and Answer Session.

(OPERATOR INSTRUCTIONS) Your first question comes from Dave Parker with Robert W. Baird.

Good morning, everyone. A question maybe just on -- refresh my memory on what was filed by the joint utility proposal on the fuel rules and what the plus or minus 1% band, how that would be taken into account, particularly given the band that we have today and how ineffective that is?

David, this is Eliot. Thanks for joining us. I will ask my colleagues to assist me here if I don't get this quite correct given my failing memory, but I believe the plus or minus 1% would function roughly equivalent to the plus or minus 2 that we have now, but with a reconciliation process at the end of the year versus interim filings when the clause would be tripped sort of along the way. I believe that's the major difference, and I am getting agreement from my colleagues here in the room.

Does it just continue to be a propensity for the regulators to want to keep investor dollars at risk for items that you really can't control or what -- why?

There is a public document on the website, David, and there was a proceeding I think last week where the Commission was faced with kind of an awkward situation where MG&E both had a decrease and an increase in the fuel clause sort of generated by application of the current process. So if you take a look at the Public Service Commission website, there is some posted information that describes that.

Okay. All right. I will take a look at that. Other than that, I think all of my questions have been asked and answered. Thanks very much.

Thanks, David.

Your next question comes from Steve Gambuzza with Longbow Capital.

Good morning.

Good morning, Steve.

I was wondering if you can just commented on the decision to move Neenah into the WP&L rate base and how that would affect the purchase options that exist on RockGen and Riverside -- whether they still exist. And what your future needs for peak and capacity are at WP&L subsequent to this transaction?

Let me try to take a stab at that. The purchase option with respect to RockGen remains legally in force today because the bankruptcy trustees have not taken any steps to either accept or reject that contract, so the option is something that we still hold as a legal proposition. Having said that, we have rerun our integrative resource plan and concluded that our incremental peaking requirements at WP&L are actually less than what we had anticipated they would be in prior years. And as a consequence of that, 300 megawatts of incremental peaking capacity is actually better suited to our needs than would be the 450 associated with the option at RockGen. In addition to that, we have conducted a solicitation in the marketplace for incremental peaking capacity that we would begin to acquire roughly coterminous with the expiration of our contract with RockGen, and the fact of the matter is the Neenah project proved to be the lowest cost alternative for WP&L and its customers by a considerable margin. Couple all of that with the fact that the tolling agreement with Wisconsin Energy expires in the summer of 2008. Wisconsin Energy elected not to extend that agreement, so the stars are very well aligned for us to move that asset from the unregulated side in a very economical fashion. That benefits the customers of Wisconsin Power and Light company.

Does that mean, then, that basically although you will no longer take power from RockGen although you will in theory retain this option -- that capacity will then be replaced by Neenah, and then you will continue to take capacity from Riverside?

Yes, that's correct.

Okay. And I guess as you look out, could you remind us when that other purchase option for Riverside expires?

I think it is 2013.

Okay. I guess do you have a view as to whether or not that will make sense for your portfolio at this time or is that too far out to say?

Steve, as we look at our integrated resource plan today, we make the assumption in our planning that we would exercise that option, but 2013 is a long way down the road from now, a lot of things could change in the process. We're delighted that we have the option, the facility is well sighted and has been operated very well. We like the facility, but there is an awful lot of moving parts that will have to be evaluated between now and 2013.

Okay. Finally, when the RockGen option expires, which I believe is 2011, given the capacity you've taken with Neenah -- would it seem to you at this point that would not necessarily make sense to exercise that option, then?

The RockGen option expires in 2009, and our expectation would be that if the Neenah facility is indeed transferred to Wisconsin Power and Light company we would have no interest in exercising that option. We would still hold it, if the contract is still in force and effect and hasn't been rejected by the bankruptcy trustees in some fashion, but the current expectation would be that we would not exercise the RockGen option if Neenah is transferred to the utility.

Great. Thank you.

Your next question is from Daniele Seitz with Dahlman Rose.

Hi. I was wondering -- your plan to build this coal plant and a pulverized coal system. This is grandfathered I am assuming by all of the environmental groups, et cetera -- all of the authorization to build are in place? There is in question mark as to the possibility of any delays in the plan?

Hi, Daniele.

Hi.

There is no grandfathering legislatively or regulatorily available for the facilities. They will both have to run the full gamut of licensing and permitting requirements in place in their respective jurisdictions.

Okay. And in terms of timing -- I am sorry, I didn't catch that -- the timing of the core plant as you plan it now?

The application for the Wisconsin coal plant is currently pending before the Wisconsin commission. We are hopeful that they will issue a decision in that case early next year and that we would be able to commence construction in the second quarter of 2008 with an in-service date in 2012. The Iowa plant, the application has not yet been filed with the Iowa Utilities Board. We expect that to occur this summer. We're hopeful we would receive a decision from them in the early parts of 2008 and construction would commence as soon as possible after that approval is received.

Great. Thanks a lot.

Your next question is from Steve Fleischman with Capital Partners.

Hi, guys, can you hear me?

Hi, Steve, how are you?

Good. Just to clarify -- first off, the storm cost and the gain on the sale you noted as being somewhat one-time in the quarter. You do not exclude those when you're looking at your full year guidance, you keep those in the numbers?

Yes.

And the comments you made about lower end and your incentive comp and all that stuff. Okay. And secondly, on the Wisconsin case, on the wind, to the degree that the final order causes you not to want to pursue the FFP, would you then potentially file for it in a base rate case and does it change your strategy on timing the next base rate case at all?

We're looking at all of that literally as we speak, and obviously are waiting to see the written order, but the way we look at it, Steve, is that traditional rate base regulation treatment in Wisconsin is not a bad course of action for us. And certainly if you simply put the alternatives that are available to us are appealed, the order, if you will, asked for some sort of reconsideration of it, simply reject it and proceed under traditional rate base rate regulation. I suppose in theory one of the alternatives is not build the wind farm, but I don't think we will pursue that because traditional Wisconsin rate base regulation is not a bad thing. I don't expect anything in the order to have a material impact on the pace at which we would proceed with that construction project.

Okay. Just to clarify, when are you currently planning to file your next Wisconsin rate case?

Quite likely would be in March of 2000 for a 2009 forecasted test year -- 2009, 2010.

Okay. If this were to be dealt with, you might move that up to try to get rates for '08?

No, I don't think so. That's why, as Eliot indicated earlier, one of the things that we are will seek to address in our reopening of our last rate case is -- how is it that we are going to address construction work in progress with respect to our build out program, given that our hope is that we not file a rate case this year but rather get on a biannual rate case process, which is what the Commission wants us to do. One of the things that we will address in that reopening is precisely the point that you're pursuing -- what's going to happen with construction work in progress for the construction that's ongoing between now and our next base rate case. We'll get that addressed in that process.

Okay. Great. Thank you.

Your next question comes from David Grumhaus with Copia Capital.

Morning, guys. Congratulations. Nice quarter.

Thanks, David.

Most of my questions were answered. One question for you. In terms of the storm recovery on IP&L, what percentage of those costs are actually in the transmission system? Sounds like a good bit of it.

David, on the capital side, about $45 million is related to transmission, but we're estimating $15 million or so incremental to what would have otherwise already have been in the CapEx budget. I don't know if that's what you were looking for. That's our current estimate.

So assuming you can get that deal through, then --

All of that capital would come back to us through the sale agreement.

Okay.

Anything -- whatever the transmission plant is at the end of the year would be included in the sale.

Got you. Okay.

Whether it is completed projects, et cetera. It's a part of the business.

The costs that you go to recover next year would simply be the costs incurred on the distribution side?

I indicated in my remarks we are contemplating a filing in 2008 utilizing a 2007 test year, but that shouldn't be construed to necessarily mean that we would seek recovery of costs -- O&M costs, all O&M costs incurred in connection with the storm. That decision has not yet been made.

Okay. That's helpful. I appreciate it. Thanks for the time.

Thank you, David.

(OPERATOR INSTRUCTIONS) You have a question from Ashar Khan with SAC Capital.

Good morning. Could I ask you how Neenah would be treated, you won't be in a rate case, so if you go ahead with the acquisition, will the rate base get adjusted automatically? I am trying to understand how you start recovering on that investment on the regulated side.

Nothing happens automatically in our business, Ashar, but in all seriousness there are costs in our costs of service associated with RockGen which, barring some proceeding, would continue.

Okay.

There is uncertainty as Bill indicated over whether or not the contract associated with the RockGen facility will be allowed to remain in place by the bankruptcy courts, so there is several variables moving around here, but it all sorts out by mid-2009 in any event. I think that's the key takeaway.

That's the key takeaway. Okay. There might be room in those costs. Okay. Eliot, I might have missed this. I know you quantified the O&M related to the storm, but did you quantify the lost revenue?

Yes. We estimated that to be about $0.01.

$0.01. Okay. Thank you.

Thank you.

Ms. Johnson, at this time there are no further questions.

With no more questions this morning, 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 today will be available through May 11th at 1-800-642-1687. Callers should reference conference ID 4528519. In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available in the Investors section of the company's website later today. Thank you.