Alliant Energy Corp (LNT) 2009 Q2 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's 2009 second quarter earnings conference call. At this time all lines are in a listen-only mode. Today's conference will be recorded.

I would now like to turn the call over to your host, Sue Gille, Manager of Investor Relations at Alliant Energy. Please go ahead.

Good morning. I would like to thank you on the call and on the webcast for joining us today. We appreciate your participation. With me here today are Bill Harvey, Chairman, President and Chief Executive Officer; and Pat Kampling, our Chief Financial Officer; as well as other members of the senior management team. Following prepared remarks by Bill and Pat, we will have time to take questions from the investment community.

We issued a news release this morning announcing Alliant Energy's 2009 second quarter earnings. This release, as well as supplemental slides that will be referenced during today's call are available on the investor page of our website at www.alliantenergy.com. 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 press release issued this morning and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update those forward-looking statements. At this point I'll turn the call over to Bill.

Thank you, Sue, and welcome to our investor relations team. I want to take a moment and thank Jamie Freeman for representing our Company during the past two years. Jamie's efforts are greatly appreciated by both the Company and we think the investment community.

To those on the call, good morning and thank you for your continued interest in our Company. My comments today will focus on three areas. First, our second quarter results. Second, changes in our 2009 guidance and the variables giving rise to that change. Third, a recap of our position on Waxman Markey. Pat will follow with a discussion of some key financial matters, a status report on our two critical pending rate cases and an update on various strategic projects. Then we will welcome your questions.

Before addressing my three identified areas, I will take this opportunity to put 2009 in context, at least as we see it. Our guidance issued in December included challenges arising out of a couple of circumstances, notably a rate case outcome in Wisconsin that did not take into account how sales were impacted by a recessed economy and increased pension and transmission costs in Iowa which would not be recovered until interim rates went into effect at the end of the first quarter.

With our first quarter results, we announced that cost cutting measures were being implemented to offset an expected further decline in industrial sales. Unfortunately, since that time we have experienced incremental weakness in the economy and the coldest July in recorded history in our service territories. These external events compel us to lower the outlook for the year. We do not believe that prudent cost controls can overcome the negative effects of the ongoing deterioration of economy dependent sales and the extraordinarily cool summer we have experienced to date.

At the same time, the utilities were experiencing negative weather and economic impacts on sales, the wind development market in the US has slowed to a crawl, leading us to revise RMT's prospects for the year as well. As we will discuss throughout the call, we believe that our travails of 2009, while painful, will not be permanent. With reasonable rate relief and an expected resurgence in the wind development market, we expect a much brighter 2010 in just a few short months. So enough reflection.

Let's get to the specific purposes of the call. First let's discuss the second quarter. Second quarter utility earnings were down $0.09 versus the same period last year. Excluding $0.08 of nonrecurring charges, our second quarter earning -- utility earnings were about flat compared to 2008. Let me break down those nonrecurring charges.

Two of the $0.08 arise from an impairment charge against the stream infrastructure at our 6th Street generating plant in downtown Cedar Rapids. You will recall that this 100-year-old facility, whose primary function was to provide cogenerated steam for downtown customers for both process and heating applications was severely damaged in the 2008 flood. Rebuilding the facilities to support its core steam functions proved economically prohibitive to customers so we have decided to cease all steam production from this facility, thus giving rise to the impairment.

The other $0.06 cents of nonrecurring charges relate to employee severance and retirement charges associated with the worst workforce restructuring segment of our cost reduction efforts. A restructuring effort affected approximately 225 utility employees and included elimination of executive, management and staff positions as well as ceasing operations at four infrequently operated and expensive generating units at WPL. These reductions were difficult for us but will serve to mitigate the rate adjustments we seek from customers in our pending rate cases. I would note that the benefits of this restructuring will be realized in the third and fourth quarters and in 2010, while all expenses associated with it were booked in the second quarter of 2009. Lower operating and maintenance expenses enabled us to hold our own despite weak sales and a reduced benefit under the Wisconsin fuel rules. I'll touch on each of those variables briefly.

First, sales. Second quarter retail electric sales were down 8% versus 2008. Residential and commercial were down 2% and 3% respectively while industrial sales were down about 13%. Lower industrial and wholesale sales reduced second quarter earnings about $0.03 versus 2008. Comparing the second quarter 2009 versus 2008, IPL and WPL experienced industrial sales declines of 14% and 13% respectively. At IPL, we had expected a decline of about 9% owing to the anticipated startup of approximately 200 mega watts of new customer owned generation facilities. Setting aside the expected decline, sales on the industrial side at IPL were down about 5%.

Industrial sales to Agra business customers are holding up well in the recession, but other traditional manufacturing operations which make up about 30% of IPL industrial sales are seeing deterioration. The 13% industrial decline at WPL was considerably worse than we expected. Although the sales decline appears to have slowed, there is little evidence that any sales recovery is forthcoming over the near term.

Based on year-to-date results and discussions with key customers, we are further lowering our industrial sales expectations at both IPL and WPL and we are lowering our wholesale sales forecast at WPL where our wholesale customers are experiencing declines in their sales similar to what we are seeing at the retail level. For the first half of 2009, declines in industrial kilowatt hour sales are larger than declines in industrial margins. We expect to see a larger decline in industrial margins in the second half of 2009 due to higher energy and demand charges in effect during summer months. As a reminder, industrial sales make up almost 50% of our retail sales, which is double the national average of 25%. Pat will discuss the implications of these sales profiles on our rate cases in a few moments.

Next, let's discuss the less favorable impacts attributed to fuel costs at WPL compared to last year. The design of the Wisconsin electric fuel rules can cause swings in earnings since fuel costs are recognized as expenses when incurred, but the fuel component within revenue remains constant. WPL actually experienced a $0.03 benefit attributable to declining electric fuel costs this quarter but that is less than the $0.06 of benefit recorded in the second quarter of 2008, thus, giving rise to an unfavorable quarter to quarter comparison. All of these puts and takes aside, I note that for all of 2008 WPL recorded a $0.02 benefit related to electric fuel costs and we expect 2009 to produce a similar result.

The final item to note concerning earnings at our utilities is that lower O&M costs increased earnings by over $0.05 for the second quarter. We remain committed to controlling costs at all levels of the organization and expect cost savings measures that we have put in place to have a greater impact on earnings per share in the second half of 2009.

On the unregulated side, transportation performed well, but RMT results for the quarter were down $0.03 versus the same period last year and year to date RMT results show a loss of $0.02. The explanation is simple. There's a lot of talk about wind development but very little of it is actually happening. RMT has retained its market share but in a stalled market that translates to sparse earnings.

Next, let me switch gears and discuss the revised guidance for 2009. As we have said often, we are a second half Company from a utility earnings perspective. While we do not typically change or narrow guidance until the third quarter is complete, we have decided to lower the midpoint of the utility range by $0.30. The drivers of the decrease are record cool July weather, the continual weakening of industrial and wholesale sales during the summer rate period and various factors increasing our expected affected tax rate for the year. This reduction in guidance does not reflect the one-time negative $0.08 of restructuring and impairment charges booked in the second quarter or the one-time positive $0.36 impact of the changes in taxes due to the new Wisconsin combined reporting legislation that was discussed in our first quarter call and release.

With respect to the impacts of weather on guidance, we decided not to enter into a summer weather hedge this year, since the costs of doing so was prohibitive compared to prior years and compared to the insurance benefit we would have received. The average temperatures for the month of July were the lowest in recorded history across our service territory with cooling degree days over 70% below normal. Our preliminary estimate is that July weather will negatively impact earnings by about $0.12 per share. While our utility guidance typically assumes normal weather, we cannot ignore what we already know about July in providing full-year guidance to you today.

With respect to our nonregulated earnings guidance, our previous full-year guidance for RMT was based on the belief that the wind market would remain vibrant even if not growing and consequently that new installed wind capacity and RMT earnings would be flat compared to 2008. However, the American Wind Energy Association is now forecasting new installed capacity to be down 40% 22009 and General Electric's energy infrastructure division puts that same number at 50%. Our own experience is that while the pipeline of projects in the planning stages is impressive, very few projects are moving forward to the execution phase. While we are lowering our earnings expectation for RMT in 2009 from $0.12 to $0.03 per share, we are confident the business can produce strong earnings in 2010 when we expect the wind market to rally. A summary to the changes to our 2009 earnings guidance is available in our earnings release and on posted slide number four.

Finally, I'd like to provide you with an update on our involvement in the House and Senate Climate bills. We have been actively trying to improve the Climate bill as it's made its way through the legislative process. One aspect that could really impact the cost to our customers is how the allowances are distributed. The House bill contains a flawed formula that would give valuable allowances away to utilities based 50% on sales and 50% on emissions. So a large utility with few emissions would receive allowances in excess of their requirements while utilities that are smaller and rely more heavily on fossil fuels would face a severe shortfall the first year of the program and the shortfalls only get worse with every following year. That's simply unfair and bad public policy. We are trying to improve this formula and other parts of the bill to minimize the costs to our customers but at the same time preserve the environmental integrity of the program to ensure that emissions are reduced. We believe both can be done in concert.

In closing let me recap the take aways for the second quarter. For the utility business earnings continue to be challenged by economic and weather factors. Our employees have sacrificed pay and benefits to help partially offset these challenges and our investors are realizing returns on equity well below those authorized in retail rates. We are looking to our regulators to promptly and fairly administer the regulatory compact in our pending rate cases to provide our utilities a fair opportunity to earn their authorized returns.

For RMT, earnings will disappoint in 2009 but we believe their position in the wind construction market remains strong and we expect significant growth for this business as the renewable construction market expands. We very much appreciate your continued support of our Company and at this time I'm going to turn the call over to Pat.

Thank you, Bill, and good morning, everyone. I would like to begin by updating you on the Company's liquidity position. In July both IPL and WPL issued a total of $550 million of long-term debt. We are very pleased with the strong interest from investors and the attractive yields we received. Just this week we made a planned $50 million contribution to our pension plan and paid off $135 million of debt maturing at IPL. Currently we have approximately $400 million of cash on marketable securities and approximately $600 million of availability under our credit facilities for a total liquidity position of around $1 billion. Our liquidity position remains strong and we are well positioned to finance our significant investments in renewable energy, environmental control projects and advanced metering infrastructure.

We were hopeful that our various utility wind projects would be able to take advantage of the treasury grants offered by the American Recovery and Reinvestment Act. We view this auction as a unique opportunity to provide immediate relief to customers through a reduction to rate base and to reduce our own financing needs. However, based on initial comments from the US Treasury, we believe that the grants would be subject to normalization rules which would require us to float the grant benefits to our customers over the book life of the investment versus an immediate reduction in revenue requirements. As a result, unlike many merchant generators that are choosing the cash grant to improve their up-front cash flow by reducing the need for a partner with taxable appetite, our regulated utility customers will benefit more through the election of production tax credits.

One final note on financing matters. As we have previously communicated, we do not expect to issue any new common equity through 2010. We now expect to be able to extend this time line even further into the future as a result of cash flow benefits of various tax initiatives and stimulus programs. So in the midst of the utility's largest capital deployment program, we do not anticipate needing any new external common equity through the end of 2011.

Turning to regulatory matters, last month the office of consumer advocate and other intervenors filed testimony in our Iowa retail electric rate case. We will file rebuttal testimony by August 21, to formally respond in detail to the various OCA positions. We strongly disagree with but were not surprised by the OCA's position on reduced recovery of certain items particularly transmission expense. While we a re hopeful that we could reach a settlement with the OCA on some or all of the matters, it appears at this time that a settlement in the case is not likely. We look forward to advancing our case during the public hearings in October and expect the Iowa Utilities board's decision in January 2010. As a reminder, the IUB staff does not file testimony in the Iowa rate case proceedings but the IUB Board members are present during the proceedings.

Bill mentioned earlier that we are now experiencing weaker than expected sales at IPL. As you are aware, Iowa uses historic test year and rate proceedings and the sales reflected in the case are not weather normalized. As a result, the sales level that will be used to establish final rates in our current case was based on 2008 actual sales with adjustments made primarily for the known changes due to customer cogeneration projects coming online this year. However, when we file our 2009 test year case early next year, which will set rates for calendar year 2010, our interim rates will be based on actual 2009 sales which will be lower than normal since they will not be weather adjusted. Due to this, we do not anticipate a significant disconnect between our IPL 2010 sales forecast and the sales forecast that will be reflected in customer rates for next year. Please recall that IPL will be filing for a rate increase in 2010 to seek recovery of the preapproved Whispering Willow Wind Farm and environmental capital.

In our Wisconsin retail rate case, staff and intervenor testimony are due by September 15, and hearings begin on October 7. We do expect a final order sometime in December with new rates effective on January 1, of 2010. The most important issue in this case is that rates must take into account below retail kilowatt hour sales, while WPL's 2009 retail electric sales are down 6% versus 2008, I would remind you that the current sales variance against what is reflected in customer rates for 2009 is a staggering 12%. This discrepancy, even after our cost savings actions into account, we estimate the retail business at WPL will earn a return on equity below 6% for 2009.

We are very fortunate that although many of the communities we serve are feeling the impacts of the economic decline, our customer accounts receivables increased only slightly compared to prior years. Late last month we filed additional testimony in the rate case which further lowered our 2010 industrial electric sales forecast. The additional 4% kilowatt hour sales reduction since the original filing in May was caused by persistent weakness in the Wisconsin economy. With July's filing, we updated our revenue request by $17 million as a result of these reduced sales levels. Revising the timing of expenditures for Bent Tree and increases in the advanced metering infrastructure or AMI project expenditures. We remain committed to working with the commission, staff and other parties in the case to identify approaches to minimize the impact of our proposed rate increase on our customers without compromising WPL's ability to earn its authorized return.

Constructive outcomes in both cases are necessary to provide our utilities a reasonable opportunity to earn a return on equity that is authorized in the respective rate orders in each state. Our view is that both cases are driven by a relatively small number of large dollar items that are traditionally fully recovered in rates. We will continue to aggressively support our filings in the coming months to produce a strong record for the Iowa Utilities Board and Public Service Commission of Wisconsin to consider in their deliberations.

I will now provide an update of our capital projects including utility wind farms. Construction activity continues at IPL's 200-megawatt Whispering Willow Wind Farm in Iowa. Over half the turbines have been fully erected and the project is expected to come online by the end of the year. At the end of the second quarter the projects had incurred almost $370 million of capital costs including the payment of approximately 80% of the total turbine cost. Under the rate making principles approved by the Iowa Utilities Board, the investment will earn a return on common equity 11.7%.

The 200-megawatt Century wind project proposed by WPL recently received unanimous approval from the Public Service Commission of Wisconsin with a cost cap of $497 million. Since the project is located in Minnesota we do have two open dockets with the Minnesota Public Utilities Commission, a site permit and certificate of need. We expect the MPUC to approve both of our applications in the third quarter of this year.

Because the regulatory approval process has taken longer than anticipated, we do not plan to begin meaningful work at Bent Tree until next year. While this delay will help us to control costs on the project by avoiding construction this winter, this decision does push back our expected end service date from the end of 2010 to the first half of 2011.

With the addition of Bent Tree and Whispering Willow wind projects we believe IPL and WPL are well situated to meet renewable portfolio standards. Once the Bent Tree wind farm is in service, 12% of WPL's retail electric sales are expected to be from renewables, above the 10% requirement by 2015. At IPL, Whispering Willow is expected to increase IPL's renewable energy to about 8%. In addition, IPL is planning to further expand Whispering Willow site by deploying the remaining 100 megawatts of our best disturbance there.

Alliant Energy is very proud of the fact that we are nearing completion of our restoration efforts after the historic flood of 2008. Our Prairie Creek generating station will be fully restored to its preflood status in the coming weeks. The approximate $165 million investment to the 215-megawatt cogeneration facility will again allow the generation of electricity and delivery of efficient and cost-effective steam to our customers. In June the 300-megawatt simple cycle natural gas fired unit energy facility was transferred from our nonregulated generation subsidiary to WPL. The transaction was done at book value of approximately $92 million. This capacity replaces the purchase power agreement of Calpines Rock Gen facility which terminated at the end of May.

And finally, our AMI investments when combined with technology already in place, creates the foundation for smart grid in our service territory. As of July 31, we have installed more than 60% of our AMI enabled meters in our WPL service territory. To further the smart grid development, Alliant Energy has officially applied for a total of six American Recovery and Reinvestment Act grants with the US Department of Energy smart grid investment grant program. These grants will cover deployment of AMI technology throughout our IPL service territory include a pilot program to participate in the city of Dubuque's Iowa climate showcase community which will evaluate energy saving smart grid technologies and in addition four grants in our WPL service territory focused on evaluating energy saving technologies for customers, for proving utilities infrastructure efficiency and added response and to accelerate AMI and smart grid implementation for commercial and industrial customers. The Department of Energy is expected to begin awarding the grants in the fourth quarter of 2009.

In closing, we look forward to meeting with many of you in the coming months in conjunction with our ongoing investor relations activities. At this time I would turn the call back over to the operators to facilitate the question and answer session.

Thank you, Ms. Kampling. At this time the Company will open up the call to questions from members of the investment community. Alliant Energy's management will take as many questions as they can within the one hour time frame of this morning's call. (Operator Instructions) And our first question comes from Brian Russo with Ladenburg Thalmann. Go ahead.

Good morning.

Good morning Brian.

You mentioned you expect WPL to earn an REO of about 6% this year. Can you possibly quantify for us for EPS impact earning 6% versus your allowed ROE?

Yes, Brian, we haven't broken it up that granualarly. That 6% does not include the returns we would receive on ATC so if you subtract the ATC earnings for the year you could probably back into it.

Okay. And then in terms of IPL, it looks like you'd be revised sales forecast does not match up with what you filed for and I guess if you're going to file for 2010 rate relief, will there still be regulatory lag assuming interim rates go into effect the end of March?

Yes, there should be some minor regulatory lag. We filed a case beginning 2010 and go into effect 10 days later.

Okay. So when do you think the timing of interim rates will go into effect?

We'd be filing the case probably late first quarter, just like we did this year.

Right.

The rates would go into effect 10 days later.

Okay. And in terms of when RMT, what gives you confidence that the wind market rebounds in 2010?

Brian, as we look at the sales funnel of opportunities, predominantly in the wind area but increasingly in the solar development area as well, we simply have to believe that with the tremendous public policy push promotive of the development of renewable energy, that the current stagnant nature of that development marketplace simply cannot persist. We do not believe that that stagnation is related to the paucity of transmission. We believe it is related to the difficulty of financing and we think that's going to change certainly in part because of government stimulus activity, but in part simply because the capital markets seem to be normalizing and recovering.

Okay. And in terms of RMT, can you comment on what you have in the pipeline or what projects you guys are developing for the remainder of 2009?

No, we haven't -- Brian, we haven't commented on specific projects. I can tell you that they are currently very active in the construction of three very large wind projects. There is a fourth that is under contract and there is a large solar project that is under contract as well, but neither of those two have completed their financing phase yet.

Okay. So just to be clear, you've revised your RMT earnings guidance to $0.03 for the year?

Yes.

Okay. So are any of these projects you just mentioned, are you generating revenues from that yet or is this something that we should see pick up in 2010 based on what's in your pipeline?

From the three that are actually in progress, they are generating revenue, the two that are under contract, but not financed are not. We would expect the actual booked portfolio of business going into 2010 and in 2010 to be considerably more robust than what I have just described.

Okay. Thank you very much.

Thank you very much. And our next question will come from Steve Fleishman, please go ahead.

Hi there.

Hey, Steve.

Good morning, Steve.

Hi. Just a question first on the Wisconsin rate case. With the updated sales forecasts and any other changes that you filed, could you give us kind of the updated revenue increase and percent increase versus what it was before?

Sure. The testimony that we just filed a few weeks ago increased the revenue requirement by $17 million, which would put the rate increase, the overall electric rate increase at slightly over 10%. Where before it was, in the low 9s.

Okay. And then could you on this whole issue on the weather hedges, because that was kind of unexpected, are you -- what is the strategy now going forward on doing the weather hedging given the change and now this outcome? What are you going to do in the future so we can kind of be prepared for that?

Yes. I think it's reasonable for you to assume on a going-forward basis, Steve, that we will not be hedging summer weather but that we will continue our practice of hedging winter weather.

Okay.

As I indicated in my remarks, the market was just very inefficient this year. I can't explain why it was, but the reality is that it was and the volume of insurance against whether that could be acquired was very low and the premium was very high, so it just didn't make any sense for us to do it. We would have been able to acquire very little earnings protection in the marketplace.

Maybe the insurers had a very good weather forecast.

Cooler weather -- a cooler summer coming. I doubt if they saw it this cool.

Yes, okay. Okay. I think those are my questions. Thank you.

Thanks, Steve.

Thank you, Steve.

Thank you very much. Our next question comes from [Chris Dackett] with Decade Capital.

Good morning.

Good morning, Chris.

Some of the utility guidance dropping about $0.30, I understand $0.12 of this was due to the July weather and some of that was due to the newly reduced industrial load but were there any other drivers that you guys haven't talked about yet?

Really, you think of it as a pie chart, 40, 40, 20. If you will, 40% of that reduction in guidance was the horrible weather in July, 40% of it is associated with a declining sales, worse than what we had expected, and the balance is a menagerie of variables that we think are going to adversely affect earnings the most significant of which is an anticipated higher effective tax rate than we envisioned going into the year.

Okay. And then I didn't hear whether you still expected to get the cost savings that you announced on the Q1 call as well as those announced on the guidance call. Can you comment on that?

The answer is yes, we do.

Great. And then any way you could estimate the margin impact of the loss sales this year both at IPL and WPL?

Did the sales decline including the July weather?

I guess if you have it ex weather, otherwise with the weather.

The weather is about, $0.12 and we are seeing just decline in margins is about another $0.12.

And that's at both utilities?

Yes.

And then finally, how should I think about the sustainability of this year's O&M cuts going into 2010.

Obviously, you never know, Chris, exactly what your ability to sustain them is, but we have, I think as a Company demonstrated an ability to sustain spending cuts over time so I would anticipate going into fiscal 2010 that we would sustain the bulk of the O&M cuts made this year. Certainly the reduced employee and employee-related expenses associated with our reduction in forces will be sustainable going into next year.

Okay. Thanks a lot for your time.

Thanks.

Thank you very much. (Operator Instructions) And we will move to our next question, comes from Oliver King with Zimmer Lucas. Please go ahead.

Good morning.

Hi, Oliver.

Just wanted to clarify on the rate cases and the updated sales forecast, it seems like in Wisconsin we have updated the sales forecast already and in Iowa you'll be filing again and have interim rates so that the impact in 2010 is actually quite minimal. Am I understanding that correctly?

Yes, in Wisconsin we revised the forecast just a few weeks ago for 2010 and in Iowa, because of the way it's not weather normalized, you're absolutely correct.

Okay. And then just moving onto the RMT, the two projects that you talked about that are not generating revenues yet, are there additional projects you expected beyond those two in 2010 and just in terms of the contracting phase, how many months in advance do you usually enter into contracts before you get something nailed down?

Let me deal with the first part of your question first. The answer, do we expect that going into 2010 we will have booked more contracts than the ones I referred to? The answer is absolutely. We expect the contracting activity in the second half of this year to be fairly robust. In terms of how far ahead of the generation of revenues do we execute contracts, that used to be a relatively short period of time between signing agreements and cash beginning to flow. That period has become somewhat protracted in this marketplace. We are optimistic that it will return to some level of normalcy in the latter part of this year but to date newly executed -- it's very difficult to predict, actually, when cash will begin to flow associated with newly executed contracts because it's very difficult to predict when financing will be completed by the developers. Hate to give you that mushy answer, but that's the reality.

No. That was helpful. Thank you.

Thank you very much and we have no further questions at this time. I'll turn it back over to Ms. Gille.

With no more questions, this concludes our call. A replay will be available through August 13, 2009, at 888-203-1112 for US and Canada or 719-457-0820 for international. Callers should reference conference ID number 8244179. In addition an archive of the conference call and a script of the prepared remarks made on the call will be available on the investor section of the Company's website later today. Thank you for your continued support of Alliant Energy and feel free to contact me with any follow-up questions.

And once again, we would like to thank everyone for their participation in today's conference. That does conclude our program.