Alliant Energy Corp (LNT) 2010 Q2 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the Alliant Energy's 2010 second quarter earnings conference call. (Operator instructions.)

I would now like to turn the call over to your host, Ms. Susan Gille, Manager of Investor Relations at Alliant Energy.

Good morning. I would like to thank all of you on the call and 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, Executive Vice President, Chief Financial Officer, and Treasurer, 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 2010 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 the remarks we make on this call and our answers to your questions include forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters discussed in Alliant Energy's press release issued this morning and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements.

In addition, this presentation contains non-GAAP financial measures. The 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'll turn the call over to Bill.

Good morning. My comments today will review our second quarter results, provide updates to our 2010 earnings guidance, and updates on our utility generation and energy efficiency projects. Later in the call, Pat will discuss our liquidity position, recent rate case filings, and environmental matters.

Our second quarter utility earnings were up $0.10 per share compared to the same period last year, once you exclude the non-GAAP adjustments from the second quarter of both years. Let me break-down those non-GAAP adjustments. 2010 non-GAAP adjustments included restructuring and impairment charges, a depreciation adjustment, and an adjustment to a reserve related to the cash balance plan lawsuit.

We recorded a $0.04 per share charge for restructuring an impairment in the second quarter of 2010. Half of those charges arose from the write-off of construction work in progress in connection with our decision to retire the electric generation facilities at the Sixth Street generation station. The other half relates to organizational changes within the energy delivery business unit. Those changes were made with one goal in mind, to focus our business on the factors most important to our customers -- reliability and exceptional service at a reasonable cost.

Second quarter results were in line with our expectations and were primarily driven by positive rate relief, offset by higher transmission service expenses, higher depreciation and operating expenses due to placing the Whispering Willow - East wind project in service in late 2009, and lower allowance for funds used during construction.

Second quarter overall retail electric sales were up 5% versus the same period last year. However, factoring out the impacts of weather the increase is approximately 3%. Residential, commercial, and industrial sales were up 9%, 3%, and 3%, respectively, when compared to the second quarter of 2009. However, excluding the impacts of weather, adjusted residential, commercial, and industrial sales were up approximately 4%, 1%, and 3%, respectively.

Supplemental slide five provides the current projected annual sales growth from 2009 to 2010 for each of IPLs' and WPLs' customer classes. The 2010 forecasted information includes six months of actual sales and six months of weather normalized sales projections. Customer growth was relatively flat for both WPL and IPL quarter-over-quarter.

Industrial sales at each of our utilities continued to rebound, albeit it slowly. As shown on supplemental slide six, IPLs' industrial sales experienced a 5% increase year-over-year for the second quarter, however, that number grows to approximately 6.5% when you remove the second quarter sales to two large customers who placed cogeneration facilities into service in late 2009.

Now, let me shift to the unregulated side. Transportation performed very well, but RMT posted a $0.01 loss for the quarter. 2010 guidance for RMT remains at $0.04 per share, even though we are seeing project timelines shifting from the third quarter to the fourth quarter.

The American Wind Energy Association reported that wind power installations to date have dropped 71% from 2009 levels. Fuel prices are low and the industry has not seen an increase in demand for power. Thus AWEA predicts that the wind industry will continue to experience low wind power installations unless Congress enacts a national renewable mandate.

Before moving on, let me summarize results in the context of the earnings guidance we issued in February. With the benefit of second quarter results, we have narrowed our utility guidance toward the top end of the range issued in February. The midpoint of the utility range is now $2.50. We also narrowed the non-regulated and parent range, leaving our RMT guidance at $0.04 per share but recognizing there does not appear to be up side potential for RMT beyond that point for 2010.

For the remainder of 2010 we expect utility earnings to be solid, with stable economies in Iowa and Wisconsin, the implementation of interim base rates in Iowa and Minnesota, and implementation of interim fuel rules in Wisconsin. A summary of the changes to our 2010 earnings guidance is available on supplemental slide two.

With respect to the impacts of weather on our guidance, we believe weather added approximately $0.02 per share to our results in the first half of the year. Our utility guidance for the year assumes normal weather in the second half of the year. The average temperatures for the month of July were above normal. Although we expect July weather to provide a modest benefit to earnings any weather benefit estimated for the third quarter is not reflected in the change to the earnings guidance announced today.

Now, an update on our utility generation and energy efficiency projects. We're pleased to report that wind generation at our Cedar Ridge and Whispering Willow wind projects remains in line with the estimated production tax credits embedded in our original 2010 utility guidance range. Construction activity is progressing at WPL's Bent Tree wind farm in Minnesota. The project has met a number of challenges with the unseasonably wet weather and severe storms during the month of June. While progress has been slower than planned, efforts are underway to mitigate the impact of that weather.

This 200-megawatt project is expected to begin operating in the last quarter of 2010, and is planned to be fully in service in the first quarter of 2011. As of the end of the second quarter the project has incurred $285 million of capital costs, excluding AFUDC. The total cost of Bent Tree is expected to be approximately $460 million, excluding AFUDC. As approved by the Wisconsin Public Service Commission in December of 2009, one-half of the construction cost earns a current return, while WPL is recording AFUDC on the other half.

On June 29th the FERC approved WPL's proposal to purchase Wisconsin Energy Corporation's 25% ownership interest in Edgewater Generating Station Unit No. 5, located in Sheboygan, Wisconsin. Edgewater Unit 5 is a 380-megawatt pulverized coal unit. WPL's purchase of WEC's interest in the plant will add about 95 megawatts of [nameplate] capacity to WPL's generating portfolio at an estimated cost of $40 million to $45 million.

Our projected capital expenditures do not include the proposed purchase of WEC's 25% share in Edgewater Unit No. 5 or the additional share of the SCR expenditures at that unit. We will include these expenditures in our projections when the purchase is approved by the states.

Upon approval of the transaction by Wisconsin and Michigan the sale will be finalized and the assets will be transferred. It's expected that this transaction will be finalized by the end of 2010. The purchase will provide further flexibility with our generating fleet, which is especially important given the uncertainty that currently exists in the utility industry.

I'm also pleased to report that we have completed the installation of advanced metering infrastructure for WPL's electric and gas customers. WPL is one of the few utilities to have successfully executed a full scale deployment of AMI that targeted all residential electric and gas customers regardless of location. AMI benefits experienced to date include operational savings from position reductions, fewer call center calls as a result of fewer estimated bills, and increased billing accuracy. Our overall strategy is focusing on grid efficiency and reliability rather than on changing things on the customer side of the meter.

Before closing my remarks, I'd like to take a moment to talk about emerging transmission cost allocation proposals in our service territories. On July 15th MISO filed with FERC proposed tariff changes to create a cost allocation methodology which allows for costs of certain projects to be socialized across the entire MISO footprint, to ensure that a pricing zone that has large amounts of generation and a small share of load is not disproportionately harmed.

The filing leaves in place the generator interconnection process, which requires generators to pay for a majority of network upgrades. As part of this generator interconnection process ITC and ATC have separate tariffs in place that do not require generators to pay for network upgrades. Please note that IPL and WPL represent 3.3% and 2.5% of the MISO footprint, respectively.

At this time, we are unable to determine the ultimate impact that the revised tariff proposal may have on our expenses, but with appropriate regulatory recovery we do not expect this proposal to have a material impact on earnings.

In closing, let me recap the takeaways for the second quarter. Due to our solid financial performance in the first half of this year we have narrowed our 2010 guidance range and increased its midpoint to $2.63 per share, and we are continuing to execute on our plan to add wind and coal generation capacity to WPL's generation fleet.

We very much appreciate your continued interest and support of our Company, and at this time I'll turn the call over to Pat.

Thanks, Bill. And good morning, everyone. I will begin by updating you on the Company's liquidity position. At the end of the second quarter the Company's liquidity remained strong, totaling almost $800 million, and was comprised of $171 million of cash and marketable securities, and $623 million of available capacity under our credit facilities.

Contributing to that increase was June's IPL and WPL long-term debt issuance, totaling $300 million. We are very pleased with the strong interest from investors and the attractive yields we received. As a reminder, Alliant Energy's $623 million credit facilities do not expire until November of 2012.

Cash flow from operations for the first half of 2010 were $479 million, a $40 million increase when compared to the first half of 2009. This difference was primarily due to increased revenue at IPL and WPL due to a return to weather normal sales volumes and new rates that were set at the appropriate sales levels. This increase was partially offset by higher IPL transition costs.

Due to our anticipated ongoing strong cash flow we confirm that our current forecast does not anticipate a need to issue new common equity through 2011.

Turning to regulatory matters, last month the Office of Consumer Advocate and other interveners filed testimony in our Iowa retail electric rate case. As a reminder, the IUB staff does not file testimony in the rate case. We plan to file a rebuttal testimony next week to formally respond in detail to the various OCA positions.

I will now outline several items in which we disagree with the OCA's position. First, transmission cost and the request for a transmission rider. The OCA argues for recovery of cost levels which are unrelated to the cost incurred. In the last rate case the Iowa Utilities Board approved recovery of 2009 cost incurred. IPL advocates following the same precedent in this case by proposing recovery of 2010 cost levels. As for the transmission rider, the IUB has the authority to approve riders, and the IUB deferred its decision on a transmission rider to this case. A rider would ensure customers do not pay more than actual cost of providing service, and would simplify the recovery of costs.

Second, the OCA would like to test year sales levels, which are based on 2009 sales to be weather adjusted. We do not believe this proposed adjustment is consistent with IUB precedents, since Iowa uses an historic test year when setting rates. And typically adjustments to a test year could only be made if they are known and measureable.

The impacts of weather are estimates at best, as evidenced by the very wide range in the weather normalization calculations by each of the interveners. If the IUB finds that a weather adjustment is necessary we feel that the rules for the adjustment should be established outside of the rate case so they can be applied uniformly.

The third and final OCA testimony topic I will address today relates to the recovery of and on the Whispering Willow - East wind farm. The rate making principles for Whispering Willow - East allow for IPL to request recovery of costs above the cost caps if they are deemed to be reasonable and prudent. IPL continues to believe that the decisions made and costs incurred for Whispering Willow - East are reasonable and prudent since they were in line with industry costs.

We understand that rate increases are difficult for our customers, especially during these difficult economic times. Thus, we have proposed a cross-management plan that will reduce our customers' bills by refunding a total of $174 million over a three-year period, funded from existing regulatory liability accounts and federal tax initiatives.

With the approval of this cost management plan customer rates would go down 4% from the interim rate levels, resulting in a final net increase of 6% over rates that were in place in February 2010. Customer rates would then gradually increase up to the final rate levels over a three-year period.

IPL also requested a rate increase with the Minnesota Public Utilities Commission, and on July 6th was granted interim rates that increased annual electric revenues by approximately $14 million or 21%. Interim rates will remain in effect until the MPUC issues a final decision, which is expected early in the third quarter of 2011.

IPL's final request is to increase annual revenues by approximately $15 million or 22%. If the final electric revenue is approved by the Minnesota Commission are lower than the interim revenue levels IPL will grant refunds to customers with interest.

Moving on to Wisconsin, in April we filed a limited reopener request to increase 2011 electric retail rates by $35 million or 3.6%. The limited reopener addresses three main issues -- impacts of bringing the Bent Tree wind farm in service and putting the remaining portion of Bent Tree into rate base, lower expected variable fuel cost, and expiring deferred credits.

As is typical during a rate case process, modifications occur to the original request. WPL filed for an additional increase of $3 million annually to support the biomass test burns of the Nelson Dewey Generating Station. In addition, we anticipate Bent Tree's 2011 output would be higher than included in our original filing, thus reducing fuel expense. Also, WPL broke through the 2010 annual 2% fuel band, resulting in an interim fuel rate increase of $9 million, which was implemented on June 10th.

With these modifications taken into account the expected outcome of the limited reopener is anticipated to be somewhat lower than our original request. The PSCW staff is expected to file their testimony in the limited reopener case next week. A decision is expected by the end of 2010 with rates effective in January of 2011.

We certainly can't predict the final outcome of our rate cases, but we are optimistic that the cases will result in fair and constructive outcomes. The cases are driven by a relatively small number of large dollar items that have been addressed in prior proceedings by the Iowa Utilities Board and the Public Service Commission of Wisconsin. We will continue to aggressively support our filings in the coming months as the cases head toward decisions.

Turning to environmental matters, we continue to make a missions control investment at our newer, larger, and most efficient generating units that will not only benefit the environment but will ensure that these units are capable of continuing to produce low-cost energy for our customers.

In July we placed into service our Company's first large-scale environmental controls, consisting of selective catalytic reduction equipment or SCR in a back house at IPL's 270-megawatt Lansing Unit No. 4. This project cost approximately $190 million, excluding AFUDC.

We estimate Lansing 4's mercury emissions rate will drop by more than 85%, and the [Knox] emission was able to drop by approximately 90% from its historic averages. In April IPL filed its emissions plan and budget, or EPB, which included a request to install a back house at the Ottumwa Generation Station, as well as additional proposed emissions coal projects at IPL's electric generating units that are expected to be required to meet proposed environmental rules and regulations.

We will provide more specific plans about how we proceed with these projects after the approval of the EPB, which is expected in the fourth quarter of 2010.

In Wisconsin the PSCW issued an order in May to approve the installation of SCR equipment at Edgewater Unified, and we are pleased to report that we started construction this week. We currently estimate that 100% of the capital expenditures project would be approximately $154 million. This is expected to be in service during the second quarter of 2013.

As early as late August or September we expect a decision by the PSCW on the proposed installation of scrubbers and back houses at both units of the Columbia Generating Station, which is co owned by WP&L, Wisconsin Public Service, and Madison Gas & Electric. WPL's estimated share of capital expenditures for this project would be approximately $290 million. Performance and reliability upgrades and the emission controls at these facilities will ensure these units remain viable for many years to come.

On July 6th the EPA issued its proposed transport rules to address the Interstate transport of air emissions that cause the formation of ozone and fine particulate matter. These proposed rules will replace the Clean Air Interstate Rules, CARE, and would affect IPL and WPLs' fossil fuel electric generating units. The EPA proposal requests comments on their preferred approach and two alternative approaches, but in all three approaches pollution limits are set at state levels for [SOX and KNOX] beginning in 2012.

While several of the approaches allow the use of newly created emission allowances to comply with these new state limits, the ability to use allowances instead of reducing our power plant emissions is expected to be very limited. As a result, we are assessing the recoverability of allowances we have already purchased, as well as the recoverability of our future emission allowance commitments.

The proposed transport rules leads a federal implementation plan for initial compliance, but also allows states to replace the federal plan with a state plan if approved by the EPA. The existing CARE will stay in place until the final transport rules become effective.

At this time we are evaluating the EPA's proposal but do not anticipate making any changes to the emission projects currently under construction or under state regulatory review. Our Company's ultimate compliance approach for this proposed rule cannot be determined until the final rule is issued and implemented at the state levels.

At this time, I will turn the call back over to Ben, the Operator, 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 timeframe for this morning's call. (Operator instructions.)

We will take our first question from Brian Russo with Landenburg Thalmann.

Hi, good morning.

Good morning, Brian.

Hi, Brian.

Could you just update us on your multiyear CapEx budget? And has there been any changes, maybe some shifts to the right or whatever related to some of these environmental projects?

Yes, now, Brian, at this point we have not updated the capital budget that we showed you earlier this year.

Okay, so we should rely on your last documented profile then?

Yes, you should.

Okay, and then just any chances of a settlement in the IPL rate case now that the OCC has filed its testimony?

As we have indicated to many of you, including you, Brian, over the course of the last several months, the prospects for settling the case were certainly higher earlier in the year than they are today but we have not given up hope that we can settle the case and are continuing to work towards that end.

Okay, and the sales forecast that you've laid-out for IPL, how does that compare with what's kind of I guess embedded in existing rates or what's been self-implemented for this year?

Oh, that's a good question. We're looking at it right now. In general, obviously, it's a considerable improvement over what we saw in 2009, but I quite honestly can't sit here today and tell you what the sales forecast, the existing rates were based on. It would have been probably 2008 actuals, and I just don't have that comparison in front of me right now.

Sure. Okay, and then just remind us, in the WPL limited reopener, what is the approved ROE and equity ratio that I guess would be applied to this outcome of this limited reopener?

Yes, sure, Brian, yes, those are not items that are being reopened in this case, so they remain the same as the last case.

Okay.

0.4% ROE.

Excuse me?

0.4% ROE.

Okay, thanks a lot.

We will take our next question from Jay Dobson with Wunderlich Securities.

Good morning, Jay.

Good morning, Jay.

Bill, could you talk a little bit about industrial sales? The forecast you're laying out for both IPL and WPL would be sort of roughly flat, and appreciate that we've got a little bit of comparison issues due to the folks that are now cogenerating, but I guess the way I'm looking at it is you've had a pretty historic improvement in the first half, so if you're going to be flat for the full year, if I'm thinking about this right, it's got to decline a lot, and I'm just trying to make sure I'm understanding that right again while I'm thinking about the folks that went off system for cogeneration. So maybe you could just help me think about that?

Yes, I think, my bet is that what is creating that uncertainty in your mind as you look at both slide five and slide six is that in the first half of this year we had a substantial volume of sales to the two companies which had deployed cogeneration facilities in the latter part of 2009. That is in some measure associated with just operating problems that they had in the startup of those cogeneration facilities, and there may well have been other motivations, as well.

But we do not forecast that robust sales to those two large cogeneration customers will continue for the balance of the year, and that's probably what makes it look, what makes the actual compared to the forecast look a little odd to you. That's the single biggest variable.

Got you. So if we've sort of excluded that or sort of in a same store sales format, we'd be looking at significantly higher industrial sales year-over-year?

Well, higher, certainly higher. I don't know that I'd characterize it as significantly but it certainly is augering in a favorable direction.

Got you, perfect. And then, too, RMT, I was hoping you could just give us a little color on sort of current conditions? Appreciate that you don't see the up side from the $0.04 and that I think you suggested in your prepared comments that things were shifting a little bit out to fourth quarter from the third quarter. But I think if I recall on the first quarter call you were sort of optimistic that at least activity, I think you suggested it was bidding activity, was accelerating. Has that continued? And just how should we be thinking about maybe the next 12 months at RMT?

I wish I could really forecast what's happening in the wind market place, but I sort of fall in the camp of a AWEA. I will tell you that the guidance that we have sustained with respect to RMT is associated with awarded business versus conjecture about business that might be won I the marketplace today. We're just going to have to wait and see what the fourth quarter brings. Conventional wisdom is, of course, that the fourth quarter is going to see a robust pick-up in this space as people chase available tax opportunities, but to date we have not seen it.

Perfect. And then a last question, Pat. Appreciate that you just did the debt financing but looking out to the balance of this year and '11 would have a need for equity, what are the financing needs we have?

So we're still looking at that. We really don't need to issue any additional long-term debt, but we do have maturities early in 2011.

Right.

So we'll be evaluating if we want to issue debt before the maturity date.

Okay, great. Thank you very much.

Thanks, Jay.

(Operator instructions.)

And we will take our next question from [Alex Kenya] with Bank of America.

Hey, good morning.

Good morning, Alex.

I was wondering do you guys have any updated thoughts on the second phase of the Whispering Willow wind project, just in light of, you know, you were talking about kind of more difficult market conditions for RMT, I'm just wondering on the -- for the prospect of somebody making a decision to build one of these projects is there any kind of change in thoughts on your court now, and when would you be able to have an update?

Sure. Alex, certainly nearby in terms of time there are no changed perspectives from our vantage point. The level of renewable resources that we have in place or deployed for IP&L today certainly stand us in good stead against the state's renewable portfolio standard and the state's bias in support of renewable resources in the state. But as we look at Whispering Willow nearby in time we don't anticipate as we sit here today proposals to expand that wind farm.

Okay, don't see proposal to expand it, great. And then just a follow-up question on the -- I guess the Iowa rate case, and thinking about your cost of mitigation offer and particularly just as a return of some of these tax benefits that you've kind of recognized or taken from the IRS, I guess is there any kind of open or uncertainty about kind of what the IRS might end up deciding? I guess in particular with respect to the I guess the repairs projects, has that been kind of okayed by the IRS or is that still kind of open for I guess audit might be the wrong word for it, but for scrutiny?

Yes. No, Alex, we have not gotten the final signoff through the audit process from the IRS yet, and that is one reason why we propose a tax tracker for any true-ups, but we're very confident that these, all of these recommended federal tax initiatives will pass the IRS scrutiny.

Okay, great. Thank you very much.

We'll take our next question from Brian Russo with Landenburg Thalmann.

Yes, hi. Just to clarify on your previous statement on the second phase of Whispering Willow, is that the Whispering Willow - West, that CapEx or rate base additions in 2012, or am I misunderstanding between the east and the west and phase one and phase two?

Yes, we currently are showing the remaining turbines from Vestas being deployed at Whispering Willow - West, but I would characterize that as an open question yet in our Company. They will be deployed either for IP&L or WP&L, but the probability as we look at it today is that they will be deployed for WP&L, which would mean they would not be deployed to Whispering Willow.

Right. So I guess the timing of that deployment is under review?

It is.

Okay.

We're still evaluating those options.

Okay, great. Thanks, again.

(Operator instructions.)

And, Ms. Gille, there are no further questions at this time.

With no more questions, this concludes our call. A replay will be available through August 12th, 2010 at 888-203-1112 for United States and Canada, or 719-457-0820 for international. Callers should reference Conference ID 8244179. In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available to 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.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.