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Alliant Energy Corporation (NYSE:LNT)

Q3 FY08 Earnings Call

October 31, 2008, 10:00 AM ET

Executives

Jamie Freeman - Manager, IR

William D. Harvey - Chairman, President and CEO

Eliot G. Protsch - Senior EVP and CFO

Analysts

Michael Gresens - Robert W. Baird

Eric McCarthy - Praesidis Asset Management

Operator

Thank you for holding ladies and gentlemen, and welcome to Alliant Energy's Third Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time all lines are in a listen-only mode

I would now like to turn the call over to your host, Jamie Freeman, Manager of Investor Relations of Alliant Energy.

Jamie Freeman - Manager, Investor Relations

Good morning. I would like to thank all of 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 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 2008 third quarter earnings. This release is available on the investors 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 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.

I'll turn the call over to Bill.

William D. Harvey - Chairman, President and Chief Executive Officer

Good morning and thanks for your continued interest in our company. While our third quarter earnings per share from continuing operations were down a little over 5% versus the same period last year, there were no surprises in the results. At the utilities earnings were negatively impacted by very cool summer weather, the continued restoration activities that are related to the June flooding in Iowa and the foreseeing consequences of the sale of our IP&L transmission assets.

These items were partially offset by lower operating expenses and increased allowances for funds used during construction resulting from Wind projects under development in both Iowa and Wisconsin.

On the non-regulated side, we saw a continued strong performance at RMT and WindConnect, which is constructing among other projects the 400 megawatt Fowler Ridge Wind Farm in Indiana which will be the largest wind site in the country when it goes into commercial operation next year.

Overall non-regulated results were down slightly, primarily due to taxes and the new PPA for the Nina energy facility.

For the full-year, the mid point of our earning guidance remains unchanged although we are narrowing the utility range now that what is typically our largest utility earning quarter is behind us.

Before covering the various regulatory proceeding related to our strategic plan, I will address what the recent turmoil in the financial markets means to us. We understand that capital is likely to be more constrained and more expensive going forward and that every company should be reevaluating their capital spending plans. At this point in time as markets are still adjusting to these new realities we have no firm plans to delay our generation, environmental retrofit or AMI projects.

We do however have substantial flexibility to modify our course going forward and certainly will if the availability in cost of capital dictates that we do so. As regulated companies says so often we can slow down our execution, but we cannot speed it up.

In terms of being able to finance our capital projects, we believe our company is advantaged for several reasons. First, the regulated utility sector historically benefits from a flight to quality in difficult times. Recent reports by both Standards and Poor's and Moody's highlight the sector's ability to content with the current markets relative to other industries.

Second, within the sector, our balanced sheet and credit ratings compare favorably. Third, selling our IP&L transmission assets to pre finance some equity needs of our capital program reduce and defers our need to access the common equity markets.

And finally, the unique advanced rate making legislation available for new generation investments in both Iowa and Wisconsin can provide comfort to investors that project costs will be recovered in rates at a known return on equity.

This enables investors to evaluate the quality of an equity return against both prevailing and expected returns. It is in part the uncertainty and volatility over the financial markets that prompted the legislative changes to encourage investment in new generation in Iowa and Wisconsin.

Receiving strong but fair outcomes on the rate making principles was always a necessary condition plus making investments in our proposed hybrid based load units. Clearly the necessity and importance of realizing strong outcomes under this legislation is heightened by the recent collapse of the credit markets. As part of the respective dockets, we have requested a return on equity of 12.55% on Sutherland and 12.5% on Nelson Dewey.

These returns are in line with previous fixed ROE decisions in both Iowa and Wisconsin and represent a fair return to investors which we believe will enable us to attract the necessary capital to finance the construction of these plans.

Other important financial measures, we have included in the Wisconsin docket include a 100% return on construction work in progress and the 52.5% equity ratio. I know that like us many of you are eager for the proceedings to reach their conclusion. So here's a quick update on the timelines.

In Wisconsin the public record on the proposed new unit at Nelson Dewey is closed. The Public Service Commission of Wisconsin staff will issue a memo summarizing the facts and arguments on the case next week, and we expect an oral decision from the commission in mid November on both the Certificate of Public Convenience and Necessity as well as the rate making principals.

I would like to thank the nearly 100 business, labor, and conservation groups representing tens of thousands of members who offered their strong support for the project during the last 20 months. We're also very appreciative that all three commissioners attended the technical hearings in person thereby enabling an efficient post hearing schedule.

In addition to meeting the energy needs of our customers, we believe this project is truly unique in its ability to jump start the bio-fuels economy in the state, increase transmission import capability and create much needed jobs for the Southwestern portion of Wisconsin.

We're proud of the record we produced and look forward to receiving a decision from the Public Service Commission of Wisconsin. The air permit for the new Nelson Dewey unit was issued for public comment earlier this month as drafted; we believe we can achieve all of the proposed emission levels.

The Wisconsin department of natural resources has until February 2nd to 2009 to either issue or deny that permit.

In Iowa, a decision on the rate making principals for the new unit at Sutherland is now expected in the first quarter of next year. The public hearings, which will begin on December 1st, were delayed from the previously scheduled date in order to give all parties adequate time to analyze the revised cost estimate for the facility and other additional information requested by the Iowa Utilities Board. The Sutherland project whose output will benefit 94 of 99 counties in Wisconsin enjoys a broad coalition of support across the state.

In addition to industry and economic development groups, over 20 labor organizations have been vocal in expressing their support of the plant. As a reminder the Iowa Utility Board approved the citing application for the plant earlier this year in a decision which included several conditions relating to co-firing with biomass and increasing IP&L's long term investment in renewable energy resources. The Iowa DNR is expected to issue the draft air permit for public comment next month.

Unlike Wisconsin, there is no formal timeline in which the air permit must be issued, but we do expect a decision in the first quarter of 2009.

Turning to our wind investments, WP&L 68 megawatt Cedar Ridge wind farm will be in commercial operation by the end of the year on time and below our previous cost estimate. Our team did a great job managing construction at the site which presented many challenges given its size and its hilly terrain.

The first turbines will be delivered to IP&L's 200 megawatt Whispering Willow Wind Farm next spring. So we will begin site preparation and infrastructure work in the coming weeks. This project is expected to be in service in 2010 and will earn a return on equity of 11.7%.

We do have one other wind project currently in the regulatory process. WP&L's proposed 200 megawatt Bent Tree Wind Farm which is located in Minnesota, requires various approvals in both Wisconsin and Minnesota. We have turbines available for the project as part of our 500 megawatt contract with Vestas and we expect to begin construction next year after all regulatory approvals are received. This project is also scheduled to go into service during 2010.

Finally I want to touch on the impact of the economy on our operations. Unlike many other utilities, up to this point, retail sales, bad debt expense and customers shutoffs have not been materially impacted. Our service territory is largely rural and agriculturally oriented. So on a relative basis, we tend not to benefit as much when times are good or suffer as much in conditions like those that we are experiencing today.

There have been some significant plant closures in Wisconsin and clearly our customers are not immune to the effects of a slower economy. Over the next 12 to 18 months, we do expect to see weaknesses in our sales. As a result when compared to our 2008 weather normalized forecast, we expect 2009 sales to be down slightly at both IP&L and WP&L.

In summary, my takeaways are as follows. First while quarterly earnings were down from the same period last year, most of the negative factors related to flooding and weather. Our core operations continue to meet our expectations.

Second, we understand the financial markets are changing, but we believe we are well positioned to continue on a path to executing our strategic initiatives. We view the advanced great making principles available in Iowa and Wisconsin as a competitive advantage in attracting capital, assuming of course better regulators issue strong and fair parameters.

And third we will receive several significant decisions from our regulators, in the coming weeks and months. We look forward to hearing their positions on many of the challenging issues that are a part of the proceedings.

At this time, I'll turn the call over to Eliot for comments on third quarter results and other financial matters.

Eliot G. Protsch - Senior Executive Vice President and Chief Financial Officer

Thanks, Bill and thanks to all of you for joining us today. Our third quarter continuing operations results came in $0.06 lower than the same period in 2007. While our earnings release contains an overview of the various earnings drivers, I would like to comment on four items.

First, earnings were reduced by $0.11 as a result of the flooding that occurred in Iowa earlier this year. The $0.11 was primarily driven by lost sale in July and August, the rental cost to standby generation for reliability in Cedar Rapids area and various restoration expenses that are not covered by our insurance policy.

Through the end of the third quarter, we have incurred flood related losses of $0.18. Our electric load is now over 99% of pre-flood levels and the standby generators are no longer required, thus the only earnings impact we expect to incur for the remainder of 2008 is modest non-reimbursable O&M restoration cost of about $0.02per share.

However we anticipate lingering earnings impacts into next year from spending at our two generating stations in Cedar Rapids that were impacted by the flood.

Second item I wanted to mention is weather. As a reminder, we traditionally hedge the impacts of weather variations on our electric and gas margin during the winter and summer months.

We had a hedge in place this summer because cooling degree days were markedly lower than average. We experienced an earnings loss of $0.04 due to lower weather related sales. Had we not hedged our weather related earnings decline for the quarter, would have been $0.07.

Third, while our sales are down for both the quarter and year-to-date, primary drivers are weather and the impacts of this summer's flooding. In terms of our industrial base the agri-business focus customers at IPL continued to show solid growth. I would remind you that as we have previously disclosed, however, the ADM plant in Clinton is finalizing construction of its co-generation facilities. The impact of this co-generation enhancement at ADM's facility is a significant driver to the 2009 sales forecast at IPL that Bill mentioned earlier.

At WPL we continue to see some weakness in the manufacturing based industrial customers. General Motors recently announced the accelerated closure of its Janesville Assembly plant from 2010 to this December. When combined with the Domtar paper mill closure earlier this year, two of our top ten industrial customers at WPL will be lost for 2009.

Finally I would like to address fuel costs in Wisconsin. Prices had continued to fall since our $16 million interim retail fuel increase went into effect at the end of April. We have reserved $12 million of anticipated refunds to customers, when we receive a final order later this year. $11 million of this reserve was recorded in the third quarter and as a result we had no fuel related EPS impact for the period.

Moving to our liquidity position and recently completed financings. At the end of the third quarter, we had $379 million of cash and $582 million available under our credit facilities or total liquidity of roughly $1 billion. Our credit facilities last year and the current agreements extend through the end of 2012 and I would note that we haven't drawn on our bank lines in many years.

On April 3rd, we issued a total of $500 of long term debt at both IPL and WPL, further strengthening our liquidity position. We had two long term maturities totaling $135 million that were redeemed this month. As a result of these various transactions and net of funding capital expenditures, our liquidity position has improved significantly, since the end of the quarter.

As of yesterday we had approximately $430 million of cash, the entire $650 million available under our credit facilities, and $150 available under our accounts receivables sales program at WPL.

Thus our total current liquidity position of $1.2 billion is up by $200 million since the end of the third quarter thus positioning us well going forward for our construction program.

On September 5th, we received a notice of default from the trustee on Alliant Energy Resources $402 million senior exchangeable notes due 2030. I would refer investors to the 10-K we issued earlier on this matter or to our 10-Q that we will be issuing shortly for additional information on this topic.

Turning to regulatory matters, I would like to update investors on three items; the record on WPL's retail rate case which covers the 2009 and 2010 test years is now closed. Primary contested issues in the case relate to ROE and capital structure as well as various operating and maintenance cost items.

Final briefs were filed last Friday and staff published their briefing memorandum and decision matrix earlier this week. We expect a decision next month with new rates taking effect on January 1st.

The second regulatory matter relates to ITC. ITC recently filed an updated Attachment O with MISO which impacts IP&L's 2009 wheeling rates. Currently the proposed rate is over 60% higher than the current rate. As a result of the proposed increase, IP&L's wheeling charges could potentially increase by $60 million in 2009. While this filing was anticipated, the magnitude of the increase was not. IPL is currently engaged in ongoing discussions with ITC to better understand the drivers behind the increase... proposed increase, and our company is aggressively pursuing opportunities to mitigate potential impact of the rate adjustments by seeking to lower or to delay the proposed rates.

IPL is also considering various regulatory options for cost reduction and recovery including the filing of a Federal Energy Regulatory Commission 206 complaint.

Finally as you know IPL has faces unprecedented challenges over the last two years with natural disasters and continued increases in the cost of doing business. While we remain committed to aggressively manage our costs in the face of these challenges, we expect to file an Iowa electric rate case in 2009 to seek appropriate cost recovery related to these challenges. Our last electric rate case in Iowa was filed in 2004.

As a remainder, Iowa uses an historical test year which includes known and measurable changes that occur within nine months of the end of the test year. Additionally interim rates go into effect subject to refund, 10 days after a filing is made.

Many of the items we have discussed this morning will be drivers for our 2009 earnings. As has been our practice we will issue guidance in December after our Board of Directors approves our 2009 budget.

In closing, we look forward to meeting with many of you at the upcoming EEI conference and in conjunction with our ongoing Investor Relation activities. I will now turn the call back over to the operator to facilitate the question-and-answer session.

Question And Answer

Operator

Thank Mr. Protsch. 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 1 hour time frame for this morning's call.

[Operator Instructions]. We'll go first to Michael Gresens with Robert W. Baird.

Michael Gresens - Robert W. Baird

The current turbine market for wind generation, wondering if you guys are seeing any opportunities in there with developers ramping or dialing back on their new build plans and is there any opportunity for you guys to build in and hopefully get improved turbine pricing?

William D. Harvey - Chairman, President and Chief Executive Officer

Michael, thanks for the question. We haven't seen that yet. Understand our positions in the wind business are number one to build the requisite alternative energy resources that are required to meet our various state RPS requirements. We really are not looking for other opportunities in the utility side of our business as it relates to wind. However RMT is obviously a major constructor of wind development projects and I would certainly expect that they would be affected positively or negatively by what happens to the full money into projects in that space. I don't know if that responsive to your question or not Michael, if it isn't please... re-ask it.

Michael Gresens - Robert W. Baird

No it is. As in the second question you didn't... you did not mention any of your emissions controls project. Are there any updates on those projects including I guess the... that one or two projects that you've proposed?

William D. Harvey - Chairman, President and Chief Executive Officer

No there are no new developments.

Michael Gresens - Robert W. Baird

Okay.

William D. Harvey - Chairman, President and Chief Executive Officer

There we have eight Clean Air Compliance Program projects that were part of our planned capital expenditure program this year; they are all on time, on budget. And we have not altered our plans at all with respect to Clean Air Compliance Program projects going forward.

The recent overturn or vacature, I guess, is the word we are using; of the care requirements will not have any noticeable impact on our planned capital programs with respect to Clean Air Compliance efforts.

William D. Harvey - Chairman, President and Chief Executive Officer

Okay, thank you.

Eliot G. Protsch - Senior Executive Vice President and Chief Financial Officer

And Michael there will be some references to any updates that have occurred in the 10-Q filing in that regard.

William D. Harvey - Chairman, President and Chief Executive Officer

All right, thank you gentlemen.

Operator

[Operator Instructions]. We will go next to Eric McCarthy, Praesidis Asset Management.

Eric McCarthy - Praesidis Asset Management

Good morning.

William D. Harvey - Chairman, President and Chief Executive Officer

Good morning.

Eric McCarthy - Praesidis Asset Management

You mentioned earlier that two of your 10 largest customers --

William D. Harvey - Chairman, President and Chief Executive Officer

Eric, could you speak up little bit.

Eric McCarthy - Praesidis Asset Management

Sorry. Is this better?

William D. Harvey - Chairman, President and Chief Executive Officer

Yes.

Eric McCarthy - Praesidis Asset Management

Okay. You mentioned earlier that two of your 10 largest customers will be out of load in 2009, how many more of your large customers are then tied to either GM or Chrysler or any other customers that might be experiencing future difficulty?

William D. Harvey - Chairman, President and Chief Executive Officer

I don't believe any of our, what we'll use the ubiquitous term large customers other than the ones referenced are, I would... I wouldn't consider them ancillary or collateral to the automobile industry.

Eric McCarthy - Praesidis Asset Management

Okay. And just as a quick question on pension funding. It looked like the pension plan was relatively well funded at the end of 2007 although with a credit lend towards equities, could you discuss if you plan on making any extraordinary contribution for that plan in 2009?

William D. Harvey - Chairman, President and Chief Executive Officer

Well we do expect pension expense to go up next year as you might imagine given what has happened with the capital markets. We will not know the effect of that until the measurement process is complete.

I would point out that pension expense is a factor in the pending WPL rate case and we are looking forward to having that be appropriately addressed in that ultimate order, and filings in Iowa will likely occur next year where we will reflect what those latest cost estimates are in our filing and hence in interim rates.

I don't know if that's totally responsive but as you would imagine, we're going to see a little pressure on pension cost in earnings and will offer greater clarity for that when we get to our December guidance.

Eric McCarthy - Praesidis Asset Management

Okay. But no plans for large cash contribution needed?

William D. Harvey - Chairman, President and Chief Executive Officer

I really don't think we should comment about that right now but as I sit here today, I'd say the answer to that is no.

Eric McCarthy - Praesidis Asset Management

Okay good. I look forward to seeing you guys out in Phoenix.

William D. Harvey - Chairman, President and Chief Executive Officer

Indeed.

Eric McCarthy - Praesidis Asset Management

Thank you.

Operator

[Operator Instructions]. And Mr. Freeman, there are no further questions in the queue at this time.

Jamie Freeman - Manager, Investor Relations

With no more questions, this concludes our call. A replay will be available through November 7, 2008 at 888-203-1112 for US and Canada or 719-457-0820 for international. Callers should reference conference ID number 462-3087.

In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available on the investors section of our 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.

Operator

This concludes today's conference. We appreciate your participation. You may now disconnect. .

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