Jamie Freeman - IR
Bill Harvey - Chairman, President, and CEO
Pat Kampling - CFO
Alliant Energy Corporation (LNT) Q1 2009 Earnings Call April 30, 2009 10:00 AM ET
Ladies and gentlemen, welcome to this Alliant Energy first quarter 2009 earnings call. This conference is being recorded. At this time, all lines are in a listen-only mode.
I would now like to turn the conference over to your host, Jamie Freeman, Head of Investor Relations at Alliant Energy. Please go ahead.
Thank you. Good morning. I'd 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 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 first quarter earnings. This release, as well as supplemental slides that will be referenced during today's call, are available on the Investors page of our website at www.alliantenergy.com.
Before we begin, I need to remind you that the remarks made 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.
At this point, I'll turn the call over to Bill.
Thank you, Jamie. Good morning, everyone. My comments today will review our first quarter results and provide an update of our wind program and capital expenditure forecast. Later in the call, Pat will discuss our recent rate case filings and other financial matters.
While our GAAP first quarter earnings were up from the same period last year, the results include $0.36 per share benefit for non-recurring, non-cash state income tax items. Pat will touch on this topic later in her remarks.
Excluding the non-recurring tax items, our 2009 first quarter utility earnings were down $0.20 per share from the same period last year. However, many of the drivers, which are summarized on the second slide of the materials posted on our website, were anticipated when we issued guidance last December.
Let me begin, however, with a discussion of the economy.
As shown on Slide 3 of the materials posted to our website, first quarter retail electric sales were down 4% versus the same period last year. Residential sales were flat and commercial sales were actually up 2%. That was slightly better than our expectations. The industrial class, however, was down 11%, which was significantly lower than our forecast.
The economic downturn is most evident in the industrial class in Wisconsin, which was down 15% versus the first quarter last year. While industrial sales were impacted by automotive and paper production plant closures that occurred in 2008, more Wisconsin companies continue to announce significant reductions in production as well as plant closures.
Recent announcements have come from large companies that are directly tied to the national residential and commercial construction market and the recreational boat market. Layoffs at some of our larger industrial customers have impacted thousands of workers and plant closures have impacted thousands more.
As shown on Slide 4, the top three largest increases in unemployment in the various metropolitan areas throughout the state and surrounding areas have been in our service territory. Times are tough for many of WP&L's industrial customers and their employees.
While not as dramatic as Wisconsin, we are also experiencing weakness in the industrial sales at IP&L. The most meaningful decline we had forecast for the year was to be the result of cogeneration being installed by ADM, our largest IP&L customer.
The ADM project was not fully operational during the first quarter. So the 4% drop in sales was primarily the result of lower energy requirements from other industrial customers.
Many of the agribusinesses that performed well throughout 2008 experienced lower energy consumption in the first quarter. While Iowa does have significantly less exposure to heavy manufacturing than Wisconsin, the companies that do operate in that segment were down noticeably.
You will recall that the guidance provided in December attempted to take a pragmatic, perhaps conservative approach, to the sales forecast for 2009. However, our first quarter results and updated forecast for the last nine months of this year have led us to lower the industrial sales outlook at WP&L and IP&L by approximately 8 percentage points and 4 percentage points respectively.
That said, it is important to note that the industrial customer class provides margins on unit sales well below those earned on the commercial and residential classes, where our utility business average industrial margins are approximately 60% lower than those earned on residential sales.
Additionally, about 30% to 40% of the industrial customer revenue is collected through demand billing components. The 11% decline in industrial sales for the first quarter of this year resulted in an earnings impact of $0.03 per share.
The economy is affecting the ability of our customers to pay, but that impact is not dramatic. While we've seen modest increases in both bad debt expense and customer accounts 90 days in arrears, the absolute levels of these metrics remain low compared to industry averages and have not materially impacted our earnings.
Now, let me move away from the economy. There are other items worth highlighting in the first quarter. As expected, higher transmission charges from ITC and pension costs at IP&L., reduced earnings by $0.09 per share in the quarter. Going forward, the $84 million interim rate increase put into effect in Iowa on March 27th is expected to recover these costs.
Another significant factor was reduced gas margins, which were $0.06 per share lower for the quarter. $0.02 of that decrease was due to the impact of milder weather on sales. Other drivers include lower commercial and industrial gas sales and the impacts of the decrease in customer gas rates at WP&L resulting from the December 2008 rate case settlement.
The largest positive earnings driver at the utilities was the non-recurring impact of recent tax legislation in Wisconsin. This item also positively impacted earnings at the parent, but negatively impacted non-regulated results. Pat will elaborate on this tax issue in her remarks.
As we look at the balance of the year for the utility business, excluding the non-recurring tax items, we remain committed to delivering results within the guidance range we established in December.
Given the unfavorable weather impacts and the incremental deterioration in industrial sales for both the first quarter and the balance of the year, we recognize there are challenges to 2009 earnings. However, we believe that the interim rate increase in Iowa and our ability to effectively manage cost will enable us to deliver on our commitments.
While the first quarter did not produce meaningful operating cost reductions versus the same period last year, we have launched aggressive cost-cutting efforts across our utilities that are constrained only by our assurance not to compromise safety or reliability.
These efforts are expected to produce $0.15 to $0.20 earnings benefit beyond the cost savings reflected in our original guidance. We have announced layoffs and retirements affecting all levels, including officers and executives.
Additionally, we have suspended our 401(k) match for the rest of the year and non-bargaining unit employees will be furloughed for one week by the end of the year, officers and executives included.
Discussions with bargaining unit leadership aimed at applying these or other cost-saving measures more broadly within our utilities are underway. Many of these measures are unprecedented for us and we suspect for our industry.
However, we do not believe that we, as employees, can be insulated from the pain our customers and investors are feeling in this environment. We will step up and share that pain and maintain our earnings objectives in the process.
Let me shift to the unregulated side. RMT posted $0.02 loss for the quarter as the slower pace of construction activity in the quarter drove down labor utilization rates. RMT has recently signed several contracts that will produce revenue for the rest of the year and is actively bidding on many other projects that will begin construction in 2009. The projects RMT has recently been awarded are located in Iowa, Missouri, and Utah.
We believe that renewable energy incentives included in the economic stimulus package are producing their intended effect. We expect RMT to deliver on its $0.12 per share commitment for the year and believe they are well positioned to grow in 2010.
I've covered a lot of information. So let me summarize by discussing our results in the context of the earnings guidance we issued last December. I should first point out that our earnings guidance for 2009 excludes the non-recurring state income tax impacts that we recorded in the first quarter.
The utility range remains unchanged and our cost-cutting actions help to offset pressure from declining sales and other items in the first quarter results. The non-regulated range remains unchanged, as we expect a strong second half of the year in the renewable market to boost RMT. And finally, our consolidated earnings guidance also remains unchanged at $2.18 to $2.48 per share.
I'll now move to an update on our utility wind projects. As evidenced by the recent American Wind Energy Association report that ranked Iowa and Minnesota as two of the top four wind-producing states, our service territories are well situated to invest in this form of renewable energy. In fact, Alliant Energy is already the seventh largest taker of wind among investor-owned utilities. We plan to maintain our leadership role in this area.
Construction activity is progressing at IP&L's Whispering Willow Wind project in Iowa. The first turbines are expected to arrive next month, and this 200-megawatt project is expected to come online by the end of the year.
As of the end of the first quarter, the project has incurred $273 million of capital costs. Under the rate making principles approved by the Iowa Utilities Board, the estimated $425 million investment in this project will earn a return on common equity of 11.7% once the project is in service and reflected in rates.
The 200-megawatt Bent Tree Wind project proposed by WP&L continues through the regulatory process. We have reached a settlement with FP&L's NextEra subsidiary, which withdrew its intervener status in the case. A public hearing on the project was held yesterday and was uneventful. We expect the Public Service Commission of Wisconsin to approve the project very shortly.
Because the project is located in Minnesota, we do have some open dockets with the Minnesota Public Utilities Commission, but we fully expect approval in the next few months.
We plan to begin infrastructure work at Bent Tree this summer. Turbines are scheduled to arrive onsite early next year, and the project is expected to be placed in service during the second half of 2010 at an estimated cost of $450 million. This will be a traditional WP&L rate-based investment.
Our current planned wind purchases and ownership are expected to result in over 10% of our retail sales requirements being sourced from renewable energy resources by the end of 2011. We are well ahead of the curve in meeting our state renewable portfolio standards, and we have over 500 megawatts of additional capacity at our Whispering Willow and Bent Tree sites available to meet whatever increased RPS requirements arise from either state or federal legislation.
In March, IP&L and its joint partners decided not to proceed with the construction of the Sutherland Generating Station Unit 4. While we continue to believe that this project and the rejected Nelson Dewey expansion in Wisconsin were the best energy options for our customers, we understand that the evolving financial, political, and environmental landscape made their permitting and construction a significant challenge.
We will not be announcing replacements for Sutherland 4 and Nelson Dewey 3 in the near future. Rather, we will closely monitor several key items before determining what type of capacity additions to pursue.
We will continue to analyze electric sales to determine both the shape and the slope of the demand curve we face. We will continue to be involved in energy policy legislation to understand future carbon and renewable requirements.
We do not expect to force clarity on these issues this year, so an announcement of our longer-term generation plans likely won't come until 2010 or later. Since our hybrid coal plants would not have been online until 2013 or 2014, the shorter execution times associated with new gas, wind, and biomass alternatives provide us the leeway to wait.
When we discussed the impacts of the capital markets last fall, I indicated that we have the ability to slow down the deployment of our capital plan by canceling the Sutherland project, by deferring substitute base load plans until a clearer picture of economic recovery and energy legislation takes shape, and by changing the timing of some of our planned AMI and environmental spending, we are doing just that.
The result of these actions is summarized on Slide 6 of the materials posted to our website, which reduces our capital expenditure guidance for 2009 through 2011 by approximately $1.2 billion. While our capital plan remains robust for a company our size, the combination of our strong cash position and relatively low debt levels is expected to allow us to defer issuing any new common equity in either 2009 or 2010.
In closing, let me recap the key takeaways for the first quarter. First, while quarterly results were below our expectations, we have implemented aggressive cost-cutting measures and remain committed to deliver full-year results within the earnings guidance ranges provided last December.
Second the execution of our utility-owned wind program and the RMT wind construction business both remain on plan. And third, our updated capital expenditure plan puts us in a position where we can finance our wind, environmental, and energy efficiency investments without issuing any new common equity through the end of 2010.
We appreciate your continued support and interest in our company. At this time, I'll turn the call ever to Pat.
Thank you, Bill, and good morning to everyone. Bill covered our first quarter drivers, but I would like to further explain the impacts to us Wisconsin's combined reporting and the tax opportunities available under the American Recovery and Reinvestment Act. The remainder of my remarks this morning will focus on our anticipated financing plans, liquidity, and various regulatory matters.
Wisconsin Senate Bill 62 was passed in February of 2009 and was retroactive back to January 1, 2009. It effectively required all Alliant Energy companies that are greater than 50% owned to file as part of the Wisconsin unitary return.
In addition, WPL will register to do business in Iowa and will accordingly file as a member of the 2009 Iowa consolidated tax return. The impact is that IPL and WPL can better leverage resources and facilities, a development that is positive for our day-to-day operations.
In the first quarter, several non-cash and non-recurring tax adjustments were recorded to reflect the impacts of SB 62 and the fact that WPL will now file as a member of the Iowa consolidated return. For the utilities, we adjusted for state deferred tax liabilities to reflect these changes, which resulted in a benefit of $0.32 per share.
In addition to the changes at the utilities, the new law makes it unlikely that we will be able to use a majority of our non-regulated Wisconsin net operating loss carryforwards. This resulted in an increase in tax expense of $6 million. Our 10-Q, which we expect to file shortly, will provide a comprehensive overview of Senate Bill 62 and the many related impacts.
For investors, there are two important takeaways. First, our quarterly results include non-recurring impacts of $0.32 benefit at the utilities, $0.05 loss at non-regulated and $0.09 benefit at the parent. And second, on a going-forward basis, we do not expect these changes and state filing requirements to have a meaningful impact on our consolidated effective tax rate.
There are two provisions of the American Recovery and Reinvestment Act that we expect to be able to take advantage of. The first relates to tax incentives that will apply to the Whispering Willow and Bent Tree wind projects. Both of these projects will qualify for production tax credits, investment tax credits, and Treasury grants.
We currently anticipate electing to take the production tax credit, but as regulatory treatment for the Treasury grant option is determined, we will carefully analyze whether that alternative would be an effective way to limit both customer rate increases and our external financing needs.
Second, Alliant Energy expects to benefit from the bonus depreciation provisions contained in the act. We anticipate additional cash flow benefits at the utilities in 2009 of $175 million based on the approximate $1 billion of eligible in-service additions that will happen in 2009.
Financing the utilities' capital plan through the end of 2010 will involve a combination of internally generated funds, equity infusions from existing cash at the parent, and issuing debt. For 2009, we currently plan to issue up to a total of $500 million of long-term debt at the utilities.
Liquidity at the end of the first quarter remained strong, totaling approximately $800 million and comprised of $284 million of cash and marketable securities and $522 million of available capacity under our credit facilities.
We have an active regulatory calendar in 2009 beginning with our Iowa retail electric rate case that was filed in March. The primary drivers of the $171 million increase include increases in ITC transmission service charges and pension expense, capital investments associated with reliability and emissions reductions, and costs resulting from the 2008 flood. The case requests a return on equity of 11.4% and a capital structure that includes a 48.5% common equity component.
IPL implemented interim rates of $84 million at the end of March. These rates are subject to refund with interest. Transmission expense and pension increases make up most of the interim amount.
As part of the rate case, we have proposed to implement an automatic adjustment clause for ITC's transmission expense. We expect a decision on and the implementation of final rates in the first quarter of 2010. As in the past, we plan to work closely with all interested parties to explore a settlement of the case before it is litigated by the Iowa Utilities Board.
We will file a base rate retail case in Wisconsin within the next few weeks. The main issues we plan to seek rate relief for include an updated retail electric sales forecast, lower variable fuel costs, construction work-in-progress return on the Bent Tree wind project, pension expense, and working capital items.
This case should enable WPL the opportunity to earn the authorized return that is set in the case. This will be a significant improvement from 2009 where we are forecasting the retail component of WPL to earn almost 300 basis points below its authorized levels.
WPL's fuel monitoring level was updated at year-end 2008 in conjunction with the rate case settlement, and we currently expect fuel costs to remain in that band for 2009.
There continues to be a fair amount of discussion on how regulators across the country will react to rate cases given the current state of the economy. We understand that the pressure between maintaining the health of a regulated utility and protecting consumers from increased rates is as high as ever.
I would like to take a minute to explain how we think our two cases are positioned to produce positive outcomes for the company.
In Iowa, the case is driven by a very few large dollar items. One is the increase relating to ITC's transmission costs and there is no precedent for regulated utility not recovering FERC-related rates.
A second driver is recovery of capital investments including those resulting from last summer's flooding. We continue to receive high marks from customers and local officials for our response in recovering from this natural disaster.
A final significant item relates to pension and other employee benefit costs. We believe these costs have been prudently incurred, in the case of pensions, have been driven by the declines in the equity markets outside of our control.
In Wisconsin, one of the key focal points of the case will be retail sales. A weak sales pattern has clearly been established over the past several quarters. And as Bill mentioned, the industrial class continues to deteriorate.
Since current rates are based on a 2009 sales forecast that was developed in 2007, we expect to file the upcoming 2010 test year case using a sales forecast that is approximately 10% below levels that are currently reflected in rates. We believe the combination of the facts supporting the sales decline and our willingness to manage other costs make the planned request reasonable.
While we can't predict the final outcome of the rate cases, we are optimistic that we will be successful in working with the regulators and interveners to produce outcomes that allow our utilities to earn their authorized returns in 2010.
There are two additional regulatory items to comment on. First, the Federal Energy Regulatory Commission dismissed our 206 complaint against ITC earlier this month. We are very disappointed that FERC did not agree to hear the case given the facts we were able to provide and the request of several interveners, including the Iowa Utilities Board.
In order to make every effort to protect our customers from costs that we view to be unreasonable, we are considering several options, including filing a request for rehearing and/or filing a new complaint with additional information. We have until May 15 to file a request for rehearing.
Second, earlier this month, we and our joint partners filed an application with the Public Utilities Service Commission of Wisconsin to install a scrubber and baghouse at the Columbia Energy Center.
We expect the project to reduce both sulfur dioxide and mercury emissions by over 90%. Our 46% share of the investment is approximately $300 million. We expect a commission order on this project and on our proposed SCR at the Edgewater Generating Station in the next 12 months.
In closing, we look forward to the opportunity to meet many of you at the AGA Financial Forum next week and at other events throughout the course of the year.
At this time, we will turn the call back over to the operator to facilitate the question-and-answer session.
(Operator Instructions). We'll go to our first question from [Danielle Seth]. Please go ahead.
Thank you. I was wondering if the recovery of flood cost could be securitized and segregated from the overall case or it is too late and not being considered.
This is Pat. No, we are not planning to securitize the costs from the Iowa floods from last summer. The amounts of these costs, as you are well aware, some of them are covered by the insurance proceeds and some of them are being requested in the current rate case.
(Operator Instructions). Mr. Freeman, there are no further questions at this time.
With no more questions, this concludes our call. A replay will be available through May 7, 2009 at 888-203-1112 for US and Canada, or 719-457-0820 for international. Callers should reference conference ID number 8241179.
In addition, an archive of the conference call and a script of prepared remarks made on the call will be available on the Investors 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.
This concludes today's conference call. Thank you for your participation.
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