Alliant Energy's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Alliant Energy (LNT)

Alliant Energy Corporation (NYSE:LNT)

Q4 2011 Earnings Conference Call

February 10, 2011 10:00 AM ET

Executives

Susan Gille – Manager, Investor Relations

William Harvey - Chairman and Chief Executive Officer

Patricia Kampling - President and Chief Operating Officer

Robert Durian - Controller and Chief Accounting Officer

John Kratchmer - Vice President and Treasurer

Analysts

Brian Russo – Ladenburg Thalmann

Jay Dobson – Wunderlich Securities

Ashar Khan - Visium Asset Management

James Krapfel – Morningstar

Operator

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy’s Year-end 2011 Earnings Conference Call. At this time, all lines are in a listen-only mode. Today’s conference is being recorded. I would now like to turn the call over to your host, Susan Gille, Manager of Investor Relations at Alliant Energy.

Susan Gille

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 and Chief Executive Officer, Pat Kampling, President and Chief Operating Officer, and Robert Durian, Controller and Chief Accounting Officer, as well as other members of the senior management team. Unfortunately, Tom Hanson, our CFO, will not be joining us today due to a back injury.

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 year-end 2011 earnings. This release, as well as supplemental slides that will be referenced during today’s call, are available on the investor’s 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 the non-GAAP and GAAP measures are provided in the supplemental slides, which are available on our website at www.alliantenergy.com.

At this point, I’ll turn the call over to Bill.

William Harvey

Thank you Sue, and good morning everyone. 2011 marked a successful year for us. We met our financial objectives and maintained excellent reliability during our hot and stormy summer season and we kept our safety initiatives moving forward. I would like to commend our employees who continue to provide our customers reliable electric and gas service while at the same time delivering value to our share owners. My comments today will detail our priorities for 2012. Later in the call, Pat will discuss various financial and regulatory matters.

As Sue mentioned, our CFO, Tom Hanson would normally present a major portion of our scripted remarks this morning, but Tom has suffered a back injury and is unable to join us this morning. Tom, if you are listening, get well soon.

Robert Durian, our Control and Chief Accounting Officer and John Kratchmer, our Treasurer are here to help us with your questions if need be.

In 2012, we will continue to focus on transforming our generating fleet. Our plans include retrofitting our Tier 1 coal facilities, fuel switching, we are investigating less expensive emission controls for our smaller coal plants and increasing the amount of gas fired generations in our portfolio. Our emission control equipment plants are intended to assure compliance with environmental rules. These expenditures are outlined on Slide 2.

Even though the Cross-State Rule was stayed, the current environmental work underway at IPL’s Ottumwa and WPL’s Edgewater and Columbia facilities support complying the with the Clean Air Interstate Rule which remains effective in the wake of the Cross State Rule stay, the Utility MACT Rule, or the Wisconsin State Mercury Rule. We planned to request regulatory approval for installing the remaining controls for our Tier 1 facilities, so they will be ready to comply with the Cross-State Air Rule or some new version of it. In Iowa, that regulatory discussion will occur through our Emissions Plan and Budget filing, which will be made on April 2.

In Wisconsin, we expect to file the required construction authorization for the Edgewater 5 scrubber and baghouse later this year. The total capital investment of this broad emission control program is approximately $765 million occurring between 2012 and 2015. We are still in the process of assessing whether all the dynamics surrounding federal environmental regulation will change our Tier 2 capital expenditure projections for 2012 through 2015 which are currently estimated to be about $100 million. We have previously stated that we will not be fully retrofitting these units, so we are exploring lower-cost emission alternatives.

As I mentioned earlier, natural gas generation is becoming an increasingly important part of our balanced energy portfolio. WPL’s application to the Public Service Commission of Wisconsin to purchase Riverside, a 600 megawatt combined cycle facility is proceeding well. This purchase would increase WPL’s gas-fired generating capacity by about 100 megawatts. The Commission has indicated that it intends to review this application without a hearing and we anticipate a decision in April. Our expectation is that closing will occur at the end of 2012. We expect the revenue requirements associated with adding Riverside to rate base will be offset by the elimination of the capacity payments currently being made to Calpine, therefore making the purchase essentially neutral to customers.

At IPL, we continue the due diligence and planning related to the potential construction of the new 600 megawatt natural gas combined cycle generating facility. Last week, we issued an RFP to assess if there are any better alternatives to construction of the gas plant. If the new natural gas facility is the preferred option, we anticipate making the required regulatory filings in the third quarter of this year. At this time, we are estimating that the proposed facility would cost approximately $700 million, excluding AFUDC. Our capital expenditure plan anticipates expenditures related to that facility to begin in 2014 with an anticipated in-service date in 2016.

I also want to provide you an update on our nuclear purchase power agreements. At this point it is unlikely that we will renew either of our current agreements. WPL’s Kewaunee agreement with Dominion Resources expires at the end of 2013. An IPL’s Duane Arnold agreement with NextEra Energy expires in February of 2014. Slide 3 reflects the various capacity payments expected to be made over the next several years. The considerable decrease in capacity payments in 2014 plays an important role in how we plan to manage customer rates.

While we continue to rely on lower emission coal for the majority of our base load generation, we expect the emissions from our coal plants will continue to decline as our retrofits become operational and as we transition some of our older less efficient units to run on natural gas. In addition, our wind farms operate in very strong wind regimes and our customers in Iowa are benefiting from the transmission upgrades which support our expanding wind production.

One of the key objectives of our plan is to manage the cost borne by our customers. This year, our customers are seeing lower total electric and gas bills as we pass through the benefit of lower energy cost to them. These lower overall cost result from a combination of the lower market cost, our generating fleet transition, and our increased wind generation.

Moving to the unregulated side of the business. The Franklin County Wind Farm in Iowa is preparing to begin construction. This site located near IPL’s Whispering Willow site is known for its high wind regime. Also the transmission upgrades involving this site are already in progress. The total estimated cost of the project is approximately $235 million, excluding capitalized interest cost. We expect this project will be in service by year end and we will likely elect the cash grant. We are currently assessing the results of the reverse RFP we issued to look and off take contract for the facility.

Before handing off to Pat, let me address RMT. In our last call, I indicated that we would assess the alternatives for this business. Yesterday, the Alliant Energy Board of Directors approved the plan to sell the RMT business. We have always maintained that while RMT does not fit our core strategy as a utility, it was attractive to us because of its important position in the renewable energy space. However; a lack of consistent federal renewable energy policy coupled with downward pressure on project margins has caused us to reconsider this investment. RMT’s employees and clients will be best served by an owner whose operations are more (inaudible) with RMT’s engineering and construction business.

As a result of this decision we plan to start recording RMT financials as discontinued operations in 2012. We expect the sale to occur by year end. Since RMT’s revenues have a significant impact on how state taxable income is apportioned among the states, selling RMT will change Alliant’s future state tax apportionment. Although, this change will have a minimal financial impact on future utility earnings, it is expected to lead to a onetime charge of approximately $0.12 per share at the utilities. We will exclude this potential onetime charge from our 2012 guidance.

So, let me recap the priorities as we execute our plan. First, we continue to provide safe and reliable electric and gas service to our customers. Second, we are working to obtain a generation portfolio that is balanced with flexibility to comply with current and future environmental regulations. Third, we continue to focus on managing costs on behalf of our customers. And finally, we will work closely with our regulators and stake holders to receive the remaining approvals required for the execution of our strategic plan.

In closing, I would like to recognize and congratulate Pat Kampling on her election as Chair President and Chief Executive Officer of Alliant Energy effective April 1 of this year. Many of you have got to know Pat during her career. Her experience in and knowledge of the industry will enable her to continue to execute on Alliant Energy strategy which will be of great benefit to our employees, our customers and our share owners.

On a personal note, it has been a pleasure getting to know many of you over these many years. I wish you all well and thank you for your support of our company. I will now turn it over to Pat.

Patricia Kampling

Thank you Will for the kind remarks. I would also like to thank you for your tremendous contribution and dedicated service to the employees, customers and share owners of Alliant Energy. We are all going to miss you and wish you all the very best in retirement.

Good morning everyone. Let’s start with 2011 results. We released earnings this morning with our GAAP earnings from continuing operations of $2.73 per share. Adjusting for items we typically exclude from guidance, 2011 adjusted earnings were $2.76 per share. The 2011 adjustments relate to charges for the IPL electric rate case decisions, the cash balance pension plan amendment, emission allowance contract and impairments. These charges were substantially offset by non-recurring state income tax impacts. Comparisons between 2011 and 2010 earnings per share are detailed on Slides 4, 5 and 6.

Moving to the economy in our service territory, 2011 weather normalized, electric sales to our commercial and industrial customers, increased modestly. However, like the other utilities in our region, residential electric sales decreased by approximately 1% when comparing 2011 to 2010.

As we noted in November, we all forecast in 2012 sales in all customer classes to be flat to 2011. These trends are illustrated on Slide 7. Our current liquidity position is strong, totaling approximately $960 million comprise of $925 million of available capacity under our credit facility and $35 million of available capacity under the sale of receivables program.

We recently increased the price of our credit facility to $1 billion to help ensure adequate liquidity to finance our capital plans. Two of the primary factors influencing the financing plans are the cash flow impact from our current tax initiatives and our capital expenditure plan which is summarized on Slide 8.

We will finance our 2012 capital plan with cash flows for operations, sale of IPL receivables and the issuance of short term and long term debt. Cash flows from operations are expected to be strong for the next few years as we do not expect to make any material federal income tax payments through 2014. These cash flow benefits will be partially offset with approximately $80 million in credits to customer bills in accordance with the IPL tax benefit writer.

Our current plan anticipates issuing long term debts of approximately $100 million for IPL, which should occur in the first half of 2012 and approximately $400 million in total for WPL and the Franklin County wind farm project which are expected to occur in the second half of 2012.

In addition we have requested regulatory approval for a $300 million, one year bridge facility to finance the river side purchase, which if utilized will lower the need for long term debt financing at WPL.

In December we did make a $100 million contribution to the qualified pension plans to mitigate increases in 2012 pension cost and increase the funding levels to approximately 85%. We do not currently anticipate making any contributions to our qualified pension plan in 2012.

One last note regarding financing plans. A recent development that could influence our plans is the ability to now consider receiving the cash grant instead of Production Tax Credits for the Whispering Willow and Bent Tree wind farms. Recent legislation has waived the tax normalization requirements. Thus the cash grant may now be more beneficial to our utility customers than the PTCs. The election to claim the cash grant in lieu of PTCs could provide our company with additional cash in excess of $250 million as soon as this year. We plan on discussing the possible cash grant election with our regulators in the coming months to determine such regulatory treatment.

Our current financing plans call for a need to issue modest new common equity in late 2013. The ability to repeat the cash grant on both wind farms would definitely push the need for equity past that point.

We have several current and planned regulatory dockets of notes for 2012, which are summarized on Slide 9. I would like to provide a bit more detail on two potential base rate cases.

We are currently evaluating the need to file a Wisconsin retail electric and gas base case in 2012 with a 2013 and 2014 test year. Our preliminary analysis would support a retail electric rate increase of 3% or less. The primary drivers of the case would be the recovery of the emission control projects at Edgewater 5 and Columbia. I Bill noted earlier, the anticipated Riverside gas facility acquisition is expected to have minimal customer rate impact. Also, since the fuel monitoring level is set as part of the base rate cases in Wisconsin, any increase we may request may be offset by changes in fuel costs.

We are also evaluating the need to file an IPL Iowa retail gas case for 2012, for the 2011 test year. It has been 7 years since base rates have changed for Iowa retail gas customers and during that time, plant additions have outpaced depreciation expense.

We have also experienced a 12% decline in weather normalized residential use for customer since 2004. We will be proposing the use of a tax benefit rider to offset the requested gas rate increase.

Finally, I would like to inform you on a few items that should assist in modeling our future earnings.

We have revised our 2012 midpoint of guidance to reflect moving RMT to discontinued operations. Our revised 2012 earnings guidance midpoint is $2.90 per share, a $0.14 increase over the non-GAAP 2011 earnings.

Our 2012 utility guidance remains unchanged and reflects stable economies, normal weather conditions, and flat weather-normalized electric sales. The capital expenditure guidance for 2012 to 2015 provided in November remains unchanged. In addition, a summary of the guidance (inaudible) for 2011 to 2012 is available on Slide 10.

Our target dividend payout ratio is 60 to 70% of utility earnings. The board approved an approximate 6% increase in the targeted dividend payout for 2012. Our annual dividend target is $1.80 per share, which results in a yield of over 4% to our shareowners based on our current stock price.

On Slide 11, we have highlighted the 2011 quarter-over-quarter impact of the tax benefit rider. You will note that the quarter-over-quarter profile of 2012 is different than 2011. This difference is mainly due to the fact that the tax benefit rider did not go into effect until February 2011 and the 2011 results were impacted by warmer than normal summer weather, whereas 2012 guidance assumes normal weather. As a reminder, the tax benefit rider causes earnings swings from quarter-to-quarter, but does not impact earnings on an annual basis. Also on Slide 12, we have provided the drivers for the changes in the effective tax rates from 2011 to 2012.

We very much appreciate your continued support of our company and look forward to meeting with many of you this year.

At this time I will turn the call back over to the operator to facilitate the question and answer session. Thank you.

Question-and-Answer Session

Operator

Thank you, Miss. Kampling. At this time, the company will open up the call to questions from members from the investment community. Alliant Energy’s management will take as many questions as they can within the one hour time frame for this morning’s call. (Operator Instructions)

Our first question comes from Brian Russo with Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Patricia Kampling

Good Morning Brian.

Brian Russo – Ladenburg Thalmann

Just the decision to move RMT to discontinued operations, does that mean you have kind of tested the market and feel that you could actually sell that year-end? I mean, if there have been any discussions with other parties of their interest in that subsidiary?

William Harvey

Brian, we have done sufficient exploration to believe that we can sell the business by year-end next year, but to date there have been no serious discussions with any third party about the potential acquisition. We expect that that process will begin in earnest very shortly.

Brian Russo – Ladenburg Thalmann

And how would you suggest we value that business? Should we look at it from a revenue perspective or multiple to operating income or and maybe even you could talk about the backlog?

William Harvey

Sure, we are advised by people that know much more about these things than we that these businesses tend to get valued as a multiple of their EBITDA’s, depending upon where the market sits at any point in time, somewhere between two and six times EBITDA is what we are advised.

Brian Russo – Ladenburg Thalmann

Okay and just any comments on the backlog?

William Harvey

We have got about $235 million of project revenues booked for this fiscal year.

Brian Russo – Ladenburg Thalmann

Okay great. Can you talk about – I know it is early in the year, but just the cost controls you are planning on implementing at each of the utility subsidiaries?

Patricia Kampling

Sure, Brain. These cost controls have been work-in-process now for a couple of years and a lot of the work that is going on now is with our generation fleet. We have converted some of our older coal facilities to gas, the second one would be converted in the second quarter of this year. There is so much tremendous bottom line savings to the organization. And I again, we are just an organization of spending the right amount of money at the right time, very (inaudible) and very disciplined and that we are seeing the costing savings in the bottom line just seen in our results.

Brian Russo – Ladenburg Thalmann

Okay. Thank you very much and Bill good luck on your future endeavors.

William Harvey

Thanks Brian, same to you.

Operator

And our next question will come from Jay Dobson, Wunderlich Securities.

Jay Dobson – Wunderlich Securities

Good morning Bill, congratulations on your retirement.

William Harvey

Thank you, Jay.

Jay Dobson – Wunderlich Securities

And I hope there isn’t any indication in Tom’s back injury of who really did the heavy lifting this quarter.

William Harvey

Jay, you have known me long enough to know that it sure isn’t me.

Jay Dobson – Wunderlich Securities

More seriously, wanted to return to the RMT, how do you envision this process, is this going to be an auction style process, just how you envision it sort of playing out as you pursue viable buyers over the next several quarters?

William Harvey

Honest answer at this point in time Jay, is I don’t know. That’s something that we will figure out in consultation with the advisors that we retain to help us with the transaction.

Jay Dobson – Wunderlich Securities

Okay, fair enough. And how did that $235 million of backlog compare with where you were last year, has that grown or is that sort of stagnant, how would that compare?

William Harvey

I would say it is relatively comparable to the book to business that we had in place at this time last year, plus or minus a little bit.

Jay Dobson – Wunderlich Securities

Okay, fair enough. And then turning to the Colonie negotiations, it seems like that is a bit of change from last quarter, where you sort thought, Duane Arnold renegotiated that Colonie would be and now neither will be, is that a factor of natural gas prices or is it something else changing there that you could help us understand?

William Harvey

I think what you should hear in that remark is that while our efforts at that point in time were continuing with the Dominion Resource is that we are out, the Duane suspect that Dominion would share this perspective that we are of that view that we are not going to get to a satisfactory deal and consequently we think those conversations are ended.

Jay Dobson – Wunderlich Securities

Got you. So really they are at the stages as Duane Arnold, you don’t anticipate any other, it is not again a negotiating ploy or anything like that?

William Harvey

No, we are not doing a rope a dope here. We think both parties made a very very earnest, intense, good faith effort to reach a mutually acceptable agreement and we just failed to do that, there is no hard feelings either way, but I think we are finished.

Jay Dobson – Wunderlich Securities

Got you. And then last question, I know some of this is in process, but maybe you can sort of talk us through at least how you are thinking about it, and since Pat will take the baton, April 1, sort of how she is thinking about it. And I am referring to the capacity chart roll off for Duane Arnold and Colonie as you roll out into ’14 and then obviously have environmental spends coming on it variable times and obviously then the gas plant that should be adding in the 2016 timeframe. How should we think about balancing that since earnings needs will vary over that timeframe?

Patricia Kampling

Yeah sure, really the story hasn’t changed, the timing of this just works out that we will have the large capital additions going into service at the time the capacity payments roll off. But as part of our rate case strategy we are hoping to have cases going forward with minimal customer impact even with this large capital expenditure plan, so that has not changed.

Jay Dobson – Wunderlich Securities

Got you. Okay I will follow up more offline, thanks so much.

Patricia Kampling

Okay.

Operator

Next is Ashar Khan, Visium Asset Management.

Ashar Khan - Visium Asset Management

Hi, could you just mention, you mentioned you might this $250 million of cash, if I heard it correct. To me it’s a big amount, could you just tell us, I guess the utilization of it? How should we look at it? And when we know specifically whether we have this or not?

Patricia Kampling

Sure, but we’ll probably know, we are hoping in the second quarter once we have our conversations with our regulators on how the cash grounds would be utilized in the rate making process. I mean, really is it’s cash, it’s the grab money from both the Whispering Willow and the Bent Tree Wind Farm, you know combine the capital on those are almost $900 million, so the cash grant money is substantial. In the short run, we will be using it displace some long-term financing that we might need, but over the multiple years, it is really going to be pushing out the need for common equity.

Ashar Khan - Visium Asset Management

Pat, can I ask you how much of – I guess it is a big amount, if you utilize it, how many years of common equity does it fore stall, can you help us? Based on the budgets you have given us for the next three years.

Patricia Kampling

We see it pushing out equity at least a year.

Ashar Khan - Visium Asset Management

So, by like what? End of 2014 or 2015?

Patricia Kampling

Yeah about that.

Ashar Khan - Visium Asset Management

Okay thanks. And then can you just reiterate, I guess with RMT the growth rate still remains – your anticipated growth rate long-term?

William Harvey

I am sorry, could repeat that?

Patricia Kampling

It’s with the absence of RMT, would you see growth remaining same? Yes it would be.

Ashar Khan - Visium Asset Management

And can you remind us what that is?

Patricia Kampling

We are still saying 5% to 7% a year.

Ashar Khan - Visium Asset Management

5% to 7% per year and what would be the base here?

Patricia Kampling

2010 weather normalized.

Ashar Khan - Visium Asset Management

2010 weather normalized, okay, thank you.

Operator

Next is James Krapfel, Morningstar.

James Krapfel – Morningstar

Hi, good morning.

William Harvey

Good morning Jim.

James Krapfel – Morningstar

You had mentioned on the call that you could get somewhere in the range of 2 to 6 times EBITDA for RMT, at least that’s what your hearing. What was EBITDA for the business, say for the last three years?

William Harvey

It was around $6 million, $7 million.

Patricia Kampling

Yes.

William Harvey

Yeah, I think 6 to 8.

James Krapfel – Morningstar

6 to 8. And then 2011, presumably was on the lower end given the (inaudible).

William Harvey

Definitely it was on the lower end, yes. With the New Jersey projects it was seriously negative, yeah.

James Krapfel – Morningstar

Okay, that’s all I had thank you.

Operator

Miss Gille, there are no further questions at this time.

Susan Gille

With no more questions, this concludes our call. A replay will be available through February 17, 2012 at 888-203-1112 for US 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 on the investor’s section in the company’s web site later today. We thank you for your continued support of Alliant Energy and feel free to contact me with any follow-up questions.

Operator

And that does conclude today’s conference. Thank you for your participation.

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