Alliant Energy Q3 2007 Earnings Call Transcript

Nov. 2.07 | About: Alliant Energy (LNT)

Alliant Energy Corp. (NYSE:LNT)

Q3 2007 Earnings Call

November 2, 2007 2:00 pm ET

Executives

Becky Johnson - Manager of Investor Relations

Bill Harvey - Chairman, President and Chief ExecutiveOfficer

Eliot Protsch - Chief Financial Officer

Analysts

Steven Rountos - Talon Capital

Steve Fleishman - Catapult Partners

Operator

Please standby, we’re about to begin. Thank you for holding,ladies and gentlemen, and welcome to Alliant Energy's Third Quarter 2007Earnings Conference Call. At this time, all lines are in a listen-only mode.

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

Becky Johnson

Good afternoon. I would like to thank all of you on the calland on the webcast for joining us today. We appreciate your participation. Withme here today are Bill Harvey, Chairman, President and Chief Executive Officer,and Eliot Protsch, our Chief Financial Officer, as well as other members of thesenior management team.

Following prepared remarks by Bill and Eliot, we will havetime to take questions from the investment community. We issued a news releasethis morning announcing Alliant Energy's third quarter 2007 earnings. Therelease is available on the investors page of our website atwww.alliantenergy.com.

Before we begin, I need to remind you that the remarks wemake on this call and our answers to your questions include forward-lookingstatements. These forward-looking statements are subject to risks that couldcause actual results to be materially different.

Those risks include among others matters discussed inAlliant Energy's press release issued this morning and in our filings with theSecurities and Exchange Commission. We disclaim any obligation to update theforward-looking statements.

At this point, I would like to turn the call over to Bill.

Bill Harvey

Thank you, Becky. Good afternoon and thanks for yourcontinued interest in our company. My comments this afternoon are primarilyfocused on updating you on our progress with our generation buildout and otherstrategic initiatives.

Later in the call, I will turn it over to Eliot to provide aregulatory update and a more detailed discussion of our quarterly earnings andfinancial guidance.

Due to the seasonal nature of our business, the thirdquarter is historically a big contributor to the annual earnings of our utilitybusiness. This year was no exception. Our third quarter results from continuingoperations were $1.05, compared to $0.75 for the third quarter of 2006.

Later in the call, Eliot will discuss some of thequarter-over-quarter variance drivers. Suffice it to say, however, we arepleased with the solid financial performance produced this quarter. Moreimportantly, as a result of this strong third quarter results, we have narrowedour consolidated earnings guidance for 2007 to what had previously been the tophalf of our range.

As for our utility operations, two of our coal plants wererecently named 2007 best performers by the electric utility cost group. TheEdgewater generating station in Sheboygan, Wisconsin, received the award in thelarge plant category; those stations greater than 250 megawatts and the Lansinggenerating station in Iowa received the award in the small plant category.

We are pleased by this recognition of our commitment tooperational excellence and reliability. Moving on to our generation buildout.Last week in Wisconsin we celebrated the official groundbreaking of the CedarRidge wind farm, Alliant Energy's first of many planned rate-based wind farms.

We began construction of turbine access roads, foundationsand the substation. This infrastructure work is ongoing and will be completedby year-end. Turbine deliveries are scheduled for the second quarter of nextyear, with turbine erection occurring in the summer of 2008.

This 68-megawatt wind farm is expected to be operational bythe end of 2008, at an estimated cost of approximately $165 million.

In addition to Cedar Ridge, WP&L continues to evaluatesites for an additional 200 megawatts of owned wind generation. Our focus hasbeen on sites in our southern Minnesota service territory, where the windregimes are superior to those found in Wisconsin.

We are in the final stages of preparing thee certificate ofpublic convenience and necessity application, requesting regulatory approvalfor this project. Similar to Cedar Ridge, we plan to use traditional ratemaking procedures for the recovery of and return on this incremental 200megawatts of wind generation.

Pending regulatory approval and the availability ofturbines, we currently project 100 megawatts of this capacity to be online in2009 and the balance in 2010, both for a total cost of approximately $360million to $440 million. Checking in on baseload generation, we continue tomake progress in Wisconsin on the development of a 300-megawatt coal plantlocated at WP&L's existing Nelson Dewey site in Cassville, Wisconsin.

The proposed unit will utilize circulating fluidized bedtechnology and is being designed to burn biomass. We intend to rely onrenewable resource fields for 10% of the BTU input for the facility.

Last February, WP&L filed a request with the PublicService Commission of Wisconsin for the approval to build Nelson Dewey 3 and alsofor fixed financial parameters and ratemaking principles for the recovery ofthis investment under the auspices of Wisconsin Act 7.

We are moving through the regulatory process and anticipateapproval of the certificate of public convenience and necessity in the secondhalf of 2008. Our current expectations of the timeline for securing thenecessary permits and procuring hardware allows for an in-service date of 2013.

We are in the final stages of negotiating the EPC contractfor the Nelson Dewey expansion, and expect an agreement to be executed in thenear future. In addition, our major equipment specifications are nearingcompletion, and we have issued an RFP for the boiler.

As a part of our application process, we updated theestimated cost of this facility to a range of $850 million to $950 million,excluding AFUDC if applicable. This increase is reflective of changes in scope,since our original application, primarily increased biomass capability andreduced wetlands impacts.

In April, WP&L filed an application with the PublicService Commission of Wisconsin to purchase the Neenah generating facility, anexisting 300-megawatt simple cycle gas-fired facility, located in Neenah,Wisconsin. This purchase by WP&L is intended to replace the output currentlyavailable under our purchase power agreement with Calpine's RockGen facility.Pending regulatory approvals, the purchase is expected to occur in 2009.

Let me now discuss the status of our IP&L generationprojects. IP&L is making progress on the development of a baseload coalfacility at our existing Sutherland generating station site in Marshalltown,Iowa. We plan to utilize supercritical pulverized coal technology for the newunit. The boiler will be designed to burn biomass, such as switch grass, cornstover and wood chips. And similar to Nelson Dewey, the plant is being designedto burn renewable resource fuels for up to 10% of the BTU input for thefacility.

Provisions are also being made to allow for cogeneration atthe plant. In July, we filed our siting application with the Iowa UtilitiesBoard, seeking approval to create Sutherland Unit 4. The facility will produce649 megawatts and IP&L plans to utilize up to 350 megawatts of the plant'soutput. IP&L anticipates the IUB decision on this application in the secondhalf of 2008.

In the first quarter of 2008, we plan to file for advancedrate making principles under House File 577, similar to the process we used forour Emery plant. We have begun the equipment procurement process for theSutherland expansion by issuing RFPs for the boiler, turbine, and air qualitycontrol systems. Pending regulatory approvals, we currently expect thisfacility to begin commercial operation in 2013. We estimate that our 350megawatts share will cost between $840 million and $910 million excludingAFUDC.

Earlier this year, Corn Belt Power Cooperative and CentralIowa Power Cooperative signed letters of intent to be joint partners in thisfacility. We are putting the finishing touches on the joint operating agreementamong us, which we expect to execute later this month. In addition, IP&Lcontinues to negotiate with other potential partners in the plan.

Concerning our wind generation in Iowa, in September wefiled our application with the Iowa Utilities Board for determination ofratemaking principles for up to 200 megawatts of wind generation.

As part of the filing, IP&L requested a 12.3% return onthe equity component of the investment. We have entered into negotiations withthe developer for the purchase of a 200 megawatts site in northern Iowa andexpect to execute an agreement for the purchase later this month.

We anticipate the IUB's decision by the end of 2008. Pendingregulatory approval and the ability of turbines, we expect the 200-megawattwind farm to be completed in the 2009…

Operator

Please stay online. We are experiencing a short interruptionin our program. We will return in just one moment.

Bill Harvey

Hello everyone. This is Bill Harvey. Wisconsin is still hereand so is Alliant Energy. We did have a breakdown in telecommunications. Butlet me back up in my prepared remarks just a little and begin with a discussionof an update on proposed sale of our IP&L transmission assets to IPCHoldings.

We continue to move forward through the various regulatoryprocesses. In September the Iowa Utilities Board formally allowed the sale tomove forward, which was a major milestone in the process.

Recently, the Office of Consumer Advocate has soughtjudicial review of the IUB's decision. We do not expect the judicial review tobe successful or delay the anticipated closing of transaction. But, as youwould expect, we cannot provide any assurances that the judicial review will beresolved in a timely or satisfactory manner.

In addition to Iowa we have received approval from theMissouri Commission. We have also made applications jointly with IPC inMinnesota, Illinois, and at the FERC. We expect to receive the Minnesotaadministrative law judge's recommendation this month. The FERC does not have adefined period of time within which to act, however, we are also expectingtheir decision this month.

In addition, both IP&L and IPC have made theirHart-Scott-Rodino filings. The FTC acted on behalf of both organizations, andthe investigation was completed in May. The sale of IP&L's transmissionassets is expected to be positive for our customers and our shareowners.Assuming all regulatory approvals are received on a timely basis, we expect tocomplete this transaction by year-end.

In closing, I will summarize the key takeaways from thequarter. First, strong sales and improved electric margins drove better thanexpected third quarter results. Second, we are narrowing our earnings guidanceand have increased the midpoint of our consolidated guidance by $0.05. Third,we successfully completed our $400 million share repurchase program.

Fourth, substantial progress has been made on theconstruction of the Cedar Ridge wind farm in Wisconsin, which is slated tobegin commercial operation next year. And finally, the regulatory proceedingsrequired to build our coal and wind facilities and to sell our IP&Ltransmission assets are progressing. We appreciate your continued support forour company and now I would like to turn the call over to Eliot.

Eliot Protsch

Thanks, Bill and thanks to all of you for joining us today.My primary focus will be to provide additional analysis on the quarter as wellas update you on our rate cases and discuss our revised financial guidance. Myremarks pertain exclusively to results from continuing operations.

First, as noted in our press release, we have postedsupplemental slides on our website to assist you in your earnings analysis. Youmay want to have these slides available for reference during my remarks. As wewalk from third quarter 2006 to 2007. There are three items that negativelyimpacted third quarter of 2006 earnings, which improved this year.

First, $0.07 related to net impacts of weather and weatherhedging, second, $0.07 related to WP&L fuel recovery-related items. Andfinally, Q3 2006 earnings included a $0.05 loss for our New Zealand operations,which have since been sold.

Positive EPS drivers for 2007 are as follows: the accretiveimpact of the share buyback was $0.05 per our utility in Q3 2007. In addition,third quarter earnings reflect improved electric margins and a forset benefitfrom the settlement of a federal income tax audit for the period 1999 to 2001.Drilling further into third quarter 2007 utility results compared to 2006. Iwould like to highlight the following.

Primarily as a result of increased retail electric salesvolumes, electric margins were approximately $0.07 higher than last year. Wecontinue to experience increased customer usage in general, as well as positiveeffects from the growth in the agricultural processing industry in our serviceterritory.

The net impacts of weather and weather hedges were slightlypositive this year as our summer weather hedge functioned as intended. We alsohad a slight pickup from a warmer than normal September which is outside thesummer hedging period. Incentive compensation related expenses were $0.05higher than the same period last year.

However, focusing on the right column on the post slide,please note that on a year-to-date basis, incentive compensation expenses areflat. The variance this quarter is related to the timing of the accruals andimproved annual earnings projections. WP&L's fuel recovery was neutral inQ3 '07.

WP&L reached a settlement agreement in August to refundany over collection of retail fuel-related costs for the period of June throughDecember 2007. Therefore, we would expect that the fourth quarter will beearnings neutral as well.

Now, I will update you on our various rate matters. Withregard to Wisconsin retail rates in June, the Public Service Commission agreedwith our request to reopen WP&L's retail rate case. In September, the PSCstaff issued its briefing memorandum, which was supportive of a $26 millionelectric rate increase in addition to our request for AFUDC clarification.

At its open meeting last week, the Commission directed staffto draft an order, which we expect to be approved sometime in the fourthquarter proposing new rates effective January 1st, 2008. We pursued thisre-opener because both the Public Service Commission of Wisconsin and WP&Lhave a desire to evolve to a biannual rate case cycle. WP&L currently plansto file its next base rate case in early 2008, with a 2009-2010 forecasted testyear.

As for WP&L's wholesale business which representsapproximately 15 to 20% of WP&L's electric revenues, formula rates becameeffective June 1st, subject to refund and continue to make progress in ourdiscussions with customers with respect to settlement of this case.

We look forward to having formula rates become an ongoingcomponent of our wholesale business as we embark upon our generation build-outprogram. I would also like to provide an update on WP&L's gasperformance-based rates or what we refer to as PBR.

In our last base rate case order, the Public ServiceCommission of Wisconsin changed the sharing mechanism for PBR to 65% customersand 35% shareholders. In addition, the commission directed staff to work withthe company on exploring various alternatives to the design of the program.

In October, the commission issued an oral decision on thefuture of WP&L's PBR mechanism. In its oral decision, the commission gaveWP&L the option to accept a new PBR sharing formula, or to implement atraditional pass through approach. Unfortunately in our judgment, the newmechanism did not include an appropriate risk return tradeoff for customers andshareholders.

For that reason, we have selected the traditional passthrough approach. In each of the last two years, the previous PBR formula hasresulted in savings of approximately $13 million for our customers, and an EPScontribution of approximately $0.06 to $0.07 for shareholders.

We currently fully expect the full year EPS contribution forPBR to be $0.02 in 2007. We may choose to revisit PBR alternatives as a part offuture base rate case applications. Now to summarize our capital plans.

Our projected capital expenditures for 2008 remain unchangedat $580 million. Future capital expenditures beyond our maintenance capitalneeds are, of course, a function of the timing of the capital spending for ourvarious infrastructure projects, and the availability of wind turbines.

In addition to new generation, we plan to make significantcapital investments in environmental compliance over the next decade. Thisincludes the installation of emissions controls, utilizing both pre and postcombustion technologies, while using the allowance market as a balancingmechanism.

Our 10-Q disclosure includes our current estimated ranges ofcapital spending to achieve compliance. In addition, for those of you who areinterested in more detail on our environmental strategy, emissions profile andcompliance plans, we recently published our annual environmental report, whichis available on our website.

Of special note, with respect to NOx reductions, we havealready achieved strong results due to the installation of combustion controltechnology at several WP&L and IP&L units.

In October, WP&L filed a certificate of authority withthe Public Service Commission, seeking approval for the gas portion of theadvanced metering infrastructure project in Wisconsin. The electric portion ofthe AMI project does not require a similar type of regulatory approval process.WP&L plans to install both gas and electric meters.

We estimate the total expenditures on AMI in Wisconsin to beapproximately $95 million. We also plan to install AMI in our IP&L serviceterritory. The estimated cost for full deployment at IP&L is $105 million.Deployment at both WP&L and IP&L will be phased in through 2011.

The timing and the amount of this investment is conditionalupon appropriate regulatory treatment in the various jurisdictions. Before Ileave CapEx, I would like to briefly comment on the slide posted on the websitedetailing our generation plan.

This table, which is also included in our 10-Q, now includesthe amount of capitalized cost incurred to date for the major generationprojects listed. This totals $63 million as of September 30th, 2007. We expectthese expenditures to grow over time and thought it would be useful forinvestors to know what has been expended to date, and what amounts may bereflected in rates and thus in our earnings.

Now, an update on our various financing activities. InAugust, WP&L completed a $300 million long-term debt issue. The proceedswere used to reduce short-term debt balances to re-capitalize WP&L inconcert with the rate order received earlier this year and to fund capitalexpenditures.

Looking ahead to the remainder of this year, as in pastyears, we have now hedged our heating system season margins and as previouslymentioned. We expect to be neutral on WP&L fuel recovery. Thus, when wecombine our fourth quarter outlook with our strong year-to-date performance, weare narrowing our earnings guidance range to $2.52 to $2.62 per share.

Finally, with respect to 2007, we are reaffirming our 2007cash flow guidance of $525 million to $575 million. 2008 earnings and cash flowguidance as well as 2008 through 2010 capital expenditure guidance will beissued in mid-December after our budget is approved by our Board of Directors.

In closing, we look forward to the opportunity to meet withmany of you at next week's EEI conference. And at this time, I would like toturn the call back over to Katie to guide us through the question-and-answersession.

Question-and-Answer Session

Operator

Thank you, Mr. Protsch (Operator Instructions). We'll gofirst to Steven Rountos with Talon Capital.

Steven Rountos - Talon Capital

Good afternoon, everyone.

Eliot Protsch

Hi, Steven.

Bill Harvey

Steven.

Steven Rountos - Talon Capital

I was wondering if you comment on the OCA's request forjudicial review. What is the timing of that? And what are the next steps forthat?

Bill Harvey

Well, the process is a relatively traditional judicialreview process. The timing of its review is something that's controlled by thereviewing court, not by some other mechanism. I think the important thing towatch for is whether or not there is any quick action by the court.

And, secondly, whether or not there's any action by thecourt relating to any possible request for a stay of the sale. There has beenno such request today and we think the probability of any such request beingsuccessful, if it were made, is very low.

Steven Rountos - Talon Capital

Okay. And then on Nelson Dewey, I think that you hadmentioned that the CapEx has increased because of the need to be able to firebiomass in it as well. Can you give us an idea on what the increase is and howit plays out over the '08 to 2010 timeframe?

Bill Harvey

I think in my prepared remarks, I indicated what the totalcapital cost increase was for our share of the facility, but you can think ofit as approximately a $50 million increase in costs. Some of that relates tosite reconfiguration relating to wetlands on the site.

Some of it relates to reconfiguration associated with theability to logistically handle the biofuels that will be burned at the plant.And some of it relates to alloy changes in the boiler that will accommodate thecombustion of higher levels of biofuel and what we had originally anticipated.

Eliot Protsch

Steven, with regard to year-by-year estimates when we fileour 2008 guidance, we will give you our best estimate at that point in time interms of year-by-year expenditures for that plant.

Steven Rountos - Talon Capital

Okay. Thank you very much.

Operator

(Operator Instructions) We will go next to Steve Fleishmanwith Catapult Partners.

Steve Fleishman - Catapult Partners

Yes, hello.

Bill Harvey

Hi, Steve.

Steve Fleishman - Catapult Partners

Could you on the non-regulated businesses in the quarter,could you -- outside of the absence of the New Zealand loss last year, whatwere the drivers at the non-reg generation and the, transport RMT WindConnect?

Bill Harvey

Well, the drivers were really twofold. Number one,substantial increase in the earnings associated with the WindConnect businessand the second is the increase in earnings in the non-regulated generationbusiness due to the retirement of debt associated with that business andconsequentially less interest carrying costs.

Steve Fleishman - Catapult Partners

Okay. Are these things that could be ongoing to the pointwhere these businesses maybe start going at a higher run rate than before or isthis kind of some just strong performance in the quarter, do you think?

Bill Harvey

Well, the wind connect businesses has been strong. It'sdifficult to predict whether or not that will sustain over the long term. Thenon-regulated generation business, obviously, that debt is gone.

Steve Fleishman - Catapult Partners

Okay.

Bill Harvey

So its performance ought to be enhanced over time, butimportantly, the transportation business is benefiting substantially from thetremendous expansion in the ethanol marketplace in Iowa. So, we hope thatbusiness will perform more strongly over time as well. What we expect in thatarea will obviously be reflected in the guidance that we issue in December ofthis year. But I think that's a fair qualitative summary.

Steve Fleishman - Catapult Partners

Okay. And then one last question, what is your currentexpectation for use of proceeds from the transmission sale?

Bill Harvey

Right now, our expectation is that we will probably redeploythat to our utility business; reduce a little bit of debt at IP&L.

Steve Fleishman - Catapult Partners

Okay.

Bill Harvey

Everybody is still there?

Steve Fleishman - Catapult Partners

Oh, sorry. So you said redeploy the utilities?

Bill Harvey

Dividend it up to the parent for redeployment both inreducing debt at IP&L and redeploying the capital program of the utilityand otherwise investing it in short-term interest bearing obligations.

Steve Fleishman - Catapult Partners

Okay. Thank you.

Operator

Thank you. Ms. Johnson, there are no further questions atthis time.

Becky Johnson

With no more questions, this concludes our call. Thanks foryour continued support of Alliant Energy and feel free to contact me with anyof your follow-up items. A replay of this call will be available throughNovember 9th, 2007 at 888-203-1112 for U.S. and Canada, or 719-457-0820 forinternational callers should reference conference ID 4510812.

In addition, an archive of the call and the script of ourprepared remarks will be available on the Investors section of the company'swebsite later this afternoon. Thank you.

Operator

We thank you for today's participation. That does concludetoday's conference call.

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