Alliant Energy Corp. Q1 2008 Earnings Call Transcript

| About: Alliant Energy (LNT)

Alliant Energy Corporation (NYSE:LNT)

Q1 FY08 Earnings Call

May 1, 2008, 10.00 AM ET


Jamie Freeman - Manager, IR

William D. Harvey - Chairman, President and CEO

Eliot G. Protsch - Senior EVP and CFO


Michael Gresens - Robert W. Baird & Co.


Thank you for holding, ladies and gentlemen, and welcome to the Alliant Energy First Quarter 2008 Earnings Conference Call. At this time, all lines are in a listen-only mode. I would like to turn the conference over to your host, Mr. Jamie Freeman, Manager of Investor Relations at Alliant Energy. Please go ahead Sir.

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 first quarter earnings. This release is available on the right hand side of the Investors page of our website at

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.

At this point, I’ll turn the call over to Bill who will provide some general comments on the quarter, the economy in our service territories, our generation plan and some recent actions on energy efficiency.

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

Thanks Jamie. Good morning everyone and thanks for your continued interest in our company. During the first quarter, our employees and businesses continue to perform admirably. Despite much colder than normal weather, and a record-breaking snowfall totals, our utility distribution system reliability was above historical averages. And most important, our continued focus on safety has significantly reduced the number of loss time accidents in our workforce. I'm also pleased with the solid financial results we produced in the first quarter. While Eliot will touch on most of the key drivers later in the call, I want to take a minute to discuss how our service territory is fairing in the current economic climate.

In Iowa, housing starts are only 2% below last year's first quarter and the unemployment rate is amongst the lowest in the nation. In terms of electric sales, colder than average weather and increased usage, drove sales up 4%. The biggest driver of this increase was in the industrial class. With a combined electric sales to our top 10 customers, many of which are agriculture base, jumped 6% either the top 10 industrial customers experienced electric usages. In Wisconsin, housing starts are 3% above last year's first quarter and the unemployment rate is slightly below the national average. While the number of WP&L retail electrical customers grew about 2% in each class versus a year ago, sales were essentially flat. Unlike IP&L, WP&L's industrial class is concentrated in manufacturing and eight of the top ten customers experienced declines in their electric usage.

Despite the much colder than normal winter and corresponding high gas prices, our utilities did not experience any spikes in either bad debt expense or accounts 30 days in arrears. In fact, both of the customer collection metrics improved versus the same period last year. In summary, to this point the economy has not significantly affected our utility business. While the manufacturing sector has softened, we have benefited from our diverse mix of industrial customers. Further, our customers have to this point; been able to pay their utility bills at normal collection patterns.

Turning to our generation build out plan, yesterday we've received our first decision from the Iowa Utility Board on IP&L's proposed southern wind generation station unit number four. We're pleased that the Board agreed that the project met the necessary criteria of the generation citing certificate and approved the docket The following conditions were part of their oral decisions. First, IP&L will periodically review the viability of carbon capture and sequestration technology for the proposed power plant with the IUB. Second, the facility will utilize biomass for 5% of its fuel source within two years of the facility becoming operational. With that number increasing to 10% within five years. On this point, I would note that Sutherland facility is already designed with the capability to burn 10% biomass. And third, 10% of the energy would be derived renewables by 2013, and IP&L would increase that amount by 1% per year for 15 years after the Sutherland generating station unit number four becomes operational.

While, we look forward to the opportunity to review the IUB's written order in the coming weeks, the conditions in yesterday's decision appeared to be both reasonable and attainable. For an IPP, there would not be any other Board involvement beyond the citing decision. Because, IP&L was a rate regulated utility. The final IUB action is to take up the ratemaking principles filing that was made in March. In that proceeding, IP&L will continue to demonstrate the reasonableness of the project compared to other supply alternatives.

As a part of the ratemaking principles' application, IP&L has requested a return on the common equity component of the investment of 12.55%. We expect a decision on this filing around the end of the third quarter. After working with our EPC contractor, in March we updated the cost of our 350-megawatt ownership share of the Sutherland project to a range with a midpoint of $1 billion, excluding AFUDC. This increases the result of material and labor cost pressures being experienced across the construction industry. Because, the cost for all types of generating facilities is rising, the project's relative economic advantage to other supply alternatives remains unchanged.

In Wisconsin, the procedural schedule for WP&L's proposed Nelson Dewey unit number 3, including technical and public hearings will be determined this quarter. We're working on an updated cost estimate for the project with our EPC contractor and expect to provide the revised numbers to the Commission later this month. Under Wisconsin statutes, the Commission has until December to make a decision on the certificate of public convenience and necessity. We believe that the two proposed hybrid base load facilities are in the best interest of our customers when balancing reliability, economics and the environment.

Moving on to our investments in wind generation, construction continues at WP&L's 68 megawatt Cedar Ridge Wind Farm. Turbine erection will begin in a few weeks and the project is expected to begin commercial operation in the fourth quarter of this year. The total investment at this site will be approximately $165 million. WP&L also continues planning for the development of 200 megawatts of wind at the Bent Tree Wind Farm site in southern Minnesota. A certificate of public convenience and necessity in Wisconsin and various filings in Minnesota are planned to be made this quarter. We expect to have all required approvals to move forward with this project by the first quarter of next year. We expect the project to be included in rate base using traditional rate making and it is scheduled to be in service by the end of 2010 at a cost of approximately $400 million to $450 million.

In February, IP&L received approval to proceed with a 200-megawatt wind project at its Whispering Willow Wind Farm in Franklin County, Iowa. Under the advanced rate making principles order already received, this $400 million to $450 million investment will earn an 11.7% return on equity when it begins commercial operation, which is currently planned for 2010.

We are engaged in negotiations with Turbine suppliers and expect to have an agreement signed this quarter. Combined the Bent Tree and Whispering Willow Wind Farm sites have about 900 megawatts of potential capacity which is 500 megawatts above our already announced development plans.

The last item of note in our utility generation plan is the Public Service Commission of Wisconsin's recent approval for WP&L to purchase the 300- megawatt simple cycle natural gas-fuelled Neenah generating facility from our non-regulated affiliate. Pending FERC approval, the transaction is expected to close in June of 2009 at a cost of approximately $95 million.

Finally let me touch on our commitment to energy efficiency. Alliant Energy has been an active participant on this front for over 20 years. Data published by the Department of Energy shows that despite accounting for less than 1% of national electric sales, our utilities have accounted for over 3% of all peak load energy efficiency and demand side management gains in the nation over the most recent five-year period. Two recent events highlight our continued commitment to energy efficiency.

First, in February WP&L received approval to implement advanced metering infrastructure and the first meters were installed last month. This $95 million program is scheduled to be rolled out to all Wisconsin electrical and gas customers by the middle of 2010. AMI will provide the foundation for the emerging smart grid that will offer conservation opportunities such as direct load control of appliances and communication with programmable thermostats. We intend to extend the AMI program to our IP&L customers pending appropriate regulatory treatment. Also at WP&L, our recent general rate case filing includes a continuation of $40 million of annual investment in energy efficiency improvements at customer facilities through WP&L's successful shared savings program, which both reduces energy consumption and allows WP&L to earn a return for its shareholders.

Second, in April, IP&L filed its 2009 to 2013 energy efficiency plan. The filing includes a commitment to spend $400 million over the next five years to help our customers reduce electric and natural gas usage. The proposal calls for an enhancement of the energy efficiency programs and cash rebates that IP&L has offered for over 15 years. New programs include cash rebates related to the installation of renewable equipment. Over the planned period, we expect to achieve energy savings of approximately 1% of retail electric sales. The spending levels and energy efficiency saving goals are more than 50% higher than those realized over the previous five years. As in the past, these expenditures and the outcomes they produce are expected to be earnings neutral.

In closing, I'll summarize that key takeaways for the quarter. First, we continue to produce solid operating and financial results in our core utilities and non-regulated businesses. And second, we continue to execute on an investment plan that balances reliability, economics, and the environment. We have received several positive regulatory approvals for our plans so far this year and we look forward to working constructively with all interested parties on our remaining applications. We appreciate your continued support of our company, and at this time I'd like to turn the call over to Eliot for comments on our first quarter earnings drivers, full-year guidance, financing plans, and regulatory matters.

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

Thanks, Bill, and thanks to all of you for joining us today. I would like to begin with a few comments on our first quarter earnings, which were $0.07 higher than the same period in 2007.

First, earnings reflect our established practice of hedging weather impacts on our utility business. Despite the hedge, we were able to capture $0.03 of weather-related earnings in the first quarter, as heating degree days were 15% higher than normal. Second, as we discussed in our guidance call last December, while we expect the sale of our IPL transmission assets to be accretive to shareowners over time, our earnings are reduced until the proceeds from the sale are deployed back into utility rate base. Third, volatile fuel costs have impacted earnings at WP&L. I'll discuss this topic in more detail in a few minutes.

Finally, led by RMT's WindConnect business, our non-regulated businesses posted solid results. RMT WindConnect, a leader in the wind farm construction business is currently executing over 700 megawatts of wind farm construction contracts in seven states. Over its history, RMT WindConnect has been involved in over 3,000 megawatts of wind projects in 19 different states from California to New York. The strong WindConnect results in the quarter and projects currently under contract have enabled us to modestly increase earnings guidance for our non-regulated businesses. We are also lowering our earnings estimate for the parent due to lower earnings on our significant short-term investments portfolio, which totaled approximately $630 million at the end of March. The RMT and parent changes offset one another thus our earnings guidance at the consolidated level is unchanged at a range of $2.55 per share to $2.75 per share.

We continue to believe that warehousing, the proceeds from our transmission sale for our generation build out, and environmental compliance program is the right choice for our investors when compared to repurchasing common stock. Some of the factors influencing that view include the near-term nature of our capital needs and the uncertainty in the equity markets. As a result of this decision, we do not anticipate issuing any new common equity in 2008 or 2009 despite our substantial capital expenditure plan.

We executed one financing that may be of interest to you in the first quarter. In March, we completed the remarketing of three series of pollution control revenue bonds totaling $78 million. These refinancings changed the interest rate from a seven-day auction rate mode to a fixed interest rate through final maturity. Like many orders of auction rate securities, the recent deterioration in the credit markets resulted in weekly rates that were at times 500 basis points higher than historical averages. As a result of the transactions, we no longer had any securities exposed to the auction rate market.

Our capital expenditure guidance for the period covering 2008 through 2010 that we've provided in our 10-K remains unchanged. Our capital plan is highly dependent on future regulatory approvals for major construction projects, wind turbine availability as well as evolving material and labor cost in the construction market. We will provide updates to these estimates when there are meaningful changes in the amounts or timing.

Moving to regulatory activity. In February, WPL filed a General Electric and Gas retail rate case for 2009 and 2010 test years. The application requests a $93 million or approximately 9% increase in electric rates. The increase includes the rate-base additions for the Cedar Ridge Wind Farm, Neenah generating facility and AMI. Other drivers include a cash return on construction work in progress and increased wheeling cost. We are requesting a limited reopener in the second year to incorporate cost associated with major infrastructure projects.

For natural gas, we are requesting an $800,000 or approximately 1% rate decrease. We are also asking to fully decouple natural gas rates for residential and our smaller commercial customers. The rate case filing requests that WP&L maintains its current authorized return on its common equity of 10.8% and a financial equity ratio of 53%. In March, WP&L also filed a retail fuel case requesting a $15.6 million or 1.3% increases.

Approval to implement interim rates at the requested level was received last week. WPL under recovered approximately $5 million of fuel cost during the first quarter, which had a negative impact of $0.03 per share. If our outlook of future prices proves incorrect, there will be further exposure to the fuel cost, if costs increase or refunds to customers with interest if costs go down. A detailed overview of the mechanics of the fuel costs rules in Wisconsin is available in the Investor section on our website.

Since the beginning of this year, all five investor-owned utilities in Wisconsin have filed fuel rate increases. As we have previously reported to you, Wisconsin investor-owned utilities have been working with Commission staff and broader stakeholder groups on a revised mechanism for fuel cost recovery that is fair to both customers and shareowners. The commission recently directed staff to proceed with a formal notice of hearing and common request on proposed changes. Although it appears that new rules will not be implemented in time to address this year's operations, given the PSCW's recent action, we are hopeful that new fuel rules will be in place for 2009.

The final regulatory issue at WPL, I want to mention, relates to wholesale customers, which accounts for about 20% of WPL's electric sales. A settlement with customers on WP&L's formula rate proposal is currently pending before FERC. The agreement, which covers all wholesale customers, includes a 10.9% return on equity and a 55% common equity ratio for a five-year period.

In Iowa, we recently file our 2009 to 2010 emissions plan and budget. Over the two-year period, projects are focused on NOx and mercury emissions controls. In the fourth quarter, we expect decisions from the IUB on both this filing and the five-year energy efficiency plan that Bill referenced earlier. Finally with respect to rate matters, we will not be filing any general rate cases at IP&L during 2008.

In closing, we look forward to the opportunity to meet with many of you at the AGA Financial Forum next week and at the EEI Financial Meeting later this month. In addition, we would like to remind you of our annual shareowners' meeting on May 15th, which will be webcast for investors who are unable to join us in person.

I will now turn the call back over to the operator to facilitate the question-and-answer session.

Question and Answer


Thank you, Mr. Protsch. At this time, the company will open up your call to questions from members of the investment community. Alliant Energy's management will take as many questions as they can within the one-hour time frame of this morning's call. [Operator Instructions]. We will go first to Michael Gresens, Robert W. Baird.

Michael Gresens - Robert W. Baird & Co.

Good morning gentlemen.

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

Hi, Michael.

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

Hi, Mike.

Michael Gresens - Robert W. Baird & Co.

First question on the fuel proceeding within Wisconsin, based on current commodity prices relative to what you have filed in March, what are your expectations or if you have any on the under recovery for the remainder of the year?

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

Well, the expectation is that since we've used forward strips in developing the filing, Michael, and since we typically update those estimates near the end of the proceeding, our expectation is that given the available forward-looking information we would breakeven under the fuel clause. That's the objective. But of course the volatility in the fuel markets today could produce a different result, either better or worse. But we think the process in the way it works, that is filings based on forward strips updating near the end of the proceeding to capture changes that may have materialized in those strips, we should have a reasonable chance of breaking even.

Michael Gresens - Robert W. Baird & Co.

Okay. And then second question on the Sutherland 4 Unit, the air permit in particular, what are they all allowed to look at in terms of deciding that issue and are there going to be a whole another rehashing of the CO2 issue?

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

Very difficult to predict that. I don't think there are any constraints in terms of what the Iowa Department of Natural Resources can take into consideration in the issuance of that permit, but our expectation at this point is that they will take into consideration existing laws and regulations rather than things which might materialize at some point in the near or distant future.

Michael Gresens - Robert W. Baird & Co.

Okay. Thank you.


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

Jamie Freeman - Manager, Investor Relations

With no more questions, this concludes our call. A replay will be available through May 8, 2008 at 888-203-1112 for US and Canada or 719-457-0820 for international callers. Callers should reference conference ID 3497403. 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 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.


That does conclude today's conference, you may disconnect at this time. We do appreciate your participation.

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