Alliant Energy Corporation 10-Q Summary
Reporting period: Three and six months ended June 30, 2010. The combined filing covers Alliant Energy Corporation and its regulated subsidiaries, Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL). Financial statements are unaudited.
Business context
Alliant Energy is a regulated electric and natural gas utility holding company serving Iowa, Minnesota and Wisconsin, with non-regulated businesses including RMT and transportation operations. Strategic priorities include wind generation, emissions controls, energy efficiency and regulated rate recovery.
Key financial metrics
| Alliant Energy consolidated | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenues | $741.6 million | $740.8 million | $1,631.8 million | $1,689.6 million |
| Operating income | $100.7 million | $62.4 million | $209.7 million | $136.1 million |
| Net income | $52.5 million | $33.8 million | $100.6 million | $111.1 million |
| Net income attributable to common shareholders | $47.8 million | $29.1 million | $91.2 million | $101.7 million |
| Diluted EPS | $0.43 | $0.26 | $0.83 | $0.92 |
| Operating margin | 13.6% | 8.4% | 12.8% | 8.1% |
Q2 operating income increased 61% and diluted EPS increased 65% year over year. Six-month common earnings declined 10% because the prior-year period included approximately $40 million of unusual tax benefits, compared with higher tax expense in 2010.
- Electric margins: $361.6 million in Q2, up 19%; $692.8 million for six months, up 18%. Improvements were driven primarily by retail rate increases, weather-related sales and lower purchased capacity costs.
- Gas margins: $30.8 million in Q2, essentially flat; $99.3 million for six months, up 3%.
- Cash flow: Six-month operating cash flow was $479.2 million versus $439.9 million in 2009. Investing cash outflow was $395.6 million versus $588.3 million. Financing cash flow was an $87.8 million outflow versus a $47.7 million inflow.
- Capital spending: Utility construction and acquisition expenditures were $384.8 million, primarily for Bent Tree wind and Lansing Unit 4 emissions controls.
- Liquidity: Cash and equivalents were $171.1 million at June 30, 2010, and available revolving credit capacity was $623 million. No commercial paper was outstanding at quarter-end.
- Debt: Long-term debt including current maturities was approximately $2.705 billion. Debt represented 47.2% of consolidated capitalization. IPL issued $150 million of 3.30% senior debentures due 2015 and WPL issued $150 million of 4.60% debentures due 2020.
- Dividends: Quarterly common dividend was $0.395 per share, increased from $0.375 in the prior-year quarter.
Material changes versus the prior comparable period
- Q2 earnings benefited from higher IPL and WPL retail rates, stronger electric sales and the absence of significant 2009 restructuring and steam impairment charges.
- Non-regulated revenue fell to $39.4 million from $96.6 million in Q2, primarily because RMT had fewer large wind-project construction management activities.
- Six-month income taxes increased materially: the effective rate was 36.4% versus a 4.1% benefit in 2009. The comparison reflects the absence of 2009 Wisconsin tax benefits and the recognition of approximately $7.1 million of deferred tax expense from federal health care legislation.
- Transmission expense increased because of higher ITC Midwest charges. IPL expects 2010 transmission charges to be approximately $85 million to $95 million higher than in 2009, subject to regulatory recovery and deferral mechanisms.
- WPL’s Bent Tree Phase I wind project began construction in April 2010. The 200 MW project had $285 million of capitalized expenditures and $8 million of AFUDC at June 30.
- IPL determined that it does not expect to rebuild electric operations at Sixth Street and recorded a $4 million impairment. Recovery of remaining net assets and the impairment is being sought in rate cases.
Guidance, outlook and management commentary
- Management stated that current liquidity and capital structures should support strategic investments and long-term contractual obligations.
- WPL expects Bent Tree Phase I to be completed within approximately 12 months, with commercial availability expected in the fourth quarter of 2010 and first quarter of 2011.
- WPL expects to purchase WEPCO’s 25% interest in Edgewater Unit 5 by year-end 2010 for approximately $40 million to $45 million, subject to regulatory approvals.
- WPL requested an approximately $38 million, or 4%, electric rate increase for 2011, expected to be effective January 1, 2011 if approved. IPL has pending Iowa and Minnesota rate cases with interim increases subject to refund.
- IPL expects $6 million to $8 million of 2010 production tax credits from the Whispering Willow-East wind project.
- Management expects potential future environmental compliance expenditures to be significant, including for proposed SO2 and NOx rules, mercury controls, greenhouse gas requirements, coal combustion by-products and water-quality regulations.
Risks, contingencies and unusual items
- Rate recovery: Interim IPL and WPL rate increases are subject to refund. Final outcomes could affect earnings, cash flow and recovery of capital investments, fuel costs, transmission costs and Sixth Street assets.
- Environmental litigation: WPL faces EPA and Sierra Club allegations concerning air permitting at Nelson Dewey, Columbia and Edgewater. Potential remedies could include penalties, pollution controls, operating restrictions or unit retirements. The filing states that an adverse outcome could be significant, but no loss was accrued because the outcome was not probable and reasonably estimable.
- Pension litigation: A cash-balance pension plan class action received a liability ruling against the plan. Plaintiffs’ reported damages estimates were $24 million to $54 million including interest, although the company disputes the range. Alliant recorded an $8 million loss contingency.
- Environmental allowances: IPL has $35 million of future emission-allowance purchase commitments. The proposed EPA Transport Rule could make some purchased allowances ineligible for future compliance, and the ultimate impact was not determinable.
- Contractual commitments: Wind-project capital commitments totaled $207 million. Operating purchase obligations totaled $1.755 billion, including purchased power, natural gas, coal and emission allowances.
- Derivative exposure: Net derivative liabilities were $104.1 million. Triggering the most restrictive credit provisions could require Alliant to post up to $104.1 million of collateral or other credit support.
- Discontinued operations: Alliant is pursuing the sale of Industrial Energy Applications by year-end 2010. The business had $11.5 million of assets and $3.1 million of liabilities held for sale at June 30.
- Variable-interest entity: The maximum exposure under WPL’s Riverside power purchase agreement could not be determined because required counterparty information was unavailable.
Most important facts for investors to verify
- Final decisions and refund exposure in IPL’s Iowa and Minnesota rate cases and WPL’s fuel-related and 2011 rate proceedings.
- Recovery of Sixth Street impairment and remaining net assets, and treatment of IPL’s transmission cost deferrals.
- Construction cost, schedule and regulatory recovery for Bent Tree, Lansing Unit 4 and Edgewater Unit 5.
- Potential financial impact of EPA environmental rules and WPL air-permitting litigation.
- Ultimate damages and funding requirements associated with the cash-balance pension litigation and IRS review.
- Whether operating cash flow, rate recovery and access to credit remain sufficient to fund capital expenditures, dividends and debt maturities.
- Effect of lower RMT activity and the planned IEA divestiture on the company’s future revenue mix and earnings.