Alliant Energy Corporation 2012 Third-Quarter Form 10-Q Summary
Business context and reporting period
This combined unaudited Form 10-Q covers Alliant Energy Corporation and its wholly owned regulated subsidiaries, Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL), for the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Alliant Energy provides regulated electric and natural gas services in Iowa, Wisconsin and Minnesota, owns non-regulated businesses through Resources, and holds an approximately 16% interest in American Transmission Company LLC.
Alliant Energy was pursuing the sale of its remaining RMT business, which was classified as held for sale and reported as discontinued operations at September 30, 2012.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenues | $887.6 million, versus $870.9 million | $2,343.6 million, versus $2,460.6 million |
| Operating income | $213.7 million, versus $209.4 million | $418.1 million, versus $407.3 million |
| Income from continuing operations | $153.0 million, versus $140.8 million | $265.7 million, versus $273.5 million |
| Net income attributable to common shareholders | $150.7 million, versus $122.0 million | $251.5 million, versus $246.6 million |
| Diluted EPS | $1.36, versus $1.10 | $2.27, versus $2.23 |
| Cash flow from operating activities | Not separately disclosed for the quarter | $600.3 million, versus $612.7 million |
Operating margin was approximately 24.1% in the third quarter and 17.8% for the first nine months, compared with approximately 24.0% and 16.6%, respectively, in the prior-year periods. Electric margins were $509.7 million for the quarter and $1,233.7 million for the nine months, compared with $501.4 million and $1,242.5 million, respectively. Gas margins were $29.1 million for the quarter and $122.8 million for the nine months, compared with $26.6 million and $131.5 million.
- Third-quarter revenue increased 2%, supported by higher electric sales and favorable weather. Nine-month revenue declined 5%, mainly because of lower gas revenues and lower bulk-power sales.
- Third-quarter common earnings increased 24% year over year. The increase primarily reflected the IPL electric tax benefit rider, favorable weather, WPL fuel-cost recovery changes, higher AFUDC and the absence of 2011 emission-allowance charges.
- Nine-month common earnings increased 2% despite lower continuing-operations income because 2011 included larger discontinued-operation losses.
- Alliant Energy’s effective tax rate was 20.4% for the quarter and 24.0% for the nine months, compared with 23.5% and 16.6% in 2011. The nine-month 2012 rate included a 4.3 percentage-point effect from state-apportionment changes associated with the planned RMT sale.
Cash flow, debt and liquidity
| Balance-sheet or liquidity item | September 30, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $41.1 million | $11.4 million |
| Total assets | $10.251 billion | $9.688 billion |
| Long-term debt, including current maturities | $2.830 billion | $2.705 billion |
| Commercial paper | $70.4 million | $102.8 million |
| Total equity | $3.263 billion | $3.160 billion |
Nine-month operating cash flow was $600.3 million. Capital and acquisition expenditures used $517.7 million, including $412.7 million for the utility business and $106.3 million for corporate and non-regulated businesses. Financing cash flow used $52.9 million, including $149.6 million of common dividends and $11.9 million of subsidiary preferred dividends. Alliant Energy issued $75 million of 3.45% senior notes due 2022.
At September 30, 2012, available revolving credit capacity was $880 million, and IPL had an additional $125 million of available receivables-sale capacity. Consolidated capitalization consisted of approximately 50.1% common equity, 3.3% preferred stock, 45.5% long-term debt and 1.1% short-term debt. Moody’s affirmed the companies’ credit ratings and changed the outlook from negative to stable.
Material changes versus the prior comparable period
- Alliant Energy’s nine-month electric revenue declined 2% and electric margins declined 1%; retail sales were generally flat, while wholesale and bulk-power volumes declined.
- Nine-month gas margins fell 7%, primarily because warmer-than-normal weather reduced demand. Gas sales volumes declined 5% overall.
- IPL’s nine-month earnings available for common stock declined to $115.2 million from $117.7 million. IPL electric margins declined 1%, while gas margins declined 4%.
- WPL’s nine-month earnings available for common stock increased to $122.2 million from $118.3 million. WPL electric margins were essentially flat, while gas margins declined 9%.
- Utility operation and maintenance expense declined $44 million year over year, reflecting the absence of 2011 regulatory charges, Cash Balance Plan costs, regulatory-asset impairments and a WPL wind-site impairment, partially offset by a 2012 IPL contract-cancellation charge.
- Construction work in progress increased substantially for emission-control projects at WPL’s Edgewater and Columbia facilities and IPL’s George Neal and Ottumwa facilities.
- RMT discontinued operations produced $1.7 million of income in the third quarter of 2012 and a $2.3 million loss for the first nine months, compared with a $14.9 million quarterly loss and $12.6 million nine-month loss in 2011.
Guidance, outlook, commentary and unusual items
- WPL completed the regulatory approvals needed to acquire the approximately 490 MW Riverside Energy Center for about $393 million and expected to close in December 2012. Management expected related financing, depreciation and operating costs to increase in 2013.
- WPL received approval for a $13 million annual retail gas base-rate decrease effective January 1, 2013, with gas rates frozen through 2014, and a freeze of retail electric base rates through 2014. A separate decision authorized a $29 million annual decrease in 2013 fuel-related electric rates.
- IPL’s Iowa gas rate case settlement proposal contemplated an $11 million annual increase and a three-year, approximately $36 million gas tax-benefit rider, subject to Iowa Utilities Board approval.
- Management expected relatively flat weather-normalized retail electric sales in 2013, reflecting low customer growth and slow economic growth.
- Management estimated 2013 transmission-service expense increases of approximately $80 million for Alliant Energy, $70 million for IPL and $10 million for WPL. IPL expected substantial recovery through its transmission-cost rider, while WPL sought recovery through rates.
- Alliant Energy expected to place the approximately 100 MW Franklin County wind project in service in the fourth quarter of 2012 at an estimated cost of approximately $235 million excluding capitalized interest.
- Alliant Energy’s projected 2012-2016 utility and other construction and acquisition expenditures totaled approximately $4.71 billion, including WPL’s Riverside acquisition, environmental projects, a proposed IPL natural-gas facility and other generation investments.
- Environmental compliance remains a major capital requirement. The company estimated 2012-2016 environmental-control expenditures of approximately $1.22 billion across IPL and WPL.
Risks, contingencies and unusual items
- The D.C. Circuit vacated and remanded CSAPR, requiring continued administration of CAIR pending a replacement rule. The ultimate environmental requirements and related capital costs remained uncertain and could be significant.
- WPL was negotiating a consent decree concerning EPA and Sierra Club air-permitting allegations involving Edgewater, Nelson Dewey and Columbia. Potential terms could include additional controls, operating restrictions, retirements, mitigation projects and civil penalties. No material loss contingency was recorded.
- The Cash Balance Plan class-action judgment was approximately $18.7 million, excluding attorney fees and costs. Alliant Energy appealed and had not recorded a material loss contingency; an adverse final outcome could materially affect retirement-plan funding and expense.
- Alliant Energy had $598 million of RMT performance guarantees outstanding and $79 million of surety bonds and related guarantees. Management did not expect material cash payments under these obligations.
- Environmental remediation liabilities for manufactured-gas-plant sites were estimated at $19 million to $44 million; $30 million had been recorded at September 30, 2012.
- IPL’s receivables-sale program had $210.9 million of receivables sold and $153.9 million of deferred proceeds at September 30, 2012. Changes in the program reduced operating cash flow by $85.0 million during the first nine months.
- WPL’s Riverside power-purchase agreement was accounted for as an operating lease because necessary counterparty information was unavailable; maximum exposure to loss was undeterminable.
- Severe 2012 Midwest drought conditions could reduce demand from food-processing and ethanol customers in 2013. IPL also faced litigation by Jo-Carroll Energy seeking early termination of a wholesale power agreement; management stated the impact could be material but could not estimate the outcome.
Most important facts for an investor to verify
- Completion, financing and rate recovery of WPL’s Riverside acquisition.
- Final regulatory outcomes for IPL’s Iowa gas rate case, tax-benefit riders and proposed Marshalltown generating facility.
- 2013 transmission-cost increases and the extent to which IPL and WPL recover them through regulatory mechanisms.
- Final federal and state environmental requirements, including CSAPR/CAIR, CAVR, ozone, particulate and greenhouse-gas rules, and their effect on capital spending and plant retirements.
- Disposition of RMT and the treatment of any related tax, working-capital or sale adjustments.
- Appeal and possible settlement of the Cash Balance Plan judgment and attorney-fee claims.
- Cash funding needs for the projected capital program, including environmental controls, Riverside, Franklin County Wind and the proposed IPL gas facility.
- Whether weather, drought, economic conditions or wholesale-customer disputes materially change electricity and gas demand assumptions.