ALLIANT ENERGY CORP annual report, FY2010

Business Context and Reporting Period

Alliant Energy Corporation filed a combined Form 10-K for Alliant Energy, Interstate Power and Light Company (IPL), and Wisconsin Power and Light Company (WPL) for the fiscal year ended December 31, 2010. Alliant Energy is a regulated utility holding company serving approximately 1 million electric customers and 412,000 natural-gas customers in Iowa, Wisconsin, and Minnesota. The utility subsidiaries also own generation, transmission interests, gas distribution assets, and limited non-regulated businesses, including RMT and transportation operations.

The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter information is included in the audited full-year results and unaudited quarterly data.

Key Financial Metrics

Metric	2010	2009	Change
Operating revenues	$3,416.1 million	$3,427.3 million	Down $11.2 million
Income from continuing operations	$308.0 million	$128.8 million	Up $179.2 million
Net income attributable to common shareowners	$287.6 million	$111.0 million	Up $176.6 million
Diluted EPS	$2.60	$1.01	Up $1.59
Cash flow from operating activities	$984.9 million	$657.1 million	Up $327.8 million
Construction and acquisition expenditures	$866.9 million	$1,202.6 million	Down $335.7 million
Total assets	$9,282.9 million	$9,036.0 million	Up $246.9 million
Long-term debt, net	$2,710.3 million	$2,512.2 million	Up $198.1 million

Operating income increased to $556.1 million from $396.2 million. The effective tax rate on continuing operations was 32.0%, compared with a negative 7.8% in 2009, when significant state tax benefits were recognized. Interest coverage was 3.78 times, versus 1.77 times in 2009.

Electric operating revenues increased 8% to $2,674.2 million, while electric margins increased 21% to $1,575.3 million. Retail electric sales volumes increased 3%, supported by warmer summer weather, rate increases, and improved economic conditions. Gas operating revenues declined 9% to $480.6 million, and gas margins were broadly stable at $176.6 million as lower volumes and prices were largely offset by cost recovery and rate effects.

IPL reported 2010 net income of $143.4 million, compared with $153.0 million in 2009. WPL reported net income of $152.3 million, compared with $89.5 million in 2009. IPL operating cash flow was $549.6 million and WPL operating cash flow was $372.4 million.

Liquidity, Debt, and Capital Structure

At December 31, 2010, Alliant Energy and its subsidiaries had $159 million of cash and cash equivalents, $576 million of available revolving-credit capacity, and $95 million of available capacity under IPL’s receivables-sale program.
Consolidated capitalization consisted of 49.1% common equity, 4.2% preferred stock, 45.9% long-term debt, and 0.8% short-term debt.
Alliant Energy issued $500 million of long-term debt in 2010. IPL issued $150 million of 3.3% debentures due 2015 and $200 million of 3.65% debentures due 2020; WPL issued $150 million of 4.6% debentures due 2020.
IPL retired $200 million of 6.75% debt and WPL retired $100 million of 7.625% debt during 2010.
Alliant Energy’s 2010 dividend was $1.58 per share. Management announced an expected 2011 annual dividend of $1.70 per share, subject to board declaration and subsidiary funding capacity.
Revolving-credit agreements expire in November 2012. The companies were in compliance with debt covenants at year-end; actual debt-to-capital ratios were 46% for Alliant Energy, 45% for IPL, and 46% for WPL.

Material Changes Versus the Prior Comparable Period

Profitability improved sharply because of non-fuel retail rate increases, higher weather-related electric demand, production tax credits from wind projects, and the absence of the $203 million pretax loss on early extinguishment of debt recorded in 2009.
Electric margins benefited from approximately $213 million of rate-related revenue increases and a $64 million improvement from weather and weather-hedging effects. These benefits were partly offset by higher transmission costs, incentive compensation, depreciation and maintenance costs for wind assets, and regulatory-related charges.
Non-regulated revenue declined to $196.7 million from $333.2 million, primarily because RMT experienced lower demand for large renewable-energy construction and environmental consulting services.
Operating cash flow increased substantially, principally because of higher customer collections after rate increases, higher electric sales, income-tax refunds, and receivables-sale activity.
Capital spending fell from 2009’s elevated level, which included major wind, flood-restoration, advanced-metering, and environmental projects. Nevertheless, utility assets and construction work in progress increased.
IPL retired several older generating units and decided not to rebuild the flood-damaged Sixth Street generating station. WPL’s Bent Tree Phase I wind project entered service in stages during late 2010 and became fully operational in early 2011.

Guidance, Outlook, Risks, and Unusual Items

Management expected weather-normalized retail electric sales to increase approximately 1% to 1.5% in 2011, reflecting a slow economic recovery, low customer growth, and limited new ethanol production.
Planned 2011–2013 construction and acquisition expenditures were approximately $2.8 billion, including generation, environmental compliance, distribution, and a potential Riverside Energy Center purchase.
Alliant Energy estimated 2011–2013 environmental-compliance capital expenditures of approximately $110 million, $270 million, and $260 million, respectively. These estimates were subject to changes in environmental rules, project approvals, and technology costs.
WPL expected to purchase the remaining 25% interest in Edgewater Unit 5 for approximately $40 million to $45 million, subject to regulatory approvals. WPL also anticipated exercising its option to purchase the 600 MW Riverside Energy Center at the end of the related power-purchase agreement in 2013.
IPL’s Iowa electric base-rate freeze remains in effect through 2013. IPL’s Minnesota interim rate increase remained subject to refund, and its Iowa rate case produced a $4 million refund reserve at year-end. WPL reserved $5 million for 2010 interim fuel-rate collections.
Regulatory assets totaled approximately $1.14 billion for Alliant Energy, including significant pension, tax-related, derivative, environmental, and transmission-related balances. Future recovery depends on regulatory treatment and continued customer rate support.
WPL faced Sierra Club litigation and an EPA notice of violation alleging Clean Air Act permitting violations at Edgewater, Nelson Dewey, and Columbia. Potential penalties, required pollution controls, operating restrictions, or retirements could be significant, although the company had not recorded a loss contingency because the outcome was not considered probable and reasonably estimable.
Environmental compliance remains a major risk, including proposed rules concerning sulfur dioxide, nitrogen oxides, mercury, greenhouse gases, coal ash, cooling-water intake structures, and thermal discharges. Management expected future compliance expenditures to be material but could not clearly quantify their ultimate impact.
The Alliant Energy Cash Balance Pension Plan litigation could result in damages of up to approximately $23 million before attorneys’ fees and costs; no liability was recorded while the matter was being appealed.
Alliant Energy recorded a $5.4 million pretax non-cash valuation charge for the IEA business, which was classified as held for sale and expected to be disposed of in early 2011.
IPL’s receivables-sale program had a purchase commitment expiring in March 2011. Failure to extend the program could require replacement liquidity.
Management estimated 2011 pension and other postretirement benefit costs would decline by approximately $9 million for Alliant Energy, $5 million for IPL, and $4 million for WPL, although approximately 30% to 40% of benefit costs are allocated to capital projects.

Most Important Facts an Investor Should Verify

Confirm the final regulatory outcomes and financial effects of IPL’s Iowa and Minnesota rate cases, including refunds, customer credits, and the tax-benefit customer cost-management plan.
Track WPL’s Edgewater Unit 5 acquisition, Riverside purchase option, Bent Tree operating performance, and associated capital requirements.
Review the status and potential exposure from Sierra Club and EPA Clean Air Act proceedings, including possible penalties, emissions controls, generation restrictions, and retirement requirements.
Assess whether planned environmental and generation investments remain recoverable through customer rates and whether regulatory assets continue to meet the probable-recovery standard.
Monitor the extension or replacement of IPL’s receivables-sale program and the company’s ability to fund approximately $2.8 billion of planned capital expenditures while maintaining investment-grade ratings.
Evaluate the effect of weather, customer demand, fuel and purchased-power costs, transmission charges, and the new Wisconsin fuel-cost recovery mechanism on future margins.
Verify the ultimate resolution and funding impact of the Cash Balance Pension Plan lawsuit and related IRS tax-qualified-plan review.
Reconcile reported earnings growth against nonrecurring 2009 debt-extinguishment losses, 2009 tax benefits, 2010 rate-case items, wind production tax credits, and other regulatory or tax-related adjustments.