Alliant Energy Corp. (NYSE:LNT) today reported income and earnings per share (EPS) from continuing operations for the third quarter of 2006 of $87.8 million and $0.75, respectively, compared to $99.6 million and $0.85 for the same period in 2005. Alliant Energy’s net income and EPS for the third quarter of 2006 were $78.8 million and $0.67, respectively, compared to $112.5 million and $0.96 for the same period in 2005. Additional details regarding Alliant Energy’s third quarter unaudited earnings are as follows (net income in millions):
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Earnings (loss) Net Income EPS Net Income EPS
Utility $85.9 $0.73 $113.1 $0.97
2005 Brazil and debt charges) * (1.7) (0.01) 24.7 0.20
Parent (primarily taxes,
interest and A&G) 3.6 0.03 3.1 0.03
Total excluding Brazil
and debt charges 87.8 0.75 140.9 1.20
asset valuation charge * – – (23.3) (0.20)
related to debt reductions * – – (18.0) (0.15)
Total earnings from continuing
operations * 87.8 0.75 99.6 0.85
Income (loss) from discontinued
operations ** (9.0) (0.08) 12.9 0.11
Net income $78.8 $0.67 $112.5 $0.96
* The total loss from continuing operations for the non-regulated businesses in the third quarter of 2006 and 2005 was ($1.7) million and ($16.6) million, or ($0.01) and ($0.15) per share, respectively.
** Alliant Energy has classified its non-regulated China, Mexico, oil and gas gathering pipeline systems and energy services businesses as well as its biomass facility as discontinued operations for all periods presented. The energy services business, biomass facility, oil gathering pipeline system and Alliant Energy’s interest in three of ten China generating facilities were sold in 2005. Alliant Energy sold its interest in three additional generating facilities in China in the first quarter of 2006. The gas gathering pipeline system and Alliant Energy’s interest in an additional China generating facility were sold in the second quarter of 2006.
The lower earnings from Alliant Energy’s utility business were largely due to the net impact of weather and weather hedging activities on its electric margins, a higher effective income tax rate and higher nuclear-related costs. The lower results from continuing operations for Alliant Energy’s non- regulated businesses, excluding the 2005 Brazil and debt charges, were largely due to $0.08 per share of foreign currency transaction losses incurred in the third quarter of 2006 associated with Alliant Energy’s New Zealand investments and income realized in 2005 related to tax adjustments ($0.05 per share) and earnings from Alliant Energy’s Brazil and Synfuel investments ($0.05 per share), which have since been sold.
“Our lower third quarter earnings were disappointing but understandable,” said William D. Harvey, Alliant Energy’s Chairman, President and CEO. “They were driven largely by the net impact of weather and our weather hedging activities and foreign currency losses related to our New Zealand investments. Despite the results for the quarter, I remain confident the fundamentals of our business remain strong. In fact, our year-to-date utility earnings are actually up slightly compared to the same period last year due to our strong first-half performance. We continue making progress on our utility generation expansion plan, which is the key component of our long-term growth strategy. We also were successful in completing over half of our $200 million share repurchase program in the third quarter. And, as our concurrent announcements should make obvious, we’re pleased with the progress on our remaining asset divestitures.”
Alliant Energy’s third quarter 2005 non-regulated income from continuing operations included a pre-tax, non-cash asset valuation charge of $40 million (after-tax charge of $23 million, or $0.20 per share) related to the company’s Brazil investments, which Alliant Energy sold in the first quarter of 2006. The 2005 results also included a pre-tax charge of $29 million (after-tax charge of $18 million, or $0.15 per share) related to debt reductions within Alliant Energy’s non-regulated businesses.
Earnings From Continuing Operations
A summary of Alliant Energy’s EPS from continuing operations for the third quarter is as follows:
2006 2005 Variance
Utility operations: *
Electric margins –
Nuclear capacity ($0.19)
Net impact of weather
and weather hedges (0.10)
WP&L fuel case
Recovery of WP&L
fuel-related costs 0.06
Operating expenses –
higher effective income
tax rate) (0.06)
Total utility operations $0.73 $0.97 (0.24)
(excl. 2005 Brazil and
debt charges): *
New Zealand (0.05) 0.02 (0.07)
Brazil (excluding asset
valuation charge; sold
in Q1 2006) – 0.04 (0.04)
allocation/other (0.02) 0.01 (0.03)
Synfuel (sold in Q4 2005) – 0.01 (0.01)
Non-regulated Generation 0.02 – 0.02
WindConnect(TM) and other
investments 0.04 0.04 –
Other (taxes, interest, A&G
and dilution; excl. debt
charges) – 0.08 (0.08)
Total non-reg. operations
(excl. 2005 Brazil and debt
charges) (0.01) 0.20 (0.21)
Parent company (taxes, interest,
A&G and dilution) * 0.03 0.03 –
Total excluding 2005 Brazil and
debt charges 0.75 1.20 (0.45)
Brazil asset valuation charge – (0.20) 0.20
Charges related to non-regulated
debt reductions – (0.15) 0.15
Earnings per share from continuing
operations $0.75 $0.85 ($0.10)
* The 2006 and 2005 EPS amounts have been computed based on the average shares outstanding in the third quarter of 2005 and the dilutive impact of increased shares outstanding is reported as a separate earnings variance item if it is material.
Continuing Operations – Utility Operations
Alliant Energy sold its interests in its two nuclear facilities in July 2005 and January 2006. Prior to the sale of these assets, the operating expenses related to the facilities consisted primarily of other operation and maintenance and depreciation and amortization expenses. These expenses are included in “Operating expenses” in the above table. Upon the sale of the facilities, Alliant Energy entered into purchased power agreements with the new owners of the facilities and its share of the costs associated with these facilities is now recorded as purchased power expense included in “Electric margins” in the above table. As a result, there are large nuclear-related variances between the periods for these line items. These are somewhat offsetting in nature and also do not capture other benefits from the sales including, among others, the impact of the application of the sales proceeds.
The net impacts of weather and weather hedging activities on Alliant Energy’s electric margins for the third quarter of 2006 and 2005 were ($12) million and $8 million, respectively (variance of ($0.10) per share). Alliant Energy utilizes weather hedges to reduce the potential volatility on its margins. The Company entered into a summer weather hedge based on cooling degree days (CDD) at Chicago for the periods June 1 through August 31 in 2006 and 2005. In each year, the terms of these agreements capped the amount Alliant Energy could pay to, or receive from, the counterparty at the end of the agreements at $9 million.
Third quarter results for 2006 included $12 million of expense related to the summer weather hedge, which includes the $9 million payment to the counterparty as well as a reversal of $3 million in hedge income recognized in second quarter earnings. In 2005, no such expense related to the weather hedge occurred in the third quarter of the year, since the full $9 million payment to the counterparty was expensed in the second quarter due to historically hot weather experienced in June 2005. As a result, third quarter 2006 electric margins were $12 million lower than the same period in 2005 related to the effects of the weather hedges.
The 2006 summer weather hedge did not produce the results expected by Alliant Energy. While CDD have historically been highly correlated between Chicago and Alliant Energy’s service territory, this was not the case in 2006 as CDD were 16% above normal in Chicago during June-August, compared to 15% and (12%) in Madison and Cedar Rapids, respectively. Alliant Energy estimates this lack of correlation resulted in it incurring losses from the weather hedge that exceeded by approximately $6 million the positive impact on its demand from the warmer than normal weather conditions.
In addition to the impact of the weather hedge, Alliant Energy estimates the impact on demand compared to normal weather for July-August of 2006 and 2005 (i.e., the final two months of the period covered by the weather hedges) was $6 million and $3 million, respectively. Further, Alliant Energy estimates the impact on demand compared to normal weather for September 2006 and 2005 (such periods were not covered by a weather hedge) was ($6) million and $5 million, respectively. As a result, third quarter 2006 electric margins were $8 million lower than the same period in 2005 related to the impact of demand compared to normal weather. Refer to the table in Key Operating Statistics for further details on the net financial impacts of weather and the weather hedges.
The Public Service Commission of Wisconsin approved a settlement in the third quarter of 2006 related to Wisconsin Power and Light Company’s (WP&L) pending fuel-related rate case. WP&L recorded charges of approximately $0.03 per share in the third quarter of 2006 related to the terms of the settlement agreement. Improved recovery of fuel-related expenses at WP&L in the third quarter of 2006 compared to the same period in 2005 partially offset the lower electric margins for the quarter.
Excluding the nuclear-related variance in other operating expenses discussed above, operating expenses were slightly higher in the third quarter of 2006 compared to the same period in 2005. The impact of higher energy conservation and transmission and distribution expenses was partially offset by lower depreciation and amortization expense, primarily due to the implementation of new depreciation rates at IP&L effective January 1, 2006.
Continuing Operations – Non-regulated Operations
The decrease in earnings from Alliant Energy’s New Zealand investments was due primarily to the impact of changes in foreign currency exchange rates. The third quarter 2006 and 2005 results included foreign currency transaction (losses)/gains of ($0.08) and $0.01 per share, respectively. Alliant Energy sold its Brazil investments in the first quarter of 2006. Therefore, the results from Alliant Energy’s non-regulated businesses, excluding the 2005 Brazil asset valuation charge, decreased by $0.04 per share in the third quarter of 2006 when compared to the same period in 2005 given the income realized from Alliant Energy’s Brazil investments in 2005.
The “Other” non-regulated results included approximately $0.05 per share of income in the third quarter of 2005 related to an adjustment of a previous deferred income tax valuation allowance resulting from a change in Alliant Energy’s anticipated ability to utilize capital losses prior to their expiration.
Alliant Energy’s non-regulated earnings for the third quarter of 2006 also reflected an $8 million decrease in interest expense compared to the same period in 2005 as a result of the Company’s non-regulated debt reduction efforts.
Share Repurchase Program
In August 2006, Alliant Energy announced its intent to repurchase up to $200 million of its common stock by the end of 2007. Alliant Energy repurchased 2.9 million shares of the Company’s common stock for $105 million during the third quarter of 2006. The share repurchases were funded from available cash balances. Alliant Energy has issued 2.0 million shares of common stock in 2006 through September 30, largely under its equity incentive plans.
Asset Divestiture Update
Alliant Energy has entered into agreements for the sale of its interest in its three remaining generating facilities in China and all such sales are nearly complete. Alliant Energy also completed the sale of its water utility in South Beloit, Illinois in the third quarter of 2006. Alliant Energy also announced today it has entered into a sale and purchase agreement to sell its investments in New Zealand. Pursuant to the applicable accounting rules, the results from Alliant Energy’s New Zealand investments will continue to be reported in Alliant Energy’s earnings from continuing operations. Alliant Energy issued a separate news release yesterday regarding the New Zealand sale which provides additional details related to the pending sale. The Company is also in the process of divesting its investment in Laguna del Mar in Mexico and its electric and gas distribution properties in Illinois and expects to complete all of its planned divestitures in 2006 or early 2007.
Alliant Energy has updated its 2006 earnings guidance for earnings from continuing operations, excluding the gain on the pending sale of Alliant Energy’s New Zealand investments and debt repayment premiums, to $2.20-2.30 per share from $2.25-2.45 per share. Alliant Energy has also updated its 2006 earnings guidance for earnings from continuing operations from its utility business to $2.10-2.20 per share from $2.10-2.30 per share. Details of the current and prior guidance are as follows:
Utility business $2.10-2.20 $2.10-2.30
Non-regulated business, excluding
New Zealand gain and debt repayment
Transportation, RMT, Non-regulated
Generation, WindConnect(TM) and Other 0.09-0.12 0.10-0.14
Brazil exit costs/other (sold
in Q1 2006) (0.02) (0.02)-(0.04)
New Zealand (excluding gain on
pending sale) 0.03-0.07 0.08-0.12
Remaining interest expense
allocation/other (0.06)-(0.08) (0.06)-(0.08)
Parent company 0.04-0.06 0.03-0.06
Alliant Energy, excluding New Zealand
gain and debt repayment premiums 2.20-2.30 2.25-2.45
Gain on pending New Zealand sale 1.10-1.20 –
Debt repayment premiums (0.48) (0.48)
Alliant Energy, including New Zealand
gain and debt repayment premiums $2.87-2.97 $1.77-1.97
The guidance does not include any potential asset valuation charges that Alliant Energy may incur in the fourth quarter of 2006, the impact of certain non-cash mark-to-market adjustments, the impact of any future adjustments made to Alliant Energy’s deferred tax asset valuation allowances, the impact of any cumulative effects of changes in accounting principles or any gains/losses that may be realized from a possible sale of certain Alliant Energy investments, other than New Zealand, that would be reported in earnings from continuing operations. The guidance does include Alliant Energy’s assumptions for the impact of its share repurchase program on its 2006 results. Finally, the guidance also assumes that no businesses will be re-classified to or from “discontinued operations” in the fourth quarter of 2006.
Drivers for Alliant Energy’s earnings from continuing operations estimates include, but are not limited to:
— Normal weather conditions in its utility service territories
— Continuing economic development and sales growth in its utility
— Continuing cost controls and operational efficiencies
— Ability of its utility subsidiaries to recover their operating costs
and deferred expenditures, and to earn a reasonable rate of return in
current and future rate proceedings, as well as their ability to
recover purchased power, fuel and fuel-related costs through rates in
a timely manner
— Stable foreign exchange rates in New Zealand and the closing of the
pending sale in 2006
— No additional material permanent declines in the fair market value of,
or expected cash flows from, Alliant Energy’s investments
— Other stable business conditions
— Ability to utilize any tax capital losses generated to-date, and those
that may be generated in the future, before they expire