Alliant Energy Corp (LNT) — Q3 2015 Earnings Call Transcript

Good morning. I would like to thank you for joining us today via the call and the webcast. We appreciate your participation. With me here today are Pat Kampling, Chairman, President and Chief Executive Officer; Tom Hanson, Senior Vice President and CFO; and Robert Durian, Vice President, Chief Accounting Officer and Controller; along with other members of the senior management team. Following prepared remarks by Pat and Tom, we will have time to take questions from the investment community. We issued a news release last night announcing Alliant Energy's third quarter 2015 earnings, narrowing 2015 earnings guidance. I’m providing 2015 through 2020 forward capital expenditure guidance. We also issued earnings guidance and the common stock dividend target for 2016. The press release, as well as supplemental slides that will be referenced during today’s call, are available on the Investor Page of our website at www.alliantenergy.com. 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 last night and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements. In addition, this presentation contains non-GAAP financial measures. The reconciliation between non-GAAP and GAAP measures is provided in the supplemental slides, which are available on our website at www.alliantenergy.com. At this point, I’ll turn the call over to Pat.

Good morning, and thank you for joining us today. Veterans Day is just a few days away. I would like to take a moment and pay tribute to the approximately 400 proud veterans who work here at Alliant Energy and to those veterans who are on the call with us today. We thank you for your service to our country and for protecting our freedoms. Enjoy your special day. Yesterday we issued press releases that included our third quarter and year-to-date financial results, our revised 2015 earnings guidance range. For 2016, our earnings guidance and targeted common stock dividend. That release also provided updated detailed annual capital expenditure plans through 2019 and our capital expenditure total for 2020 to 2024. Tom will later provide details of the quarter, but I am pleased to report that we delivered another solid quarter. Since temperatures were close to normal during the third quarter, we had no impact on our year-to-date earnings. Now, regarding our 2015 earnings guidance, we are including an adjustment to our ATC earnings to reflect the anticipated lower ROE. ATC's current authorized ROE is 12.2%. We are reserving $0.03 per share for the year, reflecting an anticipated ROE of 11.5%. Therefore, we are changing the midpoint of this year’s earnings guidance range from $3.60 per share to $3.57 per share. Looking at next year, the midpoint of our guidance for 2016 is $3.75 per share, a 5% increase from our projected 2015 guidance, as detailed on Slide number 2. This increase reflects a forecast of a 1% increase in customer sales and earnings on capital additions. Our long-term earnings growth objective continues to be 5% to 7%, supported by our robust capital expenditure plan, modest sales growth, and constructive regulatory outcomes. The ability to earn our authorized returns on rate base additions of book utilities was incorporated in both retail electric base rate settlements. Those settlements have unique treatment that allows us to reach earnings on an increasing rate base while keeping customer base rates flat. The IPL settlement utilized the historic DAEC capacity payments that are included in base rates to more than offset rate-based growth and other changes in revenue requirements. This allows us to refund the difference to customers, including a $25 million refund in 2015 and a $10 million refund in 2016. The WPL settlement utilized previously recovered energy efficiency revenues and also increases in revenue requirements, including the return on rate base additions. A balance of approximately $32 million will be amortized in 2016, and the amortization for this year is expected to be $80 million. To summarize, both creative retail rate case settlements allow us to earn on our increasing rate base while keeping retail electric base rates stable through 2016, which is the last year of the settlement. Yesterday we also announced a 7% increase in our targeted 2016 common dividend level to $2.35 per share from our current annual dividend of $2.20 per share. By 2016, the dividend target payout ratio is 62.5%, which is consistent with our long-term targeted dividend payout ratio of 60% to 70% of consolidated earnings. We issued an updated capital expenditure plan for 2015 to 2019, totaling $5.8 billion, as shown on Slide 3. In addition, we have provided a walk from the previous 2015 to 2018 capital expenditure plan to our current plan shown on Slide number 4. As you can see, the changes in our forecasted 2015 to 2018 capital expenditure plan are driven primarily by additional investments in our electric and gas distribution systems, along with a $50 million reduction for the proposed Riverside Energy Center expansion in Wisconsin. The lower cost estimate of $680 million to $720 million, excluding AFUDC and transmission, was filed in supplemental testimony with the PSCW yesterday. On Slide 5, we have provided a 10-year view of our forecasted capital expenditures. As you can see, we are planning additional new generation needs beyond 2019, which we anticipate will include gas, wind, and other renewable resources. The additional renewables in our plan are economical for our customer energy needs as we continue to retire old generating facilities. While reviewing Slide 5, it is also important to note that approximately 45% of the 10-year capital plan will be spent to enhance our electric and gas distribution systems to meet customers' changing and growing needs. Investments in our gas distribution system are becoming more significant, as evidenced by our recently completed $15 million project in Wisconsin, and we expect to commence a $65 million project in Iowa. Also, for your convenience, we have already posted on our website the EEI Investor presentation that details the separated WPL and IPL updated capital expenditures through 2019, as well as updated rate-based estimates for 2014 through 2018. Now, let me brief you on our current construction activities. As year-end approaches, this has certainly been one of our busiest construction years. I must thank the employees and approximately 800 contract workers on our properties for working safely and for their assistance on these important projects. I am extremely proud of the achievements we have made and continue to make in transitioning the environmental profile of our fossil generation fleet. We plan to reduce NOx emissions by approximately 80% and SO2 and mercury emissions by approximately 90% by 2020, and we will continue to plan for a reduced carbon future. In Wisconsin, the installation of the scrubber and baghouse at Edgewater Unit 5 is approximately 75% complete and is expected to be in service in the second quarter of 2016. We anticipate this project will come in approximately 10% below budget. We have recently signed a contract with a joint venture between Graycor industrial contractors and Sargent & Lundy to fund the engineering, procurement, and construction of the Columbia Unit 2 SCR. The construction is scheduled to start in the second quarter of 2016, and WPL's share of the expenditure for this project is approximately $50 million. We have an excellent track record of executing well on these large construction projects. I am very pleased that Power Magazine has named two of our power generating stations as top plants for 2015. This recognition of IPL's thermal generating station and WPL's Columbia Energy Center reflects our effective execution on these major investments and our dedication to cleaner and more efficient operations. The construction of IPL's 650 megawatt combined cycle natural gas-fired Marshalltown generating station is progressing well. The project is approximately 65% complete and is expected to be in service in the second quarter of 2017. KBR is the engineering, procurement, and construction contractor for this project, which includes Siemens’ combustion turbine technology. In 2013, WPL announced that it would retire several older coal facilities and natural gas peakers. These retirements begin next month at Nelson Dewey and Unit 3. When WPL's prime retirements are completed, the forecasted accredited capacity loss will be nearly 700 megawatts. As a consequence, WPL evaluated a wide range of alternatives to meet long-term energy and capacity needs for its customers. In 2014, WPL issued an RFP for market-based options. After evaluating all of our options, we concluded that the Riverside Energy Center expansion with a new approximately 650 megawatt highly efficient natural gas generating facility was in the best long-term interest of our customers. This past April, WPL applied for a certificate of public convenience and necessity (CPCN) with the Public Service Commission of Wisconsin. The CPCN is progressing, and in accordance with its procedural schedule, on September 22, we filed our direct testimony and yesterday filed supplemental testimony with updated cost projections. Intervenor and Staff testimony will be filed by November 13, and a public hearing will be conducted on November 17. Technical hearings are scheduled for December 21, and we anticipate the commission to issue a decision on the Riverside Expansion by May 2016. The proposed Riverside expansion includes an approximate 2 megawatt solar installation on the property. Adjacent to Riverside, on our Rock River landfill, Hanwha Q Cells is currently constructing the largest solar plant in Wisconsin at 2.25 megawatts, and we will purchase the power from them over the next 10 years. At our Madison general office, the installation of over 1,000 solar panels from multiple manufacturers with 11 different types of solar modules is well underway. For this project, we have partnered with the Electric Power Research Institute (EPRI) to collect data and make it available to others. We also have several other solar projects under development from which we anticipate gaining valuable experience on how to best integrate solar in a cost-effective manner in our systems. Solar projects in the developmental stage include owning and operating solar panels at the Indian Creek Nature Center in Cedar Rapids, Iowa, and our recently issued RFP focused on a solar project between 1 and 10 megawatts within our Iowa service territory. The projects resulting from the RFP will increase our system-wide solar generation by 50%. Last month, the EPA published its final rules regarding carbon emissions from electric generating stations. We understand this is just one more step that will be a long process that includes legal challenges and the development of compliance plans. As we develop strategies, we will continue to take the approach of doing what’s best for our customers and the environment. We are fortunate to operate in a state that has a long history of energy efficiency programs, environmental stewardship, and support for renewable energy. There’s a certain excitement as we work to transform into the company our customers need not only now but well into the future. A major improvement to our customer experience is happening as we went live with our new customer care and billing systems for Wisconsin customers several weeks ago. We plan to go live with Iowa customers in early 2016. A $110 million investment replaces vintage mainframe systems from the 1980s, making communications with our customers more convenient and timely. We have already accomplished a great deal as a company in transitioning to a cleaner and more modern energy system. I want to thank many of our employees for their creativity in finding cost-effective solutions to serve our customers well. Let me summarize the key messages for today. We had a solid first three quarters of the year and are well-positioned to deliver on this year’s financial and operating objectives. Our plan continues to provide for 5% to 7% earnings growth and a 60% to 70% common dividend payout target. Our target 2016 dividend has increased by 7% over the 2015 target dividend. Successful execution of our major construction projects includes completing projects on time and below budget in a safe manner. We work with our regulators, consumer advocates, environmental groups, and customers in a collaborative manner. We are shaping our organization to be leaner and faster while keeping our focus on serving our customers and being good partners in the community. We will continue to manage the company to strike a balance between capital investment, operational and financial discipline, and cost impacts on customers. Thank you for your interest in Alliant Energy, and I will now turn the call over to Tom.

Good morning everyone. We released third quarter earnings last evening, with our non-GAAP earnings from continuing operations at $1.63 per share and our GAAP earnings from continuing operations at $1.59 per share. The non-GAAP to GAAP difference is due to a $0.04 per share charge resulting from approximately 2% of employees accepting voluntary separation packages as we continue focusing on effectively managing costs for our customers. The 2015 third quarter non-GAAP earnings are $0.23 higher than the third quarter of 2014, primarily due to lower retail electric customer billing credits at IPL, higher electric sales, and lower energy efficiency cost recovery amortization at WPL. The higher quarter-over-quarter EPS was partially offset by higher electric transmission service expenses at WPL and the dilution impact of shares issued in 2015. Comparisons between the third quarter of 2015 and 2014 earnings per share are detailed on Slides 6, 7, and 8. For the first six months of this year, we experienced virtually no temperature normalized retail sales growth. We are pleased that the third quarter brought an estimated $0.06 per share increase in earnings resulting from higher temperature normalized sales. Some of the growth experienced in the third quarter of 2015 for residential and commercial has been due to an earlier fall grain harvest when compared to 2014. Of the retail sectors, industrial continues to be the largest sales growth driver year-over-year. Quarter-over-quarter, we have recognized an earnings increase of $0.05 per share from higher sales due to temperatures, as the third quarter of 2014 had approximately 20% fewer cooling degree days compared to normal. However, for the first three quarters of 2015, temperatures were close to normal. Year-to-date, non-GAAP earnings are tracking in line with the 2015 earnings guidance range, comparing non-GAAP earnings from continuing operations for the first nine months of 2015 versus 2014; earnings are up 8% year-over-year. Drivers of the differences between the statutory tax rates for IPL, WP&L, and AEC and the actual forecasting effect of the tax rates for 2015 and 2014 are profiled on Slide 9. Now let’s review our 2016 guidance. Last evening we issued our consolidated 2016 guidance range of $3.60 to $3.90 earnings per share. A walk on the midpoints of the 2015 to 2016 estimated guidance range is shown on Slide 10. The key drivers for the 5% growth in earnings relate to infrastructure investments, including higher AFUDC related to the construction of the Marshalltown generating station. The 2016 guidance range assumes normal weather and modest retail sales increases of approximately 1% for IPL and WP&L when compared to 2015. The earnings guidance is also based upon the impact of IPL's and WP&L's previously announced retail electric base rate settlements. The IPL settlement reflected rate-based growth primarily from placing the Lansing scrubber in service in 2015 and the Ottumwa baghouse scrubber and performance improvement service in 2014. The increase in revenue requirements related to rate base additions is offset by the elimination of DAEC purchase power capacity payments. In 2016, IPL expects to credit customer bills by approximately $10 million. By comparison, the billing credits in 2015 are expected to be approximately $25 million. During 2016, IPL expects to provide tax benefit billing credits to electric and gas customers totaling approximately $62 million when compared to $72 million in 2015. As in prior years, the tax benefit riders have a quarterly timing impact, but are not anticipated to impact full-year 2015 and 2016 results. The WP&L settlement reflected electric rate base growth for the Edgewater unit 5 baghouse projected to be placed in service in 2016. The increase in revenue requirements in 2016 for these and other rate base additions will be completely offset by lower energy efficiency cost recovery amortizations. Included in WP&L’s rate settlement is an increase in transmission costs primarily related to the anticipated allocation of SSR costs. As a result of a third quarter issue after the settlement, the amount of the transmission costs billed to WP&L in 2016 will be lower than what was reflected in the settlement. Since the PSCW approved escrow accounting treatment for the transmission costs, the difference between the actual cost billed to WP&L and those reflected in the settlement will accumulate in a regulatory liability. We estimate that this regulatory liability will have a balance of approximately $35 million by the end of 2016. We view this regulatory liability as another mechanism we can use to minimize future rate increases for Wisconsin retail electric customers. Retirement plan expense is currently expected to be approximately $0.03 per share higher in 2016, largely due to lower than expected asset returns forecasted for 2015. These amounts will be updated at year-end 2015 when determining the actual 2016 plan expense. Given the changes expected in income tax expense in 2016, Slide 11 has been provided to assist you in modeling the forecasted 2016 effective tax rates for IPL, WP&L, and AEC. Turning to our financing plans, cash flows from operations are expected to be strong given the earnings generated by the business. We also expect to benefit as we do not anticipate making any material federal income tax payments in 2016. These strong cash flows will be partially reduced by credits to customer bills in accordance with IPL’s tax benefit riders and IPL’s customer billing credit resulting from the settlement. We believe that with our strong cash flows and financing plans we will maintain our target liquidity and capitalization ratios as well as high-quality credit ratings. Our 2016 financing plan assumes we will be issuing approximately $25 million of new common equity through our shareowner direct plan. The 2016 financing plan also anticipates issuing long-term debt including up to $300 million at IPL and up to $310 million at the parent and Alliant Energy Resources. The $310 million of proceeds at the parent and Alliant Energy Resources are expected to be used to refinance maturing term loans. We may adjust our plans as deemed prudent if market conditions warrant and as our debt and equity needs continue to be reassessed. As we look beyond 2016, our equity needs will be driven by the proposed Riverside expansion project. Our forecast assumes that the capital expenditures for the Riverside expansion in 2017 and 2018 will be financed primarily by a combination of debt and equity. Our current financing forecast assumes no extension of bonus depreciation deductions. Under this assumption, Alliant Energy will begin making modest federal tax payments starting in 2017 and will continue to use net operating losses for the next two years as offsets to federal taxable income. We have several current and planned regulatory dockets of note for the rest of 2015, 2016, and 2017, which we have summarized on Slide 12. Later this year, we anticipate a decision from the PSCW on the 2016 fuel monitoring level. Next year, we anticipate a decision on the Wisconsin Riverside expansion proposal and on the Iowa natural gas pipeline. In 2016, we plan to file an emissions plan budget in Iowa and the Wisconsin retail electric and gas base case per rates for the years 2017 and 2018. The next Iowa retail electric and gas base rate cases are expected to be filed in the second quarter of 2017. We very much appreciate your continued support of our company and look forward to meeting with you at EEI. The slides to be discussed at EEI are posted on our website as we do with all of our investor relations conference slides. At this time, I will turn the call back over to the operator to facilitate the question-and-answer session.

Good morning guys. First question is on the charge for voluntary employee separation. What does that impact on? How is that going to impact O&M going forward?

That will be a reduction to O&M going forward, and that's reflected in our forecast in terms of 2016 guidance.

And what is the forecast for O&M next year?

We are assuming that it will be about a 2% increase now, recognizing that this excludes the normal energy efficiency costs as well as any of the regulatory amortization that flows through O&M as well.

Got it. Next, a couple of questions on Riverside. First, in terms of the CapEx you laid out, I see that you lowered it for next year spending by that $95 million. Can you give a little more detail on that? Is that assuming a little bit of a delay when the construction begins?

No, not at all. Now that we are getting bids from the contractors, this is the timing of the bids, the cash flow that they are laying out. We not only changed the total number, but we changed the timing of the payments.

Okay. The total number, if I heard you correctly, was only down about $20 million, is that right?

No, it's down. If it goes from mid-point to mid-point, it's down $50 million.

Okay. Then next question I have is with the potential for PTA instead of Riverside. If Riverside were to be either delayed or canceled, could you talk about how you might be able to backfill some of that spending in terms of what might go in and how soon you will be able to show those results?

Yes, Andrew, it's a little preliminary first to give a backup for capital for Riverside right now. It would be honest to tell you though, for 2016 it would be tough to fill the capital that we have laid out in 2016, but we’ll discuss as we get further into the year in 2016 what the backup could possibly be.

Okay. Thank you very much. I’ll let other people ask questions.

Good morning.

Good morning, Brian.

Just in terms of the 2016 guidance, what kind of earned ROE are you seeing at IPL and WP&L, maybe at the mid-point?

We are assuming that we would earn our authorized returns in both jurisdictions.

Okay. So what gets you to the high end of the range?

The high end would be if sales are higher than we expect. We currently expect a 1% increase in sales, but if they come in higher, it would definitely bring us to the high end of the range.

Okay. And then as we look into 2017, Marshalltown will be added base rates. If I believe, correct me if I am wrong, but that’s the allowed ROEs of 11.4%. So I would imagine that your earned ROE in 2017 will be enhanced relative to the earned ROE assumption in 2016. Is that the way to look at it?

Brian, so the allowed ROE for Marshalltown is 11%, 11.0%.

Okay.

But as we go through internal and final rates, you will see our earned returns increase in Iowa.

Okay, great. Thank you very much.

With no more questions, this concludes our call. A replay will be available through November 13, 2015, at 888-203-1112 for U.S. and Canada, or 719-457-0820 for international. Callers should reference conference ID 8244179. In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available on the Investors section of the company's website later today. We thank you for your continued support of Alliant Energy, and feel free to contact me with any follow-up questions.