Alliant Energy Corp (LNT) — Q2 2016 Earnings Call Transcript

Good morning. I would like to thank all of you on the call and the webcast for joining us today. We appreciate your participation. With me here today are Pat Kampling, Chairman, President and Chief Executive Officer and Robert Durian, Vice President, Chief Accounting Officer and Treasurer; as well as other members of the Senior Management Team. Following prepared remarks by Pat and Robert, we will have time to take questions from the investment community. Tom is not on the call today, since he is on vacation with his family this week. We issued a news release last night announcing Alliant Energy's second quarter 2016 earnings and reaffirmed 2016 earnings guidance. This release, as well as supplemental slides that will be referenced during today's call, are available on the Investor page of our website at 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. At this point, I'll turn the call over to Pat.

Good morning and thank you for joining us for our second quarter 2016 earnings call. As Susan mentioned, Tom Hanson is on vacation with his children and grandchildren. So, Robert Durian and I will handle today's call. I will begin with an overview of our second quarter performance, then review the progress made and advancements in cleaner energy and creating a smarter energy infrastructure for our customers. I will then turn the call over to Robert to provide details on our second quarter financial results, as well as review the regulatory calendar. Earnings from continuing operations for the second quarter of 2016, when compared to 2015, increased by $0.03 per share, which includes the $0.02 positive margin impact from temperatures. The remaining difference was primarily a result of higher allowance refunds used during construction related to the Marshalltown Generating Station. We shared some exciting news last week as Governor Branstad and I announced our proposed $1 billion investment for additional wind generation in Iowa. As you recall, we had originally forecasted additional renewable investments in the second five years of our 10-year capital plan. This plan accelerates this investment in order to take advantage of the full benefit of the production tax credit extension. This means that the expected in-service dates of the new wind project will now be in 2019 and 2020. With this announcement, IPL filed an advanced rate-making principles application for RPU with the Iowa Utilities Board for fast approval to add owned and operated wind resources of up to 500 megawatts. A portion of the wind will likely be located near our existing Whispering Willow site in Franklin County, Iowa. We are also pursuing additional land options. We have requested a return on equity of 11.5%. Details of the filings may be found on Slide 2. As part of this filing, we have requested a temporary renewable energy rider. This rider would allow us to start recovering a return of and on the wind farm when they are placed in service, while we file a traditional rate case. The rider also allows our customers to immediately receive the financial benefit of the reduction tax credits along with the energy benefit of the wind generation produced. If the rider is approved, it's expected to remain in effect until the IUB's final decision and a future retail electric base rate case. We have requested that the IUB make a decision on this RPU application during the fourth quarter of this year to secure the full production tax credit extension level. The full production tax credits and estimated energy benefits would more than offset the return of and on the net investment and related O&M expenses, resulting in savings to customers over the life of the asset. The production tax credits will decrease by 20% if we are not able to initiate our investment until next year. We issued an RFP to several wind suppliers in late June and expect those responses in a few weeks. After we evaluate the responses, you will then have a better estimate of the total cost and timing of the capital expenditures for the proposed project. If this project is approved, we don't expect our 2016 to 2019 capital plan to change materially. We are finding that some of our planned capital projects are coming in below the original forecast, and we expect to reprioritize and in some instances delay certain other capital expenditures that have not yet begun. We will update our capital expenditure plan as part of our third quarter earnings release. We do not anticipate that these changes to our capital expenditure plan will cause a change in our long-term earnings growth rate projections of 5% to 7%. Renewable energy has been a meaningful part of our energy resources. We currently have 568 megawatts of owned wind generation and anticipate supplementing that with approximately 770 megawatts via renewable purchase power agreements. The proposed Iowa investment with almost 1,200 owned and operated wind generation places Alliant Energy as one of the leading U.S. electric utilities with owned wind energy for our customers. In addition to the RPU request of 500 megawatts of new wind investments, we anticipate filing a restructuring request with the IUB, possibly this quarter, to transfer the Franklin County wind farm from Alliant Energy Resources to IPL. The transfer will be at the lower of cost or market. Therefore, if our application is approved by both the IUB and FERC, we would expect to take a non-recurring pre-tax charge of approximately half of Franklin County's net book value. We are also evaluating additional wind energy purchases and future investments for Wisconsin customers. This will add economic and stable energy to our fuel cost and allow us to offset market purchases of energy. Solar generation is also an expanding part of our renewable portfolio. We continue gathering valuable experience on how best to integrate solar in a cost-effective manner into our electric system. At our Madison headquarters, over 1,300 solar panels are now generating power for the building. Wisconsin's largest solar farm on our Rock River landfill, which is adjacent to Riverside, is also now generating power. In Iowa, construction is quickly progressing at the Indian Creek Nature Center in Cedar Rapids. We will own and operate the solar panels. A group of these, as well as our recent announcement of the solar collaboration with the City of Dubuque, are important in bringing renewable sources closer to our customers and working with them to create a sustainable energy future. Next week, we will issue our first corporate sustainability report, which is an expansion of our past environmental report. The report highlights that we have made significant reductions in NOx, SOx, and mercury emissions. The report also highlights that carbon emissions continue to decrease due to additional renewable energy, increased use of efficient natural gas-fired generation, and the transition of our coal-generation fleet. Therefore, we expect our carbon emissions to be reduced by 40% by 2030 from 2005 levels. Now let me briefly talk about our 2016 construction activities with forecast investments of over $1.1 billion, with almost half of that focused on our distribution system. Approximately $300 million is being invested in our electric distribution system to make it more robust, reliable, and resilient. This year's plan also includes approximately $200 million for improvements and expansion of our natural gas distribution business and several prior years trimming. As you are aware, the Public Service Commission of Wisconsin approved the certificate of public convenience and necessity for the rural side expansion earlier this year. We expect the asset on the new Riverside units to be approximately 700 megawatts, and the total anticipated capital expenditures remains at approximately $700 million excluding AAPC and transmission. Riverside is expected to be supplying energy to our customers by early 2020. AECOM has been selected to perform the engineering, procurement, and construction, and the combustion turbines selected are GE 27s, some of the most efficient units in production. In Iowa, the Marshalltown natural gas-fired generating facility is progressing well and is approximately 85% complete. Total capital expenditures for this project are anticipated to be approximately $700 million excluding AFUDC and transmission. Marshalltown is on time and on budget and is expected to go in service in the spring of 2017. Riverside and Emery, our two primary existing gas generating facilities, continue to experience increased dispatch when compared to prior years. During the first half of 2016, Riverside and Emery's capacity factors were approximately double their five-year average. The ability to operate natural gas-fired generation during periods of low gas prices, and as a flexible resource during periods of low wind or cloudy days, demonstrates the importance of this resource in balancing our energy mix. Moving on to our existing coal fleet, we're nearing the end of our successful construction program to review emissions at our largest facilities. The Edgewater Unit 5 scrubber and baghouse project was completed on time and below budget. Construction of the Columbia Unit 2 SCR is approximately 18% complete. WPL's total capital expenditure plan for this project is anticipated to be approximately $50 million, and it is expected to go in service in 2018. There are several new regulations on the horizon regarding ash plants, bottom ash, and water usage at our coal-fired generating station. We have developed a plan and have begun to initiate the necessary work to comply with these rules and regulations. Ash plant closures and bottom ash conversion projects are underway in Iowa, as that is part of IPL's filed commission plan and budget. In Wisconsin, PSCW recently approved our application for bottom ash conversion at Edgewater 5. The total expenditures for our ash and water programs are anticipated to exceed $200 million for the next seven years. The rate base estimates provided in our Investor Relations presentation include near-term expenditures for this program. Over the past few years, we have been excited by our plan for the orderly transition of our generating fleet to serve our customers in an economic manner. We have made progress in building a generation portfolio that has lower emissions, greater fuel diversity, and is more cost-efficient. The transition includes increasing levels of natural gas-fired renewable energy generation, lower levels of coal generation through retirements and fuel switching, installing emission controls and performance upgrades at our largest coal-fired facilities. We have also initiated work on water and ash programs at our facilities to comply with expected future requirements. I am proud to say we have accomplished all of this while holding electric base rates flat for both IPL and WPL since 2011. Let me summarize our key messages. We aim to deliver on 2016'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 targeted 2016 dividend is increased by 7% over 2015 dividends. The central execution of our major construction projects includes completing projects on time and at or below budget and in a safe manner. We will be working collaboratively with our customers, regulators, consumer advocates, environmental groups, neighboring utilities, and communities. We will reshape the organization to be leaner and faster while focusing on serving our customers and being good partners in our communities, and we will continue to manage the Company to balance capital investment, operational and financial discipline, and cost-effectiveness for our customers. Thank you for your interest in Alliant Energy, and I will now turn the call over to Robert.

A summary of the quarter-over-quarter earnings drivers may be found on Slides 3, 4, and 5. Consistent with the growth assumed in our 2016 earnings guidance, retail electric temperature normalized sales for Iowa and Wisconsin increased approximately 1% between the first half of 2015 and the first half of 2016, excluding Minnesota. The commercial and industrial segment continues to be the largest sales growth driver year-over-year. The second quarter 2016 results included adjustments to our ATC earnings to reflect an anticipated decision related to the second complaint filed regarding the return on equity level charged by transmission owners and MISO. We reserved $0.01 per share in the second quarter of 2016 reflecting an anticipated all-in ROE of 10.2%, a reduction of 200 basis points from ATC's current authorized ROE of 12.2%. This reserve was triggered by the FERC Administrative Law Judge's initial decision on the second complaint issued in June 2016. We expect a FERC decision by the end of this year for the first complaint, and within the first quarter of 2017 for the second complaint. Now let’s briefly review our 2016 guidance. In November, we issued our consolidated 2016 earnings guidance range of $1.80 to $1.95 per share on a full stock split basis. The key drivers for the 5% growth in earnings relate to infrastructure investment such as the emission control equipment at Edgewater 5 and Lansing, and higher AFUDC related to the construction of the Marshalltown generating station. The earnings guidance is based upon the impacts of IPL and WPL's previously announced retail electric base rate settlements. In 2016, IPL expects to cut its customer's bill by approximately $10 million. By comparison, the billing credits in 2015 were $24 million. IPL also expects to provide tax benefit rider billing credits to electric and gas customers of approximately $62 million in 2016 compared to $72 million in 2015. As in prior years, those tax benefit riders may have a quarterly timing impact but are not anticipated to impact full-year results. The WPL settlement for the 2016 test period reflected electric rate-based growth for the Edgewater scrubber and baghouse, which was placed in service this year. The increase in revenue requirements in 2016 for this and other rate base additions was completely offset by lower energy efficiency cost recovery amortizations. In addition, Slide 6 is provided to assist you in modeling 2016 effective tax rates for IPL, WPL, and AEC. Turning to our financing plans, our current forecast incorporates the extension of bonus depreciation deductions through 2019. As a result of the five-year extension to bonus depreciation, Alliant Energy currently does not expect to make any significant federal income tax payments through 2021. Additional tax payment reductions are expected after 2021 with the proposed wind investment at IPL. This forecast is based on current federal net operating losses and the credit carry-forward positions, as well as future amounts of bonus depreciation expected to be taken on federal income tax returns over the next five years. Cash flows from operations are expected to be strong given the earnings generated by the business. We believe that with our strong cash flows and financing plan, we will maintain our targeted liquidity and capitalization ratios, as well as high-quality credit ratings. Our 2016 financing plan assumes we'll issue approximately $25 million of new common equity through our shareholder direct plan. The 2016 financing plan also anticipates issuing long-term debt up to $300 million at IPL and up to $500 million at our non-regulated businesses. $310 million of such proceeds are expected to be used to refinance the maturity of term loans at our Parent and non-regulated businesses. As we look beyond 2016, our equity needs will be driven by the Riverside expansion project and a requested 500 megawatt wind investment at IPL. Our forecast assumes that the capital expenditures for 2017 will be financed primarily by a combination of debt and new common equity. Our 2017 financing plan currently assumes issuing up to $150 million of new common equity. We may adjust our financing plans as deemed prudent if market conditions warrant and as our debt and equity needs continue to be reassessed. We have several current and planned regulatory dockets of note for 2016 and 2017, which we have summarized on Slide 7. For IPL, our permit application for the Clinton Natural Gas pipeline has been approved. During the rest of this year, we'll be supporting the filings to add up to 500 megawatts of wind in Iowa, and later this quarter, we plan to file a restructuring request to transfer the Franklin County wind farm from Alliant Energy Resources to IPL. We anticipate receiving decisions on both of these filings prior to our Iowa retail electric filing anticipated in April 2017. We expect to file the next Iowa retail gas base rate cases in the second quarter of 2017. For WPL, we filed 2017 and 2018 retail electric and gas base rate cases, which resulted from collaboration with the Citizens Utility Board, the Wisconsin Industrial Energy Group, and PSCW staff. On Slide 8, we have provided a procedural schedule and the key financial elements of this retail electric and gas increase proposal. This filing includes new pricing options, as well as an increase in the fixed charge component of charges. We anticipate a decision from the PSCW by the end of this year, with new rates effective January 1, 2017. Finally, I would like to update you on the information we plan to share during our next two quarterly earnings calls. Typically, during the third quarter, we provide our following year's earnings guidance and dividend target, as well as updated capital expenditures and rate base forecast. Due to our planned filing of the IPL electric base rate case in 2017, we anticipate issuing 2017 earnings guidance during the year-end call next February. During our third call in November of this year, we expect to provide our 2017 dividend target, update capital expenditure forecast, and update rate base forecast. We very much appreciate your continued support of our company. At this time, I will turn the call back over to the operator to facilitate the question-and-answer session.

Hey good morning everyone. I didn’t know Tom was on vacation. I actually thought he was in the office.

We're not sure if this is a real vacation for him with all the little kids he's with right now, just to be honest.

First question, a quick one, on Franklin I believe you said it's the lower of cost to market, so that would likely result in a charge in the next quarter. Are you able to give what the book value is, your expectation of the sell price, and is there any precedent of a transfer like that in Iowa going from an unregulated subsidiary to a regulated one within the same Parent company?

You asked a lot of questions there. Let me take them in order, and Robert chime in when needed. We actually have on the investment deck on Slide 29 where we have the renewable energy win slide, and we've listed the book value of Franklin County, which was approximately $130 million at year end. So, at the time the transfer is completed, we will probably check the impairment. We’re looking into not receiving full approval until early next year, so that’s something we’ll be evaluating over the next several months. You asked about precedent. As you know, we’ve done this on the Wisconsin side already, so we've been working with the parties in Iowa to make sure they understand exactly what we’ll be asking for at that point. I don't expect to have any large issues with this, and again the rules of that transfer are at the lower cost of market, so we'll be following those rules absolutely as well.

That's helpful. Regarding the new wind project, your neighbors have also announced a significant investment in wind in the state. Have you discussed the possibility of collaborating, or do you know if regulators are viewing the proposals in a similar, competitive, or independent manner? How should we consider the relationship between these two projects?

They are two separate dockets, as you are well aware. MidAm is a little bit ahead of us, so I would consider them two separate dockets. However, we are partners with MidAm in several joint coal units, and we have a great relationship with them. But working with the state, as you can tell from our announcement, the state is very excited about both our investment and theirs, so we're working with the state jointly to ensure that all these wind projects are delivered on time for our customers. There is a strong cooperative effort between the two of us, but again, they are different dockets.

Got it. Is there any concern about a lack of enough resources, whether it’s equipment, labor, or land?

No, not at all. Prior to making the filing, we issued the RFP to the vendors just to ensure that we still have supply available. We haven't received the bids back yet, but discussions with the vendors are going very well. As you are aware, we actually have the land around Franklin County already. So, we're engaging with the townspeople, and they are very enthusiastic about us bringing more wind to their county. Therefore, we do not anticipate any issues with land or resources in Iowa for either utility as we complete these large projects.

Very good. Then my last one. You mentioned that you are not expecting any chances for long-term earning power. I'm a little surprised by that just because if this is going to lower your O&Ms and avoid some purchase power, I would think that would create some headroom. I know customer bill affordability is your, if not top concern, one of your top concerns. Shouldn't that create some headroom for at least some incremental CapEx flow with your prior guidance?

No, this is really too early to provide a meaningful answer to that. We need to step back and look at our multi-year plan and our rate case planning. But right now, we're targeting our capital plan over the next few years. So, we are targeting that 5% to 7%.

Okay. Great. Thank you for all the details.

Good Morning. Can you just tell us what the Franklin County wind farm EPS contribution is in your 2016 guidance?

I'll turn it over to Robert.

Right now, we expect about a $0.02 to $0.03 loss for 2016, which is pretty consistent with what we've seen over the past few years for Franklin County.

Okay great. And I realize you guys are looking to maintain the five-year capital budget, but could there potentially be changes in the annual spend, albeit coming up with the same total five-year budgeted amount?

Once we receive the bids from the wind vendors, we anticipate an increase in capital expenditures for 2018 and 2019 compared to our current projections. This is what we are currently addressing. Brian, it's too early to provide specific annual figures, but we will discuss this during our third quarter call, primarily at EEI. We are focused on understanding the capital and financing plan that supports our capital plan.

Then would you expect similar intervenors in your Iowa wind filing similar to the intervenors in MidAm's filing and those that were part of the settlement agreement?

That's a good question. We've been very transparent on this filing in Iowa, as you can talk from all the attention we've gotten on it. We just filed last week. It's too early to tell exactly what other parties will be part of it. We'll monitor that and, as we've done in other cases, we'll ensure we're very transparent and collaborative with anybody that wants more details on the case.

Let me ask you maybe a different way. You have large industrial customers that are supportive of a greener overall footprint in their operations.

Absolutely. Most of our large customers want to work with us on their sustainability goals as well. So, we've done a lot of outreach prior to estimating this filing with our large industrial customers. Therefore, I would expect that the case would not have a lot of controversy. But it's too early to say, since we just filed it last week.

Hi, thanks. Good morning. Regarding Franklin, do you see a potential opportunity for repowering in the future, or is this primarily to increase the rate base and move it from its current status?

It's really just a transfer between the utilities. However, I think all of us that have wind farms are considering potential repowering opportunities down the road, but that is way off and not an initial consideration. This wind farm is only a couple of years old and is performing admirably.

Got you. And then, do you guys have any other PPAs for wind currently where you would potentially look at repowering considering the IRS guidelines, and would you bring them in-house?

I would say that, first, we're focusing on our own new build and the ones that we currently own. We are supplementing as we've done historically. We're going to have another existing 770 megawatts of additional PPAs. We actually like the balance of owned wind and PPA wind. This should help stabilize costs for our customers. However, we are not looking at any of that right now, but there is definitely an opportunity to consider that down the road.

With no more questions, this concludes our call. A replay will be available through August 9, 2016 at 888-203-1112 for U.S. & 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 prepared remarks made on the call will be available on the Investor sections of the company's website later today. Thank you for your continued support of Alliant Energy and feel free to contact me with any follow-up questions.