Alliant Energy Corporation (LNT) Q2 2013 Earnings Report, Transcript and Summary

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the call over to your host, Susan Gille, Manager of Investor Relations at Alliant Energy.

Good morning. I would like to thank all of you on the call and on the webcast for joining us today. 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, Controller and Chief Accounting Officer, as well as 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 this morning announcing Alliant Energy's second quarter 2013 earnings and reaffirmed 2013 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 www.alliantenergy.com. Before we begin, I need to remind you 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 this morning 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 are 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. We have had another good quarter. We continue to have solid earnings, constructive regulatory decisions, good progress on our construction projects and high customer satisfaction. Alliant Energy customers again ranked us high in the J.D. Power and Associates 2013 Electric Utility Residential Customer Satisfaction Study. We remain on the top quartile in the Midwest large segment, and our overall satisfaction score continues to improve. We are very proud of this J.D. Power recognition, and it is a tribute to all of our dedicated men and women that provide exceptional customer service every day. Pardon me. On the regulatory front, we recently have had several positive developments. First, we received a good order at FERC addressing the complaint IPL filed in 2012 as it relates to who should pay for network upgrade cost driven by generator interconnects in our IPL service territory. We challenged ITC Midwest MISO Attachment FF, which allows generator owners to receive 100% reimbursement of these costs from ITC Midwest. While the new generators received favorable treatment, the ITC cost associated with these upgrades are passed through to our customers through higher revenue requirements. In Iowa and Minnesota, customers of the other utilities are not responsible for subsidizing network upgrades driven by generator interconnections in their service territories. With this FERC decision, our IPL customers will be treated the same as the other customers in Iowa and Minnesota. The network upgrade costs already incurred are not insignificant. The revenue requirement included in IPL's customer rates for 2013 is about $25 million higher given the 100% reimbursement policy as compared to the standard MISO tariff. The FERC order does require MISO to revise the ITC Midwest FF tariff to conform with the standard MISO Attachment FF tariff. The new reimbursement policy will be in effect for all generator interconnect agreements executed or filed with FERC after July 18, 2013. As typical with all orders issued by FERC, there is a 30-day window for intervenors to seek a rehearing and/or stay. It is difficult to predict when this order will be final, given we are still in the 30-day window. Once the order is final, we will evaluate any potential changes to the rate base associated with future transmission projects and related capital expenditures. I am also pleased to report that last week, IPL reached a partial settlement with the Office of Consumer Advocate and other interested parties in our 5-year energy efficiency plan for years 2014 through 2018. This partial settlement agreement is consistent with our goal of working closely with interested stakeholders to obtain fair and timely regulatory outcomes. Our plan includes spending approximately $400 million over the 5-year period for electric and gas energy efficiency programs in Iowa. The planned spending and energy efficiency savings are relatively the same as IPL's previous 5-year plan. The IUB is expected to make a decision on the plan by the end of the year, and the expenses will flow through IPL's energy efficiency cost recovery rider. As we discussed in our first quarter call in April, Alliance Energy's Wisconsin subsidiary, WP&L, reached a settlement with the EPA and the Sierra Club, which was approved by the U.S. district court in June. The terms of the settlement are consistent with WPL's energy resource plan announced in 2012, and a majority of their emissions control are currently under construction or completed. The SCR for Edgewater Unit 5 was completed last year, and the baghouse and scrubber have been approved by the PSCW at an estimated cost of $410 million excluding AFUDC. Construction is expected to begin in 2014 and be completed in 2016. For our Columbia units, the construction of a baghouse and scrubber at both units is on time and on budget and is expected to be completed in 2014. The settlement also requires the installation of an SCR at Columbia Unit 2, which we plan to seek approval from the PSCW in the second quarter of 2014. Our share of the construction expenditure is estimated to be between $100 million and $125 million. The majority of the spend for the SCR occurs in 2017 and 2018 with an in-service date of 2018. We are also continuing to evaluate improvements that will increase the efficiency and generating capacity of our existing generating units. Earlier this week we filed a certificate of authority application with the PSCW for authorization to replace 12 coal pulverizers and upgrade the 2 steam turbines at Columbia Units 1 and 2. The new technology will reduce the heat rate and expected to increase the operating capacity of the units. The total estimated cost of the project is $130 million and WPL's share is $60 million, excluding AFUDC. We anticipate a decision from the commission in the third quarter next year and completion of this project in 2017. This project is in our current capital expenditure guidance. In Iowa, construction is also progressing well at the installation of baghouses and scrubbers at Ottumwa and MidAmerican's Neal 3 and 4 units. The Neal 4 project will be in service later this year, and the Ottumwa and Neal 3 projects are expected to be in service in 2014. I'll now update you on the progress of our proposed Marshalltown Generating Station in Iowa. IPL and the OCA reached a settlement agreement, which includes a $700 million price cap, excluding AFUDC and transmission. The proposed settlement also includes the return on common equity of 11% for the depreciable life of the facility and the use of a 10.3% return on common equity for the calculation of AFUDC. At the end of April, we filed a settlement agreement with the Iowa Utilities Board. In May, the hearing for Marshalltown was held and the only board member present was IUB Chair Libby Jacobs. Briefs and reply briefs have since been filed, and the record is complete. However, since the hearing, Nick Wagner and Sheila Tipton had been appointed as new board members. We do not believe that the absence of the full board at the Marshalltown hearing will significantly impact the timing of the IUB decision, which we expect to receive later this year. The IUB's decision to grant us a certificate for construction will be contingent upon IPL receiving all necessary permits and other regulatory approvals, including the air permit from the Iowa Department of Natural Resources and approval for construction of a natural gas pipeline. As we have discussed in the past, an important piece of IPL's resource plan is the new Duane Arnold Energy Center PPA. All cost of the new DAEC PPA will flow through the Energy Adjustment Clause starting in February 2014. Intervenors raised concerns in the DAEC PPA docket about the potential double recovery of capacity cost if IPL does not file a new base rate case in 2014, since $135 million of DAEC capacity payments are currently included in base rates. We continue to work with the various stakeholders on a settlement to extend the current 3-year electric base rate freeze that expires at the end of this year. We are proposing to stabilize electric retail base rates at the current levels until the proposed Marshalltown Generating Station is placed in service, which is currently expected in April of 2017. The base rates stabilization proposal includes the utilization of approximately $230 million remaining tax benefit rider funds available in the regulatory liability to offset future retail electric bills for Iowa customers. If a base rate stabilization agreement cannot be reached, the electric base rate case filed in early 2014 will eliminate the revenue requirement of the DAEC capacity cost and would include recovery of and return on rate base additions of approximately $500 million, as well as other changes in revenue requirements since our last base rate case test year of 2009. Depending on the outcome of the potential 2014 rate case, there could also be a potential need for additional rate cases before 2017 since the proposed base rates stabilization plan takes a multi-year view and provides base rate and Tax Benefit Rider certainty for our customers. Let me summarize the key messages. We expect to continue to meet our 5% to 7% earnings growth and 60% to 70% common dividend payout targets. We are making great progress transforming our generating portfolio to one that is balanced with lower emissions and has the flexibility to comply with all existing and currently proposed environmental regulations. We are focused on working safely, providing exceptional customer service and improving reliability. We'll manage our company focusing on operational and financial discipline with the goal of earning our authorized returns while minimizing customer rate volatility and increases. And finally, we will continue to work closely with our regulators and stakeholders to receive fair and timely outcomes. Thank you for your interest in Alliance Energy, and I'll now turn the call over to Tom.

Good morning, everyone. Today, we released our second quarter 2013 earnings. Non-GAAP earnings from continuing operations were $0.59 per share, which is $0.01 per share increase over second quarter of 2012. The lack of capacity charges related to the Riverside PPA in 2013 resulted in a positive variance of $0.11 per share for the quarter. Other positive drivers were a 2013 revenue requirement adjustment related to IPL's tax initiatives and lower energy conservation cost recovery amortizations at WPL. These EPS positive drivers were partially offset by lower earnings resulting from weather impacts on sales, higher WPL depreciation expense and quarter-over-quarter timing impacts from IPL's electric and gas Tax Benefit Riders. Second quarter comparisons between 2013 and 2012 earnings per share are detailed on supplemental slides 2, 3 and 4. In our consolidated earnings guidance walk between 2012 and 2013, which has been provided in our investor relations presentations, we highlighted several drivers for the forecasted year-over-year earnings results. One of the largest drivers is the forecasted $0.29 per share increase in earnings due to lower purchase power capacity cost, primarily related to the Riverside Energy Center, which WPL purchased on December 31, 2012. To assist modeling quarterly earnings projections, please note that of the $60 million annual Riverside capacity payments in 2012, approximately $6 million was paid in the first quarter, $20 million was paid in second quarter, $28 million was paid in the third quarter, and $6 million was paid in the fourth quarter. We are reaffirming our 2013 consolidated earnings guidance of $2.95 to $3.25 a share. While we were pleased with the results for the first half of the year, we are a third quarter company due to summer peak and summer rates, thus, we are not making changes to our guidance at this time. The 2013 -- the July 2013 estimated weather impact was normal. By comparison, the extremely hot weather in July 2012 had an approximately $0.18 per share positive impact on earnings. The economy on our service territories continues to slowly improve. The forecasted 2013 total electric retail sales reflect relatively flat weather normalized sales when compared to 2012. Sales trends between forecasted 2013 and weather normalized 2012 by customer class are illustrated on supplemental Slide 5. The forecasted decrease in IPL's industrial sales in 2013 over 2012 weather normalized sales is due to cogeneration customer outages last year, which increased IPL's industrial sales in the first quarter 2012. Excluding sales to IPL cogeneration customers, industrial sales would have -- would be relatively flat comparing forecasted 2013 to 2012. IPL's electric and gas Tax Benefit Riders are expected to have no earnings impact for 2013, just like they had no earnings impact in 2011 or 2012. The forecasted quarterly earnings impact of the 2013 electric and gas Tax Benefit Riders, as well as the actual quarterly earnings impact of the 2012 electric Tax Benefit Rider, are provided in supplemental Slide 6. Turning to our financing plans. Cash flows from operation are expected to remain strong. Please note that the 2013 cash flows are impacted by reduced customer build in accordance with IPL's Tax Benefit Riders. Our current 2013 financing plan anticipates issuing long-term debt of up to $300 million at IPL in the fourth quarter. We believe that with our strong cash flows and financing plan, we can maintain our targeted liquidity, capitalization ratios and credit metrics. Therefore, we do not plan to issue any material new common equity in 2013. Our future financing plans will be significantly influenced by the timing of construction expenditures, including the proposed Marshalltown facility Pat discussed earlier. We expect to announce our 2014 financing plan later this year. Supplemental Slide 7 has been provided to assist you in modeling our forecasted 2013 effective tax rates for IPL, WPL and AEC. Turning to our regulatory calendar. We have made significant progress to-date on the 2013 regulatory dockets, which are summarized on Slide 8. We are waiting 2 major decisions yet this year, which are the construction authorization and rate making principles for the proposed Marshalltown generating facility and approval of our 5-year energy efficiency plant. In addition to these proceedings, we continue discussions with the OCA and other stakeholders regarding our proposed electric base rate stabilization plan, which would continue until the anticipated in-service date of Marshalltown generating facility, which is scheduled for April 2017. We very much appreciate your continued support of the company. We look forward to meeting with many of you in August and September. At this time, I'll turn the call back over to the operator to facilitate the question-and-answer session.

[Operator Instructions] We'll take our first question from Brian Russo with Ladenburg Thalmann. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Maybe you could just comment on a little further on the weather normalized year-over-year sales changes on Slide 5 and there seems to be a divergence between IPL versus WPL. Just wondering if you can give a little color on maybe the different service territories.

Well, as we look at the residential sector, we would not really see any significant differences. Simply there's a difference in the industrial sector. But as I stated, the IPL is somewhat artificially low because of the additional sales that we had with cogeneration customers that we had last year. So if you adjust for that, the profile would be similar between the 2 states. And again from our perspective, again sales are relatively flat. Certainly, we see some slight signs of improvement but nothing that would suggest that we change our forecast. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. Great. And correct me if I'm wrong, but the IUB granted an oral decision approving Marshalltown. Is that accurate?

No, that's not accurate, Brian. We reached settlement with the OCA, and that -- part of it is proceeding right now but we have not received any order from the IUB yet. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And is there a procedural schedule when that order is expected?

No, there is not. But we still expect it in the fourth quarter, though. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And then remind us what the drag on the merchant wind farm is in 2013, and are there any initiatives to maybe mitigate that in '14 and beyond?

The amount that we have in our forecast here is a $0.05 drag on earnings for Franklin County. Much of that is attributable to the transmission congestion that occurred in 2013. There are steps underway that would remedy that, would suggest that, that certainly would have a probably less of a loss, if I can characterize it that way, going into 2014. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And lastly, just on the IPL rate stabilization plan, at what point to you just stop discussions and just prepare to file a rate case, and when would that occur? I believe you filed in March and also self-implement.

Yes, Brian, we'll be going down parallel paths on this. We need to be prepared to have to file a rate case, but at the same time, we'll continue discussions with all parties up to that point and even including after the point when we filed the case if we have to go down that path but it will be a parallel path at this point.

We'll go next to Jay Dobson with Wunderlich Securities.

Revisiting on the Franklin County topic maybe, Pat, if you could just parse it into 2 topics. So if you were to resolve some of the transmission constraints that might allow you to sell the output. But maybe talk a little bit about efforts to contract the asset, which might make it a little bit easier to sell and potentially mitigate some of the equity needs in '15.

Yes. Jay, really nothing has changed on Franklin County at this point. We're pleased to report that the performance has been going very well and the transmission constraints are getting alleviated as we speak. But we're still looking at all the options on what to do with that facility at this point, so there's really nothing to report on that.

But it's fair to say -- I guess, where I'm going and maybe I overstep my bounds there, it's fair to say you are attempting to contract it, but certainly you've got to resolve the transmission constraints in order to get those parties more willing to contract?

I would say we're looking at multiple options at this point, Jay. It's not just one option we're looking at, at this point.

Okay, okay, fair enough. And then, Tom, to the $0.18 benefit on weather, if I take that and sort of assume normal weather for the third quarter but then say, well, Riverside is going to be $28 million benefit of the absence of the capacity charge netted obviously against some depreciation and then the sort of net benefit of the Tax Benefit Rider, which should be about $0.02 assuming sort of flat, but you ought to be able to offset that weather impact. Am I thinking about that right?

I'm thinking, here, Jay. Well, let's look at individual pieces. Certainly, July was extreme last year in terms of -- for the quarter, it was $0.20. So for the month of July, it was $0.18. Our forecast assumes that it would be weather normalized. Certainly, we are getting a benefit because of Riverside. Again, that's in our guidance, and we also were a third quarter company, both in terms of sales and with our summer rates. So the third quarter always is the largest of the 4 quarters. And also if you go back to the guidance that we provided in terms of the walk going from '12 to '13, hopefully, we will try to identify those individual items, and really our focus is more on the annual basis as opposed to a quarter-over-quarter basis. The reason we just wanted to call out the July weather effect is because it was so significant last year.

Oh, yes, no, exactly, and I think that's great call out. I just want to weigh it against $28 million of the capacity charge absence would be about $0.16 a share, roughly, and then it looks like you get, roughly, $0.02 of benefit from the comparative benefit of the Tax Benefit Rider. So no, that's fine. And then maybe just last question on operating costs. I know you've had, Pat, a lot of focus on continuing to manage and reduce cost just from a continuous improvement and productivity point of view. So how are those efforts going? And sort of do you continue to see a lot of wood to chop there as far as opportunity to manage costs.

I would tell you I think we've done a fantastic job over the last couple of years of identifying these items and reducing costs. We expect cost to be remain relatively flat. Again, a lot of the benefits from our cost reductions have been the conversion of our -- some of our coal facilities to gas. We don't have any of those coming down in next couple of years at least major savings, but we would expect our O&M to remain relatively flat until we add new facilities to the portfolio.

We'll go next to Ashar Khan with Visium.

Pat, I just wanted to get your view on M&A in the sector. One of your neighbors, since your last earnings call, went in and bought something on the West. I just wanted to understand how you look at M&A in terms of shareholders' return and everything from your perspective?

Sure. No, firstly, I just want to say that we are very focused on our very large capital expenditure program that we have right now, and we have very good earnings growth just organically with all the work that we're doing here at the company. I could tell you the lens that we look at M&A's the same lens that our neighbors are looking at. You want to accretive earnings, you want to make sure that there's benefits to the share owners. In this environment right now a lot of the last few M&As, the regulators put some constraints on, savings that the utilities could achieve through synergies. So we're looking at it with the same lens that everybody else is, it has to be very good for the shareowner. But right now, really focused on deploying the capital that we have in our plans right now.

We'll go next to Andrew Weisel with Macquarie Capital.

I wanted to elaborate on the approval for the rate freeze related to Marshalltown. You mentioned that there are 2 new commissioners in Iowa. How involved will they be in approving the deal with the OCA? And will they need to be confirmed before they're able to rule? My understanding is that it won't happen until after next year. But will they be involved in this decision in the fourth quarter as you're expecting or by the fourth quarter?

Yes. And just to be clear, they're actually -- they are able to vote. They'll have to be reconfirmed next year. That might be the confusion that you have on that, but they are standing members. Sheila won't be on the board until middle of August, but they will be able to vote on the proceedings. And again we don't expect any delays. The record is very clear. It's complete. So we'll just have to see how this progresses, but they are 2 very qualified board members that have been appointed.

Okay. Great. That's helpful, and then lastly, you talked quite a bit about updated cost estimates for the environmental controls, but the slide showing the details wasn't there. I can go through the transcript later, but I was hoping you could just maybe point of some of what's changed since the last slide deck, particularly around the recent EPA settlement?

Yes, actually nothing has changed on the CapEx for the environmental controls.

We'll go next to Andy Bischof of Morningstar.

Just a quick question for you this morning relating to strategy. Recently, the Wisconsin State budget called for the divestiture of state-owned generation assets. Is that something that Alliant will interested in looking at?

No, we're not interested in looking at those, we're just really focused on improving the performance for our fleet. So we actually have no intention of looking at that at all.

And we'll go next to Andy Levi with Avon Capital.

Just a very quick question. There was, I mean, the call was very clear. There was just one thing that kind of piqued my interest, and I don't know if I heard it right or if it even was meaningful, so I just want to get some clarification on it. But you had made some reference about when you were talking about the transmission and the revaluation of rate base or CapEx relative to -- I guess was relative to the ITC FERC decision, but can you just explain what you meant by that, and whether it's significant or not significant?

Sure. The question is that with this new FERC order, any new generation that we'd be placing in service, we could be responsible for the transmission, which would be a change to the rate base then. But again it's too early to speculate on that. But that's what the question is. So any new generation that we'd be putting in service could be our costs that would be paying for the transmission.

And that would kind of -- that would be additive to CapEx and additive to rate base.

Yes, yes, exactly.

Okay. So that was a positive thing that you were referring to?

Yes.

We'll go next to Eli Kraicer [ph] with Millennium.

It's Steve Gambuzza. In your comments, you talked about the need for gas pipe infrastructure for the Marshalltown this GT [ph]. Is that included in the capital forecast? And do you have to go through a separate siting and approval process to construct that infrastructure?

Yes, actually, the answer to both of those are yes. And the good news with that facility is we already have all the easements in place for the pipeline, but it's a separate docket at the IUB.

Okay. And then just a follow-up on Andy Levi's question. Are you currently evaluating this change in the FERC transmission structure? Will you provide some kind of update on what that change might mean for the generation investments you're making or is it not anticipated to be significant?

Yes. No, I think in the transmission planning it's still in its early stages for the Marshalltown facility but our current estimate would be again this is our current estimate would be an increase of rate base if we were to pay for it about $145 million.

$145 million. And given that you don't own any transmission -- am I correct that you no longer own any transmission at IP&L, currently. Is that correct?

That's correct.

So would that the -- would this $145 million be FERC jurisdictional rate base or would it be part of your state jurisdictional rate base?

It would be state.

And Ms. Gille, there are no further questions at this time.

With no more questions, this concludes our call. A replay will be available through August 9, 2013, 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 call me with any follow-up questions.

Again that does conclude today's presentation. We thank you for your participation.