Alliant Energy Corporation (LNT) Q1 2017 Earnings Report, Transcript and Summary

Thank you for holding. Ladies and gentlemen, welcome to the Alliant Energy First Quarter 2017 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to turn the conference over to your host, Susan Gille, Manager of Investor Relations at Alliant Energy.

Good morning. I would like to thank you 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; and Robert Durian, Vice President, CFO 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. We issued a news release last night announcing Alliant Energy's first quarter 2017 earnings. 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 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. A reconciliation between the non-GAAP and GAAP measures are provided in our first quarter 2017 and year end 2016 earnings release, 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, I'm pleased to share with you our first quarter 2017 results and I will also share several major milestones that occurred in April. Next, Robert will provide the details on our results as well as review our regulatory schedule. Like other utilities in the region we enjoyed a mild winter, but it did lower our first quarter results by $0.04 per share. This winter was even warmer than last year, in which we realized $0.02 per share lower earnings when compared to normal temperatures. Therefore, mild temperatures led to a negative first quarter variance from last year of $0.02 per share. Despite the mild temperatures, we achieved solid earnings this quarter of $0.43 per share, which was the same as the first quarter of 2016. With the exception of the mild weather these results were in line with our expectations. Robert will provide more details regarding the quarter's results a bit later. And with these financial results, we reaffirm our 2017 earnings guidance range of $1.92 to $2.06 per share. Earnings growth objective remains at 5% to 7% annually through 2020 based on non-GAAP 2016 earnings per share of $1.88. This long-term growth objective continues to be supported by the utilities' robust capital expenditure plans, modest sales growth and constructive regulatory outcomes. We achieved several milestones and advanced our strategy in early April. First, Marshalltown Generating Station began commercial operations on April 1. Second, the Franklin County Wind Farm was transferred to IPL also on April 1. And third, IPL filed an electric rate review on April 3, and interim rates went into effect on April 13. Marshalltown was completed on time and below budget, with a full load testing heat rate of 6,610 Btu per kilowatt hour, better than the contractual guarantee, and makes it one of the most efficient units in the world. Marshalltown's ability's to quickly ramp up or ramp down energy production complements Iowa's vast wind resources and is a great addition to our energy mix. Marshalltown is expected to have 60% less carbon emissions and 90% less water withdrawals when compared to the 2005 levels of the generating units it is replacing. Now that Marshalltown is in service and customers are realizing its benefits, its cost recovery was included in interim rates that went into effect on April 13, earning the authorized 11% ROE. Marshalltown's final costs, including AFUDC and transmission, came in at approximately $750 million, well below the approved cost cap of $920 million. Last week, the Institute for Sustainable Infrastructure awarded IPL the Envision Platinum Award for its work on Marshalltown. This is the first Envision Platinum Award for any company in Iowa. The award recognized IPL's focus on sustainable performance and infrastructure resilience. The award was issued after a peer review process that assessed Marshalltown on 60 sustainability factors addressing a wide range of important criteria. We are very proud that our sustainability efforts were recognized by this distinguished group. I do want to take a moment and recognize the Alliant Energy team and all the contractors that brought this project to a successful completion. It was truly a team effort. And I'm not only proud of the excellent construction and performance, but most importantly, safety performance on this project was world-class. Thank you. In Wisconsin, we are making good progress on the foundation and underground piping for the Riverside expansion, which we are now calling the West Riverside Energy Center. We expect that West Riverside will supply energy to our customers by early 2020. Its output will be approximately 730 megawatts, and our share of the total anticipated project cost is approximately $640 million, excluding AFUDC and transmission. The three electric cooperatives signed a letter of intent to acquire approximately 65 megawatts of West Riverside, and we expect PSCW approval of the agreement by the third quarter, these co-ops have been WPL wholesale customers for decades. And we are delighted that they'll be our partners in West Riverside. Wind energy has been an important and now increasing part of our energy portfolio. Wind energy brings many benefits to our customers and communities, including the annual lease payments to farm families and property tax payments that support the rural communities that we have the privilege to serve. Also, our owned wind farms have remarkable performance in the first quarter, with a total average capacity factor reaching over 40%. And IPL customers are now benefiting from the energy produced by our Franklin County Wind Farm, which is now part of Whispering Willow. We are pleased that the state of Iowa encourages generation investments. In late last year, the Iowa Utilities Board approved our plan to add up to 500 megawatts of wind in Iowa. Terms of that approval include a cost cap of $1,830 per kilowatt, including AFUDC and transmission costs, a return on equity of 11% for the life of the asset, and depreciable life of 40 years. As we discussed with you earlier this year, we were able to secure enough equipment to not only assure the approved 500 megawatts qualified for the 100% PTCs, but also qualified additional wind investments for 100% PTCs. Our current capital expenditure plan includes the 500 megawatts already approved in Iowa and an additional up to 200 megawatts each for IPL and WPL, for a total wind expansion of 900 megawatts replacement service by 2020. However, we are now exploring options to increase our total wind expansion to 1,100 megawatts, with an additional 200 megawatts for IPL. We have enough equipment secured that the full 1,100 megawatts would qualify for the 100% PTC. Therefore, we plan to make regulatory filings later this year, seeking approval for up to 400 megawatts of additional wind generation at IPL and up to 200 megawatts at WPL. As I mentioned, our capital expenditure plans still includes investments of 900 megawatts of wind. We have not yet updated our capital plan to include the additional 200 megawatts at IPL since we are still working to secure additional sites. As is our regular practice, we plan to provide updated capital expenditure estimates in November prior to the EEI Conference. Solar generation is the newest addition to our energy mix. We are excited about our upcoming collaboration with the City of Dubuque and the solar facility for West Riverside, which are both in the planning stages. These projects will be an addition to the three existing solar facilities located at our Rock River Campus, our learning laboratory at our Madison headquarters and the Indian Creek Nature Center in Cedar Rapids, Iowa. Solar investments such as these will help us meet our customers' growing interest in cleaner and distributed forms of energy. The electric and gas distribution systems continue to be an area of growing investment as customers expect improved reliability, resiliency and security of their power delivery. Standardizing voltages and expansion of our underground electricity distribution network are just some of our targeted investments. Also, many communities and industrial customers have requested additional natural gas supply, which is giving us the opportunity to upgrade and expand our gas systems while, at the same time, continuing our pipeline safety program. And this year, we will begin installation of smart meters for Iowa electric and gas customers. This is an important foundational component for a smarter and more resilient grid. Access to real-time information and data will allow us to manage outages, two-way energy flow and allow for remote reads, connects and disconnects. We expect to complete the Iowa smart meter installation in 2019. We are making good progress in offering our customers innovative solutions and options. WPL received approval for new residential customer offerings, including simpler time-of-use pricing plans, demand rate pilots, a fixed bill option and lower renewable energy rates. IPL has proposed a revised time-of-day option for residential and small businesses, an economic development rate and a couple of pilots for small customer demand rate and a limited income rate. And both our Iowa and Wisconsin customers are taking advantage of our rebates for installation of EV charging stations. We continue execution of our strategy by providing cleaner energies for our customers while building a smarter, more robust grid. We began the transition of our generation fleet almost a decade ago with the addition of utility and wind and combined-cycle gas to replace older, smaller and less efficient fossil generation we are retiring. By the end of this year, we will have retired or converted almost 40% our 2010 coal-fired generation capacity. Additionally, we will have retired almost 75% of our oil-fired combustion turbines and diesel-generation capacity by the end of this year. We're on a path toward our carbon emission reduction target of 40% by 2030. Let me summarize my key focus areas for 2017. Our dedicated employees delivered a solid first quarter, and we'll deliver on our full year 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 2017 dividend payout target is 63.3% based on the midpoint of our 2017 earnings guidance of $1.99 per share. We expect to complete projects on time and at or below budget and at a very safe manner. We will continue working with our regulators, customer advocates, environmental groups, neighboring utilities and customers in a collaborative manner. We continue to focus on serving our customers and being good partners in our communities while reshaping the organization to be leaner and faster. And we will continue to manage the company to strike a balance between capital investment, operational and financial discipline and cost impact to customers. Thank you for your interest in Alliant Energy, and I'll now turn the call over to Robert.

Good morning, everyone. We released first quarter 2017 earnings last evening, with our earnings from continuing operations of $0.43 per share, which is the same as the earnings for the first quarter 2016. Our summary of the year-over-year earnings drivers can be found on Slides 2 and 3. New WPL retail electric and gas base rates, which went in effect January 1, contributed to higher earnings in the first quarter of 2017. These increased earnings were offset by the negative impacts of mild temperatures, higher fuel expense and higher depreciation expense from rate base additions. Excluding the impacts of temperatures and the extra day in 2016 for leap year, retail electric sales between the first quarters of 2017 and 2016 increased more than 1%. Now let's briefly review our 2017 guidance. Last evening, we shared our updated view of our earnings walk comparing 2016 non-GAAP EPS to the midpoint of the 2017 EPS guidance range on Slide 4. The update quantifies the impacts of higher IPL and WPL revenues due to the retail base rate increases as separate drivers in the earnings walk. As shown on this slide, the 6% growth in earnings is primarily driven by infrastructure investments reflected in WPL's recently approved retail electric and gas base rates and IPL's interim electric base rates that went into effect April 13. The 2017 guidance range assumes normal temperatures and continued retail sales growth of approximately 1% when compared to 2016. Please note that when comparing 2016 to 2017, we expect most of the sales growth to come from commercial and industrial classes. During the past seven years, we have been able to earn on our increasing IPL rate base while keeping base rate flat. The recent rate base additions, which include grid modernization investments, the Marshalltown Generating Station and investments to advance cleaner energy, drove the need for a retail electric rate increase. Interim rates include retail electric rate base of approximately $3.8 billion, a blended ROE of approximately 10% and a common equity ratio of approximately 49%. Interim rates associated with this rate filing went into effect April 13. Therefore, the resulting earnings increase will only impact the last 3 quarters of 2017. To assist you in modeling, we estimate that the $0.20 per share increase in earnings from IPL's interim electric rate increase will be spread across 2017, with approximately 25% recognized in the second quarter, 45% recognized in the third quarter and 30% in the fourth quarter. Iowa retail customers will see a minimal impact to their total bills in 2017 since the approximate 7% interim rate increase will be offset with a refund related to the lower transmission ROEs and tax benefit rider billing credit. This will be the final year that IPL expects to provide tax benefit rider billing credits to electric and gas customers to help reduce their costs. The 2017 credits are estimated to be $74 million. As in prior years the tax benefit riders have a quarterly timing impact but are not anticipated to impact full year 2017 results. Slide 5 has been provided to assist you in modeling the effective tax rates for IPL, WPL and AEC. On this slide, we estimate a 2017 consolidated effective tax rate of 17%, which is 4% higher than our 2016 consolidated effective tax rate. The WPL retail electric and gas base rate increases, which went into effect January 1st, reflect electric and gas rate base growth, including a full year of the Edgewater 5 scrubber and baghouse that was placed in service in 2016 as well as performance improvements at Columbia. The increase in revenue requirements for these and other rate base additions was partially offset by energy efficiency cost recovery and transmission amortization. As part of the WPL rate design, the PSCW approved the elimination of seasonal pricing beginning in 2017. This will impact the calendarization [ph] of the rate increases in your forecasting models for this year. We estimate that the $0.18 per share increased earnings impact would be spread across the quarters, with approximately 35% recognized in each of the first and fourth quarters, approximately 25% in the second quarter and minimal increase in the third quarter. Turning to our financing plans. Our current forecast reflects strong cash flows from the earnings generated by the business and impacts of the extension of bonus depreciation deductions through 2019. Alliant Energy currently does not expect to make any significant federal income tax payments through 2021, with additional tax payment reductions expected after 2021 through the additional wind investments included in our plan. This forecast is based on current federal net operating losses and credit carry forward positions as well as future amounts of bonus depreciation expected to be taken on federal income tax returns over the next few years. There have been no changes to our 2017 financing plan. Our plan continues to assume we will issue up to $150 million of new common equity this year as well as long-term debt of up to $250 million at IPL and up to $300 million at WPL. We may adjust plans as deemed prudent if market conditions warrant and as our external financing needs continue to be reassessed. As we look beyond 2017, we expect equity needs to be driven by renewable investments in the West Riverside project. Our forecast assumes that capital expenditures beyond 2017 would be financed by operating cash flows and external financing. Our intent is to maintain the capital structures at IPL and WPL for the most recent retail rate case decisions. We have several current and planned regulatory dockets of note for 2017 and 2018, which we have summarized on Slide 6. For IPL, we expect to receive decision on our emissions plan and budget this quarter. And during the third or fourth quarter, we are planning to file the advance ratemaking principles for additional wind investments for our Iowa customers. For WPL, we plan to file a 2018 fuel only case during the third quarter, which is customary in years where our retail electric rate case is not filed. And also, in the third or fourth quarter, we anticipate filing a Certificate of Authority for additional wind for our Wisconsin customers. In our investor deck, we have provided our proposed procedural schedule for the IPL retail electric rate review. This is still a proposed schedule. All parties to the case are working to finalize the schedule, and we plan to have the updated schedule in the investor deck we will be posting on our website prior to the AGA meetings on May 22. In closing, I would like to briefly touch on the recent court decisions to remand the New England ROE case back to FERC. This action has not changed our current reserve amount related to the second MISO ROE complaint. We continue to reserve those ATC earnings based on the 9.7% ROE recommended by the ALJ plus ATC's awarded 50 basis point adder. We are monitoring any potential impacts to this court decision on the second MISO ROE complaint and ATC's ongoing authorized ROE. We received the refunds for the first MISO ROE complaint earlier this year and started refunding the IPL portion back to Iowa electric customers this week. The WPL portion of the refund will return to Wisconsin electric customers in accordance with a future regulatory proceeding. We very much appreciate your continued support of our company. At this time, I'll turn it back over to the operator to facilitate the question-and-answer session.

[Operator Instructions] It appears our first question comes from Julien Dumoulin-Smith with UBS.

This is actually Nick Campanella on for Julien. I was just curious, as we include the extra 200 megawatt wind at IPL into the CapEx plan going forward, how should we be thinking about any additional opportunities at the backfill post 2020, keeping with the long-term EPS growth profile. Just trying to get a sense of kind of what direction you're looking at initially just as PTC opportunities decline.

Sure. Thanks for the question, Nick. Now this is still an evolving story as we look for acquiring additional sites in Iowa. So it's a pretty active process that we're going through right now. Although we're very pleased that we do have the additional capacity to increase the wind filing in Iowa, I wouldn't assume that there'll be more after that. But again, if we do find that, we'll definitely let you know. But we'll probably update the CapEx plan in November again with the EEI deck. This is all still a bit preliminary until we make our regulatory filings.

Got it. Okay. And then is there any specific reason to do more at IPL rather than WPL in this case?

We're actually finding really good sites in Iowa for Iowa customers, and the Iowa regulatory climate, is very supportive of additional wind. As you recall from our last docket, when we got the 500 megawatts approved, we were encouraged to come back and do more, so really just following up on the last docket that we had in Iowa.

Got it. Okay, thank you so much.

[Operator Instructions] Ms. Gille, there are no further questions at this time.

With no more questions, this concludes our call. A replay will be available through May 11, 2017, at 888-203-1112 for US 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.