Alliant Energy Corporation (LNT) Q3 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Alliant Energy's Conference Call for the Third Quarter 2020 Results. This call is being recorded for rebroadcast. [Operator Instructions]. I would now like to turn the call over to your host, Susan Gille, Investor Relations Manager at Alliant Energy.

Good morning. I would like to thank all of you on the call and the webcast for joining us today. We appreciate your participation. Joining me on this call are John Larsen, Chairman, President and Chief Executive Officer; and Robert Durian, Executive Vice President and CFO. Following prepared remarks by John and Robert, we will have time to take questions from the investment community. We issued a news release last night announcing Alliant Energy's third quarter financial results, updated our consolidated 2020 earnings guidance range and announced our '21 earnings guidance and common stock dividend target. 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 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 references to non-GAAP financial measures. The reconciliation between non-GAAP and GAAP measures are provided in the earnings release and our 10-Q, which will be available on our website. At this point, I'll turn the call over to John.

Thanks, Sue. Good morning, everyone, and thank you for joining us today as we highlight our solid results for the third quarter of 2020. I want to start by saying how proud I am to be part of the Alliant Energy team. Our purpose to serve customers and build strong communities has guided us throughout the year and the events of this quarter. 2020 has highlighted the importance of resiliency as we face the challenges of the pandemic and the derecho windstorm in Iowa. But resiliency is not new for us. Our customer-focused strategy is designed with both resiliency and flexibility in mind. On August 10, just a few days after our second quarter call, our teams with a picture of resiliency as they responded to an unprecedented storm that impacted 341 of the nearly 700 communities we serve in Iowa. The windstorm, known as the derecho, hit with little warning, leaving more than half of our Iowa customers without power. This was the biggest storm in our company's 100-plus-year history. Our dedicated employees, many of whom were without power, were assisted by crews from across the country in Canada, working day in and day out for more than 2 weeks until every customer had power available to them. I also want to recognize the kindness and resiliency of our Iowa customers during this time. Our employees were overwhelmed with the kindness and patience expressed to them throughout the restoration process. Our resiliency extended to our social commitments to our customers. In partnership with our employees, we started Project ReConnect, a program to help homeowners make costly repairs to their residences after the storm. To date, Alliant Energy, along with our employees, have donated more than $300,000 to Project ReConnect. It's one more way that our values to do the right thing and care for others make a difference in the communities we call home. We remain flexible to assist those in need beyond the borders of our service territory as well. Over the weekend, nearly 200 Alliant Energy employees left home to help restore power following Hurricane Zeta in Gulfport, Mississippi where they'll be joined by mutual aid crews from several other states to help get the lights back on. In a few moments, I'll turn the call over to Robert who will address the sales trends we are seeing as a result of the ongoing COVID pandemic. I'm proud of the efforts our employees have made in driving cost reductions and advancing our broader transformation efforts, helping us offset expenses from the storm as well as the pandemic and resulting in lower cost for customers in 2020 compared to 2019. Turning to the execution of our strategy. We recently announced the on-time and on-budget completion of our $2 billion wind expansion in Iowa. Our generation transformation started over a decade ago and required thoughtful planning, flexibility and solid execution. And that's just what we did making us now the third largest regulated wind owner-operator in the country. And we take pride in our sustainable construction practices, delivering a range of environmental, social and economic benefits to the communities we serve. Continuing our purpose-driven strategy and building on our strong track record of project execution, last week we announced the next phase of our clean energy expansion in Iowa as part of our Clean Energy Blueprint. The Blueprint offers clarity about the generation plans in Iowa through our 2020 to 2024 planning horizon. The Blueprint aligns with our consumer preferences for more renewable energy includes adding up to 400 megawatts of solar by 2023. Our near-term investments in renewables creates long-term savings for customers. When the 400 megawatts of solar is combined with the nearly 1,300 megawatts of owned and operated wind plus the power generated by existing solar farms in Dubuque, Marshalltown and Cedar Rapids, nearly 50% of Alliant Energy's Iowa Generation portfolio will be from renewables. We also announced our intent to retire our Lansing Generating Station by the end of 2022, and the coal to natural gas conversion of our Burlington Generating Station. These plans will allow us to avoid significant investments and helps to advance toward our goal of eliminating all coal from our generation fleet by 2040. These retirements also bring the end of an era for our employees at these facilities. For decades, our employees have done an outstanding job, safely maintaining and efficiently operating these plants, providing affordable and reliable energy for our customers. We will continue to live our values by caring for our employees and assisting the impacted communities throughout the transition. The Iowa Blueprint builds upon our Clean Energy strategy, including plans to add up to 100 megawatts of distributed energy, such as community solar and energy store systems. Our Clean Energy Vision is more than renewables. It's a comprehensive view of the energy ecosystem, recognizing the changing needs of our customers and advancing investments in our connected energy network, which prioritizes reliability, resiliency and customer affordability. These investments include transitioning our grid from overhead to underground, deploying technologies such as ADMS, maximizing the use of our AMI system and advancing high-speed fiber communications. And of course, we'll continue our efforts to retain and attract customers, driving economic development through a variety of projects and partnerships. In the face of this unprecedented year, our teams have embodied resiliency and flexibility as they've delivered results. For the second year in a row, we've been recognized as a top utility for economic development by Site Selector magazine. Our teams have also secured 19 new projects across our service territory and helping to create more than 1,700 new jobs. These developments are good news for our customers and communities and another example of our purpose in motion. In closing, I'm pleased to share our forecast for our tenth year in a row of 5% to 7% earnings growth, our increased and narrowed 2020 earnings guidance range between $2.40 per share and $2.46 per share, our 2021 earnings guidance range between $2.50 per share and $2.64 per share and in keeping with our plan to grow dividends commensurate with earnings growth, our Board of Directors has approved a 6% increase in our targeted annual common stock dividend of $1.61 per share. We remain committed to our purpose-driven strategy, the health, safety and well-being of our employees, customers and communities, advancing our Clean Energy Vision and delivering consistent returns for our investors. I'll now turn the call over to Robert.

Thanks, John. Good morning, everyone. Yesterday, we announced third quarter 2020 GAAP earnings of $0.98 per share compared to $0.94 per share in the third quarter last year. Our higher earnings year-over-year were driven by higher revenue requirements due to increasing rate base, the timing of income tax expense and the favorable $0.04 adjustment to the credit loss liability related to legacy guarantees in our nonutility business. These higher earnings were partially offset by higher depreciation and equity dilution. We provided additional details on the earnings variance drivers for the quarter on Pages 3 and 4 on the supplemental slides. In the first 9 months of this year, temperatures in our service territory have increased retail, electric and gas margins by approximately $0.01 per share. By comparison in 2019, the year-to-date temperature impacts for the first 3 quarters increased retail, electric and gas margins by approximately $0.05 per share. Turning to temperature normalized sales. We've been very encouraged by the improvement we've seen in our sales when comparing the second quarter to the third quarter this year. I would characterize our current sales levels will be roughly flat versus the same period in 2019, with the increase in residential sales, offsetting the decreases seen in commercial and industrial sales. It's important to note that our third quarter results also reflected the impacts of the August 10 derecho storm in Iowa, which caused a temporary reduction in sales as we look for a couple of weeks to restore power to our customers in Central Iowa. As John mentioned, last night, we issued our consolidated 2021 earnings guidance range of $2.50 to $2.64 per share. The key drivers of the 6% midpoint growth in temperature normalized EPS are related to investments in our core utility business, including WPL's Kossuth Wind Farm and the Western Wisconsin Gas Pipeline and IPL's West -- sorry, wind expansion program. These investments were reflected in WPL's approved electric rates for 2021 as part of our rate stabilization program and IPL's approved electric rates that were implemented in February of this year. Our 2021 guidance also reflects additional earnings at IPL related to wind generation of the limited service in September, which will be captured in IPL's renewable energy rider and the DAEC PPA buyout payments in the third quarter, which we captured in IPL's fuel rider. The details of our updated capital expenditure plan are shown on Slide 5. Included in this plan are a total of 1.4 gigawatts of solar generation, up to 100 megawatts of distributed energy such as community solar and battery storage, and nearly $3 billion of investments into our electric distribution system. As noted on the slide, we plan to finance our solar investments with tax equity funding. So we anticipate approximately $700 million in contributions for our solar projects from tax equity partners. On Slide 6, we provided a walk from last year's capital expenditure plan to this year's plan. We've accelerated renewables expenditures into the next 2 years, which were originally forecasted in 2023 and also increased renewable expenditures in total over the 5-year period. These changes reflect the better-than-expected development progress with the solar sites we have acquired for our Wisconsin customers and the addition of 400 megawatts of Iowa Solar John mentioned earlier. Slide 7 has been provided to assist remodeling the effective tax rates for our 2 utilities and our consolidated group. We estimate a consolidated effective tax rate of negative 9% for 2020 and negative 14% for 2021. Additional production tax credits from the new wind projects placed into service in 2020 and the excess deferred taxes being returned to customers in 2021 are the primary drivers for the decrease in the effective tax rate. The production tax credits and excess deferred tax benefits will flow back to customers resulting in lower electric margins next year. Thus, the decreases in the effective tax rate related to PTCs and excess deferred tax benefits are largely earnings neutral. Next, I'd like to highlight our continued commitment and focus on controlling costs for our customers. In September of this year, our Iowa utility paid $110 million to terminate the Duane Arnold PPA 5 years early. This strategic decision will lead to a medium and substantial fuel cost savings for our customers. Additionally, we have and will continue to make investments in technology that will further reduce costs for our customers. A great example of this is our AMI investment in Iowa jurisdiction completed earlier this year that reduced O&M costs associated with meter reading. We are also pursuing additional technology investments to reduce O&M costs, such as our advanced distribution management system. I want to recognize the great efforts of our employees for the hard work they're putting into cost transformation efforts on behalf of our customers. In this content, our rates utilization proposal earlier this year was recently approved by the Public Service Commission of Wisconsin. This is a win-win for the utility and for our customers as we're able to begin recovery of many previously approved projects such as our Kossuth wind farm and the Western Wisconsin pipeline, while leveraging fuel savings and excess deferred income taxes to keep base rates in 2021 flat for our customers. Our utility customers in both states are benefiting from lower transmission costs, lower taxes from federal tax reform, lower fuel costs and tax credits associated with more renewable generation; and finally, lower O&M expenses. Let's move next to our financing plans for the remainder of 2020 and 2021. Our plans include approximately $25 million of new common equity through our DRIP plan in 2021. Our financing plans also include new long-term debt over the next 14 months, including up to $300 million at our Wisconsin utility and up to $300 million of Alliant Energy Finance. And finally, there are no long-term debt maturities between now and the end of 2021. Lastly, we've included our regulatory initiatives of note on Slide 8. For this year, we expect to receive the written decision regarding our WPL rate stabilization plan yet this quarter, including the final fuel cost recovery amounts for 2021. Next year, in Iowa, we plan to make an advanced rate-making principles filing for our planned 400 megawatts of new solar generation as well as a filing for the subsequent proceeding required as part of our test year 2020 retail, electric and gas rate review. Both of these filings are anticipated in the first half of next year. And in this content, we anticipate a decision from the PSCW regarding our first certificate of authority filing for solar generation by the second quarter. We also plan to make the second CA filing to round out our planned 1 gigawatt of Wisconsin solar in the first half of the year. Lastly, in the second quarter of 2021, we plan to file a retail electric and gas rig review in Wisconsin. At this time, we are still evaluating whether there would be a single test year case or multiple test years. These regulatory initiatives are important components of our operational and financial results. We very much appreciate your continued support of our company and look forward to meeting with many of you during the virtual EEI Finance Conference next week. Later today, we expect to post on our website the EEI investor presentation and the November 2020 Factbook, which detailed the IPL and WPL updated capital expenditures, rate base and construction work in progress forecast through 2024. At this time, I'll turn the call back over to the operator to facilitate the question-and-answer session.

[Operator Instructions]. The first question today comes from Julien Dumoulin-Smith of Bank of America.

Congratulations to all team here, excellent outcome here. Perhaps just to kick things off, I mean, obviously, good start on '21 here. How are you thinking about the trajectory over the longer term, especially given the pro forma CapEx? Maybe a twofold question. Where does that position you vis-à-vis your guidance on the 5% to 7%? And then secondly, how do you think about some of the other CapEx tailwinds, right? You've just got so much renewables going here, how do you think about additional T&D spend and how that fits in the budget over the cumulative 5-year period?

Great, Julien. Happy to still feel very, very comfortable with the 5% to 7%. And as you know, the midpoint is where we spend a lot of time making sure we have a plan to get solidly within that range and we'll continue to. As far as some of the tailwinds, as you probably noticed, there's a little maybe decrease in some of the T&D spend as we brought some additional renewables in, in the '22, '23. And as we've shared with you and others, we do have some plans for increasing our T&D spend overhead to underground. As Robert and I both mentioned, you'd see a little bit of that in the tail end in 2024. There's some great T&D spend yet. So as you know, we try to have that $1.2 to $1.4 billion per year is a really good spot for us to maintain the 5% to 7% minimal equity needs and keeping customer costs affordable. So we really like the CapEx plan and I would say there's some great T&D spend that we continue to look at, and we'll just let capital compete as we always do, Julien. Thanks for the question.

Absolutely. And just a quick follow-up here. In the context of '21, can you elaborate a little bit more on the execution of cost controls item? Just if you don't mind.

Sure. Robert's team has done a great job of focusing on some of our transformation and then nearing in a little longer term. So I'll maybe ask Robert to weigh in on that one. Robert?

Julien, great question. So customer affordability is going to be a key component of our strategic plan, obviously, here in 2020 and going forward. And we've made some great progress this year. Through the first three quarters, we reduced O&M by about $60 million or about 12% compared to last year. About half of that was from energy efficiency expenditure reductions. The other half is largely related to our ability to manage costs and to accelerate some of the transformation activities for future sustainable savings. And so we'll continue to work on those areas as we look into 2021 and look at all parts of the organization and implement really some changes to drive cost efficiencies throughout our business. I'm really excited about a lot of new technology opportunities for us to drive those expense reductions. And we're also operating with a lot of fewer employees by not backfilling certain vacated positions. So I think our efforts in 2019 really helped us position us well for 2020 and looking forward to the rest of this year position us really well for next year for 2021.

[Operator Instructions]. Our next question comes from Andrew Weisel of Scotiabank.

Congrats on the recent renewables update and on the nice increase to the 5-year CapEx outlook. Can you share the latest forecast for rate base gain here, perhaps with or without the solar tax equity funding that will weigh on that growth?

Yes, Andrew. So we'll be providing some additional details regarding that information later today as part of our November 2025 virtual call as the presentation we'll be sharing next week as part of the EEI Finance Conference. If you think off of a base of 2019, which is the last full year that we've completed, we're expecting approximately an 8% CAGR through 2024. And a lot of that is dependent upon all of the renewables as well as the T&D spend that John and I discussed earlier. So think of that as about an 8% CAGR over that time frame.

Great. That's helpful. So then in terms of the CapEx walk, 2020 is obviously down a bit, mostly in that other category. Can you elaborate there? Was some of that discretionary spending that you're being sensitive to customer built and recovery because of COVID? Or was there physical limitations? And would these be temporary or timing issues or more permanent changes?

Yes. Think of that, as John alluded to before, we've got a lot of flexibility in our capital expenditure plans. And so when we see there opportunities or requirements to spend dollars in certain areas, we'll flex the rest of the plan to make sure that we comply with our target of $1.2 billion to $1.4 billion. What we saw here in 2020 is with the derecho storm, we did have to increase our electric T&D expenditures in the Iowa jurisdiction really to restore and to build that system. And so we flexed down some of the other spend. And think of that as just a lot of smaller items, some generation spend for our retiring plants, some spend on our nonutility business to keep the growth aspects there as well as there's been some lower facility spend. So a lot of smaller pieces that added up to what you see in the chart there.

Okay. Got it. On equity mix, with the moving around of CapEx, any change to the prior plans you've laid out? I have a feeling this might be in the slide deck coming later today, but maybe you could give us a little preview of what the equity outlook looks like?

Yes. Andrew, beyond the drift, nothing's changed on equity with refreshed CapEx.

Terrific. Great. And then just one last housekeeping one. Are you able to quantify the EPS impact from the derecho storm?

Yes. At this point, we haven't quantified it. But there was some sales impact, as we alluded to earlier. Think of that as probably about a $0.02 decrease in the third quarter related to just the sales impact. The remaining portions of the restoration costs, we're expecting to get recovery of those costs. And so we've actually capitalized lows. And we're also seeking -- later today, we'll be filing a deferral request for any of the operating expenses as well as the offsetting tax benefits associated with the storm. So beyond the sales impact, it will about negative $0.02. We're not expecting anything else material.

[Operator Instructions]. There are no further questions at this time.

This concludes Alliant Energy's Third Quarter Earnings Call. A replay will be available through November 10, 2020, at 888-203-1112 for U.S. in Canada or 719-457-0820 for international. Callers should reference conference ID 4175543 and PIN 9578. 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.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.