Alliant Energy Corporation (LNT) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to Alliant Energy's Conference Call for First Quarter 2021 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, Chair, President and CEO; 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 first quarter 2021 financial results. 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 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.

Thank you, Sue. Hello, everyone, and thank you for joining us today. Our solid first quarter results were as expected, continuing our long track record of delivering value for our customers, communities and investors. We do this by innovating new approaches and delivering important energy solutions for our customers and the communities we proudly serve. Our purpose-driven strategy is thoughtful, flexible and well executed. The results speak for themselves. Later in the call Robert will share more details on our results. But let me jump to the headline. We are reaffirming our consolidated 2021 earnings guidance of $2.50 to $2.64. We remain committed to delivering on our 5% to 7% growth target and our 60% to 70% dividend payout ratio. At Alliant Energy, we take pride in our long track record of delivering consistent growth for our investors. And what makes this even more meaningful is in how we have delivered that growth, by living our values, to care for others and act for tomorrow. We continuously raise the bar when it comes to our environmental, social and governance commitments. We're proud to be recognized for our efforts. We're an AA rated company by MSCI, ranked in the top quartile for global utilities by Sustainalytics, and achieved Envision Platinum certification on major generation projects. With our customers in mind, we continue to accelerate our purpose-driven clean energy transition. We call it the clean energy blueprint and recently highlighted our progress towards our sustainability goals during Earth Week. We ended the year 2020 with 42% less carbon emissions than our 2005 levels, nearly 70% reduction in water compared to our 2005 levels, and nearly 70% of our coal generation is either retired or planned for retirement by 2024. We'll be sharing more of our progress and highlighting new initiatives with the release of our updated corporate responsibility report this summer. Equally important to our environmental efforts, are the commitments to our employees, customers and the communities we serve. We know that when we embrace the diversity of our employees and continue to build upon the strong culture, we create a sense of belonging and inclusion, that leads to great things for our customers. I'm very proud of the recognition of our efforts in this space by organization such as the human rights campaign and to be included in Bloomberg's Gender-Equality Index. In 2020, we were named one of America's most responsible companies by Newsweek, ranking 12 on the list for our social responsibility efforts. Turning to our recent updates, this week we announced an intent to enter into a settlement agreement for our rate filing in Wisconsin. We continued our open and transparent practices into our rate review process and are very pleased to have reached the settlement in principle with several stakeholder organizations, including the Citizens Utility Board, the Wisconsin Industrial Energy Group and the Sierra Club. The key terms with stakeholders continues to manage customer costs and enables our thoughtful transition to a clean energy future, adding certainty and flexibility for our business. Just prior to this development, we reached another successful milestone, announcing our plans to add 414 megawatts of solar in Wisconsin, rounding our previously announced plan to accelerate our clean energy transition by adding nearly 1,100 megawatts of solar in the Badger state. Upon completion of this planned expansion, Alliant Energy will own and operate the most solar energy in the state of Wisconsin. These investments are another part of our clean energy blueprint, developed through an extensive and transparent planning process and utilizing our industry best project execution. In our communities, we are partnering with businesses and community leaders to develop hometown solar projects. These local projects benefit communities through lease payments, supplying clean energy to the local energy grid, empowering homes and businesses. Some of our newest projects include a 1-megawatt community solar project located in Perry, Iowa; a customer-hosted project in Dodgeville, Wisconsin, located on the rooftop of IO County's new law enforcement center; and solar generation near our West Riverside Energy Center near Beloit, Wisconsin. Before I close, I'd like to recognize our amazing employees. They came together to serve customers during Winter Storm Uri. As a result of their efforts, coupled with smart investments we've made to ensure reliability, resiliency and the proactive planning by our energy markets team, we not only weathered the storm, our teams continued providing safe, reliable and affordable energy during this extreme weather event. And our customers will not see the significant increases experienced by others around the country. In summary, 2021 is off to a solid start for our company, and we look forward to building on that momentum throughout the year as we focus on continuing our role as a leader in advancing renewable energy, completing customer-focused investments on time and on budget, delivering solid returns for our investors and living our values as we fulfill our purpose of serving customers and building stronger communities. Thank you for your interest in Alliant Energy. I'll now turn the call over to Robert.

Thanks, John. Good morning, everyone. Yesterday, we announced first quarter 2021 GAAP earnings of $0.68 per share compared to $0.70 per share in 2020. Similar to last year, the first quarter's earnings are more than 25% of our 2021 earnings target and represent a strong start to the year. Our earnings were slightly lower on a year-over-year basis, largely due to the timing of tax expense impacts, which will reverse later this year. For the full year, we are reaffirming our earnings guidance of $2.50 per share to $2.64 per share, an increase at the midpoint of more than 6% over 2020 temperature-normalized earnings per share of $2.42. To assist you in modeling our quarterly earnings this year, I wanted to provide some additional context to one of the larger variances shown in our earnings release. As some may recall, in the first quarter of 2020, we recognized $0.06 of favorability due to the timing of income taxes, which arose from the large amount of wind generation placed in service in 2020. We had additional tax favorability in the third quarter of 2020 before a full reversal in the fourth quarter of last year. You can expect to see the inverse of that in 2021, with unfavorable variances related to the timing of income tax expense for the sum of the first 3 quarters, followed by a favorable reversal in the fourth quarter of this year. We continue to see improving economic conditions in our service territories, with more businesses returning to normal operations following the lifting of many of the COVID-19 mitigation restrictions and increasing levels of economic development activities in both states. Of note, our temperature-normalized retail electric sales in the first quarter of 2021 were better than expected and represented an approximate 1% increase over the first quarter of 2020, which was largely pre-pandemic for our service territories. We are also very encouraged by the fact that the number of our customers in arrears or on payment plans today is lower than it was before the pandemic began. This is a testament to the great work of our employees, connecting customers having difficulty making payments with available federal and state resources. I'm also very proud of donations by our company and our customers to the Hometown Care Energy Fund, which provides confidential financial support for Alliant Energy customers faced with financial challenges. Due to the COVID-19 pandemic in 2020, it was necessary for us to accelerate our cost transformation efforts to reduce -- to offset reduced sales, while holding rates flat for our customers last year. Thanks to our employees' continued focus on cost reductions, we achieved another quarter of solid operating expense reductions in the first quarter of 2021. Over the longer term, we are targeting to reduce O&M by approximately 3% to 5% per year for the next several years off of 2019 levels. We will achieve these savings through efforts that fall under 3 pillars, all of which are enabled by our customer-focused capital investments. The first and most immediately impactful are investments in generation transformation. This includes our expansion of wind and solar energy, and the sunsetting of coal generation in our portfolio. The second pillar involves investments in electric distribution, particularly in the areas of undergrounding and converting larger portions of our system to 25 kv, which will enable lower maintenance expense. The third and final pillar include investments in technology across our company, which will enhance productivity and efficiency through automation, customer self-service and telework. Slide 4 of our supplemental slides has been provided to assist you in modeling the effective tax rates for our 2 utilities and our consolidated group. We estimate a consolidated effective tax rate of negative 19% for 2021. The primary drivers of the lower tax rate are the additional tax credits from new wind projects placed into service and the return of excess deferred taxes from federal tax reform to our customers. The production tax credits and excess deferred tax benefits will flow back to customers resulting in lower electric margins. Thus, the decrease in the effective tax rate is largely earnings neutral. Turning to our financing plans. We continue to maintain strong balance sheets at our 2 utilities and the parent company with minimal financing needs in 2021. As a reminder, our financing plans for 2021 include up to $300 million of long-term debt to be issued by our Wisconsin utility and no material debt maturities this year. In addition, the only new common equity forecast to be issued this year is approximately $25 million through the shareholder direct plan. We've included our regulatory initiatives of note on Slide 5. Starting in our Wisconsin jurisdiction, as John mentioned earlier this week, we filed a notice of intent to settle with key intervening parties in Wisconsin and WPL's next electric and gas rate review filing. The agreement in principle resulted from collaboration and alignment with the settling parties on total revenue requirements for 2022 and 2023. The agreement would enable key financial terms impacting such revenue requirements, including maintaining a 10% return on equity, achieving an effective regulatory equity layer of 54% and utilizing an innovative recovery mechanism for WPL's retiring Edgewater coal plant. WPL is working with the stakeholders to finalize the terms of the settlement, which will be subject to review and approval by the PSCW. We anticipate a decision from the PSCW on this filing later this year. More details on the terms of the agreement in principle can be found on Slide 6. Additionally in Wisconsin, we received verbal approval from the PSCW in April for our certificate of authority filing for 675 megawatts of new solar generation. This verbal approval is another example of our continued track record of constructive State Regulatory decisions, approving renewable projects that support our transition to cleaner sources of energy for our customers. In the discussion of this decision, all 3 commissioners were complementary of the resource planning process and stakeholder engagement that we conducted as part of our Wisconsin Clean Energy Blueprint. The commission commended our modeling efforts in this process and the consideration paid to affordability and stability of rates, reliability of service and our path to sustainability for our customers. We'd expect a written decision in the coming weeks. We also filed our second certificate authority application for an additional 414 megawatts of Wisconsin Solar in March. We anticipate a decision from the PSCW on this filing in the first half of next year. Moving to Iowa. We expect to file for advanced remaking principles in the third quarter for a proposed approximately 400 megawatts of solar, included in our Iowa Clean Energy Blueprint. The advance remaking principles process in Iowa includes approval of the return on equity for the life of the asset, depreciation rates and a cost cap for the project. We anticipate a decision from the Iowa Utilities Board on this filing by the middle of next year. We appreciate your continued interest in our company and look forward to connecting with many of you virtually over the coming months. 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 Julien Dumoulin-Smith with Bank of America.

So perhaps just first, high-level question. As you think about the transmission opportunities reported here, how would you characterize the ATC opportunity looking at the MISO futures that were recently released, et cetera, in your words?

Yes. Great, Julien, great to hear from you. There's certainly a great deal of need for transmission to connect renewables. We know that, and a lot of those are going to be in the ATC area. So we see that as very solid. I don't think it's anything too notably different than how we've had it modeled. Transmission is going to be very important for renewables. So I guess, I categorize it as solid and pretty consistent with how we've seen it -- how we've modeled it.

Okay. All right. Fair enough. And then as you think about the backdrop of this Wisconsin settlement, I appreciate the comments in your prepared remarks. But how do you think about the rate base associated with that settlement? And where does that position you, if you can yet, against your larger 5% to 7% range, if you can comment?

Yes, Julien, this is Robert. I think that puts us right squarely where we want to be with that growth of 5% to 7%. We see good rate base growth based on the modeling that we've shared with all the analysts to date, and this is consistent with that. So just the whole process with the rate review agreement in principle, we think, is a very, very supportive of all the collaborative processes that we do with our key stakeholders. And so it's also really a good balance between the customers and the stakeholders' interest, the shares interest. And we see it as really a good avenue to provide that rate stability that we're looking for, for both our customers and our shareowners. So all in all, I think it's very, very constructive and very consistent with what we've been telling folks as far as our plan for the future.

Got it. And I presume you're confident in getting the approval of the higher 54% equity layer as part of that settlement?

That is correct.

Excellent. Sorry, if -- I know you guys are quick here. If I can just squeeze one more in here. On ATC, any initial thoughts or responses here? I mean folks are fixated on this RTO adder a little bit of late. Any context on how you think about on appeals process? Or otherwise, if should that materialize this summer? Maybe look pretty [indiscernible].

I think one thing we've learned is the process to get to the finish line on ROEs, whichever direction they're going is one that you have to be quite patient. I'm confident we'll get to a -- there'll be a reasonable outcome there. The need for transmission isn't going to change. I do think there's going to be a bit of a process to make sure it settles out to the right final number, if you will, Julien, but rather than handicap the final result, I think like we've seen in the past, you've got to be a little patient on these proceedings.

[Operator Instructions] We'll take our next question from Andrew Weisel with Scotiabank.

To start, maybe just if you could continue on the FERC ROE. If the 50 basis point incentive add were to be eliminated for you guys, what would be the EPS impact?

Yes. Great, Andrew. Great to hear from you. And maybe I'll let Robert get that dialed in. Robert, you want to share those numbers for us?

Yes, Andrew, it's a pretty modest impact for us. I would characterize it as less than $0.01 per year. So that's the direct result of the ATC earnings impact on our business. We would also see, most likely, as this played out a lower transmission expense coming to both of our utilities. And so think of that as probably in the maybe $10 million to $15 million a year. So that supports our customer affordability objectives, provides us some additional headroom for further investments and really would more than offset the impact on the earnings side on the ATC earnings.

Okay, great. Certainly manageable there. Next, just a few questions on the WPL proposed settlement, please. So first, you mentioned the effective equity ratio of 54%, but I thought the press release showed 52.5%. Are there some accounting quirks there?

Yes. Really, the difference between those 2, the regulatory equity cap -- equity ratio in the capital structure, think of that as what's used to calculate the revenue requirement. When you impute certain debt or off-balance sheet items, that's what lowers it down to the 52.5%. So we've got some PPAs and leases that is part of the regulatory process, that get imputed into the financial capital structure consistent with what occurs with the rating agencies. So -- but think of 54% is how you should calculate the revenue requirement.

Okay. Great. Next, in terms of the 2022 increase, what would that mean for customer bills, like as a percentage change for customers either in rates or monthly bills?

Yes. On average, if you think, high level, about 6%.

Okay. Then does the settlement include usage of some of the regulatory liabilities that you have available? I think last time, we talked about a range of about $60 million to $80 million. What is this settlement due to that?

Yes, Andrew, it does utilize those. The biggest of which is a regulatory liability that we were able to record as a result of some liquidated damages regarding our West Riverside facility. So it would utilize those regulatory liabilities as well as others that are in that $60 million to $80 million that you referenced.

Would it utilize all of that, I guess, is what I'm asking? Or would there be still some remaining?

It would use the vast majority of it.

Okay, terrific. And then one last one on the settlement here. Can you explain a little more of the mechanics around the Edge 5 levelization mechanism? And how to bridge the 9.8% versus 9.2% effective return?

Yes. Probably the best way I've heard it described, Andrew, is think of it like a mortgage. So it's got a consistent recovery level over the kind of the remaining asset recovery period of roughly 23 years, I think it is once it hits retirement. But just like a mortgage, we would recover a lower principal balance and a higher interest rate earlier in those years. And then the flip or reverse of that with a higher principal recovery and a lower interest later in the years. So as part of that process, what it ends up doing is we recover less in the earlier years, and that effectively then converts to 9.8% that we agreed upon to calculate the revenue requirement down to a 9.2% effective ROE. So I still think that's a very effective tool for us. What it does help us to do is lower customer costs in the earlier years, but gives us that rate stability over the remaining life of that asset. And so we felt like that was a good balance between shareowner interest and customer interest, and we're very pleased with the outcome there.

Okay. Great. That's a really helpful analogy. Congrats on filing the settlement.

Your next question comes from the line of Michael Sullivan with Wolfe Research.

Just following on the Wisconsin rate settlement. I had 2 questions there. I guess, just first, how much of the 1.1 gigawatts of solar that you're adding is covered in the rate ask? And then my second one was kind of back to Edgewater. Do you guys think that the way the recovery was treated here could be a pretty good blueprint for how Colombia ultimately is treated out in 2024?

Yes. Michael, thanks. Maybe I'll start off and let Robert add. But certainly, we see it going in, having a pretty transparent process about what we were doing from adding renewables and retiring to be a very good process to repeat. I'm certainly not going to get ahead of ourselves on how Colombia will be treated, but I think the collaborative approach and making sure we're very transparent. I do think it's struck a very solid balance between customers and investors. So we're very pleased with that. I think it's creative and brings us a lot of certainty. So we can continue to run the business. On the renewable front, I think the question was if that was all of the 1,100 megawatts, that would be correct.

Okay. Great. That's helpful. And then my other question was just more on the Biden tax plan. If maybe you could give some thoughts there, particularly as it relates to maybe the minimum book tax. I know you guys have a number of PTC carryforwards. And how you're thinking about how that could get treated. Yes, just some thoughts on the Biden tax plan.

Yes. We're certainly keeping a very close eye on that, Michael. No question about that. It's a bit early in the process, but there's a number of tax matters there that will be -- have some impact on our business and customers. So we're keeping a very close tabs on that. Maybe I'll let Robert talk about a couple of those on the minimum and PTCs. But certainly, what we look forward to on PTC, ITC is, any level of certainty there, that certainly helps the industry and our business, if the outcome has a bit of certainty to it. So Robert, anything to add on the minimum tax?

Yes. For the Biden plan, too, the provisions we're watching closely right now is obviously the corporate tax rate going from 21% to something potentially higher, that we've modeled that out at, I think, with the top end of a reasonable range is at 28%. And we think that would equate to roughly about a 2% increase in our customer bills. Some modest impacts on our EPS and then actually some positive cash flows, given our NOL position and tax credit carryforwards. But we think we can manage through that and some of the latest thinking I've read about things that, that might be in maybe 24%, 25%. So that would even probably be less impact to our customers, which would be good from our perspective. The minimum tax, we actually have seen more recently where they may set a threshold related to that and not really apply that to any companies that have less than, I think, $2 billion of annual income, and that would exclude us or exempt us for that. So we would be comfortable with that and obviously, supportive of that. So we wouldn't be put into that position. As John indicated, we're actually more interested in the widened plan right now because we see some opportunities for us to utilize some of those benefits to support a lot of the future capital growth that we may be pursuing, things like Direct Pay and potentially refundability of tax credits, we think would give us a good set of cash flows that we can reinvest in future renewables going forward. The stand-alone credit for storage. We think that would really improve the economics of those opportunities for us in the future and could build out some further capital opportunities for us. And then we're also watching the potential to be able to use PTCs instead of ITCs for solar projects that could make, what we think are, very favorable economic turns for our current solar even better. So pretty excited about some of those opportunities on the widened plan and what they might do to our capital investment opportunities going forward here.

Awesome. That's great. And then my last question, just on this corporate sustainability report you guys are doing, I know that's kind of an annual thing, but anything like incremental we should expect with that? Or is that more just a summary of what's been done on the ESG front?

Yes. We get -- we get very excited to tell our story each year and updates. I wouldn't think of anything too notably different, but you will see a bit more focus on water resources, which has been a focus for us for a number of years, but I think we'll be putting some more stories and metrics there about water stress and how our company is focused on water resources.

[Operator Instructions] We'll take our next question from Andrew Levi with Hite Hedge.

Just a couple of questions. So just on the higher equity ratio in Wisconsin, have you guys quantified the earnings power on that? How that helps your earnings power? And then I guess, you have a slightly lower ROE, right? Or was it maintained at 10% in the settlement?

Yes. Just to be clear, Andy. So the ROE is at 10% for a vast majority of the business. The only impact with the 9.8% would be on the remaining net book value of the Edgewater 5 facility. So -- and as far as the higher equity layer, think of it as each probably 100 basis points in the equity layer probably gives us $0.01 or $0.02 of additional earnings.

Okay. Got it. And then -- it's very helpful. And then on -- because you guys had mentioned about -- you have been asked about the FERC ROE, and so I understand that the impact of -- for you guys is minimal. But maybe kind of asking your CEO just kind of like a bigger picture question. So as you think about ROEs in general and obviously, FERC has afforded a, whether it's adders or whatever it may be, incentives, the ROEs seem fairly high relative to the cost of capital. Just kind of on a big picture basis, whether it's 50 basis points or 100 basis point change in ROE from the level that is the base ROE, that would never change or not change, I should say, your the amount of investment that you would make, right? Am I correct about that?

Yes. We don't see that really changing our plan. Andy, we've been on a pretty long runway here of transitioning from older coal resources to renewables for quite some time now, and we would feel those to still be very reasonable, and not materially change our investment strategy.

Okay. And then my last question is just around rates, in general. So I guess, is this the first rate increase because you talked about a 6% rate increase in Wisconsin in quite a while, is that correct?

Yes. Thanks, Andy, and maybe to clarify that 6% covers the next 2 years. And if you look from -- I believe, it's around 2010 until now, it's been over a decade. I think in Wisconsin we would average, it's less than 1%. It's maybe a 0.5% or so over those 11 or 12 years with this increase. So we've done a very nice job of keeping base rates flat and finding a way to continue to make substantial investments in the business.

And your average rate in Wisconsin, if I'm not mistaken, is around $0.10, is that correct?

Correct.

Okay. Because here on the East Coast, it's about $0.18. So -- so you have done a good job. So I just want to point that out.

And it looks like we have no further questions at this time. So I'd like to turn it back over to our speakers for any additional remarks.

This concludes Alliant Energy’s first quarter earnings call. A replay will be available through May 14, 2021, at (888) 203-1112 for U.S. and Canada, or (719) 457-0820 for international. Callers should reference conference ID 4175543. 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 website later today. We thank you for your continued support of Alliant Energy, and feel free to contact me with any follow-up questions.

And that does conclude today's call. We thank everyone again for your participation.