Alliant Energy - Earnings Call - Q2 2016

Transcript

Speaker 0

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's Second Quarter twenty sixteen Earnings Conference Call. At this time, all lines are in a listen only mode. Today's conference is being recorded. I would now like to turn the call over to your host, Susan Gill, Manager of Investor Relations at Alliant Energy.

Speaker 1

Good morning. I would like to thank all of you on the call and the webcast for joining us today. We appreciate your participation. With me here today are Pat Campling, Chairman, President and Chief Executive Officer and Robert Durian, Vice President, Chief Accounting Officer and Treasurer as well as other members of the senior management team. Following prepared remarks by Pat and Robert, we will have time to take questions from the investment community.

Tom is not on the call today since he is on vacation with his family this week. We issued a news release last night announcing Alliant Energy's second quarter twenty sixteen earnings and reaffirmed 2016 earnings guidance. This release as well as supplemental slides that will be referenced during today's call are available on the Investor page of our website at 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. At this point, I'll turn the call over

Speaker 2

to Pat. Good morning, and thank you for joining us for our second quarter twenty sixteen earnings call. As Susan mentioned, Tom Hanson is off vacationing with his children and grandchildren, so Robert Durie and I will handle today's call. I'll begin with an overview of our second quarter performance, then review the progress made in advancing cleaner energy and creating a smarter energy infrastructure for customers. I will then turn the call over to Robert to provide details on our second quarter financial results as well as review the regulatory calendar.

Earnings from continuing operations for the 2016 when compared to 2015 increased by $03 per share, which includes a $02 positive margin impact from temperatures. The remaining difference was primarily a result of higher allowance for funds used during construction related to the Marshalltown generating station. We shared some exciting news last week as Governor Branstad and I announced our proposed $1,000,000,000 investment for additional wind generation in Iowa. As you recall, we had originally forecasted additional renewable investments in the second five years of our ten year capital plan. This plan accelerates this investment in order to take advantage of the full benefit of the production tax credit extension.

This means that the expected in service dates of the new wind projects will now be in 2019 and 2020. With this announcement, IAPL filed an Advanced Rate Making Principles application or RPU with the Iowa Utilities Board to request approval to add owned and operated wind resources of up to 500 megawatts. A portion of the new wind will likely be located near our existing Whispering Willow site in Franklin County, Iowa. Options. We have requested a return on equity of 11.5%.

Details of the filing may be found on slide two. As part of this filing, we have requested a temporary renewable energy rider. This rider would allow us to start recovering a return of and on the wind farm when they are placed in service without filing a traditional rate case. The rider also allows our customers to immediately receive the financial benefits of the reduction tax credits along with the energy benefits of the wind generation produced. If the rider is approved, it's expected to remain in effect until the IUB's final decision in a future retail electric base rate case.

We have requested that the IUB make a decision on this RPU application during the fourth quarter of this year so we can make a determined down payment to secure the full production tax credit extension level. The full production tax credits and estimated energy benefits would more than offset the return of and on the net investment and related O and M expense, resulting in savings to customers over the life of asset. The production tax credits will decrease by 20% if we are not able to initiate our investment until next year. We issued an RFP to several wooden suppliers in late June and expect those responses in a few weeks. After we evaluate the responses, we will then have a better estimate of the total cost and timing of the capital expenditures for the proposed project.

If this project is approved, we don't expect our sixteen to twenty nineteen capital plan to change materially. We are finding that some of our planned capital projects are coming in below the original forecast, and we expect to reprioritize and in some instances delay certain other capital expenditures that have not yet begun. We will update our capital expenditure plan as part of our third quarter earnings release. We do not anticipate that these changes to our capital expenditure plan will cause a change in our long term earnings growth rate projection of 5% to 7%. Renewable energy has been a meaningful part of our energy resources.

We currently have five sixty eight megawatts of owned wind generation and anticipate supplementing that with approximately seven seventy megawatts renewable purchase power agreements. The proposed Iowa investments would almost double our owned and operated wind generation and place Alliance Energy as one of the leading U. S. Electric utilities with owned wind energy for our customers. In addition to the RPU request for 500 megawatts of new wind investments, we anticipate filing a restructuring request with the IUB later this quarter to transfer the Franklin County wind farm from Alliance Energy Resources to IPL.

The transfer must be made at the lower of cost or market. Therefore, our application if our application is approved by both the IUB and FERC, we would expect to take a nonrecurring pretax charge of approximately half of Franklin County's net book value. We are also evaluating additional wind energy purchases and future investments for our Wisconsin customers. This will add economic and stable energy to our fuel costs and allow us to offset market purchases of energy. Solar generation is also an expanding part of our renewable portfolio.

We continue gathering valuable experience on how best to integrate solar in a cost effective manner into our electric system. At our Madison headquarters, over 1,300 solar panels are now generating power for the building. Wisconsin's largest solar farm on our Rock River Landfill, which is adjacent to Riverside, is also now generating power. And in Iowa, construction is quickly progressing at the Indian Creek Nature Center in Cedar Rapids. We will own and operate the solar panels.

In interest of these, as well as our recent announcement of the solar collaboration with the City of Dubuque, are important to bringing renewable sources closer to our customers and working with them to create sustainable energy future. Next week, we will issue our first Corporate Sustainability Report, which is an expansion of our past environmental reports. The report does highlight that we have made significant reductions in NOx, SOx and mercury emissions. Emissions. The report also highlights that carbon emissions continue to decrease due to additional renewable energy, increased use of efficient natural gas fired generation and the transition of our coal generation fleet.

Therefore, we expect our carbon emissions to be reduced by 40% by 2030 from 2005 levels. Now let me brief you on our twenty sixteen construction activities with forecasted investments of over 1,100,000,000 with almost half of that focused on our distribution systems. Approximately $300,000,000 is being invested in our electric distribution system to make them more robust, reliable and resilient. This year's plan also includes approximately $200,000,000 for improvements and expansion of our natural gas distribution business, almost double prior year spending. As you are aware, the Public Service Commission of Wisconsin approved the Certificate of Public Convenience and Necessity for the Riverside expansion earlier this year.

We expect the output from the new Riverside units to be approximately 700 megawatts and the total anticipated capital expenditure remains at approximately $700,000,000 excluding AFUDC and transmission. Riverside is expected to be supplying energy to our customers by early twenty twenty. AECOM has been selected to perform the engineering procurement and construction and the combustion turbine selected are GE Frame seven, some of the most efficient units in production. In Iowa, the Marshalltown natural gas fired generating facility is progressing well and is approximately 85% complete. Total capital expenditures for this project are anticipated to be approximately $700,000,000 excluding AFUDC and transmission.

Marshalltown is on time and on budget and is expected to go in service in the spring of twenty seventeen. Riverside and Emory, our two primary existing gas generating facilities, continue to experience increased dispatch when compared to prior years. During the first half of twenty sixteen, Riverside and Emory's capacity factors were approximately double their five year average. The ability to lean on our gas fired generation during periods of low gas prices and also as a flexible resource during periods of low wind or cloudy days demonstrate the importance of this resource and our balanced energy mix. Moving on to our existing coal fleet.

We're nearing the end of our successful construction program to reduce emissions at our largest facilities. The Edgewater Unified Scrubber and Bag House project was completed on time and below budget. Construction of the Columbia Unit 2 SCR is approximately 18% complete. WPL's total capital expenditure plan for this project is anticipated to be approximately $50,000,000 and is expected to go in service in 2018. There are several new regulations on the horizon dealing with ash ponds, bottom ash and water usage at our coal fired generating stations.

We have developed a plan and have begun to initiate that work and need to comply with these rules and regulations. Ash pond closures and bottom ash conversion projects are underway in Iowa as outlined in IPL's filed emissions plan and budget. In Wisconsin, PSCW recently approved our application for bottom ash conversion at Edgewater Five. The total expenditures for our ash and water programs are anticipated to be over $200,000,000 next seven years. The rate based estimates provided in our Investor Relations presentation include the near term expenditures for this program.

During the past few years, we have been executing on a plan for the orderly transition of our generating fleet to serve our customers in an economic manner. We've made progress in building a generation portfolio that has lower emissions, greater fuel diversity and is more cost efficient. The transition includes increasing levels of natural gas fired and renewable energy generation, lower levels of coal generation through retirements and fuel switching, and installing emission controls and performance upgrade at our largest coal fired facilities. We have also started water and ash programs at our facilities to meet current and expected future environmental requirements. And I am proud of the fact we've accomplished all that while holding electric base rates flat for both IPL and WPL since 2011.

Let me summarize our key messages. We will work to deliver twenty sixteen's financial and operating objectives. Our plan continues to provide a 5% to 7% earnings growth and a 60% to 70% common dividend payout target. Our targeted 2016 dividend increased by 7% over 2015 dividend. Successful execution of our major construction projects include completing projects on time and at or below budget and in a safe manner working with our customers, regulators, consumer advocates, environmental groups, neighboring utilities and communities in a collaborative manner We're shaping the organization to be leaner and faster, while keeping our focus on serving our customers and being good partners in our communities.

And we will continue to manage the company to strike a balance between capital investment, operational and financial discipline, and cost and back to the customers. Thank you for your interest in Alliance Energy. I'll now turn the call over to Robert.

Speaker 3

Good morning, everyone. We released second quarter twenty sixteen earnings last evening with our earnings from continuing operations of $0.37 per share, which was $03 per share higher than the non GAAP earnings in the second quarter of twenty fifteen. A summary of the quarter over quarter earnings drivers may be found on slides three, four and five. Consistent with the growth assumed in our 2016 earnings guidance, retail electric temperature normalized sales for Iowa and Wisconsin increased approximately 1% between the 2015 and the 2016 excluding Minnesota. The Commercial and Industrial segments continue to be the largest sales growth drivers year over year.

The second quarter twenty sixteen results include an adjustment to our ATC earnings to reflect an anticipated decision related to the second complaint filed regarding the return on equity levels charged by transmission owners in MISO. We reserved $01 per share in the second quarter of twenty sixteen, reflecting an anticipated all in ROE of 10.2%, a reduction of 200 basis points from ATC's current authorized ROE of 12.2%. This reserve was triggered by the FERC Administrative Law Judge's initial decision on the second complaint issued in June 2016. We are expecting a FERC decision by the end of this year for the first complaint and within the 2017 for the second complaint. Now let's briefly review our 2016 guidance.

In November, we issued our consolidated 2016 earnings guidance range of $1.8 to $1.95 per share on a post stock split basis. The key drivers for the 5% growth in earnings relate to infrastructure investments such as emission control equipment at Edgewater five in Lansing and higher AFUDC related to the construction of the Marshalltown generating station. The earnings guidance is based upon the impacts of IPL's and WPL's previously announced retail base rate settlement. In 2016, IPL expects to credit customer bills by approximately $10,000,000 By comparison, the billing credits in 2015 were $24,000,000 IPL also expects to provide tax benefit rider billing credits to electric and gas customers of approximately $62,000,000 in 2016. For prior years, the tax benefit riders may have a quarterly timing impact, but are not anticipated to impact full year results.

The WPL settlement for the 2016 test period reflected electric rate base growth for the Edgewater scrubber and baghouse, which was placed in service this year. The increase in revenue requirements in 2016 for this and other rate base additions was completely offset by lower energy efficiency cost recovery amortization. In addition, slide six has been provided to assist you in modeling 2016 effective tax rates for IPL, WPL and AEC. Turning to our financing plans, our current forecast incorporates the extension of bonus depreciation deductions through 2019. As a result of the five year extension of bonus depreciation, Align Energy currently does not expect to make any significant federal income tax payments through 2021, with additional tax payment reductions expected after 2021 with the proposed wind investments at IPO.

This forecast is based on current federal net operating losses and credit carryforward positions as well as future amounts of bonus depreciation expected to be taken on federal income tax returns over the next five years. Cash flows from operations are expected to be strong given the earnings generated by the business. We believe that with our strong cash flows and financing plan, we will maintain our targeted liquidity and capitalization ratios as well as high quality credit ratings. Our 2016 financing plan assumes we will issue approximately $25,000,000 of new common equity through our Scharner Direct plan. The 2016 financing plan also anticipates issuing long term debt of up to $300,000,000 at IPL and up to $500,000,000 at our non regulated businesses.

Dollars $310,000,000 of such proceeds are expected to be used to refinance the maturity of term loans at our parent and non regulated businesses. As we look beyond 2016, our equity needs will be driven by the Riverside expansion project and the requested 500 megawatt wind investment at IPL. Our forecast assumes that the capital expenditures for 2017 would be financed primarily by a combination of debt and new common equity. Our 2017 financing plan currently assumes issuing up to 150,000,000 of new common equity. We may adjust our financing plans as deemed prudent if market conditions warrant and as our debt and equity needs continue to be reassessed.

We have several current and planned regulatory dockets of note for 2016 and 2017, which we have summarized on slide seven. For IPL, our permit application for the Clinton natural gas pipeline has been approved. During the rest of this year, we'll be supporting the filing to add up to 500 megawatts of wind in Iowa. And later this quarter, we plan to file a restructuring request to transfer the Franklin County wind farm from Align Energy Resources to IPL. We anticipate receiving decisions on both of these filings prior to our Iowa Retail Electric filing anticipated in April 2017.

We expect to file the next Iowa retail gas based rate case in the second quarter of twenty seventeen. For WPL, we filed our 2017 and 2018 retail electric and gas based rate case, which resulted from collaboration with the Citizens Utility Board, the Wisconsin Industrial Energy Group, and PSCW staff, settlements of this retail electric and gas increase proposal. This filing includes new pricing options as well as an increase in the fixed charge component of tariffs. We anticipate a decision from the PSCW by the end of this year with new rates effective 01/01/2017. Finally, I would like to update you on the information we plan to share during our next two quarterly earnings calls.

Typically, during the third quarter, we have provided our following year's earnings guidance and dividend target as well as updated capital expenditures and rate base forecasts. Due to our planned filing of the IPL Electric base rate case in 2017, we anticipate issuing 2017 earnings guidance during the year end call next February. During our third call in November, we expect to provide 2017 dividend target, updated capital expenditure forecasts and updated rate base forecasts. We very much appreciate your continued support of our company. At this time, I'll turn the call back over to the operator to facilitate the question and answer session.

Speaker 0

Thank you, Mr. Darien. At this time, the company will open up the call to questions from members of the investment community. Alliant Energy's management will take as many questions as they can within the one hour time frame for this morning's call. We'll take our first question from Andrew Wisele with Macquarie Capital.

Speaker 4

Hey, good morning everyone.

Speaker 1

Hey Andrew. Good morning.

Speaker 4

Didn't know Tom takes vacation. I actually thought he lives in the office.

Speaker 2

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

Speaker 4

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

Speaker 2

Sure. You asked a lot of questions here. Let me take them in order and Robert chime in here where need be. We actually have on the investor deck on slide 29 where we have the renewable energy wind slide. And we've put on there the book value of Franklin County and this was at year end approximately $130,000,000 Andrew.

So at the time the transfer would be completed is when we'd probably take the impairment. So we're looking into not receiving full approval into early next year. So that's something we'll be evaluating over the next several months. You asked about precedent. You know, again, you're familiar that we've done this on the Wisconsin side of the House already.

So we've been working with the parties in Iowa to make sure they understand exactly what we'll be asking for at that point. So I don't expect to have any large issues with this. And again, the rules that that will be transferred at the lower of cost or market. So we'll be following those rules absolutely as well.

Speaker 4

Great. That's helpful. Next on the new wind project. Your neighbors at Berkshire obviously also announced a pretty major investment in wind in the state. Have the two of you talked about working together?

Or do you know are regulators considering the proposals similarly competitively independently? How should we think about those two projects going in tandem?

Speaker 2

Sure. They're two separate dockets as you're well aware. Mid Am is a little bit ahead of us. So I would consider them two separate dockets. As you're well aware though, we're partners with Mid Am and several other joint, coal units, so we have a great relationship with them.

But working with the state, as you can tell from our announcement, the state is very excited about both our investment and Berkshire's investment. So we're working with the state jointly to make sure that all these wind projects are delivered on time for our customers. So it's a very cooperative spirit between the two of us, but it is they are two different dockets though.

Speaker 4

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

Speaker 2

No, not at all. And again, before we made the filing, we issued the RFP to the vendors just to make sure there was still a supply out there. We haven't received the bids back yet, but the discussions with the vendors are going very, very well. As you're aware, we actually have the land around Franklin County already. So we're actually talking to the townspeople and they're very excited for us to be putting more wind around their county.

So we don't anticipate with either utility having any issues with land in Iowa or resources getting these large projects completed.

Speaker 4

Very good. Then my last one, you mentioned that you're not expecting any change to the long term earnings power. I'm a little surprised by that just because if this is going to be lowering your O and M's and avoiding some purchase power, I would think that would create some headroom. I know customer bill affordability some incremental CapEx relative to your prior guidance.

Speaker 2

You know, it's really too early to be up for us answer that. We really need to step back and look at our multi year plan Andrew and our rate case planning. But right now we're targeting our capital plan over the next two years to really target that 5% to 7%.

Speaker 4

Okay, great. Thank you for all the details.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Brian Russo with Ladenburg Thalmann.

Speaker 5

Hi, good morning.

Speaker 1

Good morning, morning.

Speaker 5

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

Speaker 2

Sure. I'll turn it over to Robert.

Speaker 3

Yes. Right now we're expecting about a $02 to $03 loss for 2016 which is pretty consistent with what we've seen over the past few years for Franklin County.

Speaker 5

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

Speaker 2

Yes. The thing we have to once we get the bids back from the wind vendors, we would expect the CapEx in the years 2018 and 2019 to be increased from what we currently have. So that's what we're really working through right now. Brian, it's too early to give you an indication of what those annual numbers are going to be. And we'll share that with you on the third quarter call and when we see at EEI.

But that's what we're going through right now to make sure we understand the capital and the financing plan that goes behind the capital plan.

Speaker 5

All right. Got it. And then would you expect similar interveners in your Iowa wind filing, you know, similar to, the interveners in, MIDAM's filing and those that were part of the settlement agreement?

Speaker 2

Yeah, you know, that's a good question. We've been very transparent on this filing in Iowa, as you can tell from all the attention we've gotten on We just filed last week. It's really too early to tell exactly whether the parties want to be a part of this. But we'll monitor that. And like we've done in other cases, we'll make sure we, very transparent and collaborative with anybody that wants more information on the case.

Speaker 5

Let me ask it maybe a different way. Do you have, large, industrial customers that are supportive of kind of a greener overall footprint in their operations?

Speaker 2

Yeah, absolutely. Most of our large on their sustainability goals as well. So we've we did a lot of outreach, Brian, before we actually made this filing with our large industrial customers. So, you know, I would expect that this case would not have a lot of controversy, but it's too early to say since we just filed it last week.

Speaker 5

Got it. Thank you.

Speaker 0

Our next question comes from Scott Szymczak with Cannon.

Speaker 6

Thanks. Good morning. On Franklin, have you is there a potential opportunity down the line for repowering there? Or is this just more just to bring in the rate base and take it out from where it is now?

Speaker 2

It's really just a transfer over to the utility. But I think all of us that have owned wind farms are looking down the road at repowering opportunities, but that's way down the road, not initially. I mean this wind farm is only a couple of years old and is performing very well.

Speaker 6

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

Speaker 2

Would tell you that first we're focusing on our own new build and the ones that we currently own. And we are supplementing as we've done historically. We're going to have another existing seven seventy megawatts of additional PPAs. We actually like the balance of owned wind and PPA wind because it actually helps stabilize costs for our customers. So we're not looking at any of that at this point but there's definitely an opportunity down the road to look at that.

Speaker 6

Okay, great. Thank you very much.

Speaker 0

Ms. Gill, there are no further questions at this time.

Speaker 1

With no more questions, this concludes our call. A replay will be available through 08/09/2016 at (888) 203-1112 for U. S. And Canada or (719) 457-0820 for international. 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. Thank you for your continued support of Alliance Energy and feel free to contact

Speaker 2

us for any follow-up questions.

Speaker 0

Thank you. And that does conclude today's conference. We thank you for your participation.