Alliant Energy - Earnings Call - Q2 2017

Transcript

Speaker 0

Thank you for holding, ladies and gentlemen, and welcome to the Alliant Energy's Second Quarter twenty seventeen 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. Good morning.

I would like

Speaker 1

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 Duran, 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 second quarter twenty seventeen 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. The reconciliation between non GAAP and GAAP measures are provided in our investor presentation, which are available on our website at www.alliantenergy.com. At this point, I'll turn

Speaker 2

the call over to Pat. Thanks, Sue. Good morning, and thank you for joining us for our second quarter earnings call. Today, I am pleased to share with you our second quarter twenty seventeen results and I will update you on some recent progress we've made on delivering on our commitments and advancing our strategy. Next, Rob will provide details on our second quarter twenty seventeen results as well as review our regulatory schedule.

Although we experienced a stormy and wet spring, the temperatures were on average normal in the second quarter of twenty seventeen. In comparison, last spring was slightly warmer, which led to a negative quarter over quarter variance of $01 per share. With the normal temperatures, we achieved solid earnings this quarter of $0.41 per share, which is $04 per share higher than the second quarter of twenty sixteen. These results were in line with our expectations and reflect revenue increases at both utilities. Robert will provide more details regarding this quarter's results a bit later.

Although year to date earnings were negatively impacted by the warm winter experienced during the first quarter, our year to date earnings are still within our earnings guidance range. So we are reaffirming our 2017 earnings guidance range of $1.92 to $2.06 per share. Our 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 earnings growth continues to be supported by the utility's robust capital expenditure plans, modest sales growth and constructive regulatory outcomes. Let me spend a few minutes updating you on our wind investment activities. At the time the capital plan was issued in November, we were confident that we secured enough equipment from GE to assure that 100% PTCs could be realized on a total of 900 megawatts of additional wind, including the 500 megawatts that was already approved by the IUB in Iowa.

Now that we have more transparency into the total project cost and sites availability, we believe that we can install up to 1,200 megawatts of new wind that can qualify for 100% PTCs. So just yesterday, we filed a new Advanced Rate Making Principle Application or RPU with the Iowa Utilities Board to request approval for another up to 500 megawatts of utility owned wind. This cost effective addition to our resource plan will help keep energy costs stable for customers over the long term. In the RPU, we requested the same return on equity of 11% that was approved in the last proceeding. We also requested a cost cap of $17.80 dollars per KW, including AFUDC and transmission, which is slightly below the cap approved in the last proceeding.

Details of the filings may be found on slide two. We still plan on filing with the Wisconsin Public Service Commission for additional 200 megawatts of wind for WPL later this year. We are in the early stages of that process and I will discuss that in a few minutes. Please keep in mind that our current published capital expenditure plan includes the 500 megawatts already approved in Iowa and an additional 200 each for IPL and WPL for total wind expansion of 900 megawatts during the twenty seventeen-twenty twenty period. Since the time we issued our capital guidance, wind install costs are trending lower and are now coming in below our original forecast.

Also, as we evaluate construction schedules and in service dates, we expect to shift costs between years in the plan. As a result, we don't expect our 2017 or 2020 capital plan to increase by the full project amount for the additional 300 megawatts of wind. We will update our capital expenditure plan as part of our third quarter earnings release in November. But I want to be clear that this additional wind investment aligns with our earnings growth objective of 5% to 7%. We continue to make good progress on our wind expansion efforts, including the acquisition of additional high performing sites for future utility wind development.

I am pleased to announce that we recently executed a contract with Tradewind to acquire their 170 megawatt English farm site in Southeast Iowa that is expected to close by year end. With this acquisition, our undeveloped utility wind sites total over 1,000 megawatts, including our previously announced purchase of the 300 megawatt Upland Prairie site and the remaining land available at our existing Whispering Willow and Bentree sites that can accommodate up to an additional 600 megawatts of new wind. Construction will commence soon on the already approved 500 megawatts of Iowa wind. I am pleased to announce that the Infrastructure Energy Alternatives LLC commonly known as IEA has been selected as a balance of plant contractor for that portion of our wind expansion. We are forecasting that approximately half of this project will go in service in 2019 and the other half in 2020.

In our efforts to continue pursuing affordable energy options for our customers, we issued a request for proposals for up to 200 megawatts of wind for our Wisconsin customers. There was a lot of interest in the RFP and our team is currently reviewing the various proposals that

Speaker 3

we

Speaker 2

received. This is the first step in our process to analyze the different alternatives before seeking PSCW approval to add additional wind resources to our WPL Energy portfolio. Wind energy will continue to be a significant resource, which not only enhances our ability to manage costs for customers, but also fulfills their increasing desire for renewable energy. Our utility wind portfolio of five sixty eight megawatts will grow substantially with the plans to increase it by up to 1,200 megawatts. In addition, we supplement our owned resources with approximately 600 megawatts of renewable purchase power agreements.

We now forecast that with our utility owned wind and purchase power agreements at almost 30% of Alliance Energy's rated electric capacity will be from renewables by 2024. We are very fortunate that we serve customers in a region where wind energy is economic and abundant, and I must thank our supportive rural communities and farm families, and they are great partners in fueling our future. In addition to our utility owned wind, we recently announced a non regulated wind investment in the Great Western Wind Project. After receiving FERC approval in July, I am pleased to report that last week we closed on this acquisition of a 50% cash equity ownership interest in this Oklahoma wind project. We expect this investment to be modestly accretive to earnings in the first year and have financed the acquisition through a term loan.

We are being very thoughtful and opportunistic in pursuing non regulated growth opportunities with low risk profiles such as the Great Western project, which already includes a long term PPA. We expect that our non regulated business will contribute no more than 10% of our consolidated earnings in the next five years. Moving on to our gas generation investments, we are making good progress with Wisconsin's West Riverside Energy Center. We expect that West Riverside will supply enough energy to our customers by early twenty twenty. Its output will be approximately seven thirty megawatts and our share of the total anticipated project cost is approximately $640,000,000 excluding AFUDC and transmission.

The three electric cooperatives signed letters of intent to acquire approximately 65 megawatts of West Riverside and we have already received FERC approval and expect PSCW approval of our agreement with the co ops by the end of the quarter. These co ops have been WPL wholesale customers for decades. We are delighted that they will be our partners in West Riverside. Solar generation is the newest addition to our energy mix. We are excited about our collaboration on two solar projects with the City Of Dubuque.

The West Dubuque project is approximately 85% complete and the Port Of Dubuque project is approximately 55% complete. These projects are expected to start generating renewable energy for customers in September. Planning work continues for solar integration with our newest gas generating stations, West Riverside Energy Center in Southern Wisconsin and Marshalltown Generating Station in Central Iowa. These projects are in 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 as well as the Beyond Solar Tariff recently filed in Iowa 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 selective reliability improvements such as expansion of our underground electric distribution network are just some of our targeted investments. On the gas side, we continue to make investments in our pipeline safety program. 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. 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 power 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 continue to execute on our strategy by providing cleaner energy 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 owned wind and combined cycle gas to replace the older, smaller and less efficient fossil generation we are retiring.

By the end of this year, we will have retired or converted almost 40% of our twenty ten coal fired generation capacity. Additionally, we will have retired almost 75% of our oil and diesel fired generation capacity by the end of this year. We are on a solid path toward our carbon emission reduction target of 40% by 02/1930. We have also established a new target to reduce water withdrawals by 75% by 2030 from 2005 levels. I encourage you to review the progress we have made towards achieving our carbon reduction target as well as our other sustainability targets by reading the 2017 Corporate Sustainability Report, which will be issued in the middle of this month.

Before I wrap up, I'd like to take this opportunity to thank our dedicated employees for their storm recovery efforts. Iowa and Wisconsin have experienced significant storm activity during the last couple of months. I'm extremely proud of the quick response times and restoration efforts exhibited by our employees, all by keeping safety top of mind. Let me summarize my key focus areas for 2017. Our dedicated employees delivered solid second quarter twenty seventeen results and will deliver our full year financial and operating objectives.

Our plan continues to provide for 5% to 7% earnings growth and 60% to 70% common dividend payout target. Our targeted 2017 dividend payout ratio is 63.3 based on the midpoint of our 2017 earnings guidance of 1.99 We expect to complete our large construction projects on time and at or below budget in a very safe manner. We'll continue working with our regulators, consumer advocates, environmental groups, neighborhood utilities and customers in a collaborative manner. Continued 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 Alliance Energy.

I will now turn the call over to Robert.

Speaker 4

Good morning, everyone. We released second quarter twenty seventeen earnings last evening with our earnings from continuing operations of $0.41 per share, which is $04 per share higher than the second quarter of twenty sixteen. A summary of the year over year earnings drivers can be found on slides three and four. Contributing to the higher earnings in the second quarter were new WPL retail electric and gas base rates, which went into effect on January 1 and IPL interim retail electric base rates, which went into effect on April 13. These increases in earnings were offset by the negative impacts of higher depreciation expense from rate base addition, including the Marshalltown gas facility at IPL, as well as higher energy efficiency cost recovery amortizations at WPL.

Temperature normalized retail electric sales between the 2017 and 2016 were essentially flat. Excluding the impacts of temperatures and the extra day in 2016 for leap year, retail electric sales during the 2017 increased approximately 1% compared to last year. Now let's briefly review our full year 2017 earnings guidance. As Pat noted, we are reaffirming our 2017 guidance range of $1.92 to $2.06 per share. 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. The projected 6% growth in earnings for 2017 will be primarily driven by infrastructure investments reflected in IPL's and WPL's recent base rate review. Starting with our Iowa jurisdiction, during past seven years, we have been able to earn on our increasing IPL rate base while keeping base rates flat for our customers. The recent rate base additions, which include electric distribution investments, the Marshalltown generating station and investments to advance cleaner energy drove the need for our retail electric rate increase. Interim rates implemented in the second quarter include retail electric rate base of approximately $3,800,000,000 a blended ROE of approximately 10% and a common equity ratio of approximately 49.

Given the interim rates started in the second quarter, the resulting earnings increase will only impact the last March. Iowa retail customers will see minimal impact to their total bills in 2017, since the approximate 7% interim rate increase will be offset with refunds related to lower transmission ROEs and billing credits from the tax benefit rider. The 2017 electric tax benefit rider credits are estimated to $68,000,000 As in prior years, these tax benefit riders have a quarterly timing impact, but are not anticipated to impact the full year 2017 results. Slide five has been provided to assist you in modeling the effective tax rates for IPL, WPL and AEC, including the impact of the tax benefit rider. On this slide, we estimate a 2017 consolidated effective tax rate of 17%, which is four percent higher than our 2016 consolidated effective tax rate.

Shifting to our Wisconsin jurisdiction. The WPL retail electric and gas base rate increases went into effect January 1. These reflect electric and gas rate base growth including a full year of the Edgewater V scrubber and bag house 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 new WPL rate design, the PSCW approved the elimination of seasonal pricing beginning in 2017.

This will impact the calendarization of the rate increase in your forecasting models for this year. Turning to our financing plans, our current forecast continues to anticipate strong cash flows from the earnings generated by the business and extension of bonus depreciation deductions through 2019. Align Energy currently does not expect to make any significant federal income tax payments through 2021 with additional tax payment reductions expected after 2021 due to 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 material changes to our 2017 financing plan.

Our plan continues to assume we will issue up to $150,000,000 of new common equity this year, as well as long term debt of up to $250,000,000 at IPL and up to $300,000,000 at WPL. We completed the issuance of $125,000,000 of new common equity under an ATM program during the second quarter. We also entered into a $95,000,000 term loan last week to finance the Great Western Wind project acquisition. We may adjust the remaining financing plan for 2017 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 and the West Riverside project.

Our forecast assumes that the capital expenditures beyond 2017 would be financed by operating cash flows and external financing. Our plan is to maintain the capital structures at IPL and WPL for the most recent retail rate case decision. Finally, for our regulatory schedule, we have several current and planned regulatory dockets of note for 2017 and 2018, which we have summarized on Slide six. For WPL, we anticipate a decision in the fourth quarter on the recently filed fuel only case for 2018. Also in the fourth quarter, we anticipate filing for a certificate of authority for additional wind for our Wisconsin customers.

For IPL, we received a decision on our emissions plan and budget in the second quarter. And yesterday we filed the advanced rate making principles for the second 500 megawatt wind investment for our Iowa customers. We are requesting rate making principles consistent with the application for the first 500 megawatts approved by the IUB last year. The only notable difference is a lower cost cap reflecting a trend in declining capital costs for wind projects. In closing, I would like to briefly discuss the IPL retail electric base rate review.

Intervenor direct testimony was filed earlier this week. This completes the initial testimony by all interested parties as the IUE staff does not file testimony. Some of the key issues addressed in the intervenor testimony were return on equity, rate design and the recovery of certain capital and deferred costs. Financial information filed confidentially by the intervenors will be made available within the next couple of business days now that our second quarter results have been made public. The Office of Consumer Advocate has proposed a $90,000,000 increase in the revenue requirement versus the $176,000,000 increase requested by IPL.

Approximately half of the difference between the increases proposed by the OCA and the IPL relates to different return on equity amounts. To assist you in assessing the impact of the different viewpoints on the ROEs, please note that each 15 basis point change in ROE impacts the revenue requirement by approximately $4,000,000 or a $01 per share earnings impact. We appreciate the points of view presented by each of the interveners and acknowledge the divergent viewpoints are a normal part of rate reviews. We look forward to discussions with the interveners in the coming weeks as we work through the rate review process. 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. Duran. At this time, the company will open 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. And we'll go to our first question from Nicholas Campanella with Bank of America Merrill Lynch.

Speaker 5

Good morning.

Speaker 2

Good morning. Good morning, Nick.

Speaker 5

Good morning. Congrats on the recent announcement. I was just curious, I understand that there's additional wind coming into focus at IPL, I think 300 megawatts is not in the forecast. And you commented a little bit about wind costs and just the magnitude of contribution that we should expect to your upcoming forecast in 3Q. Could you just comment a little bit more about what you're seeing in terms of the cost side?

Speaker 2

Sure. What we're seeing is not only the installed cost coming down, but we're actually getting wind sites that are probably a little better than we initially forecasted. So the combination of the two, we think the overall capital plan of the that we already issued last November, those dollars will be coming down in total and the timing might be shifting between the years again depending on the construction cycles. So we come out with the new guidance in November. Don't expect it to be a full cost for additional 300 megawatts of wind.

All the megawatts are going to be coming down in price. So it'll be slightly different, but don't expect it to increase by the full 300 megawatts if you did the math that way.

Speaker 5

Got it. Thanks. And then just in terms of opportunities outside of wind kind of as we bump up against the PTC roll off here. Can you just expand on what you're seeing for gas or electric infrastructure kind of beyond 2019, 2020?

Speaker 4

Yeah, think this is Robert. Yeah, we're focused on that right now. We're going through a part of our strategic planning process and evaluating different opportunities. Pat alluded to a few of them with the AMI foundational work that we're going to do in Iowa to try develop some of these grid modernization opportunities that we have. We'll probably be able to give you some more details and information on that once we get to the November timeframe and probably meet with you guys in the EEI Conference in November to try and give more detail.

Speaker 5

Great. Thanks so much.

Speaker 0

We'll go next to Brian Russo with Ladenburg Thalmann.

Speaker 6

Hi, good morning.

Speaker 2

Good morning, Brian.

Speaker 6

I appreciate all the insight on the CapEx and shifting CapEx to fill in the wind. But why not increase your CapEx? Is it a question of rate pressure or stretching the balance sheet? Just curious.

Speaker 2

Yeah. It's a little bit of both. We always make sure as we put our capital plan together that it's also through the customer lens because we don't want to be driving rate increases when it's not necessary. But the additional wins, we're still within the 5% to 7% earnings growth. But as we come, we'll have more transparency and clarity for you in November as we come out with the entire CapEx plan, not just the additional wind, but the additional infrastructure investments.

But it's a balance Brian as you're well aware between rate increases and earnings growth.

Speaker 6

Got it. So in terms of the five percent to 7% CAGR, seems like you're adding a lot more incremental wind than when you initially put out this guidance and the wind has the existing wind has 11% ROEs. I would imagine that the new filing in Iowa would also capture 11%. So are you kind of gravitating towards the higher end of that CAGR given the higher ROEs of the incremental CapEx?

Speaker 2

Brian, we always give a range. And I just want to also be very clear. The reason we're increasing our wind investment is because we have confidence that that will qualify for the 100% PTC and that does have a timeframe, a limited timeframe. That's why we're moving forward with the wind at this point.

Speaker 6

Got it. Okay. And then just the Oklahoma wind project acquisition. What was the thought process around that? And can you provide any details like return parameters?

Speaker 2

Yes. No, we can't provide the details. When we file our Q, you see a little bit more information in it, but the terms are confidential. But we're looking at investments that are close to our core things that we're actually we know very well. We know wind very well.

We know the Midwest very well. So we're looking for we'll be very opportunistic. We want good partners. We want low risk projects. This has a long term PPA with a very qualified customer at the other end.

And it's just to learn, learn more about these different investment strategies. But again, we're staying very close to our core.

Speaker 6

Got it. I don't know testimony was filed in the IPO rate case. I think previously the assumption was the case is unlikely to be settled because of cost shifts and rate design. Is that still the case?

Speaker 2

Brian, as we've talked in the past, have a very solid and very straightforward case. However, we're very open for discussions, but we're willing to take this case the full through the full process. But if there is an opportunity to settle, we're definitely willing partners in any settlement discussions. But at this point, we're assuming that we're going to have the fully litigated case. Again, were no surprises in the intervenor testimony that was filed though.

So when you see that's public in maybe a couple of days, you'll have the same takeaway that there's really no surprises in any of the testimony.

Speaker 6

Understood. And then lastly, I recall if I'm correct, but the 500 megawatts of pre approved wind that will be included in a general rate case to be filed in the first quarter of twenty nineteen. Why not include this existing 500 megawatts in that rate case as opposed to a separate docket?

Speaker 4

Yes, right now Brian we're planning on the first piece of the initial 500 megawatts to be in service in the 2019 and then some of the remaining portions of the first 500 megawatts in the first quarter of twenty twenty. This last 500 megawatts that we just filed for yesterday, we don't know the exact timing of that. We're still working through that. So but we'll obviously make the regulatory filings in conjunction with when the in service dates and to ensure we don't have any regulatory lag and also as Pat indicated be very cognizant of the customer cost impacts here.

Speaker 6

Got it. Okay. Thank you very much.

Speaker 0

We'll go next to Ben Vadish with Jefferies.

Speaker 3

Hey, good morning everybody.

Speaker 2

Good morning. Good morning. Hey,

Speaker 3

I think you kind of answered this, but just on the CapEx cost shifting in addition to some of the wind cost shifting. Can you give any color on like where other spending might be shifted out? Is it other generation distribution anything like that?

Speaker 2

No, not at this point. We'll give you a lot more transparency in November. As I said earlier, we not only do we do the capital plan, also do rate case planning at the same time to make sure we're mindful of that. So as you know, have a very flexible capital plan. We're very proud of the fact that it's very flexible.

But our priority is to make sure we get this wind in and that qualifies for the 100% PTCs. So again as we get more details on construction cycles and sites etcetera, we'll be able to give you more color on the rest of the CapEx.

Speaker 3

Okay, great. Thank you.

Speaker 0

We'll go next to Greg Arrill with Barclays.

Speaker 7

Yes, hi. Thank you. Good morning. Good morning. Just in terms of the unregulated guidance, talked about getting up to 10% of earnings.

Will the wind investments that you announced in Iowa, does that affect the unregulated goals at all? Do you think you'll get to the 10% of earnings?

Speaker 2

Yes. No, the one that we just filed for yesterday that's totally regulated wins. So that's two very different investment profiles here. And when we say 10%, it's really no greater than 10%. So we don't want you to think we're going to get to 10% for the unregulated side.

We just we capped ourselves at no greater than 10%. But they're two totally different investment profiles.

Speaker 7

So you've got the incremental 300 megawatts of wind in Iowa and the unregulated plan. How do you reconcile that with the five to 7% earnings growth?

Speaker 2

Yes, that'd be all inclusive. So both the regulated wind investments and the unregulated investments in the unregulated wind as well part of the 5% to 7% earnings growth.

Speaker 7

Thank you.

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 August 1137, at (888) 203-1112 for U. S. And Canada or (719) 457-0820 for international. Callers should reference conference ID 4175543 and the PIN of nine thousand five hundred seventy eight.

In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available on the 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.

Speaker 0

This does conclude today's conference. We thank you for your participation.