Alliant Energy - Earnings Call - Q4 2016

Transcript

Speaker 0

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

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, 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 year end and fourth quarter twenty sixteen earnings. We released 2017 earnings guidance and provided updated 2017 through 2020 capital expenditure 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 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 the non GAAP and GAAP measures are provided in the earnings release, which is available on our website at www.allineenergy.com. At this point, I'll turn the call over to Pat.

Speaker 2

Good morning, and thank you for joining us for our year end earnings call. Today, I'm pleased to share with you an overview of our 2016 results and our outlook for 2017. I will also share with you our progress in advancing cleaner energy, improving the power grid and offering customers innovative products and options. Next, Robert will provide details on our 2016 results and 2017 guidance as well as review our regulatory schedule and comment on potential federal tax reform. We had another good year, achieving $1.88 non GAAP earnings per share consistent with the midpoint of our 2016 earnings guidance.

This represents a 5% increase over comparable 2015 results on a non GAAP temperature normalized basis. Although 2016 had its share of interesting temperature swings, it was on average normal for the year, so there is no need to temperature normalize our 2016 results. Also please note on slide two that 2016 non GAAP results exclude the impact of the Franklin County charge of $0.23 per share recorded in the third quarter. We also issued earnings guidance for 2017 with a midpoint of $1.99 per share, a 6% increase over 2016 non GAAP results, driven by earnings on our growing utility investments. Our earnings growth objective remains at 5% to 7% through 2020 based on non GAAP 2016 earnings per share of $1.88 This long term growth objective is supported by continued robust capital expenditure plans, modest sales growth, constructive regulatory outcomes and is on a temperature normalized basis.

We continue to make solid progress in providing cost effective clean energy for our customers while building a smarter, more robust grid. We have a dynamic planning process that gives us the flexibility to adjust our capital plans as opportunities arise. So last evening, we issued an updated capital expenditure plan for 2017 to 2020 totaling $5,600,000,000 The change from our November 2016 forecast are shown on slide three and are primarily due to the acceleration, the timing of utility wind generation and IPL smart meter investments to enable customers to realize their benefits sooner. We began the transition of our generation fleet almost a decade ago with the addition of utility owned wind and the planned retirements of our smaller, less efficient fossil generating stations. And since 2010, we have retired or converted one third of our coal fired generation, moving us toward our 2,030 carbon emissions reduction target of 40%.

Our generation fleet continues to transition to one that is cleaner and more efficient and major steps are underway to expand our natural gas generation. In Wisconsin, we are in the early stages of construction of the Riverside expansion. And in Iowa, we are in the home stretch of Marshalltown construction. The Marshalltown generating facility is now almost complete. Testing is going well and is expected to go in service by early April.

Forecasted capital expenditures for the facility are approximately $670,000,000 excluding AFUDC and transmission, and it will earn the authorized 11% ROE. We anticipate Marshalltown will be included in IPL's retail electric interim rates, which will be implemented ten days after our rate filing in the second quarter. Marshalltown will be our most efficient facility to date and is expected to have 60% less carbon emissions and 90% less water withdrawals when compared to the 2,005 levels for the generating units it will replace. In Wisconsin, we broke ground for the Riverside expansion last September and expect that it will supply 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.

Three co ops signed their letters of intent to acquire approximately 65 megawatts of Riverside and we expect PSCW approval of that agreement in the third quarter. These co ops have been WPL wholesale customers for decades and we are delighted that they will be our partners in Riverside. Our capital expenditure plan also includes an additional 900 megawatts of wind energy, of which 500 megawatts was approved by the IU Utilities Board last year. Key terms of that approval include a cost cap of $18.30 dollars per kW including AFUDC and transmission, a return on equity of 11% for the life of the asset and a depreciable life of forty years. We have selected GE as the wind turbine supplier for this expansion and acquired enough turbines from GE during the 2016 to ensure all 900 megawatts of new wind is eligible for the full level of reduction tax credits.

Solar generation is the newest addition to our energy mix, and we continue to gain valuable experience on how best to integrate it as well as storage into our electric system. We are currently receiving power from our three solar facilities, including Wisconsin's largest solar farm 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 our planned solar collaboration with the City Of Dubuque will help us meet our customers' growing interest in cleaner and distributed forms of energy. The electric and gas distribution system continues 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.

Also, communities and industrial customers have requested additional natural gas supply, which is giving us the opportunity to upgrade and expand our gas system, while at the same time continuing our pipeline safety programs. This year, we plan to begin installation of smart meters for Iowa electric and gas customers. This is an important 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 connect and disconnects. We expect to complete the Iowa SmartMavior installation in 2019.

We are making good progress in offering our customers innovative solutions and options. WP and L recently received approval for new residential customer offerings, including simpler time of use pricing plans, a demand rate pilot, a fixed bill option and lower rates for renewable energy plans. We are also offering both Iowa and Wisconsin customers rebates for installation of charging stations. When we file the IPL retail electric base rate review, we plan to propose a number of product offerings for our Iowa customers as well. As I wrap up my remarks, I would like to briefly comment on federal initiatives and the impacts they may have on our industry and specifically on Alliance Energy.

As I mentioned earlier, the transition of our generation fleet started almost a decade ago. Our plan has been based on an economic monetization of our generation fleet to one that is more energy efficient and lower in emissions and water usage. Our plans were never predicated on a Clean Power Plan, but rather they are based on providing our customers safe, reliable and cost competitive energy while improving the environment of the communities that we have the privilege to serve. The current debate on federal corporate tax reform is very important to our company and our customers, and we are very involved in the discussion. In general, lower tax rates should be beneficial to all.

However, we must look at any tax reform in its totality and not react to specific items. Robert will address how the current proposals would impact customers and shareowners of Alliance Energy. On the various legislative and regulatory proposals, we will continue to engage with key local, state and federal stakeholders as well as customer and industry groups such as EEI and advocate for our customers' and shareowners' interest. Let me summarize my key focus areas for the coming year. Our dedicated employees delivered a solid 2016 and will deliver twenty seventeen's financial and operating objectives.

Our plan continues to provide for 5% to 7% earnings growth and a 60% to 70% common dividend payout target. Our targeted 2017 dividend payout is 63.3% based on our 2017 earnings guidance of $1.99 per share. We expect to complete projects on time and at or below budget in a very safe manner. We'll continue working with our regulators, consumer advocates, environmental groups, neighboring 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. Now I'll turn the call over to Robert.

Speaker 3

Good morning, everyone. We released year end twenty sixteen earnings last evening with our non GAAP earnings from continuing operations of 1.88 per share, which is $0.13 per share higher than the non GAAP earnings for year end 2015. A summary of the year over year earnings drivers may be found on slides four, five and six. The major contributors of the year over year earnings growth were higher electric and gas margins and increased AFUDC related to the Marshalltown, January station. I'm pleased to report that temperature normalized sales increased approximately 1% as forecasted.

The Commercial and Industrial segments continue to be the largest sales growth classes year over year at both the utilities. For 2016, our earnings were not impacted by temperatures, but milder temperatures in 2015 resulted in a negative $04 per share variance. Before I move on to discuss 2017 guidance, I would like to point out that at the end of twenty sixteen, Align Energy's investment in ATC moved from WPL to one of our non regulated subsidiaries in accordance with the PSCW order. There was no impact to Align Energy's consolidated financial statements as a result of this change and we will continue including ATC's earnings with the utilities in future earnings release tables. Now, let's briefly review our 2017 guidance.

Last evening, we issued our consolidated 2017 earnings guidance range of $1.92 to $2.06 earnings per share. A walk from the 2016 non GAAP EPS to the midpoint of the 2017 estimated guidance range is shown on slide seven. The key drivers for the 6% growth in earnings relate to infrastructure investments, which are reflected in WPL's recently approved electric and gas retail rates, as well as the infrastructure investments for IPL, which will be included in interim rates, which will go in effect ten days after we filed the retail electric rate case in the second quarter of twenty seventeen. The 2017 guidance range assumes normal temperatures and retail sales growth of approximately 1% when compared to 2016. Please note that when comparing 2016 to 2017, we expect most of the sales growth to come from commercial and industrial classes.

During the past seven years, we've been able to earn on our increasing IPL rate base while keeping base rates flat. The recent rate base additions which include grid modernization, the Marshalltown generating Station and investments to advance cleaner energy are driving the need for an electric base rate increase. We expect interim rates will include an annualized electric rate base of approximately $4,000,000,000 with a blended ROE of approximately 10% and a common equity ratio of approximately 49%. Franklin County will be included in interim rate base since we received FERC approval for the transfer to IPL earlier this week. We're in the process of finalizing revenue requirements and supporting schedules.

Thus we are not disclosing the interim revenue requirement dollar amount at this time. Customers will see a minimal impact to their total bills in 2017 since the approximate 5% to 10% interim rate increase will be offset with tax benefit rider billing credits and refunds related to lower transmission ROEs. On Slide eight, we have provided the proposed regulatory schedule for the IPL electric rate proceeding as well as definitions of the key components that will be included in final rates, which we expect to impact 2018 earnings. 2017 will be the final year that IPL expects to provide tax benefit rider billing credits to electric and gas customers to help reduce their costs. The 2017 credits are estimated to be close to the $76,000,000 of credits in 2016.

As in prior years, the tax benefit riders have a quarterly timing impact, but are not anticipated to impact full year 2017 results. The WPL retail rate case reflected electric rate base growth for a full year for the Edgewater V scrubber and bag house, which 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 shown on slide nine, the 2017 approved retail electric and gas rate base was $3,000,000,000 with an authorized ROE of 10% and a common equity ratio of 52%. Slide 10 has been provided to assist you in modeling the effective tax rates for IPL, WPL and AEC.

On this slide, we estimate a 2017 consolidated effective tax rate of 18%, which is 5% higher than our 2016 consolidated effective tax rate. Also to assist you in modeling, please note that IPL's interim rates will not be in effect until second quarter. In addition, WPL's new rates are in effect for the full year of 2017, but we have eliminated the summer versus winter pricing differential for Wisconsin retail electric customers. Both are expected to result in changes to our quarterly earnings profile compared to prior years. Turning to our financing plans.

Our current forecast reflects strong cash flows given the earnings generated by the business and impacts of the 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 included in our plan. 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 few years. Our 2017 financing plan remains consistent with our announcement last November. Our plan assumes we will issue up to $150,000,000 of new common equity later this year as well as long term debt of up to $250,000,000 at IPL and $300,000,000 at WPL.

We may adjust plans as deemed prudent if market conditions warrant and as our external financing needs continue to be reassessed. As we look beyond 2017, our equity needs will be driven by renewable investments and the Riverside expansion project. Our forecast assumes that the capital expenditures beyond 2017 would be financed by operating cash flows and external financing. Our intent is to maintain the capital structures at IPL and WPL for the most recent retail rate case decision. We have several current and planned regulatory dockets of note for 2017, which we have summarized on Slide 11.

For IPL, we expect to file the next Iowa electric rate case and receive a decision on our emissions plan and budget in the second quarter. During the third quarter, we are planning to file Principles for additional wind in the State of Iowa. For WPL, we plan to file a fuel only case for 2018 by the third quarter, which is customary in years where a retail electric rate case is not filed. Also in the third quarter, we anticipate filing for a certificate of authority for additional wind for Wisconsin customers. Before I conclude my remarks, I would like to share some information on potential tax reform.

There is still much uncertainty regarding the content and timing of potential tax reform. There it is too early to provide details on the likely outcome. Instead, we are providing one set of assumptions from the various proposals for tax reform and the near term directional impacts of such assumptions to give some indication of how our customers and shareowners could be impacted. On slide 12, we have provided these assumptions and some of the issues that could differentiate Align Energy from our peers in the industry. These differences include our existing net operating loss positions at our two utilities, our low non regulated and parent debt, flow through accounting in our Iowa jurisdiction and PTC credits generated by our wind farms.

First, we have deferred tax assets on our regulated books related to federal net operating losses that we currently expect to utilize to offset taxable income through 2021. These deferred tax assets are part of the rate based calculations for both IPL and WPL and are expected to decline over the next five years under current tax provisions as we utilize such NOLs. If 100% expensing of capital expenditures is included in tax reform, we expect the utilization of our NOLs would slow down and extend beyond 2021 resulting in modest increases in IPL's and WPL's rate base in the near term. Second, Align Energy has a strong balance sheet with no long term debt at the parent and approximately $550,000,000 of long term debt at its non regulated subsidiaries. If tax reform includes a loss of interest deductibility, this relatively low debt level should not result in a significant impact on our results.

Third, we are monitoring if IPL's flow through tax methodology will continue to be available to state commissions following tax reform. If the requirements of the tax code provide no flexibility in how state commissions decide the recovery of certain property related timing differences, this could result in a slight rate increase for IPL customers over the near term. WPL's income taxes are normalized, therefore WPL customers should not be impacted by this issue. Finally, we are advocating for the retention of production tax credits under the current phase out rules as well as other credits earned under the current tax code so that we may continue providing such benefits to our customers. We very much appreciate your continued support of our company and we look forward to meeting with many of you throughout this year.

At this time, I will turn the call back over to the operator to facilitate the question and answer session.

Speaker 0

Thank you, Mr. Durian. 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 timeframe for this morning's call. And we'll go first to Brian Russo with Ladenburg Thalmann.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, I

Speaker 4

understand that you don't want to provide a revenue requirement request in the upcoming IPO rate case. But I'm just curious in general, what percent of that rate increase would you say is attributable to Marshalltown?

Speaker 2

I'll pass it on to Robert.

Speaker 3

Yes. I would say a significant majority of the interim rate increase levels will be based on the Marshalltown generating station and the return on return of that investment. Not much else.

Speaker 4

Okay, good. Because that's been preapproved, correct?

Speaker 3

Correct.

Speaker 4

And you mentioned that the interim rate would be based on a blended 10% ROE. If Marshalltown is 11%, how do you get 10% blended?

Speaker 3

So we have to use past precedent and what was used in the last rate cases and because of the double leverage issue that we have to continue to apply until we can proceed with that issue in the next rate case. Really that double leverage brings down the non advanced rate making principles down to about 9.5% and therefore when you blend that with Marshalltown, Emory and Whispering Willow that also have higher ROEs, it ends up being about 10% blended.

Speaker 4

Got it. And I may have missed this before, but did you say you have no parent debt now?

Speaker 3

That is correct. As of the end of twenty sixteen, we no longer have any parent company.

Speaker 4

Okay. So that the prior parent debt that created the double leverage at IPL no longer exists?

Speaker 3

That is correct.

Speaker 4

Okay. Got it. Thank you.

Speaker 3

Next

Speaker 0

to Greg Orrill with Barclays.

Speaker 3

Yes, thank you. Was wondering

Speaker 2

Hi, Greg.

Speaker 3

Good morning. I was wondering when for modeling purposes the I apologize if you said this when the incremental CapEx on renewable projects in 2019 would go into rate base? This is Robert, Greg. So right now we're scheduled to try and put into service the wind projects in 2019 and 2020. I would say a small portion of it's going to go into 2019 and so it won't have a significant impact on the 2019 rate base.

We are projecting to update our rate base information and present that as part of the information that we'll share next week. And so we'll be posting that probably sometime early next week if you want to look at that online. Okay. Will do. Thank you.

Thanks, Greg.

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 03/03/2017 at (888) 203-1112 for U. S. And Canada or (719) 457-0820 for international. Callers should reference conference ID 800000244179.

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.

Speaker 0

This concludes today's conference. We do thank you for your participation. You may now disconnect.