Alliant Energy Corporation (LNT) CEO Pat Kampling on Q2 2016 Results - Earnings Call Transcript

| About: Alliant Energy (LNT)

Alliant Energy Corporation (NYSE:LNT)

Q2 2016 Earnings Conference Call

August 2, 2016, 10:00 AM ET

Executives

Pat Kampling – Chairman, President and Chief Executive Officer

Robert Durian – Vice President, Chief Accounting Officer and Treasurer

Susan Gille – Investor Relations

Analysts

Andrew Weisel – Macquarie Capital

Brian Russo – Ladenburg Thalmann

Scott Senchak – Cannon Asset Management Limited

Operator

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's Second Quarter 2016 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 Gille, Manager of Investor Relations at Alliant Energy.

Susan Gille

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 Kampling, 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 this family this week.

We issued a news release last night announcing Alliant Energy's second quarter 2016 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 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 to Pat.

Pat Kampling

Good morning and thank you for joining us for our second quarter 2016 earnings call. As Susan mentioned, Tom Hanson is of vacationing with his children and grandchildren. So, Robert Durian and I will handle today's call.

I will begin with an overview of our second quarter performance, then review the progress made and advance in cleaner energy and creating a smarter energy infrastructure for our customers. I will then turn the call over to Robert to provide details on our second quarter financial results, as well as the review the regulatory calendar.

Earnings from continuing operations for second quarter of 2016 when compared to 2015 increased by $0.03 per share which include the $0.02 positive margin impact from temperatures, remaining difference was primarily result of higher allowance refunds 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 billion investment for additional wind generation in Iowa. As you recall, we had originally forecasted additional renewal investments in the second five years of our 10-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 project will now be in 2019 and 2020.

With this announcement, IPL filed an advanced rate-making principles application for RPU with the Iowa Utilities Board for fast approval to add owned and operated wind resources of up to 500 megawatts. A portion of the wind will likely be located near our existing Whispering Willow site in Franklin County, Iowa. We are also pursuing additional land options. We have requested a return on equity of 11.5%. Details of the filings maybe found on Slide 2.

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, with us filing a traditional rate case. The rider also allows our customers to immediately receive the financial benefit of the reduction tax credits along with the energy benefit of the wind generation produced. If the rider is approved, it's expected to remain in effect until the IUB's final decision and a future retail electric base rate case.

We have requested that the IUB's make decision on this RPU application during the fourth quarter of this year, choose to make 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&M expenses resulting in a savings to customers over the life of the 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, you 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 2016 to 2019 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 instance 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 projections of 5% to 7%.

Renewable energy has been a meaningful part of our energy resources. We currently have 568 megawatts of owned wind generation and anticipate supplementing that with approximately 770 megawatts renewable purchase power agreements. The proposed Iowa investment with almost 12 owned and operated wind generation and placed Alliant Energy as one of the leading U.S. electric utilities with owned wind energy for our customers.

In addition to the RPU request of 500 megawatt of new wind investments, we anticipate filing a restructuring request with the IUB maybe this quarter to transfer the Franklin County wind farm from Alliant Energy Resources to IPL. The transfer must be made as a 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 non-recurring pre-tax charge of approximately half of Franklin County's net book value.

We are also evaluating additional wind energy purchases and future investments for Wisconsin customers. This will add economic and stable energy to our fuel cost and allow us to offset market purchases of energy.

Solar generation is also and expanding part of our renewable portfolio. We continue gathering value 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 land field which is adjacent to Riverside is also now generating power. In Iowa construction is quickly progressing at the Indian Creek Nature Center in Cedar Rapids. We will own and operate the solar panels.

A group 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 report. The report does highlight that we had made significant reductions in NOx, Sox and mercury emissions. Report also highlights that carbon emissions continue to decrease due to additional renewable energy, increase use of efficient natural gas-fired generation and the transition of our cold-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 2016 construction activities with forecast investments of over $1.1 billion, it's almost half of that focused on our distribution system. Approximately $300 million is seen invested in our electric distribution system to make them more robust, reliable and resilient. This year's plan also includes approximately $200 million for improvements of expansion of our natural gas distribution business and several prior years trimming.

As you are aware, the Public Service Commission of Wisconsin approved the certificate of public convenience a necessity for the rural side expansion earlier this year. We expect the asset on the new Riverside units to be approximately 700 megawatt and the total anticipated capital expenditures remains at approximately $700 million excluding AAPC and transmission. Riverside is expected to be supplying energy to our customers by early 2020. AECOM has been selected to perform the engineering, procurement and construction, and the combustion turbines selected are GE 27s [ph] some of the most efficient units on production.

In Iowa the Marshalltown natural gas-fired generating facility is progressing well and is approximately 85% complete. Total capital expenditures for this project anticipated to be approximately $700 million excluding AFUDC and transmission. Marshalltown is on time and on budget and is expected to go in service in the spring of 2017.

Riverside and Emery are two primary existing gas generating facilities continue to experience increased dispatched when compared to prior years. During the first half of 2016, Riverside and Emery's capacity factors were approximately double their five year average. The ability to be on a gas-fired generation during period of low gas prices and also as a flexible resource during period of low wind or cloudy days demonstrate the importance of this resource and our balance energy mix.

Moving on to our existing cold fleet, we're nearing the end of our successful construction program to review submissions at our largest facilities. The Edgewater Unit 5 scrubber and baghouse project was completed on time and below budget. Constriction 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 million, and it is expected to go in service in 2018.

There are several new regulations on the horizon ash plants, bottom ash and water usage at our cold-fired generating station. We have developed a plan and have begun to initiate that work needed to comply with these rules and regulations. Ash plant closers and bottom ash conversion projects are underway in Iowa, as that one is IPLs filed commission plan and budget.

In Wisconsin PSCW recently approved our application for bottom ash conversion at Edgewater 5. The total expenditures for our ash and water programs anticipated to be over $200 million for the next seven years. The rate base estimates provided in our Investor Relations presentation includes a near-term expenditure for this program.

During the past few years, we have been exciting on a plan for the orderly transition of our generating fleet to serve our customers in an economic manner. We 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 renewable energy generation, lower levels of coal generation through retirements and fuel switching, installing emission controls and performance upgrades at our largest coal-fired facilities. We have also started water and ash programs at our facilities to be occurring and expect future requirements. And I am proud of the fact, we've accomplished all of 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 2016'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 2016 dividend increased by 7% over 2015 dividends.

The central execution of our major construction projects, includes 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.

Reshaping the organization to be leaner and faster, while keeping the 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 effective customers.

Thank you for your interest in Alliant Energy and I will now turn the call over to Robert.

Robert Durian: Good morning, everyone. We released second quarter 2016 earnings last evening with our earnings from continuing operations of $0.37 per share, which was $0.03 per share higher than the non-GAAP earnings in the second quarter of 2015

A summary of the quarter-over-quarter earnings drivers may be found on Slide 3, 4 and 5. Consistent with the growth assumed in our 2016 earnings guidance, retail electric temperature normalized sales for Iowa and Wisconsin increased approximately 1% between the first half of 2015 and the first half of 2016 excluding Minnesota.

The commercial and industry segment continue to be the largest sales growth drivers year-over-year. The second quarter 2016 result's included adjustments to our ATC earnings to reflect and anticipated decision related to the second complaint filed regarding the return on equity level charged by transmission owners and MISO.

We reserved $0.01 per share in the second quarter of 2016 reflecting and 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 Judges 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 first quarter of 2017 for the second complaint.

Now let's briefly review our 2016 guidance. In November, we issued our consolidated 2016 earnings guidance range of $1.80 to $1.95 per share on a full stock split basis. The key drivers for the 5% growth in earnings relate to infrastructure investment such as the emission control equipment at Edgewater 5 and Lansing, and higher AFUDC related to the construction of the Marshalltown generating station.

The earing guidance is based upon the impacts of IPLs and WPLs previously announced retail electric base rate settlements. In 2016, IPL expects to cut its customer's bill by approximately $10 million. By comparison, the billing credits in 2015 were $24 million. IPL also expects to provide tax benefit rider billing credits to electric and gas customers of approximately $62 million in 2016 compared to $72 million in 2015.

As in prior years, that 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-based 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 amortizations.

In addition, Slide 6 is 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 to bonus depreciation, Alliant 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 investment at IPL,

This forecast is based on current federal net operating losses and the credit carry-forward 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'll issue approximately $25 million of new common equity through our shareowner direct plan. The 2016 financing plan also anticipates issuing long-term debt up to $300 million at IPL and up to $500 million at our non-regulated businesses.

$310 million 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 a 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 million 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 7.

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 filings 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 Alliant Energy Resources to IPL. We anticipate receiving decisions on both of these filing prior to our Iowa retail electric filing anticipated in April 2017. We expect to file the next Iowa retail gas based rate cases in the second quarter of 2017.

For WPL, we filed 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.

On Slide 8 we have provided a procedural schedule and the key financial elements of this retail electric and gas increase proposal. This filing includes new pricing options, as well as in increase in the fixed charge component of chairs [ph]. We anticipate a decision from the PSCW by the end of this year with new rates effective January 1, 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 forecast. 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 of this year, we expect to provide 2017 dividend target, update capital expenditure forecast and update rate base forecast. We very much appreciate your continued support of our company.

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

Question-and-Answer Session

Operator

Thank you Mr. Durian. At this time the company will open up the call to questions for 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. [Operator Instructions] We'll take our first question from Andrew Weisel with Macquarie Capital.

Andrew Weisel

Hey good morning everyone. I didn't know Tom take vacation. I actually thought he was in the office.

Pat Kampling

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

Andrew Weisel

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, your expectation of the sell 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?

Pat Kampling

You asked a lot of questions there. Let me take them in order, and Robert chime in, when need be. We actually have on the investment deck on Slide 29 where we have the renewable energy win slide and we've put on that the book value of Franklin County and this was at year end, approximately $130 million Andrew. So, at the time of the transfer would be completed, want to probably check 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 are 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 issue with this, and again the rules of that transferred at the lower cost of market, so we'll be following those rules absolutely as well.

Andrew Weisel

Great. That's helpful. Next on the new wind project, your neighbors at [indiscernible] 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 proposal, similarly, competitively, independently, how should we think about those two projects going in tandem?

Pat Kampling

They are two separate dockets as you are well aware. MidAm is a little bit ahead of us, so I would consider them two separate dockets. As you are well aware though, we are partners with MidAm and several other joint coal units that 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 virtuous 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 there is a very cooperative step between the two of us, but it is -- they are two different dockets.

Andrew Weisel

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

Pat Kampling

No not at all. Again, before we made the filing, use issued the RFP to the vendors just to make sure that we still have supply out there. We haven't received the bids back yet, but the discussion with the vendor is going very, very well. As you are aware, we actually have the land around Franklin County already. So, we're actually talking to the towns people, and they are 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.

Andrew Weisel

Very good. Then my last one. You mentioned that you are not expecting any chances of long-summer earning power. I'm a little surprised by that just because if this is going to be lowering your O&Ms and avoiding some purchase power, I would think that would create some headroom. I know customer bill affordability is your, if not top concern, one of your top concerns. Shouldn't that create some headroom for at least some incremental CapEx flow with your prior guidance?

Pat Kampling

No. This is really too early to be upfront to 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 few years. So we really target that 5% to 7%.

Andrew Weisel

Okay. Great. Thank you for all the details.

Operator

Our next question comes from Brian Russo with Ladenburg Thalmann

Brian Russo

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

Pat Kampling

I'll turn it over to Robert.

Robert Durian

Right now, we've expect about a $0.02 to $0.03 loss for 2016 which is pretty consistent with what we've seen over the past few years for Franklin County.

Brian Russo

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 same total five year budgeted amount?

Pat Kampling

The think we have to -- once we get the bids back from the winds vendors, we will expect a CapEx in the year of 2018 and 2019 to be increased from what we currently have. So that's what's we are 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 our third quarter call mostly at EEI. But that's what we're going to -- right now to make sure we understand the capital and the financing plan that goes behind the capital plan.

Brian Russo

Then would you expect similar interveners in your Iowa wind filing similar to the interveners in MidAm's filing and those that were part of the settlement agreement?

Pat Kampling

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

Brian Russo

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

Pat Kampling

Absolutely. Most of our large customers want to book with us on their sustainability goals as well. So, we've done a lot of outreach trying before we estimate this filing with our large industrial customers. So, I would expect that the case would not have a lot of controversy. But it's too early to say, since we just filed it last week.

Brian Russo

Got it. Thank you.

Operator

Our next question comes from Scott Senchak with Cannon.

Scott Senchak

Hi, 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 rate base and take it out from where it is now?

Pat Kampling

It's really just a transfer between the utilities. But I think all of us that have on the wind farms are looking down over that 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.

Scott Senchak

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 would you bring them in-house?

Pat Kampling

I would tell you that, first we're focusing on our own new build and the ones that we currently own. We are supplementing as we've done historically. We're going to have another existing 770 megawatts of additional PPAs. We actually like the balance of owned wind and PPA wind. That should help stabilize cost for our customers. But we're not looking at any of that at this point, but there is definitely an opportunity down the road to look at that.

Operator

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

Susan Gille

With no more questions, this concludes our call. A replay will be available through August 9, 2016 at 888-203-1112 for U.S. & Canada or 719-457-0820 for international. Callers should reference conference ID 8244179. In addition, an archive of the conference call and a script prepared remarks made on the call will be available on the Investor sections of the company's website later today. Thank you for your continued support of Alliant Energy and feel free to contact me with any follow-up questions.

Operator

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

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