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Alliant Energy Corporation (NYSE: LNT ) Q3 2015 Earnings Conference Call November 06, 2015 10:00 AM ET Executives Susan Gille – Manager, IR Pat Kampling – Chairman, President & CEO Tom Hanson – SVP & CFO Robert Durian – Vice President, Chief Accounting Officer and Controller Analysts Andrew Weisel – Macquarie Capital Brian Russo – Ladenburg Development Operator Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy’s Third Quarter 2015 Earnings Conference Call. At this time, all lines are in a listen-only mode. And today’s conference is being recorded. I would now like to turn the conference over to your host, Susan Gille, Manager of Investor Relations at Alliant Energy. Susan Gille Good morning. I would like to thank you of — 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; Tom Hanson, Senior Vice President and CFO; and Robert Durian, Vice President, Chief Accounting Officer and Controller; as well as other members of the senior management team. Following prepared remarks by Pat and Tom, we will have time to take questions from the investment community. We issued a news release last night announcing Alliant Energy’s third quarter 2015 earnings narrowing 2015 earnings guidance. I’m providing 2015 through 2020 forward capital expenditure guidance. We also issued earnings guidance and the common stock dividend target for 2016. Press 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 non-GAAP and GAAP measures are provided in the supplemental slides, which are available on our website at www.alliantenergy.com. At this point, I’ll turn the call over to Pat. Pat Kampling Good morning and thank you for joining us today. The Veterans Day is just a few days away. I would like to take a moment and pay tribute to the approximately 400 proud veterans that work here at Alliant Energy and to those veterans are on the call with us today. We thank you for your service to our country and for protecting our freedoms. Enjoy your special day. Yesterday we issued press releases which included third quarter and year-to-date financial results our revised 2015 earnings guidance range. And for 2016, our earnings guidance and targeted common stock dividend. That release also provided updated detailed annual capital expenditure plans through 2019 and our capital expenditure total for 2020 to 2024. Tom will later provide details of the quarter, but I am pleased to report that we delivered another solid quarter. And since temperature was close to normal with the third quarter, at first we had no impact on our year-to-date earnings. So with the summer behind us, we are now in our 2015 earnings guidance but we are now including an adjustment to our ATC earnings to reflect the anticipated lower ROE. ATCs current authorized ROE is 12.2% we are reserving $0.03 per share for the year reflecting an anticipated ROE of 11.5%. Therefore we are changing the midpoint of this year’s earnings guidance range from $3.60 per share to $3.57 per share. Now looking at next year, the midpoint of our guidance for 2016 is $3.75 per share a 5% increase from our projected 2015 guidance as detailed on Slide number 2. This increase reflects a forecast with customer sales increase of 1% and earning on capital additions. Our long-term earnings growth objective continues to be 5% to 7% supported by our robust capital expenditure plan modest sales growth and constructive regulatory outcomes. The ability to earn our authorized returns on rate base additions of book utilities was incorporated in both retail electric base rate settlements. Those settlements have unique treatment that will allow you to reach earn on an increasing rate base while keeping customer base rates flat. The IPL settlement utilized the historic DAEC capacity payments that are included in base rates to more than offset rate-based growth and other changes in revenue requirements. This allows us to refund the difference to customers included $25 million refund in 2015 and a $10 million refund in 2016. The WPL settlement utilized previously recovered energy efficiency revenues it also increases in revenue requirements including the return on rate base additions. A balance of approximately $32 million will be amortized in 2016 and the amortization for this year is expected to be $80 million. To summarize, both creative retail rate case settlements allow us to earn on our increasing rate base or keeping retail electric base rates stable through 2016, which is last year of the settlement. Yesterday we also announced a 7% increase in a targeted 2016 common dividend level to $2.35 per share from our current annual dividend of $2.20 per share. By 2016, dividend target payout ratio is 62.5% which is consistent with our long-term targeted dividend payout ratio of 60% to 70% of consolidated earnings. We issued an updated capital expenditure plan for 2015 to 2019, totaling $5.8 billion, as shown on Slide 3. In addition, we have provided a walk from the previous 2015 to 2018 capital expenditure plan to our current plan shown on Slide number 4. As you can see the change in our forecasted 2015 to 2018 capital expenditure plan are driven primarily by additional investments on our electric and gas distribution systems and a $50 million reduction for the proposed Riverside Energy Center expansion in Wisconsin. The lower cost estimate of $680 million to $720 million excluding AFUDC and transmission was filed in supplemental test [indiscernible] with the PSCW yesterday. On Slide 5, we have provided a 10-year view of our forecasted capital expenditures. As you can see our planning additional new generation needs beyond 2019 which we anticipate will include gas, wind and other renewable resources. The additional renewables in our plan with economical for our customer energy needs as we continue to retire all the generating facilities. While reviewing Slide 5, it is also important to note that approximately 45% of the 10-year capital plan will be spent to enhance our electric and gas distribution systems to meet customers changing and growing needs. Investments in our gas distribution system are becoming more significant as evidenced by our recently completed $15 million [indiscernible] Wisconsin and we are supposed to cross $65 million [indiscernible] project in Iowa. Also for your convenience, we have already posted on our website the EEI Investor presentation that details the separated WPL and IPL updated capital expenditures through 2019 as well as updated rate-based estimates for 2014 through 2018. Now, let me brief you on our current construction activities. As year-end approaches, this has certainly been one of our busiest construction years. I must thank the employees and approximately 800 contract workers on our properties for working safely and for their assistance on these important projects. I’m extremely proud of the achievements we have made and continue to make and transitioning the environmental profile of our fossil generation fleet. We plan to reduce NOx emissions by approximately 80% and SO2 mercury emissions by approximately 90% by 2020 and we will continue to plan for a reduced carbon future. In Wisconsin, the installation of the scrubber and baghouse at Edgewater Unit 5 is approximately 75% complete and is expected to be in service in the second quarter of 2016. We are anticipating this project will come in approximately 10% below budget. We have recently a signed a contract with a joint-venture between Graycor industrial contractors and Sargent & Lundy to fund the engineering procurement and construction of the Columbia unit 2 SCR. The construction is scheduled to start in the second quarter of 2016 and WPL share the expenditure for this project of approximately $50 million. We do have an excellent track record of executing well on our these large construction projects, I am very pleased on power magazine name two of our power generating stations as our top plants for 2015. The recognition of IPLs [thermal] generating station and WPLs Columbia’s Energy Center which were excellent execution of this major investments and a dedication to a cleaner and more efficient operations. Construction of IPLs 650 megawatt combined cycle natural gas fired Marshalltown generating station is progressing well. The project is approximately 65% complete and is expected to be in service in the second quarter of 2017. KBR is the engineering, procurement, and construction contractor for this project which includes Siemens’ combustion turbine technology. In 2013, WPL announced that it would retire several older coal facilities and natural gas peakers. This retirements begin next month at Nelson Dewey and as well as in Unit 3. When WPLs prime retirements are completed the forecasted accredited capacity loss will be nearly 700 megawatts. As a consequence, WPL evaluated a wide range of alternatives to meet long-term energy and capacity needs for its customers. In 2014, WPL issued an RFP for market-based options. After evaluating all of our options, we concluded that Riverside Energy Center expansion with a new approximately 650 megawatt highly efficient natural gas generating facility was in the best long-term interest of our customers. This past April WPL applied for a certificate of public convenience and necessity or CPCN with the Public Service Commission of Wisconsin. The CPCN is progressing and in accordance with its procedure schedule on September 22 we filed that direct testimony and yesterday filed supplemental testimony through [indiscernible] updated cost projections. Intervener and Staff testimony will be filed by November 13, a public care will be conducted on November 17 in [indiscernible] and technical hearings are scheduled for December 21. We anticipate the commission issue decision on Riverside Expansion by May 2016. The proposed riverside expansion includes an approximate 2 megawatt solar installation on the property. Adjacent to riverside, on our Rock River landfill Hanwha Q Cells is currently constructing the largest solar plant at Wisconsin at 2.25 megawatts and we will purchase the power from them over the next 10 years. At our Madison general office installation of above 1000 solar panels from multiple manufacturers with 11 different types of solar modules is well underway. For this project we have partnered with the Electric Power Research Institute or EPRI to collect data and make it available to others. We also have several other solar projects under development from which we anticipate gaining valuable experience and how to best integrate solar in a cost-effective manner in our electro systems. Solar projects is in the developmental stage include owning and operating the solar panels at the Indian Creek Nature Center in Cedar Rapids Iowa and our recently issued RFP was placed in [indiscernible] solar project between 1 and 10 megawatts within our Iowa service territory. The projects resulting from the RFP will increase our system wise solar generation by 50%. Last month the EPA published its final rules through those carbon emissions from electric generating stations. We understand this is just one more step what will be a long process that includes legal challenges and the development of compliance plans. As we develop strategies, we will continue to take the approach of doing what’s best for our customers and the environment. We are fortunate that we operate in a state that has a long history of energy efficiency programs, environmental stewardship and support for renewable energy. There’s a some sort of excitement as you work to transform into the company our customers need as to be not only now, but well into the future. A major improvement to our customer experience is happening as we went live with our new customer care and billing systems for Wisconsin customers several weeks ago. And planned to go live with Iowa customers in early 2016. A $110 million investment replaces vintage mainframe systems from the 1980s. They will make communications with our customers more convenient and timely. We have already accomplished a great deal as a company as we transition to a cleaner more modern energy system. I want to thank a lot of employees for their creativity and finding cost-effective solutions in serving our customers well. Let me summarize the key message for today. We had a solid first three quarters of the year and are well positioned to deliver on this year financial and operating objectives. Our plan continues to provide for [audio gap] 5% to 7% earnings growth and 60 to 70% common dividend payout target. Our target 2016 dividend increased by 7% over the 2015 target dividend. Successful execution on our major construction projects includes completing projects on time and at a below budget in a safe manner. Work with our regulators consumer advocates, environmental groups and customers in a collaborative manner. We shape our organization to be lean and faster while keeping our focus on serving our customers and being good partners in the community. We will continue to manage the company to strike a balance between capital investment, operational and financial discipline, and cost impacted customers. Thank you for your interest in Alliant Energy and I will now turn the call over to Tom. Tom Hanson Good morning everyone. We have released third quarter earnings last evening with our non-GAAP earnings from continuing operations of a $1.63 per share and our GAAP earnings from continuing operations to a $1.59 per share. The non-GAAP to GAAP difference is due to a $0.04 per share charge resulting from approximately of 2% employees accepting voluntary separation packages as we continue focusing on effectively managing cost for our customers. 2015 third quarter non-GAAP earnings are $0.23 higher than the third quarter 2014 primarily due lower retail electric customer billing credits at IPL, higher electric sales and lower energy efficiency cost recovery amortization to WPL. Higher quarter-over-quarter EPS was partially offset by higher electric transmission service expense at WPL and the delusion impact of shares issued in 2015. Comparisons between third quarter of 2015 and 2014 earnings per share are detailed on slides 6, 7 and 8. For the first six months of this year we experienced virtually no temperature normalized retail sales growth. We are pleased that the third quarter brought an estimated $0.06 per share increase in earnings resulting from higher temperature normalized sales. Some of the growth experience in the third quarter of 2015 for residential and commercial is due to an earlier fall grain harvest in 2015 when compared to 2014. Of the retail sectors industrial continues to be the largest sales growth driver year-over-year. Quarter-over-quarter we have recognize in earnings increased of $0.05 per share from higher sales due to temperatures since the third quarter of 2014 had approximately 20% fewer cooling degree days compared to normal. However, the first three quarters 2015 temperatures were close to normal. Year to date non-GAAP earnings are tracking in line with the 2015 earnings guidance range comparing non-GAAP earnings from continuing operations for the first nine months of 2015 versus 2014, earnings are up 8% year-over-year. Drivers of the differences between the statutory tax rates for IPL, WP&L and AEC and the actual forecasting effect the tax rates for 2015 and 2014 is profiled on slide 9. Now let’s review our 2016 guidance. Last evening we issued our consolidated 2016 guidance range of $3.60 to $3.90 earnings per share. A walk on the mid points of 2015 to 2016 estimated guidance range is shown on slide 10. The key drivers for the 5% growth in earnings relate to infrastructure investments including higher AFUDC related to the construction of the Marshalltown generating station. The 2016 guidance range assumes normal weather and modest retail sales increases of approximately 1% for IPL and WP&L when compared to 2015. Also the earnings guidance is based upon the impact of IPLs and WP&Ls previously announced retail electric base rate settlements. The IPL settlement reflected rate based growth primarily from placing the Lansing scrubber in service in 2015 and the Ottumwa baghouse scrubber and performance improvement in service in 2014. The increase in revenue requirements related to rate base editions is offset by the elimination of DAEC purchase power capacity payments. In 2016 IPL expects to credit customer bills by approximately $10 million. By comparison the billing credits in 2015 are expected to be approximately $25 million. During 2016 IPL expects to provide tax benefit billing credits to electric and gas customers with approximately $62 million when compared to $72 million in 2015. As in prior years the tax benefit riders have a quarterly timing impact, but are not anticipated to impact full year 2015 and 2016 results. The WP&L settlement reflected electric rate base growth for the Edgewater unit 5 baghouse projected to be placed in service in 2016. The increase in revenue requirements in 2016 for these and other rate base additions were completely offset by lower energy efficiency cost recovery amortizations. Also included in WP&L’s rate settlement was an increase in transmission costs primarily related to the anticipated allocation of SSR costs. As a result of a third quarter issued after the settlement the amount of the transmission cost billed to WP&L in 2016 will be lower than what was reflected in the settlement. Since the PSCW approved escrow accounting treatment for the transmission cost. The difference between the actual cost billed to WP&L and those reflected in settlement will accumulate in a regulatory liability. We estimate that this regulatory liability will have a balance of approximately $35 million by the end of 2016. We view this regulatory liability as another mechanism we can use to minimize future rate increases for Wisconsin retail electric customers. Retirement plan expense is currently expected to be approximately $0.03 per share higher in 2016 largely due to lower than expected asset returns forecasted for 2015. These amounts will be updated at year end 2015 when determining the actual 2016 plan expense. Given the changes expected in income tax expense in 2016 slide 11 has been provided to assist you in modeling the forecasted 2016 effective tax rates for IPL, WP&L and AEC. Turning to our financing plans cash flows from operation are expected to be strong given the earnings generated by the business. We also will benefit given we do not expect to make any material federal income tax payments in 2016. These strong cash flows will be partially reduced by credits to customer bills in accordance with IPL’s tax benefit riders and IPL’s customer billing credit resulting from the settlement. We believe that with our strong cash flows and financing plans we will maintain our target liquidity and capitalization ratios as well as high quality credit ratings. Our 2016 financing plan assumes will be issuing approximately $25 million of new common equity through our shareowner direct plan. The 2016 financing plan also anticipates issuing long-term debt including up to $300 million at IPL and up to $310 million at the [parent] and Alliant Energy Resources. The $310 million of proceeds at the parent and Alliant Energy Resources are expected to be used to refinance maturity of term loans. We may adjust our plans as deemed prudent if market conditions warrant and as our debt and equity needs continue to be reassessed. As we look beyond 2016 our equity needs will be driven by the proposed riverside expansion project. Our forecast assumes that the capital expenditures for the riverside expansion in 2017 and 2018 will be financed primary by a combination of debt and equity. Our current financing forecast assumes no extension of bonus depreciation deduction. Under this assumption Alliant energy will be making modest federal tax payments starting in 2017 it will continue to use net operating losses for the next two years as offset to federal taxable income. We have several current and planned regulatory dockets of notes for the rest of 2015, 2016 and 2017 which we have summarized on 512. Later this year we anticipate a decision from PSCW on the 2016 fuel monitoring level. Next year we anticipate a decision on the Wisconsin riverside expansion proposal and on the Iowa natural gas pipeline. Also in 2016, we plan to file a emissions planned budget in Iowa and the Wisconsin retail electric and gas base case per rates in years 2017 and 2018. The next Iowa retail electric and gas base rate cases are expected to be filed in the second quarter of 2017. We very much appreciate your continued support of our company and look forward to meeting with you at EEI. The slides to be discussed at EEI are posted on our website as we do with all of our investor relations conference slides. 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. Hanson. [Operator Instructions] And we will take our first question from Andrew Weisel with Macquarie Capital. Andrew Weisel Good morning guys. First question is on the [four set] charged for voluntary employee separation. What does that impact on? How is that going to impact OEMs going forward? Tom Hanson That will be a reduction to ONM on going forward and that’s reflected in our forecast in terms of 2016 guidance. Andrew Weisel And what is the forecast for ONM next year? Tom Hanson We are assuming that it will be about a 2% increase now recognizing that this excludes the normal energy efficiency cost as well as any of the regulatory amortization that flow through ONM as well. Andrew Weisel Got it. Next a couple of questions on riverside, first in terms of the CapEx you laid out. I see that you lowered it for next year spending by that 95 million can you give little more detail on that. Is that assuming a little bit of a delay when the construction begins? Pat Kampling No not at all. Now that we are getting bids from the contractors, this is the timing of the bids, the cash flow that they are laying out while we changed the not only did we change the total number but we changed the timing of the payments. Andrew Weisel Okay. The total number if I heard you correctly was only down about 20 million is that right? Pat Kampling No, it’s down, if it goes from mid-point to mid-point it’s down 50 million, 50. Andrew Weisel Okay. Then next question I have is with the potential for PTA instead of riverside, if riverside were to be either delayed or canceled could you talk about how you might be able to back fill some of that spending in terms of what might go in and how soon you will be able to show those results? Pat Kampling Yes, Andrew it’s a little preliminary first to give a backup for capital for riverside right now. It would be honest to tell you though for 2016 it would be tough to fill the capital that we have laid out in 2016, but we’ll discuss as we get further down the year in 2016 what the back fill could possibly be. Andrew Weisel Okay. Thank you very much. I’ll let other people ask questions. Operator And we will take our next question from Brian Russo with Ladenburg Development. Brian Russo Good morning. Pat Kampling Good morning Brian. Brian Russo Just in terms of the 2016 guidance what kind of earned ROE are you seeing at IPL and WP&L maybe at the mid-point? Tom Hanson We are assuming that we would earn our authorized returns in both jurisdiction. Brian Russo Okay. So what gets you to the high end of the range? Pat Kampling The high end sales are higher than we expect. We currently expect 1% increase in sales but if they come in higher it would definitely bring us to the high end of the range. Brian Russo Okay and then as you we looked into 2017 Marshalltown will be added base rates and I believe correct me if I am wrong but that’s the allowed ROEs of 11.4%. So I would imagine that your earned ROE in 2017 will be enhanced relative to the earned ROE assumption in 2016. Is that the way to look at it? Pat Kampling Brian so the allowed ROE for Marshalltown is 11%, 11.0. Brian Russo Okay. Pat Kampling But as we go through internal and final rates you will see our earned returns increase at Iowa. Brian Russo Okay great. Thank you very much. Operator And Ms. Gill there are no further questions at this time. Susan Gille With no more questions this concludes our call. A replay will be available through November 13, 2015 at 888-203-1112 for U.S. and Canada, or 719-457-0820 for 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. We thank you for your continued support of Alliant Energy. And feel free to contact me with any follow-up question. Operator And ladies and gentlemen that does conclude today’s conference. Thank you for your participation. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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