Alliant Energy Corp (LNT) 2014 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's third quarter 2014 earnings conference call.

(Operator Instructions)

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.

Good morning. I would like to thank all 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; Tom Hanson, Senior Vice President and CFO; and Robert Durian, Controller and Chief Accounting Officer, 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 2014 earnings, updating 2014 earnings guidance, and providing 2014 through 2023 capital expenditure guidance. We also issued earnings guidance and the common stock dividend target for 2015.

This release, as well as supplemental slides that will be referenced during today's call, are available on the Investors 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 supplemental slides, which are available on our web site at www.alliantenergy.com.

At this point, I will turn the call over to Pat.

Good morning. Thank you for joining us today.

With Veteran's Day just a few days away, I would like to take moment and pay tribute to the approximately 400 proud veterans that work here at Alliant Energy, and to those veterans that are on the call with us today. We thank you for your service to our country and for protecting our freedom. Enjoy your special day.

Yesterday, we issued two press releases. The first press release described our plans to build a combined cycle 650 megawatt natural gas fuel facility, which we are referring to as the Riverside Energy Center expansion located on our property in Beloit, Wisconsin. The estimated capital expenditure range for this facility is between $725 million and $775 million, excluding AFUDC and transmission.

The second press release provided third quarter and year-to-date rules, our revised 2014 earnings guidance range and our 2015 earnings guidance and targeted common stock dividends. That release also updated capital expenditure plans through 2017 and provided our capital expenditure plans for 2018 through 2023.

Let me start with year-to-date 2014 financial results. I am pleased to report that we've had another solid quarter as our employees continue to manage our operations in a manner that has allowed us to meet our operating plan, objectives for safety, reliability, customer cost and financial performance.

In fact, our weather normalized earnings are inline with the midpoint of our earnings guidance of $3.40 per share. However, we have increased and narrowed the midpoint of the earnings guidance range to $3.48 per share to incorporate the positive $0.08 per share weather year-to-date. The $0.12 weather benefit realized in the first quarter of the year, mostly due to the winter that we all want to forget, still far outweighed the $0.04 per share cooler-than-normal weather impact experienced during the second and third quarters.

Now, looking at next year, the midpoint of our guidance for 2015 is $3.60 per share, a 6% increase from our projected weather normalized 2014 guidance of $3.40 per share. Our long-term earnings growth objective continues to be 5% to 7%, based on 2013 weather normalized earnings and 2015's guidance is within that range, as detailed on slide 2.

The earnings guidance increase in 2015 is a result of our ability to earn our authorized returns on rate based additions of booked utilities, which was incorporated in both retail base-rate settlements. These settlements provide increased certainty for customers, as well as allow us the opportunity to earn on an increasing rate base without the inherent uncertainty of traditional contested rate cases through 2016.

The IPL settlement utilized the capacity payments that are included in base rates under the prior DAEC purchase power agreement to more than offset rate-based growth and other traditional changes in revenue requirements. The result allowed us to refund the difference to customers for each year of the settlement.

The customer refunds will flow through the energy adjustment clause, offsetting some of the expense related to the new energy only DAEC contract that was effective in February 2014.

The WPL settlement utilized excess energy efficiency recoveries to offset increases in revenue requirements. A balance of approximately $50 million will be amortized over the next two years to offset increases in electric revenue requirements, including a return on and of rate-based editions.

To summarize, both retail rate case settlements allows us to earn on our increasing rate base while keeping retail electric base rates stable. These retail rate settlements are an excellent example of the creative and prudent means by which our state regulators, consumer groups, and customers have worked together in a collaborative matter to create rate certainty for customers and our ability to earn our authorized returns.

Yesterday, we also announced an 8% increase in a targeted 2015 common dividend level to $2.20 per share from our current annual dividend of $2.04 per share. The dividend target is consistent with our long-term targeted dividend pay our ratio of 60% to 70% of consolidated earnings.

We issued an updated capital expenditure plan for 2014 to 2018, totalling $5.2 billion shown on slide 3. In addition, we have provided a [walk] from the previous 2014 to 2017 capital expenditure plan to our current plan, shown on slide 4. As you can see on slide 4, the increase in our forecasted 2014 to 2017 capital expenditure plan is driven primarily by investments in our electric and gas distribution systems, and the proposed Riverside Energy Center expansion at WPL, which I will discuss in a few minutes.

There are two main reasons for the increased capital needs in our gas distribution business. First, we are anticipating the new gas pipeline safety rules will be issued in 2015, and we expect that these new rules will likely require an acceleration of older pipeline replacements. Second, we are working with several communities that are requesting new or expanded natural gas service. One example is a new 13-mile pipeline to service several large industrial customers in Ames, Iowa.

In Wisconsin, we have an application at the PSCW for a pipeline to expand natural gas service to the Oakdale, Wisconsin area for economic development and to service sand mines in that area. The total capital expenditure associated with these two projects is approximately $40 million.

The other press release issued yesterday described our proposed expansion of the Riverside Energy Center to replace approximately 700 megawatts of capacity currently provided by several aging coal-fired and natural gas fueled power plants, for which retirement is planned in the next few years. We believe that a new resource will be needed in 2019 due to the previously announced coal plant retirements of Nelson Dewey 1 & 2, and Edgewater 3, as well as our plans to retire certain other aging facilities, if this resource is approved.

As you may recall, the previous capital expenditure plan included a place holder for a 300 megawatt combined cycle facility. We anticipate filing our application with the PSCW in the first half of 2015 to construct a new 650 megawatt high-efficiency gas resource at an estimated cost between $725 million to $775 million, excluding AFUDC and transmission.

This facility is similar to our Marshalltown generating rating station currently under construction in Iowa. As part of our long term planning, the Riverside Energy Center will also be evaluated for the integration of solar energy as we continue to expand our renewable portfolio.

As I indicated earlier, sighting studies have conclude that the proposed location of [the] facility will be Beloit, Wisconsin, near our existing Riverside and Rock River generating stations. This site has access to gas, with multiple natural gas pipeline options, [halo]-electric transmission and will enable economic development within our service territory.

If this facility is approved, we plan to retire the Rock River and Sheepskin peaking units, which are [getting] end of their useful lives, as well as the retirement of Edgewater unit 4. Our evaluation of converting the 45 year old Edgewater unit 4 to run on natural gas has shown that such a conversion would not be economical for our customers.

In analyzing the need for a WPL resource, we followed the same process we used in our last several new resource applications. We issued an RFP earlier this year, and engaged a third party to evaluate their responses. We also compared the proposals against possible gas conversion of existing facilities, and we considered construction of a new facility. Our analysis has concluded that the construction of a new combined cycle gas facility would be in the best interest of our customers, and the analysis will be fully described in the application we file with the PSCW.

On slide 5, we have provided a 10-year view of our forecast to capital expenditures. As you can see, our plan includes additional generation needs beyond 2018, which we anticipate will include gas, wind, and other renewable resources. These additional renewables in our plan will fulfill customer energy needs and assist us in complying with EPA's clean power plan.

When reviewing slide 5, it's also important to note that approximately 25% of the 10-year capital plan will be spent on our electric distribution system to ensure reliable delivery of energy to our customers. Please note that the WPL and IPL split of the updated capital expenditures through 2018 as well as updated rate based estimates through 2013 through 2017 will be provided in EEI investor presentation slide [deck], which will be posted on our website later today.

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 thank the employees and almost 1,000 contract workers on our property for working safely, and for their assistance with these important projects. I am extremely proud of the achievements we have made and continue to make in transitioning the environmental profile of our fossil generation fleet.

We are committed to the goal of reducing NOx emissions by approximately 80%, and SO2 and mercury emissions by approximately 90% by 2020, as well as reducing our greenhouse gas emissions. In Wisconsin, construction of bag houses and scrubbers at Columbia units 1 & 2 is substantially complete, and the environmental performance to date is better than the contractual guarantees. I am very proud to report that this project came in approximately $30 million below budget, and the additional performance improvement work is currently underway.

Recently, Columbia's bag house and scrubber project was named one of two finalists for Power Engineering Magazine's project of the year, and one of seven finalists for Platts 2014 Global Energy Premier Project Award Construction. This is a well deserved recognition, and I [apploy] and thank the Alliant Energy employees and contractors that contributed to the success of this project.

The installation of a scrubber and bag house at Edgewater unit 5 is in progress, with approximately 20% of the work complete. This project is expected to be placed in service in the second quarter of 2016. In Iowa, the scrubber and bag house and turbine upgrade at our [Thoma] facility is approximately 90% complete and approximately $10 million below budget, and is expected to be placed in service before the end of this year.

In addition, the Lansing unit 4 scrubber project is approximately 40% complete, and the tie-in outage is planned for the third quarter of 2015. Construction of IPL 650 megawatt [combine] cycle natural gas fired Marshalltown generating station is in progress. Site construction activities are underway. This project 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's combustion turbine technology.

In addition to the progress we are making on transforming our Tier 1 units, we are preparing our Tier 2 units to be compliant with the utility, mercury, and air toxic standards, or UMATS, by the April 2015 deadline. Based on our testing and training this year, we believe we are well positioned to be in compliance with this new regulations and ensure a flexible and environmentally compliant generating fleet that will serve our customers well.

I will close my remarks today with a brief mention of two federal topics we are monitoring, the Clean Power Plan and the [micro] ROE challenge. EPA's Clean Power Plan would require states to develop plans to reduce greenhouse gas emissions from existing power plants by 2030. The proposed reduction for Wisconsin is 34%, and for Iowa 16% from 2012 levels.

We have been advocating on behalf of our customers for a plan that is flexible and can be implemented cost effectively and ensure reliability. The public comments we will be submitting by December 1 will have three main areas of focus. First, the EPA's plan allows us to continue to provide safe, reliable, and cost-effective power to our customers. Second, that the EPA recognizes the investments we are planning to make, and receive full credit for those investments we have already made no matter the location of the investment. And third, the plan must be based on attainable goals that can be achieved in a reasonable time frame.

Turning now to the transmission ROE challenge at MISO, last month FERC sent the pending ROE challenge in MISO to [settle] in conference and then to hearing. FERC denied the challenge to equity rich capital structures, and upheld the existing transmission ROE incentive. During this meeting, FERC stated that total ROE's, including incentives, would be capped at the top end of a reasonable range. The range of ROE's in FERC's discussion on ISO's new [England's of] authorized return on equity was from 10.57% to 11.74%.

If those same bookends were applied to ATC's current 12.2% allowed ROE, we would expect Alliant Energy's range of annual earnings exposure would be a reduction of $0.03 to $0.01 per share, respectively.

So, let me summarize the key messages for today. We will continue to manage the Company, striking a balance between capital investment, operational and financial discipline, and cost impact to customers. We have a plan that will continue to meet our 5% to 7% earnings growth objective, and 60% to 70% common dividend payout target. We're having a solid 2014, and increased the midpoint of our 2014 consolidated earnings guidance to reflect the benefit of weather, and have provided earnings and dividend guidance for 2015.

We are making progress transforming our generation portfolio to one that is responsible with lower emissions, and has the flexibility to comply with all existing and currently proposed environmental regulations, while economically meeting the energy and capacity needs of our customers. We will continue to work with our regulators, consumer advocates, environmental groups and customers in a transparent manner, as we advocate for safe, reliable, and cost-effective energy for our customers.

Finally, I must acknowledge and give thanks to our dedicated workforce, which not only provides outstanding service to our customers, but also delivers the financial results that we are discussing today.

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

Good morning, everyone.

We released third-quarter earnings last evening, with GAAP earnings from continuing operations of $1.40 per share. 2014 third-quarter earnings are lower than third quarter 2013, primarily due to electric customer billing credits at IPL, lower quarter over quarter earnings due to cooler summer weather, higher energy efficiency cost recovery amortization to WPL, and higher depreciation expense.

The lower earnings were partially offset by lower purchase power capacity costs related to Duane Arnold and Kewaunee. Comparisons between third quarter 2014 and 2013 earnings per share are detailed on slides 6 and 7.

With approximately 20% fewer cooling degree days compared to normal, the third quarter 2014 weather resulted in lower earnings from electric sales of $0.06 per share. This is $0.13 lower than the third quarter 2013 impact of a positive $0.07 per share. We have seen modest weather normalized retail sales growth in 2014.

Sales trends between 2014 and 2013 are illustrated on slide 8. You will see that the growth we are experiencing in our industrial and commercial customer class is partially offset with residential sales declines year over year. The extreme weather volatility we experienced over the last two years has increased the difficulty in estimating the impact to weather has on customer usage.

IPL's tax [benefits] riders resulted in a negative $0.02 per share variance in the third quarter of 2014 when compared to the third quarter 2013. The actual and projected quarterly earnings impact to the 2014 benefit riders, as well as the actual quarterly earnings impact to the 2013 tax benefit riders is provided on slide 9. The tax benefit riders have a quarterly impact, but do not anticipate to impactful full year 2014 results.

Year-to-date earnings are tracking in line with 2014 earnings guidance range in our operating plan. Comparing earnings from continuing operations for the first 9 months of 2014 versus 2013, earnings are up 9% year over year.

Drivers of the differences between the statutory tax rates for IPL, WPL and AEC, and the actual forecasted tax rates for 2013 and 2014 is provided on slide 10. Please note that our projected 2014 effective tax rate has decreased to 12% versus the 16% we previously forecasted. This change in estimate resulted from higher than expected mixed service cost deductions at IPL, which immediately flow through the income statement due to flow through tax accounting methodology prescribed by Iowa regulators.

Let's review our 2015 guidance. Last evening we issued our consolidated 2015 earnings guidance range of $3.45 to $3.75 earnings per share. A [walk] from the midpoint of the 2014 to 2015 estimated guidance range is shown on slide 11. The 2015 guidance range assumes normal weather and modest retail sales increases of approximately 1.5% for IPL and 2% for WPL when compared to 2014. Also the earnings guidance is based upon the impacts of IPL's and WPL's previously announced retail electric based rate settlements and WPL's gas base rate decrease.

The IPL settlement reflected rate based growth primarily from placing the [atomo] bag house and scrubber, and performance improvements in service at the end of 2014. The increase in revenue requirements related to rate base additions is offset by the elimination of Duane Arnold purchase power capacity payments.

In 2015, IPL will credit customer bills by approximately $25 million. By comparison, the billing credits in 2014 are approximately $70 million.

The WPL settlement reflected electric rate based growth as a result of the construction in progress for the Edgewater 5 bag house and scrubber, and placing the Columbia bag house and scrubber in service during 2014. The increase in revenue requirements in 2015 for these and other rate based additions was completely offset by lower energy efficiency cost recovery amortizations. WPL's electric settlement also reflected higher forecasted transmission expenses for 2015 to 2016, and the approval of escrow accounting for transmission expense.

Subsequent to the approval of the electric settlement, FERC issued an order requiring MISO to change how it allocates SSR expenses. As a result, WPL will no longer be allocated certain SSR expenses, which will reduce its forecasted 2015 transmission billings.

But, because the escrow accounting approved by the PSCW, this reduction in transmission billings will not impact earnings as WPL must match its 2015 transmission expenses to the recovery level reflected in the settlement. Any reduction in transmission billings below the level reflected in the settlement will be accumulated in a regulatory liability to be refunded to WPL's customers in the future.

Retirement plan expense is currently expected to be approximately $0.05 per share higher in 2015, largely due to anticipated reductions in the discount rate and asset returns during 2014. These amounts will be updated at year end 2014 when determining the actual 2015 retirement plan expense. Given the changes expected with income tax expense in 2015, supplemental slide 12 has been provided to assist you in modeling forecasted 2015 effective tax rates for IPL, WPL and AEC.

Turning to our financing plans, cash flows from operations are expected to be strong given the earnings generated by the business. We will also benefit, given we do not expect to make any material federal income tax payments in 2015. 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 credits resulting from the settlement.

We believe that with our strong cash flows and financing plan, we will maintain our targeted liquidity, capitalization ratios, and credit metrics. In October, we issued $250 million of 4.1% long-term debt at WPL, maturing in 2044, and refinanced $250 million of 4% long-term debt at the parent with a two year variable rate term loan. Before the end of the year, we plan to issue $250 million of long-term debt at IPL, and will refinance the $60 million debt for the Franklin County wind farm.

Our 2015 financing plan assumes we will complete the sale of our Minnesota gas distribution assets by the end of the first quarter of 2015, and the electric distribution assets by the end of the first half of 2015 and receive sales proceeds of approximately $130 million. The 2015 financing plan also anticipates issuing up to $300 million of long-term debt at IPL, with $150 million of the proceeds utilized to refinance maturity of debentures.

We also anticipate issuing approximately $150 million of new common equity in 2015 through our shareowner direct plan and one or more offerings. We do not currently plan to issue any material new common equity in 2016. We may adjust our plans as deemed prudent, if market conditions warrant and as our debt and equity needs continue to be reassessed.

We have several [current] planned regulatory dockets of note for the rest of 2014 and 2015, which we have summarized on slide 13. Yesterday the Minnesota public utilities commission issued an oral decision to approve the sale of the gas distribution assets, and determine that public common hearings were necessary in order for the commission to make a decision on the sale of the Minnesota electric distribution assets.

Next year we anticipate there will be a decision by the IUB on the IPL emissions plan and budget, and we anticipate there will be a decision from the PSCW on our application to construct the Columbia unit 2 SCR.

Finally, in the first half of 2015, we will be filing the application for a certificate of public convenience and necessity to construct the proposed 650 megawatt Riverside expansion that Pat discussed previously. We [were] anticipate the PSCW issuing [an] order by mid 2016.

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 will be posted on our website, as we do with all of our investor relations conference slides.

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

Thank you, Mr. Hanson.

(Operator Instructions)

We will take our first question from Andrew Weisel with Macquarie Capital.

Good morning, everybody.

Good morning, Andrew.

First question on the increase to CapEx. Very impressive numbers. Tom, I think you said that you're now expecting $150 million in 2015 and nothing in 2016. Over the two years, no change to the equity needs, even though you are adding almost $350 million of CapEx.

Can you walk me through what's going to plug that difference? The second part of the question is, given that you are in rate freezes in both states for the two years, any impact on your ability to earn the allowed ROE's?

First, you should expect that we will be earning our ROE's during the next two years. Certainly, that was a key component of the settlements in both states. With respect to the equity, we are expecting to meet the equity needs in 2015.

As I stated, there will be no incremental needs in 2016. The delta really will be offset with the expectation we'll have additional cash flows from operations.

Okay. Great. Next question is on the new Riverside plant that you are talking about. Help me to understand the numbers in the sense that you are replacing 300 megawatts, you had been using 300 megawatts as a place holder, did an RFP for up to 600 megawatts, and now you're coming out with a plan for 650 megawatts? How did you land on a significantly bigger number for the Riverside project?

Sure, Andrew, I will handle that one. First, when we did our analysis, it was more economical for us to retire some of these older peaking units as well. That's really what made the difference between the 300 megawatts to the 700 megawatts.

Okay. Great. Sorry if I missed that.

Lastly, when I go through the walk for 2015 guidance, I see $0.09 for other, mostly load growth. What percentage increase does that assume?

We are assuming a 1.5% growth in retail sales at IPL and 2% growth at WP&L.

Andrew, if I could just clarify something, the additional retirement of Edgewater unit 4 is also in the calculation of the megawatts.

How many megawatts was that one?

225.

Great, that definitely fills the hole then, thank you.

Exactly.

And next we go to Brian Russo with Ladenburg Thalmann.

Good morning.

Good morning, Brian.

In terms of the 2015 guidance, should we assume that the midpoint of that guidance is both utilities earning their allowed ROE? I know there is some upside to the earned returns at IPL and sharing bands. Would that get you to, say, the upper quartile of that range, versus the midpoint?

The midpoint is established with us earning our authorized returns. Any difference from that would be within the range of the guidance.

Okay, great. I would imagine in the EEI presentation you will also disclose your updated AFUDC forecast?

We will be providing update rate base as well as the quick balances, and the quick balances you will be able to calculate the incremental AFUDC.

Can we talk now about the incremental AFUDC associated with the Riverside CCGT, or would you rather just wait for the presentation?

Brian, we're going to be posting those at the end of the day today.

Okay. Fair enough.

Thank you.

Then I'm curious, you know, you conducted the RFP process. You have now chosen to self build the CCGT. I would imagine Brown Field development is just competitive on a variety of different levels than any new-build scenario that may have been submitted in the RFP. Is that the way to look at it?

There were a lot of different options, Brian. This location -- we actually own this land. It's part of our Riverside facility, right now. It's a good location for gas transmission, et cetera. That was one of the key factors in this.

Got it. And then, is it also the way to look at the CCGT, is that the rate impact of the added resource in base rates is going to be partially offset or more than offset by the capacity contracts that roll off, or partially?

Yes, Brian, there is no capacity contracts rolling off with this new facility. It will be gradual. The way In Wisconsin, where you earn during construction, will be a gradual increase to customers over several years.

So, it won't be like the magnitude of the rate increase that you will see for Marshalltown in IPL.

No, it would be over multiple years.

Thank you very much.

Next we will take a question from Ashar Kahn, with Visium.

I just want to -- what happens if bonus depreciation is extended? Does that have impact on the financings or anything?

With respect to the equity financing, it would not. Because of the NOLs that we have, certainly with bonus depreciation it will result in additional NOL's but currently we are not expecting to be a taxpayer until 2016. So, with the potential extenders, that could push us into 2017. So, that would not be impacting the target equity that we have planned for 2015.

Okay. Secondly, can we look at this -- I guess like the dividend hike. Can we look at this new rate as this kind of -- like 8% or something, can we expect now 7% to 8% growth in dividend going forward?

You know, the dividend will be growing as earnings grow. What we are doing is slightly moving up in the range. We will evaluate that each year, though.

Okay. Thank you, pat.

Sure. We will see you next week.

Thanks.

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

With no more questions, this concludes our call.

A replay will be available through November 14, 2014 at 888-203-1112 for US 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 investor 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.

And that does conclude today's conference.