Alliant Energy Corp (LNT) 2018 Q4 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to Alliant Energy's Year-End 2018 Earnings Conference Call. (Operator Instructions)

Today's conference call is being recorded. I would now like to turn the call over to your host, Susan Gille, Investor Relations Manager at Alliant Energy.

Good morning. I would like to thank all of you on the call and on the webcast for joining us today. We appreciate your participation. With me here today are Pat Kampling, Chairman and Chief Executive Officer; John Larsen, President and Chief Operating Officer; and Robert Durian, Senior Vice President and CFO; as well as other members of the senior management team. Following prepared remarks by Pat, John 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 financial results. And we affirm the consolidated 2019 earnings guidance issued in November 2018. This release as well as supplemental slides that will be referenced during today's call are available on the investor page of our website at www.alliantenergy.com.

Before we begin, I need to remind you that the remarks we make on this call and our answers to your questions include forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters discussed in Alliant Energy's press release issued last night and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements.

In addition, this presentation contains references to non-GAAP financial measures. A reconciliation between non-GAAP and GAAP measures are provided in the earnings release and our 10-K, which will be available on our website at www.alliantenergy.com.

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

Thanks, Sue. Good morning, and thank you for joining us today.

2018 was another excellent year for our company. I'm happy to share our financial results with you today. Our 2018 financial results did benefit from higher sales due to more extreme temperatures than normal. Our non-GAAP earnings per share of $2.17 include a $0.06 net benefit from temperatures. When we normalize for temperature, our adjusted earnings per share of $2.11 is 6% above last year's as shown on Slide 2.

2018 was a fifth year in a row that we achieved at least 5% to 7% earnings per share growth and increased our dividend by at least 6%. I'm also reaffirming our 2019 earnings guidance midpoint of $2.24 per share and our long-term earnings growth guidance of 5% to 7% re-based off our 2018 temperature-normalized results.

Our long-term growth guidance through 2022 is supported by our capital expenditure plan, modest sales growth, constructive regulatory outcomes and assumes normal temperatures.

Now on March 1, we plan to file our first future test year rate reviews in Iowa. For electric customers, a 2018 test year will be used for interim rates and a 2020 future test year for final rates. For gas customers, review will be based only on the 2020 future test year. Under Iowa statutes, rate reviews must generally be decided within 10 months. Therefore, we expect final orders in both the electric and gas reviews by year-end.

As I shared with you previously, the electric rate review will include recovery of our significant investments in wind energy, enhancements to our distribution network and upgrades to customer service technologies.

Interim rates based on the 2018 test year will also include known and measurable rate base additions that occur by the end of the first quarter.

Since the English Farms and Upland Prairie Wind Farms are expected to be in service in late March, interim electric rates will be effective on April 1, so those projects can be included. Customers will receive the benefits of reduced fuel cost and PTCs from the wind farms concurrent with the implementation of interim rates.

We will also be requesting modifications to simplify our rates and to reduce the huge variance in summer and winter pricing that has frustrated our customers for decades. We will also be proposing new product offerings for customers interested in partnering with us in their renewable energy efforts. And we're requesting a renewable energy writer, which would allow recovery of new investments in renewable energy when they are placed in service if that project has already received advanced ratemaking approval.

While the base rate increase and the benefits from lower fuel costs and PTCs will vary by customer class, the overall net impact on electric customer bills will be in the low- to mid-single digits. Further details will be available after the filing is made next week.

I must acknowledge that our financial and operational results are achieved through the hard work and dedication of my several employees. These employees proudly serve customers each and every day and safely restore service no matter the conditions. This past year brought many challenging days, including dealing with major flooding, blizzards, ice storms, tornadoes and extreme temperatures. And during the recent polar vortex, I'm pleased to report that our system held up well and our employees were able to maintain gas and electric system integrity and reliability.

So on behalf of our customers and investors, I'd like to thank all of our employees for providing excellent service even in the toughest conditions.

Now to summarize, I'm very pleased with our 2018 accomplishments, and our team is committed to again deliver on our financial and operational goals for 2019. We have a great track record and will continue to deliver results as we focus on the following: completing our large construction projects on time and at below budget in a very sustainable and safe manner; advancing affordable and clear energy through substantial investments in wind; construction of our West Riverside Energy Center and additional fossil plant retirements; delivering on 5% to 7% earnings growth guidance; and a 60% to 70% common dividend payout target. And we will continue to manage the company to strike a balance between capital investment, operational and financial discipline and cost impact to customers.

Before I turn the call over to John, I would like to congratulate him on being named my successor effective July 1. I'm so proud of what we've accomplished at Alliant Energy in my 7 years as CEO, and I know that under John's leadership, the company will continue to thrive. Congratulations, John.

With that, I'll turn the call over to John to provide updates on several of our key strategic priorities.

Thank you, Pat. My thanks as well for your thoughtful leadership and the strong relationships you've developed across our company, industry and investor community. We wish you all the best as you transition into a well-deserved retirement.

Good morning, everyone. 2018 was a solid year for Alliant Energy, both financially and operationally. Pat provided a great overview of our key accomplishments. I'll focus my comments on key operational achievements, and Robert will address financial outcomes and regulatory matters. I'm pleased to report that our investments in renewables, natural gas and grid operations are resulting in improved reliability and lower carbon intensity. Our fossil fuel generation capacity factors and grid reliability improved by nearly 10% compared to our 5-year average. And most importantly, our 2018 safety performance improved significantly compared to the previous year.

Our focus will be to continue making the necessary investments to deliver safe, reliable and cleaner energy to our customers. We began the transition of our generation portfolio to a greener and more efficient fleet nearly a decade ago. This transition started with the retirements of our smaller less efficient fossil fuel generation stations and the start of our utility-owned wind additions. In 2016, the Iowa Utility Board approved the first 500 of our 1,000-megawatt planned wind additions in Iowa; and in 2018, the remaining 500 megawatts was approved. Of the 1000 megawatts of approved new Iowa wind, we are on track to bring 470 megawatts into service next month and the remaining 530 megawatts in 2020.

In Wisconsin, we're making great progress on our 730-megawatt West Riverside Energy Center. This highly efficient natural gas resource is over 70% complete and expected to go into service by the end of this year. In 2018, we advanced renewable energy in Wisconsin with the Public Service Commission of Wisconsin approval to purchase 55 megawatts of the Forward Energy Wind Center and the approval to construct a 150-megawatt wind farm in Kossuth County, Iowa. We continue to power what's next as we advance our clean energy vision.

In 2018, we installed environmental controls at 2 generating stations. We tie up 480 megawatts of capacity and advanced decommissioning efforts at 4 facilities in our Iowa business. We now have permanently retired approximately 30% of our fossil fuel generation capacity since 2005. And by 2050, we will eliminate all existing coal from our energy mix.

Once facilities are decommissioned, we are restoring and redeveloping the land, rain gardens, pollinator habitats and sites for solar panels are just some of the ways that we are sustainably reusing our assets. A great example of this is in Beloit, Wisconsin. This year Beloit College will open their powerhouse facility. The college is repurposing our decommissioned Blackhawk Generating Station into a state-of-the-art student center. These are just a few examples of how we are putting our core value of act for tomorrow into practice.

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

Thanks, John, and good morning, everyone. As we closed out National Engineers Week!, I would like to begin my remarks by taking a moment to recognize Pat, John and the more than 350 other engineers at Alliant Energy for their contributions to our company's past, present and future success. Alliant Energy engineers have been at the center of virtually every major project at our company and their skills and expertise enable us to improve the lives of our customers. Thank you.

Yesterday, we announced 2018 non-GAAP earnings of $2.17 per share compared to $1.93 per share in 2017. The key drivers for the $0.24 increase were higher margins from increasing rate base, the net temperature impact on retail electric and gas sales and higher allowance for funds used during construction. These items were closely offset by higher depreciation expense.

We provided additional details on the earnings variance drivers for the year on Slides 3 and 4.

In 2018, temperatures in our service territory increased Alliant Energy's retail electric and gas margins by approximately $0.11 per share. Due to WPL's earnings sharing mechanism, we have reserved a higher margins resulting from the temperature impacts at WPL and will give those back to our Wisconsin retail customers in the future. In addition, Alliant Energy's performance pay is based on earnings. As a result, a portion of the higher earnings from the temperature impacts will be offset by higher performance pay expense. Therefore, the 2018 temperature impacts, net of reserves for WPL's earnings sharing mechanism and additional performance pay expense are estimated to be a $0.06 per share increase in earnings.

Our consolidated 2019 earnings guidance range continues to be $2.17 per share to $2.31 per share. Our walk from the midpoint of the 2018 non-GAAP temperature-normalized EPS to the midpoint of the 2019 earnings guidance range are shown on Slide 5.

The key drivers of the 6% growth in EPS are related to investments in our core utility business, including WPL's West Riverside Energy Center and our wind expansion program in Iowa. These investments were reflected in WPL's approved electric rates for 2019 and will be reflected in IPL's electric interim rates following our retail electric rate filing next month.

Slide 6 has been provided to assist you in modeling the effective tax rates for our 2 utilities in our consolidated group. We estimate a consolidated effective tax rate of 11% for 2019.

We continue to focus on controlling costs for our customers. In Wisconsin, we created the electric and gas customer bills by approximately $40 million in 2018 for current year tax savings generated by Federal Tax Reform. Going forward, we expect to hold electric and gas base rates flat for the next 2 years by using fuel savings and excess deferred taxes resulting from Federal Tax Reform to offset the cost of utility investments, including bringing our new highly efficient West Riverside Energy Center into service at the end of this year.

We have made significant progress for our Iowa customers as well. In 2018, we generated almost $50 million of tax savings from Federal Tax Reform that we're giving to our electric and gas customers. We also negotiated reduced transportation rates for coal deliveries, lowered energy efficiency charges beginning in 2019 and advocated for a lower independent adder charge by our transmission service provider, all helping reduced expenses for our customers.

In December 2018, the Iowa Utilities Board approved the agreement to terminate the Duane Arnold Energy Center purchase power agreement with NextEra early, which will begin serving our customers' money in 2021.

Lastly, as we bring on into service our planned wind projects in 2019 and 2020, we expect production tax credits and lower fuel expenses to largely offset the impact of increases in rate base from these wind project.

Moving to our financing plans. Our 2019 plan remains unchanged from the plan we shared last November, including issuing up to $400 million of new common equity. $370 million of this equity was price to equity forward agreement executed in December 2018. We expect to settle those equity forward agreements over the next 6 months to fund capital expenditures for our 2 utilities. The remaining $25 million will be issued ratably during 2019 through our share redirect program.

In 2019, we also plan to issue up to $600 million of long-term debt at IPL and up to $400 million of long-term debt at WPL. The 2019 financing plan is driven by the robust capital expenditure plans for our utilities, regulatory decisions on delivering tax reform benefits to our customers and the approved increase in WPL's common equity percentage by PSCW. These 2019 financing plans support our objective of maintaining capital structures at our 2 utilities, consistent with their most recent regulatory decision. We will adjust the financing plan if market conditions warrant and as our external financing needs are reassessed.

Lastly, we've included our regulatory initiatives note on Slide 7. These regulatory initiatives are important components of our operational and financial goals for 2019.

We very much appreciate your continued interest in our company.

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

(Operator Instructions) We'll take our first question from Julien Dumoulin-Smith with Bank of America.

It's Nick Campanella on for Julian today. So for the upcoming test year at IPL, I think it's been pretty well telegraphed that you want to go after higher equity layers. Could you just kind of give us a sense of what's assumed in your long-term 5% to 7% EPS guidance in terms of equity layers at IPL? I'm just trying to get a sense of how incremental it would be to your base plan.

Yes, Nick, this is Robert. As you probably recall when we filed the gas case for test year 2017 in Iowa, we requested a higher equity layer and received through a settlement agreement approval from the IUB to raise that up to 51%, so I would use that as a long-term projection for the 5% to 7% EPS growth.

Got it. And then, as we kind of think about equity post 2020, if we assume the CapEx program remains constant, as it stands today, is it safe to say that there is no more equity needs after your 2020 period?

Yes, Nick, based on the capital expenditure program that we shared with the investment community back in November, with the exception of some small amounts to the share redirect plan, which usually average about $25 million a year, we're not expecting any major equity beyond 2020.

And Pat, congrats on your retirement announcement, and John, congrats as well, looking forward to working together.

Thanks, Nick.

Thanks, Nick.

Our next question comes from Andrew Weisel with Scotia Howard.

I want to echo the congratulations to Pat and John as well.

Thanks, Andrew.

Thank you, Andrew.

If I may just to clarify the last comments you made there. You were talking about equity beyond 2020, but you haven't yet addressed what the 2020 need will look like. Is that right?

That is correct, Andrew. Consistent with our previous communications, we plan on providing investors the 2020 equity amounts in the second half of this year. After we have some more insight into the IPL capital structure for 2020, that will be decided in the upcoming rate filing.

Okay, got it. Just wanted to clarify that. My other clarifying question is the Duane Arnold early termination was approved, as you mentioned. Should we expect the treatment to look how you're hoping it would look with the November updates? In other words, the $110 million will not be in the CapEx plan, but it's a regulatory asset, and therefore, would be in rate base?

That is correct, Andrew.

Okay, terrific. Then lastly, the more kind of high-level question I want to ask. I understand there's some conversations in Iowa about potentially changing the pace and style of rate case filings, if you will, and I don't mean the hybrid case that you've been pretty clear on for this year. I'm talking more about the idea of potentially combining electric and gas or potentially going in on more of a regular 2-year schedule like you have in Wisconsin. Is there any feedback you're able to share at this point? I know it's preliminary, but is that something that you think is likely to happen going forward?

Yes, I'll answer that one. At a high level, we're still working with the regulators in Iowa on what the rate cases should look like going forward, this future test year, the one that we'll be filing next week is really the first case that will be using these new guidelines. So we'll be talking with them. One of the things they did do in our case is, they do want electric and gas to be filed separately, although the procedure will be the same. So we're just working on this case, and let's see what it can look like going forward. So good discussions happening in the state.

We'll take our next question from Angie Storozynski with Macquarie.

So 2 questions. So one is, I understand that your CapEx plan was heavy or somewhat front-end loaded given expiring subsidiaries for wind. How do you think about solar given the drop in solar panel prices and that was seemed to be seeing a shift in utility CapEx to solar versus wind. So is it possible that we're going to see meaningful increases in your CapEx plan beyond 2020 driven by solar CapEx?

Angie, this is John. We certainly continue to look at solar as opportunities for our customers and when that make sense. That will certainly play into our resource mix, so just like we had with our early wind developments, we are in solar development phase right now, taking a look at opportunities. So we'll continue to look at that more encouraged by the dropping in pricing.

Okay. But you would not consider commercial renewable investments something that we've seen at other regulated utilities? Meaning outside of the rate base?

Yes. This time, our primary focus would be solar that would make sense in our ongoing resource planning.

Okay. And my other question is, I remember, we talked how high transmission costs inflate bills of your IPL customers. So is there a solution there, i.e., I mean, given what's happening with the data about transmission ROEs at FERC or maybe some more focused on distributed generation, is there a way to somewhat alleviate this impact on customer bills?

Angie, this is Robert. So yes, I would say we're actively involved with the FERC filing. We provided comments to that filing and we're interested in answering the appropriate levels of ROE given that does have a direct impact on our customer bills. So you should expect us to be very involved with that process and look forward to enter good resolution with the FERC at some point here in the future.

And Angie, we have constant dialogue with our transmission provider in Iowa as well just to make sure that our planning assumptions are aligned and we prioritize the work together, so there's ongoing dialogue in Iowa on the work that's being done as well.

But I was asking more from the perspective of you could at least avoid future transmission cost and transmission CapEx by developing community solar platforms, something to that extent would actually -- would accrue more to your rate base and would be probably beneficial for the customers?

Angie, this is John. Certainly, taking a look at those options where we can have lower cost installations by either avoiding some of the transmission costs or placing that in locations where the transmission element is smaller. It obviously puts us towards the lowest-cost solution for our customers, so we continue to look at those options.

Okay. But those are not yet reflected in your CapEx plan, is that fair?

Correct.

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

With no more questions, this concludes our call. A replay will be available through March 1, 2019, at (888) 203-1112 for U.S. and Canada or (719) 457-0820 for international. Callers should reference conference ID 4175543 and PIN 9578. 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 our 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.

This concludes today's conference. Thank you for your participation. You may now disconnect.