Alliant Energy Corporation (NASDAQ:LNT) Q1 2020 Earnings Conference Call May 8, 2020 10:00 AM ET
Susan Gille – Investor Relations Manager
John Larsen – Chairman, President & Chief Executive Officer
Robert Durian – Senior Vice President & Chief Financial Officer
Conference Call Participants
Alex Morgan – Bank of America
Andrew Weisel – Scotiabank
Michael Sullivan – Wolfe Research
Good morning, ladies and gentlemen, and welcome to Alliant Energy’s Conference Call for First Quarter 2020 Results. This call is being recorded for rebroadcast. At this time, all lines are in a listen-only mode.
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 the webcast for joining us today. We appreciate your participation. Joining me on this call are John Larsen, Chairman, President and Chief Executive Officer; and Robert Durian, Executive Vice President and CFO. Following prepared remarks by 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 first quarter financial results and reaffirmed the consolidated 2020 earnings guidance range issued in November 2019. This release, as well as supplemental slides that will be referenced during today’s call are available on the investor page of our website at www.alliantenergy.com.
Before we begin, I need to remind you the remarks we make on this call and our answers to your questions, include forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others, matters discussed in Alliant Energy’s press release issued last night, and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements.
In addition, this presentation contains references to non-GAAP financial measures. A reconciliation between non-GAAP and GAAP measures are provided in the earnings release and our 10-Q, which will be available on our website at www.alliantenergy.com.
At this point, I’ll turn the call over to John.
Thank you, Sue. Good morning, everyone, and thank you for joining us. I’ll start with a review of several actions we have taken to continue our critical service to our customers and communities during the current pandemic. I’ll draw your attention to slide 2.
These are indeed unprecedented times and brings to life the values that guide our every decision. One of those values is caring for others. We understand the responsibility that comes with the essential service we provide. The Alliant Energy team has taken steps to continue safe and reliable service to our customers and communities.
We are focused now more than ever to ensure uninterrupted energy delivery. So those on the front lines can help those in need businesses can operate and provide critical products and services. Charitable organizations can support those most vulnerable, and our customers can focus on their health and well-being.
Like many of you, we’ve adjusted the way we work and many of our employees now work from home. We’ve made changes to our operations to ensure we can safely keep the lights on and the gas flowing.
We are following the important guidance from the CDC, maintaining physical distancing and adding additional precautions like wearing face coverings and gloves, when the situation requires. And we are rotating shifts for certain functions to limit exposure and business disruption.
Another one of our core values is to do the right thing. Temporarily suspending disconnections and waiving late fees for our customers was the right thing to do.
In addition, we knew that now was the time for a creative way to keep rates low and predictable for our customers. We filed a proposal in Wisconsin to keep customer rates steady through the end of 2021. This filing is a continuation of our ongoing efforts to maintain among the lowest rates in the state.
And in Iowa, with our continued focus on cost reductions and the new renewable energy rider, we do not anticipate filing an electric rate review for the next couple of years. When the health crisis first started, we reached out to our non-profit partners to understand the unmet needs in the communities we are so privileged to serve.
Over the past several weeks, we’ve made donations to several local charities, such as food banks, the American Red Cross and the United Way.
We also provided a $2 million contribution to the Hometown Care Energy Fund to support families who need assistance in paying their bills. And, through a partnership with Iowa State University, we’ve been providing 3D printed face shields to local medical facilities and healthcare workers. I think we can all agree that times like these is when the social part of ESG matters the most.
Despite the disruption and many personal impacts, this pandemic has had our employees’ commitment to our customers and communities has been remarkable. I am proud to work for Alliant Energy and am thankful for all our teams are doing to help our customers. They are living our values and delivering on our purpose to serve customers and build strong communities.
Times like these also require accurate, real-time monitoring of energy use and allows us to make better decisions. The important investments we made in smart meter technology has been a critical part of our planning efforts.
Since the crisis began, we have spent time to understand the impacts on our customers and demand for our services. Robert will address the trends we are seeing across our residential, commercial, and industrial customer base.
However, I want to mention three important factors to keep in mind, as Robert outlines the impacts. One, we have a diverse customer base and operate in two constructive regulatory jurisdictions. Two, we have summer pricing in place in our Iowa business and three, our larger commercial and industrial electric margins include both an energy and demand component.
We have managed through many economic cycles over our over 100-year history and drawing upon that experience we are keeping a strong focus on our operational and financial discipline.
Therefore, I am reaffirming our 2020 earnings guidance of $2.34 to $2.48. We remain committed to our 5% to 7% growth targets, and our 60% to 70% dividend payout ratio.
Our first quarter of 2020 was a solid start to the year, both financially and operationally. This was a direct result of the planning and execution of our long- term strategy designed to focus on customer costs, smart investments, and advancing a clean energy future.
Despite operating in a time of great uncertainty, we continue to make great progress advancing our transition to a more efficient, modern, and balanced energy portfolio. In the first quarter, we achieved another major milestone when we placed 400 megawatts of new wind into service for our Iowa customers.
These two new wind farms, the Whispering Willow North, and Golden Plains, were completed on-schedule and below budget, continuing our long track record of meeting or exceeding expectations established when we request construction authority from our regulators. And we are on track to install an additional 280 megawatts of new wind for our Iowa and Wisconsin customers by the end of this year.
This will complete the full 1,000 megawatts of renewable investment approved by the Iowa Utility Board and, also, a 150 megawatts renewable investment approved by the Public Service Commission of Wisconsin.
Our experience in planning, developing and constructing renewable energy resources puts us in a great position to advance even more renewable energy for our customers . We are now entering the regulatory approval phase of our 1,000 megawatt solar build-out in Wisconsin. We are in advance discussion with developers and anticipate filing a certificate of authority for approximately two-thirds of the 1,000 megawatts by the end of this quarter.
Our Wisconsin solar investments will be enough to power more than 260,000 homes with clean and affordable energy from the sun. The expansion of the Wisconsin renewable resource portfolio was a result of a year-long voluntary resource planning process we called the Wisconsin Clean Energy Blueprint.
We started the Iowa Clean Energy Blueprint process, and plan to share a proposal – our proposed resource plan for Iowa towards the end of this year. These plans balance many important goals, including reliability, affordability, building stronger communities and the impacts the transitions may have on our talented and dedicated employees.
I am pleased to report that we are making great strides toward achieving another major milestone in our generation transformation strategy.
West Riverside Energy Center – located near Beloit, Wisconsin has met several key testing criteria. We anticipate this 730-megawatt highly-efficient natural gas resource to be completed below budget and in time to meet the upcoming customer demand.
This resource will bring significant benefits to our customers through lower fuel costs and continued reliability as a complement to the renewable resources in the Midwest.
Alliant Energy is committed to providing reliable, economical energy and also in a sustainable manner. I am very pleased to report that the Institute for Sustainable Infrastructure has awarded our West Riverside Energy Center with its highest certification, which is Platinum.
This certification recognizes our commitment to construct sustainable projects and reinforces our commitment to environmental stewardship and collaboration with local communities and land owners. Congratulations to our West Riverside Team for accomplishing this important and distinguished achievement.
In closing, let me summarize the key messages. We are continuing to provide safe, reliable and affordable energy to our customers, advancing our clean energy strategy, on schedule, and on budget ensuring our investments are efficient and customer-focused and delivering solid returns for our investors, and continuing to focus on the safety, health, and well-being of our employees, customers and communities.
Thank you for your interest in Alliant Energy. I will now turn the call over to Robert.
Thanks John. Good morning everyone. Yesterday, we announced first quarter 2020 GAAP earnings of $0.70 per share, compared to $0.53 per share in the first quarter of 2019. Our utilities had higher earnings year-over-year, driven by higher electric and gas margins from increasing rate base and timing of income tax expense.
These increases in earnings were partially offset by lower sales due to the warmer winter temperatures in the first quarter and higher depreciation expense. We have provided additional details on the earnings variance drivers for the quarter on slides 3 and 4.
The solid start to the year accounts for approximately 30% of our 2020 earnings targets and allows us to reaffirm our 2020 earnings guidance of $2.34 per share to $2.48 per share.
The key drivers of the growth in 2020 EPS are related to investments in our core utility business including WPL’s West Riverside generating facility and IPL’s wind expansion program. These investments were reflected in IPL’s and WPL’s approved electric rates for 2020.
As John indicated, like many of our utility peers, we are expecting lower retail sales in 2020 due to the impacts of the pandemic. As noted on Slide 5, we experienced a 4% increase in residential sales in April, driven largely by more people working from home.
Our residential customers represent nearly 50% of our retail electric margins and every 1% change in residential sales equates to approximately $0.02 of earnings per share.
On the commercial and industrial side, the story is different. C&I sales decreased by 13% in April and every 1% change in annual C&I sales equates to approximately $0.02 of EPS.
Under an assumption, that the more significant pandemic-related sales declines extend through the end of the second quarter, and a slower recovery through the end of the year, we are forecasting approximately 5% lower overall retail sales this year.
We are positioned to continue our long track record of delivering on earnings growth targets by mitigating COVID- 19 impacts, as noted on slide 6. We will accelerate transformation activities and reduce discretionary spending to lower costs offsetting a large portion of the COVID-19 impact.
In addition, both the Public Service Commission of Wisconsin and the Iowa Utilities Board have issued orders authorizing the use of regulatory accounts to defer incremental costs related to COVID-19.
Lastly, during times of low energy prices like now, we have an opportunity to capture and keep a portion of fuel cost savings through WPL’s fuel sharing mechanism, which is also expected to help offset a portion of the COVID-19 impacts in 2020.
To assist you in modeling our quarterly earnings this year, it is important to note that the projected increase in earnings for 2020 will not be recognized ratably throughout the year. For example, IPL’s interim rate increase went into effect April 1, 2019 thus by skewing more of the full year increase in earnings to the first quarter of 2020.
Also, the timing of wind production tax credits and excess deferred income tax amortizations are recognized will cause quarter-over-quarter fluctuations in earnings. We expect favorable earnings variances from the timing of tax expense to continue through the first half of the year and then reverse in the second half of 2020.
Slide 7 has been provided to assist you in modeling the effective tax rates for our two utilities and our consolidated group. We estimate a consolidated effective tax rate of negative 12% for 2020. The primary drivers of the lower tax rates are the additional tax credits from new wind projects being placed in service and the return of excess deferred taxes from federal tax reform to our customers.
The production tax credits and excess deferred tax benefits will flow back to customers resulting in lower electric margins. Thus, the decrease in the effective tax rate is largely earnings neutral.
Our strategy includes continued focus on providing affordable energy to our customers. In Wisconsin, we are holding electric and gas base rates flat through 2020 by using federal tax reform benefits and lower fuel costs to offset the cost of utility investments.
Earlier this month, we proposed an extension of the current Wisconsin electric and gas rates through 2021. As summarized on slide 8, we are proposing to use additional fuel cost reductions and tax benefits to offset the increased revenue requirements in 2021 associated with rate base additions, which includes the 150-megawatt Kossuth Wind project and the Western Wisconsin gas pipeline expansion.
And since the duration of the impacts from COVID-19 is unclear, we are seeking escrow treatment for bad debt and retirement plan expenses and the flexibility to adjust regulatory liability and escrow mechanisms to address the possible impacts on 2021 sales demand.
Finally, the 2021 rate filing requests continuation of our current authorized ROE of 10%, our current authorized common equity component and our regulatory capital structure of 52.5% and our current ROE sharing mechanism.
Turning to Iowa, we plan to reduce our electric customer bills with $35 million of credits related to federal tax reform benefits and interim rate refunds.
We also expect increased production tax credits and significant fuel cost reductions to flow back to Iowa electric customers in 2020, as a result of further expansion of wind generation and low natural gas prices.
Our Iowa gas customers are also expected to see benefits in 2020 due to lower energy efficiency charges as a result of 2018 Iowa legislation.
As we look to the future in Iowa, we have taken further action to reduce costs for our electric customers with the addition of new low-cost wind PPAs and the termination of the Duane Arnold PPA later this year, both of this will begin saving our Iowa electric customers’ money in 2021.
Moving to our 2020 financing plans, which are shown on Slide 9. During the first quarter, we took steps to improve our already solid liquidity position. These included two debt offerings. First was a refinancing of a $300 million term loan for our non-regulated businesses, and second was the issuance of $350 million of 30-year debentures by our Wisconsin utility.
Both debt deals were well received by the market with favorable interest rates allowing us to lower our overall average cost of debt.
In addition, in March, we also issued the common equity planned in 2020 from our equity forward agreements generating proceeds of $222 million. With these actions, we increased our current liquidity to approximately $1.2 billion including cash and borrowing capacity under our credit facility and our sale of accounts receivable program.
Our remaining financings planned for 2020 include issuing up to $300 million of long-term debt by our Iowa utility and with the recent execution of our equity forward agreements, we have no further material equity issuances planned for the foreseeable future.
With a large portion of our 2020 financing plan already complete and only $350 million of debt maturities over the next two years, we believe we are well positioned to respond to any potential disruptions in cash flows that may result from the pandemic.
We may adjust the financing plan if market conditions warrants, and as our external financing needs are reassessed.
Lastly, we have included our regulatory initiatives of note on Slide 10, with four notable developments so far this year. First, IPL received approval from the Iowa Utilities Board to implement final retail electric rates and the new renewable energy rider in February.
Second, the Public Service Commission of Wisconsin granted us construction authority for the Western Wisconsin Pipeline expansion in March. Third, we filed WPL’s 2021 rate stabilization plan for electric and gas customers, which I outlined earlier.
And finally, both state commissions have approved accounting deferral orders related COVID-19 incremental costs. These regulatory initiatives are important components of our overall operational and financial goals for 2020 and 2021.
We appreciate your continued interest in our company and look forward to connecting with many you virtually over the coming months.
At this time, I will turn the call back over to the operator to facilitate the question and answer session.
[Operator Instructions] Our first question today comes from Julien Dumoulin-Smith of Bank of America.
Hi, good morning. This is Alex Morgan calling in for Julien. Thank you so much for taking my question and congratulations on the results.
Good morning. Thanks, Al.
No problem. So, I want to check in specifically on O&M. I know that, you mentioned in the prepared remarks, a little bit about some expenses that you are going to cut to be able to balance under the COVID impacts. But I was wondering if you could talk really specifically about O&M and how you were factoring that in originally in 2020 and then, maybe the year-over-year expectation now? Thank you so much.
Sure. Great, Alex. So, we had a number of items that bringing 580 megawatts of wind or Riverside. So we had some O&M increases in coming into 2020 and we had some offsets as well. So we were expecting it to be relatively flat coming into the year. Certainly, with the COVID impacts, we know, we have to further reduce – the good news here is, we had a lot of work internally on planning for cost reduction.
So we will see some acceleration of plans that we had. Certainly this isn’t the first time we had to react for our company during economic downturns. So we will take a look, there are a number of levers that we have to reduce costs. So we would see addressing that here – this year and maybe for a few more details, I’ll see if Robert wants to add a couple of points.
Yes, Alex. Maybe to give you some sense, so coming into the year, we expected as John indicated, maybe just a slight decrease in O&M, but we are going to benefit from the fact that our pension costs are expected to be lower in 2020, largely because of the favorable returns we saw in 2019.
And as John indicated, the remainder of the decrease was largely related to elimination of discretionary spending. Think of that as cost we incur for travel and employee expenses that have been suspended at a point in time, as well as some contractors that we are no longer going to pursue.
And then, as John also indicated, part of that is acceleration in some of the planned transformation activities where we are going through and reevaluating processes across the organization that gained some efficiencies and automate some of our plants. So, we feel well positioned to be able to execute on those and offset these sales declines.
Thank you. And one more question from me. I was wondering around the Wisconsin filings is, you could maybe provide a little more commentary on your expectations if you expect interveners to understand the filing and to largely be okay with that, especially with being able to use some of those fuel savings to balance off the rate base increase.
I am definitely interested in hearing about that. And then, potentially any expectation around timing, when we might be able to see final results? And that’s it for me. Thank you so much again.
Yes, great. And certainly important that we may be start out thinking about. We’ve had great productive conversations with our regulators and interveners thinking about getting ready for not only the stabilization filing, but also work that we are doing on our clean energy blueprint. So a lot of work going in and I would say that we’ve always had a very collaborative and transparent process.
So, there are a number of levers and as we put forward, now is the right time to think about introducing a couple of these important projects, our Kossuth project namely is one of those that would be able to put forward, as well as our West Riverside. And then have a number of these offsets that could keep customer rates flat.
So we’ve had a lot of productive discussions, felt that went well, and we appreciate that. And as far as timing, Alex, I would – I think we are looking at maybe roughly third quarter and timing obviously that’s subject to making sure we have all the information and respond to questions that the regulators have. But we feel comfortable with the filing. We think it’s the right thing to do for customers.
Thank you very much. Have a great day.
Our next question comes from Andrew Weisel of Scotiabank.
Hi, good morning everyone.
Good morning, Andrew.
First question on the WPL filing. Can you give a little more specific, there is a comment in the slide and in the filing about using regulatory mechanisms to address estimated COVID impacts on 2021 sales? Can you just dig a little deeper into that in terms of how you would quantify that? I believe that’s not adjusting for weather, just COVID specifically, right?
That is correct. And so part of our filing requested the ability to go back into the later dates and potentially use some of the regulatory liabilities that we’ve accumulated through cost reductions including fuel cost sharing mechanisms and ROE sharing mechanisms to be able to offset any potential impacts on 2021 sales demand because of COVID-19.
Because we don’t know the exact impacts from that yet next year, we’ll likely able to tell – again probably later into the year. We just asked for the ability to come back into the later point of addressing them.
Okay. Got it. Thank you. And then the next question I had was I believe you said you are expecting you are expecting a 5% overall reduction in sales this year from COVID-19. Can you break that up by customer class for us?
Yes, I think you could probably look very – at the slide that we put out there, it has the breakdown between the increase in the residential sales and the decrease in commercial and industrial sales. So think of that profile is pretty consistent.
So we do expect some increase in the residential side and then the opposite to the commercial and industrial segment. Residential is probably going to be a net 3% to 5% positive and the commercial and industrial are likely be around the 10% to 13% that that we identified.
Well, then just the math of it, would that suggest it would be down 9% for the full year?
Yes, that’s just for the second quarter and then will have a slow recovery through the remainder of the year. So you can look at the direction on the residential.
Yes, Andrew, John here. Certainly, we see minimal – as we noted minimal in Q1. We certainly see Q2 as being the major impact right now and then having a gradual, but slow trajectory for the balance of the year.
Certainly recognize that’s not necessarily going to be linear. We know there is going to be some ups and downs. So we’ve done quite a bit of scenario planning and think of it as an aggregate of a number of what if plans put together as Robert noted, then comes to around that 5% overall decline.
Okay. Got it. Thank you very much.
You are welcome.
And our last question today comes from Michael Sullivan of Wolfe Research.
Yes. Hey. Good morning everyone. Hope you are all well.
Yes, thanks, Michael. Hope you are as well.
Thanks. Yes. Just on the 2020 guidance, I think last quarter, you guys indicated that you were tracking to the upper end of the range and just wanted to confirm whether that’s still the case? Or if you are able to indicate where within a range kind of post what you’re seeing on the COVID side of things?
Yes. Great question. Thanks, Michael. One thing to keep in mind. We do have our range and guidance weather-normalized. So this is important to keep that in mind. But as we thought about reaffirming and we certainly have a target for being at the midpoint of that guidance, weather-normalized.
Okay. So weather-normal but not normalizing for COVID?
Correct. We do plan on offsetting the COVID-19 impacts. So at the end of the year when you look at our temperature-normalized non-GAAP EPS, we’ll be targeting that midpoint of the current guidance range of 2.1.
And just curious , and in one of the footnotes on the rate filing indicated, assuming that WEC and GE won’t exercise your options in West Riverside. Have they given you that indication? Or is that just kind of the mechanics here? You guys are assuming that? Or just any color on the expectation on that front?
Yes, Michael, just based on the timing for this one year stabilization. Nothing more than it is a base timing assumption.
Okay. That was all for me. Thanks a lot. Be well.
Right. Thank you.
With no more questions, this concludes our call. A replay will be available through May 17, 2020 at 888-203-1112, for US 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 investor’s 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.