Alliant Energy (LNT) Q1 2020 Earnings Call Transcript

Alliant Energy (LNT -0.28%)
Q1 2020 Earnings Call
May 08, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator instructions] I would now like to turn the call over to your host, Susan Gille, investor relations manager at Alliant Energy.

Susan Gille -- Investor Relations Manager

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 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.

The reconciliation between non-GAAP and GAAP measures are provided in the 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.

John Larsen -- Chairman, President, and Chief Executive Officer

Thank you, Sue. Good morning, everyone, and thank you for joining us. I'll start with a review of several actions we've 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 several steps to continue safe and reliable service to our customers and communities.

We're 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're following the important guidance from the CDC, maintaining physical distances and adding additional precautions like wearing face coverings and gloves when the situation requires, and we're 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 nonprofit partners to understand the unmet needs in the communities we're 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 in many personal impacts this pandemic has had, our employees' commitment to our customers and communities has been remarkable. I'm proud to work for Alliant Energy and thankful for all our teams are doing to help our customers. They're living our values and delivering on our purpose to serve customers and build strong communities. Times like these also require accurate and real-time monitoring and energy use.

It 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've spent time to understand the impacts on our customers and demand for our services. Robert will address the trends we're 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've managed through many economic cycles over our 100-year history. And drawing upon that experience, we're keeping a strong focus on our operational and financial discipline.

Therefore, I'm reaffirming our 2020 earnings guidance of $2.34 to $2.48. We remain committed to our 5% to 7% growth target 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, design 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're on track to install an additional 200 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 150 megawatts of 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 advanced 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 call the Wisconsin Clean Energy Blueprint. We started the Iowa Clean Energy Blueprint process and plan to share our proposal -- our proposed resource plan for Iowa toward 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'm pleased to report that we're 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'm 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 in collaboration with local communities and landowners. 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.

Robert Durian -- Executive Vice President and Chief Financial Officer

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 warmer winter temperatures in the first quarter and higher depreciation expense. We have provided additional details on the earnings range drivers for the first 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 a 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 annual residential sales increased approximately $0.02 of earnings per share.

On the commercial and industrial side, the story is different. Our C&I sales decreased by 13% in April, and every 1% change in annual C&I sales increased 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 slow 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 use of regulatory accounts to defer incremental account -- 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 in 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, thereby 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 for 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 with 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 of 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 continuation of our current authorized ROE of 10%, our current authorized common equity component and a 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 the interim rate refunds. We also expect increased reductions tax credits and significant fuel cost reductions to flow back to Iowa -- to 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 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 the refinancing of a $300 million term loan for our nonregulated 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 Iowa utility. And with the execution of our equity forward agreements, we have no further material equity issuance 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 warrant and as our external financing needs are reassessed. Lastly, we have included our regulatory initiatives as noted on Slide 10 with four notable development so far this year. First, IPL received approval from 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 its 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 to COVID-19 incremental costs. These regulatory initiatives are important components to 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 of you virtually over the coming months. At this time, I'll turn the call back over to the operator to facilitate the question-and-answer session.

Questions & Answers:

Operator

[Operator instructions] Our first question today comes from Julien Dumoulin-Smith of Bank of America.

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

This is Alex Morgan calling in for Julien. Thanks so much for taking my question and congratulations on the results.

John Larsen -- Chairman, President, and Chief Executive Officer

Good morning. Thanks no problem.

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

So I wanted to check in specifically on O&M. I know that you mentioned in the prepared remarks, a little bit about some expenses that you're going to cut -- to be able to balance some of the COVID impacts. But I was wondering if you could talk maybe specifically about O&M and how you were factoring that in originally in 2020? And then maybe the year-over-year expectation now?

John Larsen -- Chairman, President, and Chief Executive Officer

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've had a lot of work internally on planning for cost reductions. So we'll see some acceleration of plans that we had. Certainly, this isn't the first time we've had to react for our company during economic downturns.

So we'll 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.

Robert Durian -- Executive Vice President and Chief Financial Officer

Yes. Alex, maybe to give you some sense. So coming into the year, we expected, as John indicated, maybe just a slight decrease in that, but we're 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 '19. And as John indicated, the remainder of the decreases are largely related to elimination of discretionary spending.

Think of that as cost we incur for travel and employee expenses that have been suspended at this point in time as well as some contractors that we are no longer going to pursue. And then as John also indicated, quite a bit of acceleration of some of the planned transformation activities where we're going through and reevaluating processes across the organization that gained some efficiencies and automate some of plants. So we feel well-positioned to be able to execute on those and offset these sales decline.

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

And one more question from me. I was wondering around the Wisconsin filings. If you could maybe provide a little more commentary, your expectations if you expect interveners to understand the filing and to largely be OK with it, especially with being able to use some of those fuel savings to balance out the rate base increase. I'm definitely interested in hearing about that.

And then potentially, any expectation around timing when we might be able to see a final result? And that's it from me.

John Larsen -- Chairman, President, and Chief Executive Officer

Yes. Great. And certainly important that we maybe 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're 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. As far as timing, Alex, I would -- I think we're looking at maybe roughly third quarter 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.

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

Thank you very much. Have a great day.

Operator

Our next question comes from Andrew Weisel of Scotiabank.

Andrew Weisel -- Scotiabank -- Analyst

Hi. Good morning, everyone.

John Larsen -- Chairman, President, and Chief Executive Officer

Good morning, Andrew.

Andrew Weisel -- Scotiabank -- Analyst

First question on the WPL filing. Can you get a little more specific? There's a comment in the slide and in the filing about using regulatory mechanisms to address estimated COVID impact on 2021 sales. Can you just dig a little deeper into that in terms of how you'd quantify that? I believe that's not adjusting for weather, just COVID specifically, right?

Robert Durian -- Executive Vice President and Chief Financial Officer

Andrew, this is Robert. That is correct. And so as part of our filing, we requested the ability to go back into the later days 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 impact of that yet next year, we won't likely until we get probably later in the year.

We just asked for the ability to come back at a later point and address it then.

Andrew Weisel -- Scotiabank -- Analyst

OK, got it. And then the next question I had was I believe you said you're expecting a 5% overall reduction in sales this year from COVID-19. Can you break that up by customer class for us?

Robert Durian -- Executive Vice President and Chief Financial Officer

Yes, I think you could probably look very -- at the slide that we put out there as a break down between the increase in the residential sales and the decrease in the commercial and industrial sales. So think of that profile as pretty consistent. And we do expect some increase in the residential side and then the offset to the commercial industrial. So the residential is probably going to be a net 3% to 5% positive, and the commercial and industrial are likely to be around the 10% to 13% that we identified.

Andrew Weisel -- Scotiabank -- Analyst

Well, then just the math of it, would that suggest it would be down 9% for the full year?

Robert Durian -- Executive Vice President and Chief Financial Officer

Yes, that's just for the second quarter, and then we'll have a slower recovery through the remainder of the year. So you can look at the direction of residential.

John Larsen -- Chairman, President, and Chief Executive Officer

Yes, 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's 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.

Andrew Weisel -- Scotiabank -- Analyst

OK, got it. Thank you very much.

John Larsen -- Chairman, President, and Chief Executive Officer

You're welcome.

Operator

And our last question today comes from Michael Sullivan of Wolfe Research.

Michael Sullivan -- Wolfe Research -- Analyst

Hey, good morning, everyone. Hope you're all well.

John Larsen -- Chairman, President, and Chief Executive Officer

Thanks, Michael. Hope you are as well.

Michael Sullivan -- Wolfe Research -- Analyst

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're able to indicate where within a range kind of post what you're seeing on the COVID side of things?

John Larsen -- Chairman, President, and Chief Executive Officer

Yes. Great question. Thanks, Michael. One thing to keep in mind, we do have a 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.

Michael Sullivan -- Wolfe Research -- Analyst

OK. So weather normal but not normalizing for COVID?

Robert Durian -- Executive Vice President and Chief Financial Officer

Correct. We do plan on offsetting the COVID-19 impact. 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 2.41.

Michael Sullivan -- Wolfe Research -- Analyst

OK. And just curious, in one of the footnotes on the rate filing indicated, assuming that WEC Energy won't exercise their 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?

John Larsen -- Chairman, President, and Chief Executive Officer

Yes, Michael, just based on the timing for this one-year stabilization, nothing more than that, it's a base planning assumption.

Michael Sullivan -- Wolfe Research -- Analyst

OK. That was all for me.

John Larsen -- Chairman, President, and Chief Executive Officer

Thank you.

Susan Gille -- Investor Relations Manager

With no more questions, this concludes our call. A replay will be available through May 17, 2020, 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 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.

Duration: 34 minutes

Call participants:

Susan Gille -- Investor Relations Manager

John Larsen -- Chairman, President, and Chief Executive Officer

Robert Durian -- Executive Vice President and Chief Financial Officer

Alex Morgan -- Bank of America Merrill Lynch -- Analyst

Andrew Weisel -- Scotiabank -- Analyst

Michael Sullivan -- Wolfe Research -- Analyst

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