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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MDA includes information relating to Alliant Energy, IPL and WPL, as well as Resources and Corporate Services. Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Financial Statements and Notes included in this report. Unless otherwise noted, all “per share” references in MDA refer to earnings per diluted share.
CONTENTS OF MDA
MDA consists of the following information:
| • | Executive Summary |
| • | Results of Operations |
| • | Strategic Overview |
| • | Rate Matters |
| • | Environmental Matters |
| • | Legislative Matters |
| • | Liquidity and Capital Resources |
| • | Other Matters |
| • | Market Risk Sensitive Instruments and Positions |
| • | New Accounting Standards |
| • | Critical Accounting Policies and Estimates |
| • | Other Future Considerations |
EXECUTIVE SUMMARY
Description of Business
General - Alliant Energy is an investor-owned public utility holding company whose primary subsidiaries are IPL, WPL, Resources and Corporate Services. IPL is a public utility engaged principally in the generation and distribution of electricity and the distribution and transportation of natural gas to retail customers in select markets in Iowa. IPL also sells electricity to wholesale customers in Minnesota, Illinois and Iowa. WPL is a public utility engaged principally in the generation and distribution of electricity and the distribution and transportation of natural gas to retail customers in select markets in Wisconsin. WPL also sells electricity to wholesale customers in Wisconsin. At December 31, 2015, WPL and Resources, through their ownership interests in WPL Transco, in aggregate held an approximate 16% ownership interest in ATC, a transmission-only utility operating primarily in the Midwest. Resources is the parent company for Alliant Energy’s non-regulated businesses. Corporate Services provides administrative services to Alliant Energy and its subsidiaries. An illustration of Alliant Energy’s primary businesses is shown below.
| Alliant Energy | |||||
| Utilities, ATC and Corporate Services | Non-regulated and Parent | ||||
| - Retail electric and gas services in IA (IPL) | - Transportation (Resources) | ||||
| - Retail electric and gas services in WI (WPL) | - Non-regulated Generation (Resources) | ||||
| - 16% interest in ATC (primarily WPL) | - Parent Company | ||||
| - Wholesale electric service in MN, IL & IA (IPL) | |||||
| - Wholesale electric service in WI (WPL) | |||||
| - Corporate Services |
Utilities and Corporate Services - IPL and WPL own a portfolio of EGUs located in Iowa, Wisconsin and Minnesota with a diversified fuel mix including coal, natural gas and renewable resources. The output from these EGUs, supplemented with purchased power, is used to provide electric service to approximately 950,000 electric customers in the upper Midwest. The utility business also procures natural gas from various suppliers to provide service to approximately 410,000 retail gas customers in the upper Midwest. Alliant Energy’s utility business is its primary source of earnings and cash flows. The earnings and cash flows from the utilities and Corporate Services business are sensitive to various external factors including, but not limited to, the amount and timing of rates approved by regulatory authorities, the impact of weather and economic conditions on electric and gas sales volumes and other factors listed in “Risk Factors” in Item 1A and “Forward-looking Statements.”
Non-regulated Business and Parent - Resources manages various businesses including Non-regulated Generation (Sheboygan Falls and the Franklin County wind farm), Transportation (short-line railway and barge transportation services) and several other modest investments.
Financial Results - Alliant Energy’s net income and EPS attributable to Alliant Energy common shareowners were as follows (dollars in millions, except per share amounts):
| 2015 | 2014 | ||||||||||||||
| Income (Loss) | EPS | Income (Loss) | EPS | ||||||||||||
| Continuing operations: | |||||||||||||||
| Utilities, ATC and Corporate Services | $374.5 | $3.32 | $371.4 | $3.35 | |||||||||||
| Non-regulated and Parent | 6.2 | 0.06 | 14.1 | 0.13 | |||||||||||
| Income from continuing operations | 380.7 | 3.38 | 385.5 | 3.48 | |||||||||||
| Loss from discontinued operations | (2.5 | ) | (0.02 | ) | (2.4 | ) | (0.02 | ) | |||||||
| Net income | $378.2 | $3.36 | $383.1 | $3.46 |
The table above includes EPS from continuing operations for utilities, ATC and Corporate Services, and non-regulated and parent, which are non-GAAP financial measures. Alliant Energy believes EPS from continuing operations for utilities, ATC and Corporate Services, and non-regulated and parent are useful to investors because they facilitate an understanding of segment performance and trends and provide additional information about Alliant Energy’s operations on a basis consistent with the measures that management uses to manage its operations and evaluate its performance.
Lower earnings from continuing operations in 2015 compared to 2014 was primarily due to higher electric transmission service expense at WPL; lower electric and gas sales attributed to milder temperatures in 2015; higher income tax, depreciation, interest and employee benefits-related expenses; losses on sales of IPL’s Minnesota electric and gas distribution assets in 2015; and lower earnings at Transportation. These items were partially offset by lower retail electric customer billing credits at IPL; lower energy efficiency cost recovery amortization at WPL; and capacity charges related to the IPL DAEC PPA in 2014.
Refer to “Results of Operations” for additional details regarding the various factors impacting earnings during 2015, 2014 and 2013.
2015 Overview - In 2015, Alliant Energy, IPL and WPL focused on achieving financial objectives and executing their strategic plan, including providing competitive value and exceptional service for their customers and finding innovative ways to operate the business more efficiently and provide flexible energy resources. Key developments in 2015 include the following:
| • | WPL’s Proposed Riverside Expansion - WPL filed a CPCN application with the PSCW for approval to construct the Riverside expansion, a natural gas-fired combined-cycle EGU in Beloit, Wisconsin. Capital expenditures, excluding AFUDC, are currently estimated to be approximately $700 million to construct the EGU and a pipeline to supply natural gas to the EGU. A decision from the PSCW on WPL’s application is currently expected by the second quarter of 2016. Refer to “Strategic Overview” for discussion of a settlement agreement WPL entered into with other Wisconsin utilities and certain electric cooperatives regarding its proposed Riverside expansion CPCN application. |
| • | Sales of IPL’s Minnesota Electric and Natural Gas Distribution Assets - In 2015, IPL completed the sales of its Minnesota electric and natural gas distribution assets and received proceeds of $140 million. The proceeds from the natural gas distribution assets were used for general corporate purposes and the proceeds from the electric distribution assets were used to reduce cash amounts received from IPL’s sales of accounts receivable program. |
| • | MISO Transmission Owner Return on Equity Complaints - Complaints are currently pending with FERC regarding the level of return on equity that MISO transmission owners, including ITC and ATC, should be allowed to utilize in calculating the rates they charge their customers. Alliant Energy, IPL and WPL currently anticipate FERC’s decision on the MISO transmission owner complaints will reduce transmission owners’ current return on equity, which is expected to result in lower electric transmission service expense billed to IPL and WPL thereby reducing customer costs, and lower equity income and dividends from ATC in the future. In 2014, FERC issued an order on the complaints establishing an effective refund date of November 12, 2013. Alliant Energy and WPL have realized $15 million of reductions in the amount of equity income from ATC for the period from November 12, 2013 through December 31, 2015, including $12 million realized in 2015 and $3 million realized in 2014. |
| • | At-the-Market Offering Program - In 2015, Alliant Energy issued 2,186,617 shares of common stock through an at-the-market offering program and received cash proceeds of $133 million, net of $2 million in fees and commissions. The proceeds from the issuances of common stock were used for general corporate purposes. |
| • | Customer Billing and Information System - Corporate Services placed in service a new customer billing and information system for IPL and WPL in 2015, which houses all customer records, and processes metering, billing and payment transactions. |
Future Developments - In 2016 and beyond, the following includes key items expected to impact Alliant Energy, IPL and WPL:
| • | Protecting Americans from Tax Hikes Act - In December 2015, the PATH Act was enacted. The most significant provisions of the PATH Act for Alliant Energy, IPL and WPL relate to the extension of bonus depreciation deductions for certain capital expenditures for property incurred through December 31, 2019 and placed in service prior to December 31, 2020, as well as incentives for individuals and businesses to construct renewable generation. Refer to “Rate Matters” for further discussion. |
| • | Clean Power Plan - In 2015, the EPA published final standards under Section 111(d) of the CAA, which establish guidelines for states to follow in developing plans to reduce CO2 emissions from existing fossil-fueled EGUs. In February 2016, the Supreme Court issued a stay of these final standards until pending legal challenges are resolved, which places implementation of these final standards on hold indefinitely. In 2015, the EPA also published final standards under Section 111(b) of the CAA, which establish CO2 emissions limits for certain new fossil-fueled EGUs. Refer to “Environmental Matters” for further discussion. |
| • | Planned Utility Rate Cases - WPL currently expects to make a retail electric and gas base rate filing for the 2017/2018 Test Period in the second quarter of 2016. WPL currently expects to make a retail fuel-related rate filing (2017 Test Year) in the second quarter of 2016. IPL currently expects to make separate retail electric and gas rate filings in the first half of 2017 based on a 2016 historical Test Year. Refer to “Rate Matters” for further discussion. |
2016 Forecast - In 2016, the following financing activities, and impacts to results of operations, are currently anticipated to occur:
| • | Financing Plans - Alliant Energy currently expects to issue approximately $25 million of common stock in 2016 through its Shareowner Direct Plan. IPL and WPL currently expect to receive capital contributions of approximately $165 million and $25 million, respectively, from their parent company, Alliant Energy, in 2016. IPL currently expects to issue up to $300 million of long-term debt in 2016. The Alliant Energy parent company and Resources currently expect to issue up to approximately $400 million of long-term debt in aggregate, primarily to refinance Alliant Energy’s $250 million and Franklin County Holdings LLC’s $60 million variable-rate term loan credit agreements expiring in 2016. |
| • | Common Stock Dividends - Alliant Energy announced an increase in its targeted 2016 annual common stock dividend to $2.35 per share, which is equivalent to a quarterly rate of $0.5875 per share, beginning with the February 2016 dividend payment. The timing and amount of future dividends is subject to an approved dividend declaration from Alliant Energy’s Board of Directors, and is dependent upon earnings expectations, capital requirements, and general financial business conditions, among other factors. In addition, IPL and WPL currently expect to pay common stock dividends of approximately $150 million and $135 million, respectively, to their parent company in 2016. |
| • | Utility Electric Margins - Alliant Energy, IPL and WPL are currently expecting a modest increase in temperature-normalized retail electric sales in 2016 compared to 2015. IPL currently expects to reduce the amount of billing credits on its Iowa retail electric customers’ bills in 2016 compared to 2015 related to the approved settlement agreement for IPL’s Iowa retail electric rates. |
| • | Electric Transmission Service Expense - Alliant Energy currently expects an increase in future electric transmission service expense in 2016 compared to 2015 due to higher Attachment “O” rates charged by ITC and ATC, as well as higher MISO transmission charges billed to IPL and WPL due to the number of shared transmission projects expected to be completed in the MISO region. |
| • | Other Operation and Maintenance Expenses - Alliant Energy and WPL currently expect decreases in energy efficiency cost recovery amortizations at WPL in 2016 compared to 2015 as approved by the PSCW in a July 2014 order. Partially offsetting this expected decrease, Alliant Energy, IPL and WPL currently expect an increase in retirement plan costs in 2016 compared to 2015, resulting from lower than expected returns on retirement plan assets in 2015. |
| • | Depreciation and Amortization Expenses - Alliant Energy currently expects its depreciation and amortization expenses to increase in 2016 compared to 2015 due to property additions, including various environmental controls projects at IPL and WPL placed in service in 2015 and expected to be placed in service in 2016. |
| • | Interest Expense - Alliant Energy currently expects its interest expense to increase in 2016 compared to 2015 due to financings in 2015 and 2016 discussed above. |
| • | AFUDC - Alliant Energy currently expects AFUDC to increase in 2016 compared to 2015 primarily due to increased CWIP balances related to Marshalltown. |
RESULTS OF OPERATIONS
Overview
Alliant Energy - “Executive Summary” provides an overview of Alliant Energy’s 2015 and 2014 earnings and the various components of its business.
IPL - Earnings available for common stock increased $4 million in 2015 and $10 million in 2014. The 2015 increase was the result of lower retail electric customer billing credits and lower purchased electric capacity expense related to the previous DAEC PPA. These items were substantially offset by lower retail electric and gas sales due to changes in temperatures in IPL’s service territory, losses recorded in 2015 related to IPL’s sales of its Minnesota electric and natural gas distribution assets, higher depreciation expense and lower income tax benefits.
WPL - Earnings available for common stock decreased $4 million in 2015 and increased $3 million in 2014. The 2015 decrease was the result of higher electric transmission service expense and lower retail electric and gas sales due to changes in temperatures in WPL’s service territory. These items were partially offset by lower energy efficiency cost recovery amortizations and changes in electric fuel-related costs, net of recoveries in 2015 compared to 2014.
Additional details of Alliant Energy’s, IPL’s and WPL’s 2015, 2014 and 2013 earnings are discussed below.
Utility Electric Margins - Electric margins are defined as electric operating revenues less electric production fuel, energy purchases and purchased electric capacity expenses. Management believes that electric margins provide a more meaningful basis for evaluating utility operations than electric operating revenues since electric production fuel, energy purchases and purchased electric capacity expenses are generally passed through to customers, and therefore, result in changes to electric operating revenues that are comparable to changes in electric production fuel, energy purchases and purchased electric capacity expenses. Electric margins and MWh sales were as follows:
| Alliant Energy | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||||
| Residential (c) | $983.0 | $994.5 | (1%) | $1,009.1 | (1%) | 7,271 | 7,697 | (6%) | 7,824 | (2%) | ||||||||||||||||||
| Commercial (c) | 667.8 | 658.0 | 1% | 649.4 | 1% | 6,374 | 6,449 | (1%) | 6,432 | —% | ||||||||||||||||||
| Industrial (c) | 823.3 | 799.0 | 3% | 765.4 | 4% | 11,735 | 11,821 | (1%) | 11,471 | 3% | ||||||||||||||||||
| Retail subtotal (c) | 2,474.1 | 2,451.5 | 1% | 2,423.9 | 1% | 25,380 | 25,967 | (2%) | 25,727 | 1% | ||||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||||
| Wholesale (c) | 221.0 | 206.6 | 7% | 195.4 | 6% | 3,614 | 3,586 | 1% | 3,564 | 1% | ||||||||||||||||||
| Bulk power and other | 28.5 | 2.9 | 883% | 17.7 | (84%) | 1,228 | 335 | 267% | 763 | (56%) | ||||||||||||||||||
| Other | 46.9 | 52.6 | (11%) | 52.0 | 1% | 129 | 155 | (17%) | 152 | 2% | ||||||||||||||||||
| Total revenues/sales | 2,770.5 | 2,713.6 | 2% | 2,689.0 | 1% | 30,351 | 30,043 | 1% | 30,206 | (1%) | ||||||||||||||||||
| Electric production fuel expense | 463.6 | 443.9 | 4% | 431.0 | 3% | |||||||||||||||||||||||
| Energy purchases expense | 372.3 | 408.2 | (9%) | 294.0 | 39% | |||||||||||||||||||||||
| Purchased electric capacity expense | 1.8 | 25.1 | (93%) | 216.8 | (88%) | |||||||||||||||||||||||
| Margins (d) | $1,932.8 | $1,836.4 | 5% | $1,747.2 | 5% |
| IPL | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||||
| Residential (c) | $540.3 | $556.4 | (3%) | $574.3 | (3%) | 3,843 | 4,164 | (8%) | 4,272 | (3%) | ||||||||||||||||||
| Commercial (c) | 416.3 | 410.2 | 1% | 409.6 | —% | 4,059 | 4,099 | (1%) | 4,118 | —% | ||||||||||||||||||
| Industrial (c) | 453.6 | 458.5 | (1%) | 442.9 | 4% | 6,922 | 7,132 | (3%) | 6,973 | 2% | ||||||||||||||||||
| Retail subtotal (c) | 1,410.2 | 1,425.1 | (1%) | 1,426.8 | —% | 14,824 | 15,395 | (4%) | 15,363 | —% | ||||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||||
| Wholesale (c) | 56.4 | 32.2 | 75% | 30.0 | 7% | 845 | 485 | 74% | 419 | 16% | ||||||||||||||||||
| Bulk power and other | 5.1 | 2.1 | 143% | 2.0 | 5% | 178 | 59 | 202% | 98 | (40%) | ||||||||||||||||||
| Other | 32.1 | 33.9 | (5%) | 33.0 | 3% | 67 | 81 | (17%) | 80 | 1% | ||||||||||||||||||
| Total revenues/sales | 1,503.8 | 1,493.3 | 1% | 1,491.8 | —% | 15,914 | 16,020 | (1%) | 15,960 | —% | ||||||||||||||||||
| Electric production fuel expense | 194.5 | 231.5 | (16%) | 193.9 | 19% | |||||||||||||||||||||||
| Energy purchases expense | 233.6 | 240.8 | (3%) | 188.2 | 28% | |||||||||||||||||||||||
| Purchased electric capacity expense | 0.3 | 25.0 | (99%) | 155.2 | (84%) | |||||||||||||||||||||||
| Margins (d) | $1,075.4 | $996.0 | 8% | $954.5 | 4% |
| WPL | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||
| Residential | $442.7 | $438.1 | 1% | $434.8 | 1% | 3,428 | 3,533 | (3%) | 3,552 | (1%) | ||||||||||||||||
| Commercial | 251.5 | 247.8 | 1% | 239.8 | 3% | 2,315 | 2,350 | (1%) | 2,314 | 2% | ||||||||||||||||
| Industrial | 369.7 | 340.5 | 9% | 322.5 | 6% | 4,813 | 4,689 | 3% | 4,498 | 4% | ||||||||||||||||
| Retail subtotal | 1,063.9 | 1,026.4 | 4% | 997.1 | 3% | 10,556 | 10,572 | —% | 10,364 | 2% | ||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||
| Wholesale | 164.6 | 174.4 | (6%) | 165.4 | 5% | 2,769 | 3,101 | (11%) | 3,145 | (1%) | ||||||||||||||||
| Bulk power and other | 23.4 | 0.8 | 2,825% | 15.7 | (95%) | 1,050 | 276 | 280% | 665 | (58%) | ||||||||||||||||
| Other | 14.8 | 18.7 | (21%) | 19.0 | (2%) | 62 | 74 | (16%) | 72 | 3% | ||||||||||||||||
| Total revenues/sales | 1,266.7 | 1,220.3 | 4% | 1,197.2 | 2% | 14,437 | 14,023 | 3% | 14,246 | (2%) | ||||||||||||||||
| Electric production fuel expense | 269.1 | 212.4 | 27% | 237.1 | (10%) | |||||||||||||||||||||
| Energy purchases expense | 138.7 | 167.4 | (17%) | 105.8 | 58% | |||||||||||||||||||||
| Purchased electric capacity expense | 1.5 | 0.1 | 1,400% | 61.6 | (100%) | |||||||||||||||||||||
| Margins | $857.4 | $840.4 | 2% | $792.7 | 6% |
| (a) | Reflects the % change from 2014 to 2015. (b) Reflects the % change from 2013 to 2014. |
| (c) | In July 2015, IPL sold its electric distribution assets in Minnesota to Southern Minnesota Energy Cooperative. Prior to the asset sale, the related electric sales are included in residential, commercial and industrial retail sales. Subsequent to the asset sale, the related electric sales are included in wholesale electric sales pursuant to a wholesale power supply agreement between IPL and Southern Minnesota Energy Cooperative. |
| (d) | Includes $72 million, $85 million and $79 million of credits on IPL’s Iowa retail electric customers’ bills for 2015, 2014 and 2013, respectively, resulting from the electric tax benefit rider. The electric tax benefit rider resulted in reductions in electric revenues that were offset by reductions in income tax expense for 2015, 2014 and 2013. |
Variances - Variances between periods in electric margins were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower retail electric customer billing credits in 2015 at IPL (a) | $48 | $48 | $— | ||||||||
| Purchased electric capacity expense at IPL in 2014 related to the previous DAEC PPA, which ended in February 2014 | 25 | 25 | — | ||||||||
| Higher revenues at IPL in 2015 due to lower credits on Iowa retail electric customers’ bills resulting from the electric tax benefit rider (Refer to Note 2 for further details) | 13 | 13 | — | ||||||||
| Changes in electric fuel-related costs, net of recoveries at WPL | 11 | — | 11 | ||||||||
| Higher revenues at WPL from the impact of increased sales volumes approved in its retail electric base rate case for 2015 (b) | 9 | — | 9 | ||||||||
| Estimated changes in sales caused by temperatures | (19 | ) | (10 | ) | (9 | ) | |||||
| Other (c) | 9 | 3 | 6 | ||||||||
| $96 | $79 | $17 |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower purchased electric capacity expense at IPL related to the previous DAEC PPA, which ended in February 2014 | $129 | $129 | $— | ||||||||
| Purchased electric capacity expense at WPL in 2013 related to the Kewaunee PPA, which ended in December 2013 | 61 | — | 61 | ||||||||
| Higher revenues at IPL related to changes in recovery amounts for transmission costs through the transmission rider (d) | 18 | 18 | — | ||||||||
| Retail electric customer billing credits at IPL (a) | (72 | ) | (72 | ) | — | ||||||
| Estimated changes in sales caused by temperatures | (17 | ) | (13 | ) | (4 | ) | |||||
| Lower wholesale margins (e) | (11 | ) | (4 | ) | (7 | ) | |||||
| Changes in electric fuel-related costs, net of recoveries at WPL | (9 | ) | — | (9 | ) | ||||||
| Changes in revenue requirement adjustment related to certain tax benefits from tax accounting method changes at IPL (Refer to Note 2 for further details) | (9 | ) | (9 | ) | — | ||||||
| Lower revenues at IPL due to changes in credits on Iowa retail electric customers’ bills resulting from the electric tax benefit rider (Refer to Note 2 for further details) | (6 | ) | (6 | ) | — | ||||||
| Other (c) | 5 | (1 | ) | 7 | |||||||
| $89 | $42 | $48 |
| (a) | Refer to Note 2 for further discussion of billing credits that began in 2014 related to the approved settlement agreement for IPL’s Iowa retail electric rates. |
| (b) | The PSCW order received for WPL’s retail fuel-related rate filing (2015 Test Year) contained an increase in retail electric fuel-related revenues in 2015. A portion of the approved increase was attributable to the impact of increased sales volumes approved in WPL’s retail electric base rate case for 2015 resulting in higher electric margin in 2015. |
| (c) | Includes increases in temperature-normalized retail sales volumes at WPL in 2015 and 2014. Refer to “Sales Trends” below for more information. |
| (d) | Higher transmission rider revenues were offset by higher electric transmission service expense. |
| (e) | Primarily due to lower nuclear capacity costs in 2014, which are included in the rates charged to wholesale customers. |
Temperatures - Electric sales demand is seasonal to some extent with the annual peak normally occurring in the summer months due to air conditioning usage by residential, commercial and wholesale customers. Electric sales are also impacted to a certain extent in the winter months due to heating requirement usage. HDD data is used to measure the variability of temperatures during winter months and is correlated with both electric and gas sales demand. CDD data is used to measure the variability of temperatures during summer months and is correlated with electric sales demand. HDD and CDD are calculated using a simple average of the high and low temperatures each day compared to a 65 degree base. Normal degree days are calculated using a rolling 20-year average of historical HDD and CDD. HDD and CDD in Alliant Energy’s service territories were as follows:
| Actual | |||||||||||
| 2015 | 2014 | 2013 | Normal | ||||||||
| HDD: | |||||||||||
| Cedar Rapids, Iowa (IPL) | 6,300 | 7,657 | 7,232 | 6,756 | |||||||
| Madison, Wisconsin (WPL) | 6,667 | 7,884 | 7,627 | 7,046 | |||||||
| CDD: | |||||||||||
| Cedar Rapids, Iowa (IPL) | 732 | 670 | 884 | 769 | |||||||
| Madison, Wisconsin (WPL) | 665 | 620 | 709 | 663 |
Estimated increases (decreases) to electric margins from the impacts of temperatures were as follows (in millions):
| 2015 | 2014 | 2013 | |||||||||
| IPL | ($7 | ) | $3 | $16 | |||||||
| WPL | (4 | ) | 5 | 9 | |||||||
| Total Alliant Energy | ($11 | ) | $8 | $25 |
Sales Trends - Alliant Energy’s retail sales volumes decreased 2% in 2015 and increased 1% in 2014. The 2015 decrease was primarily due to the impact of temperatures on residential and commercial sales resulting in lower heating demand in 2015 compared to 2014 and decreased retail sales related to IPL’s sale of its Minnesota electric distribution assets in 2015. IPL’s industrial sales volumes decreased 3% in 2015 primarily due to lower usage by industrial customers that have their own
generation. WPL’s industrial sales volumes increased 3% in 2015 primarily due to production expansion at one of its industrial customers.
The 2014 increase was primarily due to an increase in industrial sales at IPL and WPL due to production expansion at several customers and higher IPL co-generation customer requirements, and modest customer growth in WPL’s service territory in 2014. These increases were partially offset by the impact temperatures had on electric sales in 2014.
Alliant Energy’s wholesale sales volumes increased 1% in 2015 and 1% in 2014. The 2015 increase was primarily due to additional sales from IPL’s new wholesale power supply agreement with Southern Minnesota Energy Cooperative. This increase was substantially offset by decreased sales to WPL’s partial-requirement wholesale customers that have contractual options to be served by WPL, other power supply sources or the MISO market. The 2014 increase was primarily due to increases in sales to one of IPL’s full-requirement wholesale customers due to production expansion partially offset by the impact of changes in sales to WPL’s partial-requirement wholesale customers.
Alliant Energy’s bulk power and other revenue changes were largely due to changes in sales in the wholesale energy markets operated by MISO. These changes are impacted by several factors including the availability and dispatch of Alliant Energy’s EGUs and electricity demand within these wholesale energy markets. Changes in bulk power and other sales revenues were largely offset by changes in fuel-related costs, and therefore, did not have a significant impact on electric margins.
Electric Production Fuel and Energy Purchases (Fuel-related) Cost Recoveries - Fossil fuels, such as coal and natural gas, are burned to produce electricity at EGUs. The cost of fossil fuels used during each period is included in electric production fuel expense. Electricity is also purchased to meet customer demand and these costs are charged to energy purchases expense.
Due to IPL’s cost recovery mechanisms for fuel-related costs, changes in fuel-related costs resulted in comparable changes in electric revenues, and therefore, did not have a significant impact on Alliant Energy’s and IPL’s electric margins. WPL’s cost recovery mechanism for wholesale fuel-related costs also provides for adjustments to its wholesale electric rates for changes in commodity costs, thereby mitigating impacts of changes to commodity costs on electric margins.
WPL’s cost recovery mechanism for retail fuel-related costs provides deferrals of amounts that fall outside an approved bandwidth of plus or minus 2% of forecasted fuel-related costs determined by the PSCW each year. The difference between revenue collected and actual fuel-related costs incurred within the bandwidth increases or decreases electric margins. WPL estimates the increase (decrease) to electric margins from amounts within the bandwidth were approximately $6 million, ($5) million and $4 million in 2015, 2014, and 2013, respectively. Refer to Note 2 for discussion of deferred fuel-related costs incurred in 2015 and 2014.
Refer to “Other Matters - Market Risk Sensitive Instruments and Positions” for further discussion of risks associated with increased fuel-related expenses on WPL’s electric margins. Refer to “Rate Matters” and Note 1(g) for additional information relating to recovery mechanisms for fuel-related expenses.
2015 vs. 2014 Summary - Alliant Energy’s electric production fuel expense increased $20 million in 2015 primarily due to deferrals recorded in 2015 and 2014 for fuel-related costs that were outside the approved bandwidth at WPL. These items were partially offset by lower dispatch of IPL’s coal-fired EGUs during 2015 and changes in the under-/over-collection of fuel-related costs at IPL.
Alliant Energy’s energy purchases expense decreased $36 million in 2015 primarily due to lower prices for electricity purchased by IPL and WPL from MISO wholesale energy markets and decreased volumes purchased. The decreased volumes purchased were due to lower electric sales.
2014 vs. 2013 Summary - Alliant Energy’s electric production fuel expense increased $13 million in 2014 primarily due to the unseasonably cold weather conditions in Alliant Energy’s service territory in the first quarter of 2014, which resulted in higher commodity prices and increased customer demand in the first quarter of 2014. This contributed to higher MISO dispatch of IPL’s and WPL’s EGUs in the first quarter of 2014. The increase in 2014 was also due to changes in the under-/over-collection of fuel-related costs at IPL. These items were partially offset by deferred fuel-related costs incurred that fell outside the approved bandwidth for 2014 at WPL, as well as lower dispatch at WPL’s coal-fired EGUs during the third quarter of 2014, which included impacts of lower than planned coal deliveries.
Alliant Energy’s energy purchases expense increased $114 million in 2014 primarily due to increased prices for electricity, partially resulting from IPL’s new DAEC PPA and the expiration of WPL’s Kewaunee PPA, and increased volumes partially due to lower dispatch of WPL’s coal-fired EGUs during the third quarter of 2014. The increase was also due to extremely cold temperatures in the first quarter of 2014 contributing to higher prices for electricity purchased by IPL and WPL from MISO wholesale energy markets for 2014.
Purchased Electric Capacity Expense - PPAs help meet customer demand. Certain of these PPAs included minimum payments for IPL’s and WPL’s rights to electric generating capacity. The previous DAEC PPA expired in February 2014 and the Kewaunee PPA expired in December 2013. Details of purchased electric capacity expense included in the utility electric margins tables above were as follows (in millions):
| 2015 | 2014 | 2013 | |||||||||
| DAEC PPA (IPL) | $— | $25 | $154 | ||||||||
| Kewaunee PPA (WPL) | — | — | 61 | ||||||||
| Other | 2 | — | 2 | ||||||||
| $2 | $25 | $217 |
Refer to “Rate Matters” for discussion of the IUB’s approval of IPL’s retail electric rate settlement agreement in 2014, which includes a retail electric base rate freeze and retail electric customer billing credits at IPL through the end of 2016. Refer to Note 2 for discussion of WPL’s retail fuel-related rate increases effective January 1, 2015 and 2016, WPL retail rate cases including a retail electric base rate freeze at WPL through the end of 2016, IPL’s electric tax benefit rider, and IPL’s revenue requirement adjustment. Refer to “Other Future Considerations” for discussion of notifications provided to each of IPL and WPL to terminate certain of their wholesale power supply agreements.
Utility Gas Margins - Gas margins are defined as gas operating revenues less cost of gas sold. Management believes that gas margins provide a more meaningful basis for evaluating utility operations than gas operating revenues since cost of gas sold is generally passed through to customers, and therefore, results in changes to gas operating revenues that are comparable to changes in cost of gas sold. Gas margins and Dth sales were as follows:
| Alliant Energy | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||||
| Residential | $215.1 | $287.5 | (25%) | $262.5 | 10% | 26,672 | 31,718 | (16%) | 29,916 | 6% | ||||||||||||||||||
| Commercial | 120.5 | 172.8 | (30%) | 150.3 | 15% | 18,966 | 23,301 | (19%) | 21,892 | 6% | ||||||||||||||||||
| Industrial | 14.3 | 23.4 | (39%) | 21.1 | 11% | 2,997 | 3,710 | (19%) | 3,803 | (2%) | ||||||||||||||||||
| Retail subtotal | 349.9 | 483.7 | (28%) | 433.9 | 11% | 48,635 | 58,729 | (17%) | 55,611 | 6% | ||||||||||||||||||
| Transportation/other | 31.3 | 33.8 | (7%) | 30.9 | 9% | 74,162 | 64,717 | 15% | 60,261 | 7% | ||||||||||||||||||
| Total revenues/sales | 381.2 | 517.5 | (26%) | 464.8 | 11% | 122,797 | 123,446 | (1%) | 115,872 | 7% | ||||||||||||||||||
| Cost of gas sold | 219.1 | 327.8 | (33%) | 276.7 | 18% | |||||||||||||||||||||||
| Margins (c) | $162.1 | $189.7 | (15%) | $188.1 | 1% |
| IPL | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||||
| Residential | $120.0 | $162.5 | (26%) | $152.8 | 6% | 14,472 | 17,839 | (19%) | 16,975 | 5% | ||||||||||||||||||
| Commercial | 67.9 | 96.1 | (29%) | 85.7 | 12% | 10,166 | 12,641 | (20%) | 12,051 | 5% | ||||||||||||||||||
| Industrial | 10.5 | 17.4 | (40%) | 16.1 | 8% | 2,239 | 2,804 | (20%) | 2,931 | (4%) | ||||||||||||||||||
| Retail subtotal | 198.4 | 276.0 | (28%) | 254.6 | 8% | 26,877 | 33,284 | (19%) | 31,957 | 4% | ||||||||||||||||||
| Transportation/other | 18.9 | 20.5 | (8%) | 19.3 | 6% | 34,129 | 31,377 | 9% | 32,019 | (2%) | ||||||||||||||||||
| Total revenues/sales | 217.3 | 296.5 | (27%) | 273.9 | 8% | 61,006 | 64,661 | (6%) | 63,976 | 1% | ||||||||||||||||||
| Cost of gas sold | 123.3 | 185.5 | (34%) | 160.3 | 16% | |||||||||||||||||||||||
| Margins (c) | $94.0 | $111.0 | (15%) | $113.6 | (2%) |
| WPL | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2015 | 2014 | (a) | 2013 | (b) | 2015 | 2014 | (a) | 2013 | (b) | |||||||||||||||||||
| Residential | $95.1 | $125.0 | (24%) | $109.7 | 14% | 12,200 | 13,879 | (12%) | 12,941 | 7% | ||||||||||||||||||
| Commercial | 52.6 | 76.7 | (31%) | 64.6 | 19% | 8,800 | 10,660 | (17%) | 9,841 | 8% | ||||||||||||||||||
| Industrial | 3.8 | 6.0 | (37%) | 5.0 | 20% | 758 | 906 | (16%) | 872 | 4% | ||||||||||||||||||
| Retail subtotal | 151.5 | 207.7 | (27%) | 179.3 | 16% | 21,758 | 25,445 | (14%) | 23,654 | 8% | ||||||||||||||||||
| Transportation/other | 12.4 | 13.3 | (7%) | 11.6 | 15% | 40,033 | 33,340 | 20% | 28,242 | 18% | ||||||||||||||||||
| Total revenues/sales | 163.9 | 221.0 | (26%) | 190.9 | 16% | 61,791 | 58,785 | 5% | 51,896 | 13% | ||||||||||||||||||
| Cost of gas sold | 95.8 | 142.3 | (33%) | 116.4 | 22% | |||||||||||||||||||||||
| Margins | $68.1 | $78.7 | (13%) | $74.5 | 6% |
| (a) | Reflects the % change from 2014 to 2015. (b) Reflects the % change from 2013 to 2014. |
| (c) | Includes $12 million, $12 million and $11 million of credits on IPL’s Iowa retail gas customers’ bills for 2015, 2014 and 2013, respectively, resulting from the gas tax benefit rider. The gas tax benefit rider resulted in reductions in gas revenues that were offset by reductions in income tax expense for 2015, 2014 and 2013. |
Variances - Variances between periods in gas margins were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Estimated decrease from changes in sales caused by temperatures | ($14 | ) | ($7 | ) | ($7 | ) | |||||
| Lower revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (a) | (9 | ) | (9 | ) | — | ||||||
| Lower revenues at WPL due to the impact of changes in retail gas base rates effective January 2015 | (4 | ) | — | (4 | ) | ||||||
| Other | (1 | ) | (1 | ) | — | ||||||
| ($28 | ) | ($17 | ) | ($11 | ) |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Estimated increase from changes in sales caused by temperatures | $4 | $2 | $2 | ||||||||
| Lower revenues at IPL related to changes in recovery amounts for energy efficiency costs through the energy efficiency rider (a) | (4 | ) | (4 | ) | — | ||||||
| Other | 2 | (1 | ) | 2 | |||||||
| $2 | ($3 | ) | $4 |
| (a) | Changes in energy efficiency revenues were mostly offset by changes in energy efficiency expense included in other operation and maintenance expenses. |
Natural Gas Cost Recoveries - Alliant Energy’s cost of gas sold decreased $109 million in 2015 and increased $51 million in 2014. The decrease in 2015 was primarily due to lower retail gas volumes at IPL and WPL caused by temperatures discussed below and lower natural gas prices. The increase in 2014 was primarily due to higher retail gas volumes caused by temperatures discussed below. Refer to Note 1(g) for additional information relating to natural gas cost recoveries.
Temperatures - Gas sales demand follows a seasonal pattern with an annual base load of gas and a large heating peak occurring during the winter season. HDD data is used to measure the variability of temperatures during winter months and is correlated with gas sales demand. Refer to “Utility Electric Margins” for HDD data details.
Estimated increases (decreases) to gas margins from the impacts of temperatures were as follows (in millions):
| 2015 | 2014 | 2013 | |||||||||
| IPL | ($2 | ) | $5 | $3 | |||||||
| WPL | (2 | ) | 5 | 3 | |||||||
| Total Alliant Energy | ($4 | ) | $10 | $6 |
Refer to Note 2 for discussion of IPL’s gas tax benefit rider and retail gas base rate decreases for WPL’s customers effective January 2015.
Utility Other Revenues - Variances between periods in utility other revenues were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower margins from IPL’s sharing mechanism related to optimizing gas capacity contracts (a) | ($5 | ) | ($5 | ) | $— | ||||||
| Other | (3 | ) | — | (3 | ) | ||||||
| ($8 | ) | ($5 | ) | ($3 | ) |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower coal sales at WPL (b) | ($7 | ) | $— | ($7 | ) | ||||||
| Higher margins from IPL’s sharing mechanism related to optimizing gas capacity contracts (a) | 4 | 4 | — | ||||||||
| Other | (2 | ) | 1 | (3 | ) | ||||||
| ($5 | ) | $5 | ($10 | ) |
| (a) | Approximately 50% of all margins earned from IPL’s sharing mechanism relating to optimizing gas capacity contracts flow through the purchased gas adjustment clause to reduce retail gas customer bills in Iowa. The remaining margins are retained by IPL and recorded in utility other revenues. Due to the extreme cold temperatures causing natural gas price fluctuations in the first quarter of 2014, margins were higher than normal in 2014. |
| (b) | Changes in utility other revenues related to coal sales were largely offset by changes in utility other operation and maintenance expenses related to coal sales. |
Non-regulated Revenues - In 2015, Alliant Energy’s non-regulated revenues decreased $9 million, primarily due to decreased revenues at Transportation resulting from decreased demand for freight, barge and transfer services.
Electric Transmission Service Expense - Variances between periods in electric transmission service expense were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher electric transmission service costs billed from ITC, ATC and MISO (a) | $18 | $6 | $12 | ||||||||
| Escrow treatment for the difference between actual electric transmission service costs and those costs used to determine rates during 2015 at WPL (Refer to Note 2 for further details) | 21 | — | 21 | ||||||||
| Other | (1 | ) | (1 | ) | — | ||||||
| $38 | $5 | $33 |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher electric transmission service costs billed from ITC, ATC and MISO (a) | $38 | $33 | $5 | ||||||||
| Changes in the under-/over-collection of electric transmission service expense through the transmission cost rider at IPL (b) | (11 | ) | (11 | ) | — | ||||||
| Other | 2 | — | 2 | ||||||||
| $29 | $22 | $7 |
| (a) | Primarily due to increased electric transmission service rates. |
| (b) | IPL is currently recovering the Iowa retail portion of its increased electric transmission service costs from its retail electric customers in Iowa through a transmission cost rider approved by the IUB in January 2011 and extended as part of the rate settlement approved in September 2014. The difference between electric transmission services expense and amounts collected from customers as electric revenues results in temporary costs (credits) recorded in electric transmission service expense until the amounts are reflected in future customer billings. |
Refer to Notes 1(g) and 2 for additional information relating to recovery of electric transmission service expenses.
Other Operation and Maintenance Expenses - Variances between periods in other operation and maintenance expenses were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower energy efficiency cost recovery amortizations at WPL (a) | ($38 | ) | $— | ($38 | ) | ||||||
| Lower generation expense (b) | (13 | ) | (2 | ) | (11 | ) | |||||
| Changes in energy efficiency expense at IPL (c) | (5 | ) | (5 | ) | — | ||||||
| Losses on sales of IPL’s Minnesota distribution assets recorded in 2015 (Refer to Note 3 for further details) | 14 | 14 | — | ||||||||
| Higher employee benefits-related expense (d) | 14 | 7 | 7 | ||||||||
| Voluntary employee separation charges recorded in 2015 (Refer to Note 12(a) for further details) | 8 | 5 | 3 | ||||||||
| Other (includes lower costs due to cost controls and operational efficiencies) | (16 | ) | (10 | ) | (3 | ) | |||||
| ($36 | ) | $9 | ($42 | ) |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher energy efficiency cost recovery amortizations at WPL (a) | $20 | $— | $20 | ||||||||
| Regulatory-related credit at IPL recorded in 2013 (e) | 7 | 7 | — | ||||||||
| Higher generation expense (b) | 7 | 4 | 3 | ||||||||
| Higher customer service expense (f) | 6 | 4 | 2 | ||||||||
| Lower employee benefits-related expense (g) | (8 | ) | (5 | ) | (3 | ) | |||||
| Lower expense related to coal sales at WPL (h) | (7 | ) | — | (7 | ) | ||||||
| Other (includes increases in other administrative and general and distribution system expenses) | 4 | 9 | 4 | ||||||||
| $29 | $19 | $19 |
| (a) | The July 2014 PSCW order for WPL’s 2015/2016 Test Period electric and gas base rate case authorized lower energy efficiency cost recovery amortizations for 2015. The July 2012 PSCW order for WPL’s 2013/2014 Test Period electric and gas base rate case authorized changes in energy efficiency cost recovery amortizations for 2013 and 2014. Regulatory amortizations at WPL related to energy efficiency costs were $4 million, $42 million and $22 million in 2015, 2014 and 2013, respectively. |
| (b) | Primarily due to the timing and extent of maintenance projects at IPL’s and WPL’s EGUs. |
| (c) | Changes in IPL’s energy efficiency expense were offset by changes in electric and gas energy efficiency revenues. |
| (d) | Primarily due to an increase in retirement plans costs and other employee benefits-related costs. The increased retirement plan costs were largely due to decreases in discount rates and a change to life expectancy assumptions in 2014. |
| (e) | In 2013, IPL received an order from the MPUC approving full cost recovery of the Minnesota retail portion of IPL’s Whispering Willow - East wind farm construction costs effective January 1, 2013. As a result, Alliant Energy and IPL reversed a prior reserve and recognized a $7 million regulatory-related credit in 2013. |
| (f) | Primarily due to increased customer billing and customer assistance-related expenses. |
| (g) | Primarily due to a decrease in retirement plan costs, partially offset by an increase in other employee benefits-related costs and the reversal of a previously recorded reserve related to the Cash Balance Plan in 2013. |
| (h) | Changes in expense related to coal sales at WPL were largely offset by changes in coal sales revenue at WPL. |
Depreciation and Amortization Expenses - Variances between periods in depreciation and amortization expenses were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher depreciation expense for IPL’s Ottumwa Unit 1 scrubber and baghouse placed in service in 2014 | $5 | $5 | $— | ||||||||
| Other (includes the impact of other property additions) | 8 | 5 | 3 | ||||||||
| $13 | $10 | $3 |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher depreciation expense for WPL’s Columbia Units 1 and 2 scrubbers and baghouses placed in service in 2014 | $4 | $— | $4 | ||||||||
| Other (includes the impact of other property additions) | 13 | 6 | 5 | ||||||||
| $17 | $6 | $9 |
Interest Expense - Variances between periods in interest expense were as follows (in millions):
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher interest expense from the issuance of WPL’s $250 million, 4.1% debentures in October 2014 | $8 | $— | $8 | ||||||||
| Higher interest expense from the issuance of IPL’s $250 million, 3.25% senior debentures in November 2014 | 8 | 8 | — | ||||||||
| Lower interest expense from the retirement of Alliant Energy’s $250 million, 4% senior notes in October 2014 | (8 | ) | — | — | |||||||
| Other | (1 | ) | (1 | ) | (2 | ) | |||||
| $7 | $7 | $6 |
| 2014 vs. 2013 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher interest expense from the issuance of IPL’s $250 million, 4.7% senior debentures in October 2013 | $9 | $9 | $— | ||||||||
| Other | (1 | ) | — | 1 | |||||||
| $8 | $9 | $1 |
Refer to Note 9 for additional details of debt.
Equity Income from Unconsolidated Investments, Net - In 2015, Alliant Energy’s and WPL’s equity income from unconsolidated investments decreased $7 million and $8 million, respectively, primarily due to reserves for rate refunds recorded in 2015 at ATC. Refer to “Other Future Considerations” for discussion of complaints pending with FERC regarding the level of return on equity that MISO transmission owners (including ATC) should be allowed to utilize in calculating the rates they charge their customers.
AFUDC - Refer to Note 3 for details of AFUDC recognized in 2015, 2014 and 2013.
Income Taxes - Refer to Note 11 for details of effective income tax rates for continuing operations.
Loss from Discontinued Operations, Net of Tax - Refer to Note 19 for discussion of discontinued operations.
Preferred Dividend Requirements of Subsidiaries - In 2014, Alliant Energy’s and IPL’s preferred dividend requirements of subsidiaries decreased $8 million and $6 million, respectively, primarily due to IPL recording charges of $5 million in 2013 related to the redemption of preferred stock. Refer to Note 8 for additional discussion of IPL’s preferred stock transactions.
STRATEGIC OVERVIEW
Strategic Plan - The strategic plan focuses on the core business of delivering regulated electric and natural gas service in IPL’s Iowa and WPL’s Wisconsin service territories. The strategic plan is built upon three key elements: competitive value, exceptional service, and responsible resources.
Competitive Value - Aggressively managing costs and serving as a resource for customers seeking energy solutions are key elements to providing competitive value for customers. Given public policy changes may result in increases to future energy costs, the strategic plan is focused on controlling costs to provide competitive and reliable rates to IPL’s and WPL’s customers. For example, IPL and WPL have retail electric base rate freezes in Iowa and Wisconsin, respectively, through 2016. IPL also has electric and gas tax benefit riders, which utilize tax benefits from income tax strategies to provide credits on Iowa retail customers’ bills to help lower customers’ costs. Refer to Note 2 for additional discussion of the retail electric base rate freezes, and Note 11 and “Rate Matters” for further discussion of the tax benefit riders.
Exceptional Service - The strategic plan also focuses resources on utilizing expertise and creative problem solving to enhance the customer experience and ensure reliable service for customers. For example, Corporate Services placed in service a new customer billing and information system in 2015. The new customer billing and information system provides customers with enhanced payment and billing options, new self-service features, increased access to information and expanded options for communication. Investments to maintain strong reliability are expected to be targeted at electric and gas distribution system improvements, including replacing, modernizing and upgrading aging infrastructure. System performance is monitored and necessary steps are taken to continually improve the safety and reliability of service for customers. Providing exceptional customer service, including emergency and outage response, is part of the mission and commitment to customers.
Responsible Resources - Another key element of the strategic plan is focused on finding innovative ways to operate the business more efficiently and provide flexible energy resources that benefit customers. A diversified fuel mix for EGUs is important to meeting the energy needs of customers and also recognizes the importance of using resources in efficient and environmentally responsible ways for the benefit of future generations. The current strategic plan includes the following portfolio of energy resources:
| • | Natural gas - purchasing, constructing and/or converting to natural gas-fired EGUs. |
| • | Renewables - operating wind farms and hydroelectric generators, as well as evaluating the development of future wind sites and solar projects. |
| • | Coal - implementing environmental controls and generation performance and reliability improvements at newer, larger and more efficient coal-fired EGUs, and fuel switching at, and retirement of, certain older, smaller and less efficient coal-fired EGUs. |
| • | PPAs - purchasing electricity to meet a portion of customers’ demand for electricity, including wind and solar power PPAs and a nuclear generation PPA related to DAEC for a term of February 2014 through December 2025. |
Increasing levels of energy produced by natural gas-fired EGUs, wind farms and other renewable energy resources, and installing environmental controls at the more efficient coal-fired EGUs, result in significant environmental benefits. As a result of these efforts, SO2 and NOx emissions are currently expected to be reduced by approximately 90% and 80%, respectively, from 2005 levels by 2025. Mercury emissions are currently expected to be reduced by approximately 90% from 2009 levels by 2025. CO2 emissions have been reduced by approximately 15% from 2005 levels.
Additional generation portfolio details, as well as discussion of investments in environmental controls and performance and reliability upgrades, are included in “Generation Plans” below.
Energy efficiency is also an important part of the strategic plan and provides customers with the opportunity to reduce their energy usage and related costs through the use of new energy efficient equipment, products and practices. IPL currently expects to spend approximately $400 million for electric and natural gas energy efficiency programs in Iowa from 2014 through 2018. In addition, WPL contributes 1.2% of its annual utility revenues to Wisconsin’s Focus on Energy program. Refer to “Energy Efficiency Programs” below for further discussion of energy efficiency programs.
Non-regulated Operations - The strategic plan for Alliant Energy’s non-regulated operations involves maintaining a modest portfolio of businesses that are accretive to earnings and cash flows but not significant users of capital.
Electric and Gas Distribution Systems - An important aspect of the strategic plan focuses resources on providing reliable electric and natural gas service to IPL’s and WPL’s customers. Investments are expected to be targeted at replacing, modernizing and upgrading aging infrastructure in the electric and gas distribution systems. These investments are designed to make the electric distribution system more resilient, robust and reliable to be able to meet customers’ changing and growing needs. Additionally, the Pipeline and Hazardous Materials Safety Administration is expected to expand and/or strengthen regulations related to gas transmission and distribution systems in the future. These regulations are expected to result in more inspections and investments to replace certain portions of IPL’s gas transmission and distribution systems and WPL’s gas distribution systems. These investments are expected to ensure the gas transmission and distribution systems are appropriately maintained and operated safely. Additional investments are expected to be made to extend various gas transmission and distribution systems in IPL’s and WPL’s service territories to serve new customer demand. Estimated capital expenditures for these expected and current projects for 2016 through 2019 are included in the “Electric and gas distribution systems” lines in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”
IPL’s Proposed Clinton Natural Gas Pipeline - In September 2015, IPL filed a petition with the IUB for a pipeline permit to construct, maintain, and operate a natural gas pipeline in Scott and Clinton Counties in Iowa, referred to as the Clinton pipeline. IPL currently expects to receive the IUB’s decision on its petition in the second quarter of 2016. Subject to such approval, construction is expected to be completed by the first quarter of 2017. Capital expenditures to construct the pipeline, excluding AFUDC, are currently estimated to be approximately $60 million to $70 million.
Generation Plans - Generation plans are reviewed and updated as deemed necessary and in accordance with regulatory requirements. Alliant Energy, IPL and WPL are currently evaluating the types of capacity and energy additions they will pursue to meet their customers’ long-term energy needs and are monitoring several related external factors that could influence those evaluations. Environmental compliance plans have also been developed to ensure cost effective compliance with current and proposed environmental laws and regulations impacting existing EGUs. Environmental compliance plans are reviewed and updated to address various external factors, as deemed necessary and in accordance with regulatory requirements. Some of the external factors impacting these plans include regulatory policies and decisions; changes in long-term projections of customer demand; availability and cost effectiveness of different generation and emission reduction technologies; developments related to environmental regulations; settlements reached with environmental agencies and citizens groups; forward market prices for fossil fuels, electricity and emission allowances; market conditions for obtaining financing; developments related to federal and state RPS; environmental requirements, such as any future requirements relating to GHG emissions or renewable energy sources; and federal and state tax incentives. Refer to “Environmental Matters” for details of current and proposed environmental regulations and requirements.
Natural Gas-Fired Generation -
IPL’s Construction of Marshalltown - In 2013, the IUB issued an order approving a siting certificate and establishing rate-making principles for IPL’s construction of an approximate 650 MW natural gas-fired combined-cycle EGU in Marshalltown, Iowa, referred to as Marshalltown. In 2013, IPL accepted the IUB’s rate-making principles, which include the following:
| • | A cost cap of $920 million, including costs to construct Marshalltown, a pipeline to supply natural gas to Marshalltown and transmission network upgrades to transmit electricity from Marshalltown, as well as AFUDC. Any costs incurred in excess of the cost cap are expected to be incorporated into rates if determined to be reasonable and prudent. |
| • | An 11% return on common equity for the 35-year depreciable life of Marshalltown and a 10.3% return on common equity for the calculation of AFUDC related to the construction of Marshalltown. |
| • | The application of double leverage is deferred until IPL’s next retail electric base rate case or other proceeding. |
In 2013, the IUB approved the construction of a pipeline for the transportation of natural gas to Marshalltown. After receiving the final necessary regulatory approvals and permits in the second quarter of 2014, IPL began constructing Marshalltown. IPL currently expects to place Marshalltown in service by the second quarter of 2017.
ITC has begun constructing the majority of the required transmission network upgrades for Marshalltown and has elected to pursue an option under the terms of MISO’s Attachment “X” tariff to self-fund these transmission network upgrades. As a result, ITC will incur the capital expenditures to construct the transmission network upgrades and include a direct charge for such transmission network upgrade costs as part of its electric transmission service costs billed to IPL as the owner of Marshalltown. Refer to Note 3 for further discussion of Marshalltown.
WPL’s Proposed Construction of the Riverside Expansion - In April 2015, WPL filed a CPCN application with the PSCW for approval to construct a natural gas-fired combined-cycle EGU in Beloit, Wisconsin, referred to as the Riverside expansion. Construction proposals received to date indicate the Riverside expansion is expected to generate up to 700 MW of electricity. Capital expenditures are currently estimated to be approximately $700 million to construct the EGU and a pipeline to supply natural gas to the EGU. The estimated capital expenditures exclude transmission network upgrades and AFUDC.
WPL recently entered into agreements with neighboring utilities and electric cooperatives that, if the proposed Riverside expansion is approved, would provide each of the neighboring utilities and electric cooperatives options to purchase a partial ownership interest in the Riverside expansion. The purchase price for such options is based on the ownership interest acquired and the net book value of the Riverside expansion on the date of the purchase. The exercise of each option is subject to PSCW approval, and the timing and ownership amounts of the options are as follows:
| Counterparty | Option Amount | Option Timing | ||
| Wisconsin Public Service Corporation (WPSC) | up to 200 MW | 2020-2024 (a) | ||
| Madison Gas and Electric Company (MGE) | up to 50 MW | 2020-2025 (a) | ||
| Electric cooperatives | up to 55 MW | By September 2016 |
| (a) | Assumes an in-service date in early 2020. |
WPSC and MGE Options - Starting on the date the proposed Riverside expansion is placed in service, WPSC’s options would allow it to acquire up to 200 MW of the EGU over four years, with no more than 100 MW available to be acquired in the first two years. Similarly, MGE could acquire up to 50 MW over five years, with no more than 25 MW available to be acquired in the first two years. If WPSC exercises its options, and subject to approval by the PSCW, WPL may exercise reciprocal options to purchase up to 200 MW of any natural-gas combined-cycle EGU that either WPSC or its affiliated utility, Wisconsin Electric Power Company (Wisconsin Electric), places in service within 10 years of the date the proposed Riverside expansion is placed in service.
The agreements with WPSC and MGE also provide that the parties negotiate amendments to the Columbia joint operating agreement that provide WPSC and MGE options to forgo certain capital expenditures at Columbia, which upon exercise would require WPL to incur such capital expenditures in exchange for a proportional increase in its ownership share of Columbia. These options for WPSC and MGE expire when the proposed Riverside expansion is placed in service and exclude capital expenditures related to the Columbia Unit 2 SCR currently being constructed.
In addition to the provisions described above, the settlement agreement WPL entered into with Wisconsin Electric and WPSC includes the following:
| • | Riverside Expansion Market Participation Date - WPL agreed that the proposed Riverside expansion would not enter the MISO capacity market prior to the date set by MISO for qualifying generation as a capacity asset for the MISO planning year beginning June 1, 2020. |
| • | Riverside Expansion Interconnection Study - WPL agreed to file a request with MISO on behalf of itself, Wisconsin Electric and WPSC to complete a non-binding study to assess an interconnection option of the proposed Riverside expansion to ATC’s transmission system. WPL and the parties filed such request with MISO in January 2016. |
| • | WPL and Wisconsin Electric PPA - WPL and Wisconsin Electric agreed to enter into a PPA whereby WPL would purchase specified levels of energy and capacity from Wisconsin Electric through 2019. |
| • | Renewable Generation Joint Development Agreement - WPL, Wisconsin Electric and WPSC agreed to negotiate a separate joint development agreement for the purpose of cooperatively developing any renewable resources greater than 50 MW in Wisconsin for the benefit of their respective customers. The terms of such agreement would be 10 years beginning on a date no later than June 1, 2016. The utility that originates such renewable resource would hold a majority ownership and operational control of the renewable resource. The other two utilities would have the right to acquire a minority interest in the other utility’s renewable resource. |
Electric Cooperatives’ Options - WPL recently executed term sheets with various electric cooperatives, which currently have wholesale power supply agreements with WPL. The term sheets provide the electric cooperatives an option to purchase a partial ownership interest in the proposed Riverside expansion while the EGU is being constructed. The options would allow the electric cooperatives to acquire an aggregate maximum amount up to 55 MW, with each cooperative required to make elections regarding such options by September 2016. If the options are exercised, the current wholesale power supply agreements with the electric cooperatives would be extended by at least four years until 2026 with automatic continuation of such agreements unless terminated by either party, with a five-year notice requirement.
A decision from the PSCW on WPL’s CPCN application is currently expected by the second quarter of 2016. The Riverside expansion is also subject to the receipt of various approvals and permits necessary to construct and operate the EGU and connect such EGU to the transmission system. Subject to such approvals, construction is currently expected to begin by early 2017 and be completed by early 2020. The Riverside expansion would replace energy and capacity being eliminated with the 2015 retirements of Nelson Dewey Units 1 and 2 and Edgewater Unit 3, and the planned retirements of Edgewater Unit 4 and
the Rock River and Sheepskin Combustion Turbine Units, which in aggregate have a nameplate capacity of approximately 700 MW.
In May 2014, the PSCW authorized WPL to defer the retail portion of incremental pre-certification and pre-construction costs associated with this proposed EGU beginning March 2014. As of December 31, 2015, WPL recorded $6 million of such costs in aggregate.
Wind Generation -
Resources’ Franklin County Wind Farm - The Franklin County wind farm began generating electricity in 2012. Resources is currently selling the electricity output from the wind farm into the MISO market as a merchant generator, and is considering various options for this wind farm. Such options include entering into a PPA with an independent third party, IPL or WPL; selling the project to IPL or WPL; or continuing to sell the output into the MISO market as a merchant generator. Refer to “Critical Accounting Policies and Estimates” and Note 3 for further discussion of the Franklin County wind farm.
Undeveloped Wind Sites - IPL has up to 400 MW of wind site capacity remaining in Franklin County, Iowa. WPL has approximately 200 MW of wind site capacity remaining in Freeborn County, Minnesota. Future development of the balance of these wind sites will depend on numerous factors such as changes in customer demand, RPS, environmental requirements, electricity and fossil fuel prices, wind project costs, technology advancements and transmission capabilities.
Coal-Fired Generation -
Environmental Controls Projects - The strategic plan includes adding environmental controls at newer, larger and more efficient coal-fired EGUs to continue producing affordable energy for customers and to benefit the environment. The following table provides current estimates of the total (past and future) project costs for certain environmental controls projects included in the current environmental compliance plans (in millions):
| Expected | Total | Compliance | Regulatory | |||||||
| Generating Unit | In-service Date | Technology (a) | Project Cost | Obligations | Approvals (b) | |||||
| IPL: | ||||||||||
| Ottumwa Unit 1 | 2018/2019 | SCR | $75-$100 | CSAPR, IPL Consent Decree | In Process | |||||
| WPL: | ||||||||||
| Edgewater Unit 5 | 2016 | Scrubber & Baghouse | 260-280 | MATS Rule, CSAPR, WPL Consent Decree | June 2013 PSCW order | |||||
| Columbia Unit 2 | 2018 | SCR | 40-60 | CSAPR, WPL Consent Decree | January 2015 PSCW order |
| (a) | Scrubber is a post-combustion process that injects lime or lime slurry into the stream of gases leaving the EGU boiler to remove SO2 and other acid gases (including hydrochloric acid) and capture them in a solid or liquid waste by-product. A scrubber typically removes more than 90% of the SO2 emissions. |
Baghouse, including carbon injection, is a post-combustion process that injects carbon particles into the stream of gases leaving the EGU boiler to facilitate the capture of mercury in filters or bags. This process can remove more than 85% of mercury emissions.
SCR is a post-combustion process that injects ammonia or urea into the stream of gases leaving the EGU boiler to convert NOx emissions into nitrogen and water. The use of a catalyst enhances the effectiveness of the conversion, enabling NOx emissions reductions of up to 90%.
| (b) | IPL’s Environmental Controls Projects - Under Iowa law, IPL is required to file an EPB biennially. Filing of periodic reports regarding the implementation of IPL’s compliance plan and related budget identified in an EPB is also currently required under a settlement agreement between IPL and the Iowa Office of Consumer Advocate. An EPB provides a utility’s compliance plan and related budget for managing regulated emissions from its coal-fired EGUs in a cost-effective manner. IUB approval of an EPB demonstrates that the EPB is reasonably expected to achieve cost-effective compliance with applicable state environmental requirements. IPL plans to include the SCR for Ottumwa Unit 1 in its next EPB filing, which is currently expected to be filed with the IUB in the first quarter of 2016. |
WPL’s Environmental Controls Projects - WPL must file a CA application and receive authorization from the PSCW to proceed with any individual environmental controls project with an estimated project cost of $10 million or more.
These capital expenditure estimates represent IPL’s or WPL’s respective portion of the total escalated capital expenditures and exclude AFUDC, if applicable. Capital expenditure estimates are subject to change based on future changes to plant-specific costs of environmental controls technologies and environmental requirements. Refer to Note 16(e) for discussion of Consent Decrees, which include requirements for IPL and WPL to install environmental controls systems noted above at certain of their EGUs.
Generation Improvement Projects - The strategic plan includes investments in generation maintenance and performance improvements at newer, larger and more efficient coal-fired EGUs, including WPL’s Columbia Units 1 and 2.
Columbia Units 1 and 2 - In 2014, WPL received an order from the PSCW approving a request for generation maintenance and performance improvements at Columbia Units 1 and 2. WPL’s portion of the capital expenditures for the projects, excluding AFUDC, is currently estimated to be between $50 million and $60 million. WPL began construction in February 2015 and currently expects to place the projects in service by the end of 2017.
Plant Retirements and Fuel Switching - The current strategic plan includes the retirement, or fuel switch from coal to natural gas, of several older, smaller and less efficient EGUs in the next several years. The plan includes the following EGUs, with net book values as of December 31, 2015 (dollars in millions):
| Nameplate | Net Book | |||||||
| EGU (In-Service Year) | Capacity | Actual/Expected Date | Value | |||||
| IPL: | ||||||||
| M.L. Kapp Unit 2 (1967) | 218 MW | Fuel switch completed in June 2015 (a) | $39 | |||||
| Prairie Creek Unit 4 (1967) | 149 MW | Fuel switch by December 31, 2017 (a) | 52 | |||||
| Sutherland Units 1 (1955) and 3 (1961) | 119 MW | Retire by December 31, 2017 (a) (b) (c) | 51 | |||||
| Dubuque Units 3 (1952) and 4 (1959) | 66 MW | Retire by December 31, 2017 (a) (b) | 6 | |||||
| Fox Lake Unit 1 (1950) and 3 (1962) | 93 MW | Retire by December 31, 2017 (b) (c) | 2 | |||||
| Other units | Approximately 195 MW | Retire by December 31, 2017 (b) (c) | 2 | |||||
| Burlington Generating Station (1968) | 212 MW | Fuel switch by December 31, 2021 (a) | 61 | |||||
| Prairie Creek Units 1 (1997) and 3 (1958) | 64 MW | Fuel switch or retire by December 31, 2025 (a) (b) | 95 | |||||
| WPL: | ||||||||
| Nelson Dewey Units 1 (1959) and 2 (1962) | 227 MW | Retired in December 2015 (a) | 38 | |||||
| Edgewater Unit 3 (1951) | 69 MW | Retired in December 2015 (a) | 7 | |||||
| Edgewater Unit 4 (1969) | 239 MW (d) | Retire by December 31, 2018 (a) (b) (e) | 46 | |||||
| Rock River Combustion Turbine Units 3-6 (1967-1972) | 169 MW | Retire by December 31, 2019 (b) (e) | 2 | |||||
| Sheepskin Combustion Turbine Unit 1 (1971) | 42 MW | Retire by December 31, 2019 (b) (e) | — |
| (a) | These actions and plans meet requirements specified in the Consent Decrees, which are discussed in Note 16(e). |
| (b) | Final MISO studies could indicate that the retirement of an individual EGU may result in reliability issues and that transmission network upgrades for system reliability are necessary to enable such retirement. Under the current MISO tariff, the specific timing for the retirement of these EGUs could depend on the timing of the required transmission network upgrades as well as various operational, market and other factors. |
| (c) | The retirements of Fox Lake Unit 3, Sutherland Units 1 and 3, and other units are contingent on the construction of Marshalltown as well as various operational, market and other factors. |
| (d) | Reflects WPL’s 68.2% ownership interest in Edgewater Unit 4. |
| (e) | The retirements of Edgewater Unit 4 and the Rock River and Sheepskin Combustion Turbine Units are contingent on the construction of the Riverside expansion as well as various operational, market and other factors. |
Nameplate capacity in the above table represents the nominal amount of electricity an EGU is designed to produce. Each EGU is also assessed a generating capacity amount from MISO through its annual resource adequacy process. The generating capacity amount assessed by MISO is subject to change each year and is based upon the current performance capability of the EGU and historical forced outages.
Alliant Energy, IPL and WPL are working with MISO, state regulatory commissions and other regulatory agencies, as required, to determine the final timing of these actions. The expected dates for the retirement and fuel switching of these EGUs are subject to change depending on operational, regulatory, market and other factors. The potential retirement of other EGUs within the generation fleet continues to be evaluated.
Utility Asset Divestitures -
IPL’s Minnesota Electric and Natural Gas Distribution Assets - Refer to Note 3 for discussion of the sales of IPL’s Minnesota electric and natural gas distribution assets in 2015.
Energy Efficiency Programs - Several energy efficiency programs and initiatives help customers reduce their energy usage and related costs through the use of new energy efficient equipment, products and practices. The following are current key energy efficiency programs:
IPL EEP - In 2013, IPL received an order from the IUB approving IPL’s EEP for 2014 through 2018. The EEP includes IPL spending approximately $400 million for electric and natural gas energy efficiency programs in Iowa from 2014 through 2018, and is expected to conserve electric and natural gas usage equal to that of more than 100,000 homes. In accordance with Iowa law, IPL is required to file an EEP every five years. An EEP provides a utility’s plan and related budget to achieve specified levels of energy savings. IUB approval demonstrates that IPL’s EEP is reasonably expected to achieve cost effective delivery of the energy efficiency programs. To the extent approved by the IUB, costs associated with executing the EEP are recovered from ratepayers through an additional tariff called an EECR factor. The EECR factors are revised annually and include a reconciliation to eliminate any over- or under-recovery of energy efficiency expenses from prior periods. There are no carrying costs associated with the cost recovery factors. The annual EECR factors are based on IPL’s approved budget as filed with its EEP, along with any over- or under-collection from prior periods, and therefore are not expected to have a material impact on Alliant Energy’s and IPL’s financial condition or results of operations.
Focus on Energy Program - In 2015 and 2014, WPL contributed 1.2% of annual utility revenues to help fund Focus on Energy, Wisconsin’s state-wide energy efficiency and renewable energy resource program.
RATE MATTERS
Overview - Alliant Energy has two utility subsidiaries, IPL and WPL. IPL and WPL are subject to federal regulation by FERC, which has jurisdiction over wholesale electric rates and certain natural gas facilities, and state regulation in Iowa and Wisconsin for retail utility rates and standards of service. Such regulatory oversight also covers IPL’s and WPL’s plans for construction and financing of new EGUs and related activities.
Retail Base Rate Filings - Base rate changes reflect both returns on additions to infrastructure and recovery of changes in costs incurred or expected to be incurred. Given that a portion of the rate changes will offset changes in costs, revenues from rate changes should not be expected to result in an equal change in net income for either IPL or WPL.
WPL’s Wisconsin Retail Electric and Gas Rate Case (2015/2016 Test Period) - In July 2014, WPL received an order from the PSCW authorizing WPL to maintain retail electric base rates at their current levels through the end of 2016. The retail electric base rate case included a return of and a return on costs for environmental controls projects at Columbia Units 1 and 2 and Edgewater Unit 5, generation performance and reliability improvements at Columbia Units 1 and 2, other ongoing capital expenditures, and an increase in electric transmission service expense. The additional revenue requirement for these cost increases was offset by the impact of changes in the amortization of regulatory liabilities associated with energy efficiency cost recoveries and increased sales volumes. The order also authorized WPL to implement a $5 million decrease in annual retail gas base rates effective January 1, 2015 followed by a freeze of such gas base rates through the end of 2016.
The order requires escrow treatment of major transmission charges, allows continuation of an 8.2% AFUDC rate, and allows continuation of a 10.4% return on common equity and the following related provisions: (1) WPL may request a change in retail base rates during the test period if its annual regulatory return on common equity falls below 8.5%; and (2) WPL must defer a portion of its earnings if its annual regulatory return on common equity exceeds 10.65% during the test period. WPL must defer 50% of its excess earnings between 10.65% and 11.40%, and 100% of any excess earnings above 11.40%. In addition, the order allows WPL to maintain its ability to request deferrals based on current practices. As of December 31, 2015, Alliant Energy and WPL did not record any deferred amounts for these provisions. Refer to Note 7 for details of WPL’s regulatory limitation on distributions of common stock dividends to its parent company in 2016.
WPL’s Wisconsin Retail Electric and Gas Rate Case (2013/2014 Test Period) - Refer to Note 2 for details of a July 2012 PSCW order, which included a provision that required WPL to defer a portion of its earnings if its annual regulatory return on common equity exceeded 10.65% during 2013 and 2014. As of December 31, 2015, Alliant Energy and WPL deferred $8 million of WPL’s 2013 and 2014 earnings for this provision, which WPL currently expects will be refunded to its customers in a future rate case or other proceeding.
IPL’s Iowa Retail Electric Rate Settlement Agreement - The IUB approved a settlement agreement in 2014 related to rates charged to IPL’s Iowa retail electric customers. The settlement agreement extends IPL’s Iowa retail electric base rates authorized in its 2009 Test Year rate case through 2016 and provides targeted retail electric customer billing credits of $105 million in aggregate. In 2015 and 2014, IPL recorded $24 million and $72 million of such credits, respectively, and the remaining $9 million of such credits is targeted for 2016. The settlement agreement included the continuation of the energy adjustment clause, transmission cost rider and electric tax benefit rider credits; the ability for IPL to seek rate relief if a significant event occurs; and the ability for parties to the DAEC PPA proceeding to request show cause action if IPL’s Iowa retail electric return on common equity exceeds 11% for 2014, 2015 or 2016.
Items considered in settlement discussions included costs for environmental controls at Ottumwa Unit 1, George Neal Units 3 and 4, Burlington Unit 1 and Prairie Creek Units 3 and 4, generation performance and reliability improvements at Ottumwa Unit 1, and other ongoing capital expenditures; the elimination of purchased electric capacity payments from the previous DAEC PPA that ended in February 2014; and costs of the new DAEC PPA. IPL assumes no change to its current authorized return on common equity and common equity component of the regulatory capital structure authorized in its 2009 Test Year case.
WPL’s Retail Fuel-related Rate Filings - Refer to Note 2 for discussion of WPL’s retail fuel-related rate filings for Test Years 2014 through 2016.
IPL’s Tax Benefit Riders - In 2009, IPL filed a request with the IUB to create a regulatory liability account for potential tax benefits resulting from changes in tax accounting methodologies and tax elections available under the Internal Revenue Code. These potential tax benefits were related to the tax treatment of repairs expenditures, allocation of insurance proceeds from floods in 2008 and allocation of mixed service costs. In 2012, IPL filed a report with the IUB requesting approval of the final amount of the regulatory liability account based on the tax benefits generated from these changes in tax accounting methodologies and tax elections that were sustained under IRS audit. The 2012 report filed by IPL identified approximately $500 million of such tax benefits, which included $452 million allocated for use with the electric tax benefit rider and $48 million allocated for use with the gas tax benefit rider discussed below. Refer to “Property Method Changes” below for discussion of additional tax benefits recorded in 2014 from two additional tax accounting method changes implemented in 2014.
Electric - The electric tax benefit rider, which was approved by the IUB and implemented in 2011, utilizes amounts from the regulatory liability account to credit bills of Iowa retail electric customers to help offset the impact of rate increases on such customers. These credits on customers’ electric bills reduce electric revenues based on customers’ KWh usage.
Gas - The gas tax benefit rider, which was approved by the IUB and implemented in 2012, utilizes amounts from the regulatory liability account to credit bills of Iowa retail gas customers to help mitigate the impact of rate increases on such customers. These credits on customers’ gas bills reduce gas revenues based on a fixed amount per day.
Utilization of Tax Benefit Riders - IPL’s tax benefit riders regulatory liability account has been utilized to credit bills of Iowa retail electric customers as follows:
| Electric | Gas | Total | |||||||||
| Regulatory liability account balance approved by IUB | $452 | $48 | $500 | ||||||||
| 2011 through 2015 customer billing credits | (380 | ) | (35 | ) | (415 | ) | |||||
| 2016 customer billing credits (estimate) | (65 | ) | (12 | ) | (77 | ) | |||||
| Remaining balance available for future periods | $7 | $1 | $8 |
Property Method Changes - In 2013, the U.S. Department of the Treasury issued tangible property regulations clarifying the tax treatment of costs incurred to acquire, maintain or improve tangible property and to retire and remove depreciable property. The regulations clarified the ability to deduct cost of removal expenditures on partial dispositions of assets. In 2014, the IRS issued implementation guidance related to these tangible property regulations, which allowed companies to file a tax accounting method change to deduct cost of removal expenditures on partial dispositions that were previously capitalized. In 2014, Alliant Energy, IPL and WPL implemented this tax accounting method change, which resulted in the inclusion of additional tax deductions on Alliant Energy’s U.S. federal income tax return for the calendar year 2014. In 2013, the IRS also issued guidance that clarified acceptable units of property to be used when assessing whether costs incurred for electric generation projects may be deducted as repair expenditures or if they must be capitalized. After assessing the guidance, Alliant Energy, IPL and WPL decided in 2014 to implement the new units of property by filing a tax accounting method change as part of Alliant Energy’s U.S. federal income tax return for the calendar year 2013. IPL currently
anticipates refunding $75 million of related current tax benefits from these two tax accounting method changes to its Iowa retail electric and gas customers in the future, which is recorded in Alliant Energy’s and IPL’s tax benefit riders regulatory liabilities.
Refer to Notes 2 and 11 for additional discussion of the impacts of the electric and gas tax benefit riders on Alliant Energy’s and IPL’s regulatory assets and regulatory liabilities, income tax expense and effective income tax rates.
Planned Utility Rate Cases -
WPL’s Wisconsin Retail Electric and Gas Rate Case (2017/2018 Test Period) - WPL currently expects to make a retail electric and gas base rate filing for the 2017/2018 Test Period in the second quarter of 2016. Any rate changes granted from this request are expected to be effective on January 1, 2017. WPL currently expects a decision from the PSCW regarding this rate filing by the end of 2016.
WPL’s Retail Fuel-related Rate Filing (2017 Test Year) - WPL currently expects to make a retail fuel-related rate filing (2017 Test Year) in the second quarter of 2016. Such filing will establish WPL’s approved fuel-related costs for inclusion in its 2017 Test Period retail rates. Any rate changes granted from this request are expected to be effective on January 1, 2017. WPL currently expects a decision from the PSCW regarding this rate filing by the end of 2016.
IPL’s Iowa Retail Electric and Gas Rate Cases (2016 Test Year) - IPL currently expects to make separate retail electric and gas rate filings in the first half of 2017 based on a 2016 historical Test Year. The key drivers for the anticipated filings include recovery of capital projects, including Marshalltown for the electric filing and the proposed Clinton natural gas pipeline for the gas filing. Any rate changes are expected to be implemented in two phases with interim rates effective approximately 10 days after the filing and final rates effective approximately 10 months after the filing date.
Retirement of WPL’s Nelson Dewey Units 1 and 2 and Edgewater Unit 3 - Refer to Note 2 for discussion of WPL’s December 2015 retirement of Nelson Dewey Units 1 and 2 and Edgewater Unit 3, including anticipated recovery of the remaining net book value of these EGUs from both its retail and wholesale customers.
Rate Case Details - Details of the currently effective rate orders in IPL’s and WPL’s key jurisdictions were as follows (Common Equity (CE); Preferred Equity (PE); Long-term Debt (LD); Short-term Debt (SD)):
| Authorized Return | Average | ||||||||||||||||
| Test | on Common | Regulatory Capital Structure | After-tax | Rate Base | |||||||||||||
| Jurisdictions | Period/Year | Equity (a) | CE | PE | LD | SD | WACC | (in millions) | |||||||||
| IPL: | |||||||||||||||||
| Iowa retail (IUB): | |||||||||||||||||
| Electric: | |||||||||||||||||
| - Emery (b) | 2009 | 11.58 | % | 48.2% | 6.5% | 45.3% | N/A | 8.85% | $281 (c) | ||||||||
| - Whispering Willow - East (b) | 2009 | 11.09 | % | 48.2% | 6.5% | 45.3% | N/A | 8.61% | 266 (c) | ||||||||
| - Other (b) | 2009 | 9.53 | % | 48.2% | 6.5% | 45.3% | N/A | 7.86% | 1,843 (c) | ||||||||
| Gas (d) | 2011 | 9.56 | % | 48.8% | 5.0% | 46.2% | N/A | 7.76% | 255 (c) | ||||||||
| Wholesale electric (FERC) (e) | 2015 | 10.97 | % | 47.7% | 5.5% | 46.8% | N/A | 7.94% | 110 (f) | ||||||||
| WPL: | |||||||||||||||||
| Wisconsin retail (PSCW): | |||||||||||||||||
| Electric | 2016 | 10.40 | % | 51.0% | N/A | 46.2% | 2.8% | 7.84% | 2,450 (g) | ||||||||
| Gas | 2016 | 10.40 | % | 51.0% | N/A | 46.2% | 2.8% | 7.84% | 204 (g) | ||||||||
| Wholesale electric (FERC) (h) | 2015 | 10.90 | % | 55.0% | N/A | 45.0% | N/A | 8.49% | 293 (f) |
| (a) | Authorized returns on common equity may not be indicative of actual returns earned or projections of future returns. |
| (b) | Authorized returns on common equity and after-tax WACC reflect application of double leverage pursuant to a January 2011 IUB order. Prior to the application of double leverage, authorized returns on common equity were: Emery-12.23%, Whispering Willow-East-11.7% and Other-10.0%, and after-tax WACC were: Emery-9.16%, Whispering Willow-East-8.91% and Other-8.09%. |
| (c) | Average rate base was calculated using a 13-month average during the test year adjusted for post-test year capital additions placed in service by September 30 following the end of the test year. |
| (d) | Authorized returns on common equity and after-tax WACC reflect application of double leverage pursuant to the unanimous settlement agreement approved in the IUB’s November 2012 order. Prior to the application of double leverage, authorized return on common equity was 10.0% and after-tax WACC was 8.0%. |
| (e) | IPL’s wholesale formula rates reflect annual changes in CE, PE, LD, WACC and rate base. |
| (f) | Wholesale average rate base reflects production-related rate base calculated as the simple average of the beginning of the test year and end of the test year balances in accordance with the respectively approved formula rates. |
| (g) | Average rate base amounts do not include CWIP or a cash working capital allowance and were calculated using a forecasted 13-month average for the test period. The PSCW provides a return on selected CWIP and a cash working capital allowance by adjusting the percentage return on rate base. |
| (h) | WPL’s wholesale formula rates reflect annual changes in WACC and rate base. |
Protecting Americans from Tax Hikes Act - In December 2015, the PATH Act was enacted. The most significant provisions of the PATH Act for Alliant Energy, IPL and WPL relate to the extension of bonus depreciation deductions for certain capital expenditures for property incurred through December 31, 2019 and placed in service prior to December 31, 2020, as well as incentives for individuals and businesses to construct renewable generation. As a result of this new legislation, Alliant Energy currently estimates its total bonus depreciation deductions to be claimed on its U.S. federal income tax returns will be as follows (in millions):
| Calendar | Bonus Depreciation | |||||||||||||
| Year | Deduction | Alliant Energy | IPL | WPL | ||||||||||
| 2015 | 50% | $200 | $100 | $50 | ||||||||||
| 2016 | 50% | 450 | 200 | 200 | ||||||||||
| 2017 | 50% | 750 | 550 | 150 | ||||||||||
| 2018 | 40% | 300 | 200 | 100 | ||||||||||
| 2019 | 30% | 500 | 100 | 400 |
These estimated bonus depreciation deductions are expected to create additional deferred tax liabilities for IPL and WPL. Any decreases in IPL’s and WPL’s rate base amounts in the rate setting process caused by the expected increase in deferred tax liabilities are expected to be partially offset by increases in IPL’s and WPL’s rate base amounts due to the additional deferred tax assets expected from additional net operating losses. These bonus depreciation estimates could change based on various factors, including regulatory approvals, changes in capital expenditures incurred, additional clarifications in the PATH Act, or the timing of when property is placed in service. Refer to “Liquidity and Capital Resources” for discussion of the impact of these estimated bonus depreciation deductions on net operating loss carryforwards and the expected amount and timing of future federal income tax payments.
ENVIRONMENTAL MATTERS
Overview - Alliant Energy, IPL and WPL are subject to regulation of environmental matters by federal, state and local authorities as a result of their current and past operations. Alliant Energy, IPL and WPL monitor these environmental matters and address them by installing controls that reduce emissions and by implementing operational modifications or other measures to address compliance obligations. These programs are subject to continuing review and are periodically revised due to various factors, including, but not limited to, changes in environmental regulations, litigation of environmental requirements, construction plans and compliance costs. There is currently significant regulatory uncertainty with respect to a number of environmental rules and regulations discussed below. Given the dynamic nature of environmental regulations and other related regulatory requirements, Alliant Energy, IPL and WPL have compliance plans to address these environmental obligations. Future expenditures for environmental compliance are expected to be material, including significant capital investments. Prudent expenditures incurred by IPL and WPL to comply with environmental requirements would likely be recovered in rates from their customers. Refer to “Strategic Overview” for details of environmental compliance plans, including discussion of specific projects and the associated estimated capital expenditures. The following are major environmental matters that could potentially have a significant impact on financial condition and results of operations.
Air Quality - The CAA and its amendments mandate preservation of air quality through existing regulations and periodic reviews to ensure adequacy of the CAA provisions based on scientific data. As part of the basic framework under the CAA, the EPA is required to establish NAAQS rules, which serve to protect public health and welfare. These rules address six “criteria” pollutants, four of which (NOx, SO2, particulate matter and ozone) are particularly relevant to electric utility operations. Ozone is not directly emitted from EGUs; however, NOx emissions may contribute to its formation in the atmosphere. Fine particulate matter may also be formed in the atmosphere from SO2 and NOx emissions.
SIPs document the collection of regulations that individual state agencies will apply to maintain NAAQS rules and related CAA requirements. The EPA must approve each SIP and if a SIP is not acceptable to the EPA or if a state chooses not to issue separate state rules, then the EPA can assume enforcement of the CAA in that state by issuing a federal implementation plan. Routinely monitored locations that do not comply with NAAQS rules may be classified by the EPA as non-attainment
and require further actions to reduce emissions. Additional emissions standards may also be applied under the CAA regulatory framework beyond NAAQS rules. The specific federal and state air quality rules that may affect operations are listed in the table below. Refer to the sections below the following tables for detailed discussion of the following air quality rules.
| Emissions | Alliant Energy’s Primary Facilities | Actual/Anticipated | ||||
| Environmental Rule | Regulated | Potentially Affected | Compliance Deadline | |||
| CSAPR | SO2, NOx | Fossil-fueled EGUs over 25 MW capacity in IA, WI and MN | Phase I - 2015; Phase II - 2017 | |||
| MATS Rule | Mercury and other HAPs | Coal-fired EGUs over 25 MW capacity in IA and WI | April 2015 | |||
| 2008 Ozone NAAQS Rule | NOx | Fossil-fueled EGUs in non-attainment areas | July 2015 | |||
| 2015 Ozone NAAQS Rule | NOx | Fossil-fueled EGUs in non-attainment areas | 2020-2037 | |||
| SO2 NAAQS Rule | SO2 | Fossil-fueled EGUs in non-attainment areas | 2021-2025 | |||
| CAA Section 111(d) | CO2 | Existing fossil-fueled EGUs over 25 MW capacity | Phase I - 2022-2029; Phase II - 2030 | |||
| CAA Section 111(b) | CO2 | Marshalltown and WPL’s proposed Riverside expansion | Upon startup of EGU |
The following table lists the fossil-fueled generating facilities by primary fuel type that IPL and WPL currently own or operate with greater than 25 MW of nameplate capacity. All of IPL’s generating facilities listed below are located in Iowa except for Fox Lake Unit 3, which is located in Minnesota. All of WPL’s generating facilities listed below are located in Wisconsin. Refer to “Strategic Overview” for discussion of various generating facilities that may be retired or changed from coal-fired to an alternative fuel source in the future.
| IPL | WPL | |||||||
| Coal | Natural Gas | Oil | Coal | Natural Gas | ||||
| Ottumwa 1 | Emery 1-3 | Marshalltown 1-3 | Columbia 1-2 | Riverside 1-3 | ||||
| Lansing 4 | M.L. Kapp 2 (a) | Lime Creek 1-2 | Edgewater 4-5 | Neenah 1-2 | ||||
| Prairie Creek 3-4 | Sutherland 1,3 | Centerville 1-2 | Sheboygan Falls 1-2 | |||||
| Burlington 1 | Fox Lake 3 | South Fond du Lac 1-4 | ||||||
| George Neal 3-4 | Dubuque 3-4 | Rock River 3,5-6 | ||||||
| Louisa 1 | Sheepskin 1 |
| (a) | IPL’s M.L. Kapp Unit 2 fuel type was switched from coal to natural gas in 2015. |
As discussed in greater detail below, a number of these air regulations are subject to legal challenges, reconsideration and/or other uncertainties that affect the ability to predict with certainty what impact such regulations may have on financial condition and results of operations.
CSAPR - CSAPR is a regional SO2 and NOx cap-and-trade program, where compliance with emission limits may be achieved by purchasing emission allowances and/or reducing emissions through changes in operations or the additions of environmental controls. CSAPR establishes state-specific annual SO2 and NOx emission caps and ozone season NOx emission caps. In 2015, CSAPR replaced CAIR. Compliance with CSAPR emission limits began in 2015, with additional emission limits reductions beginning in 2017. Alliant Energy, IPL and WPL are currently in compliance with the Phase I CSAPR emission limits. The emission allowances used for Acid Rain and CAIR program compliance cannot be used for compliance with CSAPR. CSAPR emission allowances may be banked for future year compliance. In December 2015, the EPA issued a proposed rule to further reduce the CSAPR ozone season NOx emission caps in 2017 for several states, including Iowa and Wisconsin. Alliant Energy, IPL and WPL will continue to monitor legal and regulatory developments related to CSAPR and currently expect to meet the existing CSAPR compliance requirements based on planned and completed environmental controls projects for various EGUs.
MATS Rule - In 2011, the EPA issued the final MATS Rule for existing coal-fired EGUs, which requires emission limits for mercury and other HAPs, as well as work practice standards. Compliance with the MATS Rule began in April 2015. IPL and WPL have implemented environmental controls projects and operational procedures at various EGUs, refueled certain EGUs to natural gas and/or retired certain EGUs to achieve compliance with the MATS Rule. Pursuant to a June 2015 Supreme Court decision, the EPA published a proposed supplemental finding for the MATS Rule in December 2015 that concludes, after considering costs, it is “appropriate and necessary” to regulate HAPs from coal-fired EGUs. The MATS Rule will remain in effect while the EPA finalizes its supplemental finding, which is anticipated to be completed in 2016. Alliant
Energy, IPL and WPL currently expect continued compliance with the MATS Rule based on their completed actions, but will continue to monitor legal and regulatory developments related to this rule.
Ozone NAAQS Rule - The 2008 Ozone NAAQS Rule may require a reduction of NOx emissions in certain non-attainment areas designated by the EPA. Sheboygan County in Wisconsin is currently the only non-attainment area for the 2008 ozone NAAQS rule in Alliant Energy’s service territory. WPL operates Edgewater and Sheboygan Falls in Sheboygan County, Wisconsin. This non-attainment area was required to meet the ozone NAAQS by July 2015; however, in May 2015, Wisconsin asked the EPA for a one-year extension based on lower monitored ozone concentrations. Depending on the outcome of this request, additional NOx emission reductions may be required.
In October 2015, the EPA published the 2015 Ozone NAAQS Rule, which is more stringent than the 2008 Ozone NAAQS Rule and may require NOx emission reductions in certain non-attainment areas designated by the EPA. The EPA’s final designations of non-attainment areas for this revised rule are currently expected to be issued by October 2017. Compliance deadlines range from 2020 through 2037 depending on the level of ozone monitored in non-attainment areas. Depending on the level and location of non-attainment areas, Alliant Energy, IPL and WPL may be subject to additional NOx emissions reduction requirements to meet the 2015 Ozone NAAQS Rule. Alliant Energy, IPL and WPL do not currently believe there will be a significant impact of the 2015 Ozone NAAQS Rule on their financial condition and results of operations.
SO2 NAAQS Rule - In 2010, the EPA issued a final rule that establishes a new one-hour NAAQS for SO2. The EPA is currently working with states to complete attainment and non-attainment designations from July 2016 through December 2020. In addition, an SO2 monitoring device currently operates near one of IPL’s EGUs, which could result in the area surrounding the EGU receiving a non-attainment designation. Alliant Energy and IPL are currently unable to predict with certainty the outcome of such monitoring activities. Given that the EPA has not yet finalized SO2 NAAQS designations, Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of the SO2 NAAQS rule on their financial condition and result of operations.
GHG Emissions - Climate change continues to be assessed by policymakers, including consideration of the appropriate actions to mitigate climate change. There is continued debate regarding the public policy response that the U.S. should adopt, involving both domestic actions and international efforts.
In 2009, the EPA issued a finding that GHG emissions contribute to climate change, and therefore, threaten public health and welfare. This enabled the EPA to issue rules to report and regulate GHG emissions under the authority of the CAA. The EPA Mandatory GHG Reporting rule requires sources above certain threshold levels to monitor and report emissions. The primary GHG emitted from Alliant Energy’s, IPL’s and WPL’s utility operations is CO2 from the combustion of fossil fuels at their larger EGUs. Emissions of GHG are reported at the facility level in CO2e and include those facilities that emit 25,000 metric tons or more of CO2e annually. Annual emissions reported to the EPA for electric utility and gas distribution operations, in terms of total mass of CO2e, were as follows (in millions of metric tons):
| Alliant Energy | IPL | WPL | |||||||||||||||
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||
| CO2e emissions (a) | 24.3 | 26.6 | 25.2 | 10.9 | 10.9 | 10.8 | 13.4 | 15.7 | 14.4 |
| (a) | CO2e emissions reported to the EPA represent all emissions from the facilities operated by IPL and WPL and do not reflect their share of co-owned facilities operated by other companies. |
GHG Tailoring Rule - In 2010, the EPA issued the GHG Tailoring Rule, which establishes a GHG emissions threshold for major sources under the PSD construction permit and Title V operation permit. In 2014, the Supreme Court ruled that the EPA may not treat GHG emissions as “air pollutants” for determining whether a major source is required to obtain a PSD or Title V permit, but held that the EPA can continue requiring Best Available Control Technology for GHG emissions from sources otherwise subject to review under the PSD program. This rule remains subject to legal challenges and further rulemaking may also be required to update state regulations implementing the GHG Tailoring Rule to make the Supreme Court’s decision effective.
Clean Air Act Section 111(d) - In October 2015, the EPA published final standards under Section 111(d) of the CAA, referred to as the Clean Power Plan, which establish guidelines for states to follow in developing plans to reduce CO2 emissions from existing fossil-fueled EGUs. The final standards include an interim compliance period from 2022 through 2029 and a final compliance requirement beginning in 2030. In February 2016, the Supreme Court issued a stay of the Clean Power Plan until pending legal challenges are resolved, which places implementation of the final standards on hold indefinitely. Alliant Energy, IPL and WPL are currently unable to predict with certainty the outcome of the Clean Power Plan stay and its impact
on their financial condition and results of operations. Given the EPA’s rulemaking remains subject to legal challenges, Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of the final compliance requirements, but expect that expenditures to comply with such requirements could be significant.
Clean Air Act Section 111(b) - In October 2015, the EPA published final standards under Section 111(b) of the CAA, which establish CO2 emissions limits for certain new fossil-fueled EGUs. Marshalltown and WPL’s proposed Riverside expansion are expected to be impacted by these standards. Marshalltown is being constructed, and WPL’s proposed Riverside expansion is being designed, to achieve compliance with these standards. Given the EPA’s rulemaking remains subject to legal challenges, Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of these standards.
WPL Consent Decree - Refer to Note 16(e) for discussion of a Consent Decree approved by the Western Wisconsin Court in 2013 and WPL’s obligations thereunder. The Consent Decree resolves a notice of violation issued by the EPA in 2009 and complaints filed by the Sierra Club in 2010 regarding alleged air permitting violations at Columbia, Edgewater and Nelson Dewey.
IPL Consent Decree - Refer to Note 16(e) for discussion of a Consent Decree approved by the Northern Iowa Court in September 2015 and IPL’s obligations thereunder. The Consent Decree resolves potential CAA issues associated with emissions from IPL’s coal-fired generating facilities in Iowa.
Water Quality -
Section 316(b) of Federal Clean Water Act - In 2014, the EPA published a final rule related to Section 316(b) of the Federal Clean Water Act to regulate cooling water intake structures and minimize adverse environmental impacts to fish and other aquatic life. This rule applies to existing and new cooling water intake structures at certain steam generating and manufacturing facilities. IPL and WPL have identified nine (Ottumwa 1, Prairie Creek Units 1-4, Fox Lake Units 1 and 3, Lansing Unit 4, Dubuque Units 3-4, M.L. Kapp Unit 2, Burlington Unit 1, George Neal Units 3-4 and Louisa Unit 1) and two (Columbia Units 1-2 and Edgewater Units 4-5) generating facilities, respectively, which may be impacted by the final Section 316(b) Rule. Compliance with this final rule will be incorporated during periodic facility permit renewal cycles, with final compliance anticipated by 2022. Alliant Energy, IPL and WPL do not currently believe there will be a significant impact from the EPA’s Section 316(b) rule on their financial condition and results of operations.
Effluent Limitation Guidelines - In November 2015, the EPA published final effluent limitation guidelines, which require changes to discharge limits for wastewater from steam generating facilities. IPL and WPL have identified ten (Emery Units 1-3, Ottumwa Unit 1, Prairie Creek Units 3-4, Fox Lake Units 1 and 3, Lansing Unit 4, Dubuque Units 3-4, Burlington Unit 1, Sutherland Units 1 and 3, George Neal Units 3-4 and Louisa Unit 1) and three (Riverside Units 1-3, Columbia Units 1-2 and Edgewater Units 4-5) existing steam generating facilities, respectively, that are expected to be impacted by these guidelines. In addition, Marshalltown and WPL’s proposed Riverside expansion are expected to be impacted by these guidelines. Compliance with the final guidelines for existing steam generating facilities will be required after November 1, 2018 but before December 31, 2023, depending on each facility’s wastewater permit renewal cycle, and immediately upon operation for new steam generating facilities constructed after January 2016. Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of these guidelines on their financial condition and results of operations, but believe the expenditures to comply with these guidelines could be significant.
Hydroelectric Fish Passage Device - In 2002, FERC issued an order requiring WPL to install a fish passage device at its Prairie du Sac hydro plant. WPL has been working with the FWS and the Wisconsin DNR on the final design for the fish passage device. In 2013, the FWS initiated an environmental study of the fish passage device under the National Environmental Policy Act, which could result in changes to the design of the fish passage device. The FWS has indicated that this environmental study will be completed in 2016. In 2014, FERC issued an order approving an extension of the project deadline to December 31, 2020. Alliant Energy and WPL currently believe the required capital investments and/or modifications to install the currently designed fish passage device at the facility could be approximately $15 million.
Land and Solid Waste -
Coal Combustion Residuals Rule - Refer to Note 13 for discussion of the final CCR Rule, including additional AROs that were recognized by Alliant Energy, IPL and WPL in 2015 related to such rule.
MGP Sites - Refer to Note 16(e) for discussion of IPL’s and WPL’s MGP sites.
Other - Refer to Note 16(e), Item 1 Business, “Strategic Overview” and “Liquidity and Capital Resources” for further discussion of environmental matters, including discussion of specific projects and the associated estimated capital expenditures.
LEGISLATIVE MATTERS
Overview - Various legislative developments are monitored, including those relating to energy, tax, financial and other matters. Key legislative developments include the following:
Protecting Americans from Tax Hikes Act - In December 2015, the PATH Act was enacted. Refer to “Rate Matters” for discussion of estimated bonus depreciation deductions from the PATH Act and resulting impacts to IPL’s and WPL’s future rate base amounts.
LIQUIDITY AND CAPITAL RESOURCES
Overview - Alliant Energy, IPL and WPL expect to maintain adequate liquidity to operate their businesses and implement their strategic plan as a result of operating cash flows generated by their utility business, and available capacity under their revolving credit facilities and IPL’s sales of accounts receivable program, supplemented by periodic issuances of long-term debt and equity securities.
Liquidity Position - At December 31, 2015, Alliant Energy had $6 million of cash and cash equivalents, $840 million ($160 million at the parent company, $300 million at IPL and $380 million at WPL) of available capacity under the revolving credit facilities and $145 million of available capacity at IPL under its sales of accounts receivable program. Refer to “Short-term Debt” below and Note 9(a) for further discussion of the credit facilities. Refer to Note 5(b) for additional information on IPL’s sales of accounts receivable program.
Capital Structure - Alliant Energy, IPL and WPL plan to maintain debt-to-total capitalization ratios that are consistent with their investment-grade credit ratings. Alliant Energy, IPL and WPL currently expect to maintain capital structures in which debt would not exceed 55% of total capital and preferred stock would not exceed 10% of total capital. These targets may be adjusted depending on subsequent developments and the impact on their respective WACC and investment-grade credit ratings. Capital structures were as follows (dollars in millions):
| December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||
| Alliant Energy (Consolidated) | IPL | WPL | Alliant Energy (Consolidated) | IPL | WPL | ||||||||||||||||||||||||||||||||||||
| Common equity | $3,724.1 | 47 | % | $1,995.3 | 49 | % | $1,756.3 | 53 | % | $3,438.7 | 45 | % | $1,784.3 | 48 | % | $1,706.9 | 52 | % | |||||||||||||||||||||||
| IPL’s preferred stock | 200.0 | 3 | % | 200.0 | 5 | % | — | — | % | 200.0 | 3 | % | 200.0 | 5 | % | — | — | % | |||||||||||||||||||||||
| Noncontrolling interest | — | — | % | — | — | % | 11.3 | — | % | 1.8 | — | % | — | — | % | 8.5 | — | % | |||||||||||||||||||||||
| Long-term debt (incl. current maturities) | 3,835.6 | 48 | % | 1,856.9 | 46 | % | 1,533.9 | 46 | % | 3,767.3 | 50 | % | 1,758.0 | 47 | % | 1,563.1 | 48 | % | |||||||||||||||||||||||
| Short-term debt | 159.8 | 2 | % | — | — | % | 19.9 | 1 | % | 141.3 | 2 | % | — | — | % | — | — | % | |||||||||||||||||||||||
| $7,919.5 | 100 | % | $4,052.2 | 100 | % | $3,321.4 | 100 | % | $7,549.1 | 100 | % | $3,742.3 | 100 | % | $3,278.5 | 100 | % |
Alliant Energy, IPL and WPL intend to manage their capital structures and liquidity positions in such a way that facilitates their ability to raise the necessary funds reliably and on reasonable terms and conditions, while maintaining financial capital structures consistent with those approved by regulators and necessary to maintain appropriate credit quality. In addition to capital structures, other important financial considerations used to determine the characteristics of future financings include anticipated proceeds from asset sales, financial coverage ratios, capital spending plans, regulatory orders and rate-making considerations, levels of debt imputed by rating agencies, market conditions and the impact of tax initiatives and legislation. The most significant debt imputations relate to the sales of accounts receivable program, the DAEC PPA, and pension and OPEB obligations. The PSCW factors certain imputed debt adjustments in establishing a regulatory capital structure as part of WPL’s retail rate cases. The IUB does not make any explicit adjustments for imputed debt in establishing capital ratios used in determining customer rates, although such adjustments are considered by IPL in recommending an appropriate capital structure.
Credit and Capital Markets - Alliant Energy, IPL and WPL are aware of the potential implications that credit and capital market disruptions might have on the ability to raise external funding required for their respective operations and capital expenditure plans. Alliant Energy, IPL and WPL maintain revolving credit facilities to provide backstop liquidity to their commercial paper programs, ensure a committed source of liquidity in the event the commercial paper market becomes disrupted and efficiently manage their long-term financings. In addition, Alliant Energy and IPL maintain a sales of accounts receivable program at IPL as an alternative financing source.
Primary Sources and Uses of Cash - The most significant source of cash is from electric and gas sales to IPL’s and WPL’s customers. Cash from these sales reimburses IPL and WPL for prudently-incurred expenses to provide service to their utility customers and provides IPL and WPL a return of and a return on the assets used to provide such services. Utility operating cash flows are expected to cover the majority of IPL’s and WPL’s capital expenditures required to maintain their current infrastructure and to pay dividends to Alliant Energy’s shareowners. Capital needed to retire debt and fund capital expenditures related to large strategic projects is expected to be met primarily through external financings.
Cash Flows - Selected information from the cash flows statements was as follows (in millions):
| Alliant Energy | IPL | WPL | |||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||||
| Cash and cash equivalents, January 1 | $56.9 | $9.8 | $21.2 | $5.3 | $4.4 | $4.5 | $46.7 | $0.5 | $0.7 | ||||||||||||||||||||
| Cash flows from (used for): | |||||||||||||||||||||||||||||
| Operating activities | 871.2 | 891.6 | 731.0 | 385.0 | 406.1 | 232.6 | 449.8 | 424.4 | 423.3 | ||||||||||||||||||||
| Investing activities | (919.2 | ) | (917.7 | ) | (754.7 | ) | (511.9 | ) | (552.7 | ) | (423.3 | ) | (358.2 | ) | (320.1 | ) | (335.9 | ) | |||||||||||
| Financing activities | (3.1 | ) | 73.2 | 12.3 | 126.1 | 147.5 | 190.6 | (137.9 | ) | (58.1 | ) | (87.6 | ) | ||||||||||||||||
| Net increase (decrease) | (51.1 | ) | 47.1 | (11.4 | ) | (0.8 | ) | 0.9 | (0.1 | ) | (46.3 | ) | 46.2 | (0.2 | ) | ||||||||||||||
| Cash and cash equivalents, December 31 | $5.8 | $56.9 | $9.8 | $4.5 | $5.3 | $4.4 | $0.4 | $46.7 | $0.5 |
Operating Activities -
2015 vs. 2014 - The following items contributed to increased (decreased) operating activity cash flows in 2015 compared to 2014 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Decreased collections from IPL’s and WPL’s retail customers caused by temperature impacts on electric and gas sales | ($33 | ) | ($17 | ) | ($16 | ) | |||||
| Final receipt related to Alliant Energy’s tax separation and indemnification agreement with Whiting Petroleum in 2014 (Refer to Note 5(c) for details) | (26 | ) | — | — | |||||||
| Timing of WPL’s fuel-related cost recoveries from customers | 50 | — | 50 | ||||||||
| Changes in IPL’s retail electric customer billing credits (Refer to “Rate Matters” for details) | 48 | 48 | — | ||||||||
| Other (includes other changes in working capital largely related to changes in inventory levels) | (59 | ) | (52 | ) | (9 | ) | |||||
| ($20 | ) | ($21 | ) | $25 |
2014 vs. 2013 - The following items contributed to increased (decreased) operating activity cash flows in 2014 compared to 2013 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Lower purchased electric capacity payments related to the previous DAEC PPA (IPL) and the Kewaunee PPA (WPL) | $190 | $129 | $61 | ||||||||
| Changes in the level of IPL’s accounts receivable sold (Refer to Note 5(b) for details) | 94 | 94 | — | ||||||||
| Final receipt related to Alliant Energy’s tax separation and indemnification agreement with Whiting Petroleum in 2014 (Refer to Note 5(c) for details) | 26 | — | — | ||||||||
| IPL’s retail electric customer billing credits in 2014 (Refer to “Rate Matters” for details) | (72 | ) | (72 | ) | — | ||||||
| Timing of WPL’s fuel-related cost recoveries from customers | (38 | ) | — | (38 | ) | ||||||
| Other (includes other changes in working capital largely related to changes in inventory levels) | (39 | ) | 23 | (22 | ) | ||||||
| $161 | $174 | $1 |
Income Tax Payments and Refunds - Income tax (payments) refunds were as follows (in millions):
| 2015 | 2014 | 2013 | |||||||||
| IPL | $19 | $20 | $— | ||||||||
| WPL | (7 | ) | (12 | ) | (23 | ) | |||||
| Other subsidiaries | (12 | ) | (3 | ) | 33 | ||||||
| Alliant Energy | $— | $5 | $10 |
Alliant Energy’s income tax refunds in 2014 and 2013 were primarily due to federal and state claims filed related to net operating losses carried back to prior years. Alliant Energy, IPL and WPL currently do not expect to make any significant federal income tax payments through 2021 based on their current federal net operating loss and credit carryforward positions and future amounts of bonus depreciation expected to be claimed on Alliant Energy’s U.S. federal income tax returns for calendar years 2015 through 2020. While no significant federal income tax payments through 2021 are expected to occur, some tax payments and refunds may occur between consolidated group members (including IPL and WPL) under the tax sharing agreement between Alliant Energy and its subsidiaries. Refer to Note 11 for discussion of the carryforward positions. Refer to “Rate Matters” for discussion of estimated bonus depreciation deductions from the PATH Act.
Pension Plan Contributions - Alliant Energy, IPL and WPL currently do not expect to make any significant pension plan contributions in 2016 through 2018 based on the funded status and assumed return on assets for each plan as of the December 31, 2015 measurement date. Refer to Note 12(a) for discussion of the current funded levels of pension plans.
Investing Activities -
2015 vs. 2014 - The following items contributed to increased (decreased) investing activity cash flows in 2015 compared to 2014 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Proceeds from IPL’s Minnesota distribution asset sales in 2015 (Refer to Note 3 for details) | $140 | $140 | $— | ||||||||
| Higher utility construction expenditures (a) | (125 | ) | (93 | ) | (31 | ) | |||||
| Other | (17 | ) | (6 | ) | (7 | ) | |||||
| ($2 | ) | $41 | ($38 | ) |
| (a) | Largely due to higher expenditures for Marshalltown and environmental controls projects at WPL’s Edgewater Unit 5 in 2015, partially offset by lower expenditures for environmental controls projects at IPL’s Ottumwa Unit 1 and WPL’s Columbia Units 1 and 2 in 2015. |
2014 vs. 2013 - The following items contributed to increased (decreased) investing activity cash flows in 2014 compared to 2013 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Lower (higher) utility construction expenditures (a) | ($107 | ) | ($126 | ) | $19 | ||||||
| Cash grant received in 2013 related to the Franklin County wind farm (Refer to Note 5(d) for details) | (62 | ) | — | — | |||||||
| Other | 6 | (3 | ) | (3 | ) | ||||||
| ($163 | ) | ($129 | ) | $16 |
| (a) | Largely due to higher expenditures for Marshalltown, IPL’s and WPL’s electric and gas distribution systems and environmental controls projects at WPL’s Edgewater Unit 5 in 2014, partially offset by lower expenditures for environmental controls projects at WPL’s Columbia Units 1 and 2 in 2014. |
Construction and Acquisition Expenditures - Construction and acquisition expenditures and financing plans are reviewed, approved and updated as part of the financial planning processes. Changes in such expenditures may result from a number of reasons including economic conditions, regulatory requirements, changing legislation, ability to obtain adequate and timely rate relief, improvements in technology, failure of generating facilities, improvements to ensure reliability of the electric and gas distribution systems, changing market conditions, customer and sales growth, funding of pension and OPEB plans, and new opportunities. Alliant Energy, IPL and WPL have not yet entered into contractual commitments relating to the majority of their anticipated future construction and acquisition expenditures. As a result, they have some discretion with regard to the level and timing of these expenditures. The table below summarizes anticipated construction and acquisition expenditures (in millions). Cost estimates represent Alliant Energy’s, IPL’s and WPL’s estimated portion of total escalated construction
expenditures and exclude AFUDC and capitalized interest, if applicable. Such estimates do not reflect any potential impacts to Alliant Energy’s and WPL’s capital expenditures resulting from the purchase options available to WPSC, MGE and certain electric cooperatives for a partial ownership interest in the proposed Riverside expansion, nor additional capital expenditures related to Columbia that WPL may incur related to the recent agreements entered into with WPSC and MGE. Refer to “Strategic Overview” for further discussion of certain key projects impacting construction and acquisition plans related to the utility business, and recent agreements with WPSC, MGE and certain of WPL’s electric wholesale customers.
| Alliant Energy | IPL | WPL | ||||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2016 | 2017 | 2018 | 2019 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||
| Generation: | ||||||||||||||||||||||||||||||||||||||
| Marshalltown | $200 | $10 | $— | $— | $200 | $10 | $— | $— | $— | $— | $— | $— | ||||||||||||||||||||||||||
| Proposed Riverside expansion | 80 | 260 | 225 | 115 | — | — | — | — | 80 | 260 | 225 | 115 | ||||||||||||||||||||||||||
| Environmental compliance | 110 | 75 | 55 | 15 | 30 | 40 | 50 | 10 | 80 | 35 | 5 | 5 | ||||||||||||||||||||||||||
| Other | 190 | 165 | 125 | 160 | 95 | 65 | 50 | 75 | 95 | 100 | 75 | 85 | ||||||||||||||||||||||||||
| Distribution: | ||||||||||||||||||||||||||||||||||||||
| Electric systems | 300 | 425 | 515 | 565 | 165 | 235 | 310 | 370 | 135 | 190 | 205 | 195 | ||||||||||||||||||||||||||
| Gas systems | 200 | 225 | 195 | 160 | 150 | 155 | 115 | 90 | 50 | 70 | 80 | 70 | ||||||||||||||||||||||||||
| Other | 85 | 170 | 160 | 200 | 15 | 35 | 25 | 20 | 40 | 35 | 10 | 10 | ||||||||||||||||||||||||||
| $1,165 | $1,330 | $1,275 | $1,215 | $655 | $540 | $550 | $565 | $480 | $690 | $600 | $480 |
Financing Activities -
2015 vs. 2014 - The following items contributed to increased (decreased) financing activity cash flows in 2015 compared to 2014 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Proceeds from long-term debt issued in 2014 (Refer to “Long-term Debt” below) | ($810 | ) | ($250 | ) | ($250 | ) | |||||
| Payments to retire long-term debt in 2015 (Refer to “Long-term Debt” below) | (181 | ) | (150 | ) | (31 | ) | |||||
| Payments to retire long-term debt in 2014 (Refer to “Long-term Debt” below) | 348 | 38 | — | ||||||||
| Proceeds from long-term debt issued in 2015 (Refer to “Long-term Debt” below) | 250 | 250 | — | ||||||||
| Net changes in the amount of commercial paper outstanding | 157 | — | 204 | ||||||||
| Net proceeds from common stock issuances in 2015 | 151 | — | — | ||||||||
| Higher capital contributions from IPL’s parent company, Alliant Energy | — | 75 | — | ||||||||
| Other | 9 | 16 | (3 | ) | |||||||
| ($76 | ) | ($21 | ) | ($80 | ) |
2014 vs. 2013 - The following items contributed to increased (decreased) financing activity cash flows in 2014 compared to 2013 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Proceeds from long-term debt issued in 2014 (Refer to “Long-term Debt” below) | $810 | $250 | $250 | ||||||||
| Payments to redeem cumulative preferred stock in 2013 | 211 | 150 | 61 | ||||||||
| Payments to retire long-term debt in 2014 (Refer to “Long-term Debt” below) | (348 | ) | (38 | ) | — | ||||||
| Proceeds from long-term debt issued in 2013 (Refer to “Long-term Debt” below) | (250 | ) | (250 | ) | — | ||||||
| Proceeds from IPL’s issuance of cumulative preferred stock in 2013 | (200 | ) | (200 | ) | — | ||||||
| Net changes in the amount of commercial paper outstanding | (150 | ) | 76 | (281 | ) | ||||||
| Lower capital contributions from IPL’s parent company, Alliant Energy | — | (30 | ) | — | |||||||
| Other | (12 | ) | (1 | ) | — | ||||||
| $61 | ($43 | ) | $30 |
FERC and Public Utility Holding Company Act Financing Authorizations - Under the Public Utility Holding Company Act of 2005, FERC has authority over the issuance of utility securities, except to the extent that a public utility’s primary state regulatory commission has retained jurisdiction over such matters. FERC currently has authority over the issuance of securities by IPL. FERC does not have authority over the issuance of securities by Alliant Energy, WPL, Resources or Corporate Services.
In December 2015, IPL received authorization from FERC through December 31, 2017 for the following (in millions):
| Initial Authorization and | |||
| Current Remaining Authority | |||
| Long-term debt securities issuances in aggregate | $550 | ||
| Short-term debt securities outstanding at any time (including borrowings from its parent) | 300 | ||
| Preferred stock issuances in aggregate | 300 |
State Regulatory Financing Authorizations - In 2011, WPL received authorization from the PSCW to have up to $400 million of short-term borrowings and/or letters of credit outstanding at any time through December 2018. As of December 31, 2015, WPL also has remaining authority to issue up to $300 million of long-term debt securities in aggregate in 2016 pursuant to a November 2014 PSCW order.
Shelf Registrations - Alliant Energy, IPL and WPL have current shelf registration statements on file with the SEC for availability to issue unspecified amounts of securities through December 2017. Alliant Energy’s shelf registration statement may be used to issue common stock, debt and other securities. IPL’s and WPL’s shelf registration statements may be used to issue preferred stock and debt securities.
Common Stock Dividends - Payment of common stock dividends is subject to dividend declaration by Alliant Energy’s Board of Directors. Alliant Energy’s general long-term goal is to maintain a dividend payout ratio that is competitive with the industry average. Based on that, Alliant Energy’s goal is to maintain a dividend payout ratio of approximately 60% to 70% of consolidated earnings from continuing operations. IPL’s and WPL’s goal is to maintain dividend payout ratios of approximately 65% to 75%. Alliant Energy’s, IPL’s and WPL’s dividend payout ratios were 65%, 75% and 72% of their consolidated earnings from continuing operations in 2015, respectively. Refer to “Executive Summary” for discussion of expected common stock dividends in 2016. Refer to Note 7 for discussion of IPL’s and WPL’s dividend payment restrictions based on the terms of applicable regulatory limitations and IPL’s outstanding preferred stock.
Common Stock Issuances and Capital Contributions - Refer to Note 7 for discussion of common stock issuances by Alliant Energy, capital contributions from Alliant Energy to IPL, payments of common stock dividends by IPL and WPL to their parent company, and repayments of capital by Resources to its parent company. Refer to “Executive Summary” for discussion of expected issuances of common stock and capital contributions in 2016.
Preferred Stock Issuance and Redemptions - Refer to Note 8 for discussion of IPL’s and WPL’s preferred stock redemptions and IPL’s issuance of preferred stock in 2013.
Short-term Debt - Alliant Energy, IPL and WPL maintain committed revolving credit facilities to provide short-term borrowing flexibility and backstop liquidity for commercial paper outstanding. At December 31, 2015, Alliant Energy’s short-term borrowing arrangements included three revolving credit facilities totaling $1 billion ($300 million for Alliant Energy at the parent company level, $300 million for IPL and $400 million for WPL). There are currently 13 lenders that participate in the three credit facilities, with aggregate respective commitments ranging from $10 million to $135 million. In 2014, each of the credit facilities was extended one year through December 2018. There are currently no extension renewal provisions remaining for the credit facilities. Each of the credit facilities has a provision to expand the facility size up to $100 million, subject to lender approval for Alliant Energy and subject to lender and regulatory approvals for IPL and WPL. During 2015, the Alliant Energy parent company, IPL and WPL issued commercial paper to meet short-term financing requirements and did not borrow directly under their respective credit facilities.
Alliant Energy’s, IPL’s and WPL’s credit facility agreements each contain a financial covenant, which requires the entities to maintain certain debt-to-capital ratios in order to borrow under the credit facilities. The debt-to-capital ratios cannot exceed 65%, 58% and 58% for Alliant Energy, IPL and WPL, respectively. The debt component of the capital ratios includes long- and short-term debt (excluding non-recourse debt and hybrid securities to the extent the total carrying value of such hybrid securities does not exceed 15% of consolidated capital of the applicable borrower), capital lease obligations, letters of credit, guarantees of the foregoing and new synthetic leases. Unfunded vested benefits under qualified pension plans and sales of accounts receivable are not included in the debt-to-capital ratios. The equity component of the capital ratios excludes accumulated other comprehensive income (loss).
The credit agreements contain provisions that prohibit placing liens on any of Alliant Energy’s, IPL’s or WPL’s property or their respective subsidiaries with certain exceptions. Exceptions include among others, liens to secure obligations of up to 5% of the consolidated assets of the applicable borrower (valued at carrying value), liens imposed by government entities,
materialmens’ and similar liens, judgment liens, and liens to secure additional non-recourse debt not to exceed $100 million outstanding at any one time at each of IPL and WPL, and $100 million at Alliant Energy’s non-utility subsidiaries, and purchase money liens.
The credit agreements contain provisions that require, during their term, any proceeds from asset sales, with certain exclusions, in excess of 20% of Alliant Energy’s, IPL’s and WPL’s respective consolidated assets be used to reduce commitments under their respective facilities. Exclusions include, among others, certain sale and lease-back transactions and sales of non-regulated assets and accounts receivable.
The credit agreements contain customary events of default. Alliant Energy’s credit agreement contains a cross-default provision that would be triggered if Alliant Energy or any domestic, majority-owned subsidiary of Alliant Energy defaults on debt (other than non-recourse debt) totaling $50 million or more. Accordingly, a cross-default provision would be triggered under the Alliant Energy credit agreement if IPL or WPL, as applicable, or a majority-owned subsidiary accounting for 20% or more of IPL’s or WPL’s, as applicable, consolidated assets (valued at carrying value), defaults on debt totaling $50 million or more. A default by a minority-owned subsidiary and, in the case of the Alliant Energy credit agreement, a default by a foreign subsidiary, would not trigger a cross-default. A default by Alliant Energy, Corporate Services or Resources and its subsidiaries would not trigger a cross-default under either the IPL or WPL credit agreements, nor would a default by either of IPL or WPL constitute a cross-default event for the other. If an event of default under any of the credit agreements occurs and is continuing, then the lenders may declare any outstanding obligations under the credit agreements immediately due and payable. In addition, if any order for relief is entered under bankruptcy laws with respect to Alliant Energy, IPL or WPL, then any outstanding obligations under the respective credit agreements would be immediately due and payable. In addition, IPL’s sales of accounts receivable program agreement contains a cross-default provision that is triggered if IPL or Alliant Energy incurs an event of default on debt totaling $50 million or more. If an event of default under IPL’s sales of accounts receivable program agreement occurs, then the counterparty could terminate such agreement. Refer to Note 5(b) for additional information on amounts outstanding under IPL’s sales of accounts receivable program.
A material adverse change representation is not required for borrowings under the credit agreements.
At December 31, 2015, Alliant Energy, IPL and WPL were in compliance with all material covenants and other provisions of the credit agreements.
Refer to Note 9(a) for additional information on the credit facilities, commercial paper outstanding and debt-to-capital ratios.
Long-term Debt - Significant issuances of long-term debt in 2015, 2014 and 2013 were as follows (dollars in millions):
| Company | Principal Amount | Type | Interest Rate | Maturity Date | Use of Proceeds | |||||||
| 2015: | ||||||||||||
| IPL | $250 | Senior debentures | 3.4% | Aug-2025 | Reduce commercial paper classified as long-term debt, reduce cash amounts received from its sales of accounts receivable program and for general corporate purposes | |||||||
| 2014: | ||||||||||||
| Alliant Energy | 250 | Variable-rate term loan credit agreement | 1% at December 31, 2015 | Oct-2016 | Retire its $250 million, 4% senior notes due 2014 | |||||||
| IPL | 250 | Senior debentures | 3.25% | Dec-2024 | Reduce cash amounts received from its sales of accounts receivable program, reduce commercial paper classified as long-term debt and for general corporate purposes | |||||||
| WPL | 250 | Debentures | 4.1% | Oct-2044 | Reduce commercial paper and for general corporate purposes | |||||||
| Franklin County Holdings LLC | 60 | Variable-rate term loan credit agreement | 1% at December 31, 2015 | Dec-2016 | Retire borrowings under a term loan credit agreement that matured in December 2014 | |||||||
| 2013: | ||||||||||||
| IPL | 250 | Senior debentures | 4.7% | Oct-2043 | Reduce cash amounts received from its sales of accounts receivable program, reduce commercial paper classified as long-term debt and for general corporate purposes |
Alliant Energy’s $250 million term loan credit agreement and Franklin County Holdings LLC’s $60 million term loan credit agreement (with Alliant Energy as guarantor) include substantially the same covenants, including Alliant Energy maintaining a debt-to-capital ratio not to exceed 65% on a consolidated basis and events of default, that are included in Alliant Energy’s revolving credit facility financial covenant discussion above in “Short-term Debt.” At December 31, 2015, Alliant Energy was in compliance with all material covenants and other provisions of the term loan credit agreements.
Significant retirements of long-term debt in 2015, 2014 and 2013 were as follows (dollars in millions):
| Company | Principal Amount | Type | Interest Rate | Retirement Date | ||||||
| 2015: | ||||||||||
| IPL | $150 | Senior debentures | 3.3% | Jun-2015 | ||||||
| WPL | 16 | Pollution control revenue bonds | 5% | Sep-2015 | ||||||
| WPL | 15 | Pollution control revenue bonds | 5.375% | Aug-2015 | ||||||
| 2014: | ||||||||||
| Alliant Energy | 250 | Senior notes | 4% | Oct-2014 | ||||||
| Franklin County Holdings LLC | 60 | Variable-rate term loan credit agreement | 1% at December 31, 2013 | Dec-2014 | ||||||
| IPL | 38 | Pollution control revenue bonds | 5% | Jul-2014 |
Refer to Note 9(b) for further discussion of long-term debt.
Impact of Credit Ratings on Liquidity and Collateral Obligations -
Ratings Triggers - The long-term debt of Alliant Energy and its subsidiaries is not subject to any repayment requirements as a result of explicit credit rating downgrades or so-called “ratings triggers.” However, Alliant Energy and its subsidiaries are parties to various agreements that contain provisions dependent on credit ratings. In the event of a significant downgrade, Alliant Energy or its subsidiaries may need to provide credit support, such as letters of credit or cash collateral equal to the amount of the exposure, or may need to unwind the contract or pay the underlying obligation. In the event of a significant downgrade, management believes Alliant Energy, IPL and WPL have sufficient liquidity to cover counterparty credit support or collateral requirements under these various agreements. In addition, a downgrade in the credit ratings of Alliant Energy, IPL or WPL could also result in them paying higher interest rates in future financings, reduce their pool of potential lenders, increase their borrowing costs under existing credit facilities or limit their access to the commercial paper market. Alliant Energy, IPL and WPL are committed to taking the necessary steps required to maintain investment-grade credit ratings. Credit ratings and outlooks as of the date of this report are as follows:
| Standard & Poor’s Ratings Services | Moody’s Investors Service | |||
| Alliant Energy: | Corporate/issuer | A- | A3 | |
| Commercial paper | A-2 | P-2 | ||
| Senior unsecured long-term debt | BBB+ | A3 | ||
| Outlook | Stable | Negative | ||
| IPL: | Corporate/issuer | A- | A3 | |
| Commercial paper | A-2 | P-2 | ||
| Senior unsecured long-term debt | A- | A3 | ||
| Preferred stock | BBB | Baa2 | ||
| Outlook | Stable | Negative | ||
| WPL: | Corporate/issuer | A | A1 | |
| Commercial paper | A-1 | P-1 | ||
| Senior unsecured long-term debt | A | A1 | ||
| Outlook | Stable | Negative |
Credit ratings are not recommendations to buy or sell securities and are subject to change, and each rating should be evaluated independently of any other rating. Each of Alliant Energy, IPL or WPL assumes no obligation to update their respective credit ratings. Refer to Note 15 for additional information on ratings triggers for commodity contracts accounted for as derivatives.
Off-Balance Sheet Arrangements -
Special Purpose Entities - IPL maintains a Receivables Agreement whereby it may sell its customer accounts receivables, unbilled revenues and certain other accounts receivables to a third party through wholly-owned and consolidated special purpose entities. The purchase commitment from the third party to which it sells its receivables expires in March 2016. IPL is currently pursuing the extension of the purchase commitment. In 2015, 2014 and 2013, IPL evaluated the third party that purchases IPL’s receivable assets under the Receivables Agreement and believes that the third party is a VIE. However, IPL concluded consolidation of the third party was not required. Refer to Note 5(b) for information regarding IPL’s sales of accounts receivable program.
Guarantees and Indemnifications - Alliant Energy and IPL have guarantees and indemnifications outstanding at December 31, 2015 related to prior divestiture activities. Refer to Note 16(d) for additional information.
Certain Financial Commitments -
Contractual Obligations - Consolidated long-term contractual obligations as of December 31, 2015 were as follows (in millions):
| Alliant Energy | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)): | |||||||||||||||||||||||||||
| Purchased power and fuel commitments (a) | $504 | $340 | $277 | $198 | $165 | $765 | $2,249 | ||||||||||||||||||||
| SO2 emission allowances | 14 | 8 | — | — | — | — | 22 | ||||||||||||||||||||
| Other (b) | 6 | 2 | 2 | 2 | 2 | 7 | 21 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | 313 | 5 | 356 | 256 | 357 | 2,584 | 3,871 | ||||||||||||||||||||
| Interest - long-term debt obligations | 183 | 180 | 180 | 156 | 140 | 1,927 | 2,766 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 23 | — | — | — | — | — | 23 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 6 | 8 | 3 | 2 | 2 | 19 | 40 | ||||||||||||||||||||
| Capital leases | 1 | 1 | — | — | — | — | 2 | ||||||||||||||||||||
| $1,050 | $544 | $818 | $614 | $666 | $5,302 | $8,994 |
| IPL | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)): | |||||||||||||||||||||||||||
| Purchased power and fuel commitments (a) | $291 | $210 | $183 | $175 | $151 | $759 | $1,769 | ||||||||||||||||||||
| SO2 emission allowances | 14 | 8 | — | — | — | — | 22 | ||||||||||||||||||||
| Other (b) | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | — | — | 350 | — | 200 | 1,325 | 1,875 | ||||||||||||||||||||
| Interest - long-term debt obligations | 95 | 96 | 96 | 72 | 72 | 904 | 1,335 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 7 | — | — | — | — | — | 7 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 3 | 3 | 2 | 1 | 1 | 13 | 23 | ||||||||||||||||||||
| Capital leases | — | 1 | — | — | — | — | 1 | ||||||||||||||||||||
| $411 | $318 | $631 | $248 | $424 | $3,001 | $5,033 |
| WPL | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)): | |||||||||||||||||||||||||||
| Purchased power and fuel commitments (a) | $213 | $130 | $94 | $23 | $14 | $6 | $480 | ||||||||||||||||||||
| Other (b) | 2 | — | — | — | — | — | 2 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | — | — | — | 250 | 150 | 1,150 | 1,550 | ||||||||||||||||||||
| Interest - long-term debt obligations | 80 | 80 | 80 | 80 | 64 | 1,010 | 1,394 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 16 | — | — | — | — | — | 16 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 3 | 5 | 1 | — | — | — | 9 | ||||||||||||||||||||
| Capital lease - Sheboygan Falls (Note 10(b)) | 15 | 15 | 15 | 15 | 15 | 68 | 143 | ||||||||||||||||||||
| Capital leases - other | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||
| $330 | $230 | $190 | $368 | $243 | $2,234 | $3,595 |
| (a) | Purchased power and fuel commitments represent normal business contracts used to ensure adequate purchased power, coal and natural gas supplies, and to minimize exposure to market price fluctuations. Alliant Energy, through its subsidiary Corporate Services, entered into system-wide coal contracts on behalf of IPL and WPL that include minimum future commitments. These commitments were assigned to IPL and WPL based on information available as of December 31, 2015 regarding expected future usage, which is subject to change. |
| (b) | Other operating expense purchase obligations represent individual commitments incurred during the normal course of business that exceeded $1 million at December 31, 2015. |
At December 31, 2015, Alliant Energy, IPL and WPL had no uncertain tax positions recorded as liabilities. Refer to Note 12(a) for anticipated pension and OPEB funding amounts, which are not included in the above tables. Refer to “Construction and Acquisition Expenditures” above for additional information on construction and acquisition programs. In addition, at December 31, 2015, there were various other liabilities included on the balance sheets that, due to the nature of the liabilities, the timing of payments cannot be estimated and are therefore excluded from the above tables.
OTHER MATTERS
Market Risk Sensitive Instruments and Positions - Primary market risk exposures are associated with commodity prices, investment prices and interest rates. Risk management policies are used to monitor and assist in mitigating these market risks and derivative instruments are used to manage some of the exposures related to commodity prices. Refer to Notes 1(h) and 15 for further discussion of derivative instruments.
Commodity Price - Alliant Energy, IPL and WPL are exposed to the impact of market fluctuations in the price and transportation costs of commodities they procure and market. Established policies and procedures mitigate risks associated with these market fluctuations, including the use of various commodity derivatives and contracts of various durations for the forward sale and purchase of these commodities. Exposure to commodity price risks in the utility businesses is also significantly mitigated by current rate-making structures in place for recovery of fuel-related costs as well as the cost of natural gas purchased for resale. IPL’s electric and gas tariffs and WPL’s wholesale electric and gas tariffs provide for subsequent monthly adjustments to their tariff rates for material changes in prudently incurred commodity costs. IPL’s and WPL’s rate mechanisms, combined with commodity derivatives, significantly reduce commodity risk associated with their electric and gas margins.
WPL’s retail electric margins have the most exposure to the impact of changes in commodity prices due largely to the current retail recovery mechanism in place in Wisconsin for fuel-related costs. The cost recovery mechanism applicable for WPL’s retail electric customers is based on forecasts of fuel-related costs expected to be incurred during forward-looking test year periods and fuel monitoring ranges determined by the PSCW during each retail electric rate proceeding or in a separate fuel cost plan approval proceeding. Under this cost recovery mechanism, if WPL’s actual fuel-related costs fall outside this fuel monitoring range during the test period, WPL is authorized to defer the incremental under-/over-collection of fuel-related costs from retail electric customers that are outside the approved ranges. Deferral of under-collection of fuel-related costs are reduced to the extent WPL’s return on common equity during the fuel cost plan year exceeds the most recently authorized return on common equity. Refer to Note 2 for discussion of WPL’s retail fuel-related rate filings for Test Years 2014 through 2016.
In December 2015, the PSCW approved annual forecasted fuel-related costs per MWh of $28.17 based on $392 million of variable fuel-related costs applicable for retail and wholesale customers for WPL’s 2016 Test Period. The retail portion of the 2016 fuel-related costs will be monitored using an annual bandwidth of plus or minus 2%. Based on the cost recovery mechanism in Wisconsin, the annual forecasted fuel-related costs approved by the PSCW in December 2015 and an annual bandwidth of plus or minus 2%, Alliant Energy and WPL currently estimate the commodity risk exposure to their retail electric margins in 2016 is approximately $6 million. However, if WPL’s return on common equity in 2016 exceeds the most recently authorized return on common equity, the commodity risk exposure to WPL’s electric margins in 2016 could increase.
Refer to Note 1(g) for additional details of utility cost recovery mechanisms that significantly reduce commodity risk.
Investment Price - Alliant Energy, IPL and WPL are exposed to investment price risk as a result of their investments in securities, largely related to securities held by their pension and OPEB plans. Refer to Note 12(a) for details of the securities held by their pension and OPEB plans. Refer to “Critical Accounting Policies and Estimates” for the impact on retirement plan costs of changes in the rate of returns earned by plan assets.
Interest Rate - Alliant Energy, IPL and WPL are exposed to risk resulting from changes in interest rates associated with variable-rate borrowings. In addition, Alliant Energy and IPL are exposed to risk resulting from changes in interest rates as a result of cash proceeds outstanding under IPL’s sales of accounts receivable program. Assuming the impact of a hypothetical 100 basis point increase in interest rates on variable-rate borrowings and cash proceeds outstanding under IPL’s sales of accounts receivable program at December 31, 2015, Alliant Energy’s, IPL’s and WPL’s annual pre-tax expense would increase by approximately $5 million, $0 and $0, respectively.
Refer to Notes 5(b) and 9 for additional information on cash proceeds outstanding under IPL’s sales of accounts receivable program, and short- and long-term variable-rate borrowings, respectively. Refer to “Critical Accounting Policies and Estimates” for the impacts of changes in discount rates on retirement plan obligations and costs.
New Accounting Standards - Refer to Note 1(p) for discussion of new accounting standards impacting Alliant Energy, IPL and WPL.
Critical Accounting Policies and Estimates - The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates that affect results of operations and the amounts of assets and liabilities reported in the financial statements. The following accounting policies and estimates are critical to the business and the understanding of financial results as they require critical assumptions and judgments by management. The results of these assumptions and judgments form the basis for making estimates regarding the results of operations and the amounts of assets and liabilities that are not readily apparent from other sources. Actual financial results may differ materially from these estimates. Management has discussed these critical accounting policies and estimates with the Audit Committee. Refer to Note 1 for additional discussion of accounting policies and the estimates used in the preparation of the financial statements.
Contingencies - Assumptions and judgments are made each reporting period regarding the future outcome of contingent events and loss contingency amounts are recorded for any contingent events for which the likelihood of loss is probable and able to be reasonably estimated based upon current available information. The amounts recorded may differ from the actual income or expense that occurs when the uncertainty is resolved. The estimates made in accounting for contingencies, and the gains and losses that are recorded upon the ultimate resolution of these uncertainties, could have a significant effect on results of operations and the amount of assets and liabilities in the financial statements. Note 16 provides discussion of contingencies assessed at December 31, 2015, including various pending legal proceedings, guarantees and indemnifications that may have a material impact on financial condition and results of operations.
Regulatory Assets and Regulatory Liabilities - Alliant Energy’s utility subsidiaries (IPL and WPL) are regulated by various federal and state regulatory agencies. As a result, they are subject to GAAP for regulated operations, which recognizes that the actions of a regulator can provide reasonable assurance of the existence of an asset or liability. Regulatory assets or regulatory liabilities arise as a result of a difference between GAAP and actions imposed by the regulatory agencies in the rate-making process. Regulatory assets generally represent incurred costs that have been deferred as such costs are probable of recovery in future customer rates. Regulatory liabilities generally represent obligations to make refunds to customers or amounts collected in rates for which the related costs have not yet been incurred. Regulatory assets and regulatory liabilities are recognized in accordance with the rulings of applicable federal and state regulators, and future regulatory rulings may impact the carrying value and accounting treatment of regulatory assets and regulatory liabilities.
Assumptions and judgments are made each reporting period regarding whether regulatory assets are probable of future recovery and regulatory liabilities are probable future obligations by considering factors such as regulatory environment changes, rate orders issued by the applicable regulatory agencies, historical decisions by such regulatory agencies regarding similar regulatory assets and regulatory liabilities, and subsequent events of such regulatory agencies. The decisions made by regulatory authorities have an impact on the recovery of costs, the rate of return on invested capital and the timing and amount of assets to be recovered by rates. A change in these decisions may result in a material impact on results of operations and the amount of assets and liabilities in the financial statements. Note 2 provides details of the nature and amounts of regulatory assets and regulatory liabilities assessed at December 31, 2015 as well as material changes to regulatory assets and regulatory liabilities during 2015.
Long-Lived Assets - Periodic assessments regarding the recoverability of certain long-lived assets are completed when factors indicate the carrying value of such assets may be impaired or such assets are planned to be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include assets within non-regulated operations that are proposed to be sold or are currently generating operating losses, and
certain long-lived assets within regulated operations that may not be fully recovered from IPL’s and WPL’s customers as a result of regulatory decisions in the future.
Non-regulated Operations - Factors considered in determining if an impairment review is necessary for long-lived assets within non-regulated operations include a significant underperformance of the assets relative to historical or projected future operating results, a significant change in the use of the acquired assets or business strategy related to such assets, and significant negative industry, regulatory or economic trends. When an impairment review is deemed necessary, a comparison is made between the expected undiscounted future cash flows and the carrying amount of the asset. If the carrying amount of the asset exceeds the expected undiscounted future cash flows, an impairment loss is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined by the use of quoted market prices, appraisals, or the use of valuation techniques such as expected discounted future cash flows. Long-lived assets within non-regulated operations assessed for impairment indicators in 2015 included Alliant Energy’s Franklin County wind farm.
Franklin County Wind Farm - Alliant Energy performed an impairment test of the carrying value of the Franklin County wind farm as of December 31, 2015 due to a decrease in forward electricity prices identified in the fourth quarter of 2015. The impairment test concluded the undiscounted cash flows expected from the Franklin County wind farm during its estimated useful life still exceeded its carrying value as of December 31, 2015, resulting in no impairment. A further decrease in the average forward electricity prices of approximately $2 to $3 per MWh over the remaining life of the wind farm could result in the undiscounted cash flows being less than the carrying value of the asset. Other factors that could have an effect on the future expected undiscounted cash flows for the wind farm include the volume of electricity generated, transmission constraints impacting the wind farm, the expected life of the wind farm and the likelihood of selling the wind farm. The expected output of the wind farm is, in part, based on transmission upgrades being completed in the next few years and could be significantly lower if the transmission upgrades are not completed or if the level of congestion reduction is lower than expected. If such a determination is made that the carrying amount of the assets exceeds the undiscounted cash flows in a future period, the resulting impairment charge would be material, and would likely exceed half of the carrying value. As of December 31, 2015, the carrying value of the Franklin County wind farm was $130 million and was recorded in “Property, plant and equipment, net” on Alliant Energy’s balance sheet. Note 3 provides additional discussion of the Franklin County wind farm.
Regulated Operations - Certain long-lived assets within regulated operations are reviewed for possible impairment whenever events or changes in circumstances indicate all or a portion of the carrying value of the assets may be disallowed for rate-making purposes. If IPL or WPL is disallowed recovery of any portion of the carrying value of its regulated property, plant and equipment that is under construction, has been recently completed or is probable of being retired early, an impairment charge is recognized equal to the amount of the carrying value that was disallowed recovery. If IPL or WPL is disallowed a full or partial return on the carrying value of its regulated property, plant and equipment that is under construction, has been recently completed or is probable of being retired early, an impairment charge is recognized equal to the difference between the carrying amount of the asset and the present value of the future revenues expected from its regulated property, plant and equipment. Alliant Energy’s, IPL’s and WPL’s long-lived assets within their regulated operations that were assessed for impairment and plant abandonment in 2015 included IPL’s and WPL’s generating units subject to early retirement.
Generating Units Subject to Early Retirement - Due to current and proposed environmental regulations, Alliant Energy, IPL and WPL are evaluating future plans for their electric generation fleet and have announced the early retirement of certain older and less-efficient EGUs. When it becomes probable that an EGU will be retired before the end of its useful life, Alliant Energy, IPL and WPL must assess whether the EGU meets the criteria to be considered probable of abandonment. EGUs that are considered probable of abandonment generally have material remaining net book values and are expected to cease operations in the near term significantly before the end of their original estimated useful lives. If an EGU meets such criteria to be considered probable of abandonment, Alliant Energy, IPL and WPL must assess the probability of full recovery of the remaining carrying value of such EGU. If it is probable that regulators will not allow full recovery of and a full return on the remaining net book value of the abandoned EGU, an impairment charge is recognized equal to the difference between the remaining carrying value and the present value of the future revenues expected from the abandoned EGU.
In December 2015, WPL retired Nelson Dewey Units 1 and 2 and Edgewater Unit 3. WPL received approval from FERC and the PSCW to reclassify the remaining net book value of these EGUs from property, plant and equipment to a regulatory asset on Alliant Energy’s and WPL’s balance sheets. The remaining net book value is included in WPL’s rate base and WPL is earning a return on the outstanding balance. WPL is currently recovering the remaining net book value of these EGUs from both its retail and wholesale customers over a 10-year period beginning January 1, 2013 pursuant to orders previously received by the PSCW and FERC. Given that WPL is earning a full recovery of and a full return on these assets from both its
retail and wholesale customers, Alliant Energy and WPL concluded that no impairment was required as of December 31, 2015. Alliant Energy, IPL and WPL evaluated their other EGUs that are subject to early retirement and determined that no other EGUs met the criteria to be considered probable of abandonment as of December 31, 2015. Refer to “Strategic Overview” for discussion of additional EGUs that may be retired early and could be considered probable of abandonment in future periods, along with the net book value of such EGUs.
Unbilled Revenues - Unbilled revenues are primarily associated with utility operations. Energy sales to individual customers are based on the reading of customers’ meters, which occurs on a systematic basis throughout the month. Amounts of energy delivered to customers since the date of the last meter reading are estimated at the end of each reporting period and the corresponding estimated unbilled revenue is recorded. The unbilled revenue estimate is based on daily system demand volumes, estimated customer usage by class, weather impacts, line losses and the most recent customer rates. Such process involves the use of various judgments and assumptions and significant changes in these judgments and assumptions could have a material impact on results of operations. As of December 31, 2015, unbilled revenues related to Alliant Energy’s utility operations were $154 million ($72 million at IPL and $82 million at WPL). Note 5(b) provides discussion of IPL’s unbilled revenues as of December 31, 2015 sold to a third party related to its sales of accounts receivable program.
Pensions and Other Postretirement Benefits - Alliant Energy, IPL and WPL sponsor various defined benefit pension and OPEB plans that provide benefits to a significant portion of their employees and retirees. Assumptions and judgments are made periodically to estimate the obligations and costs related to their retirement plans. There are many judgments and assumptions involved in determining an entity’s pension and other postretirement liabilities and costs each period including employee demographics (including life expectancies and compensation levels), discount rates, assumed rates of return and funding. Changes made to plan provisions may also impact current and future benefits costs. Judgments and assumptions are supported by historical data and reasonable projections and are reviewed at least annually. The following table shows the impacts of changing certain key actuarial assumptions discussed above (in millions):
| Defined Benefit Pension Plans | OPEB Plans | |||||||||||||||
| Change in Actuarial Assumption | Impact on Projected Benefit Obligation at December 31, 2015 | Impact on 2016 Net Periodic Benefit Costs | Impact on Projected Benefit Obligation at December 31, 2015 | Impact on 2016 Net Periodic Benefit Costs | ||||||||||||
| Alliant Energy | ||||||||||||||||
| 1% change in discount rate | $167 | $13 | $21 | $2 | ||||||||||||
| 1% change in expected rate of return | N/A | 9 | N/A | 1 | ||||||||||||
| IPL | ||||||||||||||||
| 1% change in discount rate | 78 | 6 | 8 | 1 | ||||||||||||
| 1% change in expected rate of return | N/A | 4 | N/A | 1 | ||||||||||||
| WPL | ||||||||||||||||
| 1% change in discount rate | 72 | 6 | 8 | 1 | ||||||||||||
| 1% change in expected rate of return | N/A | 4 | N/A | — |
Note 12(a) provides additional details of pension and OPEB plans.
Income Taxes - Alliant Energy, IPL and WPL are subject to income taxes in various jurisdictions. Assumptions and judgments are made each reporting period to estimate income tax assets, liabilities, benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Significant changes in these judgments and assumptions could have a material impact on financial condition and results of operations. Alliant Energy’s and IPL’s critical assumptions and judgments for 2015 include estimates of qualifying deductions for repairs expenditures and allocation of mixed service costs due to the impact of Iowa rate-making principles on such property-related differences. Critical assumptions and judgments also include projections of future taxable income used to determine the ability to utilize net operating losses and credit carryforwards prior to their expiration.
Effect of Rate-making on Property-related Differences - Alliant Energy’s and IPL’s effective income tax rates are normally impacted by certain property-related differences at IPL for which deferred tax is not recorded in the income statement pursuant to Iowa rate-making principles. Changes in methods or assumptions regarding the amount of IPL’s qualifying repairs expenditures, allocation of mixed service costs, and costs related to retirement or removal of depreciable property could result in a material impact on Alliant Energy’s and IPL’s financial condition and results of operations. Refer to Note 1(c) for further discussion of regulatory accounting for taxes. Refer to Note 11 for details of how the effect of rate-making on property-related differences impacted Alliant Energy’s and IPL’s effective income tax rates for 2015, 2014 and 2013.
Carryforward Utilization - Significant federal tax credit carryforwards and federal and state net operating loss carryforwards have been generated. Based on projections of current and future taxable income, Alliant Energy, IPL and WPL plan to utilize substantially all of these carryforwards prior to their expiration. Changes in tax regulations or assumptions regarding current and future taxable income could require valuation allowances in the future resulting in a material impact on financial condition and results of operations. Refer to Note 11 for further discussion of federal tax credit carryforwards, and federal and state net operating loss carryforwards. Refer to “Rate Matters” for discussion of estimated bonus depreciation deductions from the PATH Act for 2015 through 2019, which are expected to create taxable losses and additional net operating losses for Alliant Energy, IPL and WPL.
Other Future Considerations - In addition to items discussed earlier in MDA, the Notes in Item 8 and “Risk Factors” in Item 1A, the following items could impact future financial condition or results of operations:
Electric Transmission Service Expense - IPL and WPL currently receive substantially all their transmission services from ITC and ATC, respectively. Due to the formula rates used by ITC and ATC to charge their customers and possible future changes to these rates as discussed below, there is uncertainty regarding the long-term trends of IPL’s and WPL’s future electric transmission service expense. Alliant Energy, IPL and WPL currently anticipate changes to their electric transmission service expense in 2016 as follows:
Attachment “O” Rates - The annual transmission service rates that ITC or ATC charges their customers are calculated each calendar year using a FERC-approved cost of service formula rate referred to as Attachment “O.” Because Attachment “O” is a FERC-approved formula rate, ITC and ATC can implement new rates each calendar year without filing a request with FERC. However, new rates are subject to challenge by either FERC or customers. If the rates proposed by ITC or ATC are determined by FERC to be unjust or unreasonable or another mechanism is determined by FERC to be just and reasonable, ITC’s or ATC’s rates would change accordingly. In December 2015, IPL filed a complaint with FERC regarding ITC’s Attachment “O” rate pursuant to FERC-approved Attachment “O” audit protocols. IPL’s complaint alleged that ITC acted imprudently by failing to take advantage of tax savings benefits available through bonus tax depreciation deductions, which results in higher Attachment “O” rates. Alliant Energy and IPL are currently unable to determine any resulting changes to future electric transmission service charges pending a decision by FERC on the complaint.
2016 Rates Charged by ITC to IPL - In August 2015, ITC filed with MISO the Attachment “O” rate it proposes to charge its customers in 2016 for electric transmission services. In January 2016, ITC subsequently revised its proposed 2016 Attachment “O” rate as a result of changes approved by FERC on how the Attachment “O” rate is calculated. The revised proposed rate was based on ITC’s estimated net revenue requirement for 2016, a true-up adjustment credit related to amounts that ITC over-recovered from its customers in 2014 and the FERC-approved changes in the Attachment “O” rate calculation. Amounts billed under the revised 2016 Attachment “O” rate are currently expected to be approximately 4% higher than the amounts ITC charged its customers in 2015. The proposed rates for 2016 do not include any impacts associated with changes from the MISO transmission owner return on equity complaints discussed below or any estimated 2015 true-up adjustments. The proposed rates for 2016 also do not include any impacts associated with IPL’s complaint filed with FERC in December 2015 related to ITC’s decision not to take advantage of tax savings benefits available through bonus depreciation deductions.
2016 Rates Charged by ATC to WPL - In September 2015, ATC shared with its customers the Attachment “O” rate it proposes to charge them in 2016 for electric transmission services. The proposed rate was based on ATC’s estimated net revenue requirement for 2016 as well as a true-up adjustment credit related to amounts that ATC over-recovered from its customers in 2014. Amounts billed under the 2016 Attachment “O” rate are currently expected to be approximately 7% higher than the amounts ATC charged its customers in 2015. The proposed rates for 2016 do not include any impacts associated with changes from the MISO transmission owner return on equity complaints discussed below or any estimated 2015 true-up adjustments.
MISO Transmission Charges Billed to IPL and WPL - MISO tariffs billed to IPL and WPL include costs related to various shared transmission projects including MVPs. MVPs include new large scale transmission projects that enable the reliable and economic delivery of energy in support of documented energy policy mandates or provide economic value across multiple pricing zones within MISO. MVP costs are socialized across the entire MISO footprint based on energy usage of each MISO participant. MISO tariffs billed to IPL and WPL also include costs related to other shared transmission projects, including projects designed to reduce market congestion, to provide interconnection to the transmission grid for new generation, and to ensure compliance with applicable reliability standards. The costs of these projects are primarily allocated to MISO participants in a way that is commensurate with the benefit to the participants’ pricing zone. The MISO transmission charges billed to IPL and WPL are expected to increase in the future due to the number of shared transmission projects expected to be completed in the MISO region.
2016 Electric Transmission Service Expense - Alliant Energy, IPL and WPL currently estimate their total electric transmission service expense in 2016 will be higher than the comparable expense in 2015 by approximately $45 million, $35 million and $10 million, respectively, as a result of the items discussed above. A significant portion of the increase in IPL’s electric transmission service expense is expected to be offset with increases in retail electric revenues through the transmission cost recovery rider. Any difference between WPL’s actual electric transmission service expense incurred and amounts collected from customers as electric revenues in 2016 will be recorded as a regulatory asset or regulatory liability due to the escrow treatment authorized for WPL in its 2015/2016 Test Period retail electric rate case.
MISO Transmission Owner Return on Equity Complaints - In 2013, a group of MISO industrial customer organizations filed a complaint with FERC requesting to reduce the base return on equity used by MISO transmission owners, including ITC and ATC, among other items. ITC’s and ATC’s current authorized return on equity is 12.38% and 12.2%, respectively. In 2014, FERC issued an order on the complaint, established hearing and settlement procedures on the return on equity component of the complaint, and established an effective refund date of November 12, 2013. In December 2015, a FERC administrative law judge made an initial decision regarding this complaint and established a base return on equity of 10.32%, excluding any incentive adders granted by FERC. A final decision from FERC on this complaint is currently expected in 2016.
In June 2015, FERC issued an order on an additional complaint filed with FERC by a group of MISO cooperative and municipal utilities requesting to reduce the base return on equity used by MISO transmission owners, including ITC and ATC, to 8.67%. FERC’s June 2015 order established hearing procedures and an effective refund date of February 12, 2015. Various parties to the proceeding have filed testimony with FERC and hearings were held. An initial decision from a FERC administrative law judge is expected in 2016, and a final decision from FERC on this complaint is currently expected in 2017.
Based on other recent FERC return on equity decisions, Alliant Energy, IPL and WPL currently anticipate FERC’s final decisions on the MISO transmission owner complaints will reduce transmission owners’ current return on equity, which is expected to reduce electric transmission service expense costs billed by ITC and ATC to their customers and result in lower equity income and dividends from ATC in the future. Alliant Energy and WPL have realized $15 million of reductions in the amount of equity income from ATC for the period from November 12, 2013 through December 31, 2015, including $12 million realized in 2015 and $3 million realized in 2014. These reductions assume a 10.32% base return on equity for the period from November 12, 2013 to January 6, 2015 and a 10.82% return on equity (10.32% base return on equity plus 50 basis point incentive adder discussed below) for the period from January 6, 2015 to December 31, 2015.
Any changes in IPL’s electric transmission service costs billed by ITC to IPL are expected to be passed on to IPL’s Iowa retail electric customers through the transmission cost recovery rider. Any changes in WPL’s electric transmission service costs will be incorporated into WPL’s retail electric rates in a future retail electric base rate proceeding with the PSCW. Based on these transmission cost recovery mechanisms, IPL and WPL currently do not expect that any changes to electric transmission service costs billed by ITC and ATC due to these complaints will have a material impact on their financial condition and results of operations.
MISO Transmission Owners’ Request for Equity Adder - In January 2015, FERC issued an order granting a request from a group of MISO transmission owners, including ITC and ATC, to implement a 50 basis point incentive adder to their return on equity based on participation in MISO. The implementation of the adder was effective January 6, 2015, subject to certain conditions. Alliant Energy, IPL and WPL are currently unable to determine any resulting changes to future electric transmission service charges pending a decision by FERC on the MISO transmission owner return on equity complaints discussed above.
ITC Request for Equity Adder - In January 2015, ITC requested approval from FERC to implement a 100 basis point incentive adder to its base return on equity for being an independent transmission company. In March 2015, FERC issued an order granting a 50 basis point incentive adder to ITC’s base return on equity for being an independent transmission company. The implementation of the adder will be retroactively applied back to April 2015 pending a decision by FERC on the MISO transmission owner return on equity complaints discussed above.
Sales Trends -
Jo-Carroll Energy, Inc. - In 2014, Jo-Carroll Energy, Inc. provided notice of termination of its wholesale power supply agreement with IPL effective April 1, 2018. Sales to Jo-Carroll Energy, Inc. represented 3% of IPL’s total electric sales in 2015.
WPPI Energy - In 2014, WPPI Energy provided notice of termination of its wholesale power supply agreement with WPL effective May 31, 2017. Sales to WPPI Energy represented 6% of WPL’s total electric sales in 2015.
Great Lakes Utilities - In 2014, Great Lakes Utilities provided notice of termination of its wholesale power supply agreement with WPL effective December 31, 2017. Sales to Great Lakes Utilities represented approximately 2% of WPL’s total electric sales in 2015.
Retirement Plan Costs - Alliant Energy’s, IPL’s and WPL’s net periodic benefit costs related to their defined benefit pension and OPEB plans are currently expected to be higher in 2016 compared to 2015 by approximately $17 million, $10 million and $7 million, respectively. The increase in net periodic benefit costs is primarily due to lower than expected returns on plan assets resulting in decreases in retirement plan assets and increases in actuarial losses during 2015. Approximately 30% to 40% of net periodic benefit costs are allocated to capital projects each year. As a result, the increase in net periodic benefit costs is not expected to result in a comparable increase in other operation and maintenance expenses. Refer to Note 12(a) for additional details of defined benefit pension and OPEB plans.
Performance-based Compensation Plans - Alliant Energy’s total compensation package includes a performance-based compensation program, which provides substantially all of its non-bargaining employees an opportunity to receive annual cash payments based on the achievement of specific short-term annual operational and financial performance measures. In addition, the total compensation program for certain key employees includes long-term awards issued under equity-based compensation plans. In 2015, Alliant Energy, IPL and WPL incurred $35 million, $20 million and $15 million, respectively, of performance-based compensation expense. Refer to Note 12(b) for details of the equity-based compensation plans. Alliant Energy, IPL and WPL are currently unable to determine what impacts these performance-based compensation plans will have on their future financial condition or results of operations.
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