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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 AEF 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.
EXECUTIVE OVERVIEW
Description of Business
General - Alliant Energy is an investor-owned public utility holding company whose primary subsidiaries are IPL, WPL, AEF and Corporate Services. IPL and WPL are public utilities, and AEF is the parent company for Alliant Energy’s non-regulated businesses and holds all of Alliant Energy’s investment in ATC. 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 (AEF) | ||||
| - Retail electric and gas services in WI (WPL) | - Non-regulated Generation (AEF) | ||||
| - 16% interest in ATC (ATI) (a) | - Parent Company | ||||
| - Wholesale electric service in MN, IL & IA (IPL) | |||||
| - Wholesale electric service in WI (WPL) | |||||
| - Corporate Services |
| (a) | At December 31, 2016, ATI, a wholly-owned subsidiary of AEF, holds all of Alliant Energy’s investment in ATC, a transmission-only utility operating primarily in the Midwest. |
Utilities, ATC and Corporate Services - IPL and WPL own a portfolio of EGUs located in Iowa, Wisconsin and Minnesota with a diversified fuel mix including natural gas, renewable resources and coal. The output from these EGUs, supplemented with purchased power, is used to provide electric service to approximately 960,000 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, ATC 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 - AEF 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):
| 2016 | 2015 | ||||||||||||||
| Income (Loss) | EPS (a) | Income (Loss) | EPS (a) | ||||||||||||
| Continuing operations: | |||||||||||||||
| Utilities, ATC and Corporate Services | $420.4 | $1.85 | $374.5 | $1.66 | |||||||||||
| Non-regulated and Parent | (46.6 | ) | (0.20 | ) | 6.2 | 0.03 | |||||||||
| Income from continuing operations | 373.8 | 1.65 | 380.7 | 1.69 | |||||||||||
| Loss from discontinued operations | (2.3 | ) | (0.01 | ) | (2.5 | ) | (0.01 | ) | |||||||
| Net income | $371.5 | $1.64 | $378.2 | $1.68 |
(a) Amounts reflect the effects of a two-for-one stock split distributed in May 2016. Refer to Note 7 for additional details.
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 net income and EPS from continuing operations in 2016 compared to 2015 was primarily due to asset valuation charges related to the Franklin County wind farm in 2016, partially offset by higher electric and gas margins, higher AFUDC (primarily related to Marshalltown) and losses on sales of IPL’s Minnesota electric and gas distribution assets in 2015.
Refer to “Results of Operations” for additional details regarding the various factors impacting earnings during 2016, 2015 and 2014.
2016 Overview - In 2016, Alliant Energy, IPL and WPL focused on achieving financial objectives and executing their strategic plan. Key developments in 2016 include the following:
| • | IPL’s Expansion of Wind Generation - In October 2016, IPL and the Iowa Office of Consumer Advocate, among other customer groups, filed a settlement agreement with the IUB regarding the appropriate rate-making principles for up to 500 MW of additional wind generation at IPL. In October 2016, the IUB issued an order approving the settlement agreement, with limited modifications, and establishing rate-making principles, which IPL accepted, with key terms as follows. Refer to “Strategic Overview” for further discussion. |
| ▪ | Up to 500 MW of additional wind generation that qualifies for the full level of production tax credits, regardless of the location in Iowa, with a cost cap of $1,830/kilowatt, including AFUDC and transmission costs. Any costs incurred in excess of this $1,830/kilowatt cost cap are expected to be incorporated into rates if determined to be reasonable and prudent. |
| ▪ | A depreciable life of the wind generation of 40 years, unless changed as a result of a contested case before the IUB. |
| ▪ | An 11.0% return on common equity, with the exception of certain transmission facilities classified as intangible assets, which would earn the rate of return on common equity the IUB finds reasonable during a future rate case. |
| • | Franklin County Wind Farm - In addition to IPL’s expansion of wind generation discussed above, in February 2017, FERC issued an order approving the transfer of the 99 MW Franklin County wind farm from AEF to IPL. Alliant Energy and IPL currently expect to complete this transfer in 2017. |
| • | IPL’s and WPL’s Potential Expansion of Wind Generation - In addition to IPL’s 500 MW expansion of wind generation and transfer of the 99 MW Franklin County wind farm to IPL in 2017 discussed above, IPL and WPL are each exploring options to own and operate up to 200 MW of additional new wind generation. |
| • | WPL’s Construction of the Riverside Expansion - In May 2016, WPL received an order from the PSCW authorizing WPL to construct an approximate 730 MW natural gas-fired combined-cycle EGU in Beloit, Wisconsin, referred to as the Riverside expansion. After receiving the final necessary regulatory approvals and permits in the third quarter of 2016, WPL began constructing the Riverside expansion. WPL currently expects to place the Riverside expansion in service by early 2020. In November 2016, various electric cooperatives notified WPL of their intent to exercise their options to acquire approximately 65 MW of the Riverside expansion while the EGU is being constructed. As a result of the various electric cooperatives funding a portion of the capital expenditures during construction, WPL’s estimated portion of capital expenditures is expected to be approximately $640 million. |
| • | WPL’s Wisconsin Retail Electric and Gas Rate Case (2017/2018 Test Period) - In December 2016, WPL received an order from the PSCW authorizing WPL to implement an increase in annual retail electric rates of $9 million, or approximately 1%, and an increase in annual retail gas rates of $9 million, or approximately 13%. These increases are effective January 1, 2017 and extend through the end of 2018. The order included a return on common equity of 10.0% and continues a regulatory return on common equity sharing mechanism, whereby WPL must defer a portion of its earnings if its annual regulatory return on common equity exceeds 10.25% during the 2017 and 2018 Test Period. WPL must defer 50% of its excess earnings between 10.25% and 11.00%, and 100% of any excess earnings above 11.00%. |
| • | MISO Transmission Owner Return on Equity Complaints - A group of MISO cooperative and municipal utilities previously filed two complaints with FERC requesting a reduction to the base return on equity used by MISO transmission owners, including ITC and ATC. In September 2016, FERC issued an order on the first complaint and established a base return on equity of 10.32%, excluding any incentive adders granted by FERC, effective September 28, 2016, and for the refund period from November 12, 2013 through February 11, 2015. In October 2016, in response to MISO’s and the MISO transmission owners’ request, FERC ordered the related refunds to be issued no later than July 2017. In June 2016, a FERC administrative law judge issued an initial decision regarding the second complaint and recommended a base return on equity of 9.70%, excluding any incentive adders granted by FERC, for the refund period from February 12, 2015 through May 11, 2016. A final decision from FERC on the second complaint is currently expected in the first half of 2017. As a result of the two MISO complaints, Alliant Energy and WPL have realized a cumulative $24 million of reductions in the amounts of equity income from ATC through December 31, 2016, including $9 million realized in 2016. |
| • | Transfer of ATC Investment - In June 2016, WPL received an order from the PSCW requiring WPL to transfer its investment in ATC to Alliant Energy or an Alliant Energy subsidiary by December 31, 2022. On December 31, 2016, pursuant to the PSCW order, the investment in ATC was transferred to ATI. Refer to Note 6(a) for further discussion. |
| • | Common Stock Split - In April 2016, Alliant Energy’s Board of Directors approved a two-for-one common stock split and a proportionate increase in the number of authorized shares of common stock of Alliant Energy from 240 million shares to 480 million shares to implement the stock split. Alliant Energy shareowners of record at the close of business on May 4, 2016 received one additional share of Alliant Energy common stock for each share held on that date. The proportionate interest that a shareowner owns in Alliant Energy did not change as a result of the stock split. The additional shares were distributed on May 19, 2016 and post-split trading began on May 20, 2016. All Alliant Energy share and per share amounts in this report have been reflected on a post-split basis. |
Future Developments - In 2017 and beyond, the following includes key items expected to impact Alliant Energy, IPL and WPL:
| • | Planned Utility Rate Case - IPL currently expects to make a retail electric rate filing in the second quarter of 2017 based on a 2016 historical Test Year. Refer to “Rate Matters” for further discussion. |
2017 Forecast - In 2017, the following financing activities, and impacts to results of operations, are currently anticipated to occur:
| • | Financing Plans - Alliant Energy currently expects to issue up to $150 million of common stock in 2017 through one or more offerings and its Shareowner Direct Plan. Both IPL and WPL currently expect to receive capital contributions of approximately $150 million from their parent company, Alliant Energy, in 2017. IPL and WPL currently expect to issue up to $250 million and $300 million, respectively, of long-term debt securities in 2017. |
| • | Common Stock Dividends - Alliant Energy announced an increase in its targeted 2017 annual common stock dividend to $1.26 per share, which is equivalent to a quarterly rate of $0.315 per share, beginning with the February 2017 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 $156 million and $126 million, respectively, to their parent company in 2017. |
| • | Utility Electric Margins - Alliant Energy, IPL and WPL currently expect an increase in electric margins in 2017 compared to 2016 as a result of base rate increases in effect from WPL’s recent retail electric rate case and IPL’s planned retail electric rate case. Refer to “Rate Matters” for further discussion of these rate cases. |
| • | Other Operation and Maintenance Expenses - Alliant Energy currently expects its other operation and maintenance expenses to increase in 2017 compared to 2016 primarily due to IPL’s Marshalltown facility, which is expected to be placed in service in April 2017, as well as higher energy delivery infrastructure maintenance expenditures. Also contributing to the increase are energy efficiency regulatory amortizations at WPL, which will be offset by increases in WPL’s base rates as discussed in “Rate Matters.” |
| • | Depreciation and Amortization Expenses - Alliant Energy currently expects its depreciation and amortization expenses to increase in 2017 compared to 2016 due to property additions, including various environmental controls projects at IPL and WPL placed in service in 2016 and IPL’s Marshalltown facility, which is expected to be placed in service in April 2017. Refer to “Rate Matters” for discussion of updated depreciation rates for WPL effective January 1, 2017 as a result of a recently completed depreciation study. |
| • | Interest Expense - Alliant Energy currently expects its interest expense to increase in 2017 compared to 2016 due to financings completed in 2016 and planned in 2017 as discussed above. |
RESULTS OF OPERATIONS
Overview
Alliant Energy - “Executive Overview” provides an overview of Alliant Energy’s 2016 and 2015 earnings and the various components of its business.
IPL - Earnings available for common stock increased $30 million in 2016 and $4 million in 2015. The 2016 increase was due to higher AFUDC in 2016 related to Marshalltown, lower retail electric customer billing credits, losses recorded in 2015 related to IPL’s sales of its Minnesota electric and natural gas distribution assets and higher income tax benefits. These items were partially offset by higher depreciation and interest expenses. 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 increased $14 million in 2016 and decreased $4 million in 2015. The 2016 increase was due to higher retail electric sales, partially offset by higher depreciation expense. The 2015 decrease was the result of lower retail electric and gas sales due to changes in temperatures in WPL’s service territory. This was partially offset by 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 2016, 2015 and 2014 earnings are discussed below.
Utility Electric Margins - Electric margins are defined as electric operating revenues less electric production fuel, purchased power and electric transmission service expenses. Management believes that electric margins provide a more meaningful basis for evaluating utility operations than electric operating revenues since electric production fuel, purchased power and electric transmission service expenses are generally passed through to customers, and therefore, result in changes to electric operating revenues that are comparable to changes in such expenses. These electric margins may not be comparable to how other entities define utility margin. Electric margins and MWh sales were as follows:
| Alliant Energy | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||||
| Residential (c) | $1,001.1 | $983.0 | 2% | $994.5 | (1%) | 7,152 | 7,271 | (2%) | 7,697 | (6%) | ||||||||||||||||||
| Commercial (c) | 712.6 | 667.8 | 7% | 658.0 | 1% | 6,545 | 6,374 | 3% | 6,449 | (1%) | ||||||||||||||||||
| Industrial (c) | 787.1 | 763.4 | 3% | 735.1 | 4% | 10,702 | 10,820 | (1%) | 10,813 | —% | ||||||||||||||||||
| Industrial - co-generation | 64.0 | 59.9 | 7% | 63.9 | (6%) | 940 | 915 | 3% | 1,008 | (9%) | ||||||||||||||||||
| Retail subtotal (c) | 2,564.8 | 2,474.1 | 4% | 2,451.5 | 1% | 25,339 | 25,380 | —% | 25,967 | (2%) | ||||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||||
| Wholesale (c) | 256.6 | 221.0 | 16% | 206.6 | 7% | 4,039 | 3,614 | 12% | 3,586 | 1% | ||||||||||||||||||
| Bulk power and other | 10.1 | 28.5 | (65%) | 2.9 | 883% | 360 | 1,228 | (71%) | 335 | 267% | ||||||||||||||||||
| Other | 44.0 | 46.9 | (6%) | 52.6 | (11%) | 100 | 129 | (22%) | 155 | (17%) | ||||||||||||||||||
| Total revenues/sales | 2,875.5 | 2,770.5 | 4% | 2,713.6 | 2% | 29,838 | 30,351 | (2%) | 30,043 | 1% | ||||||||||||||||||
| Electric production fuel expense | 408.1 | 463.6 | (12%) | 443.9 | 4% | |||||||||||||||||||||||
| Purchased power expense | 445.9 | 374.1 | 19% | 433.3 | (14%) | |||||||||||||||||||||||
| Electric transmission service expense | 527.9 | 485.3 | 9% | 447.5 | 8% | |||||||||||||||||||||||
| Electric margins (d) | $1,493.6 | $1,447.5 | 3% | $1,388.9 | 4% |
| IPL | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||||
| Residential (c) | $536.7 | $540.3 | (1%) | $556.4 | (3%) | 3,633 | 3,843 | (5%) | 4,164 | (8%) | ||||||||||||||||||
| Commercial (c) | 445.4 | 416.3 | 7% | 410.2 | 1% | 4,159 | 4,059 | 2% | 4,099 | (1%) | ||||||||||||||||||
| Industrial (c) | 396.4 | 393.7 | 1% | 394.6 | —% | 5,791 | 6,007 | (4%) | 6,124 | (2%) | ||||||||||||||||||
| Industrial - co-generation | 64.0 | 59.9 | 7% | 63.9 | (6%) | 940 | 915 | 3% | 1,008 | (9%) | ||||||||||||||||||
| Retail subtotal (c) | 1,442.5 | 1,410.2 | 2% | 1,425.1 | (1%) | 14,523 | 14,824 | (2%) | 15,395 | (4%) | ||||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||||
| Wholesale (c) | 94.2 | 56.4 | 67% | 32.2 | 75% | 1,360 | 845 | 61% | 485 | 74% | ||||||||||||||||||
| Bulk power and other | 3.6 | 5.1 | (29%) | 2.1 | 143% | 46 | 178 | (74%) | 59 | 202% | ||||||||||||||||||
| Other | 29.4 | 32.1 | (8%) | 33.9 | (5%) | 41 | 67 | (39%) | 81 | (17%) | ||||||||||||||||||
| Total revenues/sales | 1,569.7 | 1,503.8 | 4% | 1,493.3 | 1% | 15,970 | 15,914 | —% | 16,020 | (1%) | ||||||||||||||||||
| Electric production fuel expense | 159.1 | 194.5 | (18%) | 231.5 | (16%) | |||||||||||||||||||||||
| Purchased power expense | 271.4 | 233.9 | 16% | 265.8 | (12%) | |||||||||||||||||||||||
| Electric transmission service expense | 359.7 | 328.2 | 10% | 323.4 | 1% | |||||||||||||||||||||||
| Electric margins (d) | $779.5 | $747.2 | 4% | $672.6 | 11% |
| WPL | Revenues and Costs (dollars in millions) | MWhs Sold (MWhs in thousands) | ||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||
| Residential | $464.4 | $442.7 | 5% | $438.1 | 1% | 3,519 | 3,428 | 3% | 3,533 | (3%) | ||||||||||||||||
| Commercial | 267.2 | 251.5 | 6% | 247.8 | 1% | 2,386 | 2,315 | 3% | 2,350 | (1%) | ||||||||||||||||
| Industrial | 390.7 | 369.7 | 6% | 340.5 | 9% | 4,911 | 4,813 | 2% | 4,689 | 3% | ||||||||||||||||
| Retail subtotal | 1,122.3 | 1,063.9 | 5% | 1,026.4 | 4% | 10,816 | 10,556 | 2% | 10,572 | —% | ||||||||||||||||
| Sales for resale: | ||||||||||||||||||||||||||
| Wholesale | 162.4 | 164.6 | (1%) | 174.4 | (6%) | 2,679 | 2,769 | (3%) | 3,101 | (11%) | ||||||||||||||||
| Bulk power and other | 6.5 | 23.4 | (72%) | 0.8 | 2,825% | 314 | 1,050 | (70%) | 276 | 280% | ||||||||||||||||
| Other | 14.6 | 14.8 | (1%) | 18.7 | (21%) | 59 | 62 | (5%) | 74 | (16%) | ||||||||||||||||
| Total revenues/sales | 1,305.8 | 1,266.7 | 3% | 1,220.3 | 4% | 13,868 | 14,437 | (4%) | 14,023 | 3% | ||||||||||||||||
| Electric production fuel expense | 249.0 | 269.1 | (7%) | 212.4 | 27% | |||||||||||||||||||||
| Purchased power expense | 174.5 | 140.2 | 24% | 167.5 | (16%) | |||||||||||||||||||||
| Electric transmission service expense | 168.2 | 157.1 | 7% | 124.1 | 27% | |||||||||||||||||||||
| Electric margins | $714.1 | $700.3 | 2% | $716.3 | (2%) |
| (a) | Reflects the % change from 2015 to 2016. (b) Reflects the % change from 2014 to 2015. |
| (c) | On July 31, 2015, IPL sold its electric distribution assets in Minnesota. 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 $64 million, $72 million and $85 million of electric tax benefit rider credits on IPL’s Iowa retail electric customers’ bills for 2016, 2015 and 2014, respectively. The electric tax benefit rider resulted in reductions in electric revenues that were offset by reductions in income tax expense for 2016, 2015 and 2014. |
Variances - Variances between periods in electric margins were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher revenues at IPL due to lower retail electric customer billing credits related to the approved retail electric base rate freeze through 2016 (Refer to Note 2 for details) | $15 | $15 | $— | ||||||||
| Estimated changes in sales caused by temperatures (Refer to “Temperatures” below for details) | 15 | 10 | 5 | ||||||||
| Higher revenues at IPL due to fewer electric tax benefit rider credits on customers’ bills (Refer to Note 2 for details) | 8 | 8 | — | ||||||||
| Higher electric transmission service expense at WPL (Refer to “Electric Transmission Service Expense” below for details) | (11 | ) | — | (11 | ) | ||||||
| Other (a) | 19 | (1 | ) | 20 | |||||||
| $46 | $32 | $14 |
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher revenues at IPL due to lower retail electric customer billing credits related to the approved retail electric base rate freeze (Refer to Note 2 for details) | $48 | $48 | $— | ||||||||
| Lower purchased electric capacity expense at IPL attributed to the previous DAEC PPA, which ended in February 2014 | 25 | 25 | — | ||||||||
| Higher revenues at IPL due to fewer electric tax benefit rider credits on customers’ bills (Refer to Note 2 for details) | 13 | 13 | — | ||||||||
| Changes in electric fuel-related costs, net of recoveries at WPL (Refer to “Electric Production Fuel and Purchased Power (Fuel-related) Expenses” below for details) | 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 | ||||||||
| Higher electric transmission service expense at WPL (Refer to “Electric Transmission Service Expense” below for details) | (33 | ) | — | (33 | ) | ||||||
| Estimated changes in sales caused by temperatures (Refer to “Temperatures” below for details) | (19 | ) | (10 | ) | (9 | ) | |||||
| Other (a) | 5 | (1 | ) | 6 | |||||||
| $59 | $75 | ($16 | ) |
| (a) | Includes increases in temperature-normalized retail sales volumes at WPL in 2016 and 2015. Refer to “Sales Trends” below for more information. |
| (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. |
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 | |||||||||||
| 2016 | 2015 | 2014 | Normal | ||||||||
| HDD: | |||||||||||
| Cedar Rapids, Iowa (IPL) | 5,933 | 6,300 | 7,657 | 6,798 | |||||||
| Madison, Wisconsin (WPL) | 6,420 | 6,667 | 7,884 | 7,082 | |||||||
| CDD: | |||||||||||
| Cedar Rapids, Iowa (IPL) | 971 | 732 | 670 | 766 | |||||||
| Madison, Wisconsin (WPL) | 780 | 665 | 620 | 662 |
Estimated increases (decreases) to electric margins from the impacts of temperatures were as follows (in millions):
| 2016 | 2015 | 2014 | |||||||||
| IPL | $3 | ($7 | ) | $3 | |||||||
| WPL | 1 | (4 | ) | 5 | |||||||
| Total Alliant Energy | $4 | ($11 | ) | $8 |
Sales Trends - Alliant Energy’s retail sales volumes remained unchanged in 2016 and decreased 2% in 2015. During 2016, WPL’s retail sales volumes increased due to the impact of temperatures on residential and commercial sales resulting in higher cooling demand in 2016, an extra day of retail sales during the first quarter of 2016 due to the leap year and higher commercial and industrial sales driven by customer expansions. This increase was offset by a decrease in IPL’s retail sales volumes primarily related to IPL’s sale of its Minnesota electric distribution assets in 2015. The decrease in IPL’s retail sales was partially offset by the impact of temperatures on residential and commercial sales resulting in higher cooling demand in 2016, an extra day of retail sales during the first quarter of 2016 due to the leap year and an increase in commercial sales driven by customer expansion.
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. WPL’s industrial sales volumes increased 3% in 2015 primarily due to production expansion at one of its industrial customers.
Alliant Energy’s wholesale sales volumes increased 12% in 2016 and 1% in 2015. The increases were primarily due to additional sales from IPL’s wholesale power supply agreement with Southern Minnesota Energy Cooperative effective August 1, 2015. The increases were partially 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. 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.
Alliant Energy’s bulk power and other sales volume 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 Purchased Power (Fuel-related) Expenses - Fossil fuels, such as natural gas and coal, 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 purchased power expense.
Due to IPL’s cost recovery mechanisms for fuel-related expenses, changes in fuel-related expenses 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 expenses also provides for adjustments to its wholesale electric rates for changes in commodity costs, thereby mitigating impacts of changes to commodity costs on Alliant Energy’s and WPL’s electric margins.
WPL’s cost recovery mechanism for retail fuel-related expenses supports deferrals of amounts that fall outside an approved bandwidth of plus or minus 2% of forecasted fuel-related expenses determined by the PSCW each year. The difference between revenue collected and actual fuel-related expenses incurred within the bandwidth increases or decreases Alliant Energy’s and WPL’s electric margins. WPL estimates the increase (decrease) to electric margins from amounts within the bandwidth were approximately $6 million, $6 million and ($5) million in 2016, 2015, and 2014, respectively. Refer to Note 2 for discussion of deferred fuel-related costs that were outside the approved bandwidth incurred in 2016, 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.
2016 vs. 2015 Summary - Alliant Energy’s electric production fuel expense decreased $56 million in 2016 primarily due to lower dispatch of IPL’s and WPL’s coal-fired EGUs during 2016 due to lower wholesale energy market prices and WPL’s retirement of Nelson Dewey Units 1 and 2 in December 2015. The decrease was also due to changes in the under-/over-collection of fuel-related expenses at IPL and lower natural gas prices. These items were partially offset by changes in the under-/over-collection of fuel-related expenses that were outside the approved bandwidth at WPL.
Alliant Energy’s purchased power expense increased $72 million in 2016 primarily due to increased volumes purchased resulting from lower dispatch of IPL’s and WPL’s coal-fired EGUs during 2016.
2015 vs. 2014 Summary - Alliant Energy’s electric production fuel expense increased $20 million in 2015 primarily due to changes in the under-/over-collection of fuel-related expenses 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 expenses at IPL.
Alliant Energy’s purchased power expense decreased $59 million in 2015 primarily due to lower prices for electricity purchased by IPL and WPL from MISO wholesale energy markets and decreased volumes purchased due to lower electric sales. The decrease was also due to purchased electric capacity expense at IPL attributed to the previous DAEC PPA, which expired in February 2014.
Electric Transmission Service Expense - Variances between periods in electric transmission service expense were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher electric transmission service costs billed from ITC, ATC and MISO primarily due to increased electric transmission service rates | $35 | $18 | $17 | ||||||||
| Changes at IPL in the under-/over-collection of electric transmission service expense through the transmission cost rider (a) | 12 | 12 | — | ||||||||
| Changes in WPL’s costs deferred pursuant to escrow treatment for the difference between actual electric transmission service costs and those costs used to determine rates (a) | (7 | ) | — | (7 | ) | ||||||
| Other | 3 | 2 | 1 | ||||||||
| $43 | $32 | $11 |
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher electric transmission service costs billed from ITC, ATC and MISO primarily due to increased electric transmission service rates | $18 | $6 | $12 | ||||||||
| WPL escrow treatment for the difference between actual electric transmission service costs and those costs used to determine rates (a) | 21 | — | 21 | ||||||||
| Other | (1 | ) | (1 | ) | — | ||||||
| $38 | $5 | $33 |
| (a) | Refer to Notes 1(g) and 2 for additional information relating to recovery of electric transmission service expenses. |
Refer to “Other Future Considerations” for additional information on sales trends and electric transmission service expense. Refer to “Rate Matters” and Note 2 for information on electric rate increases in 2017.
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. These gas margins may not be comparable to how other entities define utility margin. Gas margins and Dth sales were as follows:
| Alliant Energy | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||||
| Residential | $197.6 | $215.1 | (8%) | $287.5 | (25%) | 25,571 | 26,672 | (4%) | 31,718 | (16%) | ||||||||||||||||||
| Commercial | 109.6 | 120.5 | (9%) | 172.8 | (30%) | 18,820 | 18,966 | (1%) | 23,301 | (19%) | ||||||||||||||||||
| Industrial | 15.2 | 14.3 | 6% | 23.4 | (39%) | 3,352 | 2,997 | 12% | 3,710 | (19%) | ||||||||||||||||||
| Retail subtotal | 322.4 | 349.9 | (8%) | 483.7 | (28%) | 47,743 | 48,635 | (2%) | 58,729 | (17%) | ||||||||||||||||||
| Transportation/other | 33.0 | 31.3 | 5% | 33.8 | (7%) | 77,485 | 74,162 | 4% | 64,717 | 15% | ||||||||||||||||||
| Total revenues/sales | 355.4 | 381.2 | (7%) | 517.5 | (26%) | 125,228 | 122,797 | 2% | 123,446 | (1%) | ||||||||||||||||||
| Cost of gas sold | 194.3 | 219.1 | (11%) | 327.8 | (33%) | |||||||||||||||||||||||
| Gas margins (c) | $161.1 | $162.1 | (1%) | $189.7 | (15%) |
| IPL | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||||
| Residential | $110.6 | $120.0 | (8%) | $162.5 | (26%) | 13,788 | 14,472 | (5%) | 17,839 | (19%) | ||||||||||||||||||
| Commercial | 61.9 | 67.9 | (9%) | 96.1 | (29%) | 10,143 | 10,166 | —% | 12,641 | (20%) | ||||||||||||||||||
| Industrial | 10.6 | 10.5 | 1% | 17.4 | (40%) | 2,299 | 2,239 | 3% | 2,804 | (20%) | ||||||||||||||||||
| Retail subtotal | 183.1 | 198.4 | (8%) | 276.0 | (28%) | 26,230 | 26,877 | (2%) | 33,284 | (19%) | ||||||||||||||||||
| Transportation/other | 20.9 | 18.9 | 11% | 20.5 | (8%) | 37,158 | 34,129 | 9% | 31,377 | 9% | ||||||||||||||||||
| Total revenues/sales | 204.0 | 217.3 | (6%) | 296.5 | (27%) | 63,388 | 61,006 | 4% | 64,661 | (6%) | ||||||||||||||||||
| Cost of gas sold | 111.0 | 123.3 | (10%) | 185.5 | (34%) | |||||||||||||||||||||||
| Gas margins (c) | $93.0 | $94.0 | (1%) | $111.0 | (15%) |
| WPL | Revenues and Costs (dollars in millions) | Dths Sold (Dths in thousands) | ||||||||||||||||||||||||||
| 2016 | 2015 | (a) | 2014 | (b) | 2016 | 2015 | (a) | 2014 | (b) | |||||||||||||||||||
| Residential | $87.0 | $95.1 | (9%) | $125.0 | (24%) | 11,783 | 12,200 | (3%) | 13,879 | (12%) | ||||||||||||||||||
| Commercial | 47.7 | 52.6 | (9%) | 76.7 | (31%) | 8,677 | 8,800 | (1%) | 10,660 | (17%) | ||||||||||||||||||
| Industrial | 4.6 | 3.8 | 21% | 6.0 | (37%) | 1,053 | 758 | 39% | 906 | (16%) | ||||||||||||||||||
| Retail subtotal | 139.3 | 151.5 | (8%) | 207.7 | (27%) | 21,513 | 21,758 | (1%) | 25,445 | (14%) | ||||||||||||||||||
| Transportation/other | 12.1 | 12.4 | (2%) | 13.3 | (7%) | 40,327 | 40,033 | 1% | 33,340 | 20% | ||||||||||||||||||
| Total revenues/sales | 151.4 | 163.9 | (8%) | 221.0 | (26%) | 61,840 | 61,791 | —% | 58,785 | 5% | ||||||||||||||||||
| Cost of gas sold | 83.3 | 95.8 | (13%) | 142.3 | (33%) | |||||||||||||||||||||||
| Gas margins | $68.1 | $68.1 | —% | $78.7 | (13%) |
| (a) | Reflects the % change from 2015 to 2016. (b) Reflects the % change from 2014 to 2015. |
| (c) | Includes $12 million of gas tax benefit rider credits on IPL’s Iowa retail gas customers’ bills for each of 2016, 2015 and 2014. The gas tax benefit rider resulted in reductions in gas revenues that were offset by reductions in income tax expense for 2016, 2015 and 2014. |
Variances - Variances between periods in gas margins were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Estimated changes in sales caused by temperatures (Refer to “Temperatures” below for details) | ($3 | ) | ($2 | ) | ($1 | ) | |||||
| Other | 2 | 1 | 1 | ||||||||
| ($1 | ) | ($1 | ) | $— |
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Estimated changes in sales caused by temperatures (Refer to “Temperatures” below for details) | ($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 | ) |
| (a) | Changes in gas energy efficiency revenues were mostly offset by changes in energy efficiency expense included in other operation and maintenance expenses. |
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):
| 2016 | 2015 | 2014 | |||||||||
| IPL | ($4 | ) | ($2 | ) | $5 | ||||||
| WPL | (3 | ) | (2 | ) | 5 | ||||||
| Total Alliant Energy | ($7 | ) | ($4 | ) | $10 |
Cost of Gas Sold - Alliant Energy’s cost of gas sold decreased $25 million in 2016 and $109 million in 2015. The decrease in 2016 was primarily due to lower natural gas prices. The decrease in 2015 was primarily due to lower retail gas volumes at IPL and WPL caused by temperatures discussed above and lower natural gas prices. Refer to Note 1(g) for additional information relating to natural gas cost recoveries.
Refer to Note 2 for information on gas rate increases in 2017.
Other Utility Revenues - Variances between periods in utility other revenues were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower steam sales | ($3 | ) | ($3 | ) | $— | ||||||
| Other | (6 | ) | (4 | ) | (3 | ) | |||||
| ($9 | ) | ($7 | ) | ($3 | ) |
| 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 | ) |
| (a) | Approximately 50% of all margins earned from IPL’s sharing mechanism relating to optimizing gas capacity contracts flow through the 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. |
Non-regulated Revenues - Alliant Energy’s non-regulated revenues decreased $9 million in 2015, primarily due to decreased revenues at Transportation resulting from decreased demand for freight, barge and transfer services.
Asset Valuation Charges for Franklin County Wind Farm - Refer to Note 3 for details of asset valuation charges recorded in 2016 by Alliant Energy for the Franklin County wind farm.
Other Operation and Maintenance Expenses - Variances between periods in other operation and maintenance expenses were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower energy efficiency cost recovery amortizations at WPL (a) | ($15 | ) | $— | ($15 | ) | ||||||
| Losses on sales of IPL’s Minnesota distribution assets recorded in 2015 (Refer to Note 3 for details) | (14 | ) | (14 | ) | — | ||||||
| Voluntary employee separation charges in 2015 (Refer to Note 12(a) for details) | (8 | ) | (5 | ) | (3 | ) | |||||
| Higher bad debt expense at IPL (b) | 9 | 9 | — | ||||||||
| Higher stock-based performance compensation expense (Refer to Note 12(b) for details) | 7 | 4 | 3 | ||||||||
| Higher employee benefits-related expense (c) | 7 | 5 | 2 | ||||||||
| Other (includes lower costs due to cost controls and operational efficiencies) | (9 | ) | (5 | ) | (3 | ) | |||||
| ($23 | ) | ($6 | ) | ($16 | ) |
| 2015 vs. 2014 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Lower energy efficiency cost recovery amortizations at WPL (a) | ($38 | ) | $— | ($38 | ) | ||||||
| Lower generation expense (d) | (13 | ) | (2 | ) | (11 | ) | |||||
| Changes in energy efficiency expense at IPL (e) | (5 | ) | (5 | ) | — | ||||||
| Losses on sales of IPL’s Minnesota distribution assets recorded in 2015 (Refer to Note 3 for details) | 14 | 14 | — | ||||||||
| Higher employee benefits-related expense (c) | 14 | 7 | 7 | ||||||||
| Voluntary employee separation charges in 2015 (Refer to Note 12(a) for details) | 8 | 5 | 3 | ||||||||
| Other (includes lower costs due to cost controls and operational efficiencies) | (16 | ) | (10 | ) | (3 | ) | |||||
| ($36 | ) | $9 | ($42 | ) |
| (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 and 2016. 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 2014. Regulatory amortizations at WPL related to energy efficiency costs were ($11) million, $4 million and $42 million in 2016, 2015 and 2014, respectively. |
| (b) | Primarily due to an increase in IPL’s allowance for doubtful accounts as a result of increases in past due accounts receivable. |
| (c) | Primarily due to an increase in retirement plans costs and other employee benefits-related costs. The increased retirement plan costs in 2016 were largely due to lower than expected returns on plan assets in 2015. The increased retirement plan costs in 2015 were largely due to decreases in discount rates and a change to life expectancy assumptions in 2014. |
| (d) | Primarily due to the timing and extent of maintenance projects at IPL’s and WPL’s EGUs. |
| (e) | Changes in IPL’s energy efficiency expense were offset by changes in electric and gas energy efficiency revenues. |
Depreciation and Amortization Expenses - Variances between periods in depreciation and amortization expenses were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher amortization expense from the new customer billing and information system placed in service in 2015 | $8 | $4 | $4 | ||||||||
| Lower depreciation expense from the sale of IPL’s Minnesota distribution assets in 2015 | (3 | ) | (3 | ) | — | ||||||
| Other (includes the impact of property additions) | 5 | 3 | 4 | ||||||||
| $10 | $4 | $8 |
| 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 |
Interest Expense - Variances between periods in interest expense were as follows (in millions):
| 2016 vs. 2015 Summary: | Alliant Energy | IPL | WPL | ||||||||
| Higher interest expense from the issuance of IPL’s $250 million, 3.4% senior debentures in August 2015 | $5 | $5 | $— | ||||||||
| Other | 4 | 1 | (1 | ) | |||||||
| $9 | $6 | ($1 | ) |
| 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 |
Refer to Note 9 for additional details of debt.
Equity Income from Unconsolidated Investments, Net - In 2016, Alliant Energy’s and WPL’s equity income from unconsolidated investments increased $6 million and $5 million, respectively, primarily due to higher ATC income and lower reserves for rate refunds recorded at ATC in 2016 compared to 2015. 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 at ATC in 2015. Refer to “Other Future Considerations” for discussion of a complaint 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. Refer to Note 6(a) for discussion of WPL’s transfer of its investment in ATC to ATI.
AFUDC - Refer to Note 3 for details of AFUDC recognized in 2016, 2015 and 2014.
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.
STRATEGIC OVERVIEW
Strategic Plan - The strategic plan focuses on creating customer growth and value across IPL’s and WPL’s service territories. Customers have evolving expectations and access to increasingly competitive alternatives for energy. As a result, providing customized energy solutions while aggressively managing customer prices remains at the center of the strategic plan. Successful implementation of the strategic plan will result in increased earnings for Alliant Energy, IPL and WPL while limiting cost increases for IPL’s and WPL’s customers. The strategic plan is built upon two key elements: Growth and Optimization.
Growth - The growth element of the strategic plan includes accelerating the growth of customers’ electric and gas usage and expanding the portfolio of energy resources with additional clean and renewable energy. Increasing electric and gas usage in IPL’s and WPL’s service territories is expected to help minimize individual customer prices, and expanding clean and renewable energy will help customers meet sustainability objectives and reduce Alliant Energy’s carbon emissions.
Accelerate Electric and Gas Growth - Actions to accelerate the growth of customers’ electric and gas usage include: retention of current customers and growth of new customers, economic development opportunities designed to attract new customers, and efforts to promote additional markets for electricity and gas, such as the electrification of the transportation sector (e.g. electric vehicles).
To help support retention and growth of current customers, the strategic plan focuses on promoting energy efficiency and using new and existing technologies and customized energy solutions, which are expected to help reduce energy costs, provide flexibility, increase productivity and help customers achieve sustainability objectives.
Economic development across Iowa and Wisconsin is focused on attracting new businesses by providing planning resources and energy solutions that encourage companies to invest in IPL’s and WPL’s service territories. For example, the Big Cedar
Industrial Center announced in November 2016 is a 1,300 acre rail-served manufacturing and industrial site in Iowa. This ready-to-build site is in close proximity to regional airport and interstate freeways and offers access to IPL’s electric and gas services. In addition, 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 for natural gas.
Expand Clean and Renewable Energy - The expansion of clean and renewable energy contributes to a more diverse energy portfolio and reduces emissions from EGUs. Alliant Energy is currently constructing two highly efficient natural gas-fired combined-cycle EGUs and is also focused on expanding its renewable generation portfolio with wind and solar. These new generation projects are expected to increase customer access to low-cost energy resources, and also support the retirement of various older, smaller and less efficient coal-fired EGUs, resulting in Alliant Energy reducing its carbon emissions and helping customers meet sustainability initiatives.
Optimization - The second key element of the strategic plan focuses resources on providing reliable electric and natural gas service to customers in IPL’s and WPL’s service territories through continued modernization of the power grid and gas distribution system and optimization of the generation fleet. Modernizing and optimizing the distribution and generation assets is expected to maximize the value of Alliant Energy’s existing infrastructure, expand customer options, and be more price-competitive and market-responsive for customers. For example, customer engagement initiatives include new pricing options and enhanced communication through mobile devices for customers.
Alliant Energy is modernizing the power grid to accommodate a growing two-way flow of electricity and information. This includes targeting investments in replacing and upgrading aging infrastructure in the electric distribution system. This also includes making investments in advanced metering infrastructure and a customer billing and information system, which support the integration of new technologies, as well as improving the security, reliability and resiliency of the power grid.
Since 2010, Alliant Energy has retired or fuel-switched approximately one-third of its older, smaller, less efficient and more costly coal-fired EGUs, and has made investments in its newer, more efficient coal-fired EGUs. Alliant Energy is also investing in responsive and cost-effective natural gas-fired generation, which complements its growing investments in renewable energy. These investments are expected to help reduce cost and provide competitively-priced electricity for customers.
Generation Plans - 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 - constructing and/or converting to natural gas-fired EGUs. |
| • | Renewables - operating wind farms, solar projects and hydroelectric generators, as well as developing future wind sites and solar projects. |
| • | PPAs - purchasing electricity to meet a portion of customers’ demand for electricity, including wind, solar power and nuclear generation PPAs. |
| • | 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. |
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 2020. Mercury emissions are currently expected to be reduced by approximately 90% from 2009 levels by 2020. CO2 emissions have been reduced by approximately 22% from 2005 levels and are currently expected to be reduced by 40% from 2005 levels by 2030.
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. 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 and electricity; market conditions for obtaining financing; developments related to federal and state renewable portfolio standards; 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:
| • | 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, which is expected to be filed in the second quarter of 2017 based on a 2016 historical Test Year. |
IPL began constructing Marshalltown in 2014 after receiving the final necessary regulatory approvals and permits, and expects to place the EGU in service in April 2017. Capital expenditures are currently estimated to be approximately $670 million to construct the EGU and a pipeline to supply natural gas to the EGU, excluding transmission network upgrades and AFUDC.
Marshalltown will replace energy and capacity being eliminated with the planned 2017 retirements of Sutherland Units 1 and 3, Fox Lake Units 1 and 3, Burlington Combustion Turbines Units 1-4, Dubuque Units 3 and 4, Centerville Combustion Turbines Units 1 and 2, and Grinnell Combustion Turbines Units 1 and 2, which in aggregate have a nameplate capacity of approximately 460 MW.
IPL executed an engineering, procurement and construction contract for Marshalltown after a competitive bidding process. In September 2016, Marshalltown’s engineering, procurement and construction contractor announced that costs to construct Marshalltown will exceed its expectations and that it expects to seek compensation from vendors performing work on Marshalltown. IPL does not currently anticipate it will be responsible for these increased costs.
ITC is 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 Construction of the Riverside Expansion - In 2016, WPL received an order from the PSCW authorizing WPL to construct an approximate 730 MW natural gas-fired combined-cycle EGU in Beloit, Wisconsin, referred to as the Riverside expansion. In 2016, WPL executed a design, engineering, procurement and construction contract for the Riverside expansion. After receiving the final necessary regulatory approvals and permits in the third quarter of 2016, WPL began constructing the Riverside expansion. WPL currently expects to place the EGU in service by early 2020. WPL’s estimated portion of capital expenditures is expected to be approximately $640 million. The capital expenditures include costs to construct the EGU and a pipeline to supply natural gas to the EGU, and exclude transmission network upgrades and AFUDC.
The Riverside expansion will 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.
WPL entered into agreements with neighboring utilities and electric cooperatives that 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 (no more than 100 MW to be acquired in first two years) (a) | 2020-2024 (b) | ||
| Madison Gas and Electric Company (MGE) | up to 50 MW (no more than 25 MW to be acquired in first two years) | 2020-2025 (b) | ||
| Electric cooperatives | approximately 65 MW | During construction of the EGU |
| (a) | If WPSC exercises its options, WPL may exercise reciprocal options, subject to approval by the PSCW, 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 Riverside expansion is placed in service. |
| (b) | Assumes an in-service date in early 2020. |
WPSC and MGE Options - In conjunction with the agreements WPL entered into with WPSC and MGE associated with the Riverside expansion, WPL also entered into amendments to the Columbia joint operating agreement. In November 2016, WPL received an order from the PSCW approving amendments to the Columbia joint operating agreement, which allow WPSC and MGE to forgo certain capital expenditures at Columbia. Based on the additional capital expenditures WPL currently expects to incur through June 1, 2020, WPL’s ownership interest in Columbia is expected to increase from 46.2% to 53.4%. Refer to Note 4 for further discussion of these amendments.
In addition to the provisions described above, the agreement WPL entered into with Wisconsin Electric and WPSC provided for the following:
| • | Riverside Expansion Market Participation Date - WPL agreed that the 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. |
| • | WPL and Wisconsin Electric Capacity Agreement - In the second quarter of 2016, WPL and Wisconsin Electric executed a capacity agreement whereby WPL would purchase specified levels of capacity from Wisconsin Electric from June 1, 2017 through May 31, 2020. |
| • | Renewable Generation Joint Development Agreement - In June 2016, WPL, Wisconsin Electric and WPSC executed 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 agreement has a 10-year term beginning June 1, 2016, and 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 - In November 2016, various electric cooperatives, which currently have wholesale power supply agreements with WPL, notified WPL of their intent to exercise options to acquire approximately 65 MW of the Riverside expansion while the EGU is being constructed. Upon exercise of such options, the current wholesale power supply agreements with the various electric cooperatives will 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.
Wind Generation - The strategic plan includes the planned and potential addition of wind generation as follows (in MW). Estimated capital expenditures for the planned and potential wind generation projects for 2017 through 2020 are included in the “Renewable projects” line in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”
| Status | IPL | WPL | ||||||
| Expansion of wind generation | Approved by IUB | 500 | N/A | |||||
| Expansion of wind generation | Planned | 200 | 200 | |||||
| Transfer of Franklin County wind farm assets from AEF to IPL | Approved by FERC | 99 | N/A |
IPL’s Expansion of Wind Generation - In October 2016, IPL and the Iowa Office of Consumer Advocate, among other customer groups, filed a settlement agreement with the IUB regarding the appropriate rate-making principles for up to 500 MW of additional wind generation at IPL. In October 2016, the IUB issued an order approving the settlement agreement, with limited modifications, and establishing rate-making principles, which IPL accepted, as follows:
| • | Up to 500 MW of additional wind generation that qualifies for the full level of production tax credits, regardless of the location in Iowa, with a cost cap of $1,830/kilowatt, including AFUDC and transmission costs. Any costs incurred in excess of this $1,830/kilowatt cost cap are expected to be incorporated into rates if determined to be reasonable and prudent. |
| • | A depreciable life of the wind generation of 40 years, unless changed as a result of a contested case before the IUB. |
| • | An 11.0% return on common equity, with the exception of certain transmission facilities classified as intangible assets, which would earn the rate of return on common equity the IUB finds reasonable during a future rate case. |
| • | A return on common equity for the calculation of AFUDC during the construction period that is the greater of 10.0% or the percentage the IUB finds reasonable during IPL’s next rate case. |
| • | The application of double leverage is deferred until IPL’s next retail electric base rate case or other future proceeding. |
| • | Amortization over a 10-year period of IPL’s prudently incurred and unreimbursed costs, effective with IPL’s next retail electric base rate case, if IPL cancels the construction of the wind generation. |
IPL anticipates placing the 500 MW of additional wind generation in service in 2019 and 2020.
Franklin County Wind Farm - In addition to IPL’s expansion of wind generation discussed above, refer to Note 3 for discussion of a February 2017 FERC order approving the transfer of the 99 MW Franklin County wind farm from AEF to IPL. The Franklin County wind farm began generating electricity in 2012. AEF is currently selling the electricity output from the wind farm into the MISO market as a merchant generator.
IPL’s and WPL’s Potential Expansion of Wind Generation - In addition to IPL’s 500 MW expansion of wind generation and transfer of the 99 MW Franklin County wind farm to IPL in 2017 discussed above, IPL and WPL are each exploring options to own and operate up to 200 MW of additional new wind generation. IPL and WPL currently plan to file the necessary applications for the new wind generation with the IUB and the PSCW, respectively, in the third quarter of 2017. Alliant Energy continues to review and evaluate the final amount and timing of this potential additional expansion of wind generation for IPL and WPL, which is subject to change pending further evaluation.
In 2016, IPL and WPL entered into wind turbine supply agreements and made progress payments for a portion of the wind turbines in such agreements in order to be eligible for the full level of production tax credits from the electricity generated during the first 10 years of operation of future wind projects. IPL and WPL believe the progress payments in 2016 are sufficient to be eligible for the full level of production tax credits for all 900 MW of new wind generation in its current plan.
IPL has on-going project development associated with approximately 400 MW of wind site capacity in Franklin County, Iowa. Approximately 200 MW of this additional site capacity is expected to be included in the future wind expansion. WPL has on-going project development associated with approximately 120 MW of wind capacity in Freeborn County, Minnesota, which may be further expanded to 200 MW.
Solar Generation - In 2016, WPL began providing customers with energy from the 2.3 MW Rock River solar project through a 10-year PPA. The solar field is located at WPL’s Rock River landfill site in Beloit, Wisconsin. In 2017, IPL expects to install approximately 6 MW of solar arrays in Dubuque, Iowa.
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. Current projects include installing SCRs at IPL’s Ottumwa Unit 1 and WPL’s Columbia Unit 2 to achieve compliance obligations under CSAPR and the Consent Decrees. 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%. Refer to Note 16(e) for discussion of the Consent Decrees.
IPL - 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, among others. 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. In April 2016, IPL filed its most recent EPB with the IUB, which includes the SCR for Ottumwa Unit 1. A decision from the IUB is currently expected in 2017. The SCR at Ottumwa Unit 1 is currently expected to be placed in service in 2018, with an estimated total project cost of $65 million to $80 million.
WPL - 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 $10.7 million or more. WPL is currently constructing the SCR at Columbia Unit 2 pursuant to a 2015 PSCW order and expects to place it in service in 2018, with an estimated total (past and future) project cost of $40 million to $60 million. Refer to Note 3 for discussion of a scrubber and baghouse project at WPL’s Edgewater Unit 5, which was completed in July 2016.
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 2015, WPL began constructing generation maintenance and performance improvements at Columbia Units 1 and 2, pursuant to PSCW orders. WPL’s portion of the total capital expenditures for the projects, excluding AFUDC, is currently estimated to be between $70 million and $80 million. WPL currently expects to place the various projects in service by the end of 2017.
Estimated capital expenditures for the environmental controls and generation improvement projects for 2017 through 2020 are included in the “Generation - Other” line in the construction and acquisition expenditures table in “Liquidity and Capital Resources.” Such 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.
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, 2016 (dollars in millions; Combustion Turbine (CT)). Refer to “Properties” in Item 2 for additional details, including nameplate capacity.
| IPL | WPL | |||||||||||||
| Expected | Net Book | Expected | Net Book | |||||||||||
| EGU | Action | Value | EGU | Action | Value | |||||||||
| Sutherland Units 1 and 3 | Retire by 6/30/17 | $43 | Edgewater Unit 4 | Retire by 12/31/18 | $37 | |||||||||
| Dubuque Units 3 and 4 | Retire by 6/30/17 | 5 | Rock River CT Units 3-6 | Retire by 12/31/20 | 2 | |||||||||
| Prairie Creek Unit 4 | Fuel switch by 12/31/17 | 52 | Sheepskin CT Unit 1 | Retire by 12/31/20 | — | |||||||||
| Marshalltown CT Units 1-3 | Fuel switch by 12/31/17 | 4 | ||||||||||||
| Fox Lake Unit 1 and 3 | Retire by 12/31/17 | 2 | ||||||||||||
| Other units | Retire by 12/31/17 | 1 | ||||||||||||
| Red Cedar CT Unit 1 | Retire by 12/31/18 | 4 | ||||||||||||
| Burlington Unit 1 | Fuel switch by 12/31/21 | 62 | ||||||||||||
| Prairie Creek Units 1 and 3 | Fuel switch or retire by 12/31/25 | 94 |
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.
Electric and Gas Distribution Systems - The strategic plan includes investments targeted at replacing, modernizing and upgrading aging infrastructure in the electric and gas distribution systems. Estimated capital expenditures for expected and current electric and gas distribution infrastructure projects for 2017 through 2020 are included in the “Electric and gas distributions systems” lines in the construction and acquisition expenditures table in “Liquidity and Capital Resources.”
Gas Pipeline Expansion - IPL currently expects to place the Clinton natural gas pipeline, located in Scott and Clinton Counties in Iowa, which provides capacity for anticipated customer growth in Clinton County, into service in March 2017.
Pipeline and Hazardous Materials Safety Administration - In April 2016, the Pipeline and Hazardous Materials Safety Administration published proposed regulations to update safety requirements for gas transmission pipelines, which would add new assessment and repair criteria for gas pipelines, and require a systematic approach to verify a pipeline’s maximum allowable operating pressure. Alliant Energy, IPL and WPL currently anticipate final regulations will be issued in 2017. Given that the Pipeline and Hazardous Materials Safety Administration has not finalized these gas transmission regulations, Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of these regulations on their financial condition and results of operations. In anticipation of these pending rule changes, Alliant Energy, IPL and WPL have started proactively replacing certain of IPL’s transmission pipelines and making modifications to certain of WPL’s transmission pipelines.
Advanced Metering Infrastructure (AMI) - IPL currently plans to install AMI in its electric and gas service territories in Iowa through a phased approach from 2017 through 2019. AMI is a system of meters, communications networks and data management systems that enables two-way communication between utilities and its customers. AMI allows for remote meter reading, automatic outage notification, and remote disconnects and reconnects. AMI technology is expected to improve customer service, enhance energy management initiatives and provide operational savings through increased efficiencies.
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.
RATE MATTERS
Overview - 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 (2017/2018 Test Period) - In December 2016, WPL received an order from the PSCW authorizing WPL to implement an increase in annual retail electric rates of $9 million, or approximately 1%, and an increase in annual retail gas rates of $9 million, or approximately 13%. The $9 million net annual retail electric rate increase reflects a $60 million increase in base rates, partially offset by a $51 million reduction in fuel-related costs, using an estimate for 2017 fuel-related costs. These increases are effective January 1, 2017 and extend through the end of 2018. The increases reflect recovery of the costs for environmental controls projects at Edgewater and Columbia, and investments in electric and gas distribution systems, including expansion of natural gas pipeline infrastructure. These rate increases were partially offset by utilization of amounts that WPL previously over-recovered from its customers for energy efficiency cost recovery and electric transmission cost recovery, as well as amounts deferred under the return on common equity sharing mechanism for the 2013/2014 Test Period. The order included a return on common equity of 10.0% and continues a regulatory return on common equity sharing mechanism, whereby WPL must defer a portion of its earnings if its annual regulatory return on common equity exceeds 10.25% during the 2017 and 2018 Test Period. WPL must defer 50% of its excess earnings between 10.25% and 11.00%, and 100% of any excess earnings above 11.00%. Refer to Note 7 for details of WPL’s regulatory limitation on distributions of common stock dividends to its parent company in 2017 and 2018.
The order reflected the impact of the transfer of WPL’s investment in ATC to ATI on December 31, 2016 as discussed in Note 6(a), approved changes to depreciation rates pursuant to a September 2016 PSCW order, continued escrow treatment of transmission and energy conservation charges, and application of AFUDC rates to 100% of the retail portion of the CWIP balances for the Riverside expansion. The order also requires deferral of any potential changes in revenue requirement due to anticipated increases in WPL’s ownership share of Columbia resulting from the Riverside expansion agreements WPL previously entered into with neighboring utilities. The order also approved changes to retail rates, which result in a higher percentage of costs being recovered from customers through fixed and demand charges.
The fuel-related cost component of WPL’s retail electric rates for 2018 will be addressed in a separate filing, which is currently expected to be filed in the second or third quarter of 2017.
WPL’s Wisconsin Retail Electric and Gas Rate Case (2015/2016 Test Period) - Refer to Note 2 for details of a July 2014 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 2015 and 2016. As of December 31, 2016, Alliant Energy and WPL deferred $6 million of WPL’s 2016 earnings for this provision, which WPL currently expects will be refunded to its customers in a future rate case or other proceeding.
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, 2016, Alliant Energy and WPL deferred $6 million of WPL’s 2013 and 2014 earnings for this provision, which is being returned to customers as an offset to revenue requirements in the 2017/2018 Test Period retail rate case discussed above.
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 extended IPL’s Iowa retail electric base rates authorized in its 2009 Test Year rate case through 2016 and provided targeted retail electric customer billing credits of $105 million in aggregate. In 2016, 2015 and 2014, IPL recorded $9 million, $24 million and $72 million of such credits, respectively. 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 exceeded 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 assumed 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.
WPL’s Depreciation Study - In September 2016, the PSCW issued an order approving the implementation of updated depreciation rates for WPL effective January 1, 2017 as a result of a recently completed depreciation study. The September 2016 PSCW order also authorized WPL to recover the remaining net book value of Edgewater Unit 4 over a 10-year period beginning the later of the retirement date of the EGU or January 1, 2019. In December 2016, FERC issued an order approving the implementation and inclusion of the updated depreciation rates in WPL’s wholesale formula rates effective January 1, 2017.
IPL’s Tax Benefit Riders - The IUB has approved electric and gas tax benefit riders proposed by IPL, which utilize regulatory liabilities generated from tax benefits to credit bills of IPL’s Iowa retail electric customers (beginning in 2011) and gas customers (beginning in 2013) to help offset the impact of rate increases on such customers. IPL’s tax benefit riders regulatory liability account has been, and plans to be, utilized to credit bills of Iowa retail electric and gas customers as follows:
| Electric | Gas | Total | |||||||||
| Regulatory liability account balance approved by IUB | $520 | $55 | $575 | ||||||||
| 2011 through 2016 customer billing credits | (444 | ) | (47 | ) | (491 | ) | |||||
| 2017 customer billing credits (estimate) | (76 | ) | (8 | ) | (84 | ) | |||||
| Remaining balance available for future periods | $— | $— | $— |
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 Case -
IPL’s Iowa Retail Electric Rate Case (2016 Test Year) - IPL currently expects to make a retail electric rate filing in the second quarter of 2017 based on a 2016 historical Test Year. The key drivers for the anticipated filing include recovery of capital projects, including Marshalltown, power grid modernization and investments that advance clean energy. 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 after IUB approval. The IUB must decide on requests for retail rate changes within 10 months of the date of the application for which changes are filed, or the interim rates granted become permanent.
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) | 2016 | 10.97 | % | 47.8% | 5.0% | 47.2% | N/A | 7.90% | 119 (f) | ||||||||
| WPL: | |||||||||||||||||
| Wisconsin retail (PSCW): | |||||||||||||||||
| Electric | 2017 | 10.00 | % | 52.2% | N/A | 43.9% | 3.9% | 7.57% | 2,699 (g) | ||||||||
| Electric | 2018 | 10.00 | % | 52.2% | N/A | 45.2% | 2.6% | 7.59% | 2,851 (g) | ||||||||
| Gas | 2017 | 10.00 | % | 52.2% | N/A | 43.9% | 3.9% | 7.57% | 259 (g) | ||||||||
| Gas | 2018 | 10.00 | % | 52.2% | N/A | 45.2% | 2.6% | 7.59% | 284 (g) | ||||||||
| Wholesale electric (FERC) (h) | 2016 | 10.90 | % | 55.0% | N/A | 45.0% | N/A | 8.39% | 299 (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 balances as of the end of 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. |
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. 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 or enhancement 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, which serve to protect public health and welfare. These standards 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. Additional
emissions standards may also be applied under the CAA regulatory framework beyond NAAQS. 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 table for detailed discussion of these air quality rules.
| Environmental Rule | Emissions Regulated | Alliant Energy’s Primary Facilities Potentially Affected | Actual/Anticipated Compliance Deadline | |||
| CSAPR | SO2, NOx | Fossil-fueled EGUs over 25 MW capacity in IA, WI and MN | Phase I - 2015; Phase II - 2017 | |||
| 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 | IPL’s Marshalltown facility and WPL’s Riverside expansion | Upon startup of EGU |
Refer to “Properties” in Item 2 for a list of IPL’s and WPL’s EGUs by primary fuel type that they currently own or operate, as well as discussion of various generating facilities that may be retired or changed from coal-fired to an alternative fuel source in the future.
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. 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. CSAPR emission allowances may be banked for future year compliance. In September 2016, the EPA issued a final 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.
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. 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. 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.
Clean Air Act Section 111(d) - In 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 legal challenges to the Clean Power Plan or the impact of the final compliance requirements on their financial condition and results of operations, but expect that expenditures to comply with such requirements could be significant.
Clean Air Act Section 111(b) - In 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 the Riverside expansion are expected to be impacted by, and are being constructed to achieve compliance with, these standards. Given the EPA’s 111(b) rulemaking remains subject to legal challenges, Alliant Energy, IPL and WPL are currently unable to predict with certainty the impact of these standards.
In addition, in order for the EPA to regulate existing fossil-fueled EGUs under Section 111(d) of the CAA, the EPA must have valid regulation of new fossil-fueled EGUs under Section 111(b) of the CAA. If the Section 111(b) legal challenges result in Section 111(b) being vacated, this could limit the EPA’s ability to implement the Clean Power Plan.
WPL Consent Decree - Refer to Note 16(e) for discussion of a Consent Decree approved by the U.S. District Court for the Western District of Wisconsin 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 U.S. District Court for the Northern District of Iowa in 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 -
Effluent Limitation Guidelines - In 2015, the EPA published final effluent limitation guidelines, which are expected to require changes to discharge limits for wastewater from certain IPL and WPL steam generating facilities. 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. Effective January 2016, compliance for new steam generating facilities is required immediately upon operation. Projects required for compliance with these guidelines will be facility specific. Alliant Energy, IPL and WPL currently believe the expenditures to comply with these guidelines could be significant.
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. 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. 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.
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 Alliant Energy equity securities.
Liquidity Position - At December 31, 2016, Alliant Energy had $8 million of cash and cash equivalents, $756 million ($108 million at the parent company, $300 million at IPL and $348 million at WPL) of available capacity under the revolving credit facilities and $129 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 as of December 31, 2016 were as follows (Common Equity (CE); IPL’s Preferred Stock (PS); Long-term Debt (including current maturities) (LD); Short-term Debt (SD)):
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 capital structures consistent with those approved by regulators and necessary to maintain appropriate credit quality. In addition to capital structures, other important factors 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 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. The most significant debt imputations relate to the DAEC PPA, pension and OPEB obligations and the sales of accounts receivable program.
Credit and Capital Markets - Alliant Energy, IPL and WPL are aware of the potential implications that credit and capital market disruptions might have on their 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, and ensure a committed source of liquidity in the event the commercial paper market becomes disrupted. In addition, IPL maintains a sales of accounts receivable program as an alternative financing source.
Primary Sources and Uses of Cash - Alliant Energy’s 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 IPL’s and WPL’s capital expenditures required to maintain their current infrastructure and dividends paid 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 | |||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||||
| Cash and cash equivalents, January 1 | $5.8 | $56.9 | $9.8 | $4.5 | $5.3 | $4.4 | $0.4 | $46.7 | $0.5 | ||||||||||||||||||||
| Cash flows from (used for): | |||||||||||||||||||||||||||||
| Operating activities | 859.6 | 871.2 | 891.6 | 361.9 | 385.0 | 406.1 | 521.4 | 449.8 | 424.4 | ||||||||||||||||||||
| Investing activities | (1,186.5 | ) | (919.2 | ) | (917.7 | ) | (693.6 | ) | (511.9 | ) | (552.7 | ) | (478.9 | ) | (358.2 | ) | (320.1 | ) | |||||||||||
| Financing activities | 329.3 | (3.1 | ) | 73.2 | 330.5 | 126.1 | 147.5 | (38.7 | ) | (137.9 | ) | (58.1 | ) | ||||||||||||||||
| Net increase (decrease) | 2.4 | (51.1 | ) | 47.1 | (1.2 | ) | (0.8 | ) | 0.9 | 3.8 | (46.3 | ) | 46.2 | ||||||||||||||||
| Cash and cash equivalents, December 31 | $8.2 | $5.8 | $56.9 | $3.3 | $4.5 | $5.3 | $4.2 | $0.4 | $46.7 |
Operating Activities -
2016 vs. 2015 - The following items contributed to increased (decreased) operating activity cash flows in 2016 compared to 2015 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Decreased collections from IPL’s retail customers due to increased past due amounts | ($33 | ) | ($33 | ) | $— | ||||||
| Changes in cash collateral balances | (27 | ) | — | — | |||||||
| Changes in income taxes (paid) refunded | (10 | ) | (30 | ) | 35 | ||||||
| Changes in the level of cash proceeds from IPL’s sales of accounts receivable | 33 | 33 | — | ||||||||
| Timing of WPL’s fuel-related cost recoveries from customers (Refer to Note 2 for details) | 17 | — | 17 | ||||||||
| Changes in collections at IPL from higher revenues from retail electric customer billing credits related to the approved retail electric base rate freeze through 2016 (Refer to Note 2 for details) | 15 | 15 | — | ||||||||
| Other (includes other changes in working capital largely related to changes in inventory levels) | (7 | ) | (8 | ) | 20 | ||||||
| ($12 | ) | ($23 | ) | $72 |
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 collections at IPL from higher revenues from retail electric customer billing credits related to the approved retail electric base rate freeze (Refer to Note 2 for details) | 48 | 48 | — | ||||||||
| Other (includes other changes in working capital largely related to changes in inventory levels) | (59 | ) | (52 | ) | (9 | ) | |||||
| ($20 | ) | ($21 | ) | $25 |
Income Tax Payments and Refunds - Income tax (payments) refunds were as follows (in millions):
| 2016 | 2015 | 2014 | |||||||||
| IPL | ($11 | ) | $19 | $20 | |||||||
| WPL | 28 | (7 | ) | (12 | ) | ||||||
| Other subsidiaries | (27 | ) | (12 | ) | (3 | ) | |||||
| Alliant Energy | ($10 | ) | $— | $5 |
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 2016 through 2020. While no significant federal income tax payments through 2021 are expected to occur, some tax payments and refunds may occur for state taxes and 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.
Pension Plan Contributions - Alliant Energy, IPL and WPL currently do not expect to make any significant pension plan contributions in 2017 and 2018 based on the funded status and assumed return on assets for each plan as of the December 31, 2016 measurement date. Refer to Note 12(a) for discussion of the current funded levels of pension plans.
Transfer of ATC Investment - On December 31, 2016, pursuant to a PSCW order, WPL’s investment in ATC was transferred to ATI. The transfer will result in a reduction of WPL’s cash flows from operations related to WPL’s distributions from unconsolidated investments in 2017, as well as a reduction in WPL’s equity income from unconsolidated investments in 2017. The transfer is not expected to impact Alliant Energy’s cash flows from operations or income statement. Refer to Note 6(a) for further discussion of the transfer.
Investing Activities -
2016 vs. 2015 - The following items contributed to increased (decreased) investing activity cash flows in 2016 compared to 2015 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Higher utility construction expenditures (largely due to higher expenditures for IPL’s expansion of wind generation, IPL’s and WPL’s electric and gas distribution systems and WPL’s Riverside expansion in 2016, partially offset by lower expenditures for IPL’s Marshalltown facility and environmental controls projects at WPL’s Edgewater Unit 5 in 2016) | ($179 | ) | ($70 | ) | ($109 | ) | |||||
| Proceeds from IPL’s Minnesota distribution asset sales in 2015 (Refer to Note 3 for details) | (140 | ) | (140 | ) | — | ||||||
| Proceeds from the liquidation of company-owned life insurance policies in 2016 | 31 | 19 | — | ||||||||
| Other | 21 | 9 | (12 | ) | |||||||
| ($267 | ) | ($182 | ) | ($121 | ) |
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 (largely due to higher expenditures for IPL’s Marshalltown facility 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) | (125 | ) | (93 | ) | (31 | ) | |||||
| Other | (17 | ) | (6 | ) | (7 | ) | |||||
| ($2 | ) | $41 | ($38 | ) |
Construction and Acquisition Expenditures - Construction and acquisition expenditures and financing plans are reviewed, approved and updated as part of the financial planning processes. Changes 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, tax reform 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 portion of total escalated construction expenditures and exclude AFUDC and capitalized interest, if applicable. Such estimates reflect impacts to Alliant Energy’s and WPL’s capital expenditures resulting from the intent to exercise purchase options by certain electric cooperatives for a partial ownership interest in the Riverside expansion, as well as additional capital expenditures related to Columbia that WPL is expected to incur related to 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.
| Alliant Energy | IPL | WPL | ||||||||||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2017 | 2018 | 2019 | 2020 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||
| Generation: | ||||||||||||||||||||||||||||||||||||||
| Renewable projects | $105 | $310 | $690 | $260 | $140 | $290 | $500 | $150 | $— | $20 | $190 | $110 | ||||||||||||||||||||||||||
| Riverside expansion | 255 | 230 | 75 | 5 | — | — | — | — | 255 | 230 | 75 | 5 | ||||||||||||||||||||||||||
| Marshalltown | 50 | — | — | — | 50 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | 240 | 180 | 170 | 160 | 85 | 85 | 85 | 85 | 155 | 95 | 85 | 75 | ||||||||||||||||||||||||||
| Distribution: | ||||||||||||||||||||||||||||||||||||||
| Electric systems | 465 | 485 | 420 | 405 | 280 | 310 | 240 | 235 | 185 | 175 | 180 | 170 | ||||||||||||||||||||||||||
| Gas systems | 130 | 125 | 95 | 220 | 90 | 55 | 55 | 165 | 40 | 70 | 40 | 55 | ||||||||||||||||||||||||||
| Other | 155 | 115 | 110 | 105 | 40 | 25 | 25 | 20 | 20 | 15 | 15 | 15 | ||||||||||||||||||||||||||
| $1,400 | $1,445 | $1,560 | $1,155 | $685 | $765 | $905 | $655 | $655 | $605 | $585 | $430 |
Financing Activities -
2016 vs. 2015 - The following items contributed to increased (decreased) financing activity cash flows in 2016 compared to 2015 (in millions):
| Alliant Energy | IPL | WPL | |||||||||
| Proceeds from long-term debt issued in 2016 (Refer to “Long-term Debt” below) | $800 | $300 | $— | ||||||||
| Payments to retire long-term debt in 2015 (Refer to “Long-term Debt” below) | 181 | 150 | 31 | ||||||||
| Net changes in the amount of commercial paper outstanding | 66 | — | 13 | ||||||||
| Payments to retire long-term debt in 2016 (Refer to “Long-term Debt” below) | (310 | ) | — | — | |||||||
| Proceeds from long-term debt issued in 2015 (Refer to “Long-term Debt” below) | (250 | ) | (250 | ) | — | ||||||
| Lower net proceeds from common stock issuances | (125 | ) | — | — | |||||||
| Higher capital contributions from IPL’s and WPL’s parent company, Alliant Energy | — | 25 | 60 | ||||||||
| Other (includes higher dividend payments in 2016) | (30 | ) | (21 | ) | (5 | ) | |||||
| $332 | $204 | $99 |
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 | ) |
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, AEF or Corporate Services.
In 2015, IPL received authorization from FERC through December 31, 2017 for the following (in millions):
| Initial | Current | ||||||
| Authorization | Remaining Authority | ||||||
| Long-term debt securities issuances in aggregate | $550 | $250 | |||||
| Short-term debt securities outstanding at any time (including borrowings from its parent) | 300 | 300 | |||||
| Preferred stock issuances in aggregate | 300 | 300 |
State Regulatory Financing Authorizations - In September 2016, 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 the earlier of the expiration date of WPL’s credit facility agreement (including extensions) or December 2024. In December 2016, WPL received authorization from the PSCW to issue up to $1 billion of long-term debt securities in aggregate during 2017 through 2019, with no more than $650 million to be issued in any year.
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 Split - As discussed in Note 7, Alliant Energy’s Board of Directors approved a two-for-one common stock split, which was distributed in May 2016.
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 71%, 70% and 71% of their consolidated earnings from continuing operations in 2016, respectively. Refer to “Executive Overview” for discussion of expected common stock dividends in 2017. 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 in 2014 through 2016. Refer to “Executive Overview” for discussion of expected issuances of common stock and capital contributions in 2017.
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, 2016, 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. Each of the credit facilities expire in December 2018 and 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 2016, 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.
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. A default by a minority-owned subsidiary would not trigger a cross-default. A default by Alliant Energy, Corporate Services or AEF 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.
Refer to Note 9(a) for discussion of financial covenants required under the credit agreements, as well as additional information on the credit facilities and commercial paper outstanding. At December 31, 2016, Alliant Energy, IPL and WPL were in compliance with all material covenants and other provisions of the credit agreements.
Long-term Debt - Significant issuances of long-term debt in 2016, 2015 and 2014 were as follows (dollars in millions):
| Company | Principal Amount | Type | Interest Rate | Maturity Date | Use of Proceeds | |||||||
| 2016: | ||||||||||||
| AEF | $500 | Variable-rate term loan credit agreement | 1% at December 31, 2016 | Oct-2018 | Retire borrowings under Alliant Energy’s and Franklin County Holdings LLC’s variable-rate term loan credit agreements that matured in 2016, reduce outstanding commercial paper and for general corporate purposes | |||||||
| IPL | 300 | Senior debentures | 3.7% | Sep-2046 | Reduce cash amounts received from its sales of accounts receivable program, reduce commercial paper classified as long-term debt and for general corporate purposes | |||||||
| 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 |
AEF’s $500 million term loan credit agreement (with Alliant Energy as guarantor) includes 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 (except for a cross-default provision triggered at $100 million), that are included in Alliant Energy’s revolving credit facility financial covenant discussed in Note 9(a). At December 31, 2016, Alliant Energy was in compliance with all material covenants and other provisions of the term loan credit agreement.
Significant retirements of long-term debt in 2016, 2015 and 2014 were as follows (dollars in millions):
| Company | Principal Amount | Type | Interest Rate | Retirement Date | ||||||
| 2016: | ||||||||||
| Alliant Energy | $250 | Variable-rate term loan credit agreement | 1% at December 31, 2015 | Oct-2016 | ||||||
| Franklin County Holdings LLC | 60 | Variable-rate term loan credit agreement | 1% at December 31, 2015 | Oct-2016 | ||||||
| 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- | Baa1 | |
| Commercial paper | A-2 | P-2 | ||
| Senior unsecured long-term debt | N/A | Baa1 | ||
| Outlook | Stable | Stable | ||
| IPL: | Corporate/issuer | A- | Baa1 | |
| Commercial paper | A-2 | P-2 | ||
| Senior unsecured long-term debt | A- | Baa1 | ||
| Preferred stock | BBB | Baa3 | ||
| Outlook | Stable | Stable | ||
| WPL: | Corporate/issuer | A | A2 | |
| Commercial paper | A-1 | P-1 | ||
| Senior unsecured long-term debt | A | A2 | ||
| Outlook | Stable | Stable |
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. In March 2016, IPL extended through March 2018 the purchase commitment from the third party to which it sells its receivables. In 2016, 2015 and 2014, 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, 2016 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, 2016 were as follows (in millions):
| Alliant Energy | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)) | $529 | $389 | $297 | $237 | $220 | $728 | $2,400 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | 5 | 856 | 256 | 357 | 8 | 2,875 | 4,357 | ||||||||||||||||||||
| Interest - long-term debt obligations | 199 | 197 | 167 | 151 | 140 | 2,074 | 2,928 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 58 | — | — | — | — | — | 58 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 6 | 6 | 2 | 2 | 1 | 15 | 32 | ||||||||||||||||||||
| Capital leases | 2 | 1 | 1 | 1 | 1 | — | 6 | ||||||||||||||||||||
| $799 | $1,449 | $723 | $748 | $370 | $5,692 | $9,781 |
| IPL | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)) | $322 | $225 | $209 | $176 | $172 | $670 | $1,774 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | — | 350 | — | 200 | — | 1,625 | 2,175 | ||||||||||||||||||||
| Interest - long-term debt obligations | 107 | 107 | 83 | 83 | 75 | 1,117 | 1,572 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 3 | — | — | — | — | — | 3 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 3 | 2 | 1 | 1 | 1 | 10 | 18 | ||||||||||||||||||||
| Capital leases | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||
| $436 | $684 | $293 | $460 | $248 | $3,422 | $5,543 |
| WPL | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||
| Operating expense purchase obligations (Note 16(b)) | $206 | $162 | $85 | $59 | $46 | $53 | $611 | ||||||||||||||||||||
| Long-term debt maturities (Note 9(b)) | — | — | 250 | 150 | — | 1,150 | 1,550 | ||||||||||||||||||||
| Interest - long-term debt obligations | 80 | 80 | 80 | 64 | 60 | 951 | 1,315 | ||||||||||||||||||||
| Capital purchase obligations (Note 16(a)) | 55 | — | — | — | — | — | 55 | ||||||||||||||||||||
| Operating leases (Note 10(a)) | 3 | 4 | — | — | — | — | 7 | ||||||||||||||||||||
| Capital lease - Sheboygan Falls (Note 10(b)) | 15 | 15 | 15 | 15 | 15 | 53 | 128 | ||||||||||||||||||||
| Capital leases - other | 1 | 1 | 1 | 1 | 1 | — | 5 | ||||||||||||||||||||
| $360 | $262 | $431 | $289 | $122 | $2,207 | $3,671 |
At December 31, 2016, 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, 2016, 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 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. In December 2016, the PSCW approved annual forecasted fuel-related costs per MWh of $26.15 based on $361 million of variable fuel-related costs applicable for retail and wholesale customers for WPL’s 2017 Test Period. The retail portion of the 2017 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 2016 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 2017 is approximately $6 million. However, if WPL’s return on common equity in 2017 exceeds the most recently authorized return on common equity, the commodity risk exposure to WPL’s electric margins in 2017 could increase.
Refer to Note 2 for discussion of WPL’s retail fuel-related rate filings for Test Years 2014 through 2016, and 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 amounts 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, 2016, Alliant Energy’s, IPL’s and WPL’s annual pre-tax expense would increase by approximately $8 million, $0 and $1 million, 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(o) 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 management to 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 of the Board of Directors. 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. 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 actuals 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, 2016, 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 - 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, 2016.
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 certain 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, and assets within non-regulated operations that are proposed to be sold or are currently generating operating losses.
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 2016 included IPL’s and WPL’s generating units subject to early retirement.
Generating Units Subject to Early Retirement - Alliant Energy, IPL and WPL evaluate 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.
Alliant Energy and IPL concluded that Sutherland Unit 3 met the criteria to be considered probable of abandonment as of December 31, 2016. IPL is currently allowed a full recovery of and a full return on this EGU from both its retail and wholesale customers, and as a result, Alliant Energy and IPL concluded that no impairment was required as of December 31, 2016.
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, 2016. 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.
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 2016 included Alliant Energy’s Franklin County wind farm.
Franklin County Wind Farm - Based on an evaluation of the strategic options for the Franklin County wind farm performed in 2016, Alliant Energy concluded it was probable the Franklin County wind farm will be transferred to IPL. As a result, Alliant Energy performed an impairment analysis of such assets in 2016. Refer to Note 3 for discussion of the impairment analysis, which resulted in non-cash, pre-tax asset valuation charges of $86 million recorded by Alliant Energy in 2016. Going forward, the Franklin County wind farm will be 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.
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, temperature 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, 2016, unbilled revenues related to Alliant Energy’s utility operations were $180 million ($90 million at IPL and $90 million at WPL). Note 5(b) provides discussion of IPL’s unbilled revenues as of December 31, 2016 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, 2016 | Impact on 2017 Net Periodic Benefit Costs | Impact on Projected Benefit Obligation at December 31, 2016 | Impact on 2017 Net Periodic Benefit Costs | ||||||||||||
| Alliant Energy | ||||||||||||||||
| 1% change in discount rate | $162 | $11 | $21 | $2 | ||||||||||||
| 1% change in expected rate of return | N/A | 9 | N/A | 1 | ||||||||||||
| IPL | ||||||||||||||||
| 1% change in discount rate | 75 | 5 | 8 | 1 | ||||||||||||
| 1% change in expected rate of return | N/A | 4 | N/A | 1 | ||||||||||||
| WPL | ||||||||||||||||
| 1% change in discount rate | 71 | 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 2016 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 2016, 2015 and 2014.
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.
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 use of formula rates that allow ITC and ATC to change the amount they charge to their customers based upon changes to the costs they incur, there is uncertainty regarding the long-term trends of IPL’s and WPL’s future electric transmission service expense. Based on IPL’s and WPL’s electric transmission cost recovery mechanisms discussed in Note 1(g), IPL and WPL currently do not expect that any changes to electric transmission service costs billed by ITC and ATC will have a material impact on their financial condition and results of operations.
2017 Electric Transmission Service Expense - Alliant Energy and IPL currently estimate their total electric transmission service expense in 2017 will be lower than the comparable expense in 2016 by approximately $45 million, primarily due to an expected lower return on equity for ITC in 2017 and refunds anticipated to be received in 2017 from ITC resulting from the MISO transmission owner return on equity complaints discussed below, partially offset by increased rate base at ITC. WPL’s total electric transmission service expense in 2017 is expected to be consistent with 2016 due to the escrow
accounting treatment for its electric transmission service expense, as well as cost estimates included in WPL’s approved retail electric rate case (2017/2018 Test Period), which exclude the impacts of an expected lower return on equity in 2017 and associated refunds resulting from the MISO transmission owner return on equity complaints.
MISO Transmission Owner Return on Equity Complaints - A group of MISO cooperative and municipal utilities previously filed two complaints with FERC requesting a reduction to the base return on equity used by MISO transmission owners, including ITC and ATC. In September 2016, FERC issued an order on the first complaint and established a base return on equity of 10.32%, excluding any incentive adders granted by FERC, effective September 28, 2016, and for the refund period from November 12, 2013 through February 11, 2015. In October 2016, in response to MISO’s and the MISO transmission owners’ request, FERC ordered the related refunds to be issued no later than July 2017. IPL anticipates the retail portion of the refund from ITC will be refunded to its customers in 2017 through the transmission cost rider, pending IUB approval. WPL will defer the refund from ATC to a regulatory liability and refunds to its retail customers are expected to be addressed in a future rate proceeding. WPL’s and IPL’s wholesale customers will receive their share of the refunds through normal monthly billing practices as the refunds are received. Alliant Energy, IPL and WPL currently expect to receive refunds of $51 million, $40 million and $11 million, respectively, in the first quarter of 2017, subject to final true-up by the end of July 2017.
In June 2016, a FERC administrative law judge issued an initial decision regarding the second complaint and recommended a base return on equity of 9.70%, excluding any incentive adders granted by FERC, for the refund period from February 12, 2015 through May 11, 2016. A final decision from FERC on the second complaint is currently expected in the first half of 2017.
The total return on equity for ITC and ATC includes a base return on equity, as determined by FERC pursuant to the two MISO complaints, and incentive adders to the return on equity requested by the transmission owners and granted by FERC. In January 2015, FERC issued an order granting incentive adders of 0.50% to both ITC and ATC based on their participation in MISO effective January 6, 2015. In March 2015, FERC issued an order granting an additional incentive adder of 0.50% to ITC for being an independent transmission company effective April 1, 2015.
As a result of the two MISO complaints, Alliant Energy and WPL have realized a cumulative $24 million of reductions in the amount of equity income from ATC through December 31, 2016.
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 2016.
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 5% of WPL’s total electric sales in 2016.
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 2016.
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