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Edited Transcript of LNT earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Alliant Energy Corp Earnings Call

Madison Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Alliant Energy Corp earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Suan Gille

Alliant Energy Corporation - Manager of IR

* Pat Kampling

Alliant Energy Corporation - Chairman, President and CEO

* Robert Durian

Alliant Energy Corporation - VP, CFO and Treasurer

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Conference Call Participants

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* Brian Russo

Ladenburg Thalmann & Company Inc. - Analyst

* Gregg Orrill

Barclays Capital - Analyst

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Presentation

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Operator [1]

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Thank you for holding, ladies and gentlemen, and welcome to the Alliant Energy's year-end and fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Today's conference is being recorded. At this time I would like to turn the conference over to your host, Susan Gille, Manager of Investor Relations at Alliant Energy. Please go ahead.

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Suan Gille, Alliant Energy Corporation - Manager of IR [2]

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Good morning. I would like to thank all of you on the call and the webcast for joining us today. We appreciate your participation. With me here today are Pat Kampling, Chairman, President and Chief Executive Officer; and Robert Durian, Vice President, CFO and Treasurer; as well as other members of the Senior Management Team. Following prepared remarks by Pat and Robert, we will have time to take questions from the investment community.

We issued a news release last night announcing Alliant Energy's year-end and fourth-quarter 2016 earnings. We released 2017 earnings guidance and provided updated 2017 through 2020 capital expenditure guidance. This release, as well as supplemental slides that will be referenced during today's call, are available on the Investor page of our website at www.alliantenergy.com.

Before we begin, I need to remind you the remarks we make on this call and our answers to your questions include forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters discussed in Alliant Energy's press release issued last night and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements. In addition, this presentation contains non-GAAP financial measures. A reconciliation between the non-GAAP and GAAP measures are provided in the earnings release, which is available on our website at www.alliantenergy.com.

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

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Pat Kampling, Alliant Energy Corporation - Chairman, President and CEO [3]

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Good morning, and thank you for joining us for our year-end earnings call. Today I'm pleased to share with you an overview of our 2016 results and our outlook for 2017. I will also share with you our progress in advancing cleaner energy, improving the power grid, and offering customers innovative products and options. Next, Robert will provide details on our 2016 results and 2017 guidance, as well as review our regulatory schedule and comment on potential federal tax reform.

We had another good year, achieving $1.88 non-GAAP earnings per share, consistent with the midpoint of our 2016 earnings guidance. This represents a 5% increase over comparable 2015 results on a non-GAAP temperature-normalized basis. Although 2016 had its share of interesting temperature swings, it was on average normal for the year, so there is no need to temperature-normalize our 2016 results. Also, please note on slide 2 that 2016 non-GAAP results exclude the impact of the Franklin County charge of $0.23 per share recorded in the third quarter.

We also issued earnings guidance for 2017 with a midpoint of $1.99 per share, a 6% increase over 2016's non-GAAP results, driven by earnings on our growing utility investments. Our earnings growth objective remains at 5% to 7% through 2020, based on non-GAAP 2016 earnings per share of $1.88. This long-term growth objective is supported by continued robust capital expenditure plans, modest sales growth, constructive regulatory outcomes, and is on a temperature-normalized basis.

We continue to make solid progress in providing cost-effective, clean energy for our customers while building a smarter, more robust grid. We have a dynamic planning process that gives us the flexibility to adjust our capital plans as opportunities arise. Last evening, we issued an updated capital expenditure plan for 2017 to 2020, totaling $5.6 billion. The change from our November 2016 forecast are shown on slide 3 and are primarily due to the acceleration, the timing of utility wind generation, and IPL smart meter investments to enable customers to realize their benefits sooner.

We began the transition of our generation fleet almost a decade ago, with the addition of utility-owned wind and the planned retirements of our smaller, less efficient fossil generating stations. Since 2010, we have retired or converted one-third of our coal fired generation, moving us towards our 2030 carbon emissions reduction target of 40%. Our generation fleet continues to transition to one that is cleaner and more efficient and major steps are under way to expand our natural gas generation. In Wisconsin, we are in the early stages of construction of the Riverside Expansion and in Iowa, we are in the home stretch of Marshalltown construction. The Marshalltown Generating Facility is now almost complete. Testing is going well and is expected to go in service by early April.

Forecasted capital expenditures for the facility are approximately $670 million, excluding AFUDC and transmission, and it will earn the authorized 11% ROE. We anticipate Marshalltown will be included in IPL's retail electric interim rates, which will be implemented 10 days after our rate filing in the second quarter. Marshalltown will be our most efficient facility to date, and is expected to have 60% less carbon emissions and 90% less water withdrawals when compared to the 2005 levels for the generating units it will replace.

In Wisconsin, we broke ground for the Riverside Expansion last September and expect that it will supply energy to our customers by early 2020. Its output will be approximately 730 megawatts and our share of the total anticipated project costs is approximately $640 million, excluding AFUDC and transmission. [Three] co-ops signed their letters of intent to acquire approximately 65 megawatts of Riverside, and we expect key SEW approval of that agreement in the third quarter. These co-ops have been WPL wholesale customers for decades and we are delighted that they will be our partners at Riverside.

Our capital expenditure plan also includes an additional 900 megawatts of wind energy, of which 500 megawatts was approved by the Iowa Utilities Board last year. Key terms of that approval include a cost cap of $1,830 per kW, including AFUDC and transmission; a return on equity of 11% for the life of the asset; and a depreciable life of 40 years. We have selected GE as the wind turbine supplier for this expansion and acquired enough turbines from GE during the fourth quarter of 2016 to ensure all 900 megawatts of new wind is eligible for the full level of production tax credits.

Solar generation is the newest addition to our energy mix and we continue to gain valuable experience on how best to integrate it as well as storage into our electric system. We are currently receiving power from our three solar facilities, including Wisconsin's largest solar farm, located at our Rock River campus, our learning laboratory at our Madison headquarters, and the Indian Creek Nature Center in Cedar Rapids, Iowa. Solar investments such as these, as well as our planned solar collaboration with the City of Dubuque, will help us meet our customers' growing interest in cleaner and distributed forms of energy.

The electric and gas distribution system continues to be an area of growing investment, as customers expect improved reliability, resiliency, and security of their power delivery. Standardized voltages and selective reliability improvements, such as expansion of our underground electric distribution network, are just some of our targeted investments. Also, many communities and industrial customers have requested additional natural gas supply, which is giving us the opportunity to upgrade and expand our gas system while at the same time continuing our pipeline safety program.

This year we plan to begin installation of smart meters for Iowa electric and gas customers. This is an important component for a smarter and more resilient power grid. Access to real-time information and data will allow us to manage outages, two-way energy flow, and allow for remote connects and disconnects. We expect to complete the Iowa smart meter installation in 2019.

We are making good progress in offering our customers innovative solutions and options. WPL recently received approval for new residential customer offerings, including simpler time-of-use pricing plans, a demand rate pilot, a fixed bill option and lower rates for renewable energy plans. We are also offering both Iowa and Wisconsin customers rebates for installation of charging stations. When we file the IPL retail electric base rate review, we plan to propose a number of product offerings for our Iowa customers as well.

As I wrap up my remarks, I would like to briefly comment on federal initiatives and the impacts they may have on our industry and specifically on Alliant Energy. As I mentioned earlier, the transition of our generation fleet started almost a decade ago. Our plan has been based on an economic modernization of our generation fleet to one that is more energy efficient and lower in emissions and water usage. Our plans were never predicated on a clean power plan, but rather they are based on providing our customers safe, reliable, and cost-competitive energy while improving the environment of the communities that we have the privilege to serve.

The current debate on federal corporate tax reform is very important to our Company and our customers, and we are very involved with the discussion. In general, lower tax rates should be beneficial to all. However, we must look at this tax reform in its totality and not react to specific items. Robert will address how the current proposal would impact customers and share owners of Alliant Energy. On the various legislative and regulatory proposals, we will continue to engage with key local, state, and federal stakeholders as well as customer and industry groups such as EEI, and advocate for our customers' and share owners' interest.

Let me summarize my key focus areas for the coming year. Our dedicated employees delivered a solid 2016 and will deliver 2017's financial and operating objectives. Our plan continues to provide for 5% to 7% earnings growth and a 60% to 70% common dividend payout target. Our targeted 2017 dividend payout is 63.3%, based on our 2017 earnings guidance of $1.99 per share. We expect to complete projects on time and at or below budget in a very safe manner. We will continue working with our regulators, consumer advocates, environmental groups, neighboring utilities, and customers in a collaborative manner; continue to focus on serving our customers and being good partners in our communities, while reshaping the organization to be leaner and faster; and we will continue to manage the Company to strike a balance between capital investment, operational and financial discipline, and cost impact to customers.

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

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [4]

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Good morning, everyone. We released year-end 2016 earnings last evening, with our non-GAAP earnings from continuing operations of $1.88 per share, which is $0.13 per share higher than the non-GAAP earnings for year-end 2015. A summary of the year-over-year earnings drivers may be found on slides 4, 5 and 6.

The major contributors of the year-over-year earnings growth were higher electric and gas margins and increased AFUDC related to the Marshalltown generating station. I'm pleased to report that temperature-normalized sales increased approximately 1%, as forecasted. The commercial and industrial segments continue to be the largest sales growth classes year over year at both the utilities. For 2016, our earnings were not impacted by temperatures, but milder temperatures in 2015 resulted in a negative $0.04 per share variance.

Before I move on to discuss 2017 guidance, I would like to point out that at the end of 2016, Alliant Energy's investment in ATC moved from WPL to one of our non-regulated subsidiaries in accordance with the [PFCW] order. There was no impact to Alliant Energy's consolidated financial statements as a result of this change, and we will continue including ATC's earnings with the utilities in future earnings release tables.

Now let's briefly review our 2017 guidance. Last evening we issued our consolidated 2017 earnings guidance range of $1.92 to $2.06 earnings per share. A walk from the 2016 non-GAAP EPS to the midpoint of the 2017 estimated guidance range is shown on slide 7. The key drivers for the 6% growth in earnings relate to infrastructure investments, which are reflected in WPL's recently approved electric and gas retail rates, as well as the infrastructure investments for IPL, which will be included in interim rates which will go in effect 10 days after we file the retail electric rate case in the second quarter of 2017. The 2017 guidance range assumes normal temperatures and retail sales growth of approximately 1% when compared to 2016. Please note that when comparing 2016 to 2017, we expect most of the sales growth to come from commercial and industrial classes.

During the past seven years, we've been able to earn on our increasing IPL rate base while keeping base rates flat. The recent rate base addition, which include grid modernization, the Marshalltown generating station, and investments to advance cleaner energy are driving the need for an electric base rate increase. We expect interim rates will include an annualized electric rate base of approximately $4 billion with a blended ROE of approximately 10% and a common equity ratio of approximately 49%.

Franklin County will be included in interim rate base since we received FERC approval for the transfer to IPL earlier this week. We are in the process of finalizing revenue requirements and supporting schedules; thus we are not disclosing the interim revenue requirement dollar amount at this time. Customers will see a minimal impact to their total bills in 2017, then see approximate 5% to 10% interim rate increase will be offset with tax benefit rider billing credits and refunds related to lower transmission ROEs.

On slide 8, we have provided the proposed regulatory schedule for the IPL electric rate proceeding, as well as definitions of the key components that will be included in final rates, which we expect to impact 2018 earnings. 2017 will be the final year that IPL expects to provide tax benefit rider billing credits to electric ands gas customers to help reduce their costs. The 2017 credits are estimated to be close to the $76 million of credits in 2016. As in prior years, the tax benefit riders have a quarterly timing impact but are not anticipated to impact full-year 2017 results.

The WPL retail rate case reflected electric rate-based growth for a full year for the Edgewater 5 scrubber and baghouse, which was placed in service in 2016, as well as performance improvements at Columbia. The increase in revenue requirements for these and other rate base additions was partially offset by energy efficiency cost recovery and transmission amortization. As shown on slide 9, the 2017 approved retail electric and gas rate base was about $3 billion, with an authorized ROE of 10% and a common equity ratio of 52%.

Slide 10 has been provided to assist you in modeling the effective tax rates for IPL, WPL, and AUC. On this slide we estimate a 2017 consolidated effective tax rate of 18%, which is 5% higher than our 2016 consolidated effective tax rate. Also to assist you in modeling, please note that IPL's interim rates will not be in effect until second quarter. In addition, WPL's new rates are in effect for the full year of 2017, but we have eliminated the summer versus winter pricing differential for Wisconsin retail electric customers. Both are expected to result in changes to our quarterly earnings profile compared to prior years.

Turning to our financing plans, our current forecast reflects strong cash flows, given the earnings generated by the business and impacts of the extension of bonus depreciation deductions through 2019. Alliant Energy currently does not expect to make any significant federal income tax payments through 2021, with additional tax payment reductions expected after 2021 due to the additional wind included in our plan. This forecast is based on current federal net operating losses and credit carry-forward positions as well as future amounts of bonus depreciation expected to be taken on federal income tax returns over the next few years.

Our 2017 financing plan remains consistent with our announcement last November. Our plan assumes we will issue up to $150 million of new common equity later this year, as well as long-term debt of up to $250 million at IPL and $300 million at WPL. We may adjust plans as deemed prudent, if market conditions warrant, and as our external financing needs continue to be reassessed.

As we look beyond 2017, our equity needs will be driven by renewable investments and the Riverside Expansion project. Our forecast assumes that the capital expenditures beyond 2017 would be financed by operating cash flows and external financing. Our intent is to maintain the capital structures at IPL and WPL for the most recent retail rate case decision.

We have several current and planned regulatory dockets of note for 2017, which we have summarized on slide 11. For IPL, we expect to file the next Iowa electric rate case and receive a decision on our emissions plan and budget in the second quarter. During the third quarter we are planning to file the advanced ratemaking principles for additional wind in the state of Iowa. For WPL, we plan to file a fuel-only case for 2018 by the third quarter, which is customary in years where a retail electric rate case is not filed. Also, in the third quarter we anticipate filing for a certificate of authority for additional wind for Wisconsin customers.

Before I conclude my remarks, I would like to share some information on potential tax reform. There is still much uncertainty regarding the content and timing of potential tax reform. It is too early to provide details on the likely outcome. Instead, we are providing one set of assumptions from the various proposals for tax reform and the near-term directional impacts of such assumptions to give some indication of how our customers and share owners could be impacted. On slide 12 we have provided these assumptions and some of the issues that could differentiate Alliant Energy from our peers in the industry. These differences include our existing net operating loss positions at our two utilities, our low non-regulated impairment debt, flow-through accounting in our Iowa jurisdiction, and PTC credits generated by our wind farms.

First, we have deferred tax assets on our regulated books related to federal net operating losses that we currently expect to utilize to offset taxable income through 2021. These deferred tax assets are part of the rate base calculations for both IPL and WPL and are expected to decline over the next five years under current tax provisions as we utilize such NOLs. If 100% expensing of capital expenditures is included in tax reform, we expect the utilization of our NOLs would slow down and extend beyond 2021, resulting in modest increases in IPL's and WPL's rate base in the near term. Second, Alliant Energy has a strong balance sheet, with no long-term debt at the parent and approximately $550 million of long-term debt at its non-regulated subsidiaries. If tax reform includes a loss of interest deductibility, this relatively low debt level should not result in a significant impact on our results.

Third, we are monitoring if IPL's flow-through tax methodology will continue to be available to state commissions following tax reform. If the requirements of the tax code provide no flexibility in how state commissions decide the recovery of certain property-related timing differences, this could result in a slight rate increase for IPL customers over the near term. WPL's income taxes are normalized, therefore WPL customers should not be impacted by this issue. Finally, we are advocating for the retention of production tax credits under the current phase-out rules, as well as other credits earned under the current tax code, so that we may continue providing such benefits to our customers.

We very much appreciate your continued support of our Company and we look forward to meeting with many of you throughout this year. At this time, I will turn the call back over to the operator to facilitate the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We'll go first to Brian Russo with Ladenburg Thalmann.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [2]

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Hi. Good morning.

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Pat Kampling, Alliant Energy Corporation - Chairman, President and CEO [3]

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Good morning, Brian.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [4]

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I understand that you don't want to provide a revenue requirement request in the upcoming IPL rate case, but I'm just curious, in general, what percent of that rate increase would you say that is attributable to Marshalltown?

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Pat Kampling, Alliant Energy Corporation - Chairman, President and CEO [5]

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I'll pass it on to Robert.

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [6]

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I would say a significant majority of the interim rate increase levels will be based on the Marshalltown Generating Station and the return of that investment. Not much else.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [7]

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Okay, good, because that's been pre-approved, correct?

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [8]

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Correct.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [9]

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You mentioned that the interim rate would be based on a blended 10% ROE. If Marshalltown is 11%, how do you get 10% blended?

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [10]

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We have to use past precedent what was used in the last rate cases. Because of the double leverage issue that we have to continue to apply until we can proceed with that issue in the next rate case, really that double leverage brings down the non-advanced ratemaking principles down to about 9.5%. Therefore, when you blend that with Marshalltown, Emery and Whispering Willow that also have higher ROEs, it ends up being 10% blended.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [11]

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Got it. I may have missed this before, but did you say you have no parent debt now?

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [12]

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That is correct. As of the end of 2016, we no longer have any parent company --

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [13]

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Okay, so the prior parent debt at that created the double leverage at IPL no longer exists?

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [14]

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That is correct.

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Brian Russo, Ladenburg Thalmann & Company Inc. - Analyst [15]

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Okay. Got it. Thank you.

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Operator [16]

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(Operator Instructions)

Next to Gregg Orrill with Barclays.

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Gregg Orrill, Barclays Capital - Analyst [17]

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Thank you. I was wondering --

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Pat Kampling, Alliant Energy Corporation - Chairman, President and CEO [18]

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Good morning, Greg.

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Gregg Orrill, Barclays Capital - Analyst [19]

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Good morning. I was wondering when, for modeling purposes, the -- and I apologize if you said this -- when the incremental CapEx on renewable projects in 2019 would go into rate base?

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [20]

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This is Robert, Greg. Right now we're scheduled to try and put into service the wind projects in 2019 and 2020. I would say a small portion of it's going to go into 2019 and so it won't have a significant impact on the 2019 rate base. We are projecting to update our rate base information and present that as part of the information that we'll share next week. We'll be posting that probably sometime early next week if you want to look at that online.

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Gregg Orrill, Barclays Capital - Analyst [21]

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Okay. Will do. Thank you.

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Robert Durian, Alliant Energy Corporation - VP, CFO and Treasurer [22]

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Thanks, Greg.

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Operator [23]

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(Operator Instructions)

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

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Suan Gille, Alliant Energy Corporation - Manager of IR [24]

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With no more questions, this concludes our call. A replay will be available through March 3, 2017, at 888-203-1112 for US and Canada or 719-457-0820 for international. Callers should reference conference ID 8244179.

In addition, an archive of the conference call and a script of the prepared remarks made on the call will be available on the investor section of the Company's website later today. We thank you for your continued support of Alliant Energy and feel free to contact me with any follow-up question.

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Operator [25]

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This concludes today's conference. We do thank you for your participation. You may now disconnect.