WEC Energy Group Inc (WEC) — Q4 2020 Earnings Call Transcript

Good afternoon, everyone. Thank you for joining us today as we review our results for our calendar year 2020. First, I'd like to introduce the members of our management team who are here with me today. We have Kevin Fletcher, our President and CEO; Scott Lauber, our Chief Operating Officer; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported full-year 2020 earnings of $3.79 a share. Xia will provide you with more detail on our financial metrics in just a few minutes. But first, I'm pleased to report that we delivered a record year on virtually every meaningful measure of performance from customer service to network reliability to earnings per share, despite the challenges posed by the COVID-19 pandemic. Our focus on efficiency, financial discipline, and an encouraging rebound in energy demand during the second half of the year resulted in the highest net income from operations and the highest earnings per share in company history. And throughout the difficulties of a pandemic year, we also accelerated our support for the communities we serve. In total, our companies and foundations donated more than $20 million to nonprofits across our service area, including more than $2 million to direct COVID-19 relief efforts. We also made significant progress on diversity and inclusion. We spent a record $303 million with diverse suppliers during the year, and through our Board refreshment, 46% of our Board members are women or minorities. In addition, we set aggressive goals as we continue to improve our environmental footprint. In fact, I'm pleased to report that based on preliminary data for 2020, we reduced carbon dioxide emissions by 50% below 2005 levels, and we have a well-defined plan to achieve a 55% reduction by the end of 2025. Over the longer term, we expect to reduce carbon emissions by 70% by 2030, and looking out to the year 2050, the target for our generation fleet is net-zero carbon. Our new 5-year capital plan lays out a roadmap for achieving these goals. We call it our ESG progress plan. The largest 5-year plan in our history. It calls for investment in efficiency, sustainability, and growth, driving average annual growth in our asset base of 7% with no need for additional equity. Highlights of the plan include 1,800 megawatts of wind, solar, and battery storage that would be added to our regulated asset base in Wisconsin. We allocated an additional $1.8 billion to our infrastructure segment, where we see a robust pipeline of high-quality renewable projects with long-term contracts with creditworthy customers. All in all, our plan positions us to deliver among the very best risk-adjusted returns in our industry. Let’s take a brief look at the regional economy. It was, of course, an unusual year for everyone, but many of our commercial and industrial customers proved to be quite resilient, providing essential products and services such as food, plastics, paper, packaging, and electronic controls. The latest available data show Wisconsin's unemployment rate at 5.5%, which is more than a full percentage point better than the national average. As we look to the year ahead, we see positive signs of continued growth. For example, Green Bay Packaging is building a major expansion of its mill in Northeastern Wisconsin. It's a $500 million addition and is expected to be completed later this year. The projects with Foxconn, Komatsu Mining, HARIBO, and Milwaukee Tool that we've reported to you in the past are all moving forward as well. We remain optimistic about the strength of the regional economy and our long-term sales growth. Finally, I know many of you are interested in our rate case calendar for the year ahead. Under normal circumstances, our Wisconsin Utilities would be filing rate reviews later this spring for energy rates that would take effect on January 1, 2022. Of course, we're in the middle of anything but normal times, and I can tell you that we've begun discussions with the commission staff, and we'll be talking with other major stakeholders to determine whether a 1-year delay in a filing would be in everyone's best interest. I expect the final decision on this around the end of the first quarter. Now I'll turn the call over to Scott for more detail on our sales results and our forecast for 2021, as well as an update on our infrastructure segment and our O&M performance. Scott, all yours.

Thank you, Gale. Turning now to sales. We continue to see customer growth across our system. At the end of 2020, our utilities were serving approximately 11,000 more electric and 27,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volumes are shown beginning on Page 17 of the earnings package. Overall, retail deliveries of electricity, excluding the iron ore mine, were down 2.1% compared to 2019, and on a weather-normal basis, deliveries were down 2.9%. Natural gas deliveries in Wisconsin decreased 7.9% versus 2019 and by 2.4% on a weather-normal basis, excluding gas used for power generation. On the electric side, you'll note the positive trend we have seen in residential sales has continued, which has counterbalanced the weakness in small commercial and industrial sales caused by the pandemic. Meanwhile, large commercial industrial sales, excluding the iron ore mine, were down 7.1% for the full year compared to 2019 on a weather-normal basis. However, these sales were only down 4.6% for the fourth quarter, a notable positive trend, reflecting the recovery of Wisconsin's economy. Now I'd like to briefly touch on our 2021 sales forecast for our Wisconsin segment. We are using 2019 as a base for 2021 retail projections because it represents a more typical year. We're forecasting a decrease of 1.5% in weather-normal retail electric deliveries excluding the iron ore mine compared to 2019. This would represent a 1.4% increase compared to 2020. We expect large commercial and industrial sales to continue to improve and anticipate the same positive offsetting relationship between residential and small commercial industrial sales. For our natural gas business, we project weather-normalized retail gas deliveries to decrease by 2.4% compared to 2019, which leads the projected sales outlook compared to 2020 relatively flat. With this in mind, we remain focused on operating efficiencies and financial discipline across our business. We lowered operations and maintenance costs by more than 3% in 2020, and we continue to adapt new technology and apply best practices. We plan to reduce our operations and maintenance expense by an additional 2% to 3% in 2021. I also have an update on our infrastructure segment. The Blooming Grove and Tatanka Ridge projects are in service now and came in ahead of time and on budget. As a reminder, our Thunderhead Wind investment is projected to go in service by the end of the third quarter. We expect this segment to contribute an incremental $0.08 to earnings in 2021. Now I'll turn it over to Kevin for his update on utility operations.

Thank you, Scott. Throughout 2020, we kept the energy flowing to our customers safely and reliably. Our largest utility, We Energies, was named the most reliable electric company in the Midwest for the tenth year running, and our Peoples Gas subsidiary was named the most trusted brand and a customer champion for the second year in a row. Now I'll review where we stand on current projects and our ESG progress plan. As you've heard in our last call, the 2 Creek solar farm is now operating. This is a very large project. In fact, just days after achieving commercial operation this past November, our share of this project accounted for more than 20% of the solar output in the entire MISO generation market. Also in Wisconsin, We Energies is making progress in the approval process for two liquefied natural gas facilities, which would provide enhanced savings and reliability during our cold winters. If approved, we expect to be in construction in the fall of this year and to invest approximately $370 million in total to bring the facilities into operation in 2023. As Gale just mentioned, our ESG progress plan includes 1,800 megawatts of wind, solar, and battery storage. Filings with the Wisconsin Commission for a number of these projects will begin in the first quarter. Turning to Illinois, we are in the midst of a rate review for one of our smaller subsidiaries, North Shore Gas, which serves approximately 160,000 customers in the northern suburbs of Chicago. Rates for North Shore Gas were last set more than 5 years ago before we acquired the company. Since then, we have consistently invested capital to serve our customers while reducing operating costs. The Illinois Commerce Commission has set a schedule for concluding the case. Hearings are expected to begin in late April with the final order in September. With that, I'll turn it back to Gale.

Kevin, thank you very much. We're confident that we can deliver our 2021 earnings guidance in the range of $3.99 a share to $4.03 a share. This represents earnings growth of between 7% and 8% from our 2020 base of $3.73 a share. You may have seen the announcement that our Board of Directors, at its January meeting, raised our quarterly cash dividend to $0.6775 a share for the first quarter of 2021, which represents an increased focus of 7.1%. The new quarterly dividend is equivalent to an annual rate of $2.71 a share, marking the 18th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings. We're right in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more detail on our financials and our first quarter guidance. Xia?

Thanks, Gale. Our 2020 earnings of $3.79 per share increased $0.21 per share compared to 2019. Our favorable 2020 results were driven by several factors, including the execution of our capital plan, rate adjustments at our Wisconsin Utilities, ROE improvement at American Transmission Company, production tax credits in our infrastructure business, and a continued emphasis on operating efficiency. These factors helped us to overcome the sales impact of COVID-19 and mild winter weather, and all our utilities met their financial goals in 2020. The earnings package placed on our website this morning includes a comparison of 2020 results on Page 21. I'll walk through the significant drivers impacting our earnings per share. Starting with our utility operations, we grew our earnings by $0.22 compared to 2019. First, O&M expenses were favorable, including $0.08 from lower day-to-day O&M expenses and $0.09 from lower sharing amounts in 2020 at our Wisconsin Utilities. Second, despite the impact of COVID-19 and reduced wholesale and other margins, rate adjustments and continued capital investment at our Wisconsin Utilities drove a net $0.21 increase in earnings. Third, we had $0.12 of higher depreciation and amortization expense and an estimated $0.05 decrease in margins related to mild winter weather year-over-year. These factors partially offset the favorable items discussed. Overall, we added $0.22 year-over-year from utility operations. Earnings from our investment in American Transmission Company increased $0.08 per share compared to 2019. Recall that $0.07 of $0.08 was driven by ROE changes from FERC orders issued in November 2019 and May 2020, with $0.04 resulting from the November 2019 order and $0.03 from the May 2020 order, and $0.01 coming mainly from continued capital investment. Earnings at our energy infrastructure segment improved $0.05 in 2020 compared to 2019, primarily from production tax credits related to wind farm acquisitions. These include the Coyote Ridge Wind Farm placed in service at the end of 2019. The additional 10% ownership of the upstream wind energy center and the Blooming Grove Wind Farm came online in early December. Finally, we recorded a $0.09 charge in Corporate and Other to account for make-whole premiums incurred in the fourth quarter as we refinanced certain holding company debt to take advantage of lower interest rates. The remaining $0.05 decrease is related to some tax and other items, partially offset by lower interest expense. In summary, WEC improved on our 2019 performance by $0.21 per share. Now I'd like to update you on some other financial items. Our effective income tax rate was 15.9% for 2020. Excluding the benefit of unprotected taxes flowing to customers, our rate was 20.2%. Looking to 2021, we expect our effective income tax rate to be between 13% and 14%. Excluding the benefit of unprotected taxes flowing to customers, we project our 2021 effective tax rate to be between 19% and 20%. As in past years, we expect to be a modest taxpayer in 2021. Our projections show that we will efficiently utilize our tax position with our current capital plan. Looking now at the cash flow statement on Page 6 of the earnings package. Net cash provided by operating activities decreased $149.5 million. Our increase in cash earnings in 2020 was offset by higher working capital requirements, primarily related to COVID-19, and by higher pension contributions. Total capital expenditures and asset acquisitions were $2.9 billion in 2020, a $345 million increase from 2019. This reflects our investment focus in our regulated utility and contracted renewable businesses at our Energy Infrastructure segment. In terms of financing activities, in the fourth quarter of 2020, we refinanced over $1 billion of holding company debt, reducing the average interest rate of these notes from 3.3% to 1.5%. We continue to demonstrate our commitment to strong credit quality. As expected, our FFO to debt ratio was 15.4% in 2020. Adjusting for the impact of voluntary pension contributions and customer arrays related to COVID-19, our FFO to debt was 16.9% in 2020. At the end of 2020, our ratio of holding company debt to total debt was 28%, below our 30% target. Additionally, as Gale mentioned, we have no need for additional equity over the 5-year forecast period. Lastly, looking at our guidance for the first quarter of 2021, last year, we earned $1.43 per share in the first quarter. We project first quarter 2021 earnings to be in the range of $1.45 per share to $1.47 per share. We have taken into account mild weather to date, and this forecast assumes normal weather for the rest of the quarter. For full year 2021, we are reaffirming our annual guidance of $3.99 to $4.03 per share. With that, I'll turn it back to Gale.

Xia, thank you so much. We're on track and focused on delivering value for our customers and our stockholders. Operator, we're ready to open it up for the Q&A portion of our conference call today.

Sorry to disappoint, it's actually James for Shahriar. The easier question. So I guess, if we could start on the infrastructure side, you've laid out $2.2 billion going forward. How should we sort of think about the cadence of that? And does the extension of tax credits earlier this month kind of change any of your timing or thoughts there? Any changes in the opportunity set?

Happy to answer those questions. First of all, for the 5-year plan, we've laid out $1.8 billion of additional capital in that 5-year plan. As I mentioned in our prepared remarks, we're going through due diligence on a number of projects right now. We've got a robust pipeline we're looking at. Because we're so far ahead of schedule on our infrastructure segment right now, we can afford to be very selective and really cherry-pick only the very best projects that meet or exceed our criteria. So long story short, the cadence will continue. It wouldn't surprise me if we have one or two more announcements during the calendar year 2021. Regarding the change in the tax credits, the extension of the tax credits really does give us even more to look at in the pipeline. It certainly does not diminish our opportunity set. Remember that we're really utilizing our tax appetite here as a way to continue to grow earnings, improve our environmental footprint, and build optionality for down the road when we're certainly going to need a more carbon-free energy.

Just so there is no confusion, it is $2.2 billion in the 5-year plan. $400 million of that is the Thunderhead project that has been announced already. The additional $1.8 billion is just what hasn't been announced yet, just to avoid confusion.

Perfect. And I guess just kind of following on the clean resources side. Since you and Shahriar last spoke, we've seen NextEra formally file at the NRC to extend the life of Point Beach. Have you had any conversations with them yet? Are there any general updates there to consider regarding potential recontracting or retirement?

Well, first of all, they're in the very early stages of thinking through what they might want to put together for a life extension at Point Beach. We have had some very preliminary discussions. But one thing that's very clear from our standpoint and NextEra's standpoint is that we're going to make the best decision possible for our customers from an economic standpoint, whether that includes an extension of Point Beach or an investment opportunity. Either way, I see us having a robust investment opportunity set as we get into the next decade, one way or another.

I'm clear on the quarter. Thanks for the update on '21. Just on the rate case front, Gale, have you been here before? So have you done this in Wisconsin before, can you just remind us? And what might the options look like? Could you defer the rate increase? Or if I'm thinking about 2022, could you accelerate your cost savings to sort of stay on target with your 5% to 7% EPS growth rate? Any color around that would be helpful.

Sure. Thank you, Durgesh. I appreciate the question. The short answer is yes, we have had stay outs before. In fact, if you think about what occurred after the acquisition of Integrys in 2015, we were out of a rate case for four years, again, in constructive discussions with the commission staff and the intervenor groups. As I mentioned, we're in the early stages of discussion right now with the commission staff. We will be talking with all the stakeholder groups. The concept would be that rather than potentially filing a rate case on a normal schedule this year, the idea would be to determine if it's in everyone's best interest to have a 1-year delay in the filings for our Wisconsin utilities. We're working on what the outline looks like and whether everyone would agree that it's in the best interest of all parties involved to push out a rate filing for one year. These conversations are constructive, and we should have a final decision by the end of the first quarter.

Incredible cost reductions, right? I want to know how you guys are continuing to reduce costs as you think about this 2% to 3% after a year where many peers already brought down costs, and the question is the sustainability of those cost reductions. Could you elaborate on that? Also, just to follow up on the last one, I will throw in there. You already articulated some benefits on O&M and refinancing activities that certainly have some tailwinds. What other pieces in this stay-out scenario are relevant in these conversations?

Okay. Great questions, as always, Julien. First of all, related to the sustainability of O&M reductions, let me be very clear. We have continued runway and strong sustainability for continued O&M reductions. I give you three reasons why: Firstly, we're very good at it. Secondly, we continue to benefit from putting in common systems across our footprint. Remember, we had the acquisition of Integrys at the end of 2015. Since then, we have put everyone on the same platforms, including a new general ledger for all companies. Just ten days ago, we completed a major conversion to a brand-new customer information and billing system that encompasses all seven of our customer-facing utilities now on that system. This is going to drive optimization in our call centers, generating significant cost reductions. So number one, we are outstanding at financial discipline. Number two, we continue to optimize the organization post the Integrys acquisition. And third, we have announced the retirement of several older, less efficient coal-fired power plants. There are significant O&M savings that will derive from retiring these plants, particularly over 2023, 2024, and 2025. We will see millions of dollars of cost savings as we retire those plants and replace that capacity with much more efficient technology. That's a long answer, but I hope it gives you some color on our success in driving ongoing efficiency.

In terms of the rate case itself, it sounds like you've got key ingredients to justify not going in for a rate increase, I suppose.

Well, Julien, if we didn't, we would be telling a different story here. We feel good about depending on everyone's view of whether it's in the best interest of the state for us to stay out for another year. We feel confident in our ability to do that, again for both our customers and shareholders.

Just a high-level question, if I could. The Biden administration has some new emission reduction goals out there, and I was wondering if you had any thoughts on them. If this becomes law, how might this impact WEC?

Are you specifically referring to the aspirational goal of a carbon-free grid by 2035? If so, that's quite the tall order. It would take enormous technological changes. If you think about the levers to get there, advancements in modular nuclear, carbon capture improvements, breakthroughs in long-duration battery storage, and hydrogen development would all need to progress significantly. I'm apprehensive about the reality of reaching that goal by 2035. However, we have made significant progress, and emissions reduction is already part of our goal. Our targets mirror those in the Paris Climate Accord. I remain optimistic about our path of emission reductions, even though we may not entirely reach the goal by 2035.

Quick question about the extension of the ITC and PTC that just got passed in December. Is there a decent chance you might have any further extensions going forward? Could the increased economic benefits from the tax credit extensions change your view on the targeted business mix between infrastructure and utilities? Could you increase your desire for more projects?

It's a great question, Michael. We've tailored our appetite for growing the infrastructure business to two things: the availability of high-quality projects with strong credit quality offtakers and our own tax appetite. If our tax appetite increases, along with the extension of these ITCs and PTCs, there might be greater opportunities. However, for now, we're working on the plan we've already laid out. Well, I believe that's our final question for the day. We really appreciate you taking part in our conference call. Thank you again for participating. If you have any more questions, you can contact Beth Straka on her direct line, which she gives out to only a few of you. Her direct line is 414-221-4639. Thanks, everybody. Take care. Bye-bye.