WEC Energy Group Inc (WEC) — Q1 2022 Earnings Call Transcript

From the home of the defending NBA champion, Milwaukee Bucks, good afternoon, everybody, and thank you for joining us today as we review our results for the first quarter of 2022. First, I'd like to introduce the members of our management team who are here with me today. We have Scott Lauber, our President and Chief Executive; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President, Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported first quarter 2022 earnings of $1.79 a share. Our results were largely driven by colder-than-normal weather, a strong economy, and the performance of our Infrastructure segment. In light of this strong start to the year, we're raising our earnings guidance by $0.05 a share for 2022 to a range of $4.34 to $4.38 a share, with an expectation of reaching the top end of this new range. This, of course, assumes normal weather for the remainder of 2022. Our balance sheet and cash flows remain strong. As we discussed, this allows us to fund a highly executable capital plan without issuing equity. We're also making good headway on our $17.7 billion ESG progress plan, the largest five-year capital plan in the Company's history, focused on efficiency, sustainability, and growth. Over the past few months, we've received regulatory approval for more than $1.1 billion of needed capital projects in Wisconsin. Scott will provide more detail in just a few minutes. We're preparing the way for further progress ahead. As you may have seen, our Wisconsin utilities filed rate reviews with the Public Service Commission for the two-year period in 2023 and 2024. We provided you with details in the earnings packet that we released this morning, and Scott will cover the highlights in just a moment. But the request, ladies and gentlemen, is all about the investments we need to make to enhance reliability for customers and continue the largest clean energy transition in our history. I would add that even with this request, the typical electric bill for our residential customers will remain below the national average. Switching gears now, many of you have asked about the solar panel investigation by the Department of Commerce. There clearly will be impacts across the industry. At our companies, we may see some price increases and potential delays, particularly on the solar and battery projects that are still going through the regulatory approval process in Wisconsin. But the important point is that we do not expect the review by the Department of Commerce to have any material impact on our five-year capital plan. In summary, we're poised to continue our strong track record, delivering among the best risk-adjusted returns our industry has to offer. We expect our ESG progress plan to support average growth in our asset base of 7% a year, driving earnings growth, dividend growth, and dramatically improved environmental performance. Across our generating fleet, we're targeting a 60% reduction in carbon emissions by the end of 2025 and an 80% reduction by the year 2030, both from a 2005 baseline. By the end of 2030, we expect our use of coal for power generation will be immaterial, aiming for a complete exit from coal by the end of year 2035. Our capital investments fully support this transition. For the longer term, we remain focused on the goal of net-zero carbon emissions from power generation by 2050. We're also investing in our natural gas distribution business and developing sources of renewable natural gas. Our plan is to achieve net-zero methane emissions by the end of 2030. With those goals in mind, we're working to help shape the future of clean energy. Hydrogen, for example, could be a key part of the solution in the decades ahead. Earlier this year, as you recall, we announced one of the first hydrogen power pilot programs of its kind in the United States. We're joining with the Electric Power Research Institute to test hydrogen as a fuel source at one of our natural gas-powered units in the Upper Peninsula of Michigan. Engineering specifications and testing protocols are now being developed, and we're on track for actual blending of hydrogen in the unit this fall. We look forward to sharing results across the industry. Let's take a brief look at the regional economy. The latest available data show Wisconsin's unemployment rate at 2.8%, well below the national average. The state's economy recovered throughout 2021 with strong growth in the manufacturing sector, and we continue to see major investments from growing companies in our region. For example, Amazon is expanding its presence in Southeastern Wisconsin with plans to lease a 1 million square foot building currently under development. This expansion could add 400 new jobs to Amazon's workforce, which is already 3,000 strong in the region. Uline's workforce is also on the rise, adding 700 employees last year, and Uline expects to add 300 more jobs this year. We remain optimistic about the strength and trajectory of the regional economy. With that, I'll turn the call over to Scott for more information on our utility operations and our infrastructure segment.

Thank you, Gale. As Gale mentioned, across Wisconsin, we're making good progress on the transition of our generation fleet and our ESG progress plan. Work continues on our Badger Hollow II solar facility in the southwestern part of the state. We have a plan for delivery and acceptance of the panels, and we expect clearance from customs in a reasonable time frame, so we still project Badger Hollow II to be in service in the first half of 2023. Recently, the Wisconsin Public Service Commission approved our purchase of 90% of the Paris Solar Battery Park, the largest investment of its kind in Wisconsin history. Located south of Milwaukee, this facility will host 200 megawatts of solar generation and 110 megawatts of battery storage, providing our customers with sunshine after sunset. Regarding the solar panels, we have a line of sight on production and delivery, and we still project commercial operation by mid-2023. The situation with battery production and delivery is more fluid, and we'll work through the details; we'll provide you with more information about potential delays in the battery installation of the Paris facility. We will continue to examine our capacity situation in light of these developments. To put this in perspective, it's worth noting that only 3% of our five-year capital plan is devoted to renewables and battery storage in 2023. Turning to other important projects, the commission has approved our plans to build 128 megawatts of natural gas generation at our existing Weston power plant in Northern Wisconsin. The new facility will use seven reciprocating internal combustion engines, which we refer to as price units. These dispatchable units will support the retirement of older, less efficient coal generation. We expect this project to go into service in 2023. As Gale noted, WEC Infrastructure was a positive driver for the quarter with the addition of Jayhawk, which entered commercial operation in mid-December. Thunderhead will be the next wind farm to go into service, and we now expect that in the fall of this year. As discussed before, we remain ahead of schedule in our five-year capital investment plan for our infrastructure business. Regarding gas distribution, we recently signed another contract to use renewable natural gas from a local dairy farm, bringing us halfway to our net-zero methane goal for the end of 2030. Now I will touch on the rate filings Gale mentioned. On April 28, we filed a rate review with the Public Service Commission of Wisconsin. Our proposed plans would help us to continue reducing emissions, strengthening key infrastructure, and providing affordable power to customers. I'll discuss the request to set rates for We Energies and Wisconsin Public Service. You can refer to Pages 14 and 15 of the earnings packet for more details. Under our plans for the two utilities, the typical electric bill for residential customers would increase approximately $5 to $6 a month in 2023, or roughly 5% to 6%. Key drivers for our proposed increase include capital investments in renewables, battery storage, natural gas generation, and LNG storage for our gas distribution system. Many of these projects have already been approved. In addition, we are introducing grid hardening projects that are part of a 10-year plan to protect our system against severe weather. The rate review includes other costs authorized to recover in previous proceedings. In summary, this represents only the second time in eight years we have asked for a base rate increase for We Energies. We expect final orders by the end of the year with new rates effective in January 2023. We have no other regulatory reviews pending across our companies. With that, I'll turn it back to Gale.

Scott, thank you very much. As you may recall, our Board of Directors, at its January meeting raised our quarterly cash dividend by 7.4%. We believe this increase will rank in the top decile of our industry. 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 align with the growth in earnings per share. Today, we're reaffirming our projection of long-term earnings growth at 6% to 7% a year. Again, we do not see any need to issue new equity. Next up, Xia will provide more details on our first-quarter numbers and our second-quarter guidance. Xia, all yours.

Thanks, Gale. Our 2022 first-quarter earnings of $1.79 per share increased $0.18 per share compared to the first quarter of 2021. Our earnings package includes a comparison of first-quarter results on Page 13. I'll walk through the significant drivers. Starting with our utility operations, we grew our earnings by $0.15 compared to the first quarter of '21. Rate base growth contributed $0.13 to earnings. As we continued to execute on our ESG progress plan, we grew our utility rate base by over 7% last year. Colder winter weather conditions drove a $0.05 increase in earnings when compared to the first quarter of last year. Continued economic recovery added $0.01, reflecting stronger weather normalized sales during the quarter. Overall, we saw a continued economic rebound in the first quarter of 2022. Weather-normalized retail natural gas deliveries in Wisconsin, excluding gas used for power generation, were up 3.6% compared to the first quarter of '21. Residential natural gas sales were up 1.6% from the first quarter of '21, while commercial and industrial natural gas sales were up 6.8%. Additionally, weather-normalized retail deliveries of electricity, excluding the iron ore mine, were up 0.7% compared to the first quarter of '21. These positive drivers were partially offset by $0.04 of higher depreciation and amortization expense and a $0.01 increase each in day-to-day O&M and fuel. Overall, we added $0.13 quarter-over-quarter from utility operations. Earnings at our Energy Infrastructure segment improved $0.06 in the first quarter of '22 compared to the first quarter of '21. Higher production tax credits, driven by strong wind production, added $0.03 in earnings. We also recognized a $0.03 earnings contribution in Q1 this year from the final resolution of market settlements in the Southwest Power Pool related to Storm Arie. Earnings at our corporate and other segment decreased $0.01 when compared to the first quarter of '21, with unfavorable rabbi trust performance resulting in a $0.02 earnings reduction. This was partially offset by a pickup of $0.01 from our investment in a clean energy fund. In summary, we improved on our first quarter of '21 performance by $0.18 per share. Looking now at the cash flow statement on Page 6 of the earnings package, net cash provided by operating activities increased $682 million, with cash earnings and recovery of commodity costs contributing to this growth. Total capital expenditures and asset acquisitions were $384 million in the first quarter of '22, a $207 million decrease from 2021, primarily driven by spending on the Jayhawk wind farm. Before I turn it back to Gale, I'd like to provide our guidance for the second quarter. We expect a range of $0.82 to $0.84 per share, accounting for April weather and assuming normal weather for the rest of the quarter. As a reminder, we earned $0.87 per share in the second quarter last year, which included an estimated $0.03 from favorable weather. As Gale mentioned earlier, we're raising our 2022 earnings guidance to a range of $4.34 to $4.38 per share, with an expectation of reaching the top end of the new range. With that, I'll turn it back to Gale.

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

Yes, congrats on the Bucks making it to the second round of the playoffs.

It's going to be a tough series, but they showed up yesterday.

For sure. So Gale, regarding the Wisconsin rate cases and specifically storm hardening, grid resiliency, how should we interpret the timing and pace of the spending for the 800 miles of undergrounding planned over the next decade? What is the cost per mile, and is 800 miles just a starting point for possibly an expanded program?

The best way to look at it is what we have proposed in the rate review is really the start of about a 10-year program that we see ahead of us to maintain reliability and ensure we continue to be one of the most reliable utilities in terms of outage history and restoration in the country. We've had a great track record, but we're seeing some very serious storms, particularly last year. I don't think that's going to change necessarily. We also have aging equipment. We've laid out internally a 10-year program, and Scott can provide you with more detail. What you see in the rate case is the start of that.

Correct, Gale. Yes, the start is in 2023, and it's about $700 million right now, but we'll continue to evaluate it. We think $700 million over that 10-year period is just a starting estimate, but it's more than just undergrounding. It's adding technology to the grid, more re-closures, and more self-feeding technology, similar to the benefits we had in the past in Northern Wisconsin. So looking forward to this program adds $700 million right now, but we will evaluate it.

Okay. And Scott, is this incremental to the plan or included in the current plan?

No, that has been factored into our 10-year plan, as laid out last year in our five-year plan. This just gives us a longer runway as we look through this because a lot of our system is aging, and that was the discussion on how to renew that system.

Shar, we have some transformers as old as you are. We really need to replace them.

There are only 22-year-old transformers. That's pretty impressive. And then just, Gale, you have done a great job reducing O&M historically. How are you tackling your current O&M target of flat to 1% reduction in light of observable inflationary pressures in the market and whether these are transitory? Can you remind us what level of O&M reductions for '23 and '24 are you assuming in the cases you filed?

We'll take the answer in two parts. For 2022, our target was a 0% to 1% reduction in day-to-day O&M. We still believe that's achievable, and that's in our plan. Regarding the filing for the rate review, in light of inflation and wage increases, we have proposed a modest increase in O&M for 2023. Xia?

If you compare it to the last rate order in 2020, our rate filing for O&M is actually a net reduction of 2.6%. Compared to what the commission ordered us three years ago, we actually proposed a reduction. However, if you compare it to 2021, it is a modest increase, as Gale mentioned.

Okay, got it. And just quickly, thank you for addressing the supply chain constraints and circumvention issues, but I want to confirm: Do you still feel comfortable with the 700 megawatts of solar in the current plan, which you haven't filed for approvals on yet? Or could we see some of that replaced with wind, if these tail risks don’t subside?

Yes, it's a great question. The short answer is yes. We're at a point where pivots are certainly doable. Let me be clear about that. Scott covered the two projects that are on the immediate horizon that have already received regulatory approval. We feel very good about that. When you consider the projects still going through regulatory review, there may be price increases and delays. However, less than 3% of our total five-year capital plan is in solar and batteries in 2023. We’ve got significant projects not related to solar, and we could pivot to wind if needed. So we feel good about our position despite the Department of Commerce's situation.

Congrats on the results, and hopefully, Beth continues to make a speedy recovery.

Great. Thank you so much, Shar.

Hope you all are doing well, and Beth, I hope you are doing better.

Very good. She is well at the moment.

Just circling back on what you mentioned earlier, are there any net delays to your projects, particularly in 2023 and 2024? How does that impact the rate application that was filed? It sounds like you're committing to being largely intact in your numbers regardless, but I'd like to close the gap on that last question.

Yes, given everything we're seeing, the five-year capital plan of $17.7 billion is intact. Could something shift in terms of timing due to the Department of Commerce investigation? Yes, but we have a lot of flexibility.

Absolutely. In Wisconsin, we have a two-year forward-looking test year. That will give us an opportunity to look at 2024 and any effects of battery timing and solar costs as we construct the next part of the case.

Thank you, I appreciate that. Can you explain what is driving the guidance raise already and pointing to the upper end? It doesn't seem as if your retail sales outlook at 0.5% year-over-year growth is particularly outsized. Weather is clearly a tailwind, but O&M looks like a little drag. What's driving this shift?

The raise is primarily due to results outside of our utilities. Performance from the Infrastructure segment and a penny pickup from the technology fund contributed significantly. We feel it's justified to raise guidance by $0.05, and we expect to come in at the top end of that range. As I've said, we still believe in long-term earnings per share growth of 6% to 7% with no need to issue equity.

Understood. Appreciate your insights on the guidance there. Just one more point of clarification, especially regarding the solar net impact and your CAGR outlook.

Let's clarify that the energy infrastructure is tracking well above expectations. It was above expectations for Q1, and the delta will be accounted into the overall energy fund, with no offset expected for the infrastructure segment.

I would like to clarify when you said line of sight on production and delivery for the near-term projects, does that mean you physically have the panels? And can you provide more color on what's causing the delays on the battery side?

We have a plan for the Badger Hollow II project, which is the nearest term project. We know where the solar panels are and are confident in the schedule. On the Paris project, we have clear sight on our production schedule and delivery schedule, without expect customs problems. Scott, any additional information?

We've walked through the logistics on this extensively and, as Gale mentioned, the sites are ready. Delivery of the panels is expected, and we anticipate completion in mid-2023. Battery production and delivery have been a bit more volatile and will be addressed once we complete the scheduling.

It's important to note that the 2023 spending on batteries is about 1% of our $17.7 billion capital plan, so it’s not going to significantly impact our overall strategy. Is that helpful, Michael?

It is, and I would just like to follow up on the cost estimates for your solar projects. What are your most recent projections for the nearer-term ones?

Going forward, future solar projects may see a 30% to 40% increase compared to what we've seen in the past.

Initially, the first solar projects were at a rate of $1,300 per kilowatt. The upcoming ones are likely to increase by 20% to 30%, and in the longer term, perhaps by 30% to 40%.

Battery pricing remains unpredictable, and we’ll see how that circumstances develop. I hope that gives you some understanding of what we are witnessing on the solar side.

Super helpful. Lastly, regarding the rate case, is there precedent in Wisconsin for the limited rate reopener you are requesting for 2024?

Yes, there is ample precedent for a limited reopener in Wisconsin.

I would like your thoughts as an industry leader on how the investigation is progressing. What are you hearing and where do you think the Department of Commerce is headed?

There's going to be significant pressure on the Department of Commerce. We've seen letters from 26 senators basically urging a swift conclusion to the investigation. My sense is that the Department will be thorough yet may expedite the review process due to public demand. 85% or more of utility-scale solar panels produced come from outside the U.S., signifying the magnitude of the situation and potential delay impact. While they have to conduct their investigation thoroughly, the urgency for decision-making on energy security remains critical.

That helps tremendously, thank you, Gale. Just quick clarification: Is the 30% to 40% increase you previously mentioned before any additional tariffs are imposed?

Yes, that 30% to 40% estimate is prior to the impact of any potential tariffs from the Department of Commerce investigation.

Well wishes to Beth, and thank you for having me. I want to discuss potential solar delays further. Can you share your views on reserve margins in your service territory and the outlook, considering rising demand and coal retirements?

There's concern about summer reliability in light of the recent MISO report indicating potential capacity shortfalls. While we feel reasonably prepared for this summer, aging generation assets need to be evaluated closely; we may see more demand due to hot summer conditions.

Absolutely. We'll need to carefully re-evaluate our capacity situation continuously. For this summer, we believe we're in reasonable shape overall.

Could you provide more insights into retail electric sales growth expectations and their alignment with actual results for the quarter?

Longer-term outlook remains unchanged; we cannot shift expectations based on one quarter, especially considering the cold winter. Weather normalization can be imprecise, but overall, manufacturing sector strength remains a significant driver.

When assessing data, large sectors in manufacturing have a positive outlook. In addition, small commercial industrial has opened up more than we expected following the pandemic, which bodes well.

One anecdote I'd like to share: EV penetration is on the rise. In our condo building, seven out of 99 units now have EVs, something I didn't expect. While we haven't anticipated significant EV penetration in our five-year plan, interest is growing in our EV pilot.

Good luck in Boston tomorrow night; I'm a Yankees fan, so I'm always happy when a Boston team loses. I have two quick questions. The call delays on solar projects have been noted, and I see that your strategy has centered on diversification, benefiting customers. Do you see any changes from regulators amid the current headwinds for renewable energy?

We've had constructive conversations with policymakers in Wisconsin regarding decarbonization and energy security. There’s strong support to do both without compromising reliable power. We believe we can decarbonize effectively while maintaining a diverse energy portfolio.

The second question, and I apologize if I had this wrong. I believe you filed for the same ROE request as currently granted. I've seen other utilities across the country file for larger ROE requests under inflationary pressures. What are your thoughts on the level of ROE you filed for?

We believe the level of ROE is appropriate, reflecting our cost of capital. It will provide robust cash flows to maintain strong credit ratings, with an opportunity to earn above the allowed ROE through our sharing mechanism.

Can you clarify costs on customer bills related to the electric side—including the fuel costs embedded in it—and what's happening to customer total bills in comparison to nearby states?

Yes, the $5 to $6 a month increase refers to the total bill, which remains below the national average and comparable to our Midwest peers. This includes fuel costs, but each year we file for a fuel update to adjust for the latest gas price forecasts.

As Scott mentioned, the typical residential customer will see a $5 to $6 increase. This estimate considers fuel, with annual reviews expected.

What guidance did you enter the year with for weather-normalized gas demand growth?

We had guidance of 0.5% for gas demand growth going into the year. There are factors influencing gas demand such as conversions to natural gas from oil and coal.

Final question: What is the annualized growth forecast for ATC?

The annualized growth for ATC is roughly 4% to 5% per year.

That's about right.

It doesn't factor in any Future 1 projects, which are still being debated. They won’t be initiated until much later in the decade.