WEC Energy Group Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Gale E. Klappa, Executive Chairman
• Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer
• Xia Liu, Executive Vice President and Chief Financial Officer

Analysts

• Shar Pourreza, Guggenheim Partners
• Julien Dumoulin-Smith, Bank of America Co.
• Richard Sunderland, JP Morgan Cazenove
• Neil Kalton, Wells Fargo Securities
• Durgesh Chopra, Evercore ISI
• Michael Sullivan, Wolfe Research
• Andrew Weisel, Scotiabank
• Michael Lapides, The Goldman Sachs Group, Inc.
• Paul Peterson, Glenrock Associates

Presentation

[Operator]

Good afternoon and welcome to WEC Energy Group's Conference Call for fourth quarter and year end 2021 results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time.

Before the conference call begins. I remind you that all statements in the presentation other than historical facts are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, reference to earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open for analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be made available approximately two hours after the conclusion of the call.

And now it's my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, good afternoon everyone, and thank you for joining us today as we review our results for calendar year 2021. First, I'd like to introduce as always the members of our management team who are here with me today. We have Scott Lauber who is now our President and Chief Executive; 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 2021 earnings of $4.11 a share. This exceeded the upper end of our most recent guidance, which was $4.7 a share. Our positive results were driven by favorable weather, solid economic recovery in our region and our continued focus on operating efficiency. Our balance sheet and cash flows remain strong and as we've discussed this allows us to fund a highly executable capital plan without issuing equity. I would also note that the earnings we're reporting today are our quality earnings with no adjustments.

As you know, we've been very active in shaping the future of clean energy. Looking back on 2021 we set some of the most aggressive goals in our industry for reducing carbon emissions. Across our generating fleet, we're targeting a 60% reduction in carbon emissions by 2025 and an 80% reduction by the end of 2030, all from a 2005 baseline. In fact by the end of 2030, we expect our use of coal for power generation will be immaterial and our plan calls for a complete exit from coal by the year 2035. Of course for the longer term, we remain focused on achieving net zero carbon emissions from power generation by 2050.

Now, we all recognize that advances in technology will be needed to decarbonize the economy by 2015 and hydrogen, of course, could be a key player, a key part of the solution in the decades ahead. To that end, we announced last week 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 newer natural gas-powered units located in the Upper Peninsula of Michigan. The project will be carried out this year and the results will be shared across the industry to demonstrate how the use of hydrogen could materially reduce carbon emissions.

Switching gears now. We're driving forward on our $17.7 billion ESG Progress Plan, the largest 5-year plan in the company's history. The plan is focused on efficiency, sustainability and growth. One of the highlights is the planned investment in nearly 2400 megawatts of renewable capacity over the next 5 years, These renewable projects will serve the customers of our regulated utilities here in Wisconsin. Overall, we expect the 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. In summary, we believe we're poised to deliver among the very best risk-adjusted returns our industry has to offer.

And now let's take a brief look at the regional economy. We saw a promising recovery throughout 2021 despite the prolonged pandemic. The latest available data show Wisconsin's unemployment rate down at 2.8%. Folks, that's a record low, and more than a full percentage point below the national average. Importantly jobs in the manufacturing sectors across Wisconsin have returned to pre-pandemic levels and major economic development projects are moving full steam ahead. Haribo, the gummy bear company is now recruiting workers at its brand new campus in Pleasant Prairie. Komatsu has begun to relocating employees to its new state-of-the-art Milwaukee campus. Milwaukee Tools downtown office tower is set to begin operations this month and we see more growth ahead. For example ABB, a global industrial and technology company and Saputo a leading dairy products company have announced plans for major expansions in our region.

And finally, you've heard the phrase, a rising tide lifts all boats. Well, I'm pleased to report that one of the most celebrated luxury boat makers in the world, Grand Craft boats is relocating its operations from Michigan to the Milwaukee region. JLo,George Clooney, Robert Redford, they are among the high profile clients of Grand Craft, so it'll be interesting to see who shows up below deck at out next Analyst Day. Bottom line, we remain optimistic about the strength of the regional economy and our outlook for long-term growth.

With that, I'll turn the call over to Scott for more details on our utility operations and our infrastructure segment. Scott, all yours.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

Thank you, Gale. Looking back, we made significant progress in 2021. I'll start by covering some developments in Wisconsin. As Gale mentioned, we're continuing to make progress on the transition of our generation fleet in our ESG Progress Plan. I am pleased to report that our Badger Hollow I Solar project is now providing energy to our customers. You'll recall that we own a 100 megawatts of this project in Southwest Wisconsin. We have also made progress in the construction of Badger Hollow II. Currently we expect an in-service date in the first quarter of 2023. This factors in a delay of approximately 3 months due to ongoing supply chain constraints. We do not expect a material change in the construction costs.

In addition, the Public Service Commission has approved our plans to build two liquefied natural gas storage facilities in the southeastern part of the state. Construction has started and we plan to bring the facilities into service in late 2023 and mid 2024. We expect this project to save our customers approximately $200 million over time and help ensure reliability during Wisconsin's coldest winters.

And we recently signed our first contract for renewable natural gas or RNG for our gas distribution business. We will be tapping into the output of one of our large local dairy farms. The gas supplied each year will directly replace higher emission methane from natural gas that would have been entered our pipes. This one contract alone represents 25% of our 2030 goal for methane reduction. The Wisconsin based company U.S. Gain is planning to have RNG flowing to our distribution network by the end of this year. The Commission also approved the development of Red Barn, a wind Farm in southwestern part of the state. We expect our Wisconsin Public Service Utility to invest approximately $150 million in this project and for it to qualify for production tax credits. When complete, it will provide WPS with 82 megawatts of renewable capacity.

And just this past Monday, we filed an application with the Commission for approval to acquire a portion of the capacity from West Riverside Energy Center. West Riverside is a combined cycle natural gas plant owned by Alliant Energy. If approved, Wisconsin Public Service would we acquire 100 megawatts for approximately $91 million. That's the first of two potential option exercises. We expect the transaction to close in the second quarter of 2023. Looking forward, we expect to file a rate review for our Wisconsin utilities by May. We have no other rate cases planned at this time.

Turning now to our infrastructure segment. The 190 megawatt Jayhawk Wind Farm located in Kansas began service in December. We invested approximately $300 million in this project. Overall, we have brought 6 projects online in our infrastructure segment representing more than 1,000 megawatts of capacity. And as you'll be recall we expect the Thunderhead wind farm to come online for the second quarter and the Sapphire Sky by the end of this year. Including these two projects, we plan to invest a total of $1.9 billion in this segment over the next 5 years and we remain ahead of plan.

And with that, I'll turn things back to Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Scott, thanks so much. We're confident that we can deliver our earnings guidance for 2022. We're guiding, as you know, in a range of $4.29 a share to $4.33 a share. The midpoint $4.31 represents growth of 7.5% from the midpoint of our original guidance last year. And you may have seen the announcement that 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. This also marks the 19th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings 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 financial results and our first quarter guidance. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Thanks, Gale. Turning now to earnings. Our 2021 result of $4.11 per share increased $0.32 or 8.4% compared to 2020. Our earnings package includes a comparison of 2021 results on Page 17. I'll walk through the significant drivers.

Starting with our utility operations, we grew our earnings by $0.10 compared to 2020. First, weather added $0.04 mostly driven by colder winter weather conditions compared to 2020. Second, continued economic recovery drove a $0.09 increase in earnings. This reflected stronger weather normalized electric sales as well as the resumption of late payment and other charges.

Let me give you some highlights on our weather normalized retail sales. Overall retail deliveries of electricity excluding the iron ore mine were up 2.6% compared to 2020. We saw a continued economic rebound in 2021 in our service territory. Small commercial and industrial electric sales were up 4.4% from 2020 and large commercial and industrial sales excluding the iron ore mine were up 5.1%. Natural gas deliveries in Wisconsin were relatively flat excluding gas used for power generation.

Lastly, rate relief and additional capital investment contributed $0.14 to earnings and lower day-to-day O&M drove a $0.03 improvement. These favorable factors were partially offset by $0.17 of higher depreciation and amortization expense and a net $0.03 reduction from fuel cost and other items. Overall, we added $0.10 year-over-year from utility operations. Earnings from our investment in American Transmission Company decreased $0.02 per share year-over-year. The positive impact of additional capital investment was more than offset by two factors. A 2020 third quarter that benefited 2020 earnings and an impairment that we booked in the fourth quarter of 2021 on an investment outside of the ATC service territory. This substantially wrote off all of the goodwill on the project.

Earnings at our Energy Infrastructure segment improved $0.06 in 2021. This was mostly related to production tax credit from the Blooming Grove and Tatanka Ridge Wind Farms. Finally, we saw an $0.18 improvement in the Corporate and Other segment. Lower interest expense contributed $0.07 year-over-year. Also, we recognized a $0.04 gain from our investment in the funds devoted to clean energy infrastructure and technology development. The remaining positive variance related to improved rabbi trust performance and some favorable tax and other items. In summary, we improved on our 2020 earnings by $0.32 per share.

Looking now at the cash flow statement on Page 6. Net cash provided by operating activities increased $163 million. The increase in cash earnings was more than offset by working capital requirements mostly related to higher natural gas prices. As we review normal collection practices in this spring, we expect working capital to improve throughout the year. Total capital expenditures and asset acquisitions were $2.4 billion in 2021. This represents a $471 million decrease compared to 2020 due primarily to the timing of the in-service date of Thunderhead Wind Farm.

Turning now to the financing activities. We opportunistically refinanced over $450 million of holding company debt during the fourth quarter. This reduced the average interest rate of these notes from 4.5% to 2.2%. We continue to demonstrate our commitment to strong credit quality. Adjusting for the impact of voluntary pension contribution and the year-over-year increase in working capital, our FFO to debt was 15.7% in 2021.

Finally, let's look at our guidance for sales and earnings. For weather normalized sales in Wisconsin, we are expecting 0.5% growth this year in both our electric and natural gas businesses continue to grow after a very strong year. In terms of turning to earnings guidance last year we earned a $1.61 per share in the first quarter. We project first quarter 2022 earnings to be in the range of $1.68 per share to $1.70 per share. This forecast assumes normal weather for the rest of the quarter.

And as Gale stated for the full year 2022, we are reaffirming our annual guidance of $4.29 to $4.33 per share. With that, I'll turn it back to Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Xia, thank you so much. Overall, we're on track and focused on providing value for our customers and our stockholders. Operator, we're now ready to open it up for the question and answer portion of the call.

Questions and Answers

[Operator]

Now we will take your questions. [Operator Instructions] Your first question comes from the line of Shar Pourreza of Guggenheim Partners.

[Shar Pourreza, Analyst at Guggenheim Partners]

Rock and roll Shar, how are you doing today? How you doing, Gale? All good.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

We're good.

[Shar Pourreza, Analyst at Guggenheim Partners]

Excellent. So just, I know this seems like a perennial topic at this point but any sort of thoughts on the potential end of QIP in Illinois. It seems like efforts to eliminate it are getting traction yet again, obviously piece of legislation. There was a press conference on Monday. It's scheduled to expire. So what are your thoughts here. I mean, it's a little bit noisy, just high-level would be great.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Terrific Shar, thanks for the question. First of all, this is really nothing new. Each year late in the session for the past 5 years, a bill has been introduced, very similar bills have been introduced each year for the past 5 years. We don't expect any significant movement in that piece of legislation, just exactly is what happened in the last 5 years. You are correct. Under current law, the QIP rider that allows us to put into to basically begin earning a return on and of after new piping has put into service, that rider is scheduled by law to expire at the end of 2023. So we got our ways to go. I would say this. We continue to try to educate and I think have had some significant success in helping most people to understand two things. First of all, the QIP rider and the way it works is actually the most cost-effective way for customers to basically have us continue with a very needed pipe upgrade program. And secondly, the Illinois Commerce Commission last year authorized a study actually, asked us to hire an independent consulting firm called Krueger [Phonetic] which did more than a year's work in looking at what's needed in Chicago and they concluded that more than two-thirds, almost 80% of the remaining gas distribution pipes under Chicago have a useful life of less than 15 years. So the work has to be done. We're doing it the most cost-effective way possible, not concerned about any near-term legislation.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, perfect. And then maybe just shifting over to the infrastructure segment. It seems like it's been a bit of a longer time since your last acquisition like Sapphire Sky versus I guess your prior cadence. Just curious, is this sort of a symptom of anything in particular? Is there fewer opportunities or just a lot of competition, supply chain, returns. Are you seeing projects may be getting pushed out a little bit ahead of federal policy clarity. Just maybe some thoughts there would be great.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Now, I'll be happy to answer that question, Shar. First of all, as Xia mentioned and Scott we're way ahead of plan. So Jayhawk came into service a bit early on budget, Sapphire Sky, which we announced late last year is under construction and I expect Sapphire Sky to begin commercial operation at the end of this year. We don't have anything particularly in the plan for this year, not because there is a paucity of projects. We have a robust pipeline that we're looking at, I think some of the uncertainty over federal tax credits maybe slowing things down here but we're way ahead of plan. We didn't have anything specific in this year's plan but we continue to look. We have a robust pipeline of projects and you will see some continuing effort here. We can be, as you know, very selective, because we're so far ahead of plan.

[Shar Pourreza, Analyst at Guggenheim Partners]

Got it, got it. And then just one real quick modeling question. Is the ATC Holdco goodwill impairment, that's in the driver slide, just wondering what that is.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah, I'm happy to. It's an outside of the service area investment that years ago, the joint venture of Duke and ATC made in California and I'll let Xia give you the detail.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah, basically we jointly own a transmission project. We acquired that back in 2013 and we performed the normal goodwill assessment on that project and decided that if they are prudent for us to write down the majority of the goodwill. So it's a non-cash book entry that we did in the fourth quarter 2021.

[Shar Pourreza, Analyst at Guggenheim Partners]

Got it. Perfect. Thanks guys, I appreciate it and Gale, hopefully the quote unquote no adjustments comment in your prepared remarks was understood well by the audience. Appreciate it. Thanks guys.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Shar.

[Operator]

Your next question comes from the line of Julien Dumoulin-Smith of Bank of America.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Good afternoon, Julien.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Hey, afternoon. Thanks for the time guys. Appreciate it. Just to clarify the last question a little bit on people in Illinois here. I mean the only thing that concerns is the capex spend that you have over 22 to 26 here, which obviously spans the lapsing of the current program, you're saying that, if that program were to go away here that number ballpark would stay intact.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, what would happen. I mean, first of all, I think the most direct answer to your question is that work is needed for safety and reliability. So we either would continue, assuming that the rider was renewed by legislation post the end of 2023 or we would revert to basically annual rate cases and again, if you recall in Illinois, the commission there uses forward looking test periods. So either way that work has got to continue and the investment is in the range depending upon the year of $280 million to $300 million a year.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Got it. Excellent. Thank you. And then just pivoting on the transmission side here, just card Cardinal Hickory obviously some developments in the course last week, just how are you thinking about options given the federal wildlife reserve just in terms of alternate route, timing, capex, recovery. Anything you can share there.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Sure, I'm happy to. And for those who might not have been following Cardinal Hickory, there is some activity in the courts with an environmental group challenging the permits that were issued by US Fish and Wildlife Service by the Iowa Public Service Commission by the Wisconsin Public Service Commission. So there have been multiple permits that would allow this more than 100-mile line to be built coming out of Iowa into southwestern Wisconsin and then working its way over to the Madison area. So that's essentially a little more than 100-mile line and to show you how long these projects take, that project was first envisioned and first discussed in 2011. So construction has been underway essentially in the Iowa portion. The portion in question where the permits are being challenged is in the southwestern part. It's an environmentally sensitive part of the southwestern section of the State of Wisconsin. It's called the Driftless Area. American Transmission Company and again this is partially owned, this line will be partially owned by ITC, ATC and the DairyLand Power Cooperative. The ATC portion, no one has questioned the permits for that section of the line. So we'll see how all of this works out in court. But long story short, the Wisconsin Commission has reiterated the need for the line and reiterated their belief that the approval was appropriate and needed. We'll see how all this works out in court. At the end of the day, that line is an important part of moving renewable energy across the Midwest and Wisconsin. So at the end of the day I'm confident something positive will come out of this. May be a bit delayed. We'll see what happens in the courts. I hope that helps, Julien.

[Julien Dumoulin-Smith, Analyst at Bank of America]

No, actually it's good color. Well, I'll leave it there guys. Thank you again and best of luck and hope to see you guys soon.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Sounds good. Thanks, Julien.

[Operator]

Your next question comes from the line of Jeremy Tonet of JP Morgan.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Greetings, Jeremy.

[Richard Sunderland, Analyst at JP Morgan Cazenove]

Hi, it's actually Richard Sunderland on for Jeremy. Can you hear me?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I can. What have you done with Jeremy?

[Richard Sunderland, Analyst at JP Morgan Cazenove]

Jeremy is sorry to miss but I'm happy you have the time for me today. Just maybe starting around the low growth expectations for 2022. You've shared some of the key drivers there and really how you think about realized recovery from the pandemic in 2021 and maybe how much conservative is -- conservatism is baked in there for the '22 outlook.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

We're going to let Scott handle that for you. He and Xia are on top of those details. I will say this though. We are coming off of just as a reminder, we're coming off a very strong recovery in 2021 and we see continued growth in 2022. Scott, particularly at least I was impressed by the numbers related to the small C&I segment.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

You're exactly right, Gale. In fact when we go back and Xia, I look at our forecast compared to what happened in 2021, we are right on with residential. It hit exactly on. The positive surprise was in small commercial and large commercial. So we came in almost our original forecast is about 1.3% growth. We came in at 2.5% at a retail less mine. So, very happy with the growth that we saw and as you look at it we continue in 2022 to expect residential as people can start coming back to work and you start to see more and more people return to work. Residential to go down a little bit and then that small commercial to grow continuing to expand in there and then once again, large commercial, we almost have a 2% growth in that large commercial sector. So we're seeing really, really good growth and you can see as you look at our longer-term plan, a lot of good economic growth that we talked about on the call. So a lot of good economic growth coming here too.

[Richard Sunderland, Analyst at JP Morgan Cazenove]

Thanks, I appreciate the color there and then maybe pivoting this new pilot program in Michigan. What's the longer-term target for blending and how do you think about this program in the context of your entire fleet?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're speaking, I believe, of the hydrogen pilot program that we're going to undertake in the Upper Peninsula of Michigan at one of our newer RICE units. And just to put all of that in context for everyone, the RICE units, it's a technology that's been well proven fueled by natural gas, modular technology if you will, does not require water permit. I mean these are really advanced state of the art power generation facilities and the project is really a pilot project. It's being designed right now. We will actually test burn hydrogen in a mix with natural gas, up to 25% hydrogen, 75% natural gas and this project will actually be in the field in the fourth quarter of 2023. We with the Electric Power Research Institute will then analyze the results. And as I mentioned in the prepared remarks, the results will be shared across the industry. We're optimistic that this pilot program, one of the first of its kind in the US will demonstrate that hydrogen with that particular technology, the RICE unit technology could be a major player going forward in decarbonizing the economy.

[Richard Sunderland, Analyst at JP Morgan Cazenove]

Great, thank you for the time today.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're welcome.

[Operator]

Your next question comes from the line of Neil Kalton of Wells Fargo Securities.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Greetings, Neil.

[Neil Kalton, Analyst at Wells Fargo Securities]

Hi everybody.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Neil, are you getting snow or ice where you are?

[Neil Kalton, Analyst at Wells Fargo Securities]

We're getting a lot of it and I'm watching all my neighbors and my wife and son shoving the driveway right now. So I'm feeling pretty good about that,

I'm wondering,

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I just got a text from your wife, which said, you dog.

[Neil Kalton, Analyst at Wells Fargo Securities]

Yeah. Bad back, I can do things anymore. So anyway, just a question on the solar. So obviously Badger Hollow, I guess it slipped a little bit to understand given all the supply chain issues, etc. but you've got quite a bit more solar in the plan as we look at over the next few years. And I'm curious if your -- if there is any at this point, any reason to be concerned about costs or timing from what you're seeing right now as it relates to the additional I think 1300 megawatts that you plan to do over time.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah, great question, Neil. I think the short answer is, with what we are seeing for 2022 and what we have under contract, no significant issues, other than perhaps some timing. Down the road, Scott, your thoughts.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

Yeah, down the road. I mean, we're definitely watching steel prices for the infrastructure and also the solar panels but as you look at natural gas prices also as those prices go up, the economics are still there. So, and that we expect that some of the cost will rise and we're monitoring it very closely as you can imagine but I don't think it's going to change our plan.

[Neil Kalton, Analyst at Wells Fargo Securities]

Okay.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I agree with Scott and Neil, one other point. The drive to decarbonize the economy is not abating in any way, shape or form. So we continue to see those investments as both needed and expected as we go down the road.

[Neil Kalton, Analyst at Wells Fargo Securities]

Perfect, thank you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Neil.

[Operator]

Your next question comes from the line of Durgesh Chopra of Evercore ISI.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Greetings, Durgesh. How are you doing?

[Durgesh Chopra, Analyst at Evercore ISI]

Hey, I'm doing well. Thank you for asking. Thank you for taking my question also. Xia, just this is a modeling question. The $0.04, the gain on Clean Energy Fund, can you just elaborate on that. And then what quarter was that gain? And then, I'm assuming you're not sort of modeling anything for 2022 and there is a multi-part question, I'm sorry.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah, that's okay. The -- I think on the second quarter call I mentioned that we booked $0.03 of gain in the second quarter. Then we picked up another penny in the fourth quarter. So $0.04 for the whole year and we, when we develop the financial plan we don't try to build any expectations of anything like similar like investment gains like this but if the market continue to point in the right direction and if we end up having more gains, we will be happy to book those but we don't count on those going forward.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes. Sounds right. We'd be delighted to book more gains. I think this was from a revaluation, if you will, of one particular investment in the fund that is these funds, as you know, investing in clean technology, some of them hit, some of them don't. This one hit hit very, very well and with the new round of funding and with the valuation, it was perfectly appropriate to revalue our investment.

[Durgesh Chopra, Analyst at Evercore ISI]

Awesome. Thank you for that color. And then just maybe your peers on a call today talked about. Just wanted to sort of, we'd be interested in your progress on your actually your execution on new capital plan for '21. Your peers mentioned some supply chain concerns and they had to push some of the renewable projects out. I'm just wondering are you seeing any of those pressures and how do you actually do in '21 versus your targeted capex plan.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I will ask Scott to give you his view as well. The one impact we had, it was really more from COVID than it was from supply chain and that was a large solar farm, a large solar field called Badger Hollow I and that got delayed. It's now in service. That got delayed several months and it was a decision that we had to make at the point where we were deep in the pandemic in 2021 to continue the construction pace, we would have had to bring in about 150 crew people from outside the state to continue the construction at that point in time. In the middle of the pandemic, we thought that was really not a very good idea. So we agreed to a schedule delay but Scott no significant cost delay at all and that's now behind us.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

No, that's exactly correct. And everything else for 2021, our supply chain worked with our vendors to get everything in line and we've had a practice year for several years that we are ordering some of the long lead time materials a year, year and a half at time for some of these major projects to make sure we have it. So, and then the only other item was just what we mentioned in our prepared remarks was Badger Hollow II, we see about a 3-month delay right now but no significant cost at this time.

[Durgesh Chopra, Analyst at Evercore ISI]

Thank you, guys. Much appreciate the time.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're welcome. Thank you, Durgesh. Take care.

[Operator]

Your next question comes from the line of Michael Sullivan of Wolfe Research.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Michael, how's your IT department?

[Michael Sullivan, Analyst at Wolfe Research]

Yes, fantastic.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You might, kind of reiterate, no change in your rating, right Michael?

[Michael Sullivan, Analyst at Wolfe Research]

Yes. Yeah, for sure, you got it, Gale. The first question, maybe just if you could give us a sense of what the clean O&M savings number was for 2021 and what you're embedding in '22 guidance.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Happy to do so. Xia's got it right in front of her. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

So, for year 2021, we ended with 1.6% down year-over-year compared to 2020, so we guided earlier in the year to 2% to 3% and we're right in that range. And what, you had a second part of your question?

[Michael Sullivan, Analyst at Wolfe Research]

Yeah, What are you assuming in '22?

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah, for 2022 we guide flat to 1% reduction from 2021.

[Michael Sullivan, Analyst at Wolfe Research]

Okay, great.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And Michael, I'm sorry, I'm sure you recognize this but in light of the general inflation in the economy, we think that's really, really strong performance. We're very pleased about the plan we have in place to deliver what Xia is discussing.

[Michael Sullivan, Analyst at Wolfe Research]

Got it, okay. And just curious if you could give any latest thoughts on where you think things might go with the pending issue at FERC as it relates to the RTO adder?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

My own guess, and this is just a guess, but my own view is the RTO rider is probably history. But to be replaced by something else, perhaps an incentive type of mechanism. I'm guessing the RTO rider as we've known it probably won't survive. However very important point. We have not assumed the continuation at all of the RTO rider in our forecast for 2022 earnings.

[Michael Sullivan, Analyst at Wolfe Research]

Okay, that's great, thanks. And sorry, just one last one. It may be -- it looks like the FFO to debt metric ticked down a little bit year-over-year. Should we think about that is kind of stabilizing around that 15%, 15.7%. I think where it came out as a go-forward target.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Xia, your view.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah. We target the 15% to 16% measured by Moody's and S&P. So this is right in that neighborhood, and as I said in the prepared remarks, the dip is really driven by year-over-year change of working capital. So, and then that's largely attributed to higher natural gas prices. So we expect that to recover, and we also made a voluntary pension contribution in 2021. So overall, I think we're right in the target range for FFO to debt.

[Michael Sullivan, Analyst at Wolfe Research]

Great, thank you very much.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Michael. Take care and your IT folks.

[Operator]

Your next question comes from the line of Andrew Weisel of Scotiabank.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Good afternoon, Andrew.

[Andrew Weisel, Analyst at Scotiabank]

Hey, thanks for taking my question. Most of them have been answered. I just want to follow up a little bit on the upcoming Wisconsin rate case. Two quick ones. First is, do you see any potential for yet another stay out or agreement to keep rates unchanged. I don't mean to be greedy. You've done a great job managing the customer bills. Just wondering, strategically, if you want to extend the stay out or if you feel it's time to have a conversation with regulators and interveners like you do every so often.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, it's a great question, Andrew. And I think unanimously we believe it's time to reset, if you will. Number of moving parts that are in our thinking and first of all, as you recall, we've announced the retirement of four older coal-fired units at our Oak Creek side. These are 1960s vintage units and we've announced the retirement of the first two of those four in 2023 in the second two of the four in 2024. So there'll be retirement there. There will be cost savings there and we really have been out of a rate case for so long, that it's really just time to step back and reset, and I think every -- the Commission staff of the interveners, I mean we all believe it's just time to take a thorough review again and we're looking forward to that. Scott?

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

And it's going to be a very straightforward rate case. I mean, when you look at our capital investments that we've made, the capital investments and the majority of from, I think when you look at what's already been approved and at the Commission right now, that's about 60% or a little over 60% of the rate base and then you even add in new services and other reliability capital. Almost all of this has been approved or great capital additions for reliability or decarbonizing the environment. So it's going to be a pretty straightforward rate case as you see us pull the final numbers together here in the next couple of months.

[Andrew Weisel, Analyst at Scotiabank]

Okay. Not to get ahead of that but are you able to give us any kind of high level guess what it might do to rates directionally are qualitatively?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Stay tuned. We're pulling everything together. The filing is due by May 1. So we will certainly have a good conversation with you in advance of that.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

And I think the other thing to remember is this is a place where you do 2-year forward looking rate cases. So a lot of our capital projects and you see that capital spending is going to come in over two years just like Gale mentioned the retirement of those plants are over 2 years. So we will factor that in too. So, it will be a multi-year filing we do here.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Very straightforward case. So, we wouldn't expect to have, anything is dramatic in terms of, this is not a case about higher O&Ms. As Scott said, this is a case about capital, much of which will have already been approved, capital needed for reliability and for decarbonization.

[Andrew Weisel, Analyst at Scotiabank]

Very good. And just a quick follow-up. Is it too early to talk about performance-based rate making in this upcoming case?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah and I'm glad you asked. For those of you who have not followed it perhaps quite as closely, the commission did have an informational hearing about just about the concept of performance-based rate making. That hearing came out of more than a year's worth of work of the Governor's Task Force looking at climate change, looking at decarbonization, looking at what initiatives the state might put in place but I think it's very clear from the informational hearing that any changes in the process for putting rates in place in Wisconsin is going to be deliberate, going to be thoroughly thought through, and I would not expect to have -- that to have any impact on our upcoming rate review.

[Andrew Weisel, Analyst at Scotiabank]

Okay, very helpful. Thank you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're welcome. By the way. Before we go to the next caller. I just got a text from one of your brother and who says, given your performance, nobody's asking the most important question. Will Aaron Rodgers be back in Green Bay next year? The answer to that is I don't know but Janis is still with us for the bucks and rock and roll.

[Operator]

Your next question comes from the line of Michael Lapides of Goldman Sachs.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hey guys, thanks for taking my questions and I'll leave my John Moran [Phonetic] props at home for now. Where did you go?

[Michael Lapides, Analyst at The Goldman Sachs Group]

Really nice night, New York last night. Real quick. Just thinking about gas demand, if I go back over the last several years kind of 3, 4 years or so weather normalized gas demand in Wisconsin was actually pretty elevated. I can even go back 5 years and now this year you're forecasting about 0.5% and then if I look at your November slide deck you're kind of forecast, I think it's around 0.7% or 1% demand growth. Can you just talk to us a little bit about the trajectory meaning why coming down off that kind of, first of all what led to the abnormal kind of that 3% plus range from a couple of years ago and that lasted for several years and then down 0.5% now, kind of, as we're coming out of COVID but then re-ramping back up.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah. And Scott now both take a shot at that for a good question, Michael. The easy question, the first piece is what happened, why did we not see growth in weather normal gas demand during this past year during 2021 and as we looked at the data, I think the answer it really pops out from the data and that is the effect of the pandemic. If you think about the most dramatically impacted segment of our customer base for the pandemic, it's small commercial and industrial customers. Many of those premises were just closed during huge swaths of the pandemic and so they weren't, think of the restaurants that weren't cooking. Think of the stores that were completely closed and not heated to the normal level. So clearly, the impact of the pandemic tempered the growth in customer demand for natural gas but we still think we're going to see a growth trajectory and Scott, we're still seeing strong customer growth.

[Scott J. Lauber, Senior Executive Vice President and Chief Operating Officer at WEC Energy Group]

Yeah, that's exactly right. And when we look at it, we're looking at strong customer growth about 0.5%, maybe seven-tenth of a percent. If you can imagine we're factoring in if prices stay a little bit higher conservation will continue and products will continue to become efficient. So looking forward we're still assuming that 0.5% in the future will be seven-tenth to 1%. So good growth and to Gale's point, remember the pandemic started in about March. So last year, there is two months that weren't reflected in the previous year when the pandemic, we didn't have a pandemic. So that's also why 2021 was a little weaker because of just the timing of the pandemic.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah, I'll just add that, Michael, that we came pretty much on top of our forecast last year. So we guided that way. So we came out exactly what we thought it would happen last year.

[Michael Lapides, Analyst at The Goldman Sachs Group]

Got it. And then just a follow-on question, like if I look at 2020 and 2021 earnings both years actually would have been a higher number if I backed out that kind of roughly the $0.08 of debt extinguishment costs that showed up in each year. So the earnings number like a lot of companies consider that, you know, non-recurring and I respect the fact that you back things in and now when you kind of you stick with GAAP but if I think about it, there is something that probably isn't going to happen in 2022 or 2023, I may be wrong there. So it would imply the base would have actually been higher, meaning the '21 starting point or the '20 starting point but the growth rate into '22 and '23 would actually be a little bit lower just because the starting point is higher. Am I just kind of thinking about that right or there -- are you looking at the debt tranches at the Holdco and saying, hey look, I'm going to have other refinancings and I will probably incur other similar like costs? Are there other moving parts, I'm not considering?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Michael, I'll ask Xia to answer the question about the Holdco debt. Let me, if I can respond a little bit more broadly. Of course, there are a number of moving pieces in any given year but as you know some companies in our industry basically adjust their way to a high growth rate. We don't do that and I'm glad you're asking the question because I think the quality of our earnings and the fact that we don't adjust our way to a higher growth rate, I think that's a differentiator for us. I mean I really do and it shows up in things like cash flows. It shows up in things like dividend growth and so what we're reporting, I mean we don't nickel and dime you to death with little adjustments here and there just to hit a growth rate. What we're reporting is high quality and real and GAAP. And with that I'll get off my soapbox and let Xia respond.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Michael, I wouldn't just pick out that one item and we adjust whatever you're trying to adjust because to Gale's point. we are very much focused on the quality of earnings. If we see favorable weather we see stronger economic recovery than what we originally forecasted. If we also had some favorable tax resolution happen in 2020, in the year, we will remain opportunistic about debt refinancing and just to just to take advantage of the development. So I think that's just the normal course of what we do to manage throughout the year. So I wouldn't pick one item out and adjust it out at all.

[Michael Lapides, Analyst at The Goldman Sachs Group]

Got it. Thank you, guys. Much appreciated.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Take care, Michael.

[Operator]

Your final question comes from the line of Paul Peterson of Glenrock Associates.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Paul, you changed your last name, did you?

[Paul Peterson, Analyst at Glenrock Associates]

No, that's common, that's a common misunderstanding. So a lot of my questions have been asked and answered but, and I don't want to nickel and dime you guys to death but just sort of quick little follow-ups here. The $0.06 for the taxes, is that, how should we think about that going into 2022? Is that, is there any sort of something unusual there or just how should we think about th at going into 2022?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Xia, your thoughts.

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah. So no, nothing unusual there. As I said in the prepared remarks that was largely driven by the production tax credit, the additional projects that we brought online. So you know that we expect a couple of more projects coming online. One in the middle of the year, the other end of the year. So we expect another $0.08 of pickups from this section, and the only thing I would warn you is I wouldn't do $0.02 per quarter because depending on the timeline and everything else, it could be skewed to one quarter versus another but for the year, we expect another $0.08 increase.

[Paul Peterson, Analyst at Glenrock Associates]

Awesome. And then just with the goodwill impairment, I know it looks tiny. I mean it looks like it's what a penny or something maybe but just, I was just a little bit curious, you guys did a test and it led to a revaluation but what caused, what changed in order to have the test and just sort of is that you don't think of the transmission project in California. I'm just curious as to what made you guys say, hey, the goodwill doesn't apply anymore. What -- was there any particular event or anything there that that had, again, I know it's kind of nickel and dime on you guys, but I'm just sort of wondering.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, no problem. It was really basically a FERC ROE case but that we got a FERC order and we took another look. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

Yeah, so Gale mentioned one of the drivers for the year-over-year change for ATC but if you're just looking at the goodwill impairment, we do that every year. We look at the goodwill, we do the valuation, we look at the assumptions including forward looking ROE, capital expenditure opportunities and all the assumptions around that. It just -- the most recent assessment led us to believe that the goodwill should be written off. Nothing abnormal. It's just normal course.

[Paul Peterson, Analyst at Glenrock Associates]

Right. But that would, that's because basically you guys saw a lower, because a low ROE had been awarded, it impaired goodwill. Is that how we should think about it, do I understand you guys correctly or is it something else?

[Xia Liu, Executive Vice President and Chief Financial Officer at WEC Energy Group]

No, capital expenditure opportunities is no, nothing unusual. So we just look at the net cash flows and terminal value and apply the different assumptions and which led to the the conclusion that the goodwill should be written off.

[Paul Peterson, Analyst at Glenrock Associates]

Okay. Well, thanks so much. I appreciate it.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're more than welcome. Happy to have your questions. Alright. Well, I think we've worn you out. So, thanks so much for participating in our conference call today. We appreciate all your questions and if you have any other questions, feel free to contact Beth Straka. Her direct line 414-221-4639. Thanks everybody. Take care. So long for now.

[Operator]

[Operator Instructions]