WEC Energy Group Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

There are 13 speakers on the call.

Operator

Afternoon, and welcome to WEC Energy Group's Conference Call for Second Quarter 2022 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 ks and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

Operator

During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will open to 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 available approximately 2 hours after the conclusion of this call. And now, it is my pleasure to introduce Gail Clappa, Executive Chairman, and WEC Energy Group.

Speaker 1

Hot Town, Summer in the City. Good afternoon, everyone. Thank you for joining us today as we review our results for the Q2 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 Shaul Lu, our Chief Financial Officer and Beth Straka, Senior Vice President of Corporate Communications and Relations. Now as you saw from our news release this morning, we reported Q2 2022 earnings of $0.91 a share.

Speaker 1

A warm start to the summer, solid results from our infrastructure segment and continued execution of our capital plan were major It shaped yet another strong quarter. In light of this strong performance, we're again raising our earnings guidance for 2022, This time by $0.02 a share to a new range of $4.36 to $4.40 a share. We expect to reach the top end of this new range. This, of course, assumes normal weather for the remainder of the year. Our balance sheet and our cash flows remain strong.

Speaker 1

And as we've discussed, this allows us to fund a highly executable capital plan without any need for new equity. During the quarter, we continued to move forward on major initiatives across the enterprise, including investments in our $17,700,000,000 Our focus remains on building and maintaining a highly reliable infrastructure, Delivering energy that's affordable, reliable and clean. Scott will provide you with a project update in just a few moments. Now you may recall our recent announcement about an adjustment that we made to our schedule of power plant retirements. We plan to extend the operating lives of the 4 older units at our Oak Creek site.

Speaker 1

The retirement of Units 56 will be delayed by a year Until May 2024. Unit 7 and 8 will be delayed for about 18 months until late in 2025. These coal fuel units have a total rated capacity of 1100 Megawatts. We base this decision on 2 critical factors. First, tight energy supply conditions in the Midwest power market and expected delays in the delivery of solar panels and batteries, Delays that will clearly affect the in service dates of renewable projects that are now going through the regulatory approval process in Wisconsin.

Speaker 1

Keeping the older units at Earl Creek online a bit longer for capacity purposes makes great sense for our customers because we can avoid the need to purchase Higher cost capacity in the MISO market. But even with the extension of the Oak Creek units, we remain committed to our aggressive environmental goals. Across our generating fleet, we're still targeting a 60% reduction in carbon emissions by the end of 2025 And an 80% reduction by the end of 2,030. And by the end of 2,030, we expect to use coal only as a backup fuel. And we're aiming for a complete exit from coal by the end of 2,035.

Speaker 1

The capital investments we plan fully support this transition. Of course, for the longer term, we remain focused on the goal of net zero carbon emissions from power generation by 2,050. And as you know, we're working to help shape the future of clean energy, engaging in policy discussions and on the ground, carrying out innovative projects That can drive decarbonization of the economy. For example, we've now finalized the test plans for blending hydrogen with natural gas At one of our modern gas fuel units in the Upper Peninsula of Michigan, we've teamed up with the Electric Power Research Institute for this leading edge project. The field work will take place this fall and the results will be shared across our industry.

Speaker 1

Separately, for our natural gas distribution business, We're making great progress in securing supplies of renewable natural gas. Scott will update us shortly. But as a reminder, Our plan is to achieve net 0 methane emissions from our gas distribution networks by the end of 2,030. Switching gears now, let's take a brief look at the regional economy. The latest data show Wisconsin's unemployment rate at 2.9%, well of course below the national average, and we continue to see major investments from growing companies in our region.

Speaker 1

For example, Gulfstream Aerospace is expanding its operations at the Appleton Airport. That's in Wisconsin's Fox Valley Southwest of Green Bay. The company is planning to build a world class facility for painting and finishing aircraft exteriors. This expansion is expected to open in the Q3 of 2023 and it could add 200 new jobs to Gulfstream's existing workforce in Wisconsin. And just last month, Komatsu Mining celebrated the The campus is already hosting about 600 employees.

Speaker 1

It includes offices, a training center and state of the art manufacturing space to build heavy mining equipment. During the Q2, groundbreaking also took place for a major expansion of the Georgia Pacific Paper Mill in Green Bay. George Pacific is investing $500,000,000 in its new facility, which is expected to bring about 100 new jobs to the region. So with a wide range of developments in the pipeline, we remain very optimistic about the long term future of the regional economy. And with that, I'll turn the call over to Scott for more information on our utility operations and our infrastructure segment.

Speaker 1

Scott, all yours.

Speaker 2

Thank you, Gail. As Gail mentioned, we're making good progress on our capital plan. Construction is underway on a number of regulated projects.

Speaker 1

We have

Speaker 2

started work on the reciprocating internal combustion engines or as we call them, GRACE units at our Westin site in Northern Wisconsin. These units are expected to provide 128 megawatts of dispatchable capacity with an estimated cost of $170,000,000 Also work on our liquefied natural gas storage is underway. As you recall, the commission approved 2 LNG units in Southeastern Wisconsin. This $370,000,000 investment will provide needed peaking capacity for our gas distribution business. On the renewable front, we've deployed $155,000,000 toward refurbishing projects at 2 of our regulated wind farms.

Speaker 2

When completed, these projects will enhance reliability and performance at these farms. These investments will qualify those sites for production tax credits for an additional 10 years. Also, we expect our Redbarn Wind Park Development in Southwestern Wisconsin to come online around the end of the year. It will provide about 80 megawatts Renewable Energy to our Wisconsin Public Service customers. On the solar and battery front, work continues on the Badger Hollow II solar facility And the Paris Solar Battery Park.

Speaker 2

We still expect these solar projects to go into service next year, Supplying more clean energy to our Wisconsin customers. However, we've informed the Wisconsin Commission that the battery portion of the Paris project is expected to be delayed until 2024. As you may recall, we have filed for approval of 2 other solar battery Projects, Darien and Qashqinan. We initially planned to add these to our fleet in 2023 2024. We now project them to enter service in 2024 and 2025 respectively.

Speaker 2

In addition, we now expect the retirement of Columbia Energy Center to take place in 2026. As you know, Alliant Energy operates the Columbia facility and we are part owner. Of course, we'll keep you updated on any further developments. As you recall, we filed a rate review last with the Public Service Commission for our Wisconsin utilities. Our proposed rate increase would support important capital investments and grid hardening projects.

Speaker 2

Recently, we provided an update to our filing. We factored in the extended operating lives of the older Oak Creek units and the Columbia units. This update also reflects other variables, including higher interest rates and costs associated with the completion of our solar projects. We expect final orders by the end of the year with new rates effective in January 2023. We have no other rate reviews pending at this time.

Speaker 2

In our gas business, we've discussed plans To bring high quality renewable natural gas to our customers, the Wisconsin Commission recently approved our pilot project for this initiative. Just last month, we signed our 3rd RNG contract, which will connect our distribution system to a large dairy farm in Northeast Wisconsin. The 3 contracts in place are projected to bring us 80% of the way toward our goal of net 0 methane emissions. We plan to have RNG flowing in our system by the end of this year. Outside of our utilities, Structure segment was once again a positive driver for the quarter.

Speaker 2

The Thunderhead Wind Farm located in Nebraska will be the next project to go into service Scheduled for later this year, we also expect the Sapphire Sky Wind project in Illinois to come online by year end. Together, the 2 projects represent approximately $800,000,000 of investment, keeping us well ahead of our 5 year capital plan. As you know, MISO, the Midwest grid operator, has set out a long range plan to address transmission needs across the Midwest. And last week, the MISO Board approved the transmission projects for Tranche 1. At this time, American Transmission Company Estimates that its investment opportunity in tranche 1 is approximately $900,000,000 that's in today's dollars.

Speaker 2

Investment in these long dated projects are expected to start as early as 2027.

Speaker 1

And with that, I'll turn things back to Gail. Scott, thank you very much. Now as you may recall, our Board of Directors at its January meeting raised our quarterly cash dividend by 7.4%. We believe this ranks us in the top decile of our industry. We continue to target a payout ratio of 65% to 70% of earnings And therefore, I expect our dividend growth will continue to be in line with the growth in earnings per share.

Speaker 1

And today, we are reaffirming our projection of long term earnings growth at 6% to 7% a year. Next up, Shao will provide you with more details on our Q2 financials and she'll touch on the likely impact The reconciliation bill that appears to be headed for a vote in the U. S. Senate. We view the legislation as broadly positive for customers, for the energy transition and for our future investment opportunities.

Speaker 1

Shah?

Operator

Thanks, Gail. Our 2022 second quarter earnings of $0.91 per share increased $0.04 per share compared to the Q2 of 2021. Our earnings package includes a comparison of 2nd quarter results on Page 17. I'll walk through the significant drivers. Starting with our utility operations, the impact of weather was flat quarter over quarter.

Operator

On a weather normalized basis, retail electric deliveries in Wisconsin, excluding the iron ore mines, were up 0.3 percent led by our small commercial and industrial customers. Overall, retail demand for is tracking our forecast. Across our regulated business, we grew our earnings by $0.05 Compared to the Q2 of 2021, rate base growth contributed $0.09 to earnings. This is partially offset by $0.03 of higher depreciation and amortization expense and a $0.01 increase in day to day O and M. At our investment in American Transmission Company, earnings increased $0.01 compared to the Q2 of 2021, driven by continued capital investment.

Operator

Earnings at our Energy Infrastructure segment improved $0.04 in the Q2 of 2022 compared to the Q2 of 2021. This was mainly driven by production tax credits related to stronger wind production across our portfolio as well as our Jayhawk wind farm that went in commercial operation at the end of last year. Finally, you'll see that earnings at our Corporate and Other segment decreased $0.06 primarily driven by Rabbi Trust performance and a gain last year on our investment in a clean energy fund that we recognized in the Q2 last year. Remember, Rabbi Trust is largely offset in O and M. Overall, we improved on our 7 quarter performance by $0.04 per share compared to last year.

Operator

Looking now at the cash flow statement on Page 6 of the earnings package. Net cash provided by operating activities increased $536,000,000 Cash earnings and a normal recovery of commodity costs contributed to this increase. And total capital expenditures were $1,000,000,000 during the first half of twenty twenty two. As you can see, we have been executing well on our capital plan. Before I turn it back to Gail, I'd like to give A bit of color on the recently proposed inflation reduction act.

Operator

I'll also provide our guidance for the Q3. We're still analyzing the details of the proposal. From what we understand now, we believe The proposal would provide additional benefits to our customers from investments in renewables. An option to choose production tax Credit for solar projects and the ability to transfer tax credits would provide more flexibility for future renewable investments. This would apply both at our utilities and at the WEC Infrastructure segment.

Operator

So overall, we see benefits to customers, future investment opportunities and stronger credit metrics. Now let me give you the guidance for the Q3. We are expecting a range of $0.82 to $0.84 per share. This accounts for weather and storm recovery costs in July and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.92 per share in the Q3 last year, which included $0.05 of better than normal weather.

Operator

And as Gail mentioned earlier, we're raising our full year guidance to a range of $4.36 to $4.40 per share with an expectation of reaching the top end of the range. With that, I'll turn it back to Gail.

Speaker 1

Sean, thank you. Overall, we're on track and focused on delivering value for our customers and our stockholders. Operator, we're ready now for the question and answer portion of the call.

Operator

Now we will take your questions. The question and answer session will be conducted electronically. Your first question comes from the line of Shahriar Pourreza with Guggenheim Partners. Your line is now open.

Speaker 1

Rock and roll, Shahriar.

Speaker 3

Hey, Craig.

Speaker 4

Good morning, Shar. Hey, guys.

Speaker 5

Good afternoon, guys. How are you doing?

Speaker 1

Doing great. How about you, Shar?

Speaker 3

Not too bad. Not too bad. Let me just if we can touch on MISO policy for a second and maybe more specifically the generation backdrop Following the PRA earlier this spring and kind of your own retirement modifications or like you highlighted delays. Just Gail, from your position, do you envision any structural changes to the auction in the coming years? And could We'd be in a position where we see WEC undertake maybe additional retirement extensions because of the supply demand Dynamic which could present maybe a possible O and M headwind or is this a definitive timeline at this point?

Speaker 1

That's a great question, Sharra. Based on everything we're seeing today, I don't sense that we're going to Enter into any other significant extensions of plants. The dates we gave you, we pretty good about in terms of the retirement of the older Oak Creek units. And I think really what's going on here And MISO has said this, I think, fairly clearly that there's been so much retirement up to date of Older coal fired units and really they found themselves in a couple of regions in really, really tight capacity situations. Luckily, we've had the diverse supply here.

Speaker 1

We've been well prepared. We were basically unaffected by the big increase And capacity costs in the last auction, but it was very prudent for us to make sure that we have that capacity online. And remember, Shahriar, these plants that we're extending, these older Oak Creek units, they're not projected to run a great deal. We need them for capacity purposes At high demand times, and this protects our customers from continuing high auction costs in future capacity markets. But as we continue to bring the units online that Scott talked about, I think our current plan is likely to hold in terms of the retirement I hope that answers your question.

Speaker 3

No, it does. And I appreciate that. And then I think, Chuck kind of mentioned a little bit on The IRA or the Inflation Reduction Act, but there's obviously some linkages to your capital program And taxes as well. As you kind of work to finalize the roll forward this fall, could we see additional spend from the program, Especially as we're heading into the EI conference, how do we think about that? And then there's obviously that counteractive force, which is the minimum tax that We'll publicly be there by the customer, right?

Speaker 1

Yes. And we're working through all of that in our models. I will say this Right now, based on everything we're seeing and Chuck can comment further, based on everything we're seeing, some of the other benefits Of that piece of legislation really kind of offset the minimum tax issues. So we don't we actually think as And, Sha, you might want to expand on this a little bit. This likely will be a credit positive or an FFO metric positive for us, Sha?

Operator

Yes, exactly. Like Gail mentioned, we see very manageable impact from AMT. I think in general, Probably $20,000,000 $30,000,000 of increasing cash tax payment. But like Gail mentioned, we see quite a bit of Sources of credit metrics benefits from either the monetization of tax credits or, a lower Just offset by the lower debt balance, financing costs and so forth. So I think overall, if you take into consideration all the moving pieces, we actually see a benefit to the credit metrics.

Speaker 1

And a benefit also, Shahriar, one other, I think, point that we'll continue to emphasize, we talk about investment opportunities here And with this piece of legislation not only at the utilities but also at the infrastructure segment. But one of the things that comes through clear to us, This is good for our customers. I mean this can help reduce the cost, investment cost that our regulated customers have to cover. So there There's some broad positives here, Shar.

Speaker 3

Okay. Got it. Got it. And then just real quick lastly, if I may, just the rate case, the procedural schedule was obviously Issued last week, you guys are great at settling. So as we're thinking about potential settlement options, Should we be looking at maybe the end of September, early October for that?

Speaker 1

Yes. It's hard to place an absolute timeframe On the pace of settlement discussions, right now, we're still pretty early in the process. The staff is continuing to we continue to interact with Staff on their data requests, which are very normal and very good. So that part, the staff audit part, which is kicked off by our filing, that's going smoothly, going well, Going on time. And as you say, the administrative law judge in the case has proposed a schedule, which I think the interveners would like a little more time in between some of the dates.

Speaker 1

So I'm not sure the schedule is final, but it's certainly close to final. And I would say steady as she goes. And just a reminder, I mean, this case is very straightforward. It's really all about Investment in grid hardening, investment in renewables, investment in reliability, and over half The capital projects in this case have already been approved and our O and M that we proposed is actually lower than what was approved in the last order. So The backdrop is still very positive and right now it's steady as she goes.

Speaker 3

All right, terrific execution. Thanks guys. Appreciate it. See you soon.

Speaker 1

Thank you, Shahriar. Take care. Your

Operator

next question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is now open.

Speaker 1

Hey, Julian.

Speaker 5

Hey, afternoon, team. Hey, pleasure. So just coming back to a couple of details here, if I can. Normalized calls for large C and I, just again, I get that that doesn't move the needle as much on margin, but obviously through 6:30 there's a wide versus what you guys had forecasted on the year. Do you want to talk about what you're seeing there?

Speaker 5

I know you highlighted a number of industrial trends at the outset here that bode well, but just are you expecting that to reverse second half or what's the setup there if you can?

Speaker 1

Great question, Jillian. And by the way, I got a question for you when I'm done answering. Okay. The small decrease that we saw in large C and I as we kind of remember we serve customers in 17 different sectors of the economy. So it's a very broad gauge of what's going on.

Speaker 1

We saw 3 sectors In the first half and in the second quarter that really showed a bit of a decline. Food processing, food and food processing, Some of that is related to one of our very large customers that is switching product lines. So they had an outage that's going to extend a little bit. And actually, I think they're going to make more chocolate, which is a good thing according to my wife. But anyway, So electronics, food processing and printing were the 3 categories that showed some decline.

Speaker 1

Primary metals was up, but long story short, the rebound in small commercial customers, the rebound in the commercial sectors Our economy was very strong and very good. So we'll see where industrial moves in the second half. We're not at all concerned about it, but clearly what we're seeing is a very, very strong recovery In the commercial side of the business, I mean every commercial area we looked at is up from entertainment to hotels to restaurants You name it. There's a really very active backdrop right now in the Wisconsin economy. So when you put it all together And take a look at it holistically, as Shaw said, we feel like we're very much on track with our sales forecast for the year.

Speaker 5

Nice. Okay. Back half of this. Excellent. And before you answer your question, I was just going to raise in one more here.

Speaker 5

Shah, if I can put you on the spot a little bit here, You want to quantify a little bit as best even a range on what that credit metric that net credit metric impact is as well as if you adjust this Point Beach method The shift on, I think, dollars 600,000,000 of debt give or take, if you can talk to that and how that might impact anything?

Operator

Sure. We really don't have a number yet because there's so many moving pieces as you know that Qualification of production tax credit versus investment tax credit could change the dynamics Among just the regulated businesses, so we really haven't quantified a number for you, but more to come on that. On the you're talking about the supplemental filing that we made in Wisconsin Related to a methodology change related to SMP is just they update the most They recently updated their methodology to calculate the implied imputed debt related to purchase power agreements. So we updated the calculation based on the new methodologies, nothing more than that. And they are applying the same methodologies across this industry.

Operator

So we're not alone there.

Speaker 5

Right. And presumably recovery there.

Speaker 2

Right. It's pretty formulaic. Yes. It's a pretty standard type of thing.

Speaker 1

Yes. So Julian, I'm just going to check how's Merry Life doing?

Speaker 5

It's going great. We bought a house. We're keeping going. All right. All right.

Operator

Your next question comes from the line of Durgesh Chopra with Evercore. Your line is now open. Hi, Durga.

Speaker 6

Hey, good afternoon, Gail. Congratulations on Yet another solid quarter. Just I wanted to sort of sorry Shah, but I'm going to put you on the spot again. And this is just knowing how well you know this topic. Just on the concept of this, the monetization of the tax credits and transferability.

Speaker 6

So obviously, this bill doesn't include direct pay, which is part of the Build Back Better. How are you viewing that as an opportunity? Is transferability really sort of an opportunity for utilities like yourself to monetize those credits or what might be those other options When you think about monetizing PTCs, ITCs, etcetera, etcetera?

Operator

Yes. I think like I touched in the formal remarks, we see this overall bill with benefits for customers, for future investment opportunities and credit metrics. So in terms of the sources of customer benefits, obviously PTCs versus ITCs from solar projects could be 1. The flow through of ITC benefits on standalone battery Versus normalization could provide customer benefit. You touched the marketing of tax credits, So that could be beneficial for customers, extension of tax credits.

Operator

Those are the sources of customer benefits. And then like Gail touched, in terms of future investment opportunities, Wetty, for example, right now, We're looking at the tax appetite to try to match our investment opportunities with our tax appetite. Obviously, with marketability of tax credits That goes away. So that could open up for additional opportunities and we could potentially consider Investment opportunities beyond wind and then I touched already the credit metrics. So I think overall, I think we see this as a potential positive.

Operator

Having said that, our current capital plan isn't reliant Built on any of these, so I think we would see some tailwind from this if this was passed. If not, we're just fine.

Speaker 1

I'd just like to add on to something Shao said. She's exactly right. The $17,700,000,000 5 year capital plan that we've outlined for you doesn't envision any of these potential benefits. So that's why we think this is broadly positive. I would say just personally and this is just my own view, the idea of the transferability of tax credits basically creating a market, I think it's actually a superior solution than direct pay, frankly.

Speaker 1

It's much simpler. It gets rid of We don't need tax equity, but it gets rid of a tax equity structure that's complicated and time consuming. I think this is actually a pretty ingenious Approach in terms of the transferability of tax credits in the bill. I hope that helps.

Speaker 6

That helps tremendously. But just so I understand Gale, am I right in Thinking about this transferability as that you don't need ownership unlike tax equity where you actually need an ownership in the project. You don't need ownership as an investor or buyer of these tax credits. So essentially the market or interest in these tax credits going to be much larger than just those select banks or those specific tax equity investors. Is that the right way of thinking about it?

Speaker 1

Yes, I think you're right on. I think you're dead on, Rakesh. And in fact, a little bit of background, I know Some of the background of how this came to be in terms of discussions with Senator Manchin and the idea that this really opens a much Broader opportunity for these tax credits, not just with a tax equity investor. That was a major selling point. So I think Major selling point period to all of us who are crafting the bill.

Speaker 1

So I think you really analyzed it well.

Speaker 6

Thanks, Gail. Appreciate the update.

Speaker 1

You're welcome. Thank you.

Operator

Your next question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open.

Speaker 1

Hi, Jeremy. Hi, Jeremy.

Speaker 7

Hi. Thanks for having me.

Speaker 1

You survived your conference?

Speaker 7

I did. I did. Thank you. Thank you for attending. The fireside chat was great.

Speaker 8

Just want to come back to

Speaker 7

the coal retirements a little bit if I could as it relates to the Wisconsin rate case and just what have reactions been so far and Do you see any potential implications on settlement talks from this?

Speaker 1

The short answer is and when I ask Scott to give you some detail, but the short answer is we don't see any implications in terms of the rate case. And the reaction has been uniformly positive. Certainly, the Governor's office, which we communicated well with prior to the announcement was very supportive. The staff at the Public Service Commission, obviously taking its responsibility to help ensure reliability It was very positive. The industrial customers were positive.

Speaker 1

And overall, Scott, this really is not a big factor in changing the revenue requirement.

Speaker 2

No, not at all, Gail. And we factored everything in factoring and keeping these units running a little bit longer, extending those lives, factoring in The delay and remember we delayed these due to some supply chain challenges building the solar and the batteries factoring those delays in it was relatively Revenue requirement neutral. And remember, for this particular case then, just in this case, you're avoiding those additional capacity costs. So It was well received adding that reliability until we can get these renewables built and some of the other capacity online. So It was well received across the board, from my conversations with individuals across the board, like Gail said.

Speaker 1

And in addition to that, Jeremy, we were able to reassure, as I mentioned in the script, we were able to reassure everyone that our commitment to really aggressive environmental improvement Is unchanged by this action. So it just made a ton of sense both from a customer reliability and customer cost standpoint.

Speaker 7

Got it. That's very helpful there. And just want to come back, if I could, to Ira and Tax credits and what's possible there. You talked about the investment opportunity set for WEC infrastructure being larger. I imagine it's larger than a bread box, but just wondering if you could give us any bread crumbs as far as what the scale of opportunity might possibly be?

Speaker 1

At this point in time, Jeremy, it's probably too early to give you how much bigger than a bread box answer. But I will say this, Right now, our significant investments that we've made, which is as we reported to you are performing very well in the infrastructure segment. Those have all been wind projects. I think we have 8 wind projects

Speaker 8

that

Speaker 1

we're committed to and some of them operating already, a number of them operating already. What this does do and Shaw pointed to it, which is giving companies like ours the option of production tax credits for solar That could open up an entire avenue of investment in the infrastructure segment for solar simply because of the way the economics work today. So that just gives you an idea of they're all wind right now in the infrastructure segment. We continue to see opportunities with wind, but it could also open A whole different technology investment with solar.

Operator

I will add though we have the 10% Total investment as a portfolio from Wacky, so we don't see that change even with this bill passing.

Speaker 1

Yes, that's a good point. We're but the opportunity continues because our regulated business is growing as well. So But yes, we intend to keep the infrastructure segment at around 10% of earnings going forward.

Speaker 7

Got it. That's very helpful. Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Michael Sullivan with Wolfe Research. Your line is now open.

Speaker 4

Hi, Michael. Hi, Michael. Hey, Gail. Good afternoon.

Speaker 1

Good afternoon.

Speaker 4

To start with the I know it's a shoulder quarter for the gas business, but Sales trends remain pretty strong there looking at the first half of the year really, really strong. I guess, any color on what's driving that and how Sustainable, you think that is?

Speaker 1

So your question is how strong is it, right? Actually, you're asking an interesting question. The other day as we were reviewing all of the data, We were asking ourselves, this is really interesting, what are we seeing here? What are the trends? And two answers and Scott and Josh should add their viewpoint, but two answers.

Speaker 1

1 is and you've heard me say this a gazillion weather normalization is more precise than accurate. So, I'm not sure that our weather normalization techniques picked up All of the weather impact that we saw particularly in Q2, April started out as an abnormally cold month In Wisconsin. And I think that drove some sales and perhaps our weather normalization techniques didn't quite Pick up that fully. But the other thing that we're seeing and this is not surprising, but positive, A big chunk of the increase that we're seeing and it is a strong increase is in industrial processes for gas. When you look at the segments of our gas customers, actually the biggest increase in Q2 is coming from industrial process use for gas.

Speaker 1

And again, that reflects back on the strength of the economy and we see that as pretty positive. So I hope that's helpful. It has been a very strong 6 months, no question about that. We'll see what continues here. But the biggest driver in Q2 2, in terms of the increase we saw was a cold April, where residential customers use more gas and throughout the quarter, The increased use of gas by our large industrial customers for process purposes.

Speaker 4

Okay. Very helpful. Thanks. And then in terms of the pending renewables Projects on the regulated side of the business that you're building. I think there's been like a little bit of a Cost pickup on some of the nearer term stuff, whereas the longer term has been pretty steady thus far.

Speaker 4

Are those numbers still good or do you think there's ultimately going to be some upward pressure there as well?

Speaker 1

We'll let Scott give you his view on this. I will say this, The near term cost changes we fully anticipated and had communicated with our regulatory folks. So

Speaker 2

We anticipated and talked to them about it. I don't think it's a surprise to anyone when we filed the incremental increases. And what we've been saying is, We're going to see cost increases in that 20% to 30%. In fact, the last filing on the solar, the first Projects we came in were about $1300 a kw, a kilowatt hour a kilowatt. And then now it's about I think the last one was about 1640.

Speaker 2

So they're moving up a little bit, still in line with what we're seeing across the country. In the future, we'll have to Where things go, but we said it could be 30% to 40%. But once again, there's a lot of supply chain here and you're looking multiple years out. So right now, there The cost we did see go up, but really in line, in fact, a little bit lower than what we see across the country.

Speaker 4

Okay, thanks. And last one real quick. Any plans to file a Peoples Gas case anytime soon?

Speaker 1

No time soon, no.

Speaker 5

Okay, great. Thank you.

Speaker 1

Thank you, Michael.

Operator

Your next question comes from the line of Anthony Crowdell with Mizuho. Your line is now open.

Speaker 1

Greetings, Anthony.

Speaker 9

Married life is going well for me also if you just for checking. But Hopefully, just in case my wife sees someone at EEI, I don't want any problems. Hopefully, 2 easy questions. One is, I guess, guidance is 6% to 7% in one of the slide decks, I think, from the July presentation. Historically, it's been 9% CAGR.

Speaker 9

There's really you highlighted between GAAP and non GAAP, which There's no difference. I'm just curious with all the tailwinds that you've mentioned on the previous questions, What has to happen for you to hit the 6% number?

Speaker 1

What has to happen for us to hit the 6% growth trajectory?

Speaker 10

Yes.

Speaker 1

Downsides that I really don't anticipate that would be kind of out of the blue right now. Remember, our projection is 6% to 7%. And certainly, what we have in the pipeline in terms of Approved capital investments and simply our continuing our continued efficiency in driving Best practices through our operations. It would take something that I don't anticipate. Scott?

Speaker 2

No, I agree, Gail. We have really good value added Customer projects we're putting in, when we think about like grid hardening, the storms that we've seen this summer and last summer, it makes a lot of sense to go as we do that, The additional transition to Renewables. So we feel really comfortable at where we are to be able to execute. It's a very executable capital plan also.

Speaker 1

With no need for equity, exactly.

Speaker 2

So but we'll continue to evaluate our growth. And as we look at the fall and we Pull into the capital projects, we'll continue to look at it.

Speaker 1

And Anthony, when I see your wife at EEI, I'll just say what goes on in Boston Stay is in Boston. How's that going?

Speaker 9

Thanks. I appreciate that. I appreciate that. If I look at on the cost side, So far, 1st half of the year, O and M is down 4% roughly when I look at the slides you put out. What is the more challenging part of maintaining the cost in O and M in this inflationary environment?

Speaker 9

What are you seeing is the biggest challenge? What part of your O and M budget?

Speaker 1

Well, I can give you an initial thought on that. Well, certainly Scott and Shar are very close to the numbers as well. So we'll ask For their view, I would say the when you think about our own I mean, the first thing that comes to mind actually may not be the biggest Cost factor in our array of costs that we have to operate the enterprise day to day. But you just think about the gasoline That our fleet, our trucks, our service trucks, our bucket trucks, when you think about the cost of gasoline having more than doubled, That's certainly a big factor and we got we are rolling as few trucks as possible. But when you have a storm, you got to roll trucks.

Speaker 1

You haven't outage, you got to roll trucks. That's one big factor that has been largely out of our control and I would just point to that one first. Scott, Shaw?

Speaker 2

No, you're exactly right, Gail. You really have to kind of pull yourself behind the numbers here. And when you look at the O and M, Just to correct where we're at here, some of those decreases that we're seeing on the top level of the income statement are some of the items that we had in our Rate review last year for transmission, there's a little detail breakdown in a few additional pages in our packet. So some of that's related to transmission reductions that we agreed to. So Wisconsin actually was up a little bit year to date.

Speaker 2

So just because it's reaction to storms and some of these inflationary pressures that Gail talk But overall, when we look at our forecast, we're still projecting to be down about 1% flat to 1% in total O and M.

Speaker 1

Shao, anything you'd like to add?

Operator

No, I think you covered it very well.

Speaker 1

Okay, terrific. Anthony, I hope that's responsive to your question.

Speaker 9

Perfect. Thanks so much. And NFL schedules out and I think my jets may finally win 1 in Green Bay in October. Thanks for taking my questions.

Speaker 4

Yes. I'll take the over under

Speaker 1

on that one for you. Take care.

Operator

Your next question comes from the line of Sophie Karp with KeyBanc. Your line is now open.

Speaker 1

Greetings, Sophie. How are you doing today?

Speaker 8

I am doing great. Thank you. Thank you for taking my questions. Great discussion so far. Just if I may pass you a little bit more on this on the IRAs provisions, right?

Speaker 8

There's more there than just wind and solar. We have Basically, a lot of incentives for EVs for technology agnostic PTCs at some point, right? How do you think about maybe moving beyond wind and solar and branching out to sort of areas, right? Could you do, for example, modular nuclear? Or have you looked into fleet electrification opportunities like some of your peers are doing Your own fleet, you mentioned gasoline prices or maybe municipal fleets, etcetera.

Speaker 8

If you could just elaborate on what is beyond, I guess, wind and solar?

Speaker 1

Happy to. And of course, and Sean mentioned this as well, but batteries is a the battery inclusion And this act is also important in terms of the credits. So batteries certainly and that's in our plan already and probably will be Even more greatly in our plan going forward. So batteries is one area that can be beneficial to all of us given what's in this Piece of legislation, we do have and we probably don't talk about it enough, but we do have goals for electrification of our fleet. No doubt about that.

Speaker 1

So that's coming. We have now a pilot program in place In Wisconsin that the Wisconsin Commission approved a few months ago, where we are approaching commercial and some residential customers About installing individual chargers at their locations, where we would own the asset And that is off to a really good start. So those two things come to mind immediately. As far as small modular reactors, I mean, we're tracking the progress. No question about that.

Speaker 1

Our strategy folks on the generation side of the business have had regular contact with the developers of SMR. I will say this, we are not in the business of serial number 1. But certainly down the road, Particularly if this kind of tax credits apply, that certainly could be an option down the road, not in our 5 year plan, probably not in the next 5 year plan, But certainly down the road. Shanna, anything you'd like to add?

Operator

No, I think the only thing is we are going through the hydrogen test Process to learn more on that and as part of this IRA, there's new clean hydrogen production credit. So that's something that If it indeed is making sense, that would be something we would be happy to look into.

Speaker 1

Very good point. Scott?

Speaker 2

Yes. And I think the other point, you've mentioned EVs. And we really see it more as not only that, but the adoption of EVs, how does that even expand our grid hardening As more and more EVs come onto the system and like Gail said, we've got a robust program already. We've seen a lot of traction. But remember, we didn't put any of this in our future 5 year forecast that we talk about it in our Q3 call.

Speaker 2

So we have nothing in our long term plans related to EV. So adoption Could be a nice little tailwind there for some sales.

Speaker 1

Yes. And Sophie, you probably heard our rule of thumb That for every 2 new EVs put onto our system, it's probably the equivalent, the energy equivalent of a single new household. So when you think about and we just saw some statistics the other day from the state of Wisconsin projecting the trajectory of EV adoption in the state, If it's even close to right, Scott's point will be borne out in really, really fully Because I mean we only have a few thousand, a couple of 1,000 EVs in the state today and they're projecting just huge numbers by 2,030. We'll see if that's right. But behind that would have to be a very significant investment, particularly with our rule of thumb estimate about 2 new EVs on our system equal to the energy demand of a single household.

Speaker 8

Terrific color. Thank you so much. That's all for me.

Speaker 1

Thank you. Have a good day.

Operator

Your next question comes from the line of Michael Lapides with Goldman Sachs. Your line is now open.

Speaker 9

Hey, all. Thank you for

Speaker 11

taking my question. Much appreciated Gail and team.

Speaker 1

You're welcome, Michael. Hope you're doing well.

Operator

I have an easy

Speaker 11

one for you. Actually, I have 2 questions. I'll do sequentially. The first one and it follows on the EV question that just came. Can you talk about what you think the long term role of the utility, the electric utility is And the potential ownership of charging stations relative to kind of the various market models we have today in this country Where the utility is generally not the owner of charging stations or is a very small component of that.

Speaker 11

How do you just think about that from a public policy standpoint?

Speaker 1

Well, that's a great question, Michael. I would say this, I don't think there's a one size fits all answer. I think you've hit on it earlier. There's a lot of different models floating around the country, state by state, even the federal government now with a charging plan. So we're very as you know very, very early in the development of the whole infrastructure that would support a massive transition to electric vehicles.

Speaker 1

So I think the jury is still out and time will tell in terms of just in terms of how much of the actual charging Equipment that utilities will own. But and so I really can't I don't think anybody can give you a really clear answer on that question today. I will say this though, when you think about and it goes back to Scott's comment on grid hardening. If you think about A neighborhood, let's say a cul de sac with, I don't know, 8 homes, for example. If 2 or 3 of those homes adopt EVs, Well, we're going to have to put in a much larger transformer in that neighborhood.

Speaker 1

So there are incredible investment requirements In terms of our basic infrastructure, forget the charging equipment itself for a moment. There are very significant investment needs that are going to come with The adoption of EVs. And that I think will open up again Tremendous capital opportunity for a company like ours, but also the need to be able to have the grid that really supports That kind of transition to a massive, massive number of EVs. So again, none of that's in our forecast. We will wait and see how the EV adoption moves forward.

Speaker 1

But I can tell you it's beginning to gain momentum here in Wisconsin. I don't think there's any question about that. So I hope that answers your question to some extent. I just don't There's a good single answer about who owns what to what extent going forward. There's just too many models and too much discussion and development right now to give you A much more specific response.

Speaker 11

No, totally understand. And then my second question is another kind of policy one, which is When you go meet you and the team go meet with Governor Evers or go meet with folks in the state legislature or some of the leaders of some of the large business groups, What is it that the utilities in the state are not doing today or have in their next 1 or 2 or 3 year plans That they still like to see you guys do?

Speaker 1

That we would still like to see or that Governor Evers would like to see?

Speaker 11

That the governor and other both elected officials and business leaders.

Speaker 1

It all comes down to one word, reliability. Affordability, yes, but reliability is the key. I mean whenever we have discussions with legislative people, with the public service commissioners, with the Governor's office, It is really all revolving around reliability. They want to make sure that what happened in Texas does not happen here And that we're going to have the capability to continue to support the energy transition. Scott?

Speaker 2

It's reliability not only on electric, But also on natural gas, keeping the houses warm here in this cold environment in Wisconsin. So, that's also key. So we just don't want to look at it from one side.

Speaker 1

Which again led to us talking with them and making the decision to briefly extend the lives of the older Oak Creek units. Again, it was all about assuring reliability.

Speaker 11

Got it. And then finally, with the changes in the time in the in service dates for the storage and How should we think about what this does to the CapEx forecast for the next 2 to 3 years?

Speaker 1

Very little. It might shift from year to year, but I mean, we have so much flexibility in that capital budget that Scott, I don't see any major impact.

Speaker 2

Yes, we're really looking at the numbers, but every year there's a few things that we have to move around a little bit. So it's not going to be a substantial Change as we flow through our next iteration here.

Speaker 11

Got it. Thank you, guys. Much appreciated.

Speaker 1

Take care, Michael.

Operator

Your next question comes from the line of Andrew Weisel with Scotia Howard Weil. Your line is now open.

Speaker 1

Greetings, Andrew.

Speaker 10

Hi, good afternoon, everyone. Couple of quick ones on coal first. So first, in terms of the O and M impact, between delays to solar coming on solar and battery And the decision to move some retirement dates around. You've talked about the benefits of non fuel O and M savings in the future. What does that impact look like as you think about these fundamentally changing from operating as baseload units to becoming capacity resources that won't run very often?

Speaker 1

Well, I think we basically said there'd be about a $10,000,000 uptick in the O and M To use these older Oak Creek units as capacity machines offset by the other factors that Scott mentioned, Scott. Right.

Speaker 2

So that's as you look at it As compared to where we had in the rate case here, when you think of ongoing, when you go back a couple of years, When they were really full blown baseload plants, probably the O and M has come down maybe $10,000,000 when you think about it overall. So we're still trying to about $10,000,000 still looking at the efficiencies. You're not running them quite as much. You can utilize the staff in a variety of projects, Trying to make the workforce as efficient as possible. So, but it's a lot cheaper than going out and buying that capacity in the market.

Speaker 10

Right. That makes sense. Okay. And then how will that transition look for the coal units? Will they gradually decrease their capacity factors over a few months or seasons?

Speaker 10

Or will it flip like a switch on a predetermined day that all of a sudden they're only for backup now?

Speaker 1

No, I think it all depends. I mean, as you know, in the MISO market, we basically let the Midwest grid operator know what units We have available and at what marginal cost all the time, I mean day ahead, hour ahead, etcetera. Those units will run based on Efficiency and demand in the MISO market, but we anticipate just looking at our modeling, we anticipate they will be used really seasonally At the highest demand times, winter and summer, probably not online very much during the non Higher demand time, Scott? No, that's exactly right. And it's not going to be

Speaker 2

a switch. We'll continue to look at the forecast and do the strategy as we do every other Type of asset.

Speaker 10

Okay. But dispatch is ultimately determined by MISO, right?

Speaker 1

Yes, absolutely. Yes, just like every other unit. So basically this just becomes an asset in our portfolio that we offer to MISO every day.

Speaker 10

Okay, great. Then one separate question, if I can attack the O and M question from a different perspective. Given the strength of the year to date results, are you thinking about or have you started pulling forward expenses from 'twenty three and beyond to better position yourself? I know you're in the midst of a rate case and you talked about pressures from inflation from storms. Just wondering how to think about those puts and takes?

Speaker 1

Well, the short answer is, we have had particularly in July, we've had some pretty serious So we've had some additional operating costs in July that you're not seeing in our numbers yet obviously. And we have a number of maintenance projects Already scheduled in our normal plan for the second half of the year, power plant maintenance, other maintenance. So we're not Planning on pulling forward any additional O and M because we've got plenty of things to do in our normal plan. Sean?

Operator

I think that's exactly right.

Speaker 10

Okay. That's very helpful. Thank you again.

Speaker 1

Thanks. Take care.

Operator

Your final question today comes from the line of Paul Patterson with Glenrock Associates. Your line is now open.

Speaker 1

What's up to, Paul?

Speaker 12

Just last but not least, hopefully, but Good talking to

Speaker 1

you. Good talking to you.

Speaker 12

So just to follow-up on the coal plant thing, what I'm a little bit confused by is The impact of the supply chain issues, at least from what I've been reading the local press, it seems like they're associated with renewables. And I'm just trying to understand what projects that were delayed? I mean is it storage Or is it transmission components or is it I'm just wondering how what actually caused, I guess, The pushback on the plant retirements?

Speaker 1

That's a great question. And to clarify, There are really 2 elements to it and we'll let Scott cover the details. But the first is, one of the major Solar battery park investments that we are making that have already been approved, which is what we call the Paris Battery Solar Park. The batteries there are going to be delayed. So that's a piece of it.

Speaker 1

And then I think Scott, you mentioned during the prepared script, There are 2 solar projects that we're now going through the regulatory process on and they're not going to come in on the original dates. Correct.

Speaker 2

They're not going to come in. So we had several solar projects and those additional solar projects also had batteries attached to them. And with that uncertainty in the capacity, it just did not make sense to pull the trigger on those retirements.

Speaker 1

Okay. And Paul, just to kind of put all that in perspective, we're going to be running those over Oak Creek units Over the next couple of years here as we extend their lives just a little bit, we're going to be running them as capacity machines. The solar that we were putting into the batteries We're also for capacity. So that's really the trade off we're making here.

Speaker 12

Got it. And then we're seeing around different parts of the country sort of constraints, transmission constraints impacting wind production. I'm wondering, are you seeing any of that in Wisconsin or anywhere else that you guys are associated with you seeing any impact on curtailment of wind production?

Speaker 1

So far in Wisconsin, very little. However, in our Infrastructure segment, we've seen some lengthy transmission maintenance outages In the Dakotas, for example, we've seen some transmission issues that are seem to now be resolved in Kansas with our Jayhawk wind farm. So sporadically, yes, we have seen some transmission issues and there is no question that we have got to as a nation Move forward with transmission projects. We've just got to do it to maintain reliability of the grid without a doubt. And that's why we're pleased that MISO has gotten to the point where they've gotten to and you probably heard Scott, actually it's $100,000,000 higher than we thought originally.

Speaker 1

So the MISO Tranche 1 for American Transmission Company is now up to a $900,000,000 investment.

Speaker 12

Awesome. Thanks so much guys.

Speaker 1

Thank you, Paul. Take care. All right, sports fans. Well, I think that concludes our conference call for Thanks so much for participating. Always enjoyed talking with you.

Speaker 1

If you have any more questions, feel free to contact Beth Straka. She can be reached at 414-221 4,639. Thanks everybody. So long.

Operator

That concludes today's conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
WEC Energy Group Q2 2022
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