WEC Energy Group Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

There are 14 speakers on the call.

Operator

Welcome to WEC Energy Group's Conference Call for Third 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 and could cause actual results to differ materially from those contemplated.

Operator

During the discussions, reference earnings per share will be based on diluted earnings per share, unless otherwise noted. After the presentation, the conference will be 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 made available approximately 2 hours after the conclusion of this call.

Operator

And now, it's my pleasure to introduce Gail Klava, Executive Chairman of WEC Energy Group. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone, and thank you for joining us today as we review our results for the Q3 of 2022. First, I'd like to introduce the members of our management team who are here with me. We have Scott Lamber, our President and Chief Executive Sha Liu, our Chief Financial Officer and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. Now as you saw from our news release this morning, We reported Q3 2022 earnings of $0.96 a share. Three major factors shaped another solid quarter: Strong performance from our infrastructure segment, an uptick from our ownership in American Transmission Company, plus a warm close to the summer in September.

Speaker 1

Of course, our balance sheet and cash flows remain strong and stable. And I will switch gears and provide you with some background on the Wisconsin rate in the quarter. As you recall, we filed rate reviews earlier this year with the Public Service Commission of Wisconsin for all our including the Citizens Utility Board and the Wisconsin Industrial Energy Group. In fact, more parties supported these settlements than any other settlement we've reached over the years. Scott will provide you with more detail on the terms in just a moment, but I would simply say that we view this as a very positive step forward.

Speaker 1

The process, it's now in the home stretch and we look forward to the commission's review, which we expect in December. Our other big news for the day is the rollout of our ESG progress plan for the period 2023 through 2027. As you may have seen from our announcement this morning, we expect to invest $20,100,000,000 with an ongoing focus on efficiency, Sustainability and Growth. This is the largest capital plan in our history, an increase of $2,400,000,000 That's more than 13.5 percent above our previous 5 year plan. Now as we look forward, I would describe our growth trajectory as long and strong.

Speaker 1

In fact, our plan will now support compound earnings growth of 6.5% to 7% a year over the next 5 years without any need to issue equity. And as you've come to expect from us, this projected earnings growth will be of very high quality. Highlights of the plan include a significant increase in renewable energy projects for our regulated utilities from roughly 2,400 megawatts of capacity in our previous plan to nearly 3,300 megawatts in this plan. And as we continue to decarbonize our system, it's important to point out that passage of the Inflation Reduction Act is a real true game changer for customer affordability. We now project long term customer savings of nearly $2,000,000,000 from our investment in renewables in this 5 year plan.

Speaker 1

That's nearly double what we projected just a year ago. We've also dedicated more capital to hardening our networks, to our electric distribution networks so that we can deliver high level of reliability for our customers. And we've included in the new ESG progress plan and increase in transmission investment. Two major factors are driving this growth, renewable projects that require transmission and the long range planning process being conducted by MISO, the Midwest grid operator. Add it all up, shake it all around, and we have what I really believe is a at Premium Growth Plan.

Speaker 1

The projects that are driving our growth are low risk and highly executable. They're paving the way for greater sustainability, paving the way for an energy future that's affordable, reliable and clean. And now before I turn it over to Scott, I'd like to cover a significant development in our Infrastructure segment. Just yesterday, you may have seen the news that we will acquire an 80% interest in the Maple Flats Solar Energy Center. That's a 250 Megawatt project being developed by Invenergy in South Central Illinois.

Speaker 1

We plan to invest approximately $360,000,000 for 80 percent ownership of the project. Maple Flats has an offtake agreement with a Fortune 100 company for the sale of all the energy it will produce. And under the Inflation Reduction Act, Maple Flats will qualify for production tax credits. The project, of course, meets all our financial criteria and will further diversify the renewable assets in the infrastructure segment of our business. And finally, a brief look at the regional economy.

Speaker 1

Wisconsin added 14,400 private sector jobs in September and the unemployment rate in the state stands at 3.2%. That's well below the national average. We continue to see major investments from growing companies in our region and a wide range of And with that, I'll turn the call over to Scott for more information on our regulatory developments, for our operations and our infrastructure segment. Scott, all yours.

Speaker 2

Thank you, Gail. I'd like to start by reviewing where we stand on the regulatory front. First, let's get back to the details in the rate review. Pending commission approval, the partial settlement agreements would bring several other changes beyond the base rates. We've agreed to a common equity component of 53% for each of our Wisconsin utilities, consistent with our initial request.

Speaker 2

The settlement calls for the continuation of the revenue sharing mechanism that has been in place this year. The agreement also addresses the future cost recovery of the older units of our Oak Creek power plant. First, we've agreed to securitize $100,000,000 of the book value of the plant's environmental controls. 2nd, after retirement, we would propose to levelize over 25 years recovery of the remaining book value, which is approximately $400,000,000 We agreed with the settling parties that the commission should determine the return on equity for each utility, along with the allocation of revenue among customer classes. We expect a commission review by mid December.

Speaker 2

In addition, today we filed a rate review at one of our smaller utilities, Minnesota Energy Resources. We are seeking an overall bill increase of 7.9%, primarily driven by capital investments. We expect interim rates will go into effect January 1. Meanwhile, we're making good progress on a number of regulatory capital projects. In Wisconsin, work continues on our new reciprocating internal combustion engines, or as we call them, RICE units, as well as our liquefied natural gas storage facilities.

Speaker 2

As we've discussed, these projects are needed to support the reliability of our electric and natural gas systems. And our Red Barn Wind development continues To move forward in Southwestern Wisconsin, we now expect to come online early next year. With an investment of $160,000,000 This project will provide about 80 megawatts of renewable energy to our system. Work continues on the Badger Hollow II solar facility and the Perris Solar Battery Park. We still expect these projects to go into service next year with the battery storage anticipated in 2024.

Speaker 2

Of course, we'll keep you updated on any future developments. We're continuing to make strides in support of a low and no carbon generation. Just last month, we completed our pilot project, blending hydrogen and natural gas at one of our modern rice units in Michigan's Upper Peninsula. This is a first in the world test of its kind using this technology. As you'll recall, We partnered with the Electric Power Research Institute to lead this research.

Speaker 2

The project mixed hydrogen and natural gas in a 25% to 75% blend. We are still evaluating the data. However, our initial findings This call indicates that all project measures met or exceeded our expectations. The units performed very well and efficiently. As expected, nitrogen oxide emissions increased, our equipment was able to take these emissions out, and of course, carbon dioxide emissions were reduced.

Speaker 2

Our research will help demonstrate the feasibility of this approach for potential generation on a larger scale in the future. We look forward to sharing the full results with our industry and the public early next year. And as we've discussed, we've been able and working on to bring high quality renewable natural gas to our customers. Just last month, we signed our 4th RNG contract, Contributing to our goal of net 0 methane emissions, we plan to have RNG flow in our system by early next year. Outside our utilities, we continue making good progress on projects in our WEC Infrastructure segment.

Speaker 2

I'm pleased to report we've completed the acquisition of the Thunderhead Wind Farm and expect it to enter commercial operations later this year. And we expect Sapphire Sky Wind to go into service early next year. Together, the two projects represent approximately $800,000,000 in terms of investment. And as Gail noted, we're excited to add our first solar project to this segment with Maple Flats. And with that, I'll turn it back to Gail.

Speaker 1

Scott, thank you very much. And as we head now into the final months of the year, we're narrowing our earnings guidance to a range of $4.38 to 4 point at $0.40 a share and we expect to reach the top end of that range. And a quick reminder about our dividend, we continue to target a payout ratio of 65% to 70% of earnings. We're positioned very well within that range. So I expect our dividend growth We'll continue to be in line with the growth in our earnings per share.

Speaker 1

Next up, Shah will provide you with more details on our Q3 financials. Shah, all yours.

Speaker 3

Thanks Gail. Our 2022 Q3 earnings of $0.96 per share increased $0.04 per share compared to the Q3 of 2021. Our earnings packet includes a comparison of 3rd quarter results on Page 17. I'll walk through the significant drivers. Starting with our utility operations, overall earnings across our regulated businesses were down $0.03 when compared to the Q3 of 2021.

Speaker 3

While weather was favorable relative to normal, it negatively impacted earnings by an estimated $0.03 per share quarter over quarter. Outside of weather, earnings from our utility operations were flat quarter over quarter. Rate based growth contributed $0.09 to earnings. This was fully offset by higher depreciation and amortization expense, an increase in day to day O and M and the timing of fuel expense and other items. In terms of sales, on a weather normalized basis, retail electric deliveries in Wisconsin, excluding the iron ore mines were up 0.3 percent.

Speaker 3

Sales to our large commercial and industrial customers Grew 2.1% compared to last Q3. Overall, retail demand for electricity is tracking our forecast. Regarding our investment in American Transmission Company, earnings increased $0.05 compared to the Q3 of 2021. Higher earnings were mostly related to the resolution of historical appeals Pertaining to the ROE used by MISO transmission owners. As of the Q3 and going forward, We're recording ATC earnings at a 10.38% return on equity.

Speaker 3

Earnings at our Energy Infrastructure segment improved $0.02 in Q3 of 2022 compared to the Q3 of 2021. This was mainly driven by production tax credits from our Jayhawk wind farm that began commercial operation at the end of last year. Finally, you'll see that earnings at our corporate and other segment were flat quarter over quarter. Overall, we improved on our 3rd quarter performance by $0.04 per share compared to last year. Looking now at the cash flow statement on Page 6 of the earnings package.

Speaker 3

Net cash provided by operating activities increased $53,000,000 Recovery of natural gas costs drove this increase. And total capital expenditures and asset acquisitions were $2,100,000,000 for the 1st 9 months of 2022, A $316,000,000 increase as compared with the 1st 9 months of 2021. As you can see, we have been executing well on our capital plan. Looking forward, as Gil As outlined earlier, we're excited about our plan to invest $20,100,000,000 over the next 5 years in key infrastructure. This ESG progress plan supports 7.4% annual growth in our asset base.

Speaker 3

Pages 18, 19 and 20 of the earnings packet provide a breakdown of the plan, which I will highlight here. As we continue to make our energy transition, over 70% of our capital plan is dedicated to sustainability, including $7,300,000,000 in renewable projects and another $7,300,000,000 in grid and fleet Reliability. Additionally, we dedicated $2,800,000,000 to electric and gas infrastructure to support for customer growth. We also plan to invest $2,700,000,000 in technology and modernization of our systems to further generate long term operating efficiency. This robust capital plan supports a higher and narrowed EPS growth rate of 6.5% to 7% over the long term.

Speaker 3

As always, we're using the midpoint of this year's original guidance as our base. To remind you, that number is $4.31 a share. With our strong economic development backdrop and our continued focus on efficiency, sustainability and growth, We see a long runway of investment ahead even beyond the next 5 years. As Gail said before, This trajectory is long and strong. In closing, I'd like to provide our earnings guidance.

Speaker 3

For the Q4, we are expecting a range of $0.73 to $0.75 per share. As a reminder, we earned $0.71 per share in the Q4 last year. Also, let me reiterate our guidance for 2022. As Gail noted, the new range is $4.38 to $4.40 per share. Our expectation is that we'll reach the top end of the range.

Speaker 3

This assumes normal weather for the remainder of the year. With that, I'll turn it back to Gail.

Speaker 1

Sean, thank you very much. And overall, folks, we're on track and focused on providing value for our customers and our stockholders. Operator, we're now ready for the Q and A portion of the call.

Operator

Thank you. Our first question is from Shar Pourreza with Guggenheim Partners. Your line is open.

Speaker 1

Hey guys. Rock and roll, Shar.

Speaker 4

How are you doing, Cal?

Speaker 1

We're good. How about you?

Speaker 5

Not too bad. Not too bad.

Speaker 4

Just getting ready for EEI. Tigheil, just a couple of questions here. So your initial look at the 5 year capital plan shows Pretty consistent spending at the infrastructure, but a large jump on Wisconsin on the generation side. As we're sort of thinking about the drivers of the increase, Is it more on the IRA related side? And if so, are you assuming more RFP wins, less reliance on tax equity, More regulated acquisitions, I guess what's driving this jump and what's the mix between solar, wind and storage?

Speaker 1

Okay. Great question, Shahriar, as always. And take your vitamins before EEI. Let me try to break that down into several pieces. The first is, as you recall, because of our Particular situation with our tax appetite, we never had the need for tax equity.

Speaker 1

So just set that aside, that was never in our capital and then secondly, in terms of what are the big drivers of the increase from $17,700,000,000 to 20,000,000,000 Really there are 3, as I kind of mentioned in the script. But the first is continued decarbonization of our electric in Wisconsin, the retirement of older coal fired power plants in the future and the need to have carbon free generation to support the capacity needs of the state. Sha can give you the breakdown of the renewable projects that we're laying out in the 5 year plan between wind and solar and battery storage. But long story short, it's a continuation of the decarbonization of the system and very much enhanced in terms of customer affordability by the benefits of the Inflation Reduction Act. Clearly, the Inflation Reduction Act with the huge customer benefits that I mentioned over the long term are really a factor in helping with Bill Headroom as we continue again to decarbonize the economy.

Speaker 1

So that's one big chunk. And as I mentioned, we're going from in the previous 5 year plan about 2,400 megawatts of renewables for our regulated customers to about 3,300 megawatts in this particular plan. The second piece and also as more renewables get completed online in Wisconsin, There is a need for upgraded transmission. And in addition to that, some of the transmission system here is of an age where it's going to need to be rebuilt. So we're seeing big uptick in transmission investment needs.

Speaker 1

And then the third is, we had outlined a while back a $700,000,000 plan to harden our electric distribution network and that will continue. So I hope that responds to your question. Sean, do you want to give a quick breakdown of the 3,300 megawatts in terms of wind, solar and batteries?

Speaker 3

Yes, I'd be happy to. So we assumed About 1900 Megawatts of Solar, so that's a little over 4 40 Megawatts Compared to the last plan, we assumed around 670 Megawatts of wind And 7 20 megawatts of battery. So that adds up to about 3,300. So I'm giving you some round numbers. So higher solar, higher wind, slightly lower battery compared to the prior plan.

Speaker 4

Got it. And then just a detailed breakout, When you provided EEI, should we just expect a step up in generation spending will be more back end loaded or will it be an increase across the periods. I guess, how do we layer this in as we're thinking about your updated growth guide?

Speaker 1

Well, great question, Shar. As you know, we've got a number of for renewal projects in flight right now. So I think this is not a back end loading kind of a thing. It's pretty pro rata across the 5 years.

Speaker 5

Okay, perfect.

Speaker 4

And then Gil, lastly is just on, as we're thinking about the infrastructure segment, historically, it's been ahead of your planning budget, But we could see some softness there, especially as many of the regulated peers it competes with in other states are now obviously more competitive post IRA. First, I guess, do you agree with that? And then what are your thoughts on essentially all of your peers kind of exiting these non utility businesses What seems to be fairly healthy transaction multiples? Thanks. Sure.

Speaker 1

I always respect your opinion, but In terms of future softness in our infrastructure segment, we just don't see it. We honestly don't see it. And I think a good example of that is, I mean, coming out of the gate on the Inflation Reduction Act. And we mentioned to you and others that the Inflation Reduction Act by allowing a choice for solar projects Between investment tax credits and production tax credits, that choice could open up a whole lane of additional investment for us in the infrastructure segment And Shazam, it did with our announcement of Maple Flats. But honestly, we don't see for our company A softness there.

Speaker 1

And you're right, some other companies have decided to exit that business. But to be honest with you, I think a lot of that with very good transaction multiples obviously, but a lot of that is to avoid equity, A lot of that is to avoid dilution. We're not in that position. And so we think it's a very good business for us. It's meeting all of our financial criteria, but I would just add one thing that I think is really important and that we probably don't emphasize enough.

Speaker 1

We're building flexibility here. Post-two thousand and thirty, when a number of the contracts that are in place for these infrastructure segment renewables, when they roll off, We're going to have the potential to roll some of these projects at a very good price into our regulated Asset base, so we're building carbon free flexibility for the future and carbon free capacity for the future. We'll have a lot of options with these assets. And frankly, given the multiples we're seeing, they're probably worth a lot more than we are seeing in our own value.

Speaker 4

Very fair points. Thanks, Gail. We'll See you in a couple of weeks.

Speaker 1

Fantastic. I look forward to it. Thank you, Shahriar.

Operator

The next Question is from Julien Dumoulin Smith with Bank of America. Your line is open. [SPEAKER JULIEN DUMOULIN SMITH:] Hello. [SPEAKER JULIEN DUMOULIN SMITH:]

Speaker 6

Hey, afternoon. Yes, I'll take it.

Speaker 7

Thank you guys for the time. Quite well. Thank you. Appreciate it.

Speaker 1

Terrific. And still married, still in Houston, right?

Speaker 7

You betcha. Making a new life of it. Indeed. So Hey, Greg, here, couple of questions for you. Let me just start off where we're starting to left off a little bit.

Speaker 7

I mean, as you think about the extent of the IRA opportunities, obviously, You guys increased the regular utility outlook to 3.3% from 2.4%. But is that the full extent of it? I mean, can we expect a little bit more? And then related to that, As you look at the higher rate environment today, you talk about meeting the financial criteria with the solar investment here. I mean, what kind of ROEs and IRRs are Seeing out there, should we calibrate ourselves in this elevated rate environment out there?

Speaker 7

Or is that still a little bit TBD on this project Kind of the go forward WECI investments?

Speaker 1

Now to answer your second question, and I'm going to have Scott to give you his thoughts as well on the particularly on the trajectory of additional renewables beyond our 5 year plan in Wisconsin, which I think is robust. But long story short, back to your question on the IRRs on our infrastructure projects. I mentioned this particular project, dollars 360,000,000 solar Facility in Southern Illinois. This meets all of our financial criteria. So roughly 8% levered IRR And again, returns that exceed the returns in our regulated business and as I mentioned, give us tremendous flexibility in the 12 to 15 years ahead of us.

Speaker 1

So at the moment and again we can be very, very selective with these projects. We have 8 wind farms that are either in operation or we've committed to, and now this solar facility. But We are again by being selective, by working with great partners like Invenergy, I think we've got a really solid future and I don't see at the moment The kind of softness that perhaps some of the others are seeing, but it may be because we can be particularly selective. Scott? No, you're exactly right.

Speaker 2

A lot of opportunities as you saw we just announced that Maple Flats solar project. As you think about the long term and the benefits to the IRA. As Gail mentioned in the prepared remarks, we have over the 20 years, over $2,000,000,000 of customer savings for the projects that we've announced. That goes through 2027. I think there's a lot more opportunities as you look at the last half of the decade here.

Speaker 2

So probably more to come, a lot of good savings. And when we look at that $2,000,000,000 of savings for our customers, it factors in the IRA and we think a very conservative only $4 gas cost. So the benefits are even more as we look at more renewables as we see $5, $6, $7 gas cost. So a lot of opportunities here.

Speaker 1

That's helpful.

Speaker 7

Yes, absolutely. Excellent. And then if I may here, just pivoting back to the Illinois side of the equation or more focused on Peoples Gas in Chicago. Any updated regulatory strategy there following the expiration of the existing pipe replacement rider at the end of next year?

Speaker 1

Now as you mentioned, the pipe replacement rider, which we call the QIP, the Qualified Investment Plan rider, by legislation is set to expire at the end of 2023. So we are still in the process of evaluating what's appropriate. And certainly, with the election well underway and just a few days away, We need to wait until after the election to really have the appropriate conversations with the right folks. The only thing I will say is The work needs to continue, whether it's through a rider or whether it's through a rate case with forward looking test period, The work needs to continue. And as you remember, the Illinois Commerce Commission asked us to have an independent engineering study done More than 80% in that study, which was extensive and it took over a year to complete by an independent engineering firm.

Speaker 1

That firm found that more than 80% of the remaining pipes under the City of Chicago have a useful life left of less than 15 years. So the work must go on. We're on target with it, and we'll just continue to work the process as we move into next year.

Speaker 7

All right. Fair enough. We'll leave

Speaker 6

it there. Thank you, guys. See you soon.

Speaker 1

Thanks, Julian. Take care. See you.

Operator

The next question is from Jeremy Tonet with JPMorgan. Your line is open.

Speaker 1

Greetings, Jeremy. How are you doing today?

Speaker 6

Hi, good afternoon. It's actually Rich Suddenland on for Jeremy. Thanks for the time, Gail.

Speaker 1

You're welcome.

Speaker 6

Thinking about the narrowed growth rate here, Curious on a couple of different considerations. One is you walk from the greater than 7% asset based growth. I know you've Typically, our inherent financing costs is the delta down to the growth rate, but that's ticked up, but the high end of the EPS growth remains 7%. Any thoughts around the consideration to moving that higher than 7% or what else we might not be thinking of in terms of offsets from asset based EPS?

Speaker 1

Well, it kind of starts well, first of all, as you know, our new 6.5% to 7% growth rate It's probably the tightest projected growth rate in the industry. And I think that's a reflection of our ability to execute, Our ability to build projects on time and on budget, our track record of consistency. So I see the narrow growth rate as again very, very strong in our confidence of our ability to deliver. In terms of the actual math, You start with as you know, you start with what is the average growth rate in the asset base and that is 7.4% a year. And then we back we have no need for equity, which I think is a particularly distinguishing factor for us in the industry.

Speaker 1

But we have to back off financing costs, not just at the parent, but also debt costs at the individual utilities and at the infrastructure segment. So you put it all together and with our what I think is our conservative interest rate assumptions, It gets you to that 6.5% to 7% growth rate. Shao, anything you'd like to add to that?

Speaker 3

No, I think you covered it, Gail.

Speaker 1

I hope that helps to respond to your question.

Speaker 6

No, that's very helpful. And maybe just picking up the last thread there on the financing side, Where do you see FFO to that standing currently and maybe through this plan period as well, especially in consideration of the higher CapEx here?

Speaker 1

Yes, Shah has got the detail for you.

Speaker 3

Yes, we are still remember, I talked about it in the last quarter earnings call that IRA provides balance sheet flexibility from several fronts. The PTCs for solar, the standalone ITC For battery investment and also the transferability, so all those things provide more flexibility for us. So Basically, the financial plan accommodates 2 things. 1 is IRA, 2 is higher interest rate and also the higher capital and we're still looking at the target FFO to debt over the longer term. And by the way, the higher interest rates are already factored in the Wisconsin settlement as you probably already knew.

Speaker 6

Got it. Thank you very much for the color there.

Speaker 1

You're more than welcome.

Operator

The next question is from Durgesh Chopra with Evercore ISI. Your line is open.

Speaker 1

Durgesh, the Eagles still undefeated. But I heard that you were not going to change your jersey until they lost. So I'm hoping that you've taken a shower anyway.

Speaker 8

No comments, Gail. Don't jinx for you guys. Hey, just I wanted to quickly follow-up. Shah, thank you for sharing the 3.3 gigawatts worth of Renewable Generation Editions. I just wanted to kind of get a sense of what's included in the current rate settlement?

Speaker 8

And then what should we how should we think about regulatory approvals in terms of timeline and sort of Key dates for us to watch as you execute on that 3.3 gigawatt portfolio that you just articulated?

Speaker 5

Sean's got

Speaker 1

the full breakdown. I can tell you though a pretty significant percentage of the 3.3 gigawatts is already in flight, But we have a number of them coming and Shaw's got the breakdown for you.

Speaker 3

Yes. So out of the 3,300, The amount that we will file in the future is about $2,100 So that gave you a sense that Over 1200 megawatts are already either under development or we have already filed, and we'll address those in the rate case Test year 'twenty three and also we have a limited re opener in 'twenty four.

Speaker 8

Got it. So 1200 already underway and then 2,100, what's the kind of what's the timing of those? Are those like You said reopener in 2024. So are those like 25 and beyond type sort of approvals?

Speaker 3

I think like Gail mentioned, this is a pretty balanced generation reshaping plan. So I think our Spend in Wisconsin generation is pretty balanced over the 5 years. So you would think that it's incremental each year over the 5 year period.

Speaker 1

Yes, absolutely. So again, we have a number of projects in the pipeline and we're very optimistic. But really, I mentioned earlier, the benefits of the legislation In terms of customer affordability are really significant. And Scott, you might want to just talk about the timeframe. I mean, the quicker we put these in, the quicker the benefits flow.

Speaker 2

Sure. Absolutely, Gail. So as we talked about earlier, we have 3 projects that are actually during in construction right now. And then there's 2 sitting at the commission right now, waiting for their review to go through the process. But When you look at the $2,000,000,000 of dollars of savings, as we get these in, those production tax credits, as you can imagine, are probably starting in that 25, 2026, 2027 timeframe as the projects start going into service.

Speaker 2

And we already factored some of those in for the ones that are in construction now. So about $2,000,000,000 of savings over the 20 years, but as you remember, Using those production tax credits for solar, we're going to be able to give those back to customers much faster.

Speaker 1

Over 10 years, exactly.

Speaker 2

Over 10 years and they'll hit right away versus 30 years of investment tax credit, so very favorable for customers long term.

Speaker 4

That's very helpful.

Speaker 1

Trigesh, I hope that helps respond. Thank you. Take care.

Speaker 8

Thank you.

Operator

The next question is from Michael Lapides with Goldman Sachs. Your line is open.

Speaker 9

Hey, Gail. Greetings, Gail. Thank you, Gail. Good to hear from you as always. Sorry to cut you off there.

Speaker 9

Hey, I really had 2 questions. 1 was on the gas side and 1 on the financing side. This is one of your first 5 year plans Where capital spend on the gas distribution system not only didn't go up, it was flattish, maybe even down a little bit. Well, if I go back and look over the last number of years, you would add increasing levels of gas related spend, capital spend for reliability purposes, not just Illinois, but Wisconsin as well. Just curious what you're seeing there and what some of the drivers behind that are?

Speaker 1

Sure. And I'll ask Scott and Shaw to give their view as well. But long story short, Michael, you are correct. When you look at the allocation of capital across the 5 year plan, the gas distribution part of that capital is pretty flat. But I think it reflects 2 things.

Speaker 1

First of all, it reflects the real investment need and opportunity as we continue to decarbonize The electric system in Wisconsin. So that is a driving need, which has really grown the capital portion. So renewable generation is way up in the capital allocation compared to prior years. We've continued to make progress, but again, With the benefits of the Inflation Reduction Act and our continued focus on retiring older coal fired units, The opportunity and the need for renewable investment has grown. So that's in my mind the biggest factor.

Speaker 1

And then the fact that the gas distribution piece is flat, I think reflects 2 things. 1, reflects that we have a quite modern system, But we're also bolstering that system and we're not too far from the end of building LNG storage facilities for our gas distribution network in Wisconsin. But that spending, I mean, where construction is going very well and that spending will tail off as those LNG storage facilities come into service. And then of course the spending on the pipe replacement program in Chicago continues apace, but at about the same level. Scott, anything you'd like to add?

Speaker 2

You're exactly correct, Gail. I think that the key item is to remember those liquefied Our natural gas storage tanks are going to be in construction, going well, going to add capacity for our distribution system and a majority of that spending is being done this year.

Speaker 9

Got it. And then a follow on question, just for holding company related debt as well as debt at the Energy Infrastructure segments, just can you remind us Kind of what's the percent or raw dollar amount that's floating at either of those two boxes? And what's the level of maturities? And Kind of how you're thinking about refinancing levels just given the broader move in rates?

Speaker 1

Yes. Well, Sean's got the exact details Sitting right in front of her, but let me frame that for you because I think you're asking a very good question. And again, it's an area where I think we and we will separate ourselves from some other companies because as you know, we've always used conservative financing techniques, conservative financing plans. And so our percentage of floating rate debt compared to the total debt outstanding is really quite low. So we'll let Shaul give you the details.

Speaker 3

Yes. I think we have a target holding company to total debt Around 30%. So we're managing around that number. And to Gail's point, the risk Capital percentage is pretty modest for us. So I think that helps us from a rising interest rate environment.

Speaker 3

And Again, we try to assume pretty conservative interest rates in the forecast period, both at the utilities and the holding company and at So I think we're addressing the interest rate exposure that way.

Speaker 9

Got it. And then last question, just on the increase in the ATC, the transmission spend, should we assume That a large chunk of that is a little bit on the back end loaded side just due to siding and permitting?

Speaker 1

Actually, if you'd asked that question 2 years ago or even a year ago, I think Scott and I would have said, yes, particularly with TROTCH 1 from the MISO long term planning process, we would have probably said it's way out into the decade, but now I think you're going to see some of that spending really uptick in 2025 and beyond.

Speaker 2

And we'll be putting a slide together in our new investor deck, but you're actually going to start seeing it 25%, 26% as it relates to tranche 1, But actually some additional investments in American Transmission Company starting in 2024. So it's a good The long plan in American Transmission Company just came out with their 10 year assessment that even shows a longer growth period here. So It's actually up about 50% from last year's 10 year assessment. So real positive and I think it's going to be a longer term plan, starts earlier and longer. And part of that, Michael, you're asking a

Speaker 1

great question. Part of that is because some of the early opportunities that have been identified through the MISO Tranche 1 are really upgrades or additions or expansions on existing rights of way with transmission already in place. And that helps tremendously in terms of just being able to get things moving, not have to get new permits in terms of new rights of way. So there's a real positive development coming out of tranche 1 that you see beginning to be reflected in our 5 year plan.

Speaker 9

Got it. Thank you, guys. Much appreciated.

Speaker 1

Thank you. Take care, Michael.

Operator

The next Question is from Steve Fleishman with Wolfe Research. Your line is open.

Speaker 1

Did you survive the Wolf Conference? You got a chance to go to lunch at all?

Speaker 5

I'm just about to have lunch finally, but No, we have to do it again next year, always another year. So Actually, I think last time I saw you, Gail, you talked about sitting around waiting for panels to come out of a warehouse. So maybe you could just kind of talk a little bit about how you're doing on the kind of current renewables projects in terms of just the supply chain and Uflipa?

Speaker 1

Yes, great question. And you're right. The last time you and I were together actually at the Wolf Conference in late September, We were talking about kind of how are we going to keep, for example, the construction of Badger Hollow 2, Very large regulated solar farm in Southwestern Wisconsin under construction, but badly needing delivery of solar panels. And Scott has some good news for you on the developments

Speaker 2

out of the warehouse in Chicago. Yes, Gail. So we've Got about 50 megawatts in a warehouse in Chicago. The first 30 megawatts have been released. I just saw a picture yesterday.

Speaker 2

They're starting to be assembled on-site. So that's really good news. We're working on the remaining 20 megawatts. So construction continues at that site and we have orders placed now. We figured out we think we have the path figured out for the other solar panels.

Speaker 2

So orders are placed and getting things moving along here. So it's great to see them start the Construction at the Para site.

Speaker 6

Okay.

Speaker 5

And so just like overall in terms of timeline for start up, where are you now versus where you might have been This is where you might have been before on Geiger Hollow?

Speaker 2

Yes. We're still looking at in early 2023. It will all depend upon the weather and the supply chain. But right now, we think we have a path for supply chain. The weather may even be more of a factor here in Wisconsin for Badger Hollow But we're watching it very closely here.

Speaker 5

But

Speaker 2

right now, we're not really changing our timeline at this time. And the

Speaker 1

good news, Steve, as Scott said, is things are starting to move for the first time in months.

Speaker 5

Okay. That's good. And then just one other question. I know you've got a governor election in Wisconsin next week. So just and I'm sure energy has not been one of the top 3, 4, 10 Topics in the election, but just curious if it were to switch back Republican, do you see any change in emphasis to the state that would impact your business.

Speaker 1

The short answer, Steve, is we really don't see a change and the race is By all public polling and all of the information we've seen, the race is a toss-up. Depending upon which poll you look at, There's a 1 or 2 percentage point difference in terms of support for each of the candidates. Governor Evers, of course, the sitting governor Has been very supportive of our transition plan, our decarbonization plan, but also understands The natural gas is going to be needed for reliability both in heating and on power generation in Wisconsin. So the governor has had a very balanced approach. And as you say, energy is really not a major issue that's being debated.

Speaker 1

I think the top 2 certainly would be crime and inflation. The Republican candidate, Tim Michaels, I think the best description of Tim Michaels is he's an infrastructure guy. He and his family, I think his grandfather perhaps started Michael's Construction. They now have 8 1,000 employees and they literally are an infrastructure construction company. They worked on the Keystone pipeline.

Speaker 1

I mean, he's an individual that understands the need for reliable infrastructure. So whichever way the election goes, I think we're going to be in very good shape.

Speaker 5

Great. Thank you.

Speaker 1

Thanks, Steve. Take care. See you in EEI. You bet.

Operator

The next question is from Anthony Crowdell with Mizuho. Your line is open.

Speaker 1

Anthony, can you be in the handle?

Speaker 10

I'm still married and living in Staten Island. I know how Julian feels.

Speaker 1

Well, we're 2 for 2 then. I'm really glad to hear that.

Speaker 10

That's right. Just think, I was going to ask you why Shar is already packing for EEI, but A quick question, most of them have been answered just I guess on inflation. You guys have maintained guidance, you're navigating all the challenge that maybe some others are Stumbling over, just what is the most challenging part of inflation of like handling the cost pressures? Is it on labor? Is on material, supply chain or is it really just interest rates?

Speaker 10

What gives you the biggest problems going to bed at night On these inflation pressures?

Speaker 1

Well, and we'll ask Scott and Shaw to give you their idea of what keeps them up at night. I would say for us, in my mind, we've been most concerned about getting solar panels moved, Getting solar panels to our construction sites. I mean for most of the projects that we have underway and we've got Several $1,000,000,000 of projects underway. I mean, we have locked in much of the cost. I mean, there's some there's obviously some movement in solar panel cost, etcetera.

Speaker 1

But to me, the biggest thing that was keeping me up at night was actually being able to complete these solar projects that are important to our capacity and to our meeting summer demand, simply because of the holdup and the freezing, if you will, of the movement of solar panels. To me, that was the biggest issue. On interest rates, I mean, they have moved dramatically. That's Probably a classic British understatement. But again, given the forward looking test periods in Wisconsin, I mean, as Shaw said earlier, We projected reasonable interest rates given the inflationary environment we're in, and that's part of the rate settlement that we've come to with the major parties in the case.

Speaker 1

So in terms of interest rate increases, I think we're covered there because of The whole mechanism of putting the rate cases in place, we're starting to see solar panels move. And Scott, I assume we're going to see some In some of the commodity costs that affect the overall capital program.

Speaker 2

No, that's exactly correct, Gail. And like Gail said, the solar panels Probably the biggest one to see them move and start getting on-site at the Badger Hollow 2 is getting put in service is really positive. We are seeing some cost increases from inflation. We of course factored that all into our rate case filing and our filing our supplemental filing we did in the end of June to factor that in. The other item and the team has done a great job from the supply chain to our operations really working with our vendors on supply chain and delivering different distribution parts.

Speaker 2

We haven't had any significant issues. There's just a lot of for day to day conversations, week to week conversations to make sure the supplies on what we need for our construction move forward. So Everything is going along really well here, but all that inflation was factored into the test year.

Speaker 1

And Anthony, it was great to see one other quick thought for what it's worth. It was great to see in the last few weeks, pretty sizable decline in spot prices for natural gas. So perhaps the winter gas costs will be less onerous than some earlier projections. And I will say though, one of the things I'm very pleased about, we've talked with the state regulators and our state commissioners about this. We're in good shape from a supply standpoint for winter heating for natural gas.

Speaker 1

You've seen in some other parts of the country, particularly the Northeast, where they Where that may not be the case regardless of price. So, I think we're going to see perhaps Some moderation in natural gas prices overall for the winter for heating season and a supply that we believe we can count on and keep people warm.

Speaker 10

Great. And if I could just squeeze one last one in before you end up with a Jimmy Carter sweater to keep warm with higher prices. But just are you noticing any change in valuations, public versus private valuations in some of the assets Now that we've seen rising rates, I'm sure you get a lot of bankers pitching you a lot of assets to buy or sell. And just wondering if you're seeing any change As rates have risen that maybe the private market use some assets as less desirable versus this recent rise in rates?

Speaker 1

Well, let me answer it this way. In some ways, the increase in interest rates It's helpful to us on the infrastructure side of the business because some of the competitors that we might face for some of these high quality assets Load on a lot more debt in their capital plan than we do. So again, we finance our infrastructure Segment just like we finance our overall enterprise about 50% equity and 50% debt roughly. So as interest rates have risen That changes the economics of a competitor for an infrastructure project that is loading on a ton of debt. We don't do that.

Speaker 1

We haven't done that. And so I think actually in some perverse way, Higher interest rates is even beneficial in terms of our competitive position for the infrastructure segments. Scott Shaw, anything you'd like to add?

Speaker 2

No, I agree, Gail. I think our approach, our consistency really helps us to look at the infrastructure. And As you can see, we were able to announce another deal today yesterday

Speaker 1

and one that we're very pleased

Speaker 6

with you.

Speaker 7

Thank you

Speaker 10

so much for the time. Thanks so much for the time, Gail. Looking forward to seeing the DEI.

Speaker 1

Sounds great. Thank you. Take care.

Operator

The next question is from Nicholas Campanella with Credit Suisse. Your line is open.

Speaker 1

Greetings, Nick. How are you?

Speaker 11

Hey, greetings. Good afternoon. Reporting from Brooklyn, not married.

Speaker 1

Well, let me ask you this, are there any prospects and does the IRA help you in that case?

Speaker 5

You are engaged.

Speaker 9

All right.

Speaker 11

So listen, I just I wanted to just a couple of follow-up questions. So Just going back to Shah's comments on just the credit side and reflecting IRA, and I know you're still kind of working through The FFO to debt target over the long term, some of your peers have communicated a cash flow uplift in the near years of the 5 year plan. And I'm just Curious as you see it today, is that a similar dynamic that's going on in WACC?

Speaker 1

We'll ask Shaw to give you her view.

Speaker 3

Absolutely. If you keep the capital the same and just look at the IRA impact, If you just lay your IRA on top of the existing capital plan, you definitely would see that uptick on cash flow profile. So what I as I said Just now, it allows us to finance the increased capital plan and still maintain the long term FFO to debt metrics, if that makes any sense to you.

Speaker 6

Yes.

Speaker 11

Got it. All right. Thanks a lot. And then, Shod, just while I have you, you mentioned the 10.3% return on equity at ATC going forward. Does that not include any adders?

Speaker 11

And just how do we think about kind of total ROE?

Speaker 3

That's a total ROE, 10.38, just To be precise, that includes the 50 basis point adder.

Speaker 11

Got it. Okay. And then, I guess my last one is A follow-up on kind of the M and A question, but more on the regulated side, Gale. You've had a really successful M and A playbook Over the last decade, it's driven size and scale efficiencies for your customers and for investors. And my question isn't about Your main criteria whether or not it's changed or not, but just like how is the executive team viewing M and A in this current environment with cost of capital being so high?

Speaker 11

Obviously, the industry is dealing with customer bill pressures. It's becoming more apparent across every state. But does that drive more consolidation in your mind and create opportunity or just how should we kind of think about that from a higher level? Thanks.

Speaker 1

Yes, it's a great question. And I'll bore everybody, but I will not repeat the 3 criteria. You all know them. But maybe at EEI, we can put it on the wall. But to your question, which is a good one, I do think over time, and history shows that we are in a consolidating industry.

Speaker 1

I mean, goodness, if you turn the clock back to 1995, there were literally 100 Publicly traded investor owned utilities like ours in the United States. Today, there are roughly 37. So we are in a scale business, scale and efficiency matter, particularly in an era of increased capital spend, Scale and efficiency matter, because you know the formula, it's 1 for 8. We call it the power of 1 to 8. For every dollar of O and M efficiency you can drive through the enterprise, it makes room for $8 of capital without customer rate pressure.

Speaker 1

So over time, I do think we will continue to consolidate in the industry. But in the interim here, Folks are dealing with a fairly sizable, I think across the board, fairly sizable capital plans. And the question is, Can those plans be more cost effectively implemented if you have greater size and scale and a strong balance sheet? So I think over time, the answer is going to be more consolidation. I would expect though it would look more like MOEs Modified or modified mergers of equals as opposed to the old style of M and A, which was In some cases driven by debt and driven by leverage and driven by low interest costs.

Speaker 1

So I think the flavor of M and A may be different long term. I suspect it will be, but it will come in fits and starts, at least that's my view. And thank you for the question.

Speaker 11

Thanks for the answer and looking forward to seeing you down in Florida. Take care.

Speaker 1

Sounds great. Thank you.

Operator

The next question is from Jeremy Tonet with JPMorgan. Your line is open.

Speaker 12

Hi there. Good afternoon. Sorry about missing you before.

Speaker 1

No problem. One of your colleagues was impersonating you. I thought it was Halloween again.

Speaker 12

And yes, still married, Stuyvesant Town, New York City, if we're keeping track here, which it seems like we are. But anyways, moving on, I was just thinking from A higher level here. Just wanted to get touching your expertise on the space, right? And Thinking about the transmission needs broadly after talking about significant customer benefits from Aira, how do you see the Seems issue impacting transmission development overall and just any other thoughts on how to address this or other roadblocks to really effectively get into regional Projects and planning going.

Speaker 1

Yes, Jeremy, interesting question. I'll give you two thoughts for what they're worth. The first is The seams issue, I think, goes back to the days of Edison. I mean, there have been seams issues for as long as I can remember in this industry. The regional power grids, if you will, I think have made some progress, but the seams issues are real.

Speaker 1

And I think it is a matter that FERC is very interested in resolving. These things take tremendous amount of time, But my guess is that you're going to see much more inter power grid cooperation or forced cooperation, 1 or the other. And these seams issues, while they will continue on simply because of the nature of the grids, are going to be less and less and less in my to view over the next 10 years. I think they simply will have to be. Scott, your view on that?

Speaker 2

No, I agree with you, Gail. And I think as more and more transmission gets built, They're going to see it's even natural to hook more of it together. So it may fall into place, but it will take a long time.

Speaker 1

The other point I would make is that the gestation period For new transmission that's not an upgrade of existing transmission or an expansion of existing transmission, the gestation period is simply just too long. We've talked about this. There's a transmission project, for example, that was first envisioned more than 10 years ago in our region, that is still not fully constructed. It's gone through all of the approvals, but it's going through a very arduous court process right now. So I think there are 2 areas that really have to be worked on To continue to decarbonize the system and keep electricity reliable across the country, one is the seams issue, but also is just the lengthy period it takes to basically build greenfield transmission.

Speaker 1

Hope that helps.

Speaker 12

That's very helpful. I'll leave it there. Thank you.

Speaker 1

Thank you.

Operator

Our final question for today It is from Vedula Murti with Hudson Bay Capital. Your line is open.

Speaker 1

Vedula, you are last but not least.

Speaker 13

I appreciate that. Thank you.

Speaker 1

How are you doing Vedula?

Speaker 13

I'm okay. In terms of the renewables build out, Can you help us in terms of like over the period here, how much the Capacity factors and the credit that you'd be able to get from MISO for system availability and things of that nature Have improved, I mean, because if we go back to ERCOT early on, the wind was like 10%, 12%, 15%, whatever, so stuff like that. So Just want to kind of get a sense of what Conjur's World of Thumb is and that and as we go forward whether there's any whether repowering or

Speaker 1

Well, first of all, one of these days when we're on a call with you and I ask you

Speaker 2

how you're doing, I know you're going

Speaker 1

to say wonderful and award winning, but we'll wait for that day.

Speaker 13

Okay.

Speaker 1

And Vedula, I'm not sure I completely understood your question in terms I think what you were asking, but please clarify if I'm off base here. I think what you're asking is, do we have an opportunity to repower some of our existing assets to get more capacity credit in the Midwest power grid? Is that your question Vedula?

Speaker 13

That's the second part. And the first part is the 3,400 megawatts, both wind and solar. What type of capacity credit do you anticipate now from MISO as opposed to what it might have been like 5 years ago or something like that in terms of the improvement.

Speaker 1

Okay. Well, we have MISO has been very specific about the particular capacity credit for

Speaker 2

a particular type of renewables. Scott? Exactly, Gale. And I think, when you think about wind, that peak capacity in the summertime is around 14%, 15%, 16%, where solar is in that 65% to 70%. But as you know, we're going through Now looking at more seasonal capacity, so you need to look at the fall, the spring, the winter, the summer.

Speaker 2

And we're currently working through all those. I think the final stuff the final information is going to come up closer in December on how these Seasonal capacities will be looked at, but the capacity here, it's that 14%, 15% for the summer for the wind and that's 65%, 70% for the solar.

Speaker 1

Hope that responds to your question Vedula.

Speaker 13

Yes. And I guess one last thing tied to that. If to the extent that you have repowering opportunities, I guess, I'm wondering how that's going to compete with capital allocation relative to newer projects and as we go forward here, especially as you have more critical scale across that business line.

Speaker 1

And there will be some repowering opportunities, no question, particularly with some of the older renewables. When I say older, 10 to 15 years ago, For example, we're the largest owner and operator of wind farms in the state of Wisconsin and some of those came on more than a decade ago. So as the technology has improved and as wind turbines have become even more efficient, for example, There are going to be opportunities going forward. But long story short, I don't see this as crowding out. I don't see that opportunity in any way as crowding out because we have so much need to reshape our generation system and to continue to meet those goals, the aggressive environmental goals of an 80% reduction in CO2 emissions done in a way that's affordable, reliable and clean by the end of 2,030.

Speaker 13

Okay. Thank you very much and I will see you in Florida.

Speaker 1

Terrific. Thank you so much. Well, ladies and gentlemen, that concludes our call for today. We look Forward to seeing you at EEI. And in the meantime, thanks again, everybody.

Speaker 1

Take care.

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Earnings Conference Call
WEC Energy Group Q3 2022
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