[WEC stock] WEC Energy Group Q4 2020 Earnings Call (2/4/21)

Good afternoon and welcome to WEC Energy Group's conference call for fourth quarter and year-end 2020 results. This call is being recorded for rebroadcast and all participants are in a listen-only mode at this time. Before the conference call begins, I remind you that all statements in the presentation other than historical facts are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated during the discussions. Referenced 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 available approximately two hours after the conclusion of this call. And now it's my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

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

Thank you, Scott. Throughout 2020, we kept the energy flowing to our customers safely and reliably. Our largest utility, We Energies, was named the most reliable electric company in the Midwest for the 10th year running, and our Peoples Gas subsidiary was named a most trusted brand and a customer champion for the second year in a row by Escalent, a leading behavior and analytics firm. Now I'll review where we stand on current projects in our ESG Progress Plan. As you heard in our last call, the Two Creeks solar farm is now operating. As we've mentioned, a very large project. In fact, just days after achieving commercial operation this past November, our share of this project accounted for more than 20% of the solar output in the entire MISO generation market. Also in Wisconsin, We Energies is making progress in the approval process for two liquefied natural gas facilities, which would provide enhanced savings and reliability during our cold winters. If approved, we expect to be in construction in the fall of this year and to invest approximately $370 million in total to bring the facilities into operation in 2023. And as Gail just mentioned, our ESG Progress Plan includes 1,800 megawatts of wind, solar, and battery storage. Filings with the Wisconsin Commission for a number of these projects will begin in the first quarter. Turning to Illinois, as you may recall, we are in the midst of a rate review for one of our smaller subsidiaries, North Shore Gas, which serves approximately 160,000 customers in the northern suburbs of Chicago. Rates for North Shore Gas were last set more than five years ago, before we acquired the company. Since then, we have consistently invested capital to serve our customers while reducing operating cost. The Illinois Commerce Commission has set a schedule for concluding the case. Hearings are expected to begin in late April with a final order in September. And with that, I'll turn it back to Gail.

Thanks, Gail. Our 2020 earnings of $3.79 per share increased 21 cents per share compared to 2019. Our favorable 2020 results were driven by a number of factors. These included the execution of our capital plan, rate adjustments at our Wisconsin utilities, ROE improvement at American Transmission Company, production tax credits in our infrastructure business, and continued emphasis on operating efficiency. These factors helped us to overcome the sales impact of COVID-19 and mild winter weather, and all of our utilities met their financial goals in 2020. The earnings packet placed on our website this morning includes a comparison of 2020 results on page 21. I'll walk through the significant drivers impacting our earnings per share, starting with our utility operations. They grew our earnings by 22 cents compared to 2019. First, O&M expenses were favorable. This includes 8 cents from lower day-to-day O&M expenses and 9 cents from lower sharing amounts in 2020 at our Wisconsin utilities. Second, despite the impact of COVID-19 and reduced wholesale and other margins, rate adjustments at our Wisconsin utilities, continued capital investment, and fuel drove a net 21 cent increase in earnings. Third, we had 12 cents of higher depreciation and amortization expense and an estimated 5 cent decrease in margins related to mild winter weather year-over-year. These factors partially offset the favorable items we discussed. Overall, we added 22 cents year-over-year from utility operations. Earnings from our investment in American Transmission Company increased 8 cents per share compared to 2019. Recall that 7 of the 8 cents were driven due to ROE changes from FERC orders issued in November 2019 and May 2020. 4 cents resulted from the November 2019 order and 3 cents from the May 2020 order, and the penny came mainly from continued capital investment. Earnings at our energy infrastructure segment improved 5 cents in 2020 compared to 2019, primarily from production tax credits related to wind farm acquisitions. These include the Coyote Ridge Wind Farm placed in service at the end of 2019, additional 10% ownership of the Upstream Wind Energy Center, and the Blooming Grove Wind Farm which came online in early December. Finally, you'll observe that we recorded a 99 cent charge in corporate and other to account for the make-whole premiums we incurred in the fourth quarter as we refinanced certain holding company debt to take advantage of lower interest rates. The remaining 5 cent decrease is related to some tax and other items, partially offset by lower interest expense. In summary, WEC improved on our 2019 performance by 21 cents per share. Now I'd like to update you on some other financial items. Our effective income tax rate was 15.9% for 2020. Excluding the benefit of unprotected taxes flowing to customers, our rate was 20.2%. Looking to 2021, we expect our effective income tax rate to be between 13 and 14%. Excluding the benefit of unprotected taxes flowing to customers, we project our 2021 effective tax rate to be between 19 and 20%. As in past years, we expect to be a modest taxpayer in 2021. Our projections show that we will be able to efficiently utilize our tax position with our current capital plan. Looking now at the cash flow statement on page 6 of the earnings packet, net cash provided by operating activities decreased $149.5 million. Our increase in cash earnings in 2020 was more than offset by higher working capital requirements primarily related to COVID-19 and by higher pension contributions. Total capital expenditures and asset acquisitions were $2.9 billion in 2020, a $345 million increase from 2019. This reflects our investment focus in our regulated utility and contracted renewable businesses at our energy infrastructure segment. In terms of financing activities, in the fourth quarter of 2020, we opportunistically refinanced over a billion dollars of holding company debt, reducing the average interest rate of these notes from 3.3% to 1.5%. We continue to demonstrate our commitment to strong credit quality. As expected, our FFO to debt ratio was 15.4% in 2020. Adjusting for the impacts of voluntary pension contributions and customer arrears related to COVID-19, our FFO to debt was 16.9% in 2020. At the end of 2020, our ratio of holding company debt to total debt was 28%, below our 30% target. In addition, as Gail mentioned, we have no need for additional equity over the five-year forecast period. Finally, let's look at our guidance for the first quarter of 2021. Last year, we earned $1.43 per share in the first quarter. We project first quarter 2021 earnings to be in the range of $1.45 per share to $1.47 per share. We have taken into account mild winter weather to date, and this forecast assumes normal weather for the rest of the quarter. For full year 2021, we're reaffirming our annual guidance of $3.99 to $4.03 per share. With that, I'll turn it back to Gail.

Now we will take your questions. The question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit one on your phone. If you are using a speaker phone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from Char Perez with Guggenheim. Your line is open. I can roll, Char, how are you today?

Hey, sorry to disappoint, it's actually James for sure. Ah, that's all right. Better looking than younger. Yeah, exactly. The easier question. So I guess if we could start on the infrastructure side, you know, you've laid out $2.2 billion going forward. How should we sort of think about the cadence of that, and does the extension of tax credits earlier this month kind of change any your timing or thoughts there? Any changes in the opportunity set?

Dad, yeah, just so there's no confusion, it is $2.2 billion in the five-year plan. $400 million of that is the Thunderhead project that has been announced already. The additional $1.8 is just what hasn't been announced yet, just so there's no confusion. Yep, we have $1.8 billion to look at. Thunderhead is on its way, we hope by the end of the third quarter. Perfect, thanks. And I guess just kind of following on the clean resources side, since you and Char last spoke, we've seen NextEra formally file at the NRC to extend the life of Point Beach. Have you had any conversations with them yet? Are there any general updates there to think about potential recontracting or retirement?

Got it. Thanks, guys, and congrats on a strong finish to a tough year. Thank you for your questions, appreciate it. Tell Sha to behave, okay? We'll do.

Your next question comes from Dures Ho with Evercore. Your line is open.

Hi, Dures. Hey, Gail, good afternoon. Thanks for taking my question. Just on the rate case front, Gail, just have you been here before? So have you done this in Wisconsin before? Can you just remind us and what might the options look like? Could you defer the rate increase, or if I'm thinking about 2022, could you accelerate your cost savings to sort of stay on target with your 5 to 7% EPS growth rate? Just any color around that would be helpful. Thanks.

Got it. Thanks, Gail. That's all I had. Thank you. Thank you. Take care.

Your next question comes from Julian Dean Smith with Bank of America. Your line is open. Julian, how you doing?

Great, thanks for the time, guys. Afternoon. So I listen, incredible cost reductions, right? And so here's what I want to know: how are you guys continuing to reduce costs as you think about this 2 to 3% after a year where so many of your peers already brought down costs? And the question is the sustainability of those cost reductions. So if you can elaborate on that, and then separately, just to follow up on the last one, I'll throw it in there. You've already articulated some benefits on O&M, you've talked about your refinancing activities here that certainly have some tailwinds. What other pieces in this, what other ingredients are there in terms of a stay-out here that are relevant in these conversations, if you may?

Yeah, absolutely. Excellent. And that comment on '23 through '25, that relates to Columbia here, just to make sure I tie things together. Oh gosh, it relates to the four older units at our Oak Creek site, it relates to Columbia, that was our player to be named later in our investor deck. So that's because our Wisconsin Public Service subsidiary is a minority owner at Columbia, and it relates to a unit as well at Wisconsin Public Service. So it's across the fleet. Excellent. All right, we'll leave it there. Thanks, guys. Take care.

Your next question comes from Jeremy Tonet with JP Morgan. Your line is open. Greetings, Jeremy. How are you today?

Good, good afternoon. Thanks for having me. Oh, you're welcome. It's been nice being had. Just wanted to kind of start off with a high-level question if I could. The Biden Administration has some new reduction goals out there, and I was just wondering if you had any thoughts on them and if this becomes law, how this might impact WEC. Are you thinking specifically about the aspirational goal of a carbon-free grid by 2035? Is that your thought process? Yes. Okay, all right.

That's a very helpful economic context. I appreciate that. Thank you. And just one last one if I could, just to clarify here. I might have missed it, but could you confirm if the guide, the 7 to 8% guide, is based off the $3.73? If that's how we should be thinking about the CAGR here? Yeah, it's based off the midpoint of our 2020 original guidance, which was $3.73. That's great. Thanks so much. You're welcome. Good questions.

Jeremy, as a reminder, it is star one on your telephone keypad to ask a question. Your next question comes from Michael Weinstein with Credit Suisse. Your line is open. Hi, Michael. How are you doing today?

Right, right. I'm doing good. Um, hey, just... well, your technology may not be doing so good.

Michael, operator. Unfortunately, I think Michael cut off there. Okay, thank you. Your next question comes from Michael Leedes with Goldman Sachs. Your line is open.

Thanks for taking my question. You're welcome. How you doing? I'm okay. I have two for you. One may be for others on the team, one for you. Just curious for you. There are lots of states that are talking about or putting out restrictions on gas distribution, customer additions, growth, or that would impact gas distribution volumetric growth. I guess my question for you is: what's your view on that in general? It's clearly had impact on kind of the pure-play gas utilities out in the market, but also just how investors and policymakers are thinking about gas distribution businesses. And are you seeing any of that type of activity in the states you serve?

Yeah, that's correct, Gail. In fact, we are still seeing, especially in Wisconsin, Michigan, and Minnesota, about 1% new customer growth. And we saw a large customer even switch over in the fall from using coal in their industrial process over to natural gas. So we're still seeing really good growth both on the customer side and natural gas. Also, we're seeing conversion from propane still as well. So in our geographic area, gas will be a part of our future for the near term.

No, that's super helpful. Just one quick follow-up. Whether organically, meaning via growing the rate base faster than your current plan, or inorganically, would you be willing to tilt the mix of the earnings power of the company even more towards being more towards gas versus electric?

Got it. And then last one, if you'll pardon me, have you all ever disclosed or would you disclose what you think your excess balance sheet capacity is? Meaning how much incremental more investment, whether on the infrastructure segment or at the core utilities in Wisconsin or Illinois or elsewhere, how much incremental investment could you make with your current balance sheet and expected balance sheet before it would require you to seek other external financing that's not just debt financing? So how much more can we do if we were to issue more equity or not issue more equity? Yeah, I guess not issue equity. Like do you have excess balance sheet capacity? Do you have the ability to raise your capital plan without actually having to issue equity?

Yeah, I totally agree. I think I would just add two more thoughts. One is, you heard me say all the utilities met their financial goals in 2020. Actually, that has been a track record. So in terms of putting money to work, we deploy $3 billion a year, we earn our allowed ROE at the utilities, and you generate very healthy internal cash as a result. So that's number one. Number two, you heard us say that for the WEC infrastructure investment, we very much focused on using our own tax appetite. We focused on the time horizon when we could get the cash back, and we just tried to take advantage not only of the investment opportunity but also the cash flows. So I think overall, the combination of strong utility performance and the ability to recover the cash from the WEC infrastructure investment really allows us to continue to be on the trajectory that we have been on.

Got it. Thank you, guys. Much appreciated. You're welcome, Michael. Take care.

Your next question comes from Steve Fleishman with Wolfe Research. Your line is open. Hey, how you doing, Steve?

Yeah, hi, Gail and everyone. Good afternoon. So just a question in Wisconsin related to the coal shutdowns and regulatory treatment. Could you just remind us what you've done so far with that, and would something related to that potentially be in your stay-out agreement, and how you're kind of thinking about that overall?

Got it. Okay, great. And just one other question. Is on, you know, we're going to have a new FERC, ultimately Democrat majority, and I'm just curious if you have any thoughts on whether there could be another change in transmission policy or ROEs, or you think it will stay relatively stable?

Great. Thank you very much. You're welcome, Steve. Appreciate your call.

Your next question comes from Neil Kalton with Wells Fargo. Your line is open. Hey, Neil. How you doing?

I'm doing great. St. Louis is lovely this time of the year. Well, you're invited to International Falls this weekend. All right. So anyway, just I'm curious. EVs have been a pretty hot topic recently, right, all in the news. And I'm wondering how you guys are thinking about your investment opportunity around EVs. How soon you need to start planning for the system? Is this eight to ten years out? Are there going to be quicker wins? Just any kind of insight into how you're thinking about it.

Yeah, so we've got a pilot out there. It's about $50 million. We provide a couple alternatives on how to also support some of the lower-income areas of the state that may be able to help put some of that infrastructure or support that, whether it's through buses or some other ideas there. So it's in the really early stages, but it'd be somewhat of a rebate program that would help actually put some chargers in individual houses.

So early early days. Some of our larger customers who are looking at EVs and looking at what they want to do in their fleet longer term, so we've got close relationship with them and we'll continue doing that in the days ahead.

Yeah, Kevin's making a good point. Both in our region and nationally, the utilities have done so much that essentially transportation is now the largest contributor to CO2. It has surpassed, or we have cut more, and so transportation is now the largest contributor, not the utility industry.

No, that was perfect. That was it for me. Terrific. All right. Thank you.

And your final question comes from Michael Weinstein with Credit Suisse. Your line is open. Welcome back. Can you hear me this time? Sorry, we can. That's all right. Great, great.

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

That makes total sense. Hey, one other question too. If you do get a one-year delay for the rate filing, would that, could we expect to see an increased target for O&M savings this year beyond what Scott laid out earlier in the call?

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.