WEC Energy Group, Inc. (NYSE:WEC) Q3 2023 Earnings Call Transcript

WEC Energy Group, Inc. (NYSE:WEC) Q3 2023 Earnings Call Transcript October 31, 2023

WEC Energy Group, Inc. beats earnings expectations. Reported EPS is $1, expectations were $0.91.

Operator: Good afternoon, and welcome to WEC Energy Group’s Conference Call for Third Quarter 2023 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.

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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.

Gale Klappa: From America’s Heartland, good afternoon, everyone. Thank you for joining us today as we review our results for the third quarter of 2023. First, I’d like to introduce the members of our management team who are here with me today. We have Scott Lauber, our President and Chief Executive; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported third quarter 2023 earnings of $1 a share. We delivered another solid quarter of growth, and we remain on track for a strong 2023. Our focus on executing the fundamentals of our business is creating real value for our customers and our stockholders.

Today, we’re also reaffirming our earnings guidance for the year. The range is $4.56 to $4 — I’m sorry — $4.58 to $4.62 a share with an expectation of completing the year in the upper half of the range. As always, this assumes normal weather through the final quarter of 2023. Switching gears now, our big news for the day is the rollout of our ESG progress plan for the period 2024 through 2028. As you may have seen from our announcement this morning, we expect to invest $23.4 billion with an ongoing focus on efficiency, sustainability and growth. This is the largest capital plan in our history, an increase of $3.3 billion above our previous five-year plan, that’s more than a 16% increase. Several factors of driving the investment outlined in our updated ESG progress plan.

The first of these factors is the economic growth we’re seeing in the Milwaukee region, particularly in what we call the I-94 corridor in the southeastern part of the state between Milwaukee and the Illinois state line, from data centers to pharmaceuticals to micro inverters for solar panels from even more gummy bears to massive new distribution and fulfillment centers. And this growth is also spanning new commercial and residential development in the region. In our new five-year plan, we expect our asset base to grow at an average rate of 8.1% a year. And as we fund this growth with an appropriate financing package, we project our earnings per share will continue to rise at a compound annual rate of 6.5% to 7% a year. As we’ve been discussing with you, our plan will include growth equity in the form of programmatic equity, including our dividend reinvestment plan, employee benefit plans, and at the market plans.

There is no need for block equity in the five-year plan, and we’ll start in 2024 by issuing a $100 million to $200 million of new equity. Xia will provide you with more details on the financing plan in just a few minutes. I’d also like to point out a few other quick highlights for you. Over the next five years, we’ll continue to make great progress in transforming our power generation fleet and reducing carbon dioxide emissions. In the plan, for example, we’re making a significant commitment to new solar, wind and battery storage, as well as modern efficient natural gas generation and LNG storage. In addition, we’ll be adapting to the new seasonal capacity rules being put in place by MISO, Midcontinent Independent System Operator. American Transmission Company will be adding needed transmission capability and to help assure energy security for our customers will continue to harden our distribution networks.

On the environmental front, our plan still calls for reducing CO2 emissions from our power generation fleet by 80% by the end of 2030. And I’m pleased to report that assuming timely regulatory approvals, we now project a complete exit from call three years earlier by the end of 2032. So the future is bright, the investment opportunity is long, strong, and highly executable. And Scott will provide you with some specifics in just a few minutes. And now a brief look at the regional economy. The unemployment rate in Wisconsin stands at 3.1%, continuing a long running trend below the national average. And as we look inside the numbers, we see an encouraging upward trend in Wisconsin’s labor force participation of this year. As I mentioned, growing companies are investing and expanding in our region.

Microsoft is now moving dirt and moving full speed ahead to develop its new data center complex in that I-94 corridor, we mentioned south of Milwaukee. And Haribo officially opened the doors of its new confectionary plant in July. Fast forward to today, and Haribo is already planning to double the size of its production capability, adding more capacity for gummy bears, new technology and additional employees. And so — also south of Milwaukee, Uline plans to open a 1 million square foot facility this year. Uline, in case you’re not familiar with the name, is the leading distributor of shipping, industrial and packaging materials for businesses throughout North America and even more expansion is planned by Uline for 2025. These developments highlight the strength and the potential of the Wisconsin economy and underscore the need for the investments we’re outlining in our five-year plan.

With that, I’ll turn the call over to Scott for more specifics on our capital projects, our regulatory calendar, and our operational highlights. Scott, all yours.

Scott Lauber: Thank you, Gale. I’d like to start with some of the specifics on our capital plan. As Gale noted, we have identified $3.3 billion of additional investments compared to our last five-year plan. I’ll walk you through the changes. Between 2024 and 2028, we plan to increase our investment in renewables by $1.4 billion. With that, we expect to invest in 3,800 megawatts of new renewable capacity. In the plan is a billion dollar increase in transmission investment. This is our share of the ATC plan. Renewable projects and regional growth are among the driving factors. To support reliable service for our customers, we expect to spend an additional $1.3 billion on natural gas generation over the five-year plan. This includes both combustion turbines and reciprocating internal combustion engines, or RICE units.

We also have planned to invest in additional $800 million in liquified natural gas capacity, which will be used for electric generation and for our natural gas operations on the coldest days of the year. With these important investments for our utilities, we have reduced our planned investment in our Energy Infrastructure segment. We’ll be happy to share more details with you at the upcoming EEI conference. Now, moving on to the regulatory front. As you recall, we expect a decision from the Wisconsin Commission before the end of the year on our limited reopener filings. We also have an update on our rate filings under review in Illinois for Peoples Gas and North Shore Gas. Recently, the administrative law judge on the case issued a proposed order largely consistent with staff’s recommendation.

The order recommends a 9.83% return on equity at both utilities, and we expect a final decision by the end of November. And moving to the other states. I’m pleased to report that both the Minnesota and Michigan Commissions have recently approved settlements on our rate reviews. Meanwhile, we’re making progress on a number of regulated capital projects. As you recall, we closed on our first option at the West Riverside Energy Center earlier this year, adding a 100 megawatts of efficient combined cycle natural gas generation to our portfolio. Since our last call, we filed our request to purchase another 100 megawatts of Riverside capacity under our remaining option. Pending regulatory approval, we expect to invest $100 million to add this capacity in 2024.

Elsewhere in the state, work continues on the Badger Hollow II solar facility and the Paris and Darien solar battery parks. You may recall we had solar panels waiting on final release from a bonded warehouse in Chicago. I’m happy to report that those panels are being cleared. The first 100 megawatts have been released and the trucks are rolling to our Badger Hollow II site. We expect all of our panels to be released and in our possession by the end of this year. We are on track for Badger Hollow II to go into service late this year or early next year, with the Paris Solar Park to follow. In addition, work is underway on the Darien facility, which is planned to go into service by the end of 2024. We’ll keep you updated on any future developments.

With that, I’ll turn things back to Gale.

Gale Klappa: Scott. Thanks very much. And now just a quick reminder about our dividend. Our dividend growth continues to stand in the top decile of our industry. In fact, we were recently named one of the 10 best dividend stocks in America by Morningstar. As usual, I expect our Board will assess our dividend plans for next year and our regularly scheduled meeting in December. We continue to target a payout ratio of 65% to 70% of earnings. We’re positioned well within that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more information on our third quarter financials and a good bit of detail on our upcoming five-year financing plan. Xia, all yours.

Xia Liu: Thanks Gale. Our 2023 third quarter earnings of a $1 per share increased $0.04 per share compared to the third quarter of 2022. Our earnings package includes a comparison of third quarter results on page 15. I will walkthrough the significant drivers. Our earnings from utility operations were $0.18 above the third quarter of 2022. First, weather had an estimated one penny negative impact quarter-over-quarter. Higher depreciation and amortization expense and interest expense added another $0.09 of negative variance. These unfavorable variances were more than offset in the quarter. Rate base growth contributed $0.13 to earnings. This includes the base rate increase for our Wisconsin utilities as well as the interim rate increase for Minnesota energy resources.

Additionally, timing of fuel expense improved our earnings by $0.13 and lower day-to-day O&M resulted in a $0.02 improvement. Before I turn to earnings at the other segments, let me briefly discuss our weather normalized sales for the quarter. You can find this sales information on page 11 of the earnings package. Retail electric deliveries in Wisconsin, excluding the iron ore mine, were down eight tenths of a percent quarter-over-quarter. This was driven by lower sales volumes to large commercial and industrial customers. Residential usage was up 1.3% and is ahead of our forecast through the first nine months of the year. Also, sales to our small commercial and industrial customers were up four tenths of a percent and are tracking our forecast for the year.

Regarding our investment in American Transmission Company, earnings decreased $0.05 compared to the third quarter of 2022. Recall that last year we recorded a $0.05 pickup from a resolution of MISO ROE appeals. Earnings at our Energy Infrastructure segment decreased one penny in the third quarter of 2023 compared to the third quarter of 2022. This was mostly driven by lower wind production, partially offset by tax credits on projects that we placed into service. Finally, you’ll see that earnings at our Corporate and Other segments decreased $0.08 largely due to higher interest expense. As Gale noted, we are reaffirming our annual guidance of $4.58 to $4.62 per share. This includes October weather and assumed normal weather for the remainder of the year.

Now turning to our financing plan. Gale and Scott have already discussed the new five-year capital plan. I’ll provide details related to our anticipated financing activity to support the plan. You can find this information on page 22 of the earnings package. As you can see on the chart, over the next five years, we expect cash from operations to fund about 65% of our cash needs. About 28% of the funding is expected to come from debt and the remaining 7% from issuance of common equity. As Gale mentioned earlier, we expect to utilize dividend reinvestment and employee benefit plans and at the market programs to tap into the equity market. Our common equity issuance is projected to be in a range of $100 million to $200 million for 2024 and $1.8 billion to $2.2 billion over the next five-year plan.

Recall, our equity ratios in our utilities are thicker, particularly at Wisconsin Electric. Supporting these thicker equity layers results in approximately $400 million of common equity raise. The remaining equity raise represents approximately 50% of incremental capital spend. As you know, our equity issuances post 2024 will be tied to our capital plan rateably at approximately $450 million a year. This financing plan not only supports our long-term earnings growth rate, but also helps maintain our targeted credit metrics. In addition, I’ll quickly address our upcoming holding company refinancing needs. Over the next three years, we have total maturities of about $2.8 billion. The $600 million that matures in 2024 carries a very low coupon.

However, the remaining $2.2 billion scheduled to mature in 2026 has a weighted average coupon of just under 5%, which represents lower refinancing risk. In closing, as shown on the last page of the earnings package, through our capital allocations, we expect the percent of assets invested in our regulated electric businesses to grow faster. At the same time, the percent of assets in gas distribution and in contracted renewables is expected to decline. We are very excited about the investment opportunities ahead of us. With that, I’ll turn it back to Gale.

Gale Klappa: All right. Xia, thank you very much. Overall, we’re on track and the company continues to perform at a very high level. Operator, we’re ready now for the question-and-answer portion of the call.

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Q&A Session

Operator: Now, we will take your questions. [Operator Instructions] Your first question comes from the line of Shar Pourreza with Guggenheim. Your line is open.

Gale Klappa: Rock and roll, Shar. How are you?

Shar Pourreza: Mr. Klappa, how you doing?

Gale Klappa: Doing great.

Shar Pourreza: Excellent. So, Gale, obviously, in Xia’s prepared remarks, she hit on why the equity guide was obviously somewhat large and what would be dictated by the growth CapEx increase. It’s obviously, because of the higher equity layers. I guess, how should we think about this in terms of the balance sheet capacity it gives you? How is the conversations with the current rating agency? And related, are you done now through the trajectory or could incremental CapEx lend to more equity? I mean, you do tend to raise CapEx every year in the Microsoft opportunities still out there. Thanks.

Gale Klappa: Yeah. Yeah, great question, Shar. Well, first of all, kind of let me back up and reiterate a couple of things that Xia mentioned. I think you can look at, and Xia touched on this, about $400 million of the equity raise. At least in my mind, I look at that as kind of a one-time catch up because over the last rate case outcomes, we’ve received thicker equity layers virtually in every situation. So about $400 million of that really just goes to support, really strong credit metrics at all of our utilities. So I would look at that particular $400 million chunk that Xia referred to, Shar, as kind of a one-time catch up. And then to answer your question about further capital. And yes, the Microsoft plan is still being developed.

We’ll know a lot more in the next few months beyond what we’ve put in this plan related to Microsoft as they continue to refine their plan for the large complex that they’re going to develop here in southeastern Wisconsin. But I think the way to look at it is that incremental capital beyond what’s in the plan, probably equities about 50% of that incremental capital. Xia, any other thoughts?

Xia Liu: No, you addressed it.

Gale Klappa: Okay. Shar, does that respond to your question?

Shar Pourreza: Fantastic. And then just the $3.3 billion, any sense on the profile of that CapEx, or is that like an EEI update?

Gale Klappa: Yeah. Let’s walk through all of that in detail at EEI for you. We’ll have a very specific breakdown for you EEI. But I think clearly there’s going to be some additional capital. I mean, we mentioned generation and LNG as kind of large contributors to the capital plan. So I think the outer years or the later years in the five-year plan will be larger than the first couple of years. I think the first, the first couple of years probably the increase will be more dominated by transmission in the first couple of years. And then as we build generation and as we build the LNG facilities, you’ll see kind of a rise in that five-year capital plan. I will say this, there is no white space in that five-year capital plan. I mean, we have just tremendous opportunity in front of us.

Shar Pourreza: Got it. And that’s how we should think about the profile of the equity, right? It matches with the CapEx.

Gale Klappa: Absolutely. Yeah. We will match the equity issuance with the capital investment each year.

Shar Pourreza: Got it. And then lastly, just moving to the Infrastructure segment, it’s a pretty big reduction, Gale, in spending there. Is that a function of a lack of opportunities despite our IRA or is it more about making sure you kind of stay within that business risk profile and credit metrics to somewhat appease the agencies? I guess, how should we think about that segment on a go forward basis? Thanks.

Gale Klappa: Yeah. Shar, great question. Let me just first say, there’s no lack of opportunity as we see it in the Infrastructure segment. But what we’re doing here is simply reallocating capital and resources to the tremendous growth opportunity that’s evolving here in our regulated business driven by Microsoft, driven by the other economic growth that we’ve described to you. So this is not really any comment at all in terms of the potential, the returns or the opportunity in the Infrastructure segment. It’s just — we have a tremendous opportunity here now to reallocate capital to our regulated enterprise.

Shar Pourreza: Got it. Perfect. All right. I’ll pass it to someone else. We’ll see you in about a week. Thanks guys.

Gale Klappa: All right. Take care, Shar. Thank you.

Operator: Your next question comes from the line of Ross Fowler with UBS. Your line is open.

Gale Klappa: Hey, Ross. How are you?

Ross Fowler: Good afternoon. So Gale, just before we get into it, I’ve got November 22nd already circled on my calendar for Buck Celtics [ph], so we’ll get there quick, quicker than you think.

Gale Klappa: It really will. It’ll be fascinating.

Ross Fowler: Yeah. So just a couple from me. I mean, I know, Gale, as you talked about sort of the DRIP in the past, you never really turned it off to my understanding. You’ve just been sort of buying back those shares. What’s kind of been the traditional uptake of that DRIP program as I try to scale that equity in the plan to sort of what is DRIP internal and what might be ATM?

Gale Klappa: Well, it’s a good question and I will look to Xia to make sure my numbers are right, but it’s varied over the years, the DRIP program, but generally it’s about $100 million to $150 million.

Xia Liu: $100 million to $200 million over the — on average over the past four years is not just DRIP, it’s DRIP and the employee benefit plans and so what we call the programmatic plans. So on average it’s $100 million to $200 million a year.

Gale Klappa: And Ross, you’re right, we have been buying shares off the market to satisfy both the DRIP plan and the employee benefit plan. So this simply kind of puts us back in a position where I think everybody else in the industry already is.