WEC Energy Group, Inc. (NYSE:WEC) Q4 2023 Earnings Call Transcript

WEC Energy Group, Inc. (NYSE:WEC) Q4 2023 Earnings Call Transcript February 1, 2024

WEC Energy Group, Inc. reports earnings inline with expectations. Reported EPS is $1.1 EPS, expectations were $1.1. WEC Energy Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to WEC Energy Group’s Conference Call for Fourth Quarter and Year End 2023 Results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. After the presentation, the conference will be opened 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. Before the conference call begins, please note 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. This call also will include non-GAAP financial information. The company has provided reconciliations to the most directly comparable GAAP measures in the materials posted on its website for this conference call. And now it’s my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

Gale Klappa: Well, good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 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, our Senior Vice President of Corporate Communications and Investor Relations. Now, as you saw from our news release this morning, we reported full year 2023 adjusted earnings of $4.63 a share. This excludes a one-time noncash charge of $0.41 a share. You may recall that the Illinois Commerce Commission in November disallowed the construction costs for the modern service centers and facilities that we built in Illinois to improve employee safety and productivity.

We firmly believe that the investments were necessary and prudent, and at the appropriate time, we will appeal the decision in court. Despite the setback in Illinois, I’m pleased to report that we delivered another year of solid results on virtually every meaningful measure, from customer satisfaction to financial performance to steady execution of our capital plan. Xia Liu will provide you with more detail on our financial metrics for 2023 in just a few moments. Turning to other regulatory matters, the Wisconsin Commission approved our limited reopener filings in December, new rates are now in effect for all of our Wisconsin utilities. And in Illinois a limited rehearing has been scheduled for a portion of our safety modernization program.

As a reminder, the Illinois Commerce Commission ordered a pause in that program for at least one year. We’ve been systematically replacing old leaking cast iron pipes under the streets of Chicago. This long running project is approximately 38% complete today. We had plan to invest approximately $265 million in these safety upgrades during 2024. Given the Commission’s order, we will not be carrying out the program as envisioned. We honestly do not believe that stopping the work is in the best interests of our Chicago customers. But we will have another opportunity to make our case in the coming months through this limited rehearing. In addition, the Illinois commission will open a new docket this month to examine the future of gas across the state of Illinois.

This review is expected to take at least one year to complete. Switching gears now, let’s look at the investment needs of our broader enterprise. We continue to refine our ESG progress plan our roadmap if you will for the period 2024 through 2028. As you’d expect, we’re lowering our plan capital investment in Illinois. But the bigger picture is strong and growing. And today we’re increasing our five-year plan by $300 million. What was a $23.4 billion plan, the largest in our company’s history, is now a five-year plan totaling $23.7 billion. The increase is focused on two categories, electric distribution to support the strong economic growth we’re seeing in Wisconsin and WEC Energy’s projects that are in our due diligence pipeline. That’s our WEC infrastructure projects.

In fact, we’re in the final stage now of vetting another major project for our infrastructure portfolio, a 300-megawatt solar investment for approximately $460 million. Closing and commercial operation could take place in the second quarter of this year, we’ll keep you informed. Overall, the building blocks of our updated capital plan clearly support our long-term growth rate. Growth from our five-year plan on a compound average annual basis remains in the 6.5% to 7% range. As always, we’re starting with the midpoint of our 2023 guidance. However, we expect earnings for 2024 to come in at or below the current consensus estimate. The reason is simple. As we redeploy capital, at least temporarily away from Illinois, the majority of the quality projects we’re investing in will not be in service for the full year 2024.

So for this year, for 2024, we projected earnings to be in the range of $4.80 to $4.90 a share and Xia Liu will provide you with more detail in just a moment or two. One final but important point about our capital plan. As a percentage of the total enterprise, our regulated electric business will be larger five years from now than it is today. Economic development and reliability and decarbonization are driving that growth. We plan to continue our investment in the infrastructure segment as well. But five years from now, we expect the infrastructure segment will be only 6% of our asset base. And now turning to the regional economy, the unemployment rate in Wisconsin stands at 3.3%. That continues a long running trend below the national average.

And as we’ve discussed, we’re seeing some really exciting developments here on the state. You’ve heard about Microsoft’s plans in the Wisconsin Innovation Park South of Milwaukee. That investment continues to build. Microsoft has now purchased a total of 1345 acres of property, and construction is already underway on a major data center complex. Of course, Microsoft didn’t alone in what we call the I-94 corridor, companies like [indiscernible] and Uline are expanding their footprints as well. For example, Uline just announced plans for a third office building in Pleasant prairie. Uline expects to complete construction by 2025, creating additional space for more than 700 workers. Uline in case you’re not familiar with the name is the leading distributor of shipping, industrial and packaging materials to businesses throughout North America.

And just last week, West Rock a fortune 200 company that produces sustainable paper and packaging materials, announced plans to build a 587,000 square foot manufacturing facility on the former site of our Pleasant Prairie power plant. 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 ESG progress plan. And with that, I’ll turn the call over to Scott for more specifics on our regulatory calendar, our capital plan, and our operational highlights. Scott, all yours.

Scott Lauber: Thank you, Gale. I’d like to start with some more updates on the regulatory front. First, let’s review where we stand after the Wisconsin Public Service Commission’s written orders this past December. The reopener filings address recovery of capital investments for certain projects going into service in 2023 and also this year. These are renewable facilities, raise generation and LNG reliability investments. The return on equity and the equity layer were not up for consideration as part of this proceeding. In the coming months, we plan to file new rate reviews in Wisconsin for test years 2025 and 2026. You heard from Gale on the latest developments in Illinois. The commission has granted us a limited rehearing, focused on our request rescore $134 million of Safety Modernization Program in 2024.

This mostly rates to emergency work, work that is in progress, and work driven by public entities like the City of Chicago. We expect the commission to issue an order by June 1. Now turning to our updated capital plan. We have identified $300 million of additional capital investment compared to the initial version of our five-year plan. I’ll walk you through the changes, which are summarized for your reference in the slides we provided for today’s call. Most notably, we have included several new investments in our energy infrastructure portfolio. We’re continuing to take advantage of production tax credits under the Inflation Reduction Act, while providing solid returns through long-term offtake agreements. We expect these projects to add approximately $800 million to our plant.

And we’re already on our way. Just last month, we closed on an incremental 10% ownership of the Samson solar farm now in operation in northern Texas, we now own 90% of the farm for a total investment of $280 million. And as Gale mentioned, we have another major solar project in the sights. We also plan to increase investment of Wisconsin by $300 million to better support economic development and reliability in the state. Offsetting these incremental investments, you will see a $800 million decrease in our planned spending on the Illinois gas delivery system over the five-year period. This is driven by the regulatory order we received in November. Meanwhile, we’re making good progress on a number of regulated projects in support of affordable, reliable and clean energy.

We continue to work toward our ambitious goal for reducing greenhouse gas emissions. At the end of 2023, we achieved a 54% reduction in carbon emissions from electric generation compared to 2005. That puts us well on our way toward an 80% reduction in target by the end of 2030, as we build our portfolio of low and no carbon generation. And the progress continues, the final panels of the Badger Hollow Solar Park are now in service completing the largest solar project in Wisconsin history. As you’ll recall our Wisconsin utilities on a total of 200 megawatts of solar capacity at Badger Hollow. The facilities first phase went online in December 2121, and the second phase wrapped up at the end of 2023. In addition, our Bluff Creek LNG storage facility is now in service.

Liquefied natural gas provides a solution to meet peak customer demand for heating, as well as gasified needed for power generation. This storage will be necessary during extreme weather events like we experienced in mid-January. I’m also pleased to announce that we have been using renewable natural gas in our distribution system. This replaces a portion of the traditional natural gas we deliver to customers, while contributing to our methane reduction goal. Our latest pilot project with EPRI and CMBlu Energy is also underway. And as you’ll recall, this is testing a long duration battery made with environmentally friendly materials. We look forward to sharing the results across the industry later this year. It’s a strong start to the year our capital plan is robust, and highly executable.

And we continue to focus on the fundamentals of the business. With that I’ll turn things back to Gale.

Gale Klappa: Scott, thank you very much. Now, as you may have seen, our board at its January meeting, raised the quarterly dividend to $0.835 a share. That’s an increase of $0.055 a share or 7%. This will mark the 21st consecutive year that our shareholders will be rewarded with higher dividends. The increase is consistent with our policy of paying out 65% to 70% of our earnings in dividends and underscores our confidence in delivering a bright, sustainable future. One other quick note on our track record of dividend growth. We learned last week that WEC Energy is being added to S&P’s high dividend Aristocrat Index. This index is made up exclusively of companies that have raised their dividends for at least 20 consecutive years. Next up Xia will provide you with more detail on our financial results, our financing plan, and our 2024 guidance. Xia?

Xia Liu: Thanks Gale. Turning now to earnings. Excluding the $0.41 per share noncash impairment charge in Illinois, our 2023 adjusted earnings per share were $4.63. Our earnings package includes a year-over-year comparison of results on page 16. I’ll walk through the significant drivers. Starting with our utility operations, weather had an estimated $0.24 negative impact year-over-year. In fact, January, February and December of 2023 are the warmest on record over the past 133 years. Higher depreciation and amortization expense and interest expense added another $0.33 of negative variance. These unfavorable variances are more than offset during the year. Rate base growth contributed $0.75 of positive variance year-over-year.

This includes the base rate increase for our Wisconsin and Minnesota utilities, as well as the rate increase for Peoples Gas that was effective December 1, 2023. Additionally, fuel expense improved our earnings by $0.14. Lower day-to-day O&M resulted in a $0.10 improvement, and taxes and other items benefited earnings by $0.04. Remember, we originally guided our 2023 total company day-to-day O&M to be 3% to 5% higher than 2022. Throughout the year, we were able to manage to a much tighter range. Our actual 2023 total company day-to-day O&M was only six-tenths of 1% higher than 2022. Turning now to sales, you’ll see the details on Page 12 of the earnings package. On a weather normal basis, retail electric deliveries in Wisconsin excluding the iron ore mine were down 1% in 2023.

The decrease was driven by our large commercial and industrial sales, which were down 3.3%. Meanwhile, residential and small commercial and industrial sales increased two-tenths of 1%, which were ahead of our forecasts. Our sales projections for 2024 can be found on pages 12 and 13 of the earnings package. Overall, we’re projecting relatively flat electric sales year-over-year, and eight-tenths of 1% growth in gas sales year-over-year. Regarding our investment in American transmission company, earnings decreased $0.03 compared to 2022. Recall that last year, we recorded a $0.05 pickup from a resolution of MISO ROE appeals. This was partially offset by a $0.02 improvement in earnings related to additional capital investment. Earnings at our energy infrastructure segments improved $0.04 in ’23 compared to 2022.

This was mainly driven by an increase in production tax credits. Finally, you’ll see that earnings at our corporate and other segments decreased $0.29, primarily driven by an increase in interest expense. Overall, we improved our performance by $0.18 per share on an adjusted basis in 2023. Now, Gale and Scott have laid out our refreshed five-year capital plan. In light of the $300 million increase to our capital plan, we have revised our funding plan accordingly. Consistent with our previous message, we’re funding this increase with an even split between debt and equity. As you can see on page 21 of the earnings package, we now expect to issue between 1.95 billion and 2.3 5 billion of common equity over the next five years. As you can see on the chart over the next five years, we expect cash from operations to fund about 64% of our cash needs.

About 28% of the funding is expected to come from debt and the remaining 8% from issuance of common equity. We have turned on new equity to satisfy the dividend reinvestment and employee benefit plans. And we also expect to use aftermarket programs. Our common equity issuance is still projected to be in the range of $100 million to $200 million for 2024. Post 2024, our equity issuances will be tied to our capital plan ratably at approximately $500 million a year. Finally, let’s look at our earnings guidance. As Gale stated for the full year 2024, we’re providing guidance of $4.80 to $4.90 per share. In developing this guidance range, we took into consideration the expected loss of earnings from lower rebates in Illinois, and timing of several projects under development.

Now let me briefly discuss our day-to-day nonfuel O&M expectations. We expect our 2024 O&M to be 6% to 7% higher. Approximately 5% of the increase is driven by assets that were included in recent rate cases, projects in the infrastructure segment and extraordinary storms costs in January. The remaining O&M increase of 1% to 2% is largely driven by inflation offset by operating efficiencies. Looking at the bigger picture, our O&M projection for 2024 is well below our actual O&M expenditures eight years ago in 2016. In terms of first quarter 2024 earnings guidance, we project to earn in the range of $1.96 per share to $2 per share. This forecast takes into account January weather and assumes normal weather for the rest of the quarter. Recall that we earned $1.61 per share in the first quarter last year.

There are a couple of main drivers for the quarter. One, weather was unfavorable by $0.10 in Q1 last year. Of course, we’re assuming normal weather for the remainder of the quarter this year. Two, with the rate design changes at Peoples Gas under the latest commission order. We now expect base revenues will be concentrated in the first and fourth quarter heating months when natural gas usage is the highest. Correspondingly, we expect lower contributions from Peoples Gas in Q2 and Q3. We’ll provide you with more details as the year progresses. As a reminder, however, in Illinois, we have a decoupling mechanism in place that mitigates that weather impact. With that, I’ll turn it back to Gale.

Gale Klappa: Xia, thank you very much. Operator, we’re ready now for the question-and-answer portion of the call.

Operator: Thanks, Gale. And now we will take your questions. [Operator Instructions]. And it looks like your first question comes from the line of Shar Pourreza with Guggenheim Partners. Shar, please go ahead.

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Q&A Session

Shar Pourreza: Gale, just a quick one on, so the 4.80 to 4.90 guidance for ’24, I mean that obviously about 5.4% growth year-over-year. And you obviously have a very tight EPS growth range and the debit this year is clearly from the CapEx timing. As we kind of bridge into ’25, let’s just say can you kind of grow at that top end or above the EPS growth range to keep you within the 6.5% to 7% target? Or should we assume kind of bottom end in the near term and step up at the back half given the pace at which you may not be able to deploy capital?

Gale Klappa: Well, great question, Shar. Let me say this, we have a lot of levers and a lot of great opportunities. And so it’s probably too early to say exactly where in the 2025 range we might land. But we’re pretty optimistic about the levers and the opportunities that we have. In 2024, of course, as we redeploy, as I mentioned in the script, as we redeploy in a way from Illinois and into quality projects, timing is really the driver here. But let me just say this, if we were able to make the top end of our 2024 guidance 4.90, we would have recovered virtually the entire hit from the Illinois rate order. So that might help put things in perspective for 2024. And then we will work on ’25 and beyond. But again, we mean, just with what we’re seeing here on the ground, we have tremendous opportunity for appropriate investments that will drive growth.

Shar Pourreza: Okay. Got it. Perfect. And then, just Gale on the $800 million reduction in Illinois. Was that all related to S&P or what was the amount that was above that? And then just that concurrent shift into sort of the infrastructure segment, I guess, can you just talk about the profile of that spend and whether sort of there’s any earnings accretive opportunities from this shuffle, especially since you do target returns on an adjusted basis anyway, for the infrastructure segment that is higher than the regulated side?

Gale Klappa: Yes. We do. We target returns on the infrastructure segments slightly higher than the regulated piece of the business. But to answer your first question, virtually all of the $800 million reduction that you’re seeing as we allocate capital on our various business segments. Virtually all of that $800 million reduction in Illinois is an assumption. Because we just don’t know what S&P spending is going to look like, going forward. So that’s virtually all related to the cessation of work.

Shar Pourreza: Okay, got it. Okay, perfect. And then just lastly, for me, it’s just an obviously the S&P program. Obviously, there’s a new docket out there and there’s an investigation, but there was sort of this independent engineering study that was recently conducted by the Commission that already sort of proved out that the S&P needed to be carried out. How does that kind of play into this new docket? Thanks, guys.

Gale Klappa: Yes. Shar, great memory. Shar is exactly correct. A number of years ago, 2017, 2018 timeframe, the Illinois Commission ordered us to bring in a highly recognized outside engineering firm, an independent engineering firm, to assess the condition of particularly the cast iron and ductile iron pipes under Chicago. Remember, we started out on this program, there were 2000 miles of iron pipes that we believe needed to be replaced. It’s called the Kiefner study, K-I-E-F-N-E-R, it’s on file with the commission itself, if anyone wants to take a look at it. But long story short, that Kiefner study, which was delivered to the Commission in January of 2020, concluded something pretty stark. The conclusion was that more than 80% of the remaining iron pipes under Chicago have a remaining useful life of less than 15 years.

That material was reintroduced in our rate case of this past fall, it was dismissed by the intervenors as old data. And I guess my only comment on that is the pipes aren’t getting any younger. And the corrosion keeps on coming. So we think there’s really a solid basis for the standpoint of safety. And from the continuing call from the Federal Pipeline Safety Administration to accelerate the replacement of these pipes. But you got a great memory, that study is on record and very supportive of the need to continue for safety reasons, the work we’ve had underway.

Shar Pourreza: Got it. Perfect. Thank you, guys. I will see you in a couple of weeks Gale. Bye.

Gale Klappa: Sounds good. Look forward to it, Shar. Thank you.

Operator: Thanks, Shar. And our next question comes from the line of Neil Kalton with Wells Fargo Security. Neil, please go ahead.

Neil Kalton: So quick question on the sort of following up on the initial questions on the S&P program, if that were to come back into play that 800 million? How should we think about the capital allocation at that point, will we reverse some of what we’re seeing today or not necessarily? Would it be added if at that point?

Gale Klappa: That’s a great question, Neil. And I’m going to ask Scott to give you his view on this as well. I would say first of all, it wouldn’t be surprising, at least to me if some of the capital that is currently on pause in Illinois would come back simply because of the need to continue safety. So looking at it a little more broadly, Neil, our view is the sweet spot of growth is still 6.5% to 7% a year. So I think we have to see Scott, where we stand in terms of additional infrastructure investments that we have in the pipeline. But as Scott said we have several 100 million dollars of those projects now that are in final due diligence stages. Scott?

Scott Lauber: Yes, absolutely. And then when you think about the S&P program, unfortunately, about 1000 workers stopped doing work at the end of the year here. So depending on how long it takes, it may take a while to ramp it up efficiently too. So we’d really evaluate that as we get through these hearings or rehearings.

Gale Klappa: Yes, actually, Scott’s making a great point. I mean, you can’t just turn it on a dime. So if indeed just thinking out loud with you Neil, if indeed, the commission investigation of the program or their review of the need for the program lasts a year, which the order yesterday suggested a year but also said if it could be expedited with all the proper information, they would welcome that. But I wouldn’t think that it can be turned on to back to its full level, even if authorized to do so this year.

Neil Kalton: Yes. Got it. Makes sense. And one quick follow-up. I couldn’t help but notice, I guess we have thought the CapEx coming out 800 million would be replaced one-for-one, instead, I think you’ve added 300 million to the program. And just curious as to what drove that. Obviously, it entailed a little more equity to do that.

Gale Klappa: Yes, Neil. As we continue to get more detailed and granular information about the need to support the economic growth, and particular in the I-94 corridor that we talked about. Clearly, there’s going to need to be some additional distribution investment, no question about that. And then there’s also some additional renewable need. So those were the two things all regulated all Wisconsin, but really driven by the continued expansion and location and I just mentioned in the script as you may recall, another major investment by a company based in Atlanta called West Rock, with a 587,000, corrugated box production plant. So the economic growth is just amazing. I would encourage anybody. In fact, we are going to invite all of you to come see what we’re seeing on the ground here in the not-too-distant future, the economic growth, expansions that we’re seeing in that I-94 Corridor are just literally amazing.