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.

An energy efficient wind turbine on a sprawling field, generating renewable energy.

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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