Q4 2019 Earnings Call
Good afternoon, and welcome to W. E C Energy group's conference call for fourth quarter, and your and 2019 resolved.
This call is being recorded for rebroadcast and all participants are no 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 and WPC energy groups 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 reference earnings per share will be based on diluted earnings per share unless otherwise noted.
After the presentation at the conference will be opened two analysts for questions and answers.
In conjunction with this call it package of detailed financial information its posted double you you see energy group Dot com.
A replay will be available approximately two hours after the conclusion of this call.
No. It is my pleasure to introduce Gale Klappa executive Chairman of W. E C Energy group.
Good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 29 gene first I'd like to introduce the members of our management team who are here with me today, we have kind of Inflectra, President and CEO , Scott Lauber, Chief Financial Officer, Google or control were that'd be coke, making the vice President and General counsel.
Tony Reis Treasurer struck huh.
Frozen corporate communications and Investor Relations, Scott will discuss our financial results an appeal with just a moment, but as you saw from our news release. This morning, we reported full year 2019 earnings of $3.58 a share and I'm pleased to report that we delivered a record year on virtually every meaningful.
Sure performance from customer satisfaction.
Swift recovery from severe July storms caused extensive damage to our system.
As we review our financial results or balance sheet continues to strengthen.
In fact, our ratio of holding company debt to total debt now stands at 28% that'd be for 30% goal. In 2019, we also eliminated a regulatory asset for transmission costs and we continue to leverage the benefits of tax reform for both customers and shareholders.
In addition, we worked effectively to settle our Wisconsin rate reviews, which represent approximately 70% of our regulated assets.
We also took or environmental efforts a step further we set a new goal in 2019 to reduce the rate of methane emissions from our natural gas distribution system by 30% per mile by the your 2030, our ongoing work to modernize Chicago's natural gas delivery network is key to achieving this goal.
And we continue to analyze our climate related risks and opportunities in fact, a recent Moody's report focused on the risk exposure regulated utilities to heat stress water stress and extreme rainfall I'm pleased to know that nobody we see energy ranks among the lowest risk companies in our sector.
During 2019, we also reached a number of significant milestones in our infrastructure segment.
The Coyote Rich wind farm is now in service in South Dakota, and will contribute a full year of earnings in 2020.
As you May recall Coyote rich consists of 39 turbans the capacity of roughly 97 megawatts.
We invested approximately $145 million for our 80% share of the wind farm and we're entitled to 99% the tax benefits.
As you know a significant portion of our earnings from this facility come in the form of production tax credits.
The project as a 12 year offtake agreement with Google Energy LLC for all of the energy produced.
We also announced back in September that we will acquire an 80% ownership interest in the founder head wind Energy center for $338 million Inventergys developing this project in Nebraska, we expected to be in service at the end of 2020.
The site will consist of a 108 GE wind turbines with a combined capacity of 300 megawatts.
The project as a long term offtake agreement with ATM TV for 100% of the energy produced.
Under head will qualify for production tax credits at 100% bonus depreciation.
Then the earlier this week folks we announced plans for another new development.
We've agreed to acquire an 80% ownership interest in the Blooming Grove wind farm for $345 million Inventergy is developing this project in Illinois with commercial operation expected to begin by the end of this year. So we'll host 94 wind turbines with a total capacity of 250 megawatts.
Mangrove has a 12 year off take agreement with affiliates of two multinational companies that are investment grade.
We expect the blooming grow will be eligible for 100% bonus depreciation as well as production tax credits.
Overall, we're very encouraged about these investments in renewable energy, which will serve strong businesses for years to come.
We expect to return on these investments to be higher than our regulated returns of course, we're being very selective as weve that future projects. We're only interested in projects that achieve our financial return metrics and do not change our risk profile.
Now, let's take a brief looked at the regional economy, the supporting our company is longer term growth.
Sconces unemployment remains near record lows for the state and we continue to see strong economic development projects in the pipeline.
Foxconn is moving forward with its plan to create a high tech campus in Racine County, South of Milwaukee.
Work on a generation six fabrication plant for liquid crystal display screens is progressing.
Fab, which spans about 1 million square feet is now in closed and work is beginning on the internal structures.
Foundations are also in place for a high capacity data Center. In addition, Fox gone as announced plans for a smart manufacturing facility construction crews began lifting the exterior walls into place for the smart manufacturing plant earlier this week.
Based on public data, we estimate that Foxconns investment in Wisconsin over the past two years has risen to approximately $500 million.
Turning a bit further south in the can Osha area. You line has announced plans to invest $130 million into new facilities and bring approximately 350, new jobs to the area.
And as you May know is a leading distributor of shipping industrial and packaging supplies with headquarters here in Wisconsin and.
In addition, Milwaukee tool has announced another expansion.
Thank you to we'll invest $100 million in a large multi purpose campus north west of the city in mind, how many falls the company also committed to adding 870 jobs in Wisconsin.
Your 2025.
The exciting times, we look forward to more economic development and opportunity across the region.
Now I'll turn the call over to Kevin for more insight on our operations and our regulatory calendar, Kevin All yours. Thank you Bill first I'd like to share. Some good news our largest subsidiary we Energy's was named the most reliable electric utility in the Midwest put a nine year running.
Wisconsin Public service also with recognized for the first time or outstanding reliability performance.
Now I'll briefly review, where we stand in our four state jurisdictions.
As you'll recall in March of last year, we filed a proposal with the public service Commission at Wisconsin set customer rates, but we introduced and Wisconsin public service and in August we entered into settlement agreements with listens utility bought at Wisconsin.
It was confident industrial energy group.
And clean Wisconsin.
Some of the 19th the commission issued its written or apartment those settlement agreements and setting rates for the next two years.
New rates went into effect on January the first.
During 2019, we also continued to make progress in developing solar generation, while regulated businesses in Wisconsin.
You may recall that in Wisconsin, We're planning a total of 300 megawatts of utility scale solar capacity. The first facilities of this size in the state.
We've broken ground on two solar projects for Wisconsin public service to creeks Investor Hollow one.
Our share will total 200 megawatts with an expected investment of approximately $260 million.
Both projects are scheduled to begin producing energy by the end of this year.
And this past August at we Energy's, we filed with the Wisconsin Commission for approval to acquire 100 megawatts of capacity at the Badger hopefully to solar park. The projected investment would be $130 million. We expect to received the Commission's decision. This spring.
We also see efficient natural gas storage is another important part of our regulated business strategy in particular, Wisconsin needs more natural gas, peaking capacity at the highest demand times on the coldest days.
We're continuing to evaluate site plans for two liquefied natural gas facilities to help meet our customers' needs during the winter peak.
We expect to invest approximately $370 million in these projects if approved by the Wisconsin Commission construction is expected to begin in the summer of 2021.
Turning to Illinois, we continue making progress on the peoples gas system modernization program.
This program is critical to providing our Chicago customers with a natural gas delivery network that is modern safe and reliable.
Were approximately 28% complete with our replacement of outdated corroded natural gas piping some of which was installed more than a century again.
We continue to project, an investment of $280 billion to $300 billion per year on average in this program.
Now, let's turn to Michigan.
In 2019, we completed our new natural gas fired power plants in Michigan Upper Peninsula on time and on budget.
These plants are now providing a cost effective long term power supply for our customers in the upper peninsula.
With these new unit operating we were able to retire our older less efficient coal fired plant at Presque Isle.
This resulted in significant operations and maintenance savings and reduced CEO to emissions.
Taking a broader look across our business, we continue to focus on operating efficiency and financial discipline.
As a whole we exceeded our 2019 goal to reduce our day to day operation and maintenance calls.
Our goal was a reduction of 4% and we actually achieved a 7% reduction.
We have set a goal to further reduce our own down by an incremental 2% to 3% in 2020 as well.
And with that I'll turn it back to Gale.
Thank you very much as you'll recall, ladies and gentlemen are 2020 guidance is in a range of $3.71 a share to $3.75 a share. This translates to an earnings growth of between six and 7.1% of our 2019 base of $3.50 a share recall that threed.
It is in 50 cents a share was the midpoint of our original guidance for 2019.
And finally, a word about our dividend policy and its January meeting our board of directors raise the quarterly cash dividend to 63 in a quarter sense a share for the first quarter of 2020, that's an increase of 7.2%.
The new quarterly dividend is equivalent to an annual rate of $2.53 a share. This marks the 17th count them 17 consecutive year that our company will reward shareholders with higher dividends.
We continue to targeted payout ratio of 65% to 70% of earnings were right in the middle of that range now so I expect our dividend growth will continue to be in line with the growth in our earnings per share that with details on our 2019 results and our outlook for 2020 is our CFO Scott Lauber Scott. Thank you Gail are.
2019 earnings of $3.58 per share increased 24 cents per share compared to 2018.
7.2% increase.
In 2019, we benefited from additional capital investment production tax credits and continued emphasis on cost control.
While all of our utilities met their financial goals are Wisconsin utilities earned their fully allowed our OE and customers will see the benefit going forward through the sharing mechanism.
We posted the earnings packet through our website. This morning and includes a comparison of fourth quarter and full year results. My focus will be on the full year beginning with operating income by segment and then other income interest expense and income taxes.
Referring to page 10 of the earnings back at our consolidated operating income for 2019 was $1.530 billion as compared to operating income of $1.470 billion in 2018, an increase of $63 million.
Recall that as part of our previous reached settlement in Wisconsin, We agreed to apply the benefits of tax repairs to offset the growth of certain regulatory assets.
Plan continue through year end and as we expected the transmission escrow asset balance we energy's was eliminated.
My update we'll focus on changes in operating income by segment, excluding the impact of tax repairs and our adoption of the new lease accounting rules.
Starting with the Wisconsin segment operating income increased $42 million netted these adjustments.
Lower operation and maintenance expense resulted in approximately 105 million dollar increase in operating income driven by efficiencies and effective cost control across the enterprise.
This positive impact on operating income was largely offset by a few items.
First lower sales volumes due to primarily cooler summer weather conditions accounted for approximately 26 million dollar decrease in operating.
Second depreciation and amortization increased $35 million as we continue to execute on our capital plan.
And finally operating income was reduced by $22 million tax item that flowed through operating income. This was fully offset by a reduction in tax expense.
In Illinois operating income increased by $36 million, primarily as result of our continued investment in the safety and reliability of the peoples gas system.
Operating income at or other state segment decreased $3.5 million.
Turning now to our energy infrastructure segment operating income at this segment was up $800000 driven by additional investment in our power the future plants.
As expected the Bishop Hill upstream.
Rich wind farms and not have a material impact on operating income recall, a significant portion of earnings from these windfarms come in the form of production tax credits, which I recognize it's an offset to income tax expense.
These production tax credits contributed approximately eight cents per share to our earnings for the year compared to one cents in 2018.
The operating loss at our corporate and other segment increased by $12 million.
This variance reflects a $5.3 million gain that we recorded in 2018 related to the sale of our legacy business as well as well as an impairment recorded in the fourth quarter of 2019.
Assets that we inherited from integrity acquisition.
Combining these variances and excluding the impact the tax repairs and the new lease rules consolidated operating income increased $62.8 million.
Earnings from our investment in American transmission company totaled $128 million, a decrease of $9.1 million as compared to 2018.
Our earnings from ATP decreased by $19 million as a result of the recent per quarter addressing the MISO complaint.
Going forward, we're recording HTC earnings assuming a 10.38% return on equity.
This includes a 50 basis point editor for our participation in mice.
Other income net increased by $32 million driven by investment gains associated with our benefit plans.
Note that these investment gains partially offset the benefit expense included in our operating segment.
The remaining increase relates to the non service cost component of our pension and benefit plans.
Our net interest expense increased by $53 million, mostly due to higher long term debt balances to fund the capital investment.
This excludes the impact of the new lease guidance.
Our consolidated income tax expense net of tax repairs decreased by $42 million. The major drivers were production tax credits from a wind investments and the 2018 tax reform item that I mentioned earlier.
Our 2019 effective tax rate was 9.9%.
Excluding the benefits of tax preparers, our 2019 effective tax rate would have been 20.6%.
Looking forward, we expect the 2020 effective tax rate to be in the range of 16% to 17%.
This includes the effects of the unprotected tax benefits that are being refund to customers. Following our recent Wisconsin rate decision.
Excluding these benefits we expect our 2020 effective tax rate to be between 20 and 21%.
At this time, we expect to be modest taxpayer in 2020, our projections show that we'll be able to efficiently utilize our tax position with our capital plan.
Turning to our cash flow statement, our FFO to debt was 18.5% in 2019 looking ahead, we expect FFO to debt to me in the range of 16% to 18%.
We are using cash to satisfy any shares required for four one k. plans options and other programs going forward, we do not expect to issue and the additional shares.
Total capital expenditures and asset acquisitions were $2.5 billion in 2019, a $112 million increase from 2008.
Turning now to sales.
We continue to see customer growth across our system.
At the enters 2019, our utilities were serving approximately 10000 more electric in 14000, more natural gas customers compared to a year ago.
Retail electric and natural gas sales volumes are shown on page 13, and 14 of the earnings back.
Overall retail deliveries electricity, excluding the iron ore mine were down 2.8% compared to 2018 and any weather normal basis deliveries were down 1.7%.
Natural gas deliveries in Wisconsin increased 2.6% versus 2018 and by 1.8% on the weather normal basis. This excludes gas used for power generation.
And now I'll briefly touch on our 2020 sales forecast for Wisconsin segment.
We are forecasting a slight decrease one half of 1% in weather normalized retail electric deliveries, excluding there nor mine.
We projected Wisconsin weather normalized retail gas deliveries to increase by seven tenths of 1%.
This excludes gas used for power generation and of course, both of these projections our adjusted for leap year in 2020.
Finally, let's look at our guidance for the first quarter of 2020.
Last year, we earned dollar and 33 cents per share in the first quarter. As you recall. This included approximately four cents related to the colder than normal weather in 2019.
Factoring in this and the 16% warmer than normal January we project first quarter 2020 earnings to be in the range of one dollar and 32 cents per share and $1.34 cents per share.
This assumes normal weather for the rest of the court and with that I'll turn things back to Gail Scott. Thank you very much overall, we're continuing to perform at a high level on track and focused on delivering value for our customers and our stockholders operator, we're ready now to open it up for the question and answer portion of the call.
Thank you now we will take your questions. The question and answer session will be conducted electronically to ask your question. Please press the star key followed by the digit one on your follow up.
If you are using a speaker phone turn off your mute function to allow your signal to reach our equipment.
We'll 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 sharper Rosa with Guggenheim Partners. Your line is open.
Rock'n'roll sharp.
Hey, good morning, guys, Hey down.
Good how are you.
Oh, good not too bad.
So let me just a couple of questions. Here can you guys are backfilling this infrastructure capital budget relatively fast.
Especially with last week's acquisition, what's the spending shape look like given sort of these recent opportunities.
Is there any opportunities to provide upside to your current guide or is this just kind of an acceleration of that spend and then Scott I know you mentioned on the cash tax position.
Being a partial payer, but does that include last week's acquisition.
Just wanted to get a little bit of clarity there.
Well sure we'll be happy to answer those questions first.
I would view our announcement this week on blooming Grove.
Basically an acceleration of the five year plan, if you kind of looked at what we've accomplished so far with what we believe are very high quality projects were almost I worry about 38% already in terms of in terms of the projects that we have that we've agreed to acquire earned about 30.
8% of the spending we projected in our five year plan, but I would view it as an acceleration and I will tell you why.
Our five year plan, which projected about a billion AIDS in this particular segment of capital spending.
Essentially was a happy marriage of the high quality projects that we saw that we really had a strong interest in coupled with our ability to utilize all of the tax benefits.
Put all that together and the kind of shook out at 1 billion eight so Scott I would view this as an acceleration.
It's just it's just a timing and when you look at the tax position and we see a very small taxpayer, it's going to be under 15 $20 million did because of the tax rules. There's still some tax payments that are made.
But as you know we're slowly starting with the Ptcs work into 2021, then too so that will not be a full taxpayer in 2021, but still when you look at our five year plan a lot of capacity on our tech side.
Sure I remembered this for this particular windfarm doesn't come into service until the very end of 2020.
Right got it Okay, and then just on the regulated renewables.
Theres, obviously, a lot that you're doing there and can I just get a sense on how this could impact your decision to exercise the west where Merseyside option to purchase maybe up to 200 megawatts and that plan is there sort of a read through on that option and whether you would exercise.
No I wouldn't do any read through on that that is still something that we're analyzing the still something we're taking a look at.
As we continued to review our demand forecasts are needs.
The impact of renewables, but.
But that is still something that's on the table sharp.
Got it and then just lastly, Gail it's a little more of a policy question. I mean, obviously you know we had a commission or announcement last couple of weeks ago around her resignation. So we're obviously likely going to see a bit of a democratic shift within neighbors appointment is there kind of any read throughs that we should be thinking about from a policy standpoint.
As it looks like the the majority may change business as usual or could this kind of accelerate some of the solar de carbonization plans that are out there.
My own sense is I would look at.
The additional appointments of the commission largely as business as usual, but I will say and remind everyone that that the governor has appointed a climate task force.
These announced a aspirationally goal late last year to basically.
We have carbon free electricity by 2050, and this task force on which our company is represented.
At its actual first meeting just a week or so ago. So during this year I think you will see some policy recommendations related the de carbonization coming out of this task force.
In many ways the public service Commission would in all probability lead to implement some of those policy changes if they were adopted.
But the policy shift that I would see coming if there is one would really come through the Governor's task force on climate change if that makes sense to you.
It does that's that's what we thought well congrats guys on continued execution terrific and we'll see you soon.
We'll see you soon.
Your next question comes from Greg Gordon with Evercore ISI. Your line is open.
Go Bucks.
Hey, good afternoon.
Greg I'm good your stock at par today congratulations.
Thank you.
Let me.
Greg does that mean, we're looking for a bogey or what does that mean.
William will will.
Well, we'll talk about an over under on the ended the year offline gallium happy I'm happy to wager WIDIA.
Very good the the.
Can we unpack the OEM performance, a little bit because it it really is.
Quite quite impressive.
If I look at if I look at.
Page eight.
Your of your of your release.
I think what you're telling me I should be looking at the OEM as adjusted for impact of the flow through of tax repair is right. That's like the the clean number.
Yes, that's.
And it's down dramatically and.
All the more so I think because.
When I look at the the Rabbi Trust activity.
Thats basically offset in OEM by an offsetting adjustment and own m.. So if I adjusted for the Rabbi Trust activity the OEM.
Comparison would be even better.
Then it looks.
I think thats correct and if so can you unpack for us what the sort of structural.
Structural.
Savings are that are now flowing through on a full year basis from the activities you pursue that are sort of permanent benefits and and I think theres more to come with the investments you've made in your.
Invested in.
Technology.
Great and things like that so I'm, just wondering a what's the structural improvement in OEM, where do they come from and be what's the follow on from continued activities on that front.
We are happy to let me frame all of this for you and then we're going to let Scott and Kevin weigh in on some of the details, but but we did have an exceptional quarter in terms of continued efficiencies across the business.
And there are a couple of factors that then I think are important here. The first is the during 2019.
We saw essentially pretty much a full year benefit of the implementation of our of our ERP system across the entire enterprise. So that was helpful.
And we're continuing as people get used to that new system, we're continuing to see efficiencies and benefits that we thought we would.
And then compared to Q4 of a year ago.
Compared to Q4 2018 for example, there were.
There were significant on M. savings related to the closure of coal fired power plants.
Remember in we've basically over the last several months and your and a half for so we've retired three older less efficient coal fired power plants of units at.
Presque Isle up in the Upper Peninsula, Michigan, where the latest to be retired in the spring of in the spring of 2019, we have the pulliam plant near Green Bay retired and we had pleasant Prairie retired so we're seeing over in the fourth quarter, we saw own and benefits flow through from.
No longer having to incur own them for the operation of those plants than we had some of our technology investments continue to kick in.
And as Kevin said, we're projecting additional over them savings that we think we're going to gain here and we're on track to gain.
In 2020, so Scott Kevin anything you'd like to get you mentioned the ERP, but if you look at the common platforms across our system.
The fourth quarter. It this year will complete our customer information system to have that across all of our companies. We we have already seen even this past year some.
Some savings from what we had in place already but in addition to that the through a last year and focusing on the future just looking at process improvements. So as we look across our jurisdictions do benchmarking, we're looking at common standards and where it makes sense. So.
Have a proactive and similar approaches across our system that has produced some positive results parcel and whenever reduction it will continue to.
I don't think does anything else that it is across the enterprise, though everyone has oh them take out.
Attunitys inefficiencies again, and we're doing that Greg, which I'm very pleased about and I thought we would be able to we're doing that while increasing customer satisfaction.
So that's one of the reasons I mentioned earlier in my remarks.
As we track our operational and financial performance, we had a record year across virtually every meaningful measure of performance.
Right. So there is an incremental improvement on run rate I want to them as you get to the sort of fully baked savings from the coal plant closures and then there was incremental low and I am benefits, but from the that you think you'll get from the ERP and also from the rollout of the C.I.S. amongst other things you've nailed it that's exactly right.
Thank you very much guys. Congrats thank you Greg appreciate it.
Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, how do you have got done.
What shaken.
Hey, too much.
So just following up on Greg's question here, I think thats really Jermaine.
Can you dig a little bit further through the prospects to sustain these levels of cost reductions mean that really quite dramatic I mean, I think Greg emphasize that enough, but the point being how sustainable are these just given how outsized they appear to be.
Relative to the balance of the sector not just on on a trailing basis, but prospectively for 20 here as you think through the balance of your planning period.
And maybe even a push that push the point of the further how how identified is it just not not just in 20, but through the balance to your financial period that you're forecasting in terms of these levels of reduction.
Well I'll take a stab at that certainly Scott can add anything he would like to and Kevin as well, let me say this week, we believe and I think our track record demonstrates that the kind of cost savings that you saw that we continue to believe we're going to continue on a downward path. Those are very sustainable we wouldn't be publicly committed.
To them, if we Didnt think we could absolutely sustain them.
So again, we we.
We took 7% of the day to day, owing them out of the business in 2019.
The 2% to 3% projected reduction in 2020 and again, we're doing this I think in a very.
Highly planned and deliberate way and a good chunk of it is coming really from two areas. One we mentioned before that we're getting the full benefit of now and thats. The the owning them take out from the closure of was sufficient coal fired power plants, but the other is the investment in technology. So my view guys.
Would be highly sustainable.
Gilad degree or we just mentioned a couple of things that we're doing but let me add one more on the customer service side, though we have in our investing in our infrastructure and we've seen savings from having that in place to reduce the roles of trucks that will continue and we'll see those opportunities ahead in the coming years also leveraging technology like mobile apps as well.
As Apple as we get that out into our customers will it be able to have more interaction with our customers and give them opportunistic pay their bills online minimized paper billing things of that nature. So I would agree the sustainability that is built into a lot of what we're doing customer service out, especially with the things that I just mentioned.
Let me if I if I can please do jumpin little further.
What about the compounding nature of that trajectory rate, 2% to 3% is impressive but through your forecast do you anticipate compounding of that trajectory and then perhaps the really relevant second question is you've done it before how do we think about the cadence of rate cases.
And I know, we're getting that a little bit, but just given the scale of cost structures here certainly the question Doesnt seem to too early in terms of across any one of your jurisdictions given the enterprise wide cost reductions that are contemplated here.
I mean, you pushing them out.
I'm chuckling, because we just got through the rate reviews for 70% of our regulated assets I know I recognize there, but the cost reductions are incredible.
Well, we appreciate that let me say this historically as you know in Wisconsin. The Commission has like and is really requested and every two year cadence for rate reviews of Thats not to say that southern concrete, we'll take a look at it as we go forward and see where we are see where the commissions sentiment is et cetera.
As long story short.
We feel very good about our ability to execute.
And again do so in a way that maintains high reliability and high levels of customer satisfaction.
Okay too early to tell.
Why is that space.
Got it X. I'll leave it there thank you.
Okay. Thank you Julian.
Your next question comes from Michael Sullivan with Wolfe Research. Your line is open.
And Michael Yeah, Hey, Ron.
Just one more on on the on and.
What do you guys assume for earned ROE East now that you've got this.
On a different sharing Dan where you could over on a little bit before you get back to customers where does this these I want them savings targets put you on a.
Are we basis.
We are assuming as we have in the past that we earned the allowed rates of return in each one of our retail jurisdictions.
Okay, sorry, just to clarify is that like at the electric utilities that 10% or up to the tenant a quarter that you can do before sharing.
Right now we're assuming Tim.
Okay and then.
Over to the the sales growth so I think for 2020 electric your.
Progressing down a little bit and.
We go back to somewhere.
Hi slides, they're supposed to be a tick up and the next couple of years and more so as you get into 20 to 23 can can you just give us some color around.
Milestones that we should be looking for on economic growth that thats going to bridge that from down a little bit to the up closer to a percent.
Yes happy to Michael.
First of all.
The uptick that we continue to project.
Pretty slight uptick uptick that we are projecting.
In the 2020 to 2023 timeframe is really driven by.
Amazing economic development projects that I talked about a little earlier in our remarks, we have not seen any slowdown.
In terms of the number of economic development projects the amount of new construction.
Just a continuing economic growth and the pipeline of projects that are being announced here in southeastern Wisconsin in particular.
So we still feel pretty confident about the uptake in the longer term the shorter term, meaning for 2020 is really driven by.
Like for example, the large industrial segment, it's really driven by the interviews that our people have with our key account customers and feedback into our projections.
It's also driven a bit by weather normalization remember, we had two warmer than normal summers back to back.
So you look at weather normalization, we looked at conservation you look in real time feedback from our major industrial customers and you put it all together and it's like Ragu. It's in there that's what comes out and so in total a very modest decline I believe Scott one half of 1% is what we're projecting on retail absent the mines correct. So Barry.
Modest decline in once again, the projections that we have in the Investor book are really the only projects that we have that we know it doesn't include the residential and secondary that we expect to come from it. It's just the Nolan projects that have actually started turning very ready. So it just takes a while to build a building and start using debt.
We expect those are still on track to become and like Gail said, our forecast is really out there talking to our customers and really fine tuning. Its information. We have here is the best information, yet and we're still projecting even with a modest half a percent decline we're still projecting.
6% to 7% EPS growth.
Great appreciate all the color that's all I had thank you.
Your next question comes from pray for Mehta with Citigroup. Your line is open.
Good afternoon, I tell my issue.
Very good congratulations on the quarter.
Thank you very much.
Thanks, So maybe just I.
I think I guess, the only NIM point has been has been already debated in Onsites appreciate that I think on the energy infrastructure side. The 1.8 billion that was planned you've said you accelerated at this latest acquisition.
Do you expect with the tax appetite being what it is further down the road you expect that size to increase.
The 2024 timeframe or do you expect the 1.8 to still be the cap.
At the moment and again, we'll continue to look at this but at the moment I would I would view this as an acceleration and the 1.8 billion dollar for the five year is still what we're looking at.
Gotcha, and then let me think about the tax appetite and you've said that you'd be us more taxpayer how should we think about that taxpaying capacity in that 20 324 timeframe is that you still a small backspin at that point or is that capacity increasing over time.
Well when you still looking you and you won't work everything in we would still be small taxpayer getting into that.
Being out in that and that frame of time, if we execute on all these capital projects largely because of some of the tax rules that are out the self to be a minimal taxpayer.
For some of the reasons, but we need to execute on all these capital projects to get to that level given the tax rules as Scott said, it's highly unlikely that will ever in a sustained period of time get the absolute zero.
So when we say modest taxpayer for example, I think Scott mentioned 15 to 20 million this year.
So I hope that puts things in context for you.
Yes, I know it does that I appreciate that and then and just finally in terms of credit and the Holdco debt side. I think you started by saying if you've got improving credit and your Holdco debt is now down to 28%.
Is there any dog and we should be thinking about around the holdco debt level and also the afforded that kind of credit that then we should be thinking more longer term.
We are less well, let Scott on so that we do have an internal and internal cap on where we want to go where we don't want to go with Holdco credit.
Yes, so we look at that whole told a total of get it's down to 28% our target is to keep it below 30% now if there's an opportunity one year, it may pop up or down, but and we feel comfortable those ranges in our forecast here and the FFO to debt in that 16 to 18 range now last year, we hit.
18, and a half, but remember we were at it a sharing opportunity at Wisconsin utilities and that money will go back eventually to customers. So.
Next year, maybe on the lower end of that range, but still within that 16, 18 range and that range as you know well supports our current credit ratings.
Yeah got it all I really appreciate it guys. Thanks, so much year more than welcome.
Your next question comes from Andrew Weasel with Scotiabank. Your line is open.
Good afternoon, Andrew how are you doing today.
Hey, I'm OK good afternoon.
Just want to elaborate on the contracted a infrastructure projects. So.
As of now what percent of 20 to 20-F will come from that segment and let's assume the five year plan stays at one eight seems like the bias might be the upside what percent of earnings would be coming from that segment in five years, well I can get well I can give you the number for this year and obviously.
We can do a little bit of public math here, but long story short we got in 29 seen about two cents a quarter of earnings from our our infrastructure investments given the additions this year a full year earnings for Coyote Ridge, which went into service at the end of 2019, I would expect about three cents a quarter Scott.
Activity about three cents a quarter and remember the other projects, we announced in December of next year, So some impact but not a lot.
Okay, and then bigger picture, how big are you willing to let that segment be obviously, there are high quality contracted assets, but they're not the regulated rate base contract. So do you have sort of a mental.
Ceiling of how the exact could be as far as earnings mix.
Yeah, we do out at the moment I would say that our internal plan would would would hold that that's segment of our business down to about 10% of our 10% of our earnings.
Okay very good then just one last one on that same topic.
You said, you've accelerated spending, but you're not increasing it what's still limiting factor of why you're not increasing it is a balance sheet opportunity for specific projects is it that 10% ceiling. You just mentioned how do you balances.
It's the happy marriage between the quality projects that we see in the pipeline that we are very interested in.
And our tax appetite.
So you put it all together and the 1.8 billion shakes out to something that we can we think we can both AD quality projects to achieve and maximize our tax position.
Okay very good thank you.
You're welcome thank you.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Afternoon, Michael how are you.
Great.
Hey, I'm just from those that last line of questioning.
Is there a reason why you along.
Considering tax equity.
Continued expansion.
I'm sorry.
No I mean, certainly we would be opened to something like that in the future. If the economics worked out right now the economics favour exactly what we're doing.
Gosh.
And.
On HTC.
Any impact on long term planning from.
Thanks Fercs action.
Hi.
Short answer no.
And I think that had any effect.
Not yet because as you know it's now all up in the year again so.
These are.
As you know very well transmission projects have a long gestation period. So I wouldn't expect there to be some kind of a knee jerk reaction in the first 30 or 60 days, particularly with all the appeals going on in the uncertainty of what the final result will be exactly Gail and we're recording a 10, three eight and remember that long term plan, we resume intend to so.
10, Threed is it a little north of that.
Gotcha.
I missed this before but where do you guys stand in terms of dividend payout ratio targets.
What's the what's the future growth rate for dividends, just kind of track along with this morning.
Yes the plan.
Our policy is to pay out in a range of 65, the 70% of earnings. So a dividend payout ratio that is 65% to 70% of earnings as I mentioned earlier, we are right smack Dab in the middle of that range right. Now. So we would project that dividend growth would be in line with the growth and earnings per share.
Gotcha.
Thank you all right. Thank you.
Your next question comes from Michael Lapides with Jeff Your line is open.
Thanks.
Hi, Gail Thanks for taking my question Congrats on a great quarter I actually have several they're all gas related now just kinda rattle them off.
Paul your gas demand forecast of I think it's 0.7% can you remind me when the last time itself, 1% gas demand growth in Wisconsin that that's the first question.
Second question is where do you stand on the permitting and regulatory approval for that gas LNG facility at Wisconsin that that you talked about a couple of months guy or a while ago and then finally any incremental thoughts on the for new gas fired generation.
You didn't rise, possibly transformation or just to meet demand.
Demand right.
All right, we'll be happy to try to take those off one by one.
I think weather normal we were at one eight retail gas correct.
So we had a 1.8% growth in retail gas consumption on a weather normal basis in 2019.
You could probably go back in terms of when where we last below 1%.
Whatever your gas natural gas prices got to double digits. I think we did not grow meaningfully at all in terms of natural gas demand from the retail side of the business Scott, Yes, exactly than when you think about it yes, we've had 3% to 4% growth last year is 1.8, but now.
Now what we're really forecasting is really the customer growth aspect that assuming any more conservation, but also assuming that people don't turn their houses from 69 to 74 people are going to say comfortable we've also seen a lot of conversions. The last couple of years from industrial or their own environmental goals to will.
Convert from coal and oil and natural gas so you'll only convert ones. So basically our forecast now is based on customer growth.
And Michael on the LNG as far as the approval process, it's underway and as I've said in my prepared comments, we expect a approval and we would begin construction in the summer of 2021 for operational in 2023.
Got it and then on that on the gas generation side in.
Thinking about the mix of gas versus coal fired generation.
Mix of gas versus coal fired.
Hi, I'm thinking about new gas generation needs.
Well as you know we have an option.
With a wyatt.
To buy into at some point between now and say 2024, a portion of their new gas fired combined cycle, that's being built right now.
Option is still on the table, we haven't made a final decision beyond that we don't have any plan to propose any construction of new gas fired generation and of course, regardless of whether we add gas fired generation or not the percentage of gas fired generation in our total mix will be going up and coal will be coming down as we've already retired.
About 40% of our existing coal fired generating capacity.
Got it. Thank you guys much appreciate and congrats on a great quarter great. Thank you. Thank you. Thank you so much Michael.
Your next question comes from Greg Gordon with Evercore ISI. Your line is open.
Hey, guys.
Did you already I already I'm already murdy moves into that so far this year Gallagher.
[laughter] you know, it's one of those bets in truth truth, I'd be happy to lose but but anyway.
I just wanted to go back to the to the comment on what your expectations are as they sort of baked into your earnings growth aspiration to five to seven.
You said that you're targeting the.
The the authorized ROE you without and not assuming that you maximize your opportunity to get into the to the higher end of the range.
It should should should should we assume that the midpoint of your guidance represents earning the authorized return and sort of like.
The high end represents the ability to achieve other factors like earning that extra 25 basis points or if I'm not thinking about it correctly can you give us some guidance says how you're thinking about that opportunity and what it might mean for your guide for your earnings outlook.
Great question, Greg everybody in the room is nodding their head you've got it.
If we were modeling it as we know you would be we would assume fully authorized rate of return gets us to the midpoint of the guidance and then upside from there if we were to get into sharing.
Thank you. Thank you very much gigabyte you're welcome.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Last but last year Mike.
One last question I forgot to ask and this is more strategic question, but around the country.
Yeah, you're seeing some cities fan.
And then sort of natural gas distribution systems.
For full execution of seating and everything else.
Obviously the view from the.
The upper Midwest Winter is a little bit different.
I would like California, but.
Do you have any view on where that's going on.
In terms of natural gas infrastructure spending and.
Yes.
Experts.
Turnarounds.
Turnaround business.
Well, it's a very good question.
And I think you're correct in the in the less.
In the warmer climates in the late in the more temperate climates.
There's clearly a push by some of the more active environmental us not only move away from coal, but now we have a beyond gas campaign that we're seeing a.
For Us I think Michael it comes back to pure practicality and.
The recognition that if it's 40 below in the upper Peninsula, Michigan, a heat pump is simply not going to keep your hosts warm or even if it did it would be so incredibly expensive that you simply you simply couldn't deal with it so.
So for our for our upper Midwest area.
And with the market share that we have for home and commercial heating with natural gas.
I just don't see a major turn away from that for many many years to come.
I think the other the other piece of it is natural gas heating natural gas furnaces continue to get even more efficient.
And there are better ways I think in terms of in terms of running the economy and continuing to reduce cotwo emissions and if you look now at the across the us and in the upper Midwest. The number one contributor to see Cotwo emissions is no longer power generation for example, it's transportation.
So I think the low hanging fruit here in terms of continuing to decarbonize the economy, particularly in a region like the one we serve.
Is not moving away from natural gas home heating, it's actually electrification for vehicles, Kevin I don't know if you have any view on that deal I think you summed it up very well the other thing that I'll just will add is it as technology continues to evolve on the of the gas side, we'll continue to be in a part of that and looking at it but I think you summarized our position in our awful.
Thank you very well.
I hope that responds to your question Michael.
Great. Thank you very much.
Your next question comes from Vedula Murti with Avon Capital Your line is open.
We have a dual how you doing.
Well apparently not soil.
But do Liberty and your line is open.
Good afternoon.
Iberdrola.
One item I wanted to make sure I understood because you know Pcs line item and I just want to make sure. It could you explain it to me.
Can you explain to me what kind of how the Rabbi Trust Skyworks kind of how its funded deterioration and kind of how you know replicate itself over over over its life.
Sure, we'll be happy to take a stab at it a little less I'm going to let Scott do that I will say this we have to make sure that all of you don't look at the Rabbi Trust in isolation.
Because in many ways. The Rabbi Trust is that the earnings and the Rabbi Trust offset.
The cost of some of our benefit plans and I think conceptually that's an important point to remember Scott, Yes, that's exactly it Gail so the Rabbi Trust is really set up by Entegris and we inherited that investment vehicle and that is related to some of the deferred compensation that in.
Individuals from Entegris had earned through the years. So what the Rabbi Trust does is what we do as we try to match. The best we can the expense of the deferred comp that's into utilities with the investments in this Rabbi Trust. So if the Rabbi Trust goes up a dollar usually the deferred comp expense goes up or dollar or vice versa.
So it's really trying to match that we have those funds there. They are tied up specifically for the deferred comp. So there's nothing else. We can use for them. So we had to do and ended we thought the best thing to do let's try to here and match the hedging as much as possible like Gil said, though you can't look at a nice deletion.
Just for accounting purposes, it has to be on this line.
I was recorded in particular, so far and again, we inherited that in 2015 with the Entegris acquisition.
So far our strategies are matching strategy. If you will has worked exceptionally well.
So so as I think about this.
As the variance here tied to them.
Stock market performance on AWS performance of.
Wisconsin equity of Wisconsin, Energy's equity, specifically or what what creates the well equates to variant is puts up or down at all.
All right.
And again, we'll let Scott give you more detail, but long story short we know what investment options are people who've got the deferred comp.
Our in other words, we know what investment options. They've selected we can we can blend that with our investment options in the Rabbi Trust. Yes. It allows the investment options are dealing with equities in the deferred comp and Thats what were trying to match. It the best we can if that perfect, but the best we can with equities in the Rabbi Trust in so far the.
Correlation has been pretty high.
And like 99% been really good.
And so this is a static thing going forward, there's no no new participants or.
On a lot of incremental.
No no no no new participants static and is slowly goes down as participants withdraw from the old entegris deferred comp so slowly going though.
Okay.
And I guess also there just in the other thing. Obviously this is this clearly part of strategies in terms of the.
On the income tax expense line in terms of up to win credits and everything like that.
Clearly on.
If we take a look at all.
10.
Major Todd.
Very important positive factor.
And year over year was it is very large increase how should we be thinking about that in terms of.
In the odd.
Our earnings guidance range, probably the variance going forward there.
What we can certainly give you the comparison of what we achieved in terms of the infrastructure segment earnings in 2019 versus our projection in 2020 as I mentioned earlier the infrastructure segment gave us about two cents a share uptick in earnings each quarter during 29.
Scene and with the addition of Coyote Ridge Wind farm in South Dakota, which when commercial at the end of last year and will give us a full year. This year, we would expect three cents a quarter from the infrastructure investments in when you.
Yeah, and I think overall when you look at it.
Including the unprotected, we're giving back in the in the credit to our customers that effective tax rate isn't that 16% to 17% range.
And the clarify it will be an income it will be an incremental penny a quarter in 2020.
In terms of the earnings yeah, so given the I'm fully diluted share count it would appear than that that that variance should be something similar not not as dramatic earlier.
Yeah, that's exactly right.
Okay.
And it's only about three weeks pictures catchers, so I wonder purse.
Brewers are interesting there kind of reshuffling the deck, a little bit just signed the picture yesterday.
I'm more focused right now on 41 and six from the Bucks.
Okay well good luck there. Thank you. Thank you for the Illinois.
And your last question.
I'm sorry. Your next question comes from Andrew Levy with Exodus point Your line is open.
Yep that Greek free.
[laughter], Andy how are you.
I'm doing they love watching.
As you do too and you got to the game tomorrow against Denver.
Do we do Yep, Yep, and I think general feedback in the lineup.
Yes, I hope so.
So just kind of following Michael Weinstein's questions.
Just on kind of natural gas.
I guess and you've kind of answered it already but just oh, so just in the context of.
Yes, Gi and obviously he SG.
Not to be favoring natural gas.
Maybe just explain how how you deal with that and then separately.
And with everything that you had said earlier about Nat gas.
Just kind of looking at kind of a landscape and.
If you look at ltcs or or companies that are very heavy.
Natural gas their stocks have not done as well of late in the multiples have come down.
So I'm just wondering kind of where your has is that and you know at the right price would you add gas distribution customers.
To your mix beyond what you have already obviously you have a large LDC.
Illinois in a smaller one in Wisconsin.
Well good question, Andy you never say never but let me put it this way.
At the right price, obviously fitting the three criteria that we've talked about for acquisitions I mean, we would always take a hard look.
I would though because you you recognize if you're making an acquisition of any kind of company LDC or not.
You're basically making a very long term Beth our assets as you know are very long life assets. So you know wood.
And I'm, saying, there's just theoretically if an LDC and.
[laughter] Northern North Dakota came up for sale at the right price, we probably would be a lot more interested in that then if it was in.
San Diego.
I understand.
Just as far as S.G. and how you kind of.
Yes.
I think maybe obviously, that's it's an evolving.
Idea or you know investment.
Basis.
I think as far as natural gas, they've gone or not day, but.
May not be right way to look at it and there are other other things to focus on on the U.S.G. So.
Well again, a good question, Andy my sense and we've done.
We've done dozens of VSD visits.
Right now and I think for the foreseeable future. The us do focus for infrastructure companies like ours seems to be heavily heavily focused on C. O two emissions.
And what's your plan is to basically decarbonize the generation fleet that swamps, any other kind of discussion that we've had with any SG oriented investor and again, we've had hundreds of these discussions over the course of the last couple of years. In fact, everyone. Now whether you are SG focused or not everyone is beginning to ask yes.
Two questions, but I would say that in 99 out of 100 meetings. The real focus is on is really on C. O. Two emissions are there we've got a great story to tell.
The other thing that I would point out we're one of the first utilities in the country to set a methane reduction goal.
And I think you're going to be seeing because because the climate scientists as you know a really believed that methane emissions are far far more potent perhaps 25 times more important than Seo too as a greenhouse gas I think you're going to be seeing some increasing focus on methane emissions and there the kind of upgrade.
Work, we're doing a to modernize the natural gas distribution network, particularly in Chicago is really important. So those are the kind of that's the flavor of what were what we're hearing and they are SG visits today Andy.
Okay. Thank you go and you or whatever.
Thank you.
And your last question comes on the line of Paul Patterson with Glenrock Associates. Your line is open.
All your last but not least [laughter] I hope that [laughter]. So let me ask you something here I'm just a follow up on the do his question.
The Rabbi Trust if I understand your answer basically is offset by deferred comp expense. So there really isn't any.
Net income benefit of any significance.
You see driving earnings going forward or.
In terms of results for 2000, 2019 am I understanding correctly.
Correct.
Many 90 may have been an anomaly because we had so much on m. coming out of the utility.
That we're into the sharing but for the most part there is no benefit from that at all but it would have been Oklahoma and nothing Hall that we're planning on in terms of benefit for 2020.
Okay.
And then in terms of.
Column, there, there's some local articles about.
Eppers administration.
Looking at renegotiating.
The tax benefits.
Because of I guess the way the Fox, calling thing has been sort of rolling out.
Just wondering if if you had anything to share on that or.
What does that mean in terms of the outlook for the Fox content.
Economic development contributions that you guys had been.
Expecting passenger side.
Good point and let me let me just reiterate first what I mentioned in our prepared remarks in that over the past two years Foxconn has invested already over $500 million in Wisconsin.
I can tell you again I've said before focus on what's going on on the campus rather than the media reports, but I can tell you I was actually with the governor yesterday.
Hi appeared together at an economic development conference here in Milwaukee and he went out of his way to say that he believes his responsibility is to help make foxconn successful in Wisconsin.
So.
Again, that's that's as of 930 yesterday morning in a very definitive comment from the governor himself.
Okay, Great and then just finally on the the wind transaction with Google as the the offtake.
That's for the life of the project is that correct.
It would be a 12 year off take agreement as 12 years, Okay. And then just generally speaking given the the credit quality of Google and stuff.
To make sure I understand is it the.
That's a better rate of return then forgetting.
You guys perceived you guys expect to get a better return associated with that project.
What you're getting into regulated business do I understand you guys right you have you understand this absolutely correctly.
The experience that we've had so far with the other infrastructure investments that are operational experience in 2019 is proving that out.
Okay awesome. Thanks, so much.
You're welcome Thanks for the call all right well just folks that concludes our long conference call for today. Thank you. So much for participating if you have any other questions were always available. Please contact the straka at four one for two to one for six Threenine take care everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].