Q2 2020 WEC Energy Group Inc Earnings Call
[music].
Good afternoon, and welcome to WBC Energy group's conference calls for a second quarter 2020 resolved.
This call is being recorded for rebroadcast and all participants are in listen only mode. At this time.
For 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 about 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 W. E C energy groups. The latest form 10-K, and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions referenced earnings per share will be based on diluted earnings per share unless otherwise noted.
After the presentation. The conference will be opened two analysts for questions and answers in conjunction with this call a package of detailed financial information is posted a W. E C energy group Dot com.
A replay will be available approximately two hours after the conclusion of this call.
I know, it's my pleasure to introduce the Gil Klappa executive Chairman of WBC Energy group.
Okay.
Good afternoon, everyone. Thank you for joining us today as we review our results for the second quarter of 2020.
First I'd like to introduce the members of our management team, calling me today.
Unfortunately, our president and Chief Executive.
Urban Chief operating officer struck a senior vice President of corporate Communications and Investor Relations.
Joining me in a welcome in Charlotte <unk>, Executive Vice President and Chief Financial Officer.
I will discuss our metrics in more detail a little bit later in the call.
So from our news release. This morning, we reported second quarter 2020 earnings of 76 cents for sure we remain optimistic I'm confident in our ability to create value. Despite the challenges presented by the pandemic.
Always our focus on operating efficiency was a major factor in our second quarter performance.
Warmer than normal Weber girl residential energy was significantly higher core.
We also continue to make excellent progress on our 15 billion dollar capital investment plan.
Recall that plan covers the period 2023 2024 as a reminder, we have ample liquidity and no need to issuing new equity.
You may have seen early this project announced just last week.
Right to acquire an 85% ownership interest in the to talk a range wind farm <unk> Ranch is under construction in South Dakota, We expect the project to be in service in early 2021.
When complete dislike will consist of 56 wind turbines combined capacity of 155 megawatts.
Our investment is expected to total approximately $235 million.
The 85% ownership interest am substantially all of the tax benefits.
This project, ladies and gentlemen, since our investment criteria to MACI.
And as long term offtake agreements for all of the energy produced with Google Energy, LLC and with dairy land power and cooperative.
Well established electric co op based in Wisconsin and serves utilities in multiple states.
We also expect the project to be eligible for 100% bonus depreciation.
This will be our six wouldn't project and the infrastructure segment of our business as you may recall, we've allocated $1.8 billion. Our current five year plan to grow or infrastructure segment.
With the to conquer Ridge project, we've already committed over a billion dollars about a mile and we're only seven months into the five year plan.
One other quick update for you on our infrastructure segment.
Recall that we will be 90% owner of the Thunder head wind farm being built by Inventergy, an envelope county in Nebraska.
This 300 megawatt project is expected to begin service by the end of this year.
However, we now project they several months delay because the local utility has paused construction of a substation that's needed to connect the summer had project to the transmission network. We continue to work with all the relevant parties to minimize the delay I would point out however that we have a number of positive offsets from her plan.
This delay should not change the trajectory of our earnings growth for 2021.
Switching gears now I'd like to touch on our commitment to environmental stewardship and the tremendous progress we're making.
2019, we exceeded by a decade the goal we had set for the your 2030.
Whose carbon dioxide emissions by 40%.
The major solar investments were building for our Wisconsin retail customers more carbon free energy is often away.
Well one of our progress, we recently announced two new aggressive goals to reduce carbon dioxide emissions by 70% along 2005 levels by the EUR 2030.
And for our generation fleet to be net carbon neutral Bobby your 2050.
Forward to working with all of our stakeholders to develop policies that will help us achieve these appropriate goals.
We're also committed to reducing the methane emissions at the end of 2019, we were half way toward our 2030 goal of lowering methane emissions from our natural gas distribution lines by 30% per mile and that's from a 2011 baseline.
And now for a moment I'd like to take a step back and looked at the economic conditions in Wisconsin.
As you would expect unemployment spiked during the first few months of the pandemic.
The data for June were really encouraging labor market improved with the addition of more than 100000 jobs and unemployment in Wisconsin fell to 8.5% well below the national average.
We're also encouraged that the major economic development projects announced over the past few years are moving forward. For example, Amazon continues to expand here in Wisconsin with new local distribution centers and horrible German can be manufacturer receive local approval of its final site and operational plans in may.
King is now projected to take place in September.
You may recall this will be one at north Americas largest confectionary plants.
Durable expects to invest between 320 $350 million and higher 400 employees in the first phase project.
Meanwhile, just a few miles south of Milwaukee and receipt Kelly Foxconn continues to develop its high tech manufacturing and research campus.
Published reports indicate that Fox calm could begin production and its new LCD fabrication plant as early as this fall.
Disruption is progressing well on Fox comps smart manufacturing facility and its new network Operation Center.
It's also important to note that we're seeing a strong ripple effect from Fox comps commitment to Wisconsin.
Than 70 additional investment projects have been announced within a 20 mile radius of the Foxconn campus.
70, plus projects range the gamut.
From health care to housing to industrial buildings to retail.
We expect these developments will result in more than $1.2 billion of do private capital investment and more than 2500 jobs long story short or long term growth projections remain fully intact.
And now I'll turn the call over to Scott for more detail on our sales results for the quarter Scott All yours. Thanks, Gail we continued to see customer growth across our system.
Ended the quarter utilities were serving approximately 11000 more or less.
And $27 it more natural gas customers compared to a year ago.
Retail electric and natural gas sales volumes are shown on a comparative basis on page 17, and 18 of the earnings second.
We saw an impact on the stay at home orders that were in place during much of the reporting period, but usage was better than we projected on the first quarter call. For example, residential sales at electricity were up 17.1% from the second quarter of 2019.
And on a weather normal basis were up 7.3%.
3.4% better than our adjusted forecasts.
All commercial industrial electric sales were down 8.6% from last year's second quarter and on a weather normal basis were down 11.3%.
Falling 2.7% below or adjust forecast.
Meanwhile, large commercial and industrial sales, excluding the iron ore mine were down 12.9% for the second quarter of 2019 add a weather normal basis are down 14.1%.
5.4% better than our adjusted forecast.
Overall retail deliveries of electricity, excluding the iron ore mine were down 2.7% from the second quarter of 2019.
On the weather normal basis sales were down 6.9% tracking 1.7% ahead of our forecast.
To summarize are experienced during the quarter, we encouraged that the monthly trend and sales improved sequentially. Each month for more detailed see page 17 of the earnings packet.
At this time I'd like to address our sales outlook for the balance of 2020.
Our third quarter forecast has retail sales, excluding the iron ore mined down 3.6% compared to 2019 keep in mind. This is on a weather normal basis.
And looking at the data for July.
Excluding the impact of weather, we track to slightly better than our forecast.
Looking now at the projections for the fourth quarter, our adjusted forecast reflects continued economic recovery.
We are looking at sensitivities to this forecast and watching economic indicators. We are prepared if the level of recovery would drop back to what we saw in the second quarter.
Yes, the meant that the additional impact to the pretax margin would be approximately $10 million to $15 million.
We believe we could absorb this margin compression through efficiency measures already in place and now I'll turn it to Kevin for an update on utility operations.
Thank you Scott first found that we remain focused on safety and efficiency throughout this health crisis.
We have reduced our operation and maintenance cost and reasonable matter with the help of technology, we've invested in.
Our employees continue to work remotely where possible communicate with customers and ball health precautions and do the first half of 2020, we saw our highest customer satisfaction results on record across all jurisdictions.
Now I'll briefly review, where we stand in our state jurisdictions.
As you May recall, we have no active rate cases at this time, which is positive in our current environment.
We are pleased that the Michigan Commission approved proposal it allows us to defer $5 million in cost through 2021. Rather then proceed with the rate case at our Michigan gas utility.
In light of pandemic, we have worked constructively with our commissions to develop mechanisms for future recovery, a foregone late payment charges bad debt in other expenses.
In Wisconsin Public Service Commission has authorized us to defer or going late payment charges uncollectible expense and incremental pandemics related cost.
This covers all kobin related expenses in our residential as was our commercial and industrial sectors.
The Illinois Commerce Commission has established a special use rider for the recovery of bank of incremental cost and foregone late payment fees recall, there already is a bad debt rider in place.
Turning now to our projects, we're continuing to add utility scale solar generation to our portfolio.
You may recall that we're making good progress on the two solar projects for Wisconsin Public service, which will provide us with 200 megawatts of capacity.
And us is up to date construction is more than halfway complete on our two creek solar bar.
And we announced last quarter they received approval to invest in a third solar facility Badger hollow two to serve our we introduced customers.
We expect it to go into service by December 2022.
This is a slight timing change that should have no meaningful impact on our earnings for capital program.
We believe this schedule change will be beneficial to customers as we focus on managing project costs.
As you May recall, we are evaluating site plans for two liquefied natural gas facilities to help serve our we introduced customers during the winter peak.
We expect to invest approximately $370 billion in these projects.
If approved by the Wisconsin Convention construction is expected to begin in the summer 2021.
And it in Illinois, we're making progress on the system modernization program.
We have installed over 1000 miles of new gas distribution pipe and our work as almost 30% complete earlier this year and independent Engineering study confirmed a critical need for this project the keeping their engineering study found that over 80% of the pipes in the peoples gas delivery system at an average remaining life of less than 15 years.
Our improvements are making the delivery system safer and more reliable for our Chicago customers.
Now with details on our second quarter results and more information on our outlook for the remainder of 2020, Here's our CFO shall Loon Shaw.
Thank you Kevin I'm happy to join the growth for this call and I look forward to working with all of you and hopefully seeing you in person at some point.
As mentioned earlier, our 2022nd quarter earnings grew to 76 cents per share compared to 74 cents per share and 29 team.
Despite the negative margin impact and this year second quarter related to the pandemic flu I still able to achieve quarter over quarter earnings per share wells.
This was due to our continued focus on operating efficiencies executing on our capital plan significantly warmer than normal weather and an increase in the authorized our lead for American transmission company.
The earnings packet placed on our website. This morning include that comparison of second quarter results on page 21.
Through the significant drivers impacting our earnings per share for the second quarter.
Starting with our utility operation, we benefited by seven cents per share from warmer weather.
And our continued focus on operating efficiency. So a four cents decrease in day to day operating expenses.
These favorable factors were primarily offset by four cents of higher depreciation amortization expense due to our capital investment.
And by six cents lower margin, mainly due to reduce sales volumes.
Scott has map those details out for you already.
Moving onto our investment in American transmission company, we picked up three cents per share related to a firm order that allowed ATP to increase our oaky from 10.38% to 10.2%.
This adjustment was retroactive to November 2013.
Our energy infrastructure operation also were accretive to the quarter.
I'd imagine wind farm, which was placed.
In service in late December 2019 added one cents per share primarily from production tax credits.
Turning to spend DP is driven by some tax and other items, partially offset by Rabbi Trust a funding.
Remember variants in the Rabbi Trust performing it mostly offset any utility owned them.
In summary, we outperform second quarter 29 team by two cents.
Now I'd like to update you on some other financial items.
This year, we expect our effective income tax rate to be between 16 and 17%.
Excluding the benefits of unprotected tops is going to customers. We expect our 2020 effective tax rate to be between 20 and 21%.
At this time, we expect to be a modest tax payer and 2020.
Our projections show that we won't be able to efficiently utilize our tax position with our current capital plan.
Looking now at the cash flow statement on page six doping earnings have hedged net cash provided by operating activities increased $88 million.
This increase was driven by higher cash, earning and timing of half payment.
Total capital expenditures were $1 billion for the first half of 2020 182 million dollar increase from 29 team.
This reflects our investment focus in the regulated utility.
We paid $399 million in common dividend during the first six months of 2020, an increase of $27 million over the same period in 2019, which meant that the increasing the dividend level that was effective in the first quarter of this year.
In closing before I turn it back to deal I like to provide our guidance for the third quarter unfold here 2020.
For the quarter, we're expecting a range of 74 to 76 cents per share.
This accounts for July weather, and assuming normal weather for the rest of the quarter.
As a reminder, we earned 74 cents per share in the third quarter last year.
We are reaffirming our earnings guidance for the full year in a range of $3 70, Watson $50.75 per share with any expectation of reaching the top end up the range.
This assumes normal weather for the remainder of the year.
With that I'll turn it back to deal.
Excuse me Shaw. Thank you very much we're delighted who joined us.
Again, as we look to the remainder of the year, we expect to hit the top end of our guidance range $3.71 to $3.75 a share assuming normal weather. We're also reaffirming our long term projection our projection of long term earnings growth in a range of 5% to 7% a year.
And finally, a quick reminder, about our dividends recall that in January our board of directors declared a quarterly cash dividends of 63, and a quarter sensors share that was an increase of 7.2% previous quarterly great.
We continue to target the payout ratio of 65, 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 overall, we're on track focused on drilling delivering value for our customers and our stockholders and operator, we're ready now to open it up for the question of that.
Through portion of the call.
Thank you very much now we will take your questions. The question and answer session will be conducted electronically to ask a question. Please press the star keep followed by the digit one on your phone. If you are using a speaker phone turn off your mute function to allow your signal to reach our E.
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We will take as many questions as time permits once again press Star and then one on your phone to ask a question.
Your first question comes from shoppers that with Guggenheim Partners. Your line is open.
Rock'n'roll sharply.
Good afternoon guys.
Are you doing term.
Oh, I'm not too bad never a dollar moment in utility land, but a pretty good pretty good [laughter].
So just a couple of questions here I'm focusing on the infrastructure segments first was the [laughter] rich acquisition was that how to catalyze at all by the current kind of market conditions or was this just a straightforward acquisition kind of along the lines it blooming grow than coyote et cetera.
No one catalyzed at all but the pandemic. This one is we've been looking at this one for a number of months before the pandemic.
So it was really just ongoing part of our due diligence.
Got it and so with this acquisition that just in your prepared remarks that you know you slightly over half of your allocation in the in the current plan for the infrastructure bucket should we sort of expect a slower pace in the coming years or perhaps an increase in the allocation as you kind of roll forward. Later this year I easy you know.
Zero point in time, when we can see the infrastructure capital budget actually increased from the one point.
Well, we'll see how things shake out when we update our five year capital plan in the fall.
But again, a couple of parameters that really govern our work in that infrastructure segment.
First is.
Our tax appetite.
And so happens, but we continue to see very high quality projects, where we can efficiently use our tax appetite to generate cash and earnings and continue our progress and investing in renewables. So what we're looking at here and this five year capital plan and in the next five your capital plan.
It's really that happy marriage of efficiently utilizing our tax appetite and investing in renewable have very very high quality off takers and our solid projects.
Again.
Would not expect over time.
The entire infrastructure segment ready to grow to more than 10% of our total enterprise. That's that's basically our cap, we got plenty of room, even investing shorter even investing a billion to aid in this five year plan at the end of that five year plan, we're still only at 6% of our total enterprise so plenty of room and I think a number of very high.
Quality projects still on the pipeline.
Got it got it and then lastly.
Obviously, it's a really good de carbonization target it neutrality.
Can you just wanted to talk about next steps here I know you obviously your dipping your toe is a little bit in solar like you know one of your peers does sort of this you know de carbonization target does it sort of increase the importance of Peach bottom and then just maybe if we can conclude.
Is there any updates with your participation Governor you Bridge a de corporation tax path for so how do we kind of roll this up build in investment case around it.
But just for clarity, we don't get anywhere near Peach bottom.
But I know you're thinking about point Beach, that's right that's right sorry about that yes, correct [laughter].
[laughter].
It is probably but look into the CEO over their appeal CNG, but [laughter].
[laughter] at any rate.
We are.
To directly answer your question and for those who need the context.
A significant percentage of the significant percentage of the electricity, we provide to our we energy's customers like a quarter of it is coming from our point Beach nuclear plant that we sold to next era, many many moons ago.
Those units are set to turn aged 60 in 2030 and 2033.
We're looking at all kind of alternatives I can tell you now, but there will be a very significant opportunity for us in terms of investment need the latter half a decade.
Right now if I were bidding bad I would look at substantially more investment in renewables and probably battery storage.
But we will have more detail for you certainly on the next five years in terms of our generation reshaping when we update our capital plan in November.
It's on the task sports with Governor users.
That work continues with a pandemic a timeframe for recommendations was delayed but I still believe there will be recommendations from governors task force by the end of this year.
Got it Chuck congrats on the transition between.
Scott working for the best in the business. So that's threat to congrats thank you guys.
Thanks.
Your next question comes from Durgesh Chopra with Evercore ISI. Your line is open.
And your cash are you doing today.
Hey, good good afternoon. Thanks for taking my taking my question and welcome shot look forward to working with you.
I I just have a one question rest everything it's there on the on this on this slide where you are in the press release, where you breakout the.
On the margin by by segment.
This continent particular I'm just wondering what the other margin number is it's a big number in the end of this constant reconciliation, it's like a 26.4.
Earnings or margin drag <unk> any any color on that what does that comprise though.
Yeah, I'd be happy to talk about that.
I think the majority of that is Colgate related.
Remember as Scott mentioned the reduction in the weather normalized sales, but the majority of the 26.4 is.
Toby.
Got it and that's pretty much was offset by if I'm reading this correctly.
Good weather in the quarter.
Yes, that's exactly right, whether more than offset Colgate reduction for the quarter.
Understood. So then just a quick follow up when thinking about when EM.
Obviously, you've made a ton of progress.
In the quarter, how should we think about that effort going into second half of the or are you going to you flex that sort of up or down depending on how weather tracks out or you think that this quarter was more in line with how you have progressed you know in the past would just continued going m. savings.
Yes, good very good question, let me just say this we we have a plan in place that would allow us as Scott mentioned during his remarks.
Allow us to overcome a substantial additional decline in energy usage.
We were to go back to the kind of conditions, we saw in the second quarter. So we've got to plan in place that we think we'll we'll be absolutely appropriate to continuing to deliver value and reached the top end of our guidance range now if things get better.
If we see if we see a stronger economic recovery and obviously, we can flex in one direction or another but.
But but we've been very pleased with the results so far and I would also say that but for example in Illinois some of that's timing.
Illinois will not be is as hard hit some of the other companies potentially because theres decoupling of our gas distribution sales in Illinois. So long story short, we've got really strong flexibility. We've got a great plan in place, it's delivering exactly what we expected to be we can flex up or down as needed given the conditions.
Understood. Thank you very much scale and thanks for answering my questions.
Oh, you're welcome Durgesh.
Your next question comes from Julien Dumoulin Smith Your line is open.
Hey, good afternoon, everyone. Thanks for the time and congrats again Shaw.
For for the move.
Perhaps if I can pick it up where charlotte's it off.
On the investment in infrastructure side.
I mean, I think you said yourself your half a year in that you've invested ability and out of 1.8, just keeping the timing of this capital do you think about it I mean, you have a sort of finite tax capacity.
How do you think about it and those terms.
If you can think about the.
So that's what you raised that later is that necessarily going to be in the back half of that plan just given how much tax appetite you absorbed a ready or how do you think about it from that perspective.
Just just to quantify that if you don't mind and also Gil if I can clarify I think you said this a 6% of the enterprise that 6% of earnings as well just to make sure I. We heard you read as well on the through the plant.
What answer Julian Your last question first yes, I would look at that is about 6% of total enterprise earnings again that would be an investment of 1 billion a with our prior investments as well and the infrastructure segment of the end of the five year plan, a deliberate about 6% of the total enterprises earnings so short answer to that.
Yes.
Then in terms of how to look at all of this other way while I'm answering that you may want to think about charters comment about best in class.
So they're Julia.
Absolutely.
[laughter] I I was just I was just waiting for you to keep going Oh, Okay. [laughter] wanted you to ponder a little bit will I was answering your first question.
[laughter].
At any rate here's how I would look at it we have file them very high quality projects early on in the five year plan.
So again were marrying high quality projects with our tax appetite. So I would look at what we've accomplished so far as more front end loading and more de risking of that segment of our investment plan.
But again, we're going to be governed by two things tax appetite efficient use of that tax appetite and high quality projects.
<unk>.
Okay fair enough.
Second question you guys have a carbon target you guys are frankly, expanding on those how do you think about that reconciling with your day to day operational planning and maybe this might be good opportunity to talk about Colombia for instance, but I don't want to lead the witness too much on on the response here just how do you think about the carbon targets that you guys laid out most recently.
Against your ARPU clinic.
Well I think it's actually not all that complicated clearly as we look at the next 10 years, 70% reduction in Seo to emissions over the course of from where we are off to a 70% production.
It will require continued reshaping of our generation fleet.
That in cleaning and playing language means that some of the less efficient coal fired power plants that we that we have in our system or that we co jointly own.
You mentioned Columbia for example, those things will have to be looked at in terms of potential retirements.
And we will provide you more color on all of that.
As we update our next five your capital plan come fall.
Excellent well lets you execute against the best in class a plant here I take care everyone.
Thank you.
Sure.
Your next question comes from Jeremy Tonet with JP Morgan Your line is open.
Hello timing I good afternoon.
Just wanted to start off with I guess.
Your sales expectations as you look at the balance of the year here and if you could extend a bit on how this has trended versus your original expectations looks like residential shaped up quite well I'm. Just wondering if you expect that to kind of continue relative to your expectations, there and any any feeling for industrial activity over the back half of the error as well.
Sure Great questions, let me try to summarize it and then we'll ask Scott to add some color to this as well [noise].
When we had our last analysts call going into the pandemic.
We projected that we would see about an 8.6% decline in total retail sales during the second quarter with the stay at home orders in place.
We actually came in weather normal at about 6.9%, though.
We ran better in Q2, the difference between 8.6% down 6.9%, though so we ran better there.
If you look at July.
And weather normalization over a short period of time, you know how I feel about that it's more precise that accurate.
But we risk we are assuming for in our planned for Q3.
Starting in July.
About a 3.6% weather normal decline in total retail energy sales.
Your weather normalized July Scott, we were running about <unk> percent better than that and the preliminary data, we're looking at and using our automatic meter reading system. It looks about 1% better so very encouraging.
As we look at those sales I think another encouraging fact is but we look at new services that are being installed and are we energy's territory. Our gas do services are up 11% compared to the prior year and the new services, we're seeing on the electric side is up 7%. So we're seeing some good customer growth end.
Auction projects even during.
As a pandemic time.
And I think in terms of specific industries that you asked about and this is something we look at on a regular basis, we serve a large commercial and industrial customers 17 different sectors of the economy as you've heard me mentioned before the ones that seem to be hanging in there with any kind of shrink that all of it won't surprise you paper.
Food processing food packaging electronic controls.
And I will say this amec shot I, we're talking about this just earlier today.
We have less exposure to the automotive industry that many companies.
In fact, we have far less exposure to the automotive industry than we had going into the o. eight or nine recession.
So a very diversified economy.
A number of a large commercial and industrial customers.
We are deemed essential to begin with because of again food paper.
Food packaging and processing et cetera.
So we have a diversified set of customers that we're supplying energy too, but the one thing that Scott mentioned that is that stands out to be also in the quarter. It's just a number of new services that he was mentioning and the number of these services compared to last year.
Particularly on the natural gas distribution side of the business, where we continue to see strong growth.
That's very helpful.
Yes, that's very helpful. Thank you and one more if I could just.
When it comes to savings here, they either being able to achieve your today I don't know, if you're able to kind of share with us.
Number that would be in kind of the you know the context for how much of that is kind of could be ongoing in nature versus onetime in nature.
And then if you think about harvesting savings over the back half the year, whether does turn and stable over the rest of the summer. How do you think about throttling that back to I guess de risked 21 at this point.
Well, great question and as I mentioned earlier, we have a plan in place where we think we can absorb.
The hit from the economy going back to the depth of where it was in the second quarter, that's probably another $10 million to $15 million of additional on M. reduction if needed.
It's not needed we will certainly continue on with our with all of the efforts that we have I'm going to continue to keep the system reliable.
I will say this the reductions we've made so far I've really had no impact on reliability, we've designed them that way.
So we're in a great position to be able to flex up or down depending upon what we see with the economy.
And I can tell you in terms of hey, Kevin It I've talked about this in some way I can tell you in terms of.
We get asked this all the time, what what about of the cost additional cost savings, we've identified and implemented what about of that is permanent and.
Kevin I would say right now we continue to see that percentage increase but I would say, where we are at least half of those savings I would agree with that gave US said, we had we have a culture of looking for ways to continue to be more efficient and take cost out of our business with looking at reliability overlapping.
Reliability numbers are strong and I would agree with that with the efforts we had in place it still takes time.
One of the reasons. Thank you Kevin one of the reasons why we're so confident.
Is that for us operating efficiencies out of program is that something we turned on and off it's a way of life here and its embedded for years and how we do business.
So I hope that response to your question.
That was very helpful. Thank you.
[laughter].
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Greetings Michael.
Oh right, how you doing we're doing all right good.
Eric hanging in there.
Right.
Are you are you a you got your Ah you may be in an area that reliability suffers needed moved it Wisconsin [laughter].
[laughter] signing up Tomorrow [laughter] [laughter].
Hey.
You know in terms of what you just said about how but at least say half the savings from cobot 19 or.
Sustainable going forward, where does that mean in terms of the 5% to 7% growth rate.
Is that push you towards the upper end of that are going into next year and beyond.
Well as you know Michael the capital plan is really the big driver of the 5% to 7% growth rate, but I will say this and I think this is very encouraging.
The kind of cost efficiencies that we've been able to deliver.
Really are going to help us to continue to drive our capital investment plan.
Way that continues to keep pressure off rates.
I think that to me that's the key ingredient here, we've been very successful [noise].
As you know.
It basically holding rates virtually flat for the last five years since the acquisition of Entegris.
And that's been very helpful. Obviously from all kinds of directions, but long story short I think what we're seeing here is icing on the cake in terms of continuing to be able to invest the kind of capital we need to invest.
Achieved the 5% to 7% growth rate continued to improve and maintain the reliability of the system continue to invest in renewables to accelerate.
Future that Scott very low carbon but no carbon.
And keep pressure off rates.
[noise] and what about.
Sorry, [laughter], what about in terms of the.
The onshore wind projects.
As you go beyond 2020, and the tax appetite starts to Wayne.
Yeah, you still have some more.
Projects to invest and would you consider tax equity at that point or is this morning.
You will simply invest that's correct case, so that your tax appetite can absorb it completely.
Well first of all our tax appetite does not waiting after 2020.
That's why we have on 8 billion in the five year plan.
And just preliminary look beyond.
The five year plan, we don't see our tax appetite waiting. So that's that's kind of piece one piece to there are plenty of high quality projects in the greater Midwest.
But that we're looking at and I don't really see the need to venture off shore or change our risk profile by investing in something that we are not very familiar with with high quality off takers. So again don't think that our tax appetite Wayne's very quickly it just doesn't.
And there are all kind of reading cool solid projects that are in our pipeline that we're looking at that don't require us to venture offshore.
Okay. So you see a current plan still anticipate to being a taxpayer in 2020, even with continued investment.
Well, yes, and we'll let Scott Shaw explained that long story short with the tax rules, it's almost impossible to completely eliminate any federal taxes, Scott Shaw, Yes, that's exactly right. We are in modest wind project to be at modest taxpayer in 2020.
Right I think.
Yes.
[noise] Hail one last question for me <unk> as you just have a very strong equity currency.
There's a lot of Oh looks at me today, there's been some some news in the M&A front in terms in the industry, but I'm just wondering what kinds of what I mean.
Can you comment a little bit about maybe your potential appetite for M&A, considering that you have one of the strongest currencies in the industry and.
What's your view right now is of the current prices for other utility companies.
What.
You know what kind of criteria you might be looking for if you were to you can consider it.
Well, let me answer it this way my wife says Boringly predict.
So we'll give you the same three criteria because they haven't changed in fact I was modeling them in my sleep last night.
[laughter] when our approach.
Exactly what you had expected to be disciplined.
Not overpaying, we don't get involved as a general rule and processes are auctions in the three criteria that we would apply to any potential opportunity remains set in concrete first we would have to believe after significant due diligence that we could make the acquisition accretive to earnings in the first full year after closing.
We're not going to trash the balance sheet to do it.
Of the industry is littered with stories, where that and then well the third thing, which is probably the gating opportunity. The gating criteria today, we want to make sure that the earnings growth rate if anything that we would acquire would be at least as strong as our own organic growth rate read that 5% to 7% a year.
So those criteria are hard and fast in fact, the the first thing that Sean I talked about on day, one was those criteria and she had a giant smile interface.
[laughter] shot you also have dreams that night about M&A just curious.
[laughter].
It's already [laughter] ever get one have a good luck guys. Thank you.
[laughter].
Your next question comes from Sophie Karp with Keybanc. Your line is open.
I am today.
Oh Wow.
Brad from Macquarie. Thank you for the time.
Thank you.
So it's pretty clear and any good questions have been answered I just had one question I'm not sure if the guys given that they thought but.
No I think we'll be making some for another come back right now with people begin to little bit. It again, the potential quit the pencils and I'll just storage qualities I guess with Citi. Your book build out is that something you look that maybe hurry pilots blend in that regard them days a question and then your way you're planning I'm just curious.
Thank you.
Oh good question a lot of as you know about hydrogen these days.
Let me say this.
We think there maybe some potential there and there are lots of different ways, if there might be potential.
There are pilot projects I know.
The power and light just announced the pilot project that will be going into service. They believe in 2023.
For a couple of pilot projects that I'm very familiar with into Europe right now.
One of the things that we're looking at here.
Relates to the potential use of hydrogen.
As a mix in our gas distribution lines.
So.
There are lots of ways that the hydrogen angle can be played but I will tell you. It is very very early days.
And we will we will we obviously will keep a very close eye on this.
A lot of research going on Europe is probably a bit ahead in terms of the pilot projects.
We're a long long way away in my opinion from anything being commercialized at readily available a lot of potential and it could I think help all of our companies get to 2050 carbon goals, but long story short. This is really very early days and we'll see where it all goes but I think theres some.
Possibility that we that we will not only not only that we might be able to but we will be looking at both renewable natural gas and hydrogen as part of the potential for our gas distribution company going forward given anything to add to that well hydrogen is.
I'm sure you know, it's very very commonly used in boulder mining fertilizing, but.
Issue into production of them.
Cost of it so we'll continue to monitor that along the way guilt and as it makes sense look at it for our future.
Perfect. Thanks, so much.
Very good thank you.
Your next question comes from Michael It put us with Goldman Sachs. Your line is open.
Hey, my everybody.
Yeah, I know those blue martinis or whatever the heck they were lately.
The only thing that blue as my heart thinking about the Grizzlies going over three in their first regained some potentially a given up that last playoffs slot day, there's anything that I'm dreaming about its a good job Maria and the team back on track.
Uh huh glad because.
Oh go ahead, and Michael you know.
But your head coach down there was a buck staff last year I intend to that.
I'm excited about our I like markets I like our coach a lot.
Has got a question for you as someone else asked the question about your cold fleet and maybe some of the smaller or the or the less economic units actually when I turn that question. The other way around because when I think about how to make material changes to your carbon footprint, it's off the small.
Clients, it's the large ones that move the needle how should we think about your largest coal facilities, whether it's the older Oak Creek in new units or for the newer ones or maybe some of the other though west and for which is not that old.
How do you think about the path to when some of those would be potential retirement targets.
Well, it's a good question, but let me say this we've already retired 40% of our coal fired generating fleet over 1800 megawatts just since 2014.
Most of those retirements were though the older less efficient plants are in fact, that's just the way we.
I think it's appropriate to look at the World you look at what's on the bubble economically.
So we don't have a you know many of the smaller older plants left we just don't because we retired 40% of coal fired fleet.
So as we begin to look at what other units are on the bubble the economics will drive us.
And I will say to you that are that are newer power the future units at Oak Creek.
Our so efficient.
And emit less carbon per unit of output, but almost any other coal fired power plant on the planet literally so that would be the last thing you would look at but long story short.
We will drive our look at generation reshaping our continuing to look at generation reshaping is what what is the least economic and what can be replaced at a lower cost to customers. Both in terms of actual.
Actual operating dollars actual capital expenditures, but also making the best in terms of in terms of environmental improvement.
But but we're not ready driven necessarily by its particular size were driven by economics.
Got it thank you.
Total unrelated question.
Can you talk about in Wisconsin, the customer Bill.
And where you see kind of your average residential in your average individually at your average industrial rates relative to kind of your regional peer group.
And if there is dramatic differences either above or below what could potentially CHEMOSAT in coming years in either direction.
So let me say first.
And just to put things in context, we have as you know virtually frozen rates for the last five years.
During that period of time, many of our regional peers Beth likes to point. This out many of our regional peers have actually have actually had double digit rate increases.
Many of them year after year in terms of the rate increases that they've been authorized.
Our competitive position Michael as is really in great shape today, if you look at customer bills.
Which I think is the appropriate.
Measure and one that you're asking about.
We're actually in great shape, a and then we have I mean, we're actually in great shape compared to our regional peers.
But in addition to that.
I want to talk about the other things that we've done that I think are relatively innovative to be able to be incredibly competitive for new industrial customers.
One of the one of the things that we talked to Fox gone. They are glowing about their projected price per kilowatt hour, our real time pricing rates.
Our getting.
Our customers industrial customers, who are growing at prices under four cents per kilowatt hour.
At recently with natural gas prices down in demand out there.
Third days when its two cents of kilowatt hour.
So we didn't put in place a number of innovative rates to make our state.
Incredibly competitive for new industrial customers and growing industrial customers and I think you see that paying off in a number of the economic development announcements, but overall in terms of our retail rates residential commercial and industrial we're in very good shape competitively today.
Got it and final question I know next year, you're usually honor in every other year cycle is there.
It could be a rate case here in Wisconsin.
Given just kind of what's going on in the economy. He bill yourselves as needing to come in or would there be any leeway any discussion with the commission to where you could potentially push that out another year or two and hold off on a pilot.
Yes. Good good question at this point, we'll wait and see every options on the table.
But I can tell you that the normal rate filing cycle that you're referring to would have us file sometime next year for rates that were good to go into effect in Twentytwenty. Two in 2023 with our forward looking test periods, but again to your question directly no decision yet but every day.
Options on the table.
Got it thanks, Gail much appreciated.
You're welcome Michael take care.
Your last question comes from Paul Patterson with Glenrock Associates. Your line is open.
Hey ratings picture fitting me in.
You're welcome how you doing today.
Can you hear me.
Yes can you hear us.
I just did okay [laughter].
I wanted to follow up on Fox gone really briefly so my understanding that this or at least last I heard there was a contract negotiation going on with Adobe DC.
And I was wondering if you if you have any update on that in terms of them getting their tax cuts. It sounds like they got the jobs. If they met the job qualification, but there are other issues as you know with this contract. So it's just wondering if it was an update on that and then the second sort of.
Related question as you mentioned a lot of economic development, that's occurring around the Fox gone facility and I'm just wondering.
There was a lot of infrastructure and stuff that the stay put in.
And I'm just wondering you know things obviously, we've got a pandemic, we've got budgetary issues with the state just whatever they are things that can change and obviously that could potentially impact foxconn.
If it ends up that there isn't necessarily as much.
Fox gone investment as originally.
Thought of them what have you what's the potential for for the development that you're seeing around.
The the facility.
It's still being there if you follow me it would seem to me that lot of this I'm just thinking out loud would probably be there just given the investment in sort of the activity already there the sort of its own sort of.
Her show people, what I'm, saying or.
Can you give us any flavor on that.
Yeah sure Paul.
Let's talk first about the additional private investment that I mentioned within a 20 mile radius of the Fox Scott campus.
Again since 2017, when Foxconn first the turn dirt down there.
There have been more than 70.
Projects other capital investment other private entities.
Making or announcing $1.2 billion of additional projects and capital investment.
And today.
Even with the pandemic about two thirds of those projects two thirds of those 70 plus projects are either complete or underway.
So.
That is going extraordinarily well and again for those of US had been involved and economic development given it I've asked this for a long time.
We've always seen at believed in the ripple effect.
Secularly when you have a major company, making that kind of a commitment and that ripple effect is alive and well believe me I mean think about that 1 billion to have additional capital investment more than 70 projects again, two thirds of those are either underway or completed.
In terms of the Foxconn project itself they have never stopped construction during the pandemic.
They've revise their footprint they revised their plan, obviously the to adjust to market conditions.
They are activity continues a continues apace down and what they call was gone valley.
And yes, my understanding is they are in discussions with the state about some changes to the original contract.
On the original incentive contract I think thats largely driven by for example that contract which is public.
Talks about a gen 10 five.
Fabrication, which they're not building. So there are there needs to be clearly some technical changes of contract.
But the two parties as I understand that are in discussion those discussions or private but from everything I can tell foxconns commitment to Wisconsin continues.
And then also guilty as you may recall, there will be producing now ventilators for Medtronic, which never was expected obviously because no one knew about a pandemic.
Coming but theyre, they're going to be starting a very soon producing ventilators on that site for Medtronic. So there's a variety of high tech things that I don't think any of us expected that are going on there.
Okay, great. Thanks for the update I guess, what they said to the climate stuff really we should be thinking Nov is probably when you're going to be elaborating more on.
I have a what's you're gonna be how you're going to be.
How you plan on reaching those goals and everything is that.
That's what gathered so far is that pretty much the what we should stay tuned for.
Yes, exactly will will rollout will rollout abroad details on our next analyst call, which is usually late October early November and we'll be happy to provide all the details that you need.
During our discussions at the when I believe will be a virtual the conference.
Awesome. Thanks, so much goes.
You're welcome Paul take care.
Alright folks will I think that concludes our conference call for the day. Thank you. So much for participating if you have any other questions. Please feel free to contact structure. She can be reached at four one for two to one for six threenine. Thanks, everybody take care.
This concludes today's conference call you may now disconnect.
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