Q3 2020 WEC Energy Group Inc Earnings Call

Good afternoon, and welcome to double you eat see energy group's conference call for third quarter 2020 result.

This call is being recorded for rebroadcast and all participants are in a listen only mode. At this time.

Before the conference call begins I remind you that all statements in the presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at any time.

Such statements are based on management's expectations at the time they are made.

In addition to the assumptions and other factors referred to in connection with the statements factors described in W. E. C energy group's latest form 10-K, and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

During the discussions referenced earnings per share will be based on diluted earnings per share unless otherwise noted.

After the presentation the conference will be open to analysts for questions and answers.

In conjunction with this call a package of detailed financial information is posted a W. E C Energy group Dotcom.

A replay will be available approximately two hours after the conclusion of this call.

And now it's my pleasure to introduce Guild Klappa executive Chairman of double you see energy group.

Life from the Heartland and good afternoon, everyone. Thank you for joining US today as we review our results for the third quarter of 2020.

First I'd like to introduce the members of our management team who are on the call with me today, we have Kevin Fletcher, our president and CEO, Scott Lauber, our Chief operating Officer, John Lu, Our Chief Financial Officer, and Best Straka, Senior Vice President of corporate Communications and Investor Relations.

As you saw from our news release. This morning, we reported third quarter 2020 earnings of 84 cents a share our solid results were driven by a rebound in economic activity in the region.

Or summer temperatures and efficiency gains throughout our operations.

Scott in trial will provide you with more details on the quarter in just a few minutes and Kevin will cover our operational progress so far.

First I'd like to discuss our new five year capital plan.

Road map for the next five years of capital investment.

So for the period 2021 through 2025, we expect to invest at $16.1 billion. It's the largest five year capital plan in our history and increase of $1.1 billion or 7.3% above our previous five year plan works.

We're calling this road map, our U.S.G. progress plan, because we're investing was $16.1 billion for efficiency sustainability and growth.

As you would expect or U.S.G. progress plan includes a significant investment in renewables.

We're allocating nearly $2 billion to regulated renewables that will serve our Wisconsin utility customers and.

In addition to the projects we have underway, we plan to bring 800 megawatts of solar 100 megawatts of wind and 600 megawatts of battery storage into our fleet. The data show that battery storage has now become a cost effective option for us.

Our plan also calls for modernizing our gas generation fleet to improve efficiency, we expect to retire 400 megawatts of older natural gas fueled capacity.

In addition, we plan to purchase 200 megawatts of capacity in the West Riverside Energy Center, that's a new combined cycle natural gas plant recently completed by Alliant energy here in Wisconsin.

And finally on the natural gas generation front, we plan to build an additional 100 megawatts of capacity.

Using reciprocating internal combustion engines or as we call them rice units.

As we've already seen in the upper Peninsula of Michigan Rice generation is flexible reliable and scalable so.

All of these efforts should allow us to retire 1400 megawatts of our coal generation by 2025.

The benefits of our yes, you progress plan are very clear well cut C. O two emissions maintain superior reliability, lower our operating costs and grow our investment in the future of energy.

No as you may recall weve already set aggressive targets to reduce carbon dioxide emissions by 70% below 2005 levels by the year 2030.

We're also working to make our generation fleet that carbon neutral by 2050.

What's the plan, ladies and gentleman that we just described to you were able to announce today, a new near term C O two reduction target.

We're aiming to lower emissions by 55% below 2005 levels in just the next five years by the end of 20 to 25.

In addition for the longer term this generation plan will deliver significant economic benefits for our customers compared.

Compared to the status quo.

Expect customer savings of approximately $1 billion over the next 20 years.

There are a number of other important elements in our U.S.G. progress plan and we'll be happy to share all the details with you at the upcoming conference, but in summary, our updated capital plan should grow our asset base by 7% annually over the five year period with no need for additional equity.

And the plan fully supports our projection of long term earnings growth at a rate of 5% to 7% a year.

Now lets turn for a moment to the economy and a quick look at conditions here in Wisconsin.

As you know, we provide energy to a broad range of industrial and commercial customers many of them produce and deliver essential services. During the pandemic, we've seen particular strength in paper food.

Food processing packaging plastics manufacturing and electronic controls.

And there's clearly been a strong rebound in the labor market over the past few months.

The latest available data show Wisconsin's unemployment rate down to 5.4% and of course, that's well below the national average.

I would add that new developments are creating even more opportunity, particularly in the south eastern corridor of the state.

For example, Komatsu, who recently broke ground on a state of the art manufacturing and global mining campus, serving as its Milwaukee area headquarters.

Our company sold 43 acres of land to come out to for this development, which is taking place in whats known as Milwaukee's Harbor District.

Matsui expects to invest approximately $285 million in the project when.

When completed it will include engineering and Robotics labs, a large office complex customer centre, a modern manufacturing facilities and more has the potential to employ more than a thousand people construction of the campus is expected to be complete in 20 to 22.

And literally just a few days ago, Amazon open a two and a half million square foot distribution Center in Oak Creek, that's just south of Milwaukee.

This four storey center is equipped with the latest in robotics for packing and shipping and.

And at full strength Amazon expects to employ 1500 full time workers at its facility.

And of course I know all of you are interested in the Foxconn development in Racine County.

As we speak construction work continues on a smart manufacturing facility and a network operations center that will support high performance computing.

Breaking the high Tech campus took place just a little more than two years ago since.

Since that time Foxconns plans have clearly evolved the company is now assessing a much more diverse product line than originally envisioned.

Now because of these changes the state of Wisconsin is asking to revise its tax incentive contract with Foxconn and the head of the state's economic development Agency has said the door is wide open to support Foxconns business expansion in the state.

So all things considered with a resilient economy and major developments in the pipeline, we remain optimistic about our long term sales growth.

And with that we'll turn it over to Scott and he will chat about our.

Sales for the third quarter of this year, Scott all yours. Thank you Gail.

We continue to see customer growth across our system.

At the end of the third quarter, our utilities were serving approximately 11000 board elected and 32000 more natural gas customers compared to a year ago.

Retail electric and natural gas sales volumes are showing on a conservatively on page 17 18 of the earnings back.

As you recall, we adjusted our forecast at the start of the Panda.

The results in the third quarter were better than our adjusted forecast across all customer classes for example.

Residential sales of electricity were up 7.1% from the third quarter of 2019 and had a weather normal basis were up 4.2%.

That's a 1.6% better than our forecast.

Small commercial and industrial electric sales were down 2.5% since last years third quarter and on a weather normal basis were down 3.3%.

This was six tenths of 1% better than our forecast.

Meanwhile, large commercial and industrial sales, excluding the iron ores.

Or down 5.4% from the third quarter of 2019 on both an actual and weather normal basis.

This reflects a rebound in economic activity in Wisconsin, and was 4.3% better than our forecast.

Overall retail deliveries of electricity were down by three tenths of 1% from the third quarter of 2019 and.

I'm not a weather normal basis, we're down one and a half or 100%.

1.5% tracking well ahead of our forecast.

And looking at the sales trend on page 17 of the package, we continue to see favorable progression towards normal demand in the third quarter.

In fact, we're very pleased with the preliminary sales results, we see for October of.

Of course of course, we're watching economic indicators as a whole is and we are prepared to respond it's a level of recovery drops back to what we saw earlier this year.

I also have a few updates on the wind projects in our infrastructure segment.

Construction on the Blooming Grove Intertanko Ridge project is on schedule.

We grow should be completed by the end of this year.

It's a taco rich we expect commercial operation in the first quarter of 2021.

And turning to another of our projects construction on the 100 head wind Energy Center in Nebraska is nearly complete however, as we reported last quarter there'll be a delay in the in service date.

Definitely has been caused by a permitting issue related to a substation being built by the Preska public power district.

We're working with all parties to complete the work and bring Thunder hit to commercial operation in the latter half of 2021.

I point out that we have a number of upsizing. The plant. So this delay should not change the trajectory of earnings growth for 2021.

And now ill turn things over to Kevin to give an update on utility operations.

Thank you Scott I'll start with the fact that we have maintained our focus on safety and customer service in fact, our customer satisfaction scores remain at an all time record high.

While we have streamlined our operations and maintenance costs to a number of efficiency measures and I'm confident that the momentum we've seen this year will continue.

Now I'll review, where we stand in our state jurisdictions in Wisconsin Im pleased to report that just yesterday, our two creek solar farm began commercial operation, providing 100 megawatts of renewable capacity for their customers at Wisconsin Public service ahead of schedule and on budget. This.

This is our first utility scale solar project with an investment of $130 million.

And we continue to develop plans for two liquefied natural gas facilities, working with regulators and local officials and pending all necessary approvals.

Spec construction to start in the fall of 2021.

These facilities will provide customer savings and enhance reliability during wisconsin's cold winters.

Illinois, we're seeking a rate review for one of our smaller subsidiaries north shore gas, which serves approximately 160000 customers and another northern suburbs of Chicago.

Thanks for North shore gas for last set more than five years ago before we acquired the company. Since then we have consistently invested capital to serve our customers, while reducing operating costs fixed.

We expect a constructive dialogue with the Illinois Commerce Commission as we seek rates that will support system safety and reliability.

And with that I'll turn it over to show.

Thank you Kevin as Gale noted earlier, our 22000 <unk> third quarter earnings to 84 cents per share compared to 74 cents per share in 2019.

To reiterate Scotts comments pull the 19 had a much milder impact sales.

Sales overall.

Overall, we estimate that the pandemic caused a one cents decrease in margin for the quarter.

This decrease was more than offset by favorable third quarter results largely driven by our continued focus on operating efficiency rate adjustment and our Wisconsin utilities and the execution of our capital plan.

Our electric utilities also benefited from warmer than normal weather.

Earnings packet placed on our website. This morning include the comparison of third quarter results on page nine.

I'll walk through the significant drivers impacting earnings per share.

Starting with our utility operations this quarter, the outperformed third quarter last year by 11 cents.

Our focus on operating efficiency drove a four cents decrease in day to day, Oman and expenses.

We benefited by an estimated three cents per share from warmer weather.

And all other factors had a positive variance of seven cents, primarily driven by rate adjustments continued recovery from capital investments and fuel.

These favorable factors were offset by basin of higher depreciation and amortization expense.

Our energy infrastructure segment also was accretive to the quarter.

Hi, you did rage wind farm, which was placed in service in late December 2019 added one cents per share primarily from production tax credit.

Finally, the two cents drag in corporate and other was driven by some tax and other items, partially offset by lower interest expense and improved Rabbi Trust performing.

The member Rabbi Trust performance.

Asset integrity owing in.

In summary, we improved on our third quarter 2019, performing by 10 cents.

Now I'd like to update you on some other financial items.

The full year, we expect our effective income tax rate to be between 16 and 17%.

Excluding the benefit of unprotected taxes flowing to customers. We project, our 2020 effective tax rate to be between 20 and 21%.

At this time, we expect to be a modest tax payer in 2020.

Our projections show that we will be able to efficiently utilize our tax position with our current capital plan.

Looking now at the cash flow statement on page six of the earnings package.

Net cash provided by operating activities increased $109 million.

This increase was driven by higher cash earnings, partially offset by higher working capital requirements, including coal that related impacts.

Total capital expenditures were $1.6 billion for the first nine months of 2020.

$107 million increase from 29 team.

This reflects our investment focus in our regulated utility.

Last month, we refinanced $950 million of our holding company debt, reducing the average coupon of fees from 3.3% to 1.6%.

We will recognize the six cents make whole premium in the fourth quarter, which we have already factored into our 2012 annual guidance.

In closing I'd like to provide our updated guidance.

We are narrowing and raising our earnings guidance for 2020 to a range of $3.74 to see dollars 76 cents per share with an expectation of reaching the top end of the range.

This assumes normal weather for the remainder of the year.

Our previous guidance was in the range of $3.71 to feed on or 75 cents per share.

With that I'll turn it back to Gale Shaw.

John Thank you very much we're on track for a solid year again in light of our strong performance our guidance range as Sean indicated now stands at $3.74 to $3.76 per share with a clear expectation of reaching the top end of the range.

We're also reaffirming our projection of long term earnings growth in the range of 5% to 7% a year.

Finally, a quick reminder, about our dividend as usual I expect our board will assess our dividend plans for next year at our scheduled meeting in early December we continue to target a payout ratio of 65% to 70% of earnings we're right in the below that range now so I expect our dividend growth will continue to be in line with the growth in our earnings per share.

And operator, we're now ready 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 a question. Please press the star key followed by the digit one on your phone. If you are using a speakerphone turn off your mute function to allow your signal to reach our equipment, 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 Shire Pourreza with Guggenheim Partners. Your line is open.

I sure how you doing today.

Oh, not too bad Gale how are you.

We're good are you still in your and identified bunker in Jersey.

[laughter].

Breakout to be honest, yes.

So that hopefully over there are you on.

Everyone's health, we're good to hear thank you sure.

Excellent excellent. So couple of questions here first obviously, another healthy capex increases were heading into <unk>.

The generation spend could be a little bit more lumpy versus traditional renewable so how do we sort of think about the cadence of that spend through 25 is it ratable is the 7% rate base growth linear and just remind us what drives sort of the delta between rate base growth and earnings growth, especially since you are.

Issuing equity right that was that was clear or are you simply gail implying that unless something is unforeseen earnings growth should be close to the top end marrying 7% rate based growth. So how do we start to think about that.

Okay terrific, let me handle the second part of your question first and then we'll let Scott Shaw talked about about the generation portion of the capital spend and how it shakes out in our projections over the five year period, but in terms of your basic question about how the 7% asset base growth.

Translate into earnings growth, particularly since we don't need to issue equity and that I think as you know is a differentiating factor for us, but obviously I mean to be accurate as you know you have to take into account the fact that but that.

We will be issuing some debt.

To help finance the capital program. So in essence, when you when you look at 7% asset base growth and you throw in some assumptions on financing cost for death and remember, we're we're basically trying to finance our growth at 50%, 50% equity roughly.

Essence that takes the 7% down a bit and I would say that conservatively. This plan should put us in that certainly in the low sixs, but.

But certainly in the top half of that well into the top half of that 5% to 7% growth projection.

Hope that responds to your question Sir.

It does and I appreciate that.

And Scott.

And Sean on the generation spending over the five years and there will be more color in the deck that we provide on this.

This Friday and for each but as you look at the five year plan.

Spread probably.

The over Moreover, the first four years with probably 23 and four.

Thank you at 23 being the larger years on capital spending but.

But once again, we're early we have to go through the regulatory approvals and it will affect the timing of this.

But the.

The typical five year plan that you've seen that you will see later the first three four years or two or three years and much more.

Analyze a little more detail to it with the four or five years that usually tail off a little bit because we're quite that quite that far in a way.

And all those projects, so 2023 and 22 were by the figures.

Got it. Thank you thanks for that Scott.

And Charlie just add one other piece of color to that should we were expecting and in our plan. We're expecting some unit retirements in 2023 and 2024 in order to prepare for those unit retirements would have to be spending capital on on replacement capacity upfront. So I think it's gotten jar right you would expect to see the lion's share.

I would think of our generation capital spend 22, 23, 24, and perhaps a bit over into 2025.

Right right. That's helpful. And then like Gil just as you kind of look at the generation transition looking what you're proposing today, it's like 1.8 gigawatts of fossil fuel assets that are retiring focusing on solar batteries. When I mean, obviously this is going to afford some additional owned and the cost savings.

Maybe some of the best we've seen in the industry.

How do we sort of think about the size of the owing them profile and the trajectory.

As we think about 21 and sort of beyond there and we're looking to sort of model the the rate inflation or even the OEM profile you guys. Because it just seems like this is going to lead to additional bill headroom for additional capital opportunities.

Sure I think there was a question about that.

Because yes, as we retire some of these older less efficient units.

There is significant on him involved in maintaining those units there's also avoided capital.

There is a significant amount of avoided capital here that would have to be spent on the older efficient units. If we kept the or inefficient units, if we kept them running.

To give you an example.

And then we've all talked a good bit about this as you can imagine in terms of what we really think is real in terms of the continuing decline in operation and maintenance costs, while maintaining prebuy period customer service.

But let's say for example, a.

For unit coal fired plant that is an older plants.

We're seeing probably net 50 million of a one m. savings on the retirement of a plant like that for example.

So clearly there are coal retirements as I mentioned.

During the script.

Involved here, but but its multimillion dollars about one m. savings not to mention additional fuel cost savings.

So, yes, theres going to be there's going to be headroom here and we don't see this plan driving driving rate increases at all above the inflation rate and in the longer term as I mentioned compared to the status quo I would expect.

At least a $1 billion of savings compared to the status quo over about a 20 year period, but in the near term there'll be some little uptick that we will have to ask for to take care of the recovery of the capital, but there will be huge on m. offsets.

Fuel cost saving offsets for customers, so very little bill pressure.

Got it and then in terms of just where we are at this stage of the game Kevin.

Kevin We really think like as we look at finish our budgets for 2021.

But the own him savings trajectory. We're on will continue that's exactly right Gail as I mentioned in my the momentum that we've seen so far we have full expectations will continue going forward.

Perfect and then just last one for me Gail on obviously, we saw with Foxconns move last week the challenge.

Determination on its tax credits and the scope change how do you sort of see this process kind of playing out and how should we think sort of as observers on the sidelines kind of think about it is it just part of the process given the design has changed a little do you still envision incremental opportunities with the project like how do we start to put all this.

Stuff together sitting on the sidelines.

Yeah, Great question Charles.

And I would give you a three part answer the first is you've heard me say this before forget about what you read the headlines look at what's happening on the campus look at the construction activity going on.

On the high Tech campus that there are now two years into developing.

Scott has invested over a half a billion dollars already in this campus.

As I mentioned construction continues they've already become the largest single property tax payer in the county in Racine County.

And I do think what will happen here because the contract with the state. So specific about building a gen 10, five fabrication plan for LCD panels I do think they will have to be some changes to the contract.

Which there are ongoing discussions about but.

But again I would say to you.

Look at what's happening on the campus and I would add.

That.

Because their plans have changed in their original plan did not have high capacity computing.

We're still seeing significant projection of demand for electricity.

So our demand projections have not have not changed dramatically at all because as they have changed and evolve their plans they've added things like high capacity computing.

And then the last thing I would say to you is.

One of the products that they are looking at.

Developing and producing out of that campus.

Our server parts and server racks.

And they're already deploying a combination of technologies.

But I just really got a briefing on yesterday from them, which was just really amazing they're already deploying.

On a test basis, there if that campus.

Artificial intelligence Fiveg and robotics.

To be the most efficient producer of server and server racks in the world out of that campus.

So they are still very active and in terms of determining what they want to do there I do think it will probably require some modifications to the wording of the contract, but again I would say keep your eye on what's happening on the campus and we'll be happy to keep you updated.

Perfect. Thank you guys and gals Congrats on your extension as chairman now you're stuck with us still 24.

Thanks Scott.

Thank you, Sir happy to be stuck but.

Do you guys take.

Take care.

Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Greetings, Julian where are you today traveling the U.S. voting several times I assume.

All right every time.

And let me, let me reemphasize sorry.

Please be able to continue to report to you what we are doing that over the next few years.

So they are related to that.

Thank you.

So if I can pick it up where you left off as well.

Let's talk about timing on the energy infrastructure, just more broadly as well and I and I.

I know you guys talked to the generation piece here, but.

You all were so successful in this first year and pulling forward that capex.

Identified opportunities et cetera, what's the potential yet we do that again, especially as it seems like the energy infrastructure opportunities before you're probably larger that now than they were before so I want to get too far ahead of myself here, but curious how you fund that.

Yeah, well first of all I think your observation is correct wouldn't.

When you look at the pipeline of high quality opportunities that we're seeing that pipeline, even though we have been very successful in pulling forward as you say a significant amount of investment in the infrastructure segment.

That pipeline of opportunity is definitely broader and greater and deeper today than it was before the pandemic.

So we are as you know we're being very selective here because we were in a very strong competitive position with our tax appetite and with the fact that we can we can bring these to closure without having to issue equity without having to go through a lot of hoops.

So we're being very selective and.

We're we're we're focusing right now on three or four near term projects.

I wouldn't expect any announcement new announcement before the end of the year, but.

I would just say watch this space for 2021.

Got it excellent and then if I can turn back to.

21 in the context of earnings entering attitude.

Not necessarily on the longer term five to seven but just as you think about the own him that you were able to pull.

The latitude in your numbers, perhaps I'll frame it that way how do you think about the ability to accelerate especially in the Fourq you hear some of the costs from next year and Uh Huh.

Add confidence to your numbers going into next year put it that way, especially given some of the refinancing.

Opportunities you all have as well.

Yeah, Great question Julien, Let me say this we have a significant number of maintenance projects underway now in the fourth quarter.

We had identified as you may recall in addition to our original plan, which had about a 2% to 3% reduction in knowing them for this year. In addition to that we identified up to about $80 million of additional cost reductions if needed.

The good news is with what you've heard in terms of a number of the positive developments, we will not need that deep a cost reduction.

And in addition to that show.

On the finance team did a great job as you mentioned on the refinancing so thats another plus so there's a lot of work going on right now.

In terms of.

In terms of the kinds of outage maintenance projects and other open end projects that have that I think will be helpful. In de risking 2021, Shaw anything to add to that so I think you covered it.

Thanks, Austin, guys go up to an acid over I'm sorry.

No. Thank you Julien anything else on your mind.

We are good excellent best of luck.

Thank you. Thank you very much.

Again, it is star one on your telephone keypad to ask a question. Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Greetings Michael.

Hey, guys.

Hey, Jim.

Considering that you're going to be a taxpayer in 2020.

Modest tax burn.

Yeah, you should just touching on the outcome of the election Theres talk of possible higher tax rates going forward.

If it were higher tax rates for that.

Increase your ability to grow the infrastructure business faster deeper have.

I have it be a higher percentage of overall earnings than your original plan, just curious how that might affect.

Good question, let me try to frame the answer and we're going to ask John Scott.

Ed whatever they would like on that question.

For starters, we are always modest as you know as you know.

So yes.

[laughter] text.

Taxpayer in 2020, but.

But with the way the current tax rules work on production track on investment tax credits and production tax credits were always going to be no matter. What the effective tax rate is we're always going to be in our projections a modest taxpayer simply because you can't take under the rules you really can't take it zero.

So that's one point and then if a if tax rates go up.

There's actually a couple of benefits to us overall Shaw yes.

I think one to your point Michael that.

Tax rate went up then we would potentially have a higher tax appetite. So therefore, we can potentially beat up the infrastructure investments.

Top of that you all knew that that interest tax shield at the holding.

So with a higher tax rate that would basically.

Provide some benefits at the holding company and obviously, we would need to work with regulators in each jurisdiction on the on.

Hi, refresh, but if we are able to recover.

The higher tax rate.

And then we would have better cash flow and credit metrics and we have pass through mechanisms in the jurisdiction. So I think overall we are prepared.

So from a different pack.

Hi.

Hi situation.

Michael just out of curiosity, how are you going to avoid higher taxes I don't think that works for you does it.

[laughter] modesty as the best policy.

[laughter] I would reiterate though that certainly.

Regardless of the tax rates we.

We are going to look at the infrastructure segment long term not being more than 10% of our total of our total earnings I just want to reiterate that with you.

Hey, just one more question I'll, let you go.

The.

Theres talk also of extending or getting new tax credits to batteries going forward.

Is that an area that you think you might be able to invest in going forward.

I get it presumably it's an ITC rather PTC just curious.

At your thought process.

I would guess it would almost have to be an ITC as opposed to a PTC, but yes, you probably heard me say that for the first time in this new five year capital plan that we're rolling out today for the first time, we're adding battery storage for our regulated business.

The economics are such now that with the amount of battery storage that we think we need.

It will fill a very economic function for us.

With or without additional tax credits.

So long story short, regardless of who wins the presidency it wouldn't surprise me.

If there was some modification to all of the tax credits associated with renewables.

You can see a big push for tax credits for batteries, we have not counted on that in our five year capital plan, but just the economics in the niche need that we have for batteries, particularly at peak times, it's beginning to make and then for the first time, making significant economic sense for our customers.

Do you think would be a role for batteries at with the wind projects and the infrastructure business, though.

Oh, potentially yes, absolutely absolutely and we have room.

The number of our in the wind farms in our infrastructure projects, we have room for battery storage. So yeah that that potentially could be an enhancement down the road no question.

Great interesting I have a great day take care. Thanks. Thank you.

Your next question comes from Jeremy Tonet with JP Morgan Your line is open.

Good afternoon Jeremy.

As everything Jeremy.

Very good thanks for having me.

I spent ahead.

[laughter] I was just wondering if you might be able to update us a bit on the local and economic sales trends across your service territory that you separate kind of underpinning favorable October trends as you mentioned there and.

Also curious on expectations for the winter heating season under ongoing kind of COVID-19 impacts here and how do you think the impacts differ on the electric versus the gas operations there.

Yes, that's a great question in terms of how the impacts differ between the electric and natural gas distribution business and.

And we have actually had a lot of internal discussion about that.

First of all let me say this the just to give you a kind of a framing answer related to the electric side and the trends we're seeing.

As I mentioned to you.

Residential consumption of electricity.

As exceeded what we thought during the pandemic now.

Now some of that was weather driven we had a warm summer compared to compared to normal.

But some of it also is just the fact that you know working from home schooling from home and many in many cases, it's just driving more.

Energy consumption from residential customers. So the residential demand for electricity during the last few months whether or not.

Has actually exceeded our expectations that's been on the plus side.

We've done better than we thought we would in terms of industrial demand for electricity still down, but we've we've done better than we thought we would as I mentioned during the script.

We have a number of industrial customers that the that produce essential products.

And certainly paper food packaging food processing electronic controls plastics manufacturing, we've all seen strength among our customers in those segments.

Where where we continue to see a drag and it won't surprise you is in small commercial and industrial.

Many restaurants are still at 25% capacity.

Just to give you an example.

Hair salons or are having to operate at much lower levels.

There's some some university campuses are not back in terms of full complement of students. So the dorms are not full.

So on the commercial side, particularly for small business.

There is still a struggle going on.

So that would be that would be kind of my answer Scott Chuck can add whatever they would like and Kevin as well.

In terms of the difference between electric and gas.

Yeah, it's going to be interesting to see but.

We had a relatively cold October for October temperatures in in Wisconsin.

For that matter in the upper Midwest.

And actually.

Even weather normalized natural gas demand was better than we thought it would be exceeded our projections the.

The other thing I can tell you that is I think significant Scott.

Scott can add to this.

We're seeing very very good customer growth on the natural gas distribution side of the business Scott.

Thats correct, especially when you look at Wisconsin the growth we're talking about on the.

The industrial side and the economic development, you're talking we're seeing good natural gas growth analysts.

This growth is.

Nearly 5% and do cut 5% more new customer bookings this year than we.

And over the last year. So good good customer growth and that number is like three or 4% on the electric side. So.

Really positive as we're seeing new connections come along and your rate going into the winter months, but October our preliminary view looks looks reasonable and very happy with what we're seeing.

Okay does that respond to your question lot Jeremy Yes.

Yeah that was very helpful. Thank you for that.

And then.

Just wanted to go back to the to the aluminum side, I guess and how how.

How has owned empty savings trended versus expectations and.

See extending into 2021 here and really just want to see are these savings meaningful enough to potentially to for your next Wisconsin rate case in any sense on commission appetite there.

Well, Jeremy let me say first on the on the rate case front.

We too early to have any meaningful discussions about potential filing in 2021 in Wisconsin and I would just simply say this every option is on the table right. Now so we'll have a whole lot better feel as we move into the first part of next year, but every options on the table right now and then and then in terms of the the own Emerald.

Auctions.

Essentially.

I'm guessing that we end up showing about 3% to 4% or one of them lower.

For this calendar year than last calendar year.

Shaking your head up and down yes.

Now we had identified potentially the most.

More on him savings than that.

But as we've had a number of positive developments a bottom.

Bottom line is we simply don't need to cut that deep.

But Kevin everything I'm seeing I know you're closer to it than I am on the operational side, but everything I'm seeing is that our momentum on a onetime reduction will continue into next year and a big chunk of the savings that we're seeing are sustainable that's exactly right. Gail if you look at things that we've learned during though.

Cobot pandemic that we're all dealing with is we've been more effective and.

In our field operation and scheduling we're also completing the.

Our customer service platform that will be all four we energies here. The first of January and that will have the consistent platform available for all of our companies and that will also give us some sustainability in our cost savings as well.

And then of course, we have in the future plan as you know we've got retirements of older less efficient generating units, which also will deliver on him savings. So we're very we're very bullish and optimistic on our ability to continue to drive efficiency and best practice across our seven operating companies.

Got it that's very helpful. Thanks for that.

You're more than welcome you take care.

You too thanks.

Your next question comes from Sophie Karp with Keybanc. Your line is open.

Hello, Sophie how are you today.

I'm doing great. Thank you good afternoon.

The state of Ohio, right in Cleveland hanging in Cleveland.

No no I'm in Utah, Hunkering down you'd softens, Oh Wow good for you.

Right.

Okay. So a question for you guys.

Batteries, you mentioned that batteries are becoming a cost effective solution for you could you maybe put it in relative terms.

Cost effective.

And I'm.

I would assume a native places peakers some sorts, maybe if you could give us a little bit more color.

How you're deploying those assets and the what you're comparing them.

Now I'll be happy to answer and the answer is really very straight forward its cost effective compared to other peaking solutions. If you will compared to other capacity that we would need to help meet peak demand or someone said during one of our meetings the other day.

Battery solution basically is going to give a sunshine after sunset.

Which I thought was interesting an interesting comparison.

But but yes for when you compare it to other peaking.

Technology other peaking capacity.

Certain amount of battery storage has become cost effective for our customers.

So that is before any potential tax incentives are attached to it.

That would be before any additional tax incentives that is correct. We're not counting on any additional tax incentives at all but if they're available we will definitely take advantage of Oh, absolutely, yes, thats right.

Got it and in the first questions are you will can be on battery storage are you looking at any other.

Yes, Krishna reforest stationary solutions, maybe you know.

As the types of chemistry.

The technology, if not better or is it primarily just lithium ion batteries at this point.

At this point it remains lithium ion batteries now.

That doesn't mean, we're blind to something else, but the plan because its proven and we understand the cost and the effectiveness of the technology. The plan right now calls for lithium ion batteries.

If two years from now.

Two years into our five year plan, if something else emerges that we know is cost effective and reliable than we would certainly be open to it but right now its lithium ion let me.

Let me add to that just a philosophical comment.

A company like ours.

I don't believe in our whole management team feels the same way.

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We're not we're not in the business of being on the bleeding edge of technology.

I mean this this.

To deliver customer value and shareholder value. This is all about.

Cost effectiveness and reliability.

And that's our job cost effectiveness reliability customer satisfaction all of that leads to shareholder returns.

So so we we are very close follower.

And Kevin is on the board of the Electric Power Research Institute I was years ago, we participate in a number of the experimental projects.

We stay abreast of technology developments, but we're not but for our customers and for what we believe is the core of how we do business, we're not into the bleeding edge of technology.

Thank you. This is all from me appreciate the answers.

Oh, you're more than welcome take care Sophie.

Your next question comes from Michael Sullivan with Wolfe Research. Your line is open.

Hi, Michael update on that.

Hey, Ron I'm doing well gale.

Your Snicks generale, hopefully we could.

Got a couple of Bucks titles during during the next four years right.

We're certainly hope so and you know I've had to take a lower pay because we have to get morty honest I think we'll see we'll talk about that.

All right sounds good.

I just had a question on the.

The coal and gas that you are shutting down the 1400 and 400 megawatts.

Are you able to quantify the refi the remaining rate base value of that and how.

How that is planning to be recouped.

Absolutely so.

If you think about.

And again, those retirements will occur probably most of them 2023 2024.

So if you look at our projected rate base for 2025, it's roughly cross our entire operation our entire system if.

It would be roughly about $32 billion.

If you look at essentially what we will be retiring.

Of the remaining rate base is probably roughly Shaw 600 million net of deferred taxes.

So a way to look at that as it's about 2% of our total asset base or will be about 2% to 2% of our total asset base and for Wisconsin under 5% of our rate base.

So that's really kind of.

The basic numbers as we see them today and in terms of future recovery, We think we've done very well in terms of coming to a.

Agreed upon solution with the commission with the with the environmental advocates with the industrial customer groups.

We've got a good track record of coming to an amiable and constructive solution in terms of.

Recovery also potentially in terms of some securitization, particularly of environmental control costs. So there'll be a there'll be a lot of discussions over the next four years, but.

But in direct answer to your question less than 5% of the Wisconsin rate base.

By 2025, and roughly about 2% of our total asset base.

Great. That's Super helpful. And then my second question was just.

You mentioned in the remarks about filing.

North shore gas case, and Illinois, any near term plans to do the same for for peoples gas.

Short answer no.

Simple enough okay. Thanks, a lot appreciate it.

You are welcome thank you.

Your last question comes from Paul Patterson with Glenrock. Your line is open.

Greetings, Paul Hey.

Thanks.

Okay.

So.

Just sort of I know it's.

So far off but we hope it is over.

Are you seeing any.

What are your thoughts about what you think.

Demand growth or.

Well.

The.

The economic activity, that's occurring and that you're seeing are you seeing any potential changes and.

In the usage patterns.

Happening after Cove it.

More telecommuting.

Changes in peak anything like that that.

That you're potentially thinking we're going to be more long lasting them.

And what's the pandemic is kind of over.

Well, it's a good question Paul.

In Everybodys Crystal ball is a bit fuzzy after what we've all been through in 2020, However couple of thoughts for what they're worth.

I think.

We've all seen how telecommuting working from home working remotely.

Can lead to positive results and.

Most all major corporations ours included.

Are going to need.

Less office space I think I think some amount of remote working will be a permanent part of the American landscape the corporate landscape for many many years to come.

So the question then becomes well how much remote working will remain after cobot as finally conquered.

And what does that mean in.

In terms of commercial energy usage and also in terms of continuing growth in residential energy usage.

And those questions are still to be answered, but I think to me manufacturing, particularly with as hot an area as we have manufacturing and distribution in the southeastern corner of Wisconsin.

Some of these projects may move a few months here or there, but but but as I mentioned in the prepared remarks.

This is a hot area for industrial and commercial growth right now, we don't see that diminishing.

So then the question becomes the things shift around a bit between commercial and residential depending upon how much work at home activity. There continues to be post post the vaccine Kevin any other thoughts given that's that's certainly true for the.

Our group look at our economy that you just look again at that what we've seen as a result of you mentioned about facilities, we're seeing that because of the positive results.

Results and meeting the needs of our customers. We don't we don't need as much in the way of facilities that we've had in our major markets. So as you pointed out I think looking broadly.

Broadly other industries will be like us in that perspective, but I would also agree is it's really too early to tell.

See how we bounce back and how quickly vastly.

Okay, great so on.

On that note. The you guys have a large amount of industrial activity that you guys have gone over and Youve got also.

Also you know things have changed over the years, you've got a large amount of geographical.

Diversity.

Have you.

And you mentioned Fox Con.

And there is you know as you know in the immediate sort the saga about this.

And I know, you're very supportive Foxconn and you see that the big win and what have you, but let's just for argument sake.

Say that whatever.

For whatever reason products con and the state can come to an agreement.

Given everything that you've got going for you.

With the dynamic growth in the.

Right around you, but also just the geographic diversity the size of the company now.

What kind of impact would that have if.

If it actually this didn't happen before what I'm, saying.

Yes.

Well let.

Let me say first of all I mean, Fox kind of as a huge corporation I think from a revenue standpoint, the fourth largest tech company in the world but.

But even a company that size I mean, they've already invested a half a billion dollars more than $500 million in beginning to build out the campus that.

We've talked about in Racine County.

So even a company that size I don't think were just walk away from a half a billion dollar investment that they just made in very modern state of the art production equipment.

So.

It didn't take that a step further.

If they did nothing more.

I would still have a half a billion dollars of investment that would still have significant electric demand because they've added high computing, hi, Chris Hi capacity computing to their plans in fact, thats already being built right now.

And we've already seen $1.3 billion.

Additional private investment that has nothing to do with Foxconn directly but $1.3 billion of additional private investment two thirds of which is either complete or underway.

In the 10 mile radius around the Foxconn campus. So theres already been from a textbook economic development standpoint, Paul there's already been tremendous ripple effect and the state has benefited from that.

To put that in perspective.

If there was no more investment from Foxconn at 500 billion, EUR 500 million, which they've already done it would still be the largest economic development project in the history of the state of Wisconsin.

Then we have horrible, which we've talked about a lot the gummy bear people.

They are breaking ground next month.

And their investment is going to be.

Gosh, probably 30% to 35% more than they originally envision it's going to be a much bigger campus.

So, we're seeing such tremendous opportunity and tremendous pipeline of growth.

That.

Im not overly concerned about what might happen.

And also I mean, there's good faith on both sides here. So I mean I just don't see despite all the political rhetoric that you see again my my advice is forget the headlines look at what's going on on the ground.

Okay, Great and I guess, you could we could take that further that maybe Wisconsin.

Thanks, so much appreciate it.

You're more than welcome Paul.

All right I think that wraps us up folks that concludes our conference call for today. Thanks again for participating always a joy to be with you. If you have any other questions. Please feel free to contact Beth straka. She can be reached at 414 to two one for 639, thanks, everybody stay safe and have a good election day.

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