Q3 2022 WEC Energy Group Inc Earnings Call
Conference call begins I remind you that all statements in the presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at any time.
Such statements are based on management's expectations at the time they are made.
In addition to the assumptions and other factors referred to in connection with the statements factors described in WEC energy group's latest Form 10-K, and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions referenced earnings per share will be based on diluted earnings per share unless otherwise noted.
After the presentation the conference will be open to analysts for questions and answers.
In conjunction with this call.
A package of detailed financial information is posted at WEC Energy group Dot com.
A replay will be made available approximately two hours after the conclusion of this call.
And now it's my pleasure to introduce Gale <unk> executive Chairman of WEC Energy Group. Please go ahead.
Thank you and good afternoon, everyone and thank you for joining US today as we review our results for the third quarter of 2022 first I'd like to introduce the members of our management team who are here with me, we have Scott <unk>, our president and Chief Executive Shawn Lu, Our Chief Financial Officer, and Beth Straka, Senior Vice President of corporate Communications and <unk>.
Bester relations now.
Now as you saw from our news release. This morning, we reported third quarter 2022 earnings of 96 cents a share three major factors shaped another solid quarter strong performance from our infrastructure segment, an uptick from our ownership in American transmission company plus a warm closed the summer in September .
Of course, our balance sheet and cash flows remained strong and stable.
And I will switch gears and provide you with some background on the Wisconsin rate settlements that we announced in October .
As you'll recall, we filed rate reviews earlier this year with the public service Commission of Wisconsin for all our Wisconsin utilities after.
After the commission staff completed its analysis, we reached agreements with multiple parties, including the citizens utility Board and the Wisconsin Industrial Energy group in fact more parties supported these settlements than any other settlement that we've reached over the years.
Scott will provide you with more detail on the terms in just a moment, but I would simply say that we view this as a very positive step forward.
The process is now in the homestretch and we look forward to the Commission's review, which we expect in December .
Our other big news for the day is the rollout of our ESG progress planned for the period 2023 through 2027% as.
As you may have seen from our announcement. This morning, we expect to invest $21 billion with an ongoing focus on efficiency sustainability and growth.
This is the largest capital plan in our history, an increase of $2 4 billion.
That's more than 13, 5% above our previous five year plan.
Now as we look forward I would describe our growth trajectory as long and strong in fact, our plan will now support compound earnings growth of six and a half two 7% a year over the next five years without any need to issue equity.
And as you've come to expect from US This projected earnings growth will be a very high quality.
Highlights of the plan include a significant increase in renewable energy projects for our regulated utilities from roughly 2400 megawatts of capacity in our previous plan to nearly 3300 megawatts in this plan.
And as we continue to Decarbonize our system. It is important to point out that the passage of the inflation reduction Act is a real true game changer for customer affordability.
We now project a long term customer savings of nearly $2 billion from our investment in renewables in this five year plan, that's nearly double what we projected just a year ago.
We've also dedicated more capital to hardening our networks, our electric distribution networks. So that we can deliver high level of reliability for our customers and we've included in the new ESG progress plan, an increase in transmission investment.
Two major factors are driving this growth renewable projects that require transmission and the long range planning process being conducted by MISO the Midwest grid operator.
Add it all up shake it all around and we have what I really believe is a premium growth plan.
The projects that are driving our growth are low risk and highly executable. They are paving the way for greater sustainability paving the way for an energy future, that's affordable reliable and clean.
And now before I turn it over to Scott I'd like to cover a significant development in our infrastructure segment.
Yesterday, you may have seen the news that we will acquire an 80% interest in the Maple flats Solar Energy Center. That's a 250 megawatt project being developed by Invenergy and South Central Illinois, We plan to invest approximately $360 million for 80% ownership of the project.
They both flats has an off take agreement with a fortune 100 company for the sale of all the energy it will produce and under the inflation reduction Act Maple flats will qualify for production tax credits.
The project of course meets all of our financial criteria and we will further diversify the renewable assets in the infrastructure segment of our business.
And finally, a brief look at the regional economy, Wisconsin added 14400 private sector jobs in September and the unemployment rate in the state stands at three 2% that's well below the national average we continue to see major investments from growing companies in our region and a wide range of <unk>.
Developments in the pipeline so I would just say watch this space.
And with that I'll turn the call over to Scott for more information on our regulatory developments, our operations and our infrastructure segment, Scott All yours. Thank you Gail.
Like to start by reviewing where we stand on the regulatory front.
First let's get back to the details in the rate review.
Pending commission approval the partial settlement agreements would bring several other changes beyond the base rates, we've agreed to a common equity component of 53% for each of our Wisconsin utilities consistent with our initial request.
The settlement calls for the continuation of the revenue sharing mechanism that has been in place this year.
The agreement also addresses the future cost recovery of the older units of our Oak Creek power plant first we've agreed to securitize, a $100 million of the book value of the plants environmental controls.
After retirement, we would propose to level is over 25 years.
Recovery of the remaining book value, which is approximately $400 million.
We agreed that the settling parties that the commission should determine the return on equity for each utility along with the allocation of revenue among customer classes.
We expect the Commission review by mid December .
In addition, today, we filed a rate review at one of our smaller utilities, Minnesota Energy resources.
We are seeking an overall bill increase of seven 9%, primarily driven by capital investments. We expect interim rates will go into effect January one.
Meanwhile, we're making good progress on a number of regulatory capital projects in Wisconsin, where it continues on our new reciprocating internal combustion engines or as we call them race units as well as our liquefied natural gas storage facilities as.
As we've discussed these projects are needed to support the reliability of our electric and natural gas systems.
And Erin in a red barn wind development continues to move forward in southwestern Wisconsin, We now expect to come online early next year with an investment of $160 million. This project will provide about 80 megawatts of renewable energy to our system.
Work continues on the Badger Hollow II solar facility and the Paris Solar Battery Park, we still expect these projects to go into service next year with the battery storage anticipated in 2024 of.
Of course, we'll keep you updated on any future developments.
We're continuing to make strides in support of our low and no carbon generation.
Just last month, we completed our pilot project blending hydrogen and natural gas at one of our modern race units in Michigan's Upper Peninsula.
This is a first in the world test of its kind using this technology as Youll recall, we partnered with the electric Power Research Institute to lead this research.
The project mixed hydrogen and natural gas and a 25% to 75% blend.
We are still evaluating the data however, our initial findings indicate that all project measures met or exceeded our expectations.
The units performed very well and efficiently.
As expected nitrogen oxide emissions increased our equipment was able to take these emissions out and of course carbon dioxide emissions were reduced.
Our research will help demonstrate the feasibility of this approach for potential generation on a larger scale in the future. We look forward to sharing the full results with our industry and the public early next year.
And as we've discussed we've been able and working on to bring high quality renewable natural gas to our customers.
Just last month, we signed our fourth R&D contract.
Contributing to our goal of net zero methane emissions, we plan to have RMG flow in our system by early next year.
Okay.
Outside of the utilities, we continue making good progress on projects in our WEC infrastructure segment I am pleased to report we've completed the acquisition of the Thunderhead wind farm and expect it to enter commercial operations. Later this year and we expect SaaS fires Sky win to go into service early next.
At year.
Together, the two projects represent approximately $800 million of investment.
And as Gail noted we're excited to add our first solar project to this segment with Maple flats, and with that I'll turn it back to Gail Scott. Thank you very much.
And as we head now into the final months of the year, we're narrowing our earnings guidance to a range of $4 38 to $4 40, a share and we expect to reach the top end of that range and a quick reminder, about our dividend we continue to target a payout ratio of 65% to 70% of earnings we're.
Very well within that range. So I expect our dividend growth will continue to be in line with the growth in our earnings per share next up Shah who will provide you with more details on our third quarter financials shop, all yours, thanks scale or 2022 third quarter earnings of 96 per share increased <unk> <unk> per share.
Compared to the third quarter of 2021 hour.
Our earnings packet includes a comparison of third quarter results on page 17, I'll walk through the significant drivers.
Starting with our utility operation.
Overall earnings across our regulated businesses were down when compared to the third quarter of 2021.
While weather was favorable relative to normal.
The impacted earnings.
<unk> three per share quarter over quarter.
Outside of weather earnings from our utility operations were flat quarter over quarter.
Rate base growth contributed nicely to earnings.
Fully offset by higher depreciation and amortization expense an increase in day to day, O&M and the timing of fuel expense and other items.
In terms of sales on a weather normalized basis.
Retail electric delivery and Wisconsin, excluding the iron ore mines were up 310th of percent.
Sales to our large commercial and industrial customers grew two 1% compared to last Q3.
Overall retail demand for electricity in tracking our forecast.
Regarding our investment in American transmission company.
<unk> increased five thing compared to the third quarter of 2021.
Higher earnings were mostly related to the resolution of historical appeal pertaining to the R. O E used by MISO transmission owners.
As of the third quarter and going forward.
According ATC earnings at a 10, 38% return on equity.
Earnings at our energy infrastructure segment improved two.
Third quarter of 2022 compared to the third quarter of 2021.
This was mainly driven by production tax credits from our Jayhawk wind farm that began commercial operation at the end of last year.
Finally, you'll see that earnings at our corporate and other segment were flat quarter over quarter.
Overall, we improved on our third quarter pro funding by <unk> <unk> per share compared to last year.
Looking now at the cash flow statement on page six of the earnings packet.
Net cash provided by operating activity increased 53 $9.
Coverage of natural gas costs drove this increase.
And total capital expenditures and asset acquisitions or to $1 billion for the first nine months of 2022, a $316 million increase as compared with the first nine months of 2021.
As you can see we have been executing well on our capital plan.
Looking forward as Gil outright outlined earlier.
We're excited about our plan to invest $21 billion over the next five years in key infrastructure.
ESG progress plan support seven 4% annual growth in our asset base.
Pages, 18, 19, and 20 of the earnings packet provide a breakdown of the plan, which I will highlight here.
As we continue to make our energy transition over 70% of our capital plan is dedicated to sustainability, including seven $3 billion in renewable projects and another seven $3 billion in grid and fleet reliability.
Additionally, we dedicated to $8 billion to the lab.
Chicken in gas infrastructure to support customer growth.
We also plan to invest $2 $7 billion in technology and modernization of our it systems to further generate non term operating efficiency.
This robust capital plan supports a higher and narrowed the EPS growth rate.
Fixed and half two 7% over the long term.
As Ali.
Using the midpoint of this year's original guidance at RBC.
To remind you that number is $4 31 a share.
With our strong economic development backdrop, and our continued focus on efficiency sustainability and growth.
See a long runway of investment ahead, even beyond next five years.
As Gail said before this trajectory is long and strong.
In closing I'd like to provide our earnings guidance.
For the fourth quarter, we're expecting a range of 73 to 75 per share.
As a reminder, we earned <unk> 71 per share in the fourth quarter last year.
Also let me reiterate our guidance for 2022 as Gail noted the new range is $4 38 to.
To $5 40 per share.
Our expectation is that we'll reach the top end of the range. This assumes normal weather for the remainder of the year.
With that I'll turn it back to Dale Sean. Thank you very much and overall folks were on track and focused on providing value for our customers and our stockholders operator, we're now ready for the Q&A portion of the call.
Thank you.
If you'd like to ask a question at this time. Please press Star then one on your telephone keypad. Our first question is from Shar <unk> with Guggenheim Partners. Your line is open.
Hey, guys Rock'n'roll Shar.
Hey, Darren.
We're good how about you.
Not too bad not too bad just getting ready for.
Just a couple of questions here. So your initial look.
At the five year capital plan shows pretty consistent spending at the infrastructure, but a large jump in Wisconsin on the generation side as we're sort of thinking about the drivers of the increase is it more on the IRA related side and if so are you assuming more RFP wins less reliance on tax equity more.
Regulated acquisitions, I guess, what's driving this jump and what's the mix between solar wind and storage.
Okay, Great question, Shar as always and take your vitamins before.
Yes.
Let me try to break that down into several pieces.
First as you recall because of our particular situation with our tax appetite, we never had the need for tax equity.
So just set that aside that was never in our capital plan.
But then secondly in terms of what are the big drivers of the increase from $17 7 billion to $20 billion.
Really there are three as I kind of mentioned in the script, but the first is continued.
Continued de carbonization of our electric system in Wisconsin, the retirement of older coal fired power plants in the future and the need to have carbon free generation to support the capacity needs of the state.
Sure I can give you the breakdown of the.
The renewable projects that were that were laying out of the five year plan between wind and solar and battery storage, but long story short, it's a continuation of the de carbonization of the system and very much enhanced in terms of customer affordability by the benefits of the inflation reduction Act.
Clearly the inflation reduction act with the with the huge customer benefits that I mentioned over the long term.
Really a factor in helping with bill headroom as we continue again to Decarbonize. The economy. So thats, one big chunk and as I mentioned, we're going from in the previous five year plan about 'twenty 400 megawatts of renewables for our regulated customers to about 3300 megawatts in this particular plan the second piece.
Okay.
Great.
Plan, but also as more renewables get completed.
Online in Wisconsin, there is a need for upgraded transmission and in addition to that some of the transmission system here is of an age where it's going to need to be rebuilt. So we're seeing big uptick in transmission investment needs and then the third is we had outlined a while back a $700 million plan.
<unk>.
To harden, our electric distribution network and that will continue so I hope that responds to your question. Sean do you want to give a quick breakdown of the 3300 megawatts in terms of wind solar and batteries, yes, I'd be happy to so we assumed.
About 1900 megawatts of solar.
That's a little over 440 megawatts.
Increase.
Sure to that plan, we assumed around 670 megawatts of wind and 2720 megawatts of battery. So that's that.
That adds up to about 3300, I'm going to round numbers.
Higher solar higher wind slightly lower battery compared to the prior plan.
Got it and then just a detailed break out when you provided <unk> should we just expect a step up in generation spending will be more backend loaded or what would be an increase across the periods I guess, how do we layer the thin as we're thinking about your updated growth guide.
Yes.
Well great question Shar as you know, we've got a number of renewable projects in flight right now.
So I think this is not a back end loading kind of a thing it's pretty pro rata across the five years.
Okay Perfect and then lastly is just on.
We're thinking about the infrastructure segment historically, it's been ahead of your planning budget, but we could see some softness there, especially as many of the regulated peers. It competes with and other states are now obviously more competitive post IRI first and then I guess do you agree with that and then what are your thoughts on essentially all of your P.
Here's kind of exiting these non utility businesses in what seems to be fairly healthy transaction multiples.
Sure I always respect your opinion, but in terms of future softness in our infrastructure segment, where we just don't see it we honestly don't see it and I think a good example of that is coming out of the gate on the inflation reduction Act and we mentioned to you and others.
At the inflation reduction act by allowing a choice for solar projects between investment tax credits and production tax credits that choice could open up a whole laying up of additional investment for us in the infrastructure segment and Shazam. It did [laughter] with our announcement of Maple flats, but honestly.
We don't see for for our company a.
Softness there.
Youre right. Some other companies have decided to.
I have decided to exit that business.
But be honest with you I think a lot of that.
With very good transaction multiples, obviously, but a lot of that is to avoid equity a lot of that is to avoid dilution we're not in that position.
So we think it's a very good business for us and it's meeting all of our financial criteria, but I would just add one thing that I think is really important and that we probably don't emphasize enough we're building flexibility here.
Post 2030, when a number of the contracts that are in place for these.
For these infrastructure segment renewables when they roll off.
We're going to have the potential to roll some of these projects at a very good price into our regulated asset base. So we're building carbon free flexibility for the future and carbon free capacity for the future. We will have a lot of options with these assets and frankly, given the multiples we're seeing they're probably worth a lot more than we're seeing in our own value.
Very very fair points. Thanks, Karl we'll see you in a couple of weeks.
And I look forward to it thank you shar.
Okay.
The next question is from Julien Dumoulin Smith with Bank of America. Your line is open.
Hello, Hey afternoon.
Okay.
Alright, well. Thank you appreciate it.
Yeah, terrific and still married still in Houston right.
You bet.
Thank you the new life of it.
Okay.
So.
Greg a couple of questions Great. Let me, let me just start off where we are so let's talk a little bit I mean do you think.
About the extent to the IRI opportunities. Obviously, you guys increased regulated utility outlook to $3 three of them to wait for it but is that the full extent of it I mean can we expect a little bit more and then related to that as you look at the higher rate environment. Today, you talk about meeting the financial grit, Gary with the solar investment here I mean, what kind of ROE is an IRR that you're seeing.
Out there should we calibrated recalibrate ourselves in this elevated rate environment out there or is that still a bit TBD on on this project and kind of the go forward wacky investments.
To answer your second question and I'm going to have Scott give you his thoughts as well on the particularly on the trajectory of additional renewables beyond our five year plan in.
In Wisconsin, which I think is robust, but long story short back to your question on the IRR on our infrastructure projects I mentioned, this particular project $360 million solar facility in Southern Illinois. This meets all of our financial criteria, so roughly 8%.
Levered IRR.
And again returns that exceed the returns in our regulated business and as I mentioned gives us tremendous flexibility in the 12 to 15 years ahead of us.
So.
At the moment and.
And again, we can be very very selective with these projects. We have eight wind farms that are either in operation or we'd committed to and.
Now this solar facility.
But we are again by being selective by working with great partners like in <unk> energy.
We've got a really solid future and I don't see at the moment, the kind of softness that perhaps some of the others are seeing but it may be because we can be particularly selective Scott.
Youre exactly right.
A lot of opportunity there as you saw we just announced that Maple flat solar project as you think about the long term and the benefits of the IRI as Gale mentioned in the prepared remarks, we have over over the 20 years over $2 billion of customer savings.
For the projects that we've announced that goes through 2027, I think there's a lot more opportunities as you look at the last half of the decade here. So so probably more to come a lot of good savings and when we look at that $2 billion of savings for our customers. It factors in the IRI and we think a very conservative only $4 gas costs. So the benefit.
That's our even more as we look at more renewables as we see $567 gas price.
Yeah.
So a lot of opportunity here.
Yes.
Okay. That's helpful.
Yeah, absolutely absolutely excellent.
If I if I may here, just pivoting back to the Illinois side of the equation are more focused on peoples gas in Chicago.
Any updated regulatory strategy there following the exploration of the existing pipe replacement rider at the end of next year.
No as you mentioned in the pipe.
Replacement rider, which we call the Q IP the qualified investment plan rider by.
By legislation is set to expire at the end of 2023. So we are still in the process of evaluating what what's appropriate and certainly.
With the election, and well underway in just a few days away.
<unk>.
Practically we need to wait till after the election to really have the appropriate conversations with.
With the right with the right folks the only thing I will say is.
The work needs to continue whether it's through a rider or whether it's through a rate case with the forward looking test period, the work needs to continue and as you remember.
The Illinois Commerce Commission and asked US to have an independent engineering study done more than 80% in that study, which was extensive and it took over a year to complete by an independent engineering firm that firm found that more than 80% of the remaining pipes under the city of Chicago have a useful life left of less than 50.
Years, So the work must go on or on target with it.
We will just continue to work the process as we move into next year.
Alright fair enough I'll leave it there. Thank you guys.
Thanks, Julien take care see you.
The next question is from Jeremy Tonet with Jpmorgan. Your line is open.
Greetings, Jeremy how are you doing today.
Okay.
Hi, good afternoon, it's actually rich Sunderland on for Jeremy Thanks for the time Gail.
Youre welcome.
Okay.
Thinking about the narrowed growth rate here I'm curious on a couple of different considerations. One is you walk from that greater than the 7% asset base growth I know you typically outlined parent financing cost as the delta down to the growth rate, but that's that's ticked up at the high end of the EPS growth remains 7% and thoughts around.
The consideration.
Moving that higher than 7% or what else, we might not be thinking of in terms of offsets from from asset based Etfs.
Okay.
Well it kind of starts well first of all as you know our new six 5% to 7% growth rate is probably the tightest projected growth rate in the industry.
That's a reflection of our ability to execute our ability to build projects on time and on budget our track record of consistency.
So I see the narrow growth rate.
As is again very very strong and our confidence of our ability to deliver.
In terms of the actual math.
You start with as you know you start with what is the average growth rate in the asset base and that is seven 4% a year and then we back we have no need for equity, which I think is a particularly distinguishing factor for us in the industry.
But we have to back off financing costs not just at the parent but also debt costs at the individual utilities and infrastructure segment. So you put it all together and with our with our what I think is our conservative interest rate assumptions. It gets you to that six 5% to 7% growth rate shot anything you'd like to add.
No I think you've covered it.
I hope that helps to respond to your questions.
No that's very helpful and maybe just picking up the last thread there on the financing side.
Where do you see episode of debt standing currently and maybe through this planned period as well.
In consideration of the higher Capex here.
Yes, sure it's got the detail for you.
Yes, we are still remember I talked about it in the last quarter earnings call that <unk> provides.
On the sheet flexibility from several fronts.
PTC for solar than Standalone ITT for battery investment and also the transferability or other things provide more flexibility for us. So basically the financial plan accommodate two things one is IRI to a higher interest rate.
And also the higher capital and we're still looking at the target.
That go to that over the longer term.
And by the way the entire interest rates are already factored in the Wisconsin settlement.
You probably all revenue.
Yeah.
Got it thank you very much for the color there.
You're more than welcome.
The next question is from <unk> Chopra with Evercore ISI. Your line is open.
The Eagles spill undefeated but.
But I heard that you were not going to change your jersey until they until they loss, so I'm, hoping that you've taken a shower anyway.
No no comments.
Okay.
Yeah.
Don't think seger just.
I wanted to quickly follow up Sean Thank you for sharing the.
The three three gigawatts worth of renewable generation additions.
I just wanted to kind of get a sense of what's included.
In the current rate settlement and then what should we how should we think about regulatory approvals.
In terms of timeline sort of key dates for us to watch as you execute on that one three gigawatt portfolio that you just articulated.
<unk> got a full breakdown I can tell you, though is a pretty significant percentage of the three three gigawatts is already in flight.
But we have a number of them coming and <unk> got the breakdown for you yeah. So the out of the 3300.
The.
With that we will file in a few carries about 'twenty 100 that they do.
These are things that over 1200 now the latter already either under development or we have already filed.
And we will address that.
T J.
23, and also we have to be opened in 2004.
Got it.
1200 already underway and then 'twenty 100, whats the kind of what's the timing of those are those like you said reopener in 'twenty four so are those like 25 and beyond type.
Sort of approvals.
I think like Gale mentioned this is a pretty balmy generation radiation may shaping plan. So I think our spend in Wisconsin generation pretty.
Pretty balanced over the five years. So you would think that it incremental each year over the five year period.
Yes, yes, absolutely.
So again, we have a number of projects in the pipeline.
We're very optimistic.
It really I mentioned earlier.
The benefits of the legislation.
In terms of customer affordability are really significant.
Got you might want to just talk about the timeframe I mean, the quicker we put these in the quicker the benefits flow sure absolutely Gail so.
As we talked about earlier, we have three projects that are actually in construction right now and then there's two sitting at the commission right now waiting for their review.
To go through the process, but when you look at the 2 billion of dollars of savings as we get these in those production tax credit as you can imagine they're probably starting in that 'twenty five 'twenty six 'twenty seven timeframe as the projects start going into service and we are already factored some of those.
And for the ones that are in construction now so.
About $2 billion of savings over the 20 years, but as you remember using those production.
Production tax credits for solar or we're going to be able to give those back to customers much faster over 10 years 10 years and it will hit right away versus 30 years with the investment tax credit so very favorable for customers long term.
Okay.
It helps response thank you.
Take care. Thank you.
The next question is from Michael Lapides with Goldman Sachs. Your line is open hey.
Hey, Mike.
Thank you. Thank you Gail good good to hear from you as always.
Sorry to cut you off there.
I really had two questions one was on the gas side and one on the financing side. This is one of your first five year plans.
Capital spend on the gas distribution system not only it didn't go up but go up it was flattish maybe even down a little bit while if I go back and look over the last number of years, you had at increasing levels of gas related spend.
Capital spend for reliability purposes, not just Illinois, Wisconsin as well just curious what you're seeing there and what some of the drivers behind that are.
Sure and.
And I'll ask Scott and shot and give their view as well, but long story short Michael you're correct. When you look at the allocation of capital across the five year plan.
Gas distribution part of that capital is pretty flat.
But I think it reflects two things first of all it reflects the real investment need and opportunity as we continue to decarbonize assist to the electric system in Wisconsin.
So that is a driving need which is really growing the capital portion.
So renewable generation is way up in the capital allocation compared to prior years, we've continued to make progress, but again with the with the benefits of the inflation reduction Act and our continued focus on retiring older coal fired units.
The opportunity and the need for renewable investment has grown so that's in my mind. The biggest factor and then the fact that the gas distribution pieces flat I think reflects two things.
One reflects that we have a quite modern system.
But we're also bolstering that system and we're not too far from the end of building.
LNG storage facilities for our gas distribution network in Wisconsin.
<unk> spending I mean, where construction is going very well and that spending will tail off as those LNG storage facilities come into service.
Then of course, the spending on the pipe replacement program in Chicago.
Continues apace, but at about the same level, Scott anything you'd like to add your exact youre exactly correct deal I think that the key item is to remember, though it looks by natural gas storage tanks are going to be in construction going well going to add capacity for our distribution system.
Majority of that spending is being done this year.
Got it and then a follow on question just for holding company related debt as well as get at theater key infrastructure segments. Just can you remind us kind of what's the percent of raw dollar amount that's floating at either of those two boxes and what's the level of maturities and kind of how you're thinking about refinancing levels just given the broader.
Move in rates.
Yes, sure. It's got the exact details sitting right in front of her but let me frame that for you because I think you're asking a very good question and again, it's an area, where I think we separate ourselves from some other companies because as you know we've always used conservative financing.
Techniques conservative financing plans and so our percentage of floating rate debt compared to the total debt outstanding is really is really quite low. So we will let you I'll give you the details.
Yes.
Yeah.
Have a target holding company total debt.
30%.
We're managing around that number and to gail's point, the risk capital percentage, it's pretty modest for us. So I think that helps us from a rising interest rate environment and again, we try to assume pretty conservative interest rate in the forecast period, both at the utility.
Company Rocky level so.
I think we were attracting the interest rate exposure that way.
Got it and then last question just on the increase in the ATC. The transmission spend should we assume that a large chunk of that is a little bit on the backend loaded side, just due to siting and permitting.
Actually if you had asked that question two years ago, or even a year ago, I think Scott and I would've said, yet, particularly with tranche one from the MISO long term planning process. We would have probably said its way out into the decade, but now I think youre going to see some of that spending really uptick in 2025 and beyond.
And we will be putting a slide together in our new investor deck with you are actually going to start seeing it.
25, 2006, as it relates to tranche, one, but actually some additional investments in American transmission company starting in 2024. So it's a good long plan in the American transmission company just came out with their 10 year assessment that even shows a longer a longer growth period here. So it's.
Up about 50% from last year's 10 year assessments, so a real positive and I think it would be a longer term plan starts earlier and longer.
And part of that Michael you're asking a great question and part of that is because some of the early opportunities that have been identified through the MISO tranche, one are really upgrades or additions or expansions on existing rights of way with transmission already in place and that helps tremendously in terms of just being able to get things moving.
<unk> not have to get new permits in terms of new rights of way. So there is there is a real positive development coming out of tranche. One that you see beginning to be reflected in our five year plan.
Got it thank you guys much appreciated.
Thank you take care Michael.
The next question is from Steve Fleishman with Wolfe Research Your line is open.
Hey, good afternoon.
Did you survive the Wolfe conference you had a chance to.
Go to lunch at all.
I'm just about to have lunch finally, but.
No.
You have to do it again next year is another year.
So.
Actually I think last time I saw you Gail you talked about.
Sitting around waiting for panels to come out of a warehouse.
Maybe you could just kind of talk a little bit about.
How youre doing on the kind of current renewables projects in terms of just the supply chain and you flip back.
Yes, great question and you're right. The last time, you and I were together actually at the Wolfcamp, France in late September .
We're talking about.
How are we going to how are we going to keep for example, the construction of Badger hollow two very large regulated solar farm in southwestern Wisconsin under construction, but badly needing delivery of solar panels.
And Scott has some good news for you on the developments out of that warehouse in Chicago.
At scale, so we've got.
<unk> got about 50 megawatts in a warehouse in Chicago. The first 30 megawatts have been released they just saw a picture yesterday theyre starting to be assembled onsite. So thats really good news.
Working on the remaining 20 megawatts. So construction continues at that site and we have orders placed now we figured out we think we have the path figured out for the other solar panels. The orders are placed and.
Getting things moving along here so it's great to see them start to <unk>.
Construction at the <unk>.
Parasite.
Okay, and so just like overall.
A timeline for startup where are you now versus.
Where you might have been.
Before.
On Badger hollow.
Yes, we're still looking at in early 2023.
It will all depend upon the weather and the supply chain, but right now we think we have a path for supply chain.
There may even be more of a factor here in Wisconsin for Badger hollow too, but we're watching it very closely here.
Right now, we're not really changing our timeline at this time.
And the good news, Steve as Scott said as things are starting to move.
Okay for the first time in months.
Okay.
Okay. That's good.
And then just one other question I know you've got a governor election.
Wisconsin next week, so just and I am sure energy has not been one of the top three for $10.
Topics.
In the election, but just curious if if it were to switchback.
<unk> do you see any change in emphasis in the state that would impact your business.
The short answer Steve is we really don't see a change.
The race is by all public polling and all of the information we've seen the race is tough.
Toss up.
Depending upon which poll you look at there is a one or two percentage point difference in terms of support for each of the candidates.
Governor <unk> of course, the sitting governor has been very supportive of our transition plan or de Carbonization plan, but also understands that natural gas is going to be needed for reliability, both in heating and power generation in Wisconsin. So the governor has had a very balanced approach.
And as you say energy is really not a major issue that's being debated I think the top two certainly would be crime and inflation.
The Republican candidate Tim Michaels.
I think the best description of Tim Michaels as he is an infrastructure got it.
He and his family.
I think his grandfather, perhaps started Michael's construction. They now have 8000 employees and they literally are an infrastructure construction company. They worked on the Keystone pipeline.
Ease of individual that understands the need for reliable infrastructure. So.
Whichever way the election goes I think we're going to be in very good shape.
Yeah.
Great. Thank you.
Thanks, Steve take care see you an EI.
You bet.
The next question is from Anthony <unk> with Mizuho. Your line is open.
Anthony.
And behavior.
I'm still married delivered in Staten Island Julien.
Well there were two for two that I am really glad to hear that.
Alright.
I was going to ask you why are you talking to.
A quick question most of have been answered just I guess on inflation.
You guys have maintained guidance youre navigating all the challenge that maybe some others are.
Stumbling Oliver just what what is the most challenging part of inflation handling the cost pressures on labor and material supply chain or is it really just interest rates.
What gives you the biggest.
Going to bed at night.
These inflation pressures.
Well and we'll ask Scott and shot I'll give you their idea of what keeps them up at night I would say for us.
In my mind.
We've been most concerned about getting solar panels mood getting solar panels to our construction sites.
I mean for most of the projects that we.
We have underway and we've got several billion dollars of projects underway.
We have locked in much of the much of the cost.
Theres, obviously, some movement in solar panel costs et cetera.
But to me the biggest thing that was keeping me up at night was actually being able to complete these solar projects that are important to our capacity into our meeting summer demand.
Because of the holdup in and the freezing if you will of the movement of solar panels to me that was the biggest issue on interest rates.
They have moved dramatically.
Probably a classic British understatement.
But again given the forward looking test periods in Wisconsin.
<unk> said earlier, we projected.
Reasonable interest rates given the inflationary environment, we're in and that's part of the rate settlement that we've come to with the major parties in the case. So in terms of interest rate increases I think we are.
We're covered there because of the whole mechanism of putting the rate cases in place.
We're starting to see solar panels move.
Scott I assume we're going to see some increase in some other commodity costs that affect the overall capital program No Thats exactly correct Galen and like you said the solar panels are probably the biggest one to see them move and start to getting on site at Badger hollow to getting put in service is really positive we are seeing some some cost increases from inflation.
We of course factored that all into our rate case filing and our filing a supplemental filing we did in the end of June to factor that in the other item.
And the team has done a great job from the supply chain to our operations really working with our vendors.
Supply chain and delivering different distribution parts, we haven't had any significant issues theres just a lot of.
Day to day conversations we can be conversations to make sure the supply is and what we need for our construction move forward. So.
Everything is going along really really well here, but all of that inflation was factored into the net test here in.
Anthony It was great to see one other quick thought for what it's worth it was great to see in the last few weeks.
Pretty sizable decline in spot prices for natural gas.
So perhaps the winter gas costs will be less onerous than.
And then some earlier projections.
And I will say, though one of the things I'm very pleased about we've talked with the state regulators and are in our state commissioners about this.
We're in good shape from a supply standpoint for winter heating for natural gas.
<unk> seen in some other parts of the country, particularly in the northeast, where they where that may not be the case regardless of price.
No.
I think we're going to see perhaps some moderation in natural gas prices overall for the winter for heating season.
Our supply that we believe we can count on and keep people warm.
Great and if I could.
One last one.
The 48 before you end up with a Jimmy Carter, sorry to keep warm.
But.
Just.
Any change in valuations publicly public versus private valuations in some of the assets now that we've seen rising rates I am sure you get a lot of bankers pitching you have a lot of assets to buy or sell and just wondering if youre seeing any change as rates have risen that maybe the private market use some assets is less desirable.
This recent rise in rates.
Well, let me answer it this way.
In some ways the increase in interest rates is helpful to us on the infrastructure side of the business because some of the competitors that we might face for some of these high quality assets.
On a lot more of that in there and their capital plan than we do so again, we finance our infrastructure segment, just like we finance, our overall enterprise about 50% equity and 50% debt roughly.
So as interest rates have risen that changes the economics.
Of a competitor for an infrastructure project that is loading on a ton of that we do.
Don't do that we haven't done that.
And so I think actually in <unk>.
Some perverse way the higher interest rates has even been beneficial in terms of our competitive position for the infrastructure segments.
Scott Shaw anything you'd like to add.
No I agree Gail I think are our approach our consistency really helps as we look at the infrastructure and as you can see we were able to announce another deal day.
Yesterday.
And one that we're very thankful for the time.
Sure.
Thanks, so much at a time looking solid continued.
Sounds great. Thank you take care.
The next question is from Nicholas Campanella with Credit Suisse. Your line is open.
Greetings, Nick how are you.
Hey, great. Thanks, good afternoon.
Reporting from Brooklyn, not married.
Well, let me ask this are there any are there any prospects in this the IRA help you and I are engaged.
Alright.
Oh man.
Yes.
So listen I, just I wanted to just a couple of follow up questions.
Just going back to <unk>.
<unk> comments on just the credit side, and reflecting IRA and I know you are still kind of working through the episode of that target over the long term.
Some of your peers have communicated a cash flow uplift in the near years of the five year plan and I'm just curious as you see it today is that a similar dynamic thats going on in WAC.
Okay.
U S short I'd give you her view absolutely if you keep.
Capital the same and just sell Kathy IRI impact if you just layer.
On top of existing capital planning you definitely would see that uptake time cash flow profile for what I as I said just now it allows us to test.
The increased capital plan and maintain the long term.
That metric.
Patrick.
That makes sense. Thank you.
Yeah.
Yes.
Got it alright, thanks, a lot and then Chuck.
Just while I have you you mentioned the 10, 3% return on equity at ATC going forward.
Does that not include any adders and just how do we think about kind of total ROA.
That's a total ROE of 10, three eight to be.
To be precise that includes the 50 basis an adder.
Got it Okay, and then I guess my last one is a follow up on.
Kind of the M&A question, but more on the regulated side Gail <unk> had a really successful M&A playbook over the last decade, it's driven size and scale efficiencies to your customers and for investors. In my question isn't about your main criteria, whether or not its changed or not but just like how is the executive team viewing M&A in this current environment with <unk>.
Cost of capital being so high.
Obviously, the industry is dealing with customer bill pressures since becoming more apparent across every state, but does that drive more consolidation in your mind and create opportunity or just how should we kind of think about that from a higher level.
Yes, it's a great question.
I'll bore everybody, but I will not repeat the three criteria you all know them, but maybe if we can put it on the wall.
But to your question, which is a good one I do think over time.
And history shows that we are in a consolidating industry and goodness. If you turn the clock back to $19 95, there were literally 100 publicly traded investor owned utilities like ours in the United States today, there are roughly 37%.
So we are in a scale business scale and efficiency matter, particularly in an era of increased capital spend scale and efficiency matter.
Because you know the formula it's one for rate we call. It the power of 1% to eight for every dollar of O&M efficiency, you can drive through the enterprise It makes room for $8 of capital without customer rate pressure.
So over time I do think we will continue to consolidate in the industry.
But in the interim here.
Folks are dealing with a fairly sizable I think cross the board fairly sizable capital plans and the question is.
Can those plans to be more cost effectively implemented.
If you have greater size and scale and a strong balance sheet. So I think over time. The answer is going to be more consolidation I would expect though it would look more like <unk>.
<unk> modified modified mergers of equals as opposed to the old style of M&A, which was in some cases driven by that.
Driven by leverage.
And driven by low interest costs. So I think the flavor of M&A, maybe different long term.
I suspect it will be.
But it will come in fits and starts at least that's my view and thank you for the question.
Thanks, Thanks for the answer and looking forward to seeing you down in Florida take care it sounds great. Thank you.
The next question is from Jeremy Tonet with Jpmorgan. Your line is open.
Hi, there good afternoon, sorry about missing it before.
No problem one of your one of your colleagues was impersonating you I thought it was all over again.
And yes, it's still married Stuyvesant Town, New York City for keeping track here, which it seems like we are but anyways moving on.
Okay.
Okay.
Higher level here.
Just wanted to get.
Touching your expertise in the space right.
Thinking about the transmission needs broadly after talking about significant customer benefits from IRA.
How do you see the seams issue impacting transmission development overall, and just any other thoughts on how to address this or other roadblocks really effectively get interregional.
Projects in planning going.
Yes, Jeremy interesting question.
I'll give you two thoughts for what they're worth the first is the.
The seams issue I think goes back to the days of Edison.
There had been seams issues for as long as I can remember in this industry. The regional power grids. If you will I think have made some progress but the seams issues are real and I think it is a matter that FERC is very interested in resolving these things take a tremendous amount of time, but.
But my guess is that youre going to see much more inter power grid cooperation or forced cooperation one or the other.
These themes issues, while they will continue on simply because of the nature of the grids are going to be less and less and less in my view over the next 10 years I think they simply will have to be Scott your view on that.
No I agree with you Gail and I think as more and more transmission gets built they're going to see is even natural to help more and more of it together. So it may fall into place, but it will take a long time.
The other point I would make is that the gestation period for new transmission thats, not an upgrade of existing transmission or an expansion of existing transmission. The gestation period is simply just to law.
We've talked about this there is a there was a transmission project for example that was first envisioned.
More than 10 years ago in our region.
That is still.
Not fully constructed it's gone through all of the approvals, but it is going through a very argue was court process right now.
I think there are two areas that really have to be worked on to continue to decarbonize the system and keep keep electricity reliable across the country. One is the seams issue, but also is just the lengthy period it takes to.
So basically build greenfield transmission hope that helps.
That's very helpful. I'll leave it there thank you.
Thank you.
Okay.
Our final question for today is from Vedula Murti with Hudson Bay Capital. Your line is open.
Fidelity you are last but not least.
I appreciate that thank you.
How are you doing vedula.
I'm okay.
In terms of.
The renewables Buildout.
Can you can you help us in terms of like over a period here.
How much the.
Capacity factor.
That you'd be able to get from <unk>.
So for sure.
Availability and things of that nature.
Through that then because if we go back to ERCOT early on Wednesday.
10, 12, 15, whatever stuff like that so.
<unk>.
But kind of rule of thumb is in that and as we go forward with it.
<unk>.
Emerging technologies actually provide a step function up.
Well first of all one of these days when we're on a call with you and I ask you how you're doing I know youre going to say wonderful and award winning but we'll wait for that day.
Okay, and we'll do it.
I'm not sure I completely understood your question.
In terms I think what you were asking but please clarify if I'm off base here I think what you're asking is do we have an opportunity to repower some of our existing assets to get more capacity credit in the Midwest power grid is that is that your question vedula.
The second part and the first part is the 3400 megawatts, both wind and solar what type of capacity clarity do you anticipate now from MISO.
As to what might have been like five years ago or something like that in terms of the improvement.
Okay, well, we have the MISO has been very specific about the particular capacity credit for a particular type of renewable Scott exactly Gale and I think.
When you think about when that peak capacity in the summertime is around $14 $15, 16%, where solar is in that 65% to 70%, but as you know we're going through a process now looking at more seasonal capacity. So you need to look at the fall.
This spring the winter in December and we're currently working through all those I think the final discuss the final information is going to come out closer in December and how these seasonal capacities will be looked at.
But.
The capacity here.
At 14%, 15% for the summer for the win.
And that $65, 70% for the for the solar.
I hope that responds to your question Videla.
Yes, and I guess, one last thing to add to that if to the extent that you have repowering opportunities I guess.
I'm wondering how that's going to compete with.
Capital allocation relative to newer projects.
Yes.
Yes.
As we go forward here, especially as you have more critical scale.
Cross across that business line.
And there will be some repowering opportunities no question, particularly with some of the older renewables when I say over 10 to 15 years ago.
For example, we are the largest owner and operator of wind farms in the state of Wisconsin, and some of those came on more than a decade ago. So as the technology has improved and is.
As we.
Wind turbines will become even more efficient for example, they're going to be opportunities going forward, but long story short I don't see this as crowding out I don't see that opportunity in any way is crowding out because we have so much need to reshape our generation system and to continue to meet those goals the aggressive environmental goals of <unk>.
80% reduction in <unk> emissions.
Done in a way that's affordable reliable and clean by the end of 2030.
Okay. Thank you very much LLC in Florida.
Terrific. Thank you so much ladies and gentlemen that concludes our call for today, we look forward to seeing you at EI and in the meantime, thanks again, everybody take care.
Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.