Q2 2023 WEC Energy Group Inc Earnings Call
Good afternoon, and welcome to W. E C Energy group's conference call for second quarter 2023 results. This call is being recorded for rebroadcast and all participants are in a listen only mode. At this time before the conference call begins I remind you that all statements in the presentation other than historical facts are.
Forward looking statements that involve risks and uncertainties that are subject to change at any time.
Such statements are based on management's expectations at the time. They were made in addition to the assumptions and other factors referred to in connection with the statements factors described N. 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 contracts.
And played it.
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 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 Gale copper executive Chairman of W. E C Energy group.
Well good afternoon, everyone. Thank you for joining us today as we review our results for the second quarter of 2023 first I'd like to introduce the members of our management team who are here with me today, we have Scott Lauber, our president and Chief Executive Charles Lu, Our Chief Financial Officer, and Beth Straka, Senior Vice President of corporate Communications.
And Investor Relations.
As you saw from our news release. This morning, we reported second quarter 2023 earnings of 92 cents a share after a down first quarter marked by one of the warmest winters on record we delivered solid results in the second quarter and we're firmly on track for a strong 2023 today, we are reaffirming our guidance for the.
A year the range is $4.58 to $4 62, a share this of course assumes normal weather going forward.
And as always we're focused on the fundamentals of our business financial discipline.
Operating efficiency and customer satisfaction.
During the second quarter. We also continued to move forward on our major initiatives, including the investments outlined in our 20.1 billion dollar ESG progress plan.
As we've discussed the plan is based on projects that are low risk and highly executable, we expect to quadruple the amount of renewable generation for our regulated customers add highly efficient gas fueled capacity to ensure reliability and continue to harden our delivery networks.
Scott will provide you with more detail on several specific projects in just a moment.
As a reminder, we projected our ESG progress plan will drive growth in earnings per share of six and a half two 7% a year and as we've discussed there is no need to issue equity for this $28 $1 billion of five year plan.
Now over the past few months. Many of you have asked about the trajectory of our next five year plan.
Our updated plan will cover the period 2024 through 2028 of course of growth and demand for capacity and energy drives our next capital plan significantly higher then we'll evaluate all our financing options. In addition to incremental debt and refinancing opportunities or options could include.
Who is accessing the equity market through our dividend reinvestment plans employee benefit plans and at the market programs I would stress that at this point, we do not see the need for any block equity offering.
Again as a reminder, any equity needs will be driven by growth and would support our long term growth projections.
As you would expect we are on schedule with the development of our next five year plan and as usual we will share the details with you in the fall.
Now, let's take a brief look we'll switch gears and take a brief look at our regional economy.
We're still seeing a very strong labor market in Wisconsin in June the state added 7000 private sector jobs. The unemployment rate came in at 2.5% well below the national average and the Labor force participation rate rose for the fourth straight month in Wisconsin to 65, 3% very solid.
Numbers.
We're also encouraged by the pipeline of economic activity in our region last quarter, you heard that Microsoft plans to make an initial investment of $1 billion to create a new data center campus. This new complex will be built south of Milwaukee, and the Wisconsin Innovation Park, where Fox Con is located micros.
Microsoft has purchased 315 acres in the area of three of the park and is moving full speed ahead.
Fact earthwork at the site began just a few days ago. So along with American transmission company were working closely in fact on a weekly basis with Microsoft to determine the full extent of the energy infrastructure that will be needed to serve this development.
We're excited about supporting Microsoft as the company moves forward with a major technology investment and we'll update you has the planning proceeds with that I'll turn the call over to Scott for more information on our regulatory developments and on our operations Scott All yours.
Thank you Gail I'd like to start with a few updates on the regulatory front.
In May we filed a limited reopener to set 2020 for rates for our Wisconsin utilities.
Filings address the recovery of capital and debt Spence for certain projects going into service this year and in 2024.
These are renewable facilities race generation and LNG reliability investments the projects have already been approved by the Wisconsin Commission the.
The return on equity and the equity layer are all set and are not up for consideration as part of this proceeding.
We expect a decision from the commission by the end of this year.
And as you recall, we have rate filings under review in Illinois for peoples gas and north shore guests.
After nine years without a base rate case at peoples gas, we're making these request for 'twenty 'twenty four to support our investments in critical infrastructure.
In mid July the staff filed its rebuttal testimony recommending a 983% return on equity and an equity layer of 58, 3% for peoples gas.
This was consistent with the initial recommendations from the staff, we expect a final decision by the end of the year.
And moving to the other states. We are very pleased that we have reached a settlement agreement in our rate reviews at both Minnesota Energy resources, and Michigan gas utilities.
The Minnesota Commission is considering a settlement that would provide a seven 1% increase in base rates as a quick reminder, that space at a $9 six 5% return on equity with an equity layer of 53% and we're pleased to update you then in Michigan, we have reached a unanimous settlement.
And the details will be made public later this week.
We expect final condition to approval by the end of the year.
Meanwhile, we're continuing progress on a number of regulatory regulated capital projects at the beginning of June we closed on our first option of West Riverside Energy Center for $95 million.
This adds 100 megawatt of efficient combined cycle natural gas generation to our portfolio as you recall. This plant is in operation and the purchase price was based on book value.
And then the next few weeks, we plan to file a request to purchase another 100 megawatts of Riverside capacity under our remaining option.
We also put a 128 megawatts of new natural gas generation online last month.
As you recall, we invested $170 million to build this generation at our existing western power plant site in Northern Wisconsin facility uses seven reciprocating internal combustion engines or as we call them race units.
Elsewhere in the state work continues on the Badger Hollow II solar facility in the Paris, and Darien Solar battery parks, the Badger Hollow II site has begun receiving panels using non Chinese polysilicon.
Also we continue to work on securing custom release of panels from a bonded warehouse in Chicago, and we're still expecting Badger hollow two to go into service late this year or early next year with Paris Solar Park to follow in addition work has begun in the dairy and solar facility, which is <unk>.
And to go into service in 2024.
We'll keep you posted and updated on future developments with that I'll turn you back to Scott Thanks, very much as.
As you May recall, our board of directors at its January meeting raised our quarterly cash dividend by seven 2%. We believe this continues to rank our dividend growth in the top decile of our industry.
We're targeting a payout ratio of 65% to 70% of earnings we're right in the middle of that range now so I expect our dividend growth will continue to be in line with the growth in our earnings per share next shot will provide you with more detail on our financial results and unveil our third quarter guidance all yours.
Scale, our 2023 second quarter earnings of 92 per share increase of one penny per share compared to the second quarter of 2022.
Our earnings package includes a comparison of second quarter results on page 15, I'll walk through the significant drivers.
Our earnings from utility operations for four cents above the second quarter of 2022 first weather had an estimated negative impact quarter over quarter.
Higher depreciation and amortization expense and interest expense added another nine.
Madison Varian.
These negative variances were more than offset in the quarter.
Faith growth contributed <unk> 11 to earnings.
This includes the base rate increase.
Thompson utility as well as the interim rate increase on Minnesota Energy resources, both of which were effective January one 2023.
Additionally, timing of fuel expense improve our earning iron nickel.
And lower day to day, O&M taxes, and other items resulted in a <unk> <unk> improvement.
Before I turn to earnings at the other segment, let me briefly discuss our weather normalized sales for the quarter.
You can find this information on page 11 of the earnings packet.
Retail electric deliveries and with Samsung, excluding the iron ore mine were down 6% on a weather normal basis.
This was driven by lower sales volume for large commercial and industrial customers.
Residential usage again on a weather normal basis was flat quarter over quarter, which is in line with our forecast.
Also sales to our small commercial and industrial customers were up one 4%, which is ahead of forecast.
Earnings at our energy infrastructure segment improved in the second quarter of <unk> 23, compared to the second quarter of 'twenty two.
This was largely driven by higher production tax credits as a result of the acquisition of renewable project.
Finally, you'll see that earnings at our corporate and other segment decreased five.
Primarily driven by an increase in interest expense.
This was partially offset by favorable Rabbi trust funding and some tax and other items.
Remember Rabbi Trust performance is largely offset in O&M.
Overall, we improved on our second quarter performing by one penny per share compared to last year and by eight per share compared to the midpoint of our Q2 guidance.
Looking now at the cash flow statement on page six of the earnings packet net cash provided by operating activities was relatively flat compared to the prior year.
And total capital expenditures and asset acquisitions were $2 $1 billion. During the first half of 2023, an increase of more than $1 billion in the first half of 2022.
This was primarily driven by acquisition of generation projects in our regulated and infrastructure segment.
Now, let me give you the guidance for the third quarter.
Expecting a range of 88 to 90 per share visitor counts for July weather and assumes normal weather for the rest of the quarter.
As a reminder, we earned <unk> 96 per share in the third quarter last year, which included a positive two from weather and a 5% pickup related to the resolution of the MISO complaint.
Complaints.
As Gil mentioned earlier, we are reaffirming our 2023 earnings guidance of $4 58.
So $4 62 per share assuming normal weather for the rest of the year.
As a reminder, largely due to timing of O&M and fuel expense, we expect earnings in Q4 to be materially better in Q4 of 2022.
With that I'll turn it back to Gail alright. Thank you overall, we are on track and focused on providing value for our customers and our stockholders operator, we're ready now for the question and answer portion of the call.
We will now 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. Our first question will come from the line of Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, Julien Julian before we start.
Before we start I know a great puppy trainers. So just let me know.
Yeah.
Yeah.
Okay.
Julien are you still with us.
Julien Your line is open.
Can you hear me now Darius Gulfport, we can begin.
I thought I heard a dog barking in the bank.
[laughter], sorry about that I don't know what happened I thought I was on mute there.
Yes.
I would just I would just say Julien Julian I would just say on that I know of great Puppy trainer. So let me know.
Alright, im going to put it duly noted Sir duly noted I appreciate it and by the way Congrats guys on all the all the update there really nicely done.
Do you think you see that effect.
You think about the settlement here in Michigan, how do you think about Illinois here and the ability to settle that out.
At least in part here as you get through the bulk of the hearings here in the near term.
Any opportunities and also any thoughts here on the legislative side going into 2024 for.
For gas in Illinois as well.
Okay I appreciate the questions Julien very much.
Tackle the first one first and that is any potential or possibility for a.
Rate settlement, and our peoples gas and north shore gas cases in Illinois. So as many of you know the way the process really unfolds during normal rate reviews in Illinois.
Historically settlement Windows really don't occur are really don't open until the administrative law judge has prepared a draft order.
And if I remember correctly the schedule for that administrative law Judge draft order.
Probably it looks like a late October early November Scott is agreeing that thats. The case. So if there's a settlement opportunity I think those discussions would take place probably in the November timeframe.
So we will see again as Scott mentioned in his prepared remarks, the staff has reiterated its position with a 98 three rich.
Turn on equity recommendation and an equity layer higher than what we have at peoples gas today. So I hope that responds to your question and then as far as legislation related to gas in Illinois.
We just have to see what.
What takes place.
And but first things first we continue to work on a positive resolution of the cases currently pending before the Illinois Commerce Commission hope that helps Julien.
Yeah.
It certainly does.
And then just quickly if I can any thoughts convert chairman I heard your opening comment scale.
Curious if.
Open to following the trend across the space.
Yes.
As we look at our financing package that will be needed to support our new five year capital plan I mean, we will look at it it could be part of the mix, but again I think it really depends upon the circumstances at the time, we havent ruled it out we've followed the we follow the companies that have used <unk>.
This particular financing and I think you saw one announced today as a matter of fact.
So we haven't ruled it out we havent ruled it in but it certainly will be part of what we look at going forward.
Awesome well leave it there I'll follow up with you go alright take care it sounds it sounds good thanks Julien.
Your next question will come from the line of sharp <unk> with Guggenheim Partners. Please go ahead.
Jared you didn't do any you didn't do any permanent damage to those portions digi.
You hope that southern company that not me.
Well I noticed I noticed they're taken a charge this quarter. So I was a little worried about what you did down there.
We will have to wait for that one.
Thanks.
I know you mentioned the Microsoft facility could be in service by late 'twenty for early 'twenty, five, which obviously that overlaps with your existing five year plan through 2007 should we be thinking about Microsoft related investments is something thats separate and incremental to the current five year plan or is that.
Focus on really maintaining that seven 7% asset base growth as you manage customer affordability. So.
Other words, so could other base spending be pushed out to make room for Microsoft related expenses.
Well, great question, Shar and first off.
I don't think really just given the magnitude of the construction that Microsoft seems to be planning my own belief is we won't see the Microsoft campus in operation in 2024, I think thats just too much of a stretch my guess, although the company is still very much in it.
Refining its plans.
I guess it is fourth quarter 25 early 'twenty six would be my guess for the first element of the plan that Microsoft is putting together to be operational and then secondly to your question about would.
The Microsoft investment that we need to make to support their energy needs and reliability would that would that investment be incremental to the plan absolutely incremental to the plan.
<unk> about that because it was not in our current five year plan.
Although there are many moving pieces at this stage of the game, but I would just say this is a really positive exciting opportunity.
For a major new high Tech investment in our state.
Okay perfect.
We shouldn't look at it.
Building out other base related spending as you're managing rates.
No absolutely I mean think about it as a <unk>.
Question, Shar, but I would think about it this way.
I mean, clearly with the way our.
Our customer rates are set.
Demand for Microsoft I mean, essentially I mean, given the rate charges that Microsoft would receive they will pay their fair share of whatever additional capacity and energy is needed.
So it wouldn't be a crowd out type of a type of a factor at all in my opinion.
Okay, Perfect and then just on the equity common scale I, just wanted to get a little bit of a better sense on timing and then trigger is it like would it be Microsoft related spending because I have to imagine that the facilities.
Whatever 'twenty five 'twenty six facility the generation needs would be before.
Before that transmission and distribution needs would be before that so what's the trigger for incremental equity is at Microsoft or is there other things we should be thinking about.
I think it's both I mean, certainly if we need to add significant capacity to support Microsoft.
Operation here, but there are other things going on.
The other other economic developments that have occurred for example.
I mean, we talked a lot about horrible, but they are now up and running and they've told us they will produce 132 million pounds of gummy bears.
Next 12 month period, so there's a good bit of economic activity going on so if you think about if you think about transmission and we're going to start to see in the next five year plan of the impact of tranche one from the MISO planning process. So I think we're going to see an uptick in transmission investments I think we're going to see clearly some addition.
Capacity need we need to continue to harden our distribution networks. There are a lot of moving pieces and all of them moving in a direction of a stronger capital budget.
And as Scott and I have talked about a stronger for longer in terms of our of our continuing growth projections.
Okay, perfect I guess that will wait for <unk> should that should be an interesting update and for the record Gail I did not crash courses. Thanks guys.
Yeah.
Rock'n'roll Shar.
Your next question will come from the line of <unk> Chopra with Evercore ISI. Please go ahead.
Hi, good gosh How're you doing.
Good afternoon, Gale I'm doing just fine thanks for asking.
Hey, just a quick.
Sorry, if I missed it but what drove the eight cent varying sources guidance like what what are the kind of the tailwind you had which which then drove the beat versus your guidance in the quarter.
Shots, all meet with superior management, but she probably has a more granular answer.
It was a.
A little better fuel and quite a bit better O&M.
Weather was actually slightly negative compared to normal means better fuel better O&M.
Other items.
Got it.
In terms of.
The guidance for back half of the year.
I'm just thinking about like how are you positioned versus.
So your guidance there I mean is better O&M.
Whats your plan correct.
Yeah, we.
We see quite a bit of O&M tailwind coming loose in the fourth quarter.
Back to Steve O&M to be much better than Q4 last year.
Expect fuel to be better and additional PTC and other items that quite a bit of O&M appeal tailwind in the fourth quarter.
And I guess, just just to add on to what <unk>, saying, if you recall there were a number of very significant items in Q4 of last year.
That will not repeat in Q4. This year. So there is a very major difference as we compare the comps for Q4 of 2022 and what we what we expect to happen in Q4 of this year.
And remember we guided to two 3% higher on day to day O&M. This year compared to last year. So you see some quarter to quarter variances for the year, we expect that to be a 2% to 3% higher than last year.
I understood. Thanks for all that additional color.
Maybe just sure.
We recently talked about transfer.
<unk> variability and the implications to <unk> and there was a lot of discussion.
Amongst your peers on how that needs to be how that should be treated.
Just any additional color or thoughts there progress youre, making with other stakeholders on.
How are you going to treat the transferability as cash flow.
We'll get we'll try to give you the.
The detail on this but I would say one very important point to kind of kick off the answer is that our entire industry is really aligned around what we believe is the proper treatment of these ongoing transfers that will happen across the industry. The ongoing sale of production tax credits.
And that alignment across the industry has really resulted in I think.
A very thorough and very solid white paper.
Yes.
<unk> developed a very comprehensive white paper really outlined his views from FASB from the big four accounting firms trend overt like Gil said the industry. So they shared the white paper with.
Rating agencies and.
All of that is to say I think everybody is aligned in terms of.
We plan to follow GAAP.
And the Transferability will go through income tax provision on income statement, therefore would be picked up as well.
So we are looking forward to continuing to work with the rating agencies on this issue I will say, though is we would not issue equity just to a glass that transferability item.
That's something we will continue to work with the rating agencies.
Yes.
Got it thanks, so it sounds like discussion is underway there.
We shared that color as well thank you guys.
Take care of dish.
Again for any questions. Please press star one on your telephone keypad. Our next question will come from the line of Anthony <unk> with Mizuho. Please go ahead.
Hey, good afternoon Scott.
Scott.
Hello, No no no dogs, no portions, but plenty of gummy bears here.
Yes.
Just maybe two housekeeping keeping items ahead on.
That PDF page follow up here you release, just curious if you can give us some more color the decline in large commercial industrial sales and maybe I have the wrong view typically view them as maybe like weather agnostic, but yet.
Come in 3% just thoughts on that.
Yeah, a couple of thoughts and we'll ask John to give you some chapter and verse on some specifics, but two things that.
But as we've looked at the data and again, we have a very granular breakdown of the major industrial sectors that we serve.
So let me first say.
Most people just as you mentioned Anthony look at large commercial and industrial is fairly whether insensitive fairly as you said fairly weather agnostic.
We'll say, though you've heard me say this a gazillion times the weather normalization is more.
It is more precise and accurate and as we looked at kind of the backdrop of the economy in Wisconsin as we look to look at the jobs that have been added and as we kind of look at the industrial sectors.
I would describe.
The industrial economy in Wisconsin for the first half of 2023 is really fairly flat.
There were a couple of major customers, who had outages planned outages et cetera that affected the numbers, but the 3% seems on a weather normal basis seems a little draconian to me.
I think Scott Shaw worked through this and we kind of look at it as kind of first half flat, but having said that the most recent data is pretty encouraging Shah.
To put it in perspective in Q1, we saw minus three 9% quarter over quarter Q2 that number became better minus three point why not keep pointed out Anthony I think if you look at Q2 by month June was fairly close to the forecast. If you look at the last four weeks.
Compared to the last.
13 week or even the prior four weeks, we're seeing lots of cream actually everything was taking off so we are very cautious.
Cautiously optimistic that the.
C&I will come back in the second half of the year, so nothing to worry too much about it and I would just say that.
Our residential.
Pretty flat.
Year over year and Buddy.
Charlie better than prior to Covid and that's the key point on the residential usage smallest eni.
Actually year to date is on par with them with last year. So those are higher margin.
Great and then just lastly, you have.
<unk> been very clear on what would cause you to issue more equity sure you had said it it's not so much to it.
If it was to I don't know.
But the words in your mouth, but like.
The credit agency, it's more for growth is it fair to say that if you you got to the point, where there was more growth ahead of the finance that you would finance at cap structure Thats, probably equal to what you have at the regulated utilities or is there an opportunity that you would look to over <unk>. I guess is that term somebody using if you had had the additional to get some.
Where else going on.
I think the <unk>.
First and foremost is we're still developing our capital plan. So the numbers are we're still developing it but like Gil said in his prepared remarks.
Growth capital growth and significantly higher we wouldn't mind turning on.
The employee benefit plan travel plans and rely on maybe ATM, but we don't see any block sales at this point number one number two.
We are very confident in our long term EPS growth forecast, we don't expect any equity sale to <unk>.
Lutz state long term EPS growth.
I'll also say that we're very mindful about the rating agencies and we want to work with them.
But on the equity would be to support <unk>.
And.
Very good description description that Charles just made I will say.
She also mentioned and I would just reiterate.
For the one item on <unk> to debt that might affect.
Our rating at one particular agency, we Wouldnt issue equity simply to chase that particular item has the transferability, Brian Transferability Yep.
Great. Thanks for the clarity and again congrats on a great quarter.
Great. Thank you good to see you.
Your next question will come from the line of Michael Sullivan with Wolfe Research. Please go ahead.
Rock and roll Michael How're you doing.
Doing great. Thanks.
Well I wanted to just circle back to the Microsoft and just what what Youre seeing in terms of.
Long term sales growth potential there and then maybe if you could just.
Compare and contrast.
Right.
What this looks like relative to <unk>. There was there was a lot of excitement around the Fox gone.
A couple of years ago, and I know different companies different situations, but.
Just in terms of how you think about that from a from a planning standpoint with another.
Big name company coming to your service territory.
Yeah, Great question Michael.
Let me just phrase it this way.
Sure.
I think we will certainly know by the fall and certainly in time for our new five year capital plan.
What the next.
What's the time period between now and say 2000, 2030 will look like in terms of Microsoft's capacity and energy needs.
They are as I mentioned in my prepared remarks, they are full speed ahead.
I mean, they purchased the 315 acres in a very short period of time in that Technology Park Earth work has already begun and they are still refining their plans.
But everything we're hearing from Microsoft would indicate that.
But there they are planning a very major investment here.
They need to do it in a relatively short timeframe.
So.
Theres really no question in our mind about how.
How strongly intention and how strong the momentum is from the Microsoft development as it relates to Fox Con or back in 2017, they announced a long term very very significant player. They were talking about 10000 jobs are over 10 to 12 years or a 10% to 13 years. They were talking about 10 billion.
<unk> of investment at this stage of the game Fox Con, which is working in area one of that park.
Foxconn has invested over $1 billion and has over 1000 employees. So while they have been slower to ramp up in their business plan has changed almost completely from the original thinking.
They are still growing in that area.
But Microsoft I think.
They're really not talking at the moment about a long term 10 to 15 year plan like Foxconn was they were talking about at least at the beginning here they've called it an initial investment, but they really want to get moving on and that would affect our next five year capital plan does that respond to your question Michael Yes Super helpful.
And just as a follow on I think someone asked earlier or has to spend a couple of questions around.
New capacity needs and new generation that you might have to built in given the quick turnaround time is.
Further delaying any.
Any currently planned retirements.
Contemplated at all the things, we're looking kind of tight from a from a timeframe perspective.
Well, that's a great question and we're looking at all of that will let Scott give you his view on that.
So we're going to it's a great question, we're going through the planning process right now.
We are evaluating what our capacity needs are and you know MISO has changed as capacity needs over the seasonal approach to which will also affect our capital plans as we look at it. This fall so right now nothing to announce we're just going through the analysis.
Scott has made a really good point that we shouldn't gloss over though and that is as MISO has looked at.
Responsibility to ensure reliability.
There really are changing their capacity rules that all of us need to abide by and it will have it but we believe it will have a particular effect on our winter capacity reserves and that's all being factored into our new five year capital plan.
Got it okay very helpful. Thanks, Thanks, a lot.
Take care Michael.
With that I will turn the call back over to Gail Cooper for any closing remarks.
Terrific well that concludes our conference call for today. Thanks, so much for being with US. If you have any additional questions feel free to call. Beth Straka. She can be reached most days no everyday at 4142 to 14639, thanks, everybody take care.
That will conclude today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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