WEC Energy Group Q4 2023 Earnings Call Transcript

Presentation

[Operator]

Good afternoon, and welcome to WEC Energy Group's Conference Call for Fourth Quarter and Year-End 2023 Results. [Operator Instructions] [Operator Instructions] In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. Before the conference call begins, please note 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. This call also will include non-GAAP financial information. The company has provided reconciliations to the most directly comparable GAAP measures in the materials posted on its website for this conference call.

And now it is my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 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; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. Now as you saw from our news release this morning, we reported full year 2023 adjusted earnings of $4.63 a share.

This excludes a onetime noncash charge of $0.41 a share. You may recall that the Illinois Commerce Commission, in November, disallowed the construction costs for the modern service centers and facilities that we built in Illinois to improve employee safety and productivity. We firmly believe that the investments were necessary and prudent. And at the appropriate time, we will appeal the decision in court. Despite the setback in Illinois, I'm pleased to report that we delivered another year of solid results on virtually every meaningful measure from customer satisfaction, to financial performance, to steady execution of our capital plan.

Xia will provide you with more detail on our financial metrics for 2023 in just a few moments. Turning to other regulatory matters. The Wisconsin Commission approved our limited reopener filings in December. New rates are now in effect for all of our Wisconsin utilities. And in Illinois, a limited rehearing has been scheduled for a portion of our Safety Modernization Program. As a reminder, the Illinois Commerce Commission ordered a pause in that program for at least one year.

We've been systematically replacing old leaking cast iron pipes under the streets of Chicago. This long-running project is approximately 38% complete today. We had planned to invest approximately $265 million in these safety upgrades during 2024. Given the commission's order, we will not be carrying out the program as envisioned. We honestly do not believe that stopping the work is in the best interest of our Chicago customers.

But we will have another opportunity to make our case in the coming months through this limited rehearing. In addition, the Illinois Commission will open a new docket this month to examine the Future of Gas across the state of Illinois. This review is expected to take at least one year to complete. Switching gears now. Let's look at the investment needs of our broader enterprise. We continue to refine our ESG progress plan, our road map, if you will, for the period 2024 through 2028.

As you'd expect, we're lowering our planned capital investment in Illinois. But the bigger picture is strong and growing. And today, we're increasing our five year plan by $300 million. What was a $23.4 billion plan, the largest in our company's history, is now a five year plan totaling $23.7 billion. The increase is focused on two categories, electric distribution to support the strong economic growth we're seeing in Wisconsin and WEC Energy's projects that are in our due diligence pipeline.

That's our WEC infrastructure projects. In fact, we're in the final stage now of getting another major project for our infrastructure portfolio, a 300-megawatt solar investment for approximately $460 million. Closing and commercial operation could take place in the second quarter of this year. We'll keep you informed. Overall, the building blocks of our updated capital plan clearly support our long-term growth rate. Growth from our five year plan on a compound average annual basis remains in the 6.5% to 7% range.

As always, we're starting with the midpoint of our 2023 guidance. However, we expect earnings for 2024 to come in at or below the current consensus estimate. The reason is simple, as we redeploy capital, at least temporarily away from Illinois, the majority of the quality projects we're investing in will not be in service for the full year 2024. So for this year, for 2024, we project earnings to be in the range of $4.80 to $4.90 a share, and Xia will provide you with more detail in just a moment or 2. One final but important point about our capital plan.

As a percentage of the total enterprise, our regulated Electric business will be larger five years from now than it is today. Economic development, reliability and decarbonization are driving that growth. We plan to continue our investment in the infrastructure segment as well. But five years from now, we expect the Infrastructure segment will be only 6% of our asset base. And now turning to the regional economy. The unemployment rate in Wisconsin stands at 3.3%.

That continues a long-running trend below the national average. And as we've discussed, we're seeing some really exciting developments here in the state. You've heard about Microsoft's plans in the Wisconsin Innovation Park south of Milwaukee. That investment continues to build. Microsoft has now purchased a total of 1,345 acres of property and construction is already underway on a major data center complex.

Of course, Microsoft didn't alone, in what we call the I-94 Corridor, companies like HARIBO and Uline are expanding their footprints as well. For example, Uline just announced plans for a third office building in Pleasant Prairie. Uline expects to complete construction by 2025, creating additional space for more than 700 workers. Uline, in case you're not familiar with the name, is the leading distributor of shipping, industrial and packaging materials to businesses throughout North America.

And just last week, WestRock, a Fortune200 company that produces sustainable paper and packaging materials, announced plans to build a 587,000 square foot manufacturing facility on the former site of our Pleasant Prairie Power Plant. These developments highlight the strength and the potential of the Wisconsin economy and underscore the need for the investments we're outlining in our five year ESG progress plan.

And with that, I'll turn the call over to Scott for more specifics on our regulatory calendar, our capital plan and our operational highlights. Scott, all yours.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Thank you, Gale. I'd like to start with some more updates on the regulatory front. First, let's review where we stand after the Wisconsin Public Service Commission's written orders this past December. The reopener filings address recovery of capital investments for certain projects going into service in 2023 and also this year. These are renewable facilities, RICE generation and LNG reliability investments. The return on equity and the equity layer were not up for consideration as part of this proceeding. In the coming months, we plan to file a new rate review in Wisconsin for test years 2025 and 2026.

You heard from Gale on the latest developments in Illinois. The commission has granted us a limited rehearing focused on our request to rescore $134 million of Safety Modernization Program in 2024. This mostly relates to emergency work, work that is in progress and work driven by public entities like the city of Chicago. We expect the commission to issue an order by June 1. Now turning to our updated capital plan.

We have identified $300 million of additional capital investment compared to the initial version of our five year plan. I'll walk you through the changes, which are summarized for your reference in the slides we provided for today's call. Most notably, we have included several new investments in our Energy Infrastructure portfolio. We're continuing to take advantage of production tax credits under the Inflation Reduction Act, while providing solid returns through long-term offtake agreements.

We expect these projects to add approximately $800 million to our plant, and we're already on our way. Just last month, we closed on an incremental 10% ownership of the Samson Solar Farm, now in operation in Northern Texas. We now own 90% of the farm for a total investment of $280 million. And as Gale mentioned, we have another major project, solar project in their sites. We also plan to increase investment in Wisconsin by $300 million to better support economic development and reliability in the state.

Offsetting these incremental investments, you will see an $800 million decrease in our planned spending on the Illinois Gas Delivery system over the five year period. This is driven by the regulatory order we received in November. Meanwhile, we're making good progress on a number of regulated projects in support of affordable, reliable and clean energy. We continue to work toward our ambitious goal for reducing greenhouse gas emissions.

At the end of 2023, we achieved a 54% reduction in carbon emissions from electric generation, compared to 2005. That puts us well on our way toward an 80% reduction in target by the end of 2030, as we build our portfolio of low and no carbon generation. And the progress continues. The final panels of the Badger Hollow Solar Park are now in service, completing the largest solar project in Wisconsin's history. As you'll recall, our Wisconsin utilities own a total of 200 megawatts of solar capacity at Badger Hollow.

The facility's first phase went online in December 2021 and the second phase wrapped up at the end of 2023. In addition, our Bluff Creek LNG storage facility is now in service. Liquefied natural gas provides a solution to meet peak customer demand for heating as well as gas supply needed for power generation. This storage will be necessary during extreme weather events, like we experienced in mid-January. I'm also pleased to announce that we have been using renewable natural gas in our distribution system.

This replaces a portion of the traditional natural gas we deliver to customers, while contributing to our methane reduction goal. Our latest pilot project with EPRI and CMBlu Energy is also underway. And as you'll recall, this is testing a long-duration battery made with environmentally friendly materials. We look forward to sharing the results across the industry later this year. It's a strong start to the year. Our capital plan is robust and highly executable and we continue to focus on the fundamentals of the business.

With that, I'll turn things back to Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Scott, thank you very much. Now as you may have seen, our Board at this January meeting raised the quarterly dividend to $0.835 a share. That's an increase of $0.055 a share or 7%. This will mark the 21st consecutive year that our shareholders will be rewarded with higher dividends. The increase is consistent with our policy of paying out 65% to 70% of our earnings in dividends and underscores our confidence in delivering a bright, sustainable future. One other quick note on our track record of dividend growth. We learned last week that WEC Energy is being added to S&P's High Dividend Aristocrats Index. This index is made up exclusively of companies that have raised their dividends for at least 20 consecutive years.

Next up, Xia will provide you with more detail on our financial results, our financing plan and our 2024 guidance. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Thanks, Gale. Turning now to earnings. Excluding the $0.41 per share noncash impairment charge in Illinois, our 2023 adjusted earnings per share were $4.63. Our earnings package includes a year-over-year comparison of results on page 16. I'll walk through the significant drivers. Starting with our utility operations. Weather had an estimated $0.24 negative impact year-over-year. In fact, January, February and December of 2023 were the warmest on record, over the past 133 years. Higher depreciation and amortization expense and interest expense added another $0.33 of negative variance.

These unfavorable variances were more than offset during the year. Rate-based growth contributed $0.75 of positive variance year-over-year. This includes the base rate increase for our Wisconsin and Minnesota utilities, as well as the rate increase for Peoples Gas that was effective December 1, 2023. Additionally, fuel expense improved our earnings by $0.14. Lower day-to-day O&M resulted in a $0.10 improvement and taxes and other items benefited earnings by $0.04.

Remember, we originally guided our 2023 total company day-to-day O&M to be 3% to 5% higher than 2022. Throughout the year, we were able to manage to a much tighter range. Our actual 2023 total company day-to-day O&M was only 0.6% higher than 2022. Turning now to Sales. You'll see the details on page 12 of the earnings package. On a weather-normal basis, retail electric deliveries in Wisconsin, excluding the iron ore mine, were down 1% in 2023.

The decrease was driven by our large commercial and industrial sales, which were down 3.3%. Meanwhile, Residential and Small Commercial and Industrial sales increased 0.2%, which were ahead of our forecast. Our sales projections for 2024 can be found on pages 12 and 13 of the earnings package. Overall, we're projecting relatively flat Electric sales year-over-year and 0.8% growth in Gas sales year-over-year. Regarding our investment in American Transmission Company, earnings decreased $0.03 compared to 2022.

Recall that last year, we reported a $0.05 pickup from a resolution of MISO ROE appeals. This was partially offset by a $0.02 improvement in earnings related to additional capital investment. Earnings at our Energy Infrastructure segment improved $0.04 in '23, compared to 2022. This was mainly driven by an increase in production tax credits. Finally, you'll see that earnings at our Corporate and other segment decreased $0.29, primarily driven by an increase in interest expense.

Overall, we improved our performance by $0.18 per share on an adjusted basis in 2023. Now Gale and Scott have laid out our refreshed five year capital plan. In light of the $300 million increase to our capital plan, we have revised our funding plan accordingly. Consistent with our previous message, we're funding this increase with an even split between debt and equity.

As you can see on page 21 of the earnings package, we now expect to issue between $1.95 billion and $2.35 billion of common equity over the next five years. As you can see on the chart, over the next five years, we expect cash from operations to fund about 64% of our cash needs. About 28% of the funding is expected to come from debt and the remaining 8% from issuance of common equity. We have turned on new equity to satisfy the dividend reinvestment and employee benefit plans, and we also expect to use at-the-market programs.

Our common equity issuance is still projected to be in the range of $100 million to $200 million for 2024. Post 2024, our equity issuances will be tied to our capital plan, ratably at approximately $500 million a year. Finally, let's look at our earnings guidance. As Gale stated, for the full year 2024, we're providing guidance of $4.80 to $4.90 per share. In developing this guidance range, we took into consideration the expected loss of earnings from lower rate base in Illinois and timing of several projects under development.

Now let me briefly discuss our day-to-day nonfuel O&M expense expectations. We expect our 2024 O&M to be 6% to 7% higher. Approximately 5% of the increase is driven by assets that were included in recent rate cases, projects in the Infrastructure segment and extraordinary storm costs in January. The remaining O&M increase of 1% to 2% is largely driven by inflation, offset by operating efficiencies.

Looking at the bigger picture, our O&M projection for 2024 is well below our actual O&M expenditures eight years ago in 2016. In terms of first quarter 2024 earnings guidance, we project to earn in the range of $1.96 per share to $2 per share. This forecast takes into account January weather and assumes normal weather for the rest of the quarter. Recall that we earned $1.61 per share in the first quarter last year. There are a couple of main drivers for the quarter. One, weather was unfavorable by $0.10 in Q1 last year.

Of course, we're assuming normal weather for the remainder of the quarter this year. Two, with the rate design changes at Peoples Gas, under the latest commission order, we now expect base revenues will be concentrated in the first and fourth quarter heating months, when natural gas usage is the highest. Correspondingly, we expect lower contributions from Peoples Gas in Q2 and Q3. We'll provide you with more details as the year progresses. As a reminder, however, in Illinois, we have a decoupling mechanism in place that mitigates the weather impact.

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

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Xia, thank you very much. Operator, we're ready now for the question-and-answer portion of the call.

Questions and Answers

[Operator]

[Operator Instructions] And it looks like your first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go-ahead.

[Shar Pourreza, Analyst at Guggenheim Partners]

Good morning, guys. Gale, just a quick one on -- so the $4.80 to $4.90 guidance for '24, I mean, that's obviously about 5.4% growth year-over-year. And you obviously have a very tight EPS growth range and the divid this year is clearly from the capex timing. As we kind of bridge into '25, let's just say, can you kind of grow at that top end or above the EPS growth range to keep you within the 6.5% to 7% target? Or should we assume kind of bottom end in the near term and a step-up in the back half, given the pace at which you may not be able to deploy capital?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, great question, Shar. Let me say this. We have a lot of levers and a lot of great opportunities. And so it's probably too early to say exactly where in the 2025 range we might land, but we're pretty optimistic about the levers and the opportunities that we have in 2024, of course, as we redeploy, as I mentioned in the script, as we redeploy in -- away from Illinois and into quality projects, timing is really the driver here.

But let me just say this, if we were able to make the top end of our 2024 guidance, $4.90, we would have recovered virtually the entire hit from the Illinois rate order. So that might help put things in perspective for 2024. And then we will work on '25 and beyond. But again, we -- I mean, just with what we're seeing here on the ground, we have tremendous opportunity for appropriate investments that will drive growth.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay. Got it. Perfect. And then just Gale on the $800 million reduction in Illinois, was that all related to S&P, and what was the amount that was above that? And then just that concurrent shift into sort of the infrastructure segment? I guess, can you just talk about the profile of that spend and whether sort of there any earnings accretive opportunities from this shuffle, especially since you do target returns on an adjusted basis anyway for the infrastructure segment, that is higher than the regulated side?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes. We do. We target returns on the Infrastructure segment slightly higher than the regulated piece of the business. But to answer your first question, virtually all of the $800 million reduction that you're seeing, as we allocate capital in our various business segments -- virtually all of that $800 million reduction in Illinois is an assumption because we just don't know what S&P spending is going to look like going forward. So that's virtually all related to the cessation of work.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay. Got it. Okay. Perfect. And then just lastly for me. It's just -- obviously, the S&P program -- obviously, there's a new docket out there and there's an investigation, but there was sort of this independent engineering study that was recently conducted by the commission that already sort of proved out that the S&P needed to be carried out. How does that kind of play into this new docket?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes, Shar, great memory. Shar, it is exactly correct. A number of years ago, 2017, 2018 time frame, the Illinois Commission ordered us to bring in a highly recognized outside engineering firm, an independent engineering firm, to assess the condition of, particularly, the cast iron and ductile iron pipes under Chicago. Remember, we started out on this program, there were 2,000 miles of iron pipes that we believe needed to be replaced. It's called the Kiefner study, K-I-E-F-N-E-R. It's on file with the commission itself, if anyone wants to take a look at it. But long story short, that Kiefner study, which was delivered to the commission in January of 2020, concluded something pretty stark.

The conclusion was that more than 80% of the remaining iron pipes under Chicago have a remaining useful life of less than 15 years. That material was reintroduced in our rate case this past fall. It was dismissed by the intervenors as old data. And I guess my only comment on that is the pipes aren't getting any younger, and the corrosion keeps on coming.

So we think there's really a solid basis from the standpoint of safety and from the continuing call from the Federal Pipeline Safety Administration to accelerate the replacement of these pipes. But you got a great memory, that study is on record and very supportive of the need to continue for safety reasons, the work we've had underway.

[Shar Pourreza, Analyst at Guggenheim Partners]

Got it. Perfect, thank you guys. I've seen a couple of weeks go by. Sounds good. And look-forward to ensure. Thank you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks sure.

[Operator]

And our next question comes from the line of Neil Kalton with Wells Fargo Securities. Neil, please go-ahead.

[Neil Kalton, Analyst at Wells Fargo Securities]

Yeah, hey, Neal. So a quick question on the -- sort of following up on the initial questions on the S&P program. If that were to come back into play, that $800 million -- how should we think about the capital allocation at that point? Would we reverse some of what we're seeing today or not necessarily? Would it be added if at that point?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

That's a great question, Neil. And I'm going to ask Scott to give you his view on this as well. I would say, first of all, it wouldn't be surprising, at least to me, if some of the capital that is currently on pause in Illinois would come back, simply because of the need to continue safety. So looking at it a little more broadly, Neil, our view is the sweet spot of growth is still 6.5% to 7% a year. So I think we have to see, Scott, where we stand in terms of additional infrastructure investments that we have in the pipeline. But as Scott said, we have several hundred million dollars of those projects now that are in final due diligence stages. Scott?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

No, absolutely. And then when you think about the S&P program, unfortunately, about 1,000 workers stopped doing work at the end of the year here. So depending on how long it takes, it may take a while to ramp it up efficiently, too. So you would -- we'd really evaluate that as we get through these hearings or re-hearings.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes. Actually, Scott is making a great point. I mean you can't just turn it on a dime. So if indeed, just thinking out aloud with you, Neil, if indeed, the commission investigation of the program or their review of the need for the program lasts a year, which the order yesterday suggested a year, but it also said if it could be expedited with all the proper information, they would welcome that.. But I wouldn't think that it could be turned on back to its full level even if authorized to do so this year.

[Neil Kalton, Analyst at Wells Fargo Securities]

Got it. Makes sense. And one quick follow-up. Couldn't help but notice. I guess the -- we had thought the capex coming out, the $800 million would be replaced one for one, and instead I think you've added $300 million to the program. And just curious as to what drove that? Obviously, it entailed a little more equity to do that.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes, Neil, as we continue to get more detailed and granular information about the need to support the economic growth, in particular in the I-94 corridor that we talked about. Clearly, there's going to need to be some additional distribution investment. No question about that. And then there's also some additional renewable need. So those were the two things, all regulated, all Wisconsin. But really driven by the continued expansion and location.

And I just mentioned in the script, as you may recall, another major investment by a company based in Atlanta called WestRock with a 587,000 corrugated box production plan. So the economic growth is just amazing. I would encourage anybody. In fact, we're going to invite all of you to come see what we're seeing on the ground here in the not-too-distant future. The economic growth, the expansions that we're seeing in that I-94 corridor are just literally amazing.

[Neil Kalton, Analyst at Wells Fargo Securities]

Okay, thank you. I appreciate it. They will take care.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks, Neil.

[Operator]

And our next question comes from the line of Jeremy Tonet with JPMorgan. Jeremy, please go-ahead.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you. Rock n Roll, Jeremy.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Hi. Just wanted to kind of come back to Illinois overall here. And given the lower-than-expected rate case outcomes from the ICC than you expected. What's your current view, I guess, on Illinois as a regulatory jurisdiction here? And how have conversations with stakeholders been trending regarding the longer-term outlook for Illinois and Gas Illinois?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I think clearly, we're going to see a lot more evidence as we move through 2024 because there are really two dockets now of a very significant importance that are in their absolute beginning stage. The first occurred yesterday, when the Illinois Commission authorized the start of their review of our safety modernization program. And then they're also beginning this look at, which will take, we think, at least a year, just look at the Future of Gas in the state of Illinois. Actually, we're looking forward to both of these dockets.

Because there will be broad-based evidence from all kinds of parties, intervenors across the board, who all have an opinion on this. I would just simply say that we're encouraged by the fact that there's going to be open, productive discussion in both of these dockets. And when you step back and think about it, particularly with the fact that we talked about earlier, where from a safety standpoint, these cast iron pipes, 80% of them have a remaining life of less than 15 years.

I think at the end of the day, Illinoisans are pretty practical. And at the end of the day, I think we're going to get to a very reasonable point. This policy is just too important to the future, not only from an Energy supply standpoint, but from an economic standpoint for the state of Illinois. Scott, do you want to add anything to that?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

No, I agree. It just -- it will be good to get the facts on the table and everyone be able to talk about the issues and work through it. So we have a lot of good information and willing to provide it.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Got it. That's helpful there. And then just want to pivot towards Wisconsin here. With the PSC, we've seen kind of some rapid turnover, if you will, and just wondering, I guess, updated thoughts on commission outlook and relationships going forward given the changes we've seen?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I think probably the most significant change, obviously, is Chairman Valcq deciding that she would like to retire from the position and Summer Strand, who was appointed last year by the governor becoming the new Chair. And I would just simply repeat what we've said before about the qualifications that Summer Strand has in her background in energy policy, her background in construction and engineering very, very well suited to a position like this.

So we're looking forward to working even more closely with Summer. And then the other most recent appointment is a person who's been at the commission and has headed up divisions and staffs at the commission for, I believe, more than a decade. So a good bit of experience to join Summer Strand. And Scott, I think we feel like we're both of these appointments are very balanced.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Yes, very balanced and having that experience in the commission and be able to fill one of the spots very quickly is good to see.

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Got it. And maybe just a last one, if I could. Just thoughts about the Energy Infrastructure segment in general versus the regulated utilities. There was a pivot, kind of a way before and then back towards it. And so just wondering how you think about, I guess, investments in the two different sides. And are you targeting higher returns on the Infrastructure business, in excess of the authorized ROEs. So just wondering kind of how you see the gives and takes there given the shifts in capex in recent years?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, let me start and we'll let Scott give you his view on this as well. Let me start by saying that when we originally laid out our new five year capital plan, which would have been in early November, but it was before, obviously, the rate order decision in the Illinois. Essentially that plan to achieve a 6.5% to 7% EPS growth -- that plan crowded out, if you will, a number of Infrastructure projects that we had in the due diligence pipeline. So really, it was not all that difficult to begin to look at what alternatives do we have here for high-quality projects. I would say there are kind of two things related to your question.

The first is -- the first is that we are still seeing a significant number of high-quality projects that we're looking at, number one. Number two, we target in the neighborhood of an 8% unlevered IRR, that's kind of basically the way we look at this. That should result in a return slightly higher than the regulated business. But I would just add, and Scott can add on to this. For a number of the projects, and we probably don't talk enough about this, we're building flexibility for our regulated business, particularly, Scott, for the projects that are in the MISO footprint.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

That's exactly right, Gale. So when these PPAs wind down at the end, 10, 15 years, we'll have the ability then perhaps to either repower -- repower them, find another offtaker or especially in the MISO footprint, move them into the regulated utility here as we continue to decarbonize. So I think there's a lot of opportunities here. And when we look at these projects, we also look at getting all the cash back within 10 years and for sure in the time of the PPA. So we're really looking at it as good cash flow, but also opportunities here in the regulated long term.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Does that respond to your question?

[Jeremy Tonet, Analyst at JPMorgan Chase & Co.]

Yes, that's helpful. I'll leave it there. Thank you very much.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you.

[Operator]

And our next question comes from the line of Durgesh Chopra with Evercore ISI. Please go-ahead.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hey, Durgesh. How are you doing today.

[Durgesh Chopra, Analyst at Evercore ISI]

Hey, good afternoon. Gale, Just a clarification on 2024 EPS guidance. Does that include the 300-megawatt project that you might be executing on or rather buying in the -- I think you said in the first half, the solar project?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes, it does. Yes. And we're in final due diligence right now on that project. However, the project itself is not yet commercial. It's close, but it's not yet commercial.

[Durgesh Chopra, Analyst at Evercore ISI]

Got it. So in that $4.80 to $4.90 range, we should be modeling like half a year plus contribution from that project?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

That's fair. Absolutely. That's fair.

[Durgesh Chopra, Analyst at Evercore ISI]

Okay. And then maybe just, Xia, just can you update us on the timing of equity. I think you're targeting a small amount this year and then sort of pro rata going forward, setting the numbers of $100 million to $200 million this year and then $450 million a year starting in 2025. How should we think about that with a slightly higher equity number now?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Nothing is new, Durgesh. The $100 million to $200 million, we're on the way getting there. We turned on the dividend reinvestment plan and employee benefit plans as of January one this year. And we have seen shares coming in so far. And traditionally, those programs give us between $100 million to $200 million. If not, we'll turn on the ATM program, later in the year. And then going forward, it will be a combination of benefit programs and the ATM program.

[Durgesh Chopra, Analyst at Evercore ISI]

So just to be clear, though, the total equity issuance amount doesn't -- it should still be in that $100 million to $200 million range. I guess what I was really asking is the incremental equity, I know it's small. That's going to be just kind of 2025 and beyond?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Correct. Yes. Exactly.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes.

[Durgesh Chopra, Analyst at Evercore ISI]

Thank you, Liolios.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks, Durgesh.

[Operator]

And our next question comes from the line of Michael Sullivan with Wolfe Research. Michael, please go-ahead.

[Michael Sullivan, Analyst at Wolfe Research]

Greetings.. Hey, Gale. I wanted to just parse out the '24 guide a little bit more. How much year-over-year uplift are you getting from the Energy Infrastructure segment? And can you just confirm the Solar project, is it going to be taking PTC or ITC?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

We'll let Xia give you the breakdown, but the solar project that we're in final due diligence on would be PTCs. Not ITCs, PTCs. So we're not -- to your point, we're not playing accounting games. We're not trying to take some giant one time leap forward here, it would be the standard approach that we've used on all of our other Infrastructure projects. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Yes, I would look at it holistically. So '23 to '24, we talked about the reduction from Illinois. That's $0.10 to $0.12. And we have some interest headwinds in the year and a little bit of O&M. And offsetting that, you would see Wisconsin, ATC and WEC to offset those headwinds. So overall, that's the increase from the $4.63 to midpoint $4.85.

[Michael Sullivan, Analyst at Wolfe Research]

Okay. And then just on sticking with '24, the O&M increase, how much of that was kind of known, I guess, through most of last year? And how much of it popped up more recently? Like I don't know if you could piece out this January storm and then the -- these projects, it sounds like there's a little bit of reg lag on. Yes. What was kind of like known versus more recent development of the O&M uptick?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, we'll let Xia give you the more detailed answer, but long story short, the lion's share of the O&M increase is already recovered in rates. I mean they were driven by asset additions, I mean driven by -- mostly by asset additions that have come into service and were recovered in the last rate cases. Xia?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Yes. And that's it. So about 1% -- I call it out 5% of those. We already knew. 1% of that was related to storm. The rest would be the O&M and related to assets in the rate cases, as well as additional WEC Infrastructure projects.

[Michael Sullivan, Analyst at Wolfe Research]

Okay. Do you have that on, sorry, go ahead, Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, I was just going to say, if you just think about it broadly, as we add assets, you add O&M to basically operate those assets and we added a considerable -- I mean, we added a considerable number of renewable assets, infrastructure projects, etc. But if you look at core O&M, I mean, core O&M is very, very under control.

[Michael Sullivan, Analyst at Wolfe Research]

Okay. Just -- can you put the storm onetime in like an earnings per share basis?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Scott, I think we're talking, the January storm $8 million-ish...

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Yes, it's about $0.02.

[Michael Sullivan, Analyst at Wolfe Research]

Okay. Okay. And -- and then kind of just shifting to this upcoming Wisconsin rate case, any like high-level sense of the size of the rate increase we should be anticipating there?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Scott, go ahead.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

So we're currently pulling all those numbers together. As you can tell, we've been working on filling in the hole from the Illinois capital. But we're currently working on those numbers. We've got these asset additions that we're putting in this year. And of course, there will be some inflation as we look at the O&M. So we don't have a final number yet, but we should know by the end of the first quarter here, when we file something, but it's -- everything seems reasonable as we're pulling stuff together.

[Michael Sullivan, Analyst at Wolfe Research]

Okay. Like within the range of where the last case was, in terms of like opening ask, ballpark, is that fair?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Yes. Yes, I doubt it to be higher than that. It will be in that ballpark or a little less, I would think. We're still pulling those together though, and we got to factor a lot of stuff in and look at like the production tax credits we're getting on the Solar that just went into service and factor in that all in.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And you'll see the filing in the second quarter.

[Michael Sullivan, Analyst at Wolfe Research]

All right. Thanks, Michael.

[Operator]

And our next question comes from the line of Andrew Weisel with Scotiabank. Andrew, please go-ahead.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hello, Andrew.

[Andrew Weisel, Analyst at Scotiabank]

Hey, good afternoon everybody. Two quick follow-ups on the commissioners in Wisconsin. So obviously, some new faces there. First question, just to confirm, that turnover won't have any impact on the timing or outcome of the rate case, right? Well, I shouldn't say outcome. It won't impact the timing, right?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No. The timing has been set by commission policy. I would expect no change.

[Andrew Weisel, Analyst at Scotiabank]

Okay. Great. The other question I had relates to former Commissioner, Tyler Huebner, he was ousted, if you will, by the Republican-led Senate. And a lot of the media reports make it sound like a lot of the pushback from that Senate was around his support for renewables and solar in particular. So my question is, do you worry that the state's commitment to renewables might potentially be changing politically? And if so, would that impact your spending strategy at all?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Short answer is, no. And in fact, I don't know what you were reading, but I really don't think his support for renewables or solar was really a deciding factor in the Senate vote at all. I would just ask you to go back and perhaps read some of the other -- actually, there are very specific comments that were made by members of the Senate Energy Committee, news releases that were put out after the fact, explaining the action. But it wasn't -- at least in our view, it was not at all related to the fact that he felt a certain amount of renewables were needed, not at all.

[Andrew Weisel, Analyst at Scotiabank]

Okay. Great. That's reassuring. Then just a very quick follow-up on equity. I understand this slightly higher equity related to the higher capex. What about the write-down following the Illinois rate case and disallowances? Are you not expecting that to lead to additional equity? Or are you awaiting results of rehearings or potential court cases before you decide?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

That write-down, the additional equity will sent down to Illinois. That's already in the five year plan. It's included in the new equity numbers I gave you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

So we've already baked into the five year plan.

[Andrew Weisel, Analyst at Scotiabank]

Very good. Thank you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you. All right.

[Operator]

Our next question comes from the line of Paul Fremont with Ladenburg. Paul, please go-ahead.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hi, Paul, how are you doing today.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

Doing great. Thank you. Thank you for asking. I guess my first question is, does -- when you look at sort of the '28 outlook for the company, the 5% decrease in the Natural Gas Distribution segment, what does that assume in terms of outcomes in Illinois?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

It assumes the status quo because we just don't know exactly the outcome of the Safety Modernization review. Scott?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Right. So it assumes that we will still be doing emergency work and work for the city and some of those real reliability needs. But we're assuming the status until they get through the system -- the Safety Modernization Program and review that neighborhood program, we don't have any of that in there.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

So Scott's right, it assumes some spending because we have to do emergency work related to -- I mean, if you can't fix a pipe and you have to replace it, we have to do that emergency work. And we really do need to cooperate with the city of Chicago when they're replacing their water mains, for example. So -- but beyond that, it does not assume any return to the full roughly $280 million a year. It does not assume that.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

And presumably, I mean, if the outcome were favorable in Illinois, would that potentially change upward?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

It certainly could. We'll just have to see the outcome. And we probably won't know more on that, though, until -- what you think, Scott?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Late, at the end of next year, the same time as this year. It's going to take a while to get through, which is -- they want to be thorough. So that's good.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And because it's not only a specific look at the Safety Modernization Program, but with a separate docket on the Future of Gas. There will be broad policy decisions within a year, we believe.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

Great. And then, can you discuss what comprises the added Infrastructure investment? Is that all essentially renewable investment?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Oh, yes. Yes, largely solar, but yes, all renewable.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

Great. And any update on the tender or -- and where are you in the tender? Because the early period, I think, expired. When does the tender expire?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Xia has all the details for you. And yes, the early tender has run its course.

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Yes. The early tender has expired. We expect to tender a little over $120 million, out of the $500 million, so all that is coming together.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

So are you're still waiting for the regular tender to expire, right?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Correct. But given the expiration of the early tender, we don't expect much pickup up to the early expiration date.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

Okay. And then, I guess, last question, when would we see sort of the annual breakout of the change in your spending? So in other words, the five year numbers?

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

We have that in the 10-K, so we'll issue the 10-K in February, and then we have a February investor deck, which will give you the details for the next three years.

[Paul Fremont, Analyst at LADENBURG THALM/SH SH]

Great. That's it for me and. Thank you so much. I'm surprised you and. I have more questions,. Thank you for your time..

[Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair at WEC Energy Group]

Thanks, Paul.

[Operator]

And our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Julien. The floor is yours.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Yeah, actually. Good afternoon. There's been a lot of conversation on all sides on legislation in Illinois and a lot of different parties coming to the table. Obviously, it doesn't seem entirely right or obvious where that's going. But -- how do you see that kind of meshing up against these various dockets, whether it's Future of Gas or frankly, your own rehearing. We're just kind of getting a cohesive set of policies, maybe aligning with the governor around or what have you. I mean how do you see that possibly coming together? Like what venue even, if you will?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I think -- I'm not sure if there's a clear answer to that, but I can give you my opinion and let you know my opinion on this because it's not a clear answer, it could be wrong. But my sense is that every major step that we're going to see going forward is going to be under the umbrella of implementing what we call CEJA, the Clean Energy Jobs Act. And I think that you see that path very clearly discussed with -- by Chairman, Scott, as he talks about his decisions and the Commission's decisions being tied to implementation of that Clean Energy Jobs Act.

So that's, I think, the framework or the umbrella under which a lot of all of these dockets are going to proceed, if you will. And I think the Chairman sees his job as his mandate from the Governor, of basically putting into action that piece of legislation. And one of the most important steps now is going to be at the Commission and with that docket that they've now just authorized looking at the Future of Gas in the state of Illinois.

And again, that's going to be very open, very productive. I think all the stakeholders are going to have their say. And I would just say to you, at the end of the day, Midwesterners, Illinoisans are pretty practical people. So I think we're going to end up with a practical result. That would be my projection at the end of all of those discussions. Scott, anything to add?

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

No, nothing additional Gale. I agree with you. We'lll probably go through that process.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I hope that responds to your question, Julien.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Absolutely. I know it's a little opaque for the time being. But appreciate it. Look, actually, related, if we can, just talking about QIP, I mean, obviously, there's an element of trying to get recovery here of spending. Is there any portion of spending that can be funneled through that or related riders here? I mean how do you think about lag in the context of spending in Illinois? I mean obviously, you're pulling back on spending here, but I just want to try to make sure we kind of calibrate accordingly to how to think about the business and the ability to earn at or near you are authorized, if you will?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I think it's a great question. I think the short answer is, really to be found in the docket that now is being authorized and will come to a conclusion by June one or we expect early June at the latest. So there were -- under that Safety Modernization Program, you call it QIP, which was the piece of legislation that authorized a rider to recover these investments, a bill rider. There were several buckets of activity that were included in that legislation and recovered through that rider. One of the buckets, we feel just has to continue.

As Scott mentioned earlier, it's the emergency work and it's the work that, for example, we do in conjunction with the city of Chicago, they are actively replacing aging water mains. And it doesn't make a lot of sense to rip up the streets twice. So we work together, and we work together very well to accomplish what we need to accomplish as they were doing their work. That bucket also got paused in the Commission's order, as well as the big piece of the plan, which is the neighborhood work, going neighborhood by neighborhood based on risk, to upgrade the safety and put in new modern state-of-the-art piping.

So the piece that we're saying to them that, look, we really need to continue and get appropriate recovery for is a $134 million. It's that bucket of work relating to emergency things that we have to do and to work, for example, like with the city of Chicago. So that piece is what we're asking for a recovery on and we should get an answer, Scott, I believe, by early June.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

Yes. We expect that in June. And then the remaining, as you look at the neighborhood programs, and we think it will take about a year to go through the docket, that then would have to be looked at in a forward-looking test year, I'd imagine, as we put rates together. So there will be really two steps here.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Indeed.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

So that's the story. I was just going to say watch this space. There will be a lot of activity over the course of the next 12 months.

[Julien Dumoulin-Smith, Analyst at Bank of America]

Absolutely. Excellent. All right, well, look, I'll leave it there. Thank you guys very much for the details and best luck and I'm sure I'll see you guys soon.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks, Julian.

[Operator]

Our final question today comes from the line of Paul Patterson with Glenrock Associates. Paul, please go-ahead.

[Paul Patterson, Analyst at Glenrock Associates]

Hello. Global revenues. So following up on Julien's question on rate lag as you, I'm sure, aware that you were one of a number of decisions that happened late in 2023, that were not what the utilities kind of expected. And as you know, Gale, you've been doing this a long time. We may be entering into an environment where there just is less appetite for the capex spending and more of a desire for bang for the buck kind of approach or regulatory lag, as Julian was bringing up. I guess, sort of a bigger picture question, a, I mean, at least where I'm looking at that, that's what I see, if you disagree, let me know.

And then secondly, how do you think, because you've been doing this long time, and you've seen this kind of environment in the past, I'm sure. What -- how you might approach the situation in which there's just a hesitancy to continue with mechanisms like the S&P or at least augmenting them or changing them in such a way that it might be a bit more of a challenge. I just wanted to -- just wondering sort of big picture if you can sort of address that.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes, I'd be happy to. And as you ask the question, there are two specific things that really come to my mind. The first is that -- I mean, we're obviously only going to make investments that follow public policy. And public policy on the Safety Modernization Program, on the Future of Gas in Illinois are going to be decided in the next 12 months. Having said that, there's a -- I believe there's a certain amount of investment that's simply going to have to take place for the safety of Chicagoans.

What amount that is, I don't know. In terms of what decision might be made. But I can't imagine the Safety Modernization Program, maybe it's changed, maybe it's not, but I can't imagine that investment going to 0. Just from a pure practical standpoint, I don't think that's feasible in terms of protecting the city of Chicago or preparing the city of Chicago for an energy future that could include renewable natural gas, hydrogen any other type of fuel.

So that's kind of piece 1. Piece 2, just remember that under normal circumstances, Illinois has a future test period. Their rate cases have a one year future test period, which does help to mitigate any kind of issue related to regulatory lag on a normal ongoing basis. And then I guess the other thing that I would add is look at just the adjustments we've made since November 16, in our capital plan. I mean, I mentioned earlier, three megatrends are driving the kind of investment opportunity that we have in front of us, which is robust.

And those three megatrends are basically reliability, the incredible economic growth that we're seeing in terms of expansion and attraction here of businesses and industrial customers. And then the third -- and these are all important decarbonization. So I don't see, regardless of the outcome in Illinois, any type of really diminished opportunity, Scott, in terms of the broad avenues that we have for productive investment that support those trends.

[Scott J. Lauber, President and Chief Executive Officer at WEC Energy Group]

No. And when you're looking at it, when you think about the decarbonization, it's more than that because a lot of these power plants that are retiring, it's either invest hundreds of millions of dollars there or in a carbon-free resource and doesn't cost anything for the fuel. So there's also cost savings there in the long term with the production tax credit. So we do have a lot of opportunities here.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Paul, does that respond?

[Paul Patterson, Analyst at Glenrock Associates]

Appreciate it.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

All right. Well, I think we wore you guys out today. So that concludes our conference call for this afternoon. Thank you so much for your questions and for participating as always. And if you have any additional thoughts or questions, Beth Straka is happy to pick up the phone. She can be reached at (414) 221-4639. Thanks, everybody, so long.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Gale E. Klappa, Executive Chairman
• Scott J. Lauber, President and Chief Executive Officer
• Xia Liu, Executive Vice President and Chief Financial Officer, Office of the Chair

Analysts

• Shar Pourreza, Guggenheim Partners
• Neil Kalton, Wells Fargo Securities
• Jeremy Tonet, JPMorgan Chase & Co.
• Durgesh Chopra, Evercore ISI
• Michael Sullivan, Wolfe Research
• Andrew Weisel, Scotiabank
• Paul Fremont, LADENBURG THALM/SH SH
• Julien Dumoulin-Smith, Bank of America Co.
• Paul Patterson, Glenrock Associates