WEC Energy Group, Inc. (NYSE:WEC) Q4 2022 Earnings Call Transcript

WEC Energy Group, Inc. (NYSE:WEC) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good afternoon, and welcome to WEC Energy Group’s Conference Call for Fourth Quarter and Year End €˜22 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 are made. In addition to the assumptions and other factors referred to in connection with these 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 wecenergygroup.com. The replay will be available approximately two hours after the conclusion of this call. And now, it’s my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

Gale Klappa : Good afternoon, everyone. Thank you for joining us today, as we review our results for calendar year 2022. 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 2022 earnings of $4.45 a share. Xia will provide you with more detail on our financial metrics in just a few minutes. But I’m pleased to report to you that we delivered an exceptional year on virtually every meaningful measure from employee safety and customer satisfaction to growth in earnings per share.

Three major factors really shaped our strong results for 2022: favorable weather; solid performance from our infrastructure and transmission segments; and steady execution of our capital plan, as we paved the way for an energy future that’s affordable, reliable, and clean. On the regulatory front, as you may know, we saw balanced and credit supportive results from our Wisconsin rate reviews in December, despite a little bit of noise in the process. New rates are now in effect for all of our Wisconsin utilities. And last month, on January 6th, we filed rate requests with the Illinois Commerce Commission for our gas utilities in Illinois. I would point out that home heating bills in Chicago are currently below those of other major U.S. cities, like New York, Boston, Baltimore, and Philadelphia.

And we expect that to continue with this filing. Scott will provide you with more detail in just a moment. Turning now to our ESG progress plan that we updated for you in November. It’s the largest five-year investment plan in our history, totaling $20.1 billion for efficiency, sustainability, and growth. We expect the plan to drive compound earnings growth of 6.5% to 7% a year over the period 2023 through 2027. The key part of the plan is a major commitment to renewable projects, both in our regulated business and in our infrastructure segment. In fact, earlier this week, we announced that our infrastructure group will acquire an 80% ownership interest in Phase 1 of the Samson Solar Energy Center. Located in Northeast Texas, Samson I has a capacity of 250 megawatts.

It entered commercial service in May of last year and has a long-term power purchase agreement with AT&T. Pending final regulatory approval, we plan to invest approximately $250 million for our portion of Samson I. We expect to close the transaction late in the first quarter of this year. Samson I, as you may know, is the first of 5 phases being developed by Invenergy. Overall, Samson is the largest solar project under construction in the United States today, and we’re pleased to take part in Phase 1. Now, as you know, one of our goals is to help shape the future of clean energy. And today, we’re announcing an important pilot project with the Electric Power Research Institute and a company called CMBlu Energy. CMBlu is a German designer of long duration battery storage using common low-cost, environmentally-friendly materials.

In simple English, it’s a green battery. This 1 to 2 megawatt hour pilot project will be one of the first of its kind on the United States electric grid. Our plan is to test the durability of this battery system. We believe it can store energy for up to twice as long as the typical batteries in use today. We plan to launch the project at our Valley Power Plant near downtown Milwaukee in the fourth quarter of this year when temperatures turn cold. The results will be shared in early 2024 across the industry. And now, let’s switch gears and take a brief look at the regional economy. Wisconsin added 52,000 private sector jobs in 2022, and in December, the unemployment rate in the state dropped to 3.2%. That’s well below the national average. We believe the current strength and remarkable diversity of the Wisconsin economy positions us well as we move forward in 2023.

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.

Scott Lauber: Thank you, Gale. I’d like to start with some updates on the regulatory front. First, let’s review where we stand for the Wisconsin Public Service Commission’s written orders this past December. The commission authorized return on equity of 9.8% for all our Wisconsin utilities. It approved an increase in the equity component of our capital structure to 53%. We’ll also continue the earning sharing mechanism to provide benefits to Wisconsin customers if our performance exceeds our forecast. And as Gail mentioned, we now have rate filings under review in Illinois for Peoples Gas and North Shore Gas. At Peoples Gas, we are not seeking an extension of the automatic bill adjustment rider known as QIP, after it expires at the end of this year.

We plan to return to the traditional rate making process to recover the cost of necessary infrastructure improvements. Our rate request would continue to support those key capital investments. Peoples Gas operates one of the oldest natural gas delivery networks in the United States. And as you may recall, an independent engineering study found that over 80% of the iron pipes in the system are approaching the end of their useful life. We are modernizing the system to ensure safety and reliability and to reduce methane emissions. With natural gas prices declining, we project customer bills will remain largely flat as the new rates take effect in 2024. You may also recall we filed a rate review at one of our smaller utilities, Minnesota Energy Resources last November.

We are seeking an overall increase of 8.1%, primarily driven by capital investments. Interim rates went into effect January 1st. Meanwhile, we’re making good progress on a number of our regulatory capital projects. Our Red Barn wind development is on track to come online within the next few months in Wisconsin with an expected 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 the solar parks to go into service this year, assuming timely release of the panels. We also received regulatory approval for our purchase of the Darien Solar-Battery Park, with plans for 225 megawatts of solar capacity and 68 megawatts of battery storage.

We expect this facility to go into service in 2024. Of course, we’ll keep you updated on any future developments. And just last month with an investment of approximately $75 million, we closed our purchase of the Whitewater combined cycle plant, a 236 megawatt facility. As a reminder, we previously received energy and capacity from this natural gas unit under a purchase power agreement. In the natural gas business we have been working to bring high quality renewable natural gas to our customers. We signed another contract in January, which brings us to a planned total of 1 billion cubic feet of RNG that’ll enter our system annually. We expect RNG to flow this year, supporting our aggressive goals to reduce methane emissions. Outside our utilities, we continue to make good progress on zero carbon projects in our WEC Infrastructure segment.

The Thunderhead Wind Farm in Nebraska is now in service. In addition, we expect to complete the acquisition of Sapphire Sky in Illinois in the coming weeks as commercial operation begins. And as Gale noted, we’re excited about our plans to add the Samson I solar project in our infrastructure segment before the end of the first quarter. And with that, I’ll turn things back to Gale.

Gale Klappa: Great, Scott. Thank you very much. We’re confident that we can deliver on our earnings guidance for 2023. As you recall, we’re guiding to a range of $4.58 to $4.62 a share. The midpoint $4.60 a share represents growth of 6.7% from the midpoint of our original guidance last year. And as we’ve discussed, we expect to fund our capital plan without any need to issue equity. And you may have seen the announcement that our Board of Directors at its January meeting raised our quarterly cash dividend by 7.2%. This marks the 20th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings. We’re right in the middle of that range now, so you can expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more detail on our financial results and our first quarter guidance. Xia, all yours.

Xia Liu: Thanks, Gale. Turning now to earnings. Our 2022 earnings of $4.45 per share increased $0.34 per share or 8.3% compared to 2021. Our earnings package includes a comparison of 2022 results on page 17. I’ll walk through the significant drivers. Starting with our utility operations, we grew our earnings by $0.19 compared to 2021. Weather drove a $0.04 increase in earnings compared to 2021. Rate base growth contributed $0.41 to earnings, and lower day-to-day O&M expense resulted in a $0.02 improvement and achieved our goal for the year. These favorable factors were partially offset by $0.12 of higher depreciation and amortization expense related to continued capital investment and a $0.12 increase in fuel expense, mainly driven by higher natural gas costs.

In terms of sales, on a weather-normalized basis, retail electric deliveries in Wisconsin excluding the iron ore mines, were up 0.1%. Small commercial and industrial sales increased 0.5%, while residential and large commercial and industrial sales stayed relatively flat. Overall, our sales mix was stronger than our forecast. Our sales projections for 2023 can be found on Pages 13 and 14 of the earnings package. Overall, we are projecting relatively flat electric and gas sales year-over-year. Regarding our investment in American Transmission Company, earnings increased $0.07 compared to 2021. If you recall, $0.05 related to the resolution of historical appeals that we discussed on our third quarter earnings call. As previously discussed, beginning with the third quarter of 2022 and going forward, we are recording ATC earnings at a 10.38% return on equity.

Earnings at our Energy Infrastructure segment improved $0.14 in 2022 compared to 2021. This was mainly driven by production tax credits as a result of stronger wind production and the addition of our Jayhawk wind farm that went into commercial operation at the end of 2021. In addition, recall that we recognized a $0.03 earnings contribution earlier in 2022 from the final resolution of market settlements in the Southwest Power Pool. Finally, you’ll see that earnings at our Corporate and Other segment decreased $0.06, primarily driven by rabbi trust performance and lower gains recognized on our investment in the clean energy fund. Remember, rabbi trust performance is largely offset in O&M. Overall, we improved on our 2021 performance by $0.34 per share.

Looking now at the cash flow statement on page 6 of the earnings package. Net cash provided by operating activities increased $28 million. And total capital expenditures and asset acquisitions were $2.7 billion in 2022, a $324 million increase as compared to 2021. As you can see, we have been executing well on our capital plan. Finally, let’s look at our earnings guidance. In terms of first quarter 2023 earnings guidance, we project to earn in the range of $1.68 per share to $1.72 per share. This forecast takes into account the fourth warmest January on record since the 1880s and assumes normal weather for the rest of the quarter. Remember, last year, we earned $1.79 per share in the first quarter, which included $0.02 of favorable weather, $0.03 from the Southwest Power Pool settlement and $0.03 from our investment in the clean energy fund.

And for the full year 2023, we’re reaffirming our annual guidance of $4.58 to $4.62 per share. We’re also reaffirming our long-term earnings growth of 6.5% to 7% a year over the next five years. With that, I’ll turn it back to Gale.

Gale Klappa: Xia, thank you. Overall, we’re 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.

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Q&A Session

Operator: Our first question from Shar Pourreza with Guggenheim Partners.

Gale Klappa: Rock and roll. Shar, you’re ready for the West Coast?

Shar Pourreza: I am ready for the West Coast. I’m packing my bag just.

Shar Pourreza: Just two quick ones for you. Just on the transmission CapEx with ATC, which obviously just pretty healthy uptick. In the past, I know you’ve said you were seeing increases as early as 25 for Tranche 1 with LRTP and additional investments even earlier in €˜24. I guess, can you maybe talk about the cadence of this current increase as we’re thinking about the spending profile? And do you see more opportunities? Any sense on how you’re thinking about Tranche 2?

Gale Klappa: Yes. Great question, Shar. Let me unpack the second piece of the question first, if that’s satisfactory. On the second piece of the question really about Tranche 2, and again, just to level set everyone, MISO is going through a very thorough and rigorous long-term planning process for transmission investment in the region. They have been through and have now completed Phase 1 Tranche 1 — I’m sorry, Future 1 Tranche 1. So now we’re into Future 1 Tranche 2. And it’s a little too early to tell you precisely what we’re seeing in the planning for Tranche 2. But I can tell you that what we’re seeing so far in the stakeholder discussions at MISO is that — is I think a good probability that the amount of investment opportunity for American Transmission Company in Tranche 2 is potentially greater than what we’re even seeing in Tranche 1.

So, we’re optimistic about that. I would expect that we will be able to give you more detail before the end of this year on kind of the broad numbers as they emerge in the planning process. And Scott, would you like to handle kind of the cadence question?

Scott Lauber: Sure. So, when you look at — and we’ll hear the end of this year or the beginning of next year as Tranche 2, we’ll just see how fast that process goes. When you look at the projects, starting to ramp up really in €˜24 and €˜25, and that’s related to Tranche 1, but also, we saw a lot of entries here at American Transmission Company just looking at connecting renewables on the state. So, that was about half of our increase in the prior year along with Tranche 1. So, I expect we’re going to see more of that as we look forward over the next 5 to 10 years, too.

Gale Klappa: Shar, Scott is making a good point. Not only are we seeing the need for additional transmission related to these longer term projects that are part of the MISO planning but just to hook in the significant number of renewable projects being built in Wisconsin, that’s an additional uptick, if you will, in our plan from just the Wisconsin connections for many renewable projects under development here.

Shar Pourreza: Got it. Perfect. And then, just lastly, just Gale, on the current 5-year plan. I know you guys budgeted roughly $1.9 billion in the Infrastructure segment. Obviously, you had two recent announcements with investing in sort of PTC eligible solar projects, I think, for the first time, obviously, in this segment. How are you sort of thinking about the remaining $1.1 billion of capital, I think you plan to deploy in this business? And should we expect more solar, more wind, or perhaps can you open it up to other technologies, which are obviously now PTC eligible post IRA? Thanks.

Gale Klappa: Shar, we certainly could open it up to other technologies, but the big likelihood, given what we’re seeing in the pipeline of projects that we’re doing due diligence on, the big likelihood is they will largely be solar and wind. And you’re referring to the announcement we just made a couple of days ago, the Samson 1 Solar Energy Center in North Texas. That project, we’re very pleased to be a part of. It is coming in a little earlier. I think internally, we all thought that we would probably add another solar project toward the end of 2023. So, that’s actually good news that it’s coming in a little earlier. And as I mentioned, we hope to close on that transaction final — given final regulatory approval late in the first quarter. I hope that helps, Shar.

Shar Pourreza: It always does. And Scott always makes good points, by the way. I appreciate it, guys, and I’ll see you soon.

Gale Klappa: Sounds good. Great. Thank you, Shar.

Operator: Our next question comes from Julien Dumoulin-Smith with Bank of America.

Gale Klappa: Good afternoon, Julien. Julien, are you and your wife buying a dog yet?

Julien Dumoulin-Smith: Oh, my God. Just you wait, just you wait. I’ll give you the update next quarter. Oh, my God. So, just coming back to Wisconsin really quick. Just reopen your filing, if we can talk about super quickly. Obviously, there’s been a lot of attention of late. Perhaps just at the outset, any comments and reactions of what’s transpired here and just how to think about that reopener? And then within that, just a couple of subpoints, just West Riverside, how confident are you that you’ll be able to submit data to prove the benefits for WEC are greater or at least equal to LNC? And then with respect to Oak Creek, some of the same considerations around what are the unrecovered balances of scrubbers and other plant? And do you see any specific obstacles around Oak Creek retirement and recovery on that front?

Gale Klappa: Okay. Well, let’s kind of — I’m glad you got it all out. Let’s try to kind of walk through that, if I forget, Scott and Xia, any of the elements of the question, Scott and Xia will help remind me. But first, I think you were asking about the “limited reopener€ that was part of the rate decision in December. So the limited reopener is for 2024, and it truly is a limited reopener relating to the investment cost of several projects that will be coming into service over the course of 2023. All of them regulated projects — I think virtually all of them are really the renewable projects, Scott, that we are underway with here. So, the limited reopener is simply to reopen and put into rates recovery of the investment costs for projects that have already been approved and are under development, Scott, got by the commission.

Scott Lauber: Yes. It’ll be very specific. For example, the liquefied natural gas plants we have going on in our gas system, some of the renewable projects I talked about in the prepared remarks, and some of the new RICE units that we have going in, in Weston. So, it’s very specific projects. For instance, LNG goes in at the end of the year, we’ll just factor that in for a full year then. So, those — that should be very straightforward as we do that filing.

Gale Klappa: Yes, exactly. There’s no reopener related to the equity layer or the ROE. This is simply related to capital investments in projects already approved. So, I hope that answers that question. And then, in terms of just the general backdrop, I think one of the things that I believe Julien you actually did an interview with the Chairperson of the Wisconsin Commission, I would just encourage everyone to listen and read through some of the additional comments that she has made related to her view of the future of regulation in Wisconsin, wanting very much to be credit supportive as the decision was of our Wisconsin utilities and wanting to maintain the reputation of the Wisconsin Commission is very professional and certainly carrying out day-to-day the concept of gradualism.

So, I hope that’s helpful. And then secondly, on Riverside, we have already provided on time, all of the additional modeling data that the commission asked for in terms of modeling the impact of us exercising the Riverside option and to level set everyone. Riverside is a natural gas combined cycle plant at Alliant built. During the construction process, we agreed with Alliant that we would have two options each for 100 megawatts per option to essentially acquire at book value, those megawatts over a certain period of time. So, this particular question that you have relates to the first option. And again, the modeling data that the commission asked for is in their hands right now. And we expect sometime in the next 45, certainly no more than 60 days for the commission to take up the matter.

So, I hope that responds and I hope we didn’t miss anything.

Julien Dumoulin-Smith: A lot there. Just lastly, super quick. On Oak Creek, just the current unrecovered balance of scrubber and plant, just as far as getting recovery there and any obstacles in that end? That was the last one.

Gale Klappa: Okay. Great. Thank you for reminding us. The current book balance for the older Oak Creek units — remember, there are four older Oak Creek units. They’re labeled Oak Creek 5, 6, 7 and 8. Those units went into service, I mean, literally, I think the oldest one was 1959 and the others are 1960s vintage units. So, the base plant itself, there’s almost no book value left. The major part of the book value is in the emission controls, the modern emission controls that we build and put on those units at least a decade ago now. And that is roughly about $400 million. But I would remind everyone that that’s not a subject for the limited reopener in Wisconsin in 2024, because the retirement dates have been pushed out a bit, given the tight capacity market. Scott, anything you’d like to add?

Scott Lauber: And remember, when we look at those retirements. We also — when they do retire, when all 4 of them retire, that’s like $30 million to $35 million of reduced O&M expense along with less fuel cost. So, we’ll be looking at them. I think our current date is May of €˜24. So potentially, we’ll be analyzing it, but we’ve got to look at our capacity situation. But right now, that is the plan. So, maybe part of the limited reopener. When you look at the whole picture, it reduces O&M costs, it reduces fuel cost. And remember, we’re replacing a lot of this capacity, some of it’s with renewables and get that production tax credits there in the front end. It’s going to be very good for customers.

Gale Klappa: Yes. Scott’s right. There’s some immediate significant savings. And you think about $30 million to $35 million of O&M savings from the closure of the plant. And on top of that, you get fuel cost savings.

Operator: We’ll take the next question from Jeremy Tonet with JPMorgan.

Jeremy Tonet: I just wanted to pick up a little bit on the prior conversation there with regards to Wisconsin Commission. And are you hearing anything from the Governor or stakeholders about who the next commissioner might be if the Governor has any particular policy goals for the commission that could potentially be expressed in this next nominee?

Gale Klappa: No. In terms of any particular change of policy goals, no. The conversations we’re hearing related to the concept of what the appropriate next appointee will be, really, in my opinion and from everything we’ve heard, revolve around the major concerns that the Governor has had since he took office, which is reliability, affordability and the continued transition away from fossil fuels, but in a pace and in a manner that preserves reliability. So, nothing different in terms of our belief in the Governor’s policy objectives. And the other thing that I would say is I would be shocked if the vetting process was not already underway. We would expect some type of an appointment announcement, if you will, I would guess, in the next 60 days.

The other point, I think, that’s important to remember is all the governors appointees have to be confirmed by the state Senate. And the Senate is heavily Republican. And I think all of that leads to the type of an appointment that’s really close to the center line in terms of philosophy and in terms of approach of continuing the same type of approach the commission has been noted for over the course of many decades. I hope that helps, Jeremy.

Jeremy Tonet: Yes. No, that’s helpful there. I didn’t mean — I don’t think I said different. I was just more thinking just type of policy as far as — we were under the impression that maybe some labor-oriented policy might be in focus here. So, I didn’t know if that was something that had come across our radar, but we can move along here.

Gale Klappa: Well, Jeremy, actually, to your point, we do know, and we’ve had conversations with the Governor’s office. As more and more renewable projects are under development, under construction inside the state of Wisconsin, we do know the Governor’s office is very interested and making sure as many of those jobs as possible are Wisconsin jobs. So, what you’re saying would not be a particular surprise. I think that’s been part of the Governor’s agenda from the very beginning.

Jeremy Tonet: Right. Right. Great. Thank you for that. And then kind of moving along and recognizing it’s earlier in the PGS rate case process, but have you received any stakeholder feedback here, particularly in how the QIP rider impacts this? And any sense from the legislature on an extension?

Gale Klappa: Well, as you probably recall, our filing position, if you will, and we announced when we filed the case on January 6th, that it would not be our intention to try to extend the QIP rider through legislation. It’s pretty clear from conversations with a number of the policymakers, including the Governor’s office in Illinois, that the preference is to return to traditional rate making procedures for all the capital investments that PGL and North Shore are making, but in particular, the capital investments that had been part of the, what we call, the QIP rider program. So, when you think about it and actually — we’ve really talked about this a lot internally. First of all, important to point out that the Illinois regulatory process in these rate reviews utilizes a forward-looking test period.

So, even with going to a traditional ratemaking process, you’re in a forward-looking test period. So, that should help in terms of eliminating regulatory lag. Number one. Number two, actually going through a rate review with all of the testimony and all of the different stakeholders being able to voice their opinions, actually, I think it’s going to be a positive thing because there’s been noise about the method of recovery of the investment as opposed to the need for the investment. What this will allow us to do — this process over the course of 2023, this will allow us to again make the case for why the upgrade of aging, deteriorating piping systems underneath Chicago is so, so necessary for the safety and efficiency and stability of gas distribution in Chicago.

So actually, we kind of look forward to the debate. And we look forward to the whole process, which Scott will take probably through close to December.

Scott Lauber: It would take most of the year. And they’re just — currently, we’ll — we haven’t even seen a final schedule yet. So, that will be coming out.

Jeremy Tonet: Got it. That’s very helpful.

Gale Klappa: Is that responsive, Jeremy?

Jeremy Tonet: That is very helpful. Just one last one, if I could here. Just after this latest solar investment with the Samson announcement, how does the broader market interest currently stand? Anything notable to highlight here on this transaction?

Gale Klappa: No, other than — I mean, other than — in this particular transaction, there’s really no construction risk because the facility went into service in May of last year. So, we really have no construction risk here whatsoever. We’ve got a year of operating data that we can base our due diligence on. And again, we’re really pleased with this particular investment. And we think it’s going to, again, add really high, high-quality project to our infrastructure portfolio.

Jeremy Tonet: And just on the ITCs, had you guys disclosed how many years you’re amortizing this over?

Gale Klappa: Well, we’re using production tax credits instead of investment tax credits, and that’s really what helps our economics here. I mean, obviously, with the Inflation Reduction Act, solar is now eligible, you can choose either ITCs or PTCs. And our choice here is clearly PTCs, which will be spread over, Scott, a 10-year period.

Scott Lauber: 10-year period. And adding that second solar farm in our portfolio really adds diversity to portfolio, too. So, really happy to adding that second solar.

Operator: We’ll take our next question from Michael Sullivan with Wolfe Research.

Gale Klappa: Greetings, Michael.

Michael Sullivan: Hey Gale, how are you?

Gale Klappa: We’re good. You’re keeping Steve straight?

Michael Sullivan: All good. We’re going to steal Aaron Rodgers from, too.

Gale Klappa: He looks good in green, I believe.

Michael Sullivan: Yes, actually. Anyways, I wanted to start with just the credit metrics. I think you all used to give a reconciliation of FFO to debt with year-end earnings. Do you have that off the top of your head? Are you able to give where that ended up shaking out for the year?

Gale Klappa: Sure. We’ll ask Xia to give you a response to that.

Xia Liu: Michael, we disclosed the longer-term credit metrics and — but we have all the actual data, and we’ll be happy to provide that to you. I think it’s all public information.

Michael Sullivan: Okay. And then I just wanted to check on the solar build out. Scott, I think you said like assuming release of panels, which has kind of been like a little bit of a moving target? Just any updated color there on where things stand with where the panels are and being able to get them?

Scott Lauber: Yes. So, we’ve been able to get them in the U.S. We’ve been able to get them in the warehouse. In fact, about 40% of the panels we need to complete Badger Hollow 2 in Paris are in Chicago warehouse, and another 30% of the panels are about in the U.S. So we have the panels. We’re just working to get them through the paperwork to get through the Border Patrol. We’re starting to see a few panels, not ours, but a few panels get through the Border Patrol, so we’re optimistic. But we have them in the States, and we just need to get them released yet. So, we think all the paperwork is good. We’ve gone back and worked with our suppliers and worked with our developers to get everything lined up. It’s just a matter of getting it through the final Border Patrol. But, we’re already — the sites serve — the one site is ready, and we have a lot of the panels right here, just a few — 100 miles away to be able to put them on. We just got to get them out.

Michael Sullivan: Okay. Great. And then, last…

Gale Klappa: They’re in a hermetically sealed warehouse in Chicago.

Michael Sullivan: Got it. Okay. And then last one, just flipping to the Samson acquisition, I know like none of these projects are exactly alike. But just on like a $1 per KW basis, this actually was one of like the cheaper deals that you’ve done. Is that just a function of location, current environment, anything like nuance there that we should be thinking about?

Gale Klappa: No. I think when you look at the appropriate purchase price, one of the big factors is the particular elements of the offtake agreement or the purchase power agreement, in this case with AT&T. So, that was a heavy determinant of the overall value that we saw in the project. Xia, anything you want to add to that?

Xia Liu: No, that’s exactly right. It’s a function of the PPA purchase price.

Michael Sullivan: Okay. Thank you very much.

Gale Klappa: You’re welcome, Michael. Our next question comes from Durgesh Chopra with Evercore ISI.

Gale Klappa: So, Durgesh, you’re going to sing fly Eagles, fly for us?

Durgesh Chopra: That’ll put you to sleep. I’m not a great singer. But I will be singing after they actually win in a few weeks here. Okay. Thanks, Gale, for giving me time. I was going to ask you a question on the price of Samson 1 versus Maple Flats that you’ve answered. So, that’s good. Maybe just — are you seeing — we’ve heard a lot about transformer shortage and just general material storages. I think you talked about the panels already being in-house. But can you just generally talk about materials, construction materials? And are you seeing some tightness there, specifically issues with transformers or any other equipment?

Gale Klappa: Yes. Great question, Durgesh. Let me say this. A couple of years ago, we actually were in a position where we thought we would be very protective of our customers and our franchise if we did a double order of transformers. And that has served us pretty well. I think everyone is a bit tight. It’s kind of we feel reasonably in good shape with where we stand.

Scott Lauber: We feel like we’re in good shape. We’ve been working with our suppliers every week. Probably the one that’s across the industry is more of those pad-mount transformers. But we’ve been working and we are able to continue with all our construction and our capital work. So, we don’t think there’s any issues, but we’re watching it very closely. Hopefully, things will loosen up here. But the pad-mount transformers along with some meter sets have been probably the tightest things for us, but we’re watching everything.

Gale Klappa: And so far, so good.

Durgesh Chopra: I guess, are you sourced for the balance of the year in €˜24? Is that how we should think about it when you’re talking about the two-year kind of preorder?

Scott Lauber: I think we’re sourced through the year next year. What we did is some of our larger transformers that we need for substations, we went out and did some ordered way ahead of time, just to get into the queue. Those are the transformers that Gale was talking about. So, there’s different sizes of transfers. Those real large ones, we get out there a year ago to put orders out ahead of time.

Gale Klappa: And Durgesh, one of the reasons we did what Scott just described is the large economic development projects that were coming to fruition here. For example, I mean, we’ve talked a lot about but they are up and running and ramping up and Komatsu was finished and is now operating their new headquarters and manufacturing — state-of-the-art manufacturing plant. So a number of the major economic development projects, which we knew would require large transformer sets we prepared for that in advance, which was really good.

Durgesh Chopra: Got it. Guys, thanks so much. I appreciate the time.

Gale Klappa: Go Eagles.

Durgesh Chopra: For sure. Go Eagles.

Operator: We’ll take our next question from Andrew Weisel with Scotiabank.

Andrew Weisel: First question is another one on Samson 1 here. It’s early, but how do you think about the potential to invest in some or all of the next five phases? I mean that alone could be more than half of the five-year budget, or would you prefer to diversify your projects?

Gale Klappa: Well, we’ve really followed a philosophy of diversification. However, you never say never. We will see if the performance on Samson 1 is as we expected, and we’re certainly open to looking at portions of future phases. But we have not made any decision on that whatsoever. It’s certainly a possibility. And I’m confident if we wanted to be a continued partner in any of those future phases, we would have the opportunity to do so. But, we’ll balance that against what we see as the performance in Samson 1 and against our thinking about diversification, both solar, wind and region.

Andrew Weisel: Do we know the timing of when Samson 2 is going to be at that decision point?

Gale Klappa: It’s under construction now, but I don’t have an in-service date, but we know it’s under construction now. So my guess is it’s in the next 12 to 18 months max.

Andrew Weisel: Okay. Great. Next question on a similar front here. The year-over-year EPS walk shows positive $0.10 from PTCs. Are you able to quantify what percent of your total earnings relate to renewable tax credits at the Energy Infrastructure segment?

Gale Klappa: Xia might be able to give you that. I can — we can tell you what the earnings from our renewable investments were. We can start at $0.28, which is what we delivered in terms of the investments in our infrastructure projects. So, you wrap in the PTCs, you wrap in other revenues. And Xia, we got to about $0.28 a share for 2022 from the Infrastructure segment.

Xia Liu: Correct. And we don’t have the breakdown between PTCs and operating revenue, but the majority of the $0.28 million is from PTCs.

Andrew Weisel: Okay. Great. Thanks. Then one last one, if I can. The new battery pilot sounds exciting, but I’m interested in your other science project, the hydrogen blending. You briefly mentioned on the last call that initial results were encouraging. Are you able to give us any additional updates on that project?

Gale Klappa: Yes, they were very encouraging. And within a matter of weeks now, I think before the end of February, the Electric Power Research Institute, which really was the main technical organization helping to drive the project and helping to analyze the project. The Electric Power Research Institute will have a full report available on all the analysis. And we expect that report to be out in the next few weeks. But, again, very encouraged from the standpoint of both the efficiency of what we saw, no degradation of the equipment, and you name it, and it was — as Scott said, the engineers were giddy. And that’s scary actually when the engineers

Scott Lauber: Enjoy the project.

Operator: We’ll take our next question from Anthony Crowdell with Mizuho.

Anthony Crowdell: Good afternoon, Gale.

Gale Klappa: Anthony

Anthony Crowdell: Absolutely. I saw some photos of you with Aaron Rodgers in a basketball game recently in one of the local papers.

Gale Klappa: Yes. I was apparently seated next to him and some other folks. It was — for some reason or another, when you’re sitting next to Aaron, there are a lot of pictures being taken.

Anthony Crowdell: It was all of you, Aaron was very fortunate. I own one share, so I hope he wasn’t out that late. I hate keeping my employees out late there. Just more housekeeping questions, I guess one on Illinois. I think you spoke earlier on the rate case. And maybe I think if I characterize it correctly, it’s good maybe to go through an entire case and the commission, and I think parties will see how much the company has invested. I’m just curious when you see the timing of the QIP rider, expires, then also on the electric side, which I know you guys are not there, but on the electric side, the formula rate plan expired. So the commission right now has 6 or 7 pretty sizable rate cases. Does that make settlements maybe more likely to happen given the workload there?

Gale Klappa: It’s very difficult to say one way or another. But certainly, the commission will have a solid amount of work to get through. I believe every natural gas distribution company of any size has filed their rate case in Illinois and of course, as you say, the formula rate plans and the changes under the legislation on the electric side. So there will be a lot cooking in Illinois this particular year. Whether that leads to more settlements, I think it’s way too early to tell. But clearly, the Illinois has had a track record of settlements. We actually, I believe, had a very positive settlement with our North Shore case just a year or so ago. So, it’s certainly not out of the realm of possibility, Anthony, at all.

Anthony Crowdell: Got it. And if I stay with the gas business, at least Henry Hub gas prices have really declined from the start of the winter until now, and we’re still have a couple more weeks of winter left. I mean, is the company able to maybe capture that in customer bills through contracts? I’m just wondering, as maybe the company’s buying, more hedging process kicked up with these lower prices to mitigate customer bill impact.

Gale Klappa: Well, we’re clearly going to see — I mean, gosh, I look today, and I think we’re around 2.60 per million BTU is amazing compared to where we were just about two, three months ago. But if you look at — particularly for our natural gas heating customers, we have a set commission-approved strategy where we basically — in advance of the winter season, we basically do a third, a third, and a third; roughly a third of gas and storage, a third of financial hedging and a third on the spot market. So, the extent that third that’s being purchased off the spot market is materially better, it’s going to be helpful to customer bills.

Scott Lauber: And we also have that process as we start thinking about next year as we put injection. So, we may be hedging a little bit right now, just following a very strict pattern to lock in some of those prices for next year.

Gale Klappa: Exactly. And one thing that I would add to all of that is that when we filed our case for Peoples Gas in Illinois, and Scott mentioned this in his prepared remarks, just looking at the futures market for natural gas, we should be able to completely — even with the rate increase in base rates, we should be able to completely offset that with lower commodity costs and keep customer bills flat in 2024 in Illinois.

Anthony Crowdell: Great. And then, if I just — last question, I’d say with costs. I’m just curious, it seems — obviously, WEC large corporation in our space. You’ve been able to navigate a lot of the challenges of maybe higher rates, inflation headwinds. And is it the scale and size? I mean, how big of a factor is that navigating where some of the smaller utilities or smaller companies are really stumbling on navigating? I mean, is it that — do you need that scale and size to handle these challenges?

Gale Klappa: Anthony, it’s a great question and my view would be we are in a scale business. I don’t think there’s any question about that. And I’m going to ask Xia to give you one statistic that I think underscores the benefits of scale. If you look back to the — as a starting point, to 2016, which would be the first full year after our acquisition of Integrys, so from 2016 to the end of €˜22, Xia will give you a statistic that will blow your mind.

Xia Liu: I think Gale mentioned — is thinking about the day-to-day O&M performance. You know we brought down over $300 million since the acquisition. The CAGR from 2016 all the way to the projected 2023, I think is about 2.5% reduction a year projected. So at the same time, if you think about the asset base growth over the same period, it’s been north of 7% a year. So, the growing rate base asset base, at the same time bringing down O&M. So, that’s a pretty solid track record.

Gale Klappa: It just gives you an example, Anthony, of the benefits of scale.

Anthony Crowdell: Well, thanks so much. Thanks for the time. I’m also not planning a dog anytime soon. I hope you guys have a great day.

Gale Klappa: Thank you, Anthony.

Operator: Our last question comes from the line of Vedula Murti with Hudson Bay Capital.

Gale Klappa: Hello, Vedula.

Vedula Murti: Good afternoon. How are you?

Gale Klappa: We’re good. How about you?

Vedula Murti: I’m okay. A question

Gale Klappa: No, no, no, no. Vedula, I keep wanting you to say wonderful and award winning. You know that.

Vedula Murti: Great. Wonderful, award winning. I appreciate that. Thank you.

Gale Klappa: All Right.

Vedula Murti: Okay. With all the focus on affordability and the regularity of rate filings and rate increases over multiple years, associated with investments, et cetera. I’m wondering if you can maybe — the topic talk too much about is the rate design and whether in fact there is any room or any ability to kind of work on that to perhaps balance some misalignment or to like somehow perhaps make things perhaps broadly more affordable. I know that in the past, it was always the industrial, large customers, subsidize residential and those used to be the thing to want to work it back through cost of service. So, I’m just wondering — I wonder if you can kind of give us your thoughts on that. And secondarily, one of the other things is about the fixed charge versus variable and whether there’s been a trend mostly to moving towards a much larger fixed charge and away from being volumetrically exposed?

Is there any thought or any duration or philosophy around perhaps using that as a means to make things more balanced into affordability?

Gale Klappa: Okay. Well, I will ask Scott to give his view on this as well. Let me start off with one thing that immediately comes to mind. We have been, I think, pretty innovative in trying to help on the whole affordability issue. In fact, in the prior rate case and then it will be actually improved coming out of this rate case, we started something called the LIFT program for low income individuals where if you stayed on a payment plan, there was actually some forgiveness of bill arrears. And that’s been actually an example again of how we’re trying to help and work on the whole affordability issue. So, that’s one thing that comes to mind. And the other is, I’m sure, as we continue to see adoption of EVs across the footprint, that we will be looking at time of use rates and things that can be helpful in terms of not adding to the peak demand and therefore, not adding to our investment cost because of the prevalence of — as we continue to grow the prevalence of EVs. Scott?

Scott Lauber: You’re exactly right. Looking at like time of use rates has been very helpful, especially as people are starting to get the EVs and they charge at night. And we’re always looking at other opportunities, and we had — we’ve added in the past year some real-time market pricing programs, too, to encourage economic development. So, we really continue to evaluate what’s good for the state of Wisconsin and our customers.

Gale Klappa: Hope that’s helpful.

Vedula Murti: I appreciate it. Thank you.

Gale Klappa: You’re welcome. All right, folks. Well, I think that concludes our conference call for today. Thanks so much for taking part. Always enjoy the discussions with you. And if you have any additional questions, feel free to call Beth Straka at 414-221-4639. Thank you, everybody, so long.

Operator: Thank you, everyone, for your participation. You may now disconnect.