Good afternoon, and welcome to WEC Energy Group's Conference Call for Second Quarter 2020 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'll remind you that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made.

In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.

During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. After the presentation, the conference will be opened to analysts for questions-and-answers. 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. And now it’s my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group..

Hot town, summer in the city. Good afternoon, everyone. Thank you for joining us today, as we review our results for the second quarter of 2020. First, I'd like to introduce the members of our management team who are on the call with me today.

We have Kevin Fletcher, President and Chief Executive, Scott Lauber, our new Chief Operating Officer, Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. And please join me in welcoming Xia Liu, our new Executive Vice President and Chief Financial Officer.

Xia, will discuss our metrics in more detail a little bit later in the call. As you saw from our news release this morning, we reported second quarter 2020 earnings of $0.76 a share. We remain optimistic and confident in our ability to create value despite the challenges presented by the pandemic.

As always, our focus on operating efficiency was a major factor in our second quarter performance. In addition, warmer than normal weather drove residential energy use significantly higher during the quarter. We also continue to make excellent progress on our $15 billion capital investment plan.

If you recall, that plan covers the period 2020 through 2024. As a reminder, we have ample liquidity and no need to issue new equity. Now you may have seen our latest project announcement just last week [indiscernible] to acquire an 85% ownership interest in the Tatanka Ridge wind farm.

The Tatanka Ridge is under construction in South Dakota and we expect the project to be in service in early 2021. When complete, the site will consist of 56 wind turbines with a combined capacity of 155 megawatts. Our investment is expected to total approximately $235 million for the 85% ownership interest and substantially all of the tax benefits.

This project, ladies and gentlemen, fits our investment criteria to a T. It has long-term offtake agreements for all of the energy produced with Google Energy LLC and with Dairyland Power Cooperative, a well-established electric co-op based in Wisconsin that serves utilities in multiple states.

We also expect the project to be eligible for 100% bonus depreciation. This will be our sixth wind project in the infrastructure segment of our business. As you may recall, we've allocated $1.8 billion of our current five-year plan to grow our infrastructure segment.

With the Tatanka Ridge project, we've already committed over $1 billion of that amount, and we're only seven months into the five-year plan. We have one other quick update for you on our infrastructure segment. You may recall that we will be the 90% owner of the Thunderhead Wind Farm being built by Invenergy in Antelope County, Nebraska.

This 300-megawatt project was expected to begin service by the end of this year. However, we now project a several-month delay because the local utility has paused construction of a substation that's needed to connect the Thunderhead project to the transmission network. We continue to work with all the relevant parties to minimize the delay.

I would point out, however, that we have a number of positive offsets in our plan. So this delay should not change the trajectory of our earnings growth for 2021. Switching gears now I'd like to touch on our commitment to environmental stewardship and the tremendous progress we're making.

In 2019, we exceeded by a decade the goal we had set for the year 2030 to reduce carbon dioxide emissions by 40%. The major solar investments we're building for our Wisconsin retail customers more carbon free energy is on the way.

In light of our progress, we recently announced two new aggressive goals, to reduce carbon dioxide emissions by 70% below 2005 levels by the year 2030 and for our generation fleet to be net carbon neutral by the year 2050. We look forward to working with all of our stakeholders to develop policies that will help us achieve these appropriate goals.

We're also committed to reducing methane emissions. At the end of 2019, we were halfway toward our 2030 goal of lowering methane emissions from our natural gas distribution lines by 30% per mile and that's from a 2011 baseline. And now for a moment, I'd like to take a step back and look at the economic conditions in Wisconsin.

As you would expect unemployment spiked during the first few months of the pandemic. The data for June were really encouraging. Labor market improved with the addition of more than 100,000 jobs and unemployment in Wisconsin fell to 8.5% well below the national average.

We are also encouraged that the major economic development projects announced over the past few years are moving forward. For example, Amazon continues to expand here in Wisconsin with new local distribution centers. And HARIBO, the German candy manufacturer received local approval of its final site and operational plans in May.

Groundbreaking is now projected to take place in September. You may recall this will be one of North America's largest confectionary plans. HARIBO expects to invest between $320 million and $350 million and hire 400 employees in the first phase of the project.

Meanwhile, just a few miles south of Milwaukee in Racine county, Foxconn continues to develop its high-tech manufacturing and research campus. Recent published reports indicate that Foxconn could begin production at its new LCD fabrication plant as early as this fall.

Construction is progressing well on Foxconn's smart manufacturing facility and its new network operations center. It's also important to note that we're seeing a strong ripple effect from Foxconn's commitment to Wisconsin. More than 70 additional investment projects have been announced within a 20-mile radius of the Foxconn campus.

70 plus projects range the gamut from health care to housing to industrial buildings to retail. We expect these developments will result in more than $1.2 billion of new private capital investment and more than 2,500 jobs. Long story short, our long-term growth projections remain fully intact.

And now I'll turn the call over to Scott for more details on our sales results for the quarter. Scott, all yours..

Thanks, Gale. We continue to see customer growth across our system. At the end of the quarter, our utilities were serving approximately 11,000 more electric and 27,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volumes are shown on a comparative basis on page 17 and 18 of the earnings packet.

We saw an impact from the stay-at-home orders that were in place during much of the reporting period, but usage was better than we projected on the first quarter call. For example, residential sales of electricity were up 17.1% from the second quarter of 2019. And on a weather normal basis were up 7.3%, 3.4% better than our adjusted forecast.

Small commercial industrial electric sales were down 8.6% from last year's second quarter. And on a weather normal basis, were down to 11.3%, falling 2.7% below our adjusted forecast.

Meanwhile, large commercial and industrial sales, excluding the iron ore mine, were down 12.9% for the second quarter of 2019, and on a weather normal basis were down 14.1%, 5.4% better than our adjusted forecast. Overall, retail deliveries of electricity, excluding the iron ore mine were down 2.7% from the second quarter of 2019.

On a weather normal basis, sales were down 6.9%, tracking 1.7% ahead of our forecast. To summarize our experience during the quarter, we're encouraged that the monthly trends in sales improved sequentially each month. For more detail, see page 17 of the earnings package. At this time, I'd like to address our sales outlook for the balance of 2020.

Our third quarter forecast has retail sales, excluding the iron ore mine, down 3.6% compared to 2019. Keep in mind, this is on a weather normal basis. In looking at the data for July, excluding the impact of weather, we tracked slightly better than our forecast. Looking now at the projections for the fourth quarter.

Our adjusted forecast reflects continued economic recovery. We are looking at sensitivities to this forecast and watching economic indicators. We are prepared if the level of recovery would drop back to what we saw in the second quarter. We estimate that the additional impact to the pretax margin would be approximately $10 million to $15 million.

We believe we could absorb this margin compression through efficiency measures already in place. And now I'll turn it to Kevin for an update on utility operations..

Thank you, Scott. First, I'll note, we've remained focused on safety and efficiency throughout this health crisis. We have reduced our operations and maintenance costs in a reasonable manner with the help of technology we've invested in. Our employees continue to work remotely where possible, communicate with customers and follow health precautions.

And through the first half of 2020, we saw our highest customer satisfaction results on record across all jurisdictions. Now I'll briefly review where we stand in our state jurisdictions. As you may recall, we have, no active rate cases at this time which is positive in our current environment.

We are pleased that the Michigan Commission approved a proposal that allows us to defer $5 million in cost through 2021 rather than proceed with a rate case at our Michigan gas utility.

In line with pandemic, we have worked constructively with our commissions to develop mechanisms for future recovery of foregone late payment charges, bad debt and other expenses. In Wisconsin, Public Service Commission has authorized us to defer foregone late payment charges, uncollectible expense and incremental pandemic-related cost.

This covers all COVID-related expenses in our residential as well as our commercial and industrial sectors. The Illinois Commerce Commission has established a special use rider for the recovery of incremental cost and foregone late payment fees. Recall, there already is a bad debt rider in place. Turning now to our projects.

We're continuing to add utility scale solar generation to our portfolio. You may recall that we're making good progress on the two solar projects for Wisconsin Public Service, which will provide us with 200 megawatts of capacity. And as of to date, construction is more than halfway complete on our Two Creeks Solar farm.

And we announced last quarter that we received approval to invest in a third solar facility Badger Hollow II to serve our We Energies customers. We expect it to go into service by December 2022. This is a slight timing change that should have no meaningful impact on our earnings or capital program.

We believe this scheduled change will be beneficial to customers as we focus on managing project costs. As you may recall, we are evaluating site plans for two liquefied natural gas facilities to help serve our We Energies customers during the winter peak. We expect to invest approximately $370 million in these projects.

If approved by the Wisconsin Commission, construction is expected to begin in the summer of 2021. In Illinois, we're making progress on the system modernization program. We have installed over 1,000 miles of new gas distribution pipe, and our work is almost 30% complete.

Earlier this year, an independent engineering study confirmed the critical need for this project. The Kiefner engineering study found that over 80% of the pipes in the people’s gas delivery system had an average remaining life of less than 15 years. Our improvements are making the delivery system safer and more allowable for our Chicago customers.

Now with details on our second quarter results and more information on our outlook for the remainder of 2020, here is our CFO, Xia Liu.

Xia?.

Thank you, Kevin. I'm happy to join the group for this call, and I look forward to working with all of you and hopefully seeing you in person at some point. As mentioned earlier, our 2020 second quarter earnings grew to $0.76 per share compared to $0.74 per share in 2019.

Despite the negative margin impact in this year's second quarter related to the pandemic, we were still able to achieve quarter-over-quarter earnings per share growth.

This was due to our continued focus on operating efficiencies, executing on our capital plan, significantly warmer than normal weather and an increase in the authorized ROE for American Transmission Company. The earnings packet placed on our website this morning includes a comparison of second quarter results on page 2021.

I'll walk through the significant drivers impacting our earnings per share for the second quarter. Starting with our utility operations, we benefited by $0.07 per share from warmer weather and our continued focus on operating efficiency drove a $0.04 decrease in day-to-day operating expenses.

These favorable factors were primarily offset by $0.04 of higher depreciation and amortization expense due to our capital investment and by $0.06 of lower margin, mainly due to reduced sales volumes. Scott has mapped those details out for you already. Moving on to our investment in American Transmission Company.

We picked up $0.03 per share related to a FERC order that allowed ATC to increase ROE from 10.38% to 10.52%. This adjustment was retroactive to November 2013. Our energy infrastructure operations also were accretive to the quarter.

The Coyote Ridge wind farm, which was placed in service in late December 2019 added $0.01 per share, primarily from production tax credit. The remaining $0.02 decrease is driven by some tax and other items, partially offset by Rabi Trust performance. Remember, variance in the Rabi Trust performance is mostly offset in the utility O&M.

In summary, we outperformed second quarter 2019 by $0.02. Now I'd like to update you on some other financial items. This year, we expect our effective income tax rate to be between 16% and 17%. Excluding the benefits of unprotected taxes flowing to customers, we expect our 2020 effective tax rate to be between 20% and 21%.

At this time, we expect to be a modest taxpayer in 2020. Our projections show that we will be able to efficiently utilize our tax position with our current capital plan. Looking now at the cash flow statement on page six of the earnings package. Net cash provided by operating activities increased $88 million.

This increase was driven by higher cash earnings and timing of tax payments. Total capital expenditures were $1 billion for the first half of 2020, a $182 million increase from 2019. This reflects our investment focus in the regulated utilities.

We paid $399 million in common dividends during the first six months of 2020, an increase of $27 million over the same period in 2019 which reflects the increase in the dividend level that was effective in the first quarter of this year.

In closing, before I turn it back to Gale, I'd like to provide our guidance for the third quarter and full year 2020. For the quarter, we're expecting a range of $0.74 to $0.76 per share. This accounts for July weather and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.74 per share in the third quarter last year.

We are reaffirming our earnings guidance for the full year in the range of $3.71 to $3.75 per share with an expectation of reaching the top end of the range. This assumes normal weather for the remainder of the year. With that, I'll turn it back to Gale..

Xia, thank you very much. We're delighted you've joined us. Again, as we look to the remainder of the year, we expect to hit the top end of our guidance range of $3.71 to $3.75 a share, assuming normal weather. We're also reaffirming our long-term projection. Our projection of long-term earnings growth in a range of 5% to 7% a year.

Finally, a quick reminder about our dividend. Recall that in January, our Board of Directors declared a quarterly cash dividend of $0.6325 a share, that was an increase of 7.2% over the previous quarterly rate. We continue to target the payout ratio of 65% to 70% of earnings. We're right in the middle of that range now.

So I expect our dividend growth will continue to be in line with the growth in our earnings per share. Overall, we're on track, focused on delivering value for our customers and our stockholders. And operator, we're ready now to open it up for the question-and-answer portion of the call..

Thank you very much. Now we will take your question. [Operator Instructions] Your first question comes from Shar Pourreza with Guggenheim Partners. Your line is open..

Rock and rolling, Shar..

Hey. Good afternoon, guys..

How are you doing Shar?.

Not too bad. Never a dull moment in utility land. But pretty good. So Gale, just a couple of questions here.

Focusing on the infrastructure segment first, was the Tatanka Ridge acquisition, was that catalyzed at all by the current kind of market conditions? Or was this just a straightforward acquisition kind of along the lines of Blooming Grove and Coyote, et cetera?.

No, it wasn't catalyzed it all by the pandemic. This one is - we've been looking at this one for a number of months before the pandemic. So it was really just an ongoing part of our due diligence..

Got it. And then sort of with this acquisition, and you highlighted this in your kind of prepared remarks that you're slightly over half of your allocation in the current plan for the infrastructure bucket.

Should we sort of expect a slower pace in the coming years or perhaps an increase in the allocation as you kind of roll forward later this year, i.e., is there a point in time when we can see the infrastructure capital budget actually increase from the 1.8?.

Well, we'll see how things shake out when we update our five-year capital plan in the fall. But again, a couple of parameters that really govern our work in that infrastructure segment. First is our tax appetite.

And it so happens that we continue to see very high-quality projects where we can efficiently use our tax appetite to generate cash and earnings and continue our progress in investing in renewables.

So what we're looking at here in this five-year capital plan and in the next five-year capital plan is really that happy marriage of efficiently utilizing our tax appetite and investing in renewables that have very, very high-quality off-takers in our solid projects.

Again, we would not expect over time the entire infrastructure segment really to grow to more than 10% of our total enterprise. That's basically our cap. We have plenty of room, even investing $1.8 billion in this five-year plan. At the end of that five-year plan, we're still only at 6% of our total enterprise.

So plenty of room, and I think a number of very high-quality projects still in the pipeline..

Got it. Got it. And then lastly, Gale, you guys obviously have a really ambitious decarbonization target to hit neutrality. Can you just sort of talk about next steps here? And then obviously, you're dipping your toes a little bit in solar, like one of your peers.

Sort of this decarbonization target, does it sort of increase the importance of Peach Bottom. And then just maybe if we can conclude around, is there any sort of updates with your participation in Governor Evers decarbonation task force.

So how do we kind of roll this up and build an investment case around it?.

Just for clarity, we don't get anywhere near Peach Bottom. I know you're thinking about Point Beach..

That's right. That's right. Sorry about that. Yes, correct..

And I think Kevin is probably better looking than the CEO over there at [indiscernible] At any rate we are - to directly answer your question and for those who need the context, a significant percentage of the electricity we provide to our We Energies customers, like a quarter of it is coming from our Point Beach nuclear plant that we sold to NextEra many, many moons ago.

Those units are set to turn age 60 in 2030 and 2033. And we're looking at all kind of alternatives. I can tell you now that there will be a very significant opportunity for us in terms of investment need in the latter half of the decade.

Right now, if I were a betting man, I would look at substantially more investment in renewables and probably battery storage. But we will have more detail for you certainly on the next five years in terms of our generation reshaping, when we update our capital plan in November..

Got it.

And is there any updates on the task force with Governor Evers?.

That work continues. I think with the pandemic, the time frame for recommendations was delayed, but I still believe there will be recommendations from Governor's task force by the end of this year..

Got it. Xia, congrats on the transition. I know between Gale, Kevin and Scott, you're working with the best in the business. So that's terrific, congrats. Thank you, guys..

Thanks, Shar..

Thanks, Shar..

Your next question comes from Durgesh Chopra with Evercore ISI. Your line is open..

Hey, Durgesh.

How are you doing today?.

Hey, Gale good afternoon. Thanks for taking my question and welcome, Xia. I look forward to working with you. I just have one question. Rest everything is clear. On this - on the slide where you or in the press release where you break out the margin by segment, Wisconsin, in particular. I'm just wondering what this other margin number is.

It's a big number in the Wisconsin reconciliation. It's like a 26.4 earnings or margin drag year-over-year.

Any color on that? What is that comprised of?.

Yes. I'd be happy to talk about that. I think the majority of that is COVID related. Remember Scott mentioned the reduction in the weather-normalized sales. So the majority of the 26.4 is COVID driven..

Got it. And that pretty much was offset by, if I'm reading this correctly, good weather in the quarter..

Yes, that's exactly right. The weather more than offset the COVID reduction for the quarter..

Understood. So then just a quick follow-up. When thinking about O&M obviously, you've made a ton of progress in the quarter.

How should we think about that effort going into second half of the year? Are you going to - do you flex that sort of up or down depending on how weather tracks out? Or you think that this quarter was more in line with how you have progressed in the past with just continued O&M savings?.

Durgesh, a very good question. Let me just say this. We have a plan in place that would allow us, as Scott mentioned during his remarks, that would allow us to overcome a substantial additional decline in energy usage, if we were to go back to the kind of conditions we saw in the second quarter.

So we've got a plan in place that we think will be absolutely appropriate to continuing to deliver value and reach the top end of our guidance range. Now if things get better, if we see a stronger economic recovery, then obviously, we can flex in one direction or another. But we've been very pleased with the results so far.

And I would also say that, for example, in Illinois, some of that's timing. Illinois will not be as hard hit as some of the other companies potentially because there's decoupling of our gas distribution sales in Illinois. So long story short, we've got really strong flexibility, we've got a great plan in place.

It's delivering exactly what we expected to be. We can flex up or down as needed given the conditions..

Understood. Thank you, very much Gale and thanks for answering my questions..

You’re welcome, Durgesh..

Your next question comes from Julien Dumoulin-Smith. Your line is open..

Hey. Good afternoon, everyone. Thanks for the time and congrats again Xia for the move. Perhaps if I can pick it up where Shar left off. On the investment and infrastructure side, I mean, I think you said yourself, you're half a year in, and you invested $1 billion out of $1.8 billion.

Just given the timing of this capital, as you think about it and you have a sort of finite tax capacity. How do you think about it in those terms? If you can think about the - to the sense which you raise that later, is that necessarily going to be in the back half of the plan, just given how much tax appetite you've absorbed over a year.

How do you think about it from that perspective? Just to quantify that, if you don't mind. And also, Gale, if I can clarify, I think you said this 6% of the enterprise. Is that 6% of earnings as well, just to make sure we heard you right as well on the through the plan..

Well to answer, Julien, your last question first, yes, I would look at that as about 6% of total enterprise earnings. Again, that would be an investment of $1.8 billion with our prior investments as well in the infrastructure segment at the end of the five-year plan, delivering about 6% of the total enterprise's earnings.

So the short answer to that is yes. Then in terms of how to look at all of this, by the way, while I'm answering that, you may want to think about Shar's comment about best-in-class.

Still there, Julien?.

Absolutely. I was just waiting for you to keep going..

tax appetite, efficient use of that tax appetite and high-quality projects..

Okay. Fair enough. Second question, you guys have a carbon target. You guys are frankly expanding on those. How do you think about that reconciling with your day-to-day operational planning? And maybe this might be a good opportunity to talk about Columbia, for instance. But I don't want to leave the witness too much on the response here.

Just how do you think about the carbon targets that you guys laid out most recently against your IRP planning?.

Well, I think it's actually not all that complicated. Clearly, as we look at the next 10 years, a 70% reduction in CO2 emissions over the course of - from where we are up to a 70% reduction, it will require continued reshaping of our generation fleet.

And that in plain language means that some of the less efficient coal-fired power plants that we have in our system or that we jointly own, like you mentioned, Columbia, for example, those things will have to be looked at in terms of potential retirements.

And we will provide you more color on all of that as we update our next five-year capital plan come fall..

Excellent. Well, I'll let you execute against the best-in-class plan here. Take care, everyone..

Thank you, Julien..

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

Hello, Jeremy..

Hi, good afternoon. Just want to start off with, I guess, your sales expectations as you look at the balance of the year here. And if you could expand a bit on how this has trended versus your original expectations. It looks like residential shaped up quite well.

Just wondering if you expect that to kind of continue relative to your expectations there? And any feeling for industrial activity over the back half of the year as well?.

Sure. Great questions. Well, let me try to summarize it, and then we'll ask Scott to add some color to this as well. When we had our last analyst call going into the pandemic, we projected that we would see about an 8.6% decline in total retail sales during the second quarter with the stay-at-home orders in place.

We actually came in weather normal at about 6.9% down. So we ran better in Q2, the difference between 8.6% down and 6.9% down. So we ran better there. If you look at July and weather normalization over a short period of time, you know how I feel about that. It's more precise than accurate. But we are assuming for in our plan for Q3.

Starting in July, about a 3.6% weather-normal decline in total retail energy sales. If you weather normalize July, Scott, we were running about 1% better than that..

And the preliminary data we're looking at in using our automatic meter reading system, it looks about 1% better. So very encouraging as we look at those sales.

I think another encouraging fact is when we look at new services that are being installed in our We Energies territory, our gas new services are up 11% compared to the prior year, and the new services we're seeing on the electric side is up 7%. So we're seeing some good customer growth and good construction projects even during this pandemic time..

And I think in terms of specific industries that you asked about, and this is something we look at on a regular basis. We serve large commercial and industrial customers in 17 different sectors of the economy, as you've heard me mention before.

The ones that seem to be hanging in there with any kind of strength at all, it won't surprise you, paper, food processing, food packaging, electronic controls. And I will say this, in fact Xia and I were talking about this just earlier today, we have less exposure to the automotive industry than many companies.

In fact, we have far less exposure to the automotive industry that we had going into the '08, '09 recession. So a very diversified economy, a number of the large commercial and industrial customers were deemed essential to begin with because of, again, food, paper, food packaging and processing, et cetera.

So we have a diversified set of customers that we are supplying energy to.

But the one thing that Scott mentioned that is - that stands out to me also in the quarter, is just the number of new services that he was mentioning and the number of new services compared to last year, particularly on the natural gas distribution side of the business, where we continue to see strong growth..

That's very helpful. Yes. That was very helpful. Thank you. And one more, if I could. Just when it comes to savings here that you've been able to achieve year-to-date.

I don't know if you're able to kind of share with us what number that would be in kind of the context for, how much of that is kind of - could be ongoing in nature versus onetime in nature? And then as you think about harvesting savings over the back half of the year, weather does turn favorable over the rest of the summer, how do you think about throttling that back to, I guess, de-risk 2021 at this point?.

Well, great question. And as I mentioned earlier, we have a plan in place where we think we could absorb the hit from the economy going back to the depths of where it was in the second quarter. That's probably another $10 million to $15 million of additional O&M reduction, if needed.

If it's not needed, we will certainly continue on with our - with all of the efforts that we have ongoing to continue to keep the system reliable. I will say this, the reductions we've made so far have really had no impact on reliability. We designed them that way.

So we're in a great position to be able to flex up or down depending upon what we see with the economy. And I can tell you, in terms of - Kevin and I have talked about this at some length.

I can tell you in terms of - we get asked this all the time, what amount of the cost - additional cost savings we've identified and implemented, what amount of that is permanent. And Kevin, I would say right now, we continue to see that percentage increase, but I would say where we are, at least half of those savings..

I would agree with what Gale has said. We have a culture of looking for ways to continue to be more efficient to take cost out of our business with looking at reliability, reliability numbers are strong, and I would agree with that, with the efforts we have in place, at least I have..

One of the reasons - thank you, Kevin. One of the reasons why we're so confident is that for us, operating efficiency is not a program. It's not something we turn on and off. The way of life here and it's embedded for years in how we do business. So I hope that responds to your question..

That was very helpful. Thank you..

Your next question comes from Michael Weinstein with Crédit Suisse. Your line is open..

Michael, how are you today?.

All right.

How are you doing?.

Good. You may be in an area where liability suffers, same to [ph] Wisconsin..

I am signing off tomorrow. In terms of what you just said about how - at least half the savings from COVID-19 are sustainable going forward.

What does that mean in terms of the 5% to 7% growth rate? Does that push you towards the upper end of that going into next year and beyond?.

Well, as you know, Michael, the capital plan is really the big driver of the 5% to 7% growth rate. But I will say this, and I think this is very encouraging. The kind of cost efficiencies that we've been able to deliver really are going to help us to continue to drive our capital investment plan in a way that continues to keep pressure off rates.

So I think that - to me, that's the key ingredient here. We've been very successful, as you know, in basically holding rates virtually flat for the last five years since the acquisition of Integrys. And that's been very helpful, obviously, from all kinds of directions.

But long story short, I think what we're seeing here is icing on the cake in terms of continuing to be able to invest the kind of capital we need to invest, achieve the 5% to 7% growth rate, continue to improve and maintain the reliability of the system, continue to invest in renewables to accelerate future that's got very low carbon to no carbon and keep pressure off rates..

And what about, sorry, what about in terms of the onshore wind projects, as you go beyond 2020 and the tax appetite starts to wane, you still have some more projects to invest in.

Would you consider tax equity at that point? Or is this more - where you'll simply invest at the correct case so that your tax appetite absorbs it?.

Well, first of all, our tax appetite does not wane after 2020. That's why we have $1.8 billion in the five-year plan. And just a preliminary look beyond the five-year plan, we don't see our tax appetite waning. So that's kind of piece one. Piece two, there are plenty of high-quality projects in the greater Midwest that we're looking at.

And I don't really see the need to venture offshore or change our risk profile by investing in something that we are not very familiar with, with high-quality off-takers. So again, don't think that our tax appetite wanes very quickly. It just doesn't.

And they're all kind of really cool, solid projects that are in our pipeline that we're looking at that don't require us to venture offshore..

Okay.

So is the current plan still anticipating you being a taxpayer in 2020, even with continued investment?.

Well, yes. And we'll let Scott and Xia explain that. Long story short with the tax rules, it's almost impossible to completely eliminate any federal taxes.

Scott, Xia?.

Yes, that's exactly right. We are in modest - we project to be a modest taxpayer in 2020. I think the....

Right. One last question for me. You guys have a very strong equity currency. There's a lot of - certainly, today, there's been some news on the M&A front in terms of in the industry.

But I'm just wondering what kinds of - what I mean, can you comment a little bit about maybe your potential appetite for M&A, considering that you have one of the strongest currencies in the industry? And what your view of right now is of the current prices for other utility companies? And what kind of criteria you might be looking for if you were to even consider it?.

Well, let me answer it this way. My wife says that I'm boringly predictive. So I would give you the same three criteria because they haven't changed. In fact, I was mumbling them in my sleep last night. I mean our approach is exactly what you would expect it to be, disciplined, not overpaying.

We don't get involved as a genital rule in processes or auctions. And the three criteria that we would apply to any potential opportunity remains set in concrete. First, we would have to believe after significant due diligence that we can make the acquisition accretive to earnings in the first full year after closing.

Second, we're not going to trash the balance sheet to do it. The industry is littered with stories where that didn't end well. And then the third thing, which is probably the gating criteria today.

We want to make sure that the earnings growth rate of anything that we would acquire would be at least as strong with our own organic growth rate, read that 5% to 7% a year. So those criteria are hard and fast. In fact, the first thing that Xia and I talked about on day one was those criteria, and she had a giant smile on her face..

Scott, you also have dreams in night about M&A?.

Just curious..

Have a good night, guys. Thank you..

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

Hi, Sophie.

How are you today?.

I am doing well. Congrats on the quarter. And thank you for the time..

Thank you..

So it is pretty clear and I think a lot of questions have been answered. I just have one question. I'm not sure if you guys given it any thought, but so hydrogen seem to be making some kind of a comeback right now where people begin to look at it again as a potential - for its potential energy storage qualities, I guess, with the renewable build-out.

Is that something you looked at, maybe have a pilot planned in that regard and just factoring it anyway in your planning? I'm just curious. Thank you..

Great question. A lot of buzz, as you know, about hydrogen these days. Let me say this, we think there may be some potential there and there are lots of different ways if there might be potential. There are pilot projects. Florida Power & Light just announced a pilot project that will be going into service they believe in 2023.

There are a couple of pilot projects that I'm very familiar in Europe right now. One of the things that we're looking at here relates to the potential use of hydrogen as a mix in our gas distribution lines. So there are lots of ways that the hydrogen angle can be played, but I will tell you, it is very, very early days.

And we will - we obviously will keep a very close eye on this, but lot of research going on. Europe is probably a bit ahead in terms of the pilot projects. We are a long, long way away, in my opinion, from anything being commercialized and readily available.

A lot of potential and it could, I think, help all of our companies get to the 2050 carbon goals. But long story short, this is really very early days, and we'll see where it all goes.

But I think there's some possibility that we will - not only that we might be able to, but we will be looking at both renewable natural gas and hydrogen as part of the potential for our gas distribution company going forward.

Kevin, anything to add to that?.

Well, hydrogen, I'm sure you know, is very commonly used in petroleum refining and fertilizing. But the issue is the production and pipelining cost of it. So we'll continue to monitor that along the way, Gale, and as it makes sense, we'll look at it for our future..

Good. Thank you so much..

Very good. Thank you..

Your next question comes from Michael Lapides with Goldman Sachs. Your line is open..

Hi, everybody..

Getting one of those blue martinis, whoever – they were lately..

The only thing that’s blue is my heart thinking about that [indiscernible] in the first three games and potentially given up that last playoff slot day. If there is anything that I am doing and about it getting Jon Marray [ph] and the team back on track..

Michael, you know, that you’re head coach down there was on the backstamp [ph] last year..

I am excited about our – I like our coach. I like our coach a lot. Got a question for you. Someone else asked the question about your cold fleet and maybe some of the smaller or the less economic units. Actually, I want to turn that question the other way around.

Because when I think about how to make material changes to your carbon footprint, it's not the small plants, it's the large ones that move the needle. How should we think about your largest coal facilities, whether it's the older Oak Creek units or the newer ones or maybe some of the other, the Weston 4, which is not that old.

How do you think about the path to win some of those would be potential retirement targets?.

Well. That's a good question. But let me say this. We've already retired 40% of our coal-fired generating fleet, over 1,800 megawatts just since 2014. Most of those retirements were the older, less efficient plants. In fact, that's just the way we I think it's appropriate to look at the world. You look at what's on the bubble economically.

So we don't have many of the smaller older plants left. We just don't because we've retired 40% of the coal-fired fleet. So as we begin to look at what other units are on the bubble, the economics will drive us.

And I will say to you that our newer power, the future units at Oak Creek are so efficient and emit less carbon per unit of output than almost any of their coal-fired power plant on the planet, literally. So that would be the last thing you would look at.

But long story short, what will drive our look at generation reshaping, our continuing look at generation reshaping is what is the least economic what can be replaced at a lower cost to customers, both in terms of actual operating dollars, actual capital expenditures, but also making the best in terms of environmental improvement.

But we're not really driven necessarily by particular size, we're driven by economics..

Got it. Thank you. And then a total unrelated question.

Can you talk about Wisconsin, the customer bill? And where you see kind of your average residential and your average industrial rates relative to kind of your regional peer group? And if there is dramatic differences either above or below, what could potentially change that in the coming years in either direction?.

So let me say first, just to put things in context, we have, as you know, virtually frozen rates for the last five years. During that period of time, many of our regional peers and Beth likes to point this out. Many of our regional peers have actually - have actually had double-digit rate increases.

Many of them year after year in terms of the rate increases that they've been authorized. So our competitive position, Michael, is really in great shape today. And if you look at customer bills, which I think is the appropriate measure and one that you're asking about, we're actually in great shape.

And then we have - I mean, we're actually in great shape compared to our regional peers. But in addition to that, I want to talk about the other things that we've done that I think are relatively innovative, to be able to be incredibly competitive for new industrial customers.

One of the things that we talked to Foxconn, they are glowing about their projected price per kilowatt hour. Our real-time pricing rates are getting our customers, industrial customers who are growing at prices under $0.04 a kilowatt hour. And recently, with natural gas prices down and demand down, gosh, there are days when it's $0.02 a kilowatt hour.

So we have put in place a number of innovative rates to make our state incredibly competitive for new industrial customers and growing industrial customers. And I think you see that paying off in a number of the economic development announcements.

But overall, in terms of our retail rates, residential, commercial and industrial, we are in very good shape competitively today..

Got it. And final question.

I know next year because you're usually on every other year cycle, is there supposed to be a rate case here in Wisconsin is - given just kind of what's going on in the economy, do you fill yourselves as needing to come in? Or would there be any leeway, any discussion with the commission to where you could potentially push that out another year or two and hold off from a filing?.

Yes. Good question. At this point, we'll wait and see every option is on the table. But I can tell you that the normal rate filing cycle that you're referring to would have us file sometime next year for rates that will go into effect in 2022 and 2023 with our forward look test periods.

But again, to your question directly, no decision yet, but every option is on the table..

Got it. Thank you, Gale. Much appreciate it..

You’re welcome, Michael. Take care..

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

Thanks for filling me in..

You’re welcome.

How are you doing today?.

Can you hear me?.

Yes.

Can you hear us?.

I just did. Okay, sorry. I wanted to follow-up on Foxconn really briefly. So my understanding is that there's - at least last I heard there was a contract negotiation going on with the WEDC. And I was wondering if you have any update on that in terms of them getting the tax cut.

It sounded like they got the jobs, they met the job qualification, but there are other issues, as you know, with this contract. So I was just wondering if, a, there was an update on that. And then the second sort of related question is you mentioned a lot of the economic development that's occurring around the Foxconn facility.

And I'm just wondering, there was a lot of infrastructure and stuff that the state put in. And I'm just wondering, things obviously, we've got a pandemic, we've got budgetary issues with the state. Just whatever, there are things that can change, and obviously, that could potentially impact Foxconn.

If it ends up that there isn't necessarily as much Foxconn investment as originally thought of and what have you.

What's the potential for the development that you're seeing around the facility sort of still being there, if you follow me? It would seem to me that a lot of this, and I'm just thinking out loud, would probably be there just given the investment and sort of the activity already there, sort of its own sort of inertia, if you follow what I'm saying? Or can you give us any flavor on that?.

Yes. Sure, Paul. Let's talk first about the additional private investment that I mentioned within a 20-mile radius of the Foxconn campus. Since 2017, when Foxconn first turned dirt down there.

There have been more than 70 projects, other capital investment, other private entities making or announcing $1.2 billion of additional projects and capital investment. And today, even with the pandemic, about two thirds of those projects, two thirds of those 70-plus projects are either complete or underway. So that is going extraordinarily well.

And again, for those of us who've been involved in economic development, Kevin and I have been at this for a long time. We've always seen and believed in the ripple effect, particularly when you have a major company making that kind of a commitment. And that ripple effect is alive and well, believe me.

I mean think about that, $1.2 billion of additional capital investment, more than 70 projects. Again, two thirds of those are either underway or completed. In terms of the Foxconn project itself, they have never stopped construction during the pandemic. They revised their footprint, they've revised their plan, obviously, to adjust to market conditions.

But their activity continues at pace down in what they call Wisconn Valley. And yes, my understanding is they are in discussions with the state about some changes to the original contract, the original incentive contract.

But I think that's largely driven by, for example, that contract, which is public, talks about a Gen 10.5 fabrication plant, which they're not building. So there need to be clearly some technical changes in the contract. But the two parties, as I understand it, are in discussion, those discussions are private.

But from everything I can tell, Foxconn's commitment to Wisconsin continues.

In fact, they announced that they'll be, as you may recall, they'll be producing now ventilators for Medtronic, which never was expected obviously, because no one knew about a pandemic coming, but they're going to be starting very soon, producing ventilators on that site for Medtronic.

So there's a variety of high-tech things that I don't think any of us expected that are going on there..

Okay. Great. Thanks for the update. And I guess with respect to the climate stuff, really, we should be thinking November is probably when you're going to be elaborating more on sort of what you're going to be - how you're going to be how you plan on reaching those goals and everything? Is that - that's what I've gathered so far.

Is that pretty much what we should stay tuned for?.

Yes, exactly. We'll roll out the broad details on our next analyst call, which is usually late October, early November and we'll be happy to provide all the details that you need during our discussions at the - what I believe will be a virtual EEI conference..

Awesome. Thanks so much, guys..

You’re welcome Paul. Take care..

All right, folks. Well, I think that concludes our conference call for today. Thank you so much for participating. If you have any other questions, please feel free to contact Beth Straka. She can be reached at (414) 221-4639. Thanks, everybody. Take care..

This concludes today's conference call. You may now disconnect..