Good afternoon, and welcome to WEC Energy Group's Conference Call for Second Quarter 2023 Results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time.

Before the conference call begins, I remind you that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made.

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

During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at 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..

Financial discipline, operating efficiency and customer satisfaction. During the second quarter, we also continued to move forward on our major initiatives, including the investments outlined in our $20.1 billion ESG progress plan. As we've discussed, the plan is based on projects that are low risk and highly executable.

We expect to quadruple the amount of renewable generation for our regulated customers, add highly efficient gas field capacity to ensure reliability and continue to harden our delivery networks. Scott will provide you with more detail on several specific projects in just a moment.

As a reminder, we project that our ESG progress plan will drive growth in earnings per share of 6.5% to 7% a year. And as we've discussed, there is no need to issue equity for this $20.1 billion five-year plan. Now over the past few months, many of you have asked about the trajectory of our next five-year plan.

Our updated plan will cover the period 2024 through 2028. Of course, if growth in demand for capacity and energy drives our next capital plan significantly higher, then we'll evaluate all our financing options.

In addition to incremental debt and refinancing opportunities, our options could include accessing the equity market through our dividend reinvestment plans, employee benefit plans and at-the-market programs. I would stress that at this point, we do not see the need for any block equity offering.

Again, as a reminder, any equity need would be driven by growth and would support our long-term growth projections. As you would expect, we're on schedule with the development of our next five-year plan, and as usual, we'll share the details with you in the fall.

Now let's take a brief look, we'll switch gears and take a brief look at our regional economy. We're still seeing a very strong labor market in Wisconsin. In June, the state added 7,000 private sector jobs.

The unemployment rate came in at 2.5%, well below the national average, and the labor force participation rate rose for the fourth straight month in Wisconsin to 65.3%. Very solid numbers. We're also encouraged by the pipeline of economic activity in our region.

Last quarter, you heard that Microsoft plans to make an initial investment of $1 billion to create a new data center campus. This new complex will be built south of Milwaukee, in the Wisconsin Innovation Park where Foxconn is located. Microsoft has purchased 315 acres in Area 3 of the park and is moving full speed ahead.

In fact, earthwork at the site began just a few days ago. So along with American Transmission Company, we're working closely, in fact, on a weekly basis with Microsoft to determine the full extent of the energy infrastructure that will be needed to serve this development.

We're excited about supporting Microsoft as the company moves forward with a major technology investment, and we'll update you as the planning proceeds. With that, I'll turn the call over to Scott for more information on our regulatory developments and on our operations. Scott, all yours..

Thank you, Gale. I'd like to start with a few updates on the regulatory front. In May, we filed a limited reopener to set 2024 rates for our Wisconsin utilities. The filings address the recovery of capital investments for certain projects going into service this year and in 2024.

These are renewable facilities, RICE generation and LNG reliability investments. The projects have already been approved by the Wisconsin Commission. The return on equity and the equity layer are all set and are not up for consideration as part of this proceeding. We expect a decision from the commission by the end of this year.

And as you recall, we have rate filings under review in Illinois for Peoples Gas and North Shore Gas. After nine years without a base rate case at Peoples Gas, we're making these requests for 2024 to support our investments in critical infrastructure.

In mid-July, the staff filed its rebuttal testimony, recommending a 9.83% return on equity and an equity layer of 50.83% for Peoples Gas. This was consistent with the initial recommendations from the staff. We expect a final decision by the end of the year.

And moving to the other states, we are very pleased that we have reached a settlement agreement in our rate reviews at both Minnesota Energy Resources and Michigan Gas Utilities. The Minnesota Commission is considering a settlement that would provide a 7.1% increase in base rates.

As a quick reminder, that’s based at a 9.65% return on equity with an equity layer of 53%. And we’re pleased to update you that in Michigan we have reached a unanimous settlement and the details will be made public later this week. We expect final commissioned approval by the end of the year.

Meanwhile, we’re continuing progress on a number of regulatory – regulated capital projects. At the beginning of June, we closed on our first option of West Riverside Energy Center for $95 million. This adds 100 megawatts of efficient combined cycle natural gas generation to our portfolio.

As you recall, this plant is in operation and the purchase price was based on book value. And in the next few weeks, we plan to file a request to purchase another 100 megawatts of Riverside capacity under our remaining option. We also put 128 megawatts of new natural gas generation online last month.

As you recall, we invested $170 million to build this generation at our existing Western power plant site in Northern Wisconsin. The facility uses seven reciprocating internal combustion engines or as we call them, race units. Elsewhere in the state work continues on the Badger Hollow II solar facility and the Paris and Darien solar-battery parks.

The Badger Hollow II site has begun receiving panels using non-Chinese polysilicon. Also, we continue to work on securing custom release of panels from a bonded warehouse in Chicago and we’re still expecting Badger Hollow II to go into service late this year or early next year with Paris Solar Park to follow.

In addition, work has begun on the Darien solar facility, which is planned to go into service in 2024. We’ll keep you posted and updated on future developments. With that, I’ll turn you back to Gale..

Scott thanks very much. As you may recall, our Board of Directors at its January meeting raised our quarterly cash dividend by 7.2%. We believe this continues to rack our dividend growth in the top decile of our industry. We’re targeting a payout ratio of 65% to 70% of earnings.

We’re right in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more detail on our financial results and unveil our third quarter guidance. Xia, all yours..

Thanks, Gale. Our 2023 second quarter earnings of $0.92 per share increased $0.01 per share compared to the second quarter of 2022. Our earnings package includes a comparison of second quarter results on Page 15. I’ll walk through the significant drivers. Our earnings from utility operations were $0.04 above the second quarter of 2022.

First, weather had an estimated $0.05 negative impact quarter-over-quarter. Higher depreciation and amortization expense and interest expense added another $0.09 of negative variance. These negative variances were more than offset in the quarter. Rate base growth contributed $0.11 cents to earnings.

This includes the base rate increase for our Wisconsin utility as well as the interim rate increase for Minnesota Energy Resources, both of which were effective January 1, 2023. Additionally, timing of fuel expense improved our earnings by $0.05 and lower day-to-day O&M, taxes and other items resulted in a $0.02 improvement.

Before I turn to earnings of the other segment, let me briefly discuss our weather normalized sales for the quarter. You can find this sales information on Page 11 of the earnings package. Retail electric deliveries in Wisconsin, excluding the iron ore mine were down 0.6% on a weather normal basis.

This was driven by lower sales volumes to large commercial and industrial customers. Residential usage, again on a weather normal basis was flat quarter-over-quarter, which is in line with our forecast. Also, sales to our small commercial and industrial customers were up 1.4%, which is ahead of forecast.

Earnings at our Energy Infrastructure segment improved $0.02 in the second quarter of 2023 compared to the second quarter of 2022. This was largely driven by higher production tax credit as a result of the acquisition of renewable projects.

Finally, you’ll see that earnings at our Corporate and Other segments decreased $0.05, primarily driven by an increase in interest expense. This was partially offset by favorable rabbi trust performance and some tax and other items. Remember, rabbi trust performance is largely offset in O&M.

Overall, we improved on our second quarter performance by $0.01 per share compared to last year and by $0.08 per share compared to the midpoint of our Q2 guidance. Looking now at the cash flow statement on Page 6 of the earnings package. Net cash provided by operating activities was relatively flat compared to the prior year.

And total capital expenditures and asset acquisitions were $2.1 billion during the first half of 2023, an increase of more than $1 billion from the first half of 2022. This was primarily driven by acquisitions of generation projects in our Regulated and Infrastructure segment. Now, let me give you the guidance for the third quarter.

We’re expecting a range of $0.88 to $0.90 per share. This accounts for July weather and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.96 per share in the third quarter last year, which included a positive $0.02 from weather and a $0.05 pickup related to the resolution of the MISO ROE complaint.

As Gale mentioned earlier, we are reaffirming our 2023 earnings guidance of $4.58 to $4.62 per share, assuming normal weather for the rest of the year. As a reminder, largely due to timing of O&M and fuel expense, we expect earnings in Q4 to be materially better than Q4 of 2022. With that, I’ll turn it back to Gale..

Great, Xia. Thank you. Overall, we’re on track and focused on providing value for our customers and our stockholders. And operator, we’re ready now for the question and answer portion of the call..

[Operator Instructions] Our first question will come from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead..

Julien, before we start, I know – before we start, I know a great puppy trainer, so just let me know.

Julien, are you still with us?.

Julien, your line is open..

Can you hear me now? Darius, go for it..

We can..

I thought I heard a dog barking in the back there, Julien..

You can, sorry. Sorry about that. I don’t know what happened. I thought I was on mute and off mute there, but then I got figured..

I was just saying Julien – Julien, I was just saying that I know a great puppy trainer, so let me know..

All right, I’m going to put it duly noted, sir, duly noted. I appreciate it. And by the way, congrats guys on all the updates here, really nicely done.

I mean to that effect when you think about the settlement here in Michigan, how do you think about Illinois here and the ability to settle that out at least in part here as you get through the bulk of the hearings here in the near-term? Any opportunities and also any thoughts here on the legislative side going into 2024 for gas in Illinois as well?.

Okay. Appreciate the questions Julien, very much. Tackle the first one first and that’s any potential or possibility for a rate settlement in our Peoples Gas and North Shore Gas cases in Illinois.

So, as many of you know, the way the process really unfolds during normal rate reviews in Illinois, historically settlement windows really don’t occur or really don’t open until the administrative law judge has prepared a draft order.

And if I remember correctly, the schedule for that administrative law judge draft order probably looks like late October, early November. Scott is agreeing that that’s the case. So if there’s a settlement opportunity, I think those discussions would take place probably in the November timeframe. So we’ll see.

Again, as Scott mentioned in his prepared remarks the staff has reiterated its position with a 983 return on equity recommendation and an equity layer higher than what we have at Peoples Gas today. So I hope that responds to your question. And then as far as legislation related to gas in Illinois, we’ll just have to see what takes place.

But first things first, we continue to work on a positive resolution of the cases currently pending before the Illinois Commerce Commission.

Hope that helps, Julien?.

Certainly does. And then just quickly, if I can.

Any thoughts about converts here? I mean, I heard your opening comments Gale and just curious if open to following the trend across the space?.

Yes. Well, as we look at our financing package that will be needed to support our new five-year capital plan, I mean, we’ll look at it, it could be part of the mix, but again, I think it really depends upon the circumstances at the time. We haven’t ruled it out.

We’ve followed the companies that have used this particular financing and I think you saw one announce today as a matter of fact. So, we haven’t ruled it out. We haven’t ruled it in but it certainly will be part of what we look at going forward..

Awesome. We’ll leave it there. I’ll follow-up with you, Gale. All right, take care..

Sounds good. Thanks Julien..

Your next question will come from the line of Shar Pourreza with Guggenheim Partners. Please go ahead..

Shar you didn’t do any permanent damage to those Porsches, did you?.

You have to ask Southern company that, not me..

Well, I noticed they’re taking a charge this quarter, so I was a little worried about what you did down there..

We’ll have to wait for that one. Gale, I know you mentioned the Microsoft Facility could be in service by late 2024, early 2025, which obviously that overlaps with your existing five-year plan through 2027.

Should we be thinking about Microsoft related investment as something that’s separate and incremental to the current five-year plan? Or is the focus on really maintaining that 7.7% asset based growth as you manage customer affordability? So, in other words, so could other base spending be pushed out to make room for Microsoft related spending? Thanks..

Well, great question, Shar. And first off, I don’t think really just given the magnitude of the construction that Microsoft seems to be planning, my own belief is we won’t see the Microsoft campus in operation in 2024. I think that’s just too much of a stretch.

My guess, although the company is still very much in its – refining its plans my guess is fourth quarter 2025, early 2026 would be my guess for the first element of the plan that Microsoft is putting together to be operational.

And then secondly to your question about would the Microsoft investment that we need to make to support their energy needs and reliability, would that investment be incremental to the plan? Absolutely incremental to the plan. There’s no question about that because it was not in our current five-year plan.

Although there are many moving pieces at this stage of the game. But I would just say this is a really positive exciting opportunity for a major new high tech investment in our state..

Okay, perfect.

So we shouldn’t look at it as crowding out other base related spending as you’re managing rates in the vehicle?.

No, absolutely. I mean, think about, it’s a great question, Shar, but I would think about it this way. I mean, clearly with the way our customer rates are set demand from Microsoft, I mean essentially, I mean, given the rate charges that Microsoft would receive, they will pay their fair share of whatever additional capacity and energy is needed.

So it wouldn’t be a crowd out type of a type of a factor at all, in my opinion..

Okay, perfect. And then just on the equity common scale, I just want to get a little bit of a better sense on timing and the trigger.

Is it like, would it be Microsoft related spending? Because I have to imagine if the facilities at whatever 2025, 2026 facility the generation needs to be before that – transmission and distribution needs would be before that.

So what’s the trigger for incremental equity? Is it Microsoft or is there other things we should be thinking about?.

I think it’s both. I mean, certainly if we need to add significant capacity to support Microsoft’s operation here, but there are other things going on.

The other economic developments that have occurred, for example, I mean we talk a lot about Haribo, but they are now up and running and they’ve told us they will produce 132 million pounds of gummy bears in the next 12 month period. So there’s a good bit of economic activity going on.

So if you think about transmission, and we’re going to start to see in the next five-year plan the impact of tranche one from the MISO planning process, so I think we’re going to see an uptick in transmission investments. I think we’re going to see clearly some additional capacity need. We need to continue to harden our distribution networks.

There are a lot of moving pieces and all of them moving in a direction of a stronger capital budget. And as Scott and I have talked about stronger for longer in terms of our continuing growth projections..

Okay, perfect. I guess, we’ll wait for – it should be an interesting update. And for the record, Gale, I did not crash any Porsches. Thanks guys..

Rock and roll, Shar..

Your next question will come from the line of Durgesh Chopra with Evercore ISI. Please go ahead..

Hi, Durgesh.

How you doing?.

Hey good afternoon, Gale. I’m doing just fine, thanks for asking.

Just – Xia, sorry if I missed it, but what drove the $0.08 variance versus guidance? Like what were the kind of the tailwinds you had, which then drove the beat versus your guidance in the quarter?.

Xia told me it was superior management, but she probably has a more granular answer..

It was – it’s a little better fuel and quite a bit better O&M. And weather was actually slightly negative compared to normal, but it’s better fuel, better O&M and a couple of other items..

Got it. So I guess in terms of the guidance for back half of the year, I’m just thinking about like how are you positioned versus your guidance there.

I mean, is better O&M versus your plan, correct?.

Yes. We see quite a bit of O&M tailwind coming in, in the fourth quarter, so we’ll expect to see O&M to be much better than Q4 last year. We expect fuel to be better and additional PTCs and other items, but quite a bit of O&M and fuel tailwind in the fourth quarter..

And Durgesh, just to add on to what Xia is saying, if you recall, there were a number of very significant items in Q4 last year that will not repeat in Q4 this year. So there’s a very major difference as we compare the comps for Q4 of 2022 and what we expect to happen in Q4 of this year..

And remember, we guided 2% to 3% higher on day-to-day O&M this year compared to last year. So you see some quarter-to-quarter variances, but for the year we still expect that to be 2% to 3% higher than last year..

Understood. Thanks for all that additional color. Maybe just – Xia, just – I know we recently talked about transferability and the implications to FFO and there was a lot of discussion amongst your peers on how that needs to be – how that should be treated.

Maybe just any additional color or thoughts there or progress you’re making with other stakeholders on how are you going to treat the transferability as cash flow?.

We’ll ask Xia to give you the detail on this, but I would say one very important point to kind of kick off the answer is that our entire industry is really aligned around what we believe is the proper treatment of these ongoing transfers that will happen across the industry, the ongoing sale of production tax credits.

And that alignment across the industry has really resulted in I think, Xia, a very thorough and very solid white paper..

Yes. We – I developed a very comprehensive white paper. Really outlined the views from FASB from the big four accounting firms, from the – over, like Gale said, the industry.

So they shared the white paper with the rating agencies and all that is to say, I think everybody is aligned in terms of we plan to follow GAAP and the transferability will go through income tax provision on income statement, therefore, would be picked up as FFO. So we are looking forward to continuing to work with the rating agencies on this issue.

I will say, though, is we would not issue equity just to address that transferability item. So that's something we'll continue to work with rating agencies..

Got it. Thanks. So it sounds like discussion is underway there. I appreciate that color as well. Thank you, guys..

Take care, Durgesh..

[Operator Instructions] Our next question will come from the line of Anthony Crowdell with Mizuho. Please go ahead..

Good afternoon, Gale, Xia and Scott, No dogs, no Porsches, but plenty of gummy bears here. Just maybe two housekeeping items I had on the PDF Page 12 of your release. Just curious if you could give us some more color.

The decline in large commercial industrial sales, and maybe I have the wrong view, I typically view them as maybe like weather agnostic, but yet they've come in 3%.

Just thoughts on that?.

Yes. A couple of thoughts, and we'll ask Xia to give you some chapter and verse on some specifics. But two things that as we've looked at the data, and again, we have a very granular breakdown of the major industrial sectors that we serve.

So let me first say, most people, just as you mentioned, Anthony, look at large commercial and industrial as fairly weather insensitive. Fairly, as you said, fairly weather agnostic. I will say, though, and you've heard me say this a gazillion times, the weather normalization is more – it's more precise and accurate.

And as we look at kind of backdrop of the economy in Wisconsin, as we look at the jobs that have been added and as we kind of look at the industrial sectors, I would describe the industrial economy in Wisconsin for the first half of 2023 is really fairly flat.

There were a couple of major customers who had outages, planned outages, et cetera, that affected the numbers. But the 3% seems, on a weather-normal basis, seems a little draconian to me. I think Scott and I and Xia have already worked through this, and we kind of look at it as kind of first half flat.

But having said that, the most recent data is pretty encouraging.

Xia?.

Yes. Just to put it in perspective, in Q1, we saw a minus 3.9% quarter-over-quarter. Q2, that number became better to minus 3.1%, like you pointed out, Anthony. I think if you look at Q2 by month, June was fairly close to the forecast.

If you look at the last four weeks compared to the last 13 weeks or even the prior four weeks, we're seeing lots of green. Actually, everything was picking up. So we are very cautiously optimistic that the large C&I will come back in the second half of the year, so nothing to worry too much about.

And I would just say that on residential, it's pretty flat year-over-year, and – but it's fairly better than prior to COVID and that's the sticky point on the residential usage. Small C&I, actually year-to-date, is on par with last year. So those are higher margin segments..

Great. And then just lastly, you've been very clear on what would cause you to issue more equity. Xia, you had said it's not so much to – if it was to – I don't want to say, put the words in your mouth, but like the credit agency, it's more for growth.

Is it fair to say that if you got to the point where there was more growth that had to be financed that you would finance that – a cap structure that's probably equal to what you have at the regulated utilities? Or is there an opportunity that you would look to over-equitize, I guess the term some are using, if you had the additional to get some growth going on?.

I think the first and foremost is we're still developing the capital plan. So the numbers are – we're still developing it.

But like Gale said in his prepared remarks, if growth, capital growth is significantly higher, we wouldn't mind turning on the employee benefit plans, the dribble plans and rely on maybe ATM, but we don't see any block sales at this point, number one. Number two, we are very confident in our long-term EPS growth forecast.

We don't expect any equity sales to dilute the long-term EPS growth. And I'll also say that we're very mindful about the rating agencies and we want to work with them, but the equity would be to support growth..

And a very good description that Xia just made. I will say, she also mentioned and I would just reiterate, for the one item on FFO to debt that might affect our rating at one particular agency, we wouldn't issue equity simply to chase that particular item..

That's the transferability. That's transferability. Yes..

Great, thanks for the clarity. And again, congrats on a great quarter..

Thank you. Good to see you..

Your next question will come from the line of Michael Sullivan with Wolfe Research. Please go ahead..

Rock and roll, Michael.

How you doing?.

Hey, Gale. I’m doing great. Thanks. Wanted to just circle back to the Microsoft, and just what you're seeing in terms of long-term sales growth potential there? And then maybe if you could just compare and contrast what this looks like relative to – there was a lot of excitement around the Foxconn build out a couple of years ago.

I know different companies, different situations.

But just in terms of how you think about that from a planning standpoint, with another big name company coming to your service territory?.

Yes. Great question, Michael. Let me just phrase it this way. I think we will certainly know by the fall and certainly in time for our new five-year capital plan, what the next – what the time period between now and say, 2030 will look like in terms of Microsoft's capacity and energy needs.

I mean they are – I mentioned in my prepared remarks, they are full speed ahead. I mean they purchased the 315 acres in a very short period of time in that technology park, earthwork has already begun, they are still refining their plans.

But everything we're hearing from Microsoft would indicate that they're planning a very major investment here, and they need to do it in a relatively short time frame. So there's really no question in our minds about how strong the intention and how strong the momentum is from the Microsoft development.

As it relates to Foxconn, well, back in 2017, they announced a long-term, very, very significant plan. They were talking about 10,000 jobs over 10 to 12 years or 10 to 13 years. They were talking about $10 billion of investment.

At this stage of the game, Foxconn, which is working in Area 1 of that park, Foxconn has invested over $1 billion and has over 1,000 employees. So while they have been slower to ramp up and their business plan has changed almost completely from the original thinking, they are still growing in that area.

But Microsoft, I think they're really not talking at the moment about a long-term 10 to 15 year plan like Foxconn was. They're talking about, at least at the beginning here, they've called it an initial investment that they really want to get moving on, and that would affect our next five-year capital plan.

Does that respond to your question, Michael?.

Yes. Super helpful. And just as a follow-on, I think someone asked earlier or there's been a couple of questions around new capacity needs and new generation that you might have to build.

And given the quick turnaround time, is further delaying any currently planned retirements contemplated at all if things were looking kind of tight from a time frame perspective?.

Well, that's a great question, and we're looking at all of that. I'll let Scott give you his view on that..

So we're going – it's a great question. We're going through the planning process right now. We're evaluating what our capacity needs are. And you know MISO has changed is capacity needs over the seasonal approach too, which will also affect our capital plans as we look at it this fall. So right now, nothing to announce.

We're just going through the analysis..

Scott has made a really good point that we shouldn't gloss over though, and that is as MISO has looked at its responsibility to ensure reliability, they really are changing their capacity rules that all of us need to abide by. And it will have a – we believe it will have a particular effect on our winter capacity reserves.

That's all being factored into our new five-year capital plan..

Got it. Okay. Very helpful. Thanks. Thanks a lot..

Take care, Michael..

With that, I will turn the call back over to Gale Klappa for any closing remarks..

Terrific. Well, that concludes our conference call for today. Thanks so much for being with us. If you have any additional questions, feel free to call Beth Straka. She can be reached most days, no, everyday at (414) 221-4639. Thanks, everybody. Take care..

That will conclude today's call. Thank you all for joining. You may now disconnect..