Barclays CEO Energy-Power Conference

Sep 5, 2018

Slides

Happily introduce Gale Klappa, Chairman and CEO of WEC Energy Group. If you'd like to come on up, Gale, we'd love to hear what you have to say today. Eric promised to be short and sweet, he really was. Good afternoon, everybody. Thank you for joining us. Wanted to just walk you through, I'm sure many of you are somewhat familiar with our story, but we thought we'd level set you and walk you through what we have become over the last three or four years, post a major acquisition, talk about our strategy and plan for a bit going forward. If we can move the slides, we'll be in great shape here. There we go. I think we missed the legal slide, which basically, since we pay our lawyers by the word, I can tell you your results may vary. In essence, as a summary, a couple of very important points. First of all, I really believe, and you'll see as we walk through the presentation, that we have a premium portfolio of businesses. In essence, we are targeting and have targeted since our acquisition of Integrys, 5%-7% earnings per share growth, and we now can achieve that with very minimal impact on customers and on rates. We have dividend growth that we're projecting in the 5%-7% range, in line with our growth and earnings per share. We have a dividend policy of paying out 65%-70% of our earnings in dividends, and today we're right smack dab in the middle of that range. Going forward, you can expect dividend growth in line with earnings growth. Probably one of the most significant differentiating factors, I believe for our company, when you look across the landscape of the industry, is that we have no need to issue any additional shares, no equity issuances throughout our forecast period. We can finance without equity issuances, almost $12 billion of new capital expenditures. Again, I think that's a significant differentiating factor for us in our industry. Finally, I really believe that we're poised to deliver among the very best risk-adjusted returns in our industry. Just to level set everyone, we're a Fortune 500 company. We serve four and a half million customers across the upper Midwest. We have over $31 billion of assets, and from the retail standpoint, from a state jurisdictional standpoint, nearly 70% of our assets are still housed in the state of Wisconsin. If you add, though, our ownership of American Transmission Company, we are the 60% owner of American Transmission Company, almost 85% of our assets are physically located in the state of Wisconsin. We are the eighth-largest natural gas distribution company by customers in the U.S., and by market value, the 13th-largest utility network in America. Just to kind of give you a more granular breakdown, you can see on the screen that electric generation and distribution accounts for about 40% of our total assets. We also have in the brown on the screen here, you can see about 29% is in gas distribution. I want to point out the gas distribution, because that, as you'll see when we get to our capital spending plan, that is where a lot of our growth is coming from. We have seen over the course of the last decade, since really the Great Recession began, we have seen, not just for our company, but nationwide, almost no growth in consumption of electricity in the U.S. On the other hand, we are seeing very strong consumption growth for natural gas across the sectors, across industrial, commercial, and residential. You'll see as we get to our capital spending plan, a fairly significant amount of our new capital dedicated to gas distribution. Then again, you can see just by jurisdiction, in terms of retail regulation, state regulation, about 69% of our assets are in Wisconsin. When you add the American Transmission Company, you get to about 85% of our assets located in Wisconsin. About 13% of our assets are with Peoples Gas in Chicago, Illinois. Over the course of the last decade, you've seen quite strong and consistent earnings per share growth. If you look back starting in 2008 and then factor in what we expect and what we've guided to earn for 2018, you'll see 8% compound annual growth in earnings per share. With that, a consistent track record of dividend increases. 2018 has marked our 15th consecutive year of dividend increases. Again, as I mentioned, you can expect earnings per share growth and dividend growth to mirror one another going forward. If you'll just let me walk down memory lane a little bit. This is kind of my favorite slide, you got to bear with me. If you look over the course of the past 15 years, you can see that utilities as a whole have been a pretty strong-performing group. Whether you like the S&P Electric Index, the PHLX Utility Sector Index, or the Dow Utility Average, you see total returns there ranging anywhere from about 350% to about 493%. A very strong 15-year performance track record for the utility sector. If you look at the broader averages, obviously the Nasdaq essentially tops that list with a 511% total shareholder return over the course of the past 15 years. My favorite part of this slide, our total shareholder return over that 15-year period has been over 720%. Operationally, we take great pride in both customer satisfaction and operating reliability. This past year, we were named in Wisconsin at We Energies, which is headquartered in Milwaukee, we were named the most reliable utility in the U.S., and for the seventh consecutive year, the most reliable utility in the Midwest. We have a very, very solid track record, obviously, of reliability for our customers. We were also, for the second consecutive year, named by Corporate Responsibility Magazine as one of the 100 Best Corporate Citizens in the U.S. Our capital plan going forward is actually quite simple, but there are some important points that I'd like to cover with you. As I mentioned earlier, a very significant portion of our capital plan over the course of the next five years will be dedicated to gas distribution. Let me give you some specific statistics. As I mentioned earlier, we're seeing very strong growth in terms of natural gas consumption by our retail customers. You try to weather-normalize our data because the weather can obviously skew natural gas consumption pretty considerably one way or another. If you look at 2016 over 2015, on a weather-normal basis, natural gas demand in our region grew by 3.7%. You then go to the next year, 2017 over 2016, again, on a weather-normal basis, natural gas consumption grew by another 3.7%. For the first half of this year, we're well ahead of plan. On a weather-normal basis, natural gas consumption is up by 5.4%. That's being driven by a couple of things. First and foremost, cheap natural gas prices. Secondly, the upper Midwest has been dominated historically by propane for heating. We're seeing, particularly post the polar vortex winter of 2014, more and more customers transferring off of propane and hooking into our natural gas distribution network. We're seeing good customer growth, we're seeing stable and relatively inexpensive natural gas prices, we're also seeing industrial demand for natural gas grow. There, I'll talk about one specific sector. In the western part of the state of Wisconsin, we have the best sand for fracking in the U.S. In fact, about one-third of all frack sand that is utilized in fracking wells across the U.S., about one-third of that sand comes from the state of Wisconsin. We built, a number of years ago, a huge natural gas lateral across into the western part of the state of Wisconsin, and we're seeing really solid growth from the frack sand miners who have to dry the sand before shipping. In fact, in the first half of this year, natural gas demand just from that sector alone was up by 32%. Very good growth in the natural gas distribution sector, supporting about 42% of our capital expenditures going forward. The second, I'll talk more about this in a minute, about 21% of our capital plan will be devoted to the generation, the power generation segment. We have a smaller segment at about 8% of our capital spending plan that we simply call technology. There, there are a couple of examples that I will give you. The first is we are investing at the Milwaukee-based utility, $100 million in a brand-new customer information and billing system, which will, once we get that in place, all seven of our operating utilities will all be on the same platform for customer information and customer billing. That $100 million investment should result in about $25 million of operational cost savings. That's just one example in the technology sector. In the next sector, we have distribution. Of course, we're constantly trying to upgrade and modernize and harden our electric distribution system. About 21% or $2.5 billion of our total capital spending over the next five years will go into the electric distribution segment. Then we have a relatively new segment called energy infrastructure. Again, about 8% of our capital spend, I'll talk with you about that in some detail in the slides coming up. One of our major goals is to support a clean energy future, we have a very significant reshaping going on with our power generation portfolio. Our plan includes retiring more than 1,800 megawatts of coal-fired generation, older, less efficient coal-fired generation during this planning period. The first of our major coal-fired plants that we're retiring was shut down in April. We expect the second plant to be shut down by the end of this year, the third plant, which is in the Upper Peninsula of Michigan, to be retired in the first half of 2019. We're also expecting to add, we're seeking approval to add over 400 megawatts of natural gas-fired generation by 2022. The first piece of that is already well underway, all approvals are in hand. I mentioned the retirement of the Upper Peninsula of Michigan plant. It's the only operating power plant in the Upper Peninsula. We will be shutting down that old coal-fired power plant and replacing it with, I think, something very interesting. They're called reciprocating internal combustion engines, or we call them RICE units. They're fueled by natural gas, very low emissions, no water permits needed, they're modular. The only power plant I've ever seen in 40 years in this industry that's actually on wheels. This, I think, is a very good solution for the Upper Peninsula of Michigan. Again, it's an example of replacing older, less efficient units with higher cost production, with lower cost operation and maintenance costs, less environmental impact. That's a very significant part of what we're trying to accomplish. Also, we plan to invest in more than 350 megawatts of what we call zero carbon generation. In this case, it will be solar in the state of Wisconsin. We've just announced a brand-new carbon emission reduction goal as part of this entire generation reshaping plan. Last year, we set a goal to reduce carbon emissions by 40% by the year 2030, compared to 2005 levels. Our new goal, which we just announced actually on our earnings call a month or so ago, is an 80% reduction in CO2 emissions by the year 2050. I think we will clearly exceed our 40% reduction goal. I believe if we stay on track, that we'll meet the 2030 goal for a 40% reduction actually by 2023. We're making great progress in terms of achieving lower CO2 emissions. The energy infrastructure segment that I mentioned is really something quite new for us, I think shows you how having a strong balance sheet, having a tax appetite, not having to issue equity, having some real flexibility, what that can mean in terms of a strong company in today's industry landscape. As you know, some companies in our industry have stumbled. Some companies are trying to sell really good assets. Some developers are trying to cash out on their assets. Some companies are trying to repair their balance sheets. Many do not have a tax appetite. By not having a tax appetite, that means that they cannot take full advantage of the value of investing in renewables, because if you don't have a tax appetite, you cannot get the value of the tax credits, or at least the full value of the tax credits. Luckily, our situation and our balance sheet is strong enough that we can be opportunistic in this industry landscape. We set a goal of investing in renewables by and large, renewables or gas storage. We had a goal in our capital plan of $900 million of investment over the next five years. Actually, in the first six months of this year, we are almost halfway there toward achieving that goal. Let me talk with you briefly about the assets that we've acquired. The first that we want to talk about is basically the Bishop Hill 3 Wind Energy Center. Bishop Hill 3, in which we will own 80% for a total investment of $148 million. Bishop Hill 3 is in Henry County, Illinois. It's in the Midwest power market, and the long-term offtaker for 22 years is one of our existing wholesale power customers, Wisconsin Public Power. This is a great asset for us. It doesn't fit in retail regulation, but because it's a long-term offtake with a highly credit-worthy customer that is one of our wholesale power customers to begin with, it does not change our risk profile. The returns are slightly better than what we're able to earn in our regulated retail business. The other investment that we've made is in something called the Upstream Wind Energy Center. Total investment there, and this is a bit bigger wind farm, the total investment there is going to be over $270 million. It's in Antelope County, Nebraska, population zero. No, I'm not kidding. Population very small, but great wind. The offtaker for this particular wind facility is a unit of Allianz, A-rated, publicly traded company. Again, a high-quality offtaker, very favorable contract terms, and a long-term offtaker with a credit quality company. We expect to provide returns from these types of investments that are actually higher, as I mentioned, than our regulated returns. These two particular investments fully qualify for Investment Tax Credits and Production Tax Credits. The cash-on-cash returns are actually far superior to those in our regulated business. I would be remiss if I didn't also just quickly mention to you the strength of the economy today in our region. The U.S. is obviously experiencing economic growth faster than any time since 2008. In Wisconsin, we have an unemployment rate at 2.9%. That unemployment rate has stayed below 3% now for six consecutive months. In the entire history of the state of Wisconsin, for the entire time that they have been creating and monitoring unemployment statistics, we have never had unemployment below 3% in the state before for six consecutive months. The labor participation rate in Wisconsin, adults in the workforce, if you will, percentage of adults in the workforce, is number five in the U.S., top five in the U.S. We're seeing a pipeline of economic activity that is really unprecedented in the state. The first I'll mention, some of you have probably heard the name Foxconn. Foxconn is the world's fourth largest tech company. How many of you either have an Apple or a Samsung iPhone? Well, Samsung doesn't have iPhone, but Samsung, whatever. If you have it, Foxconn put it together for Apple. They're the largest electronic contract manufacturer in the world. They put things together for Hewlett-Packard, for Sony, for Microsoft, for Apple, for Samsung. Just a huge company. They acquired a controlling interest a couple of years ago in a Japanese electronics firm, which the name will be familiar to you, Sharp Corporation. Sharp has developed something called 8K technology. It is the highest resolution, highest clarity visual technology in the history of the world. You probably could buy a 4K TV today. 8K technology is not just double 4K resolution. It's exponentially higher. The markets for this 8K technology, they believe, are going to be many. Certainly, televisions and electronics, but also medical. They're already doing, in Japan, experimental surgeries using this high-resolution technology. Medical, homeland security, national defense, and automobiles. They are going to build, Foxconn is going to build in Wisconsin, just 15 miles south of the Milwaukee airport, one of the largest high-tech manufacturing campuses in the entire world. They've committed a $10 billion investment. That's $10 billion investment, promising to employ 13,000 high-tech employees by the year 2023. It will take 10,000 construction workers just to build the high-tech campus. Already, the economic development, the ripple development that we're seeing is significant. Already, in just a few months, there has been $300 million of commercial economic development announced just around the Foxconn campus. A terrific opportunity for us. We are building new natural gas distribution infrastructure to serve that campus. That's $140 million project, not in our capital plan. American Transmission Company needs to upgrade the transmission network in southeastern Wisconsin. They just got approved and are beginning construction of a $117 million upgrade of the transmission network in that part of the state. Terrific opportunity with Foxconn coming down the road. I would point you, if you have kids, you know about Haribo. Kids love gummy bears. Haribo is a German company, 100 years old. They're making their first North American investment in Wisconsin. They're going to build one of the largest confectionery plants anywhere in North America. It's a $240 million investment, and mostly what they will produce is gummy bears. If you come to EEI, Beth is promising more gummy bears. They will start off with 400 employees, projected to grow to 1,400 employees over the next few years. If any of you like to go to The Home Depot, you've probably seen the brand Milwaukee Electric Tools. Milwaukee Electric Tools makes basically what their brand name says, electric tools for the construction and building trades all over the world. Their growth has been phenomenal. They're based in a suburb of Milwaukee. Just about a month ago, the governor and I did a groundbreaking for Milwaukee Electric Tool. They are going to put in another 350 jobs and build their worldwide manufacturing design center and innovation center right in Milwaukee. Just to give you a sample of the kind of economic development activity that we think will keep the Wisconsin economy humming for a number of years to come. Just to wrap it up, our key takeaways. A track record of, I think you would agree, exceptional performance, a portfolio of premium businesses, investment opportunities that support the 5%-7% growth target that we aspire to, dividend growth in line with earnings per share growth. No need to issue any additional equity. We have 315.5 million shares outstanding today. Tomorrow, we're going to have 315.5 million shares outstanding. I believe that we're poised to deliver, ladies and gentlemen, among the best risk-adjusted returns in the industry. Thank you so much for your attention. Eric, do we do questions? We'll definitely open up for questions. If you have a question, please wait for the microphone to come along as we're being webcast. While we're waiting, I would just ask, you've talked about the infrastructure investments of $900 million between now and 2021. You've identified about half of that. You've obviously said you don't need equity. You have balance sheet capacity. Would there be an expectation that that might increase, especially given what you've talked about with the potential solar project on the Foxconn or any other projects and the such? Good question. The quick answer is yes, I would expect as we update our new capital planning. We generally provide you with a new five-year capital projection. In this case, we will probably announce our new five-year capital plan on our third quarter analyst call at the end of October. We will dive into all of the details at the EEI Financial Conference. I would expect, Scott and I are continuing to look through the prospect pipeline. I would expect that you could see some increase because of the success we've already had in that infrastructure bucket. Yes, sir. I have a question on your gas utilities in Minnesota, Michigan, and Wisconsin. I noticed that you have the gas pipeline replacement rider in Illinois. Right. What's sort of the condition of the pipelines in the other states? Is there a reason why the regulators don't want to use a regulatory replacement rider versus doing the rate cases to get that investment in the rate base? Essentially, if you didn't catch the question, this gentleman's asking about what condition our condition is in. That's Kenny Rogers, first edition, way back when. Never mind. We have, in Chicago, kind of a unique program that's really statewide in Illinois. The Illinois legislature in 2014 passed a piece of legislation to help incentivize the natural gas distribution utilities, not just ours in Chicago, but in all of Illinois, to upgrade really aging, leaking, dilapidated, rusty, really ineffective natural gas distribution systems that were in place. If you think about how old the natural gas distribution network is in Chicago, for example, we are finding in some instances, as we replace this aging system, we're finding actually wooden pipes. Think about that. Some of these pipes are well in excess of 100 years old. The work has to be done, and the Federal Pipeline Safety Administration has also asked for utilities to, quickly as they can, upgrade for safety and efficiency reasons, and for environmental reasons, to upgrade the distribution networks. On the environmental front, for example, when a natural gas pipeline leaks, it leaks methane. If you think CO2 is a problem for global warming, methane is believed by the scientists to be exponentially more problematic. There are many reasons to expedite the replacement of the natural gas systems, particularly where they are really old, like Chicago. We have a rider, a bill rider. It's a line item on the bill the legislature has allowed, and we're investing between $280 million-$300 million a year in upgrading the Chicago natural gas distribution network. It's a slightly different story in Wisconsin, in Minnesota, and Michigan, in that the age of the gas distribution networks is not nearly the same. We really have a very modern natural gas distribution network now in Wisconsin. In Minnesota, we're seeing very significant growth in gas distribution, though, because of the economy. One of the areas that we serve in Minnesota is Rochester, Minnesota, where the Mayo Clinic is located. The Mayo Clinic is a huge medical campus in Rochester, Minnesota. They have announced plans to more than double their medical care capacity in the next few years, and we're seeing very big gas demand growth in that whole area. There, it's not a matter of urgent replacement like it is in Chicago. It's a matter of the normal capital spending being a little higher than usual to accommodate the growth. Does that answer your question? Yep. Very good. Great question. Thank you. How we doing on time, Harry? We got about seven minutes. Oh, seven minutes. All right. Yes, sir. You've talked previously about the potential for installing solar assets at the Foxconn facility. Can you give us a sense as to when you might have something more concrete to announce on that front? Absolutely. I would expect well before the end of the year. Obviously, Foxconn is having to plan a lot of things for a 23-million-square-foot campus. We are working very closely with them. We have not yet, because they're just finishing their designs, we have not yet completed our proposal for the electric configuration for Foxconn. We're day-to-day talking with their technical folks and with their general contracting people. I would expect we'll have a decision on the final electric configuration for Foxconn by the end of this year. Just conceptually, how should we think about those assets? Would you own them and operate them, just operate them, or how would they be structured? At the moment, the way to think about those assets is it's a fluid conversation between our company and Foxconn. All kinds of different possibilities and ideas are on the table. I'm very optimistic that we're going to end up with a really good solution for both companies. Very good question. Thank you, sir. How long of a runway do you have to continue to achieve additional synergies and cost savings from the Integrys acquisition? We've already been able to achieve over $200 million of annual cost savings from the Integrys acquisition. There is more to come in several different ways. The biggest next leg to come in terms of cost reduction is related to what I discussed earlier. That's the retirement of three older coal-fired power plants. If you think about the annual operation and maintenance costs for those three plants, then you add back some operation and maintenance costs for the RICE generation that we're going to be adding, and a tiny amount of O&M for solar, you still get net net about $100 million of annual O&M savings. We expect to achieve that $100 million. We have already started with the first closure in April. We expect to achieve that $100 million of savings by the first half of 2019, when the third coal-fired power plant would retire. There's a whole another leg of cost-saving opportunities that we'll deliver on coming from the combination of the companies and the ability to retire those older, less efficient plants. My other question was just with respect to the infrastructure investment. You've done wind in the Midwest, sort of in the neighborhood. I think you've done gas storage as well. Yeah. How far afield geographically, would you get any types of other types of assets, is there a governor for % of the business this could become? Sure. Well, Australia's off the table. No, I'm kidding. The biggest benefit may well be for renewable assets or gas storage assets in or near the Midwestern part of the United States. That's not to say that we wouldn't look farther for the right particular deal, the right price, the right type of asset, the right type of off-taker that's long contracted and high credit quality. Our first preference, obviously, because I think we have more optionality if the renewable assets are in the Midwest market, for the right opportunity, we wouldn't limit ourselves strictly to the Midwest. We would limit ourselves to the geographical United States. Yes, sir. Hi. Two questions. First, you mentioned the propane mix shift has been a benefit. How big of an opportunity is still left there? Is price the main determinant in terms of somebody making that shift? Is there anything else that goes on there? My second question, just on the energy infrastructure, you talked about the returns for that being higher than what you get elsewhere. Incrementally over time, what kind of benefit would that have on your return on equity? Okay. Very good questions. First on the question about propane and gas. I don't think we've, Scott, we haven't quantified the dollar opportunity in the market, but I can tell you that Illinois, Michigan, Minnesota, Wisconsin, where we have gas distribution companies, those four states are among the four or five heaviest using propane states in the U.S. We think there's a good conversion market there. Yes, price is a factor in many of these customers switching off of propane and onto our natural gas network, but it's also convenience and security. If you think about the biggest impetus that we've seen in terms of people switching, it was the polar vortex winter of 2014. Propane became scarce, and I mean truly scarce. The governors, at least in Wisconsin, Michigan, and Minnesota, declared a propane emergency during the polar vortex of 2014. People couldn't get contracted propane. That really motivated a lot of customers to switch on to our natural gas distribution network. Plus, once you're hooked into our network, you don't got to do anything but pay the bill. There's convenience, there's price, there's security, and we're seeing good customer growth as a result. 2%, 2.5% customer growth each year. There was a second question that you had. On the energy infrastructure, you talked about how you get stronger returns there, but I'm just trying to think on a consolidated basis as we see this over time, what kind of incremental benefit could that have for return on equity? Well, it would take quite a, it's clearly an incremental positive from day one. However, when you think about $31 billion of assets earning a regulated return, even if we added $1 billion of assets, it's not going to make a giant leap forward in return on equity. It does support incrementally slightly higher returns. Did I wear you out? I think we've come to the appointed time. There will be a breakout session up in Liberty Five for anyone wanting to ask additional questions. Thank you very much, Gale. We appreciate you being here.