WEC Energy Group, Inc.

Good afternoon and welcome to WEC Energy Group's conference call for fourth quarter and year-end 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 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 Gail Klapa, Executive Chairman of WEC Energy Group.

Good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 2020. First, I'd like to introduce the members of our management team who are here with me today. We have Kevin Fletcher, our President and CEO, Scott Lauber, our Chief Operating Officer, Sha Lu, our Chief Financial Officer, and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported full-year 2020 earnings of $3.79 a share, which I will provide you in more detail on our financial metrics in just a few minutes. But first, I'm pleased to report that we delivered a record year on virtually every meaningful measure of performance, from customer service to network reliability to earnings per share, despite the challenges posed by the COVID-19 pandemic. Our focus on efficiency, on financial discipline and an encouraging rebound in energy demand during the second half of the year resulted in the highest net income from operations and the highest earnings per share in company history. And throughout the difficulties of a pandemic year, we also accelerated our support for the communities we serve. In total, our companies and foundations donated more than $20 million to nonprofits across our service area, including more than $2 million to direct COVID-19 relief efforts. We also made significant progress on diversity and inclusion. We spent a record $303 million with diverse suppliers during the year, and through our board refreshment, 46% of our board members now are women or minorities. In addition, we set new aggressive goals as we continue to improve our environmental footprint. In fact, I'm pleased to report that based on preliminary data for 2020, reduced carbon dioxide emissions by 50% before 2005 levels. And we have, as you know, a well-defined plan to achieve a 55% reduction by the end of 2025. Over the longer term, expect to reduce carbon emissions by 70% by 2030. And as we look out to the year 2050, the target for our generation fleet is net zero carbon. Our new five-year capital plan lays out a roadmap for achieving these goals. We call it our ESG progress plan, the largest five-year plan in our history. It calls for investment in efficiency, sustainability, and growth. And it drives average annual growth in our asset base of 7% with no need for additional equity. Highlights of the plan include 1,800 megawatts of wind, solar, and battery storage that would be added to our regulated asset base in Wisconsin. And we've allocated an additional $1.8 billion to our infrastructure segment, where we see a robust pipeline of high-quality renewable projects, projects that have long-term contracts with strong, creditworthy customers. All in all, our plan positions us to deliver among the very best risk-adjusted returns our industry has to offer. And now let's take a brief look at the regional economy. It was, of course, an unusual year for everyone. but many of our commercial and industrial customers proved to be quite resilient, providing essential products and services such as food, plastics, paper, packaging, and electronic controls. The latest available data show Wisconsin's unemployment rate at 5.5%. That's more than a full percentage point better than the national average. And as we look to the year ahead, we see positive signs of continued growth. For example, Green Bay Packaging is building a major expansion of its mill in northeastern Wisconsin. It's a $500 million addition and is expected to be completed later this year. The Foxconn, Kamatsu Mining, Haribo, and Milwaukee Tool projects that we've reported to you in the past are all moving forward as well. So we remain optimistic about the strength of the regional economy and our long-term sales growth. Finally, I know many of you are interested in our rate case calendar for the year ahead. As you know, under normal circumstances, our Wisconsin utilities would be filing rate reviews later this spring for energy rates that would go into effect on January 1 of 2022. Of course, we're in the middle of anything but normal times, and I can tell you that we've begun discussions with the Commission staff, and we'll be talking with other major stakeholders to determine whether a one-year delay in a filing would be in everyone's best interest. I expect the final decision on this around the end of the first quarter. And now I'll be happy to turn the call over to Scott for more detail on our sales results and our forecast for 2021, as well as an update on our infrastructure segment and our O&M performance. Scott, all yours.

Thank you, Gail. Turning now to sales, we continue to see customer growth across our systems. At the end of 2020, 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 beginning on page 17 of the earnings packet. Overall, retail deliveries of electricity, excluding the iron ore line, were down 2.1% compared to 2019. and on a weather normal basis, deliveries were down 2.9%. Natural gas deliveries in Wisconsin decreased 7.9% versus 2019 and by 2.4% on a weather normal basis. This excludes gas use for power generation. On the electric side, you'll note the positive trend that we've seen in residential sales has continued. Importantly, It has counterbalanced the weakness in small commercial and industrial sales caused by the pandemic. Meanwhile, large commercial industrial sales, excluding the iron ore mine, were down 7.1% for the full year compared to 2019 on a weather normal basis. However, these sales were only down 4.6% for the fourth quarter, a notable positive trend reflecting the recovery of Wisconsin's economy. Now I'd like to briefly touch on our 2021 sales forecast for our Wisconsin segment. We are using 2019 as a base for 2021 retail projections. We're using 2019 because it represents a more typical year. We are forecasting a decrease of 1.5% in weather and oil retail electric deliveries, excluding the iron ore mine, compared to 2019. This would represent a 1.4% increase compared to 2020. We expect large commercial and industrial sales to continue to improve and anticipate the same positive offsetting relationship between residential sales and small commercial industrial sales. For our natural gas business, we project weather normalized retail gas deliveries to decrease by 2.4% compared to 2019 This leads the projected sales outlook compared to 2020 relatively flat. With this in mind, we remain focused in operating efficiencies and financial discipline across our business. We lowered operations and maintenance costs by more than 3% in 2020, and we continue to adopt new technology and apply best practices. We plan to reduce our operations and maintenance expense by an additional 2 to 3% in 2021. I also have an update on our infrastructure segment. The Blooming Grove and Tatanka RIN projects are in service now and came in ahead of time and on budget. As a reminder, our Thunderhead wind investment is projected to go in service by the end of the third quarter. We expect this segment to contribute an incremental $0.08 to earnings in 2021. And now I'll turn it over to Kevin for his update on utility operations.

Thank you, Scott. Throughout 2020, we kept the energy flowing to our customers safely and reliably. Our largest utility, WeEnergies, was named the most reliable electric company in the Midwest for the 10th year running, and our People's Gas subsidiary was named the most trusted brand and a customer champion for the second year in a row by Esculent, a leading behavior and analytics firm. Now I'll review where we stand on current projects in our ESG progress plan. As you heard in our last call, the Two Creek Solar Farm is now operating. As we've mentioned, this is a very large project. In fact, just days after achieving commercial operation this past November, our share of this project accounted for more than 20% of the solar output in the entire miso generation market. Also in Wisconsin, we introduced as making progress in the approval process for two liquefied natural gas facilities, which would provide enhanced savings and reliability during our cold winters. If approved, we expect to be in construction in the fall of this year and to invest approximately $370 million in total to bring the facilities in operation in 2023. And as Gail just mentioned, our ESG progress plan includes 1,800 megawatts of wind, solar, and battery storage. Filings with the Wisconsin Commission for a number of these projects will begin in the first quarter. Turning to Illinois, as you may recall, we are in the midst of a rate review for one of our smaller subsidiaries, North Shore Gas, which serves approximately 160,000 customers in the northern suburbs of Chicago. Rates for North Shore Gas were last set more than five years ago before we acquired the company. Since then, we have consistently invested capital to serve our customers while reducing operating costs. The Illinois Commerce Commission has set a schedule for concluding the case. Ratings are expected to begin in late April with a final order in September. And with that, I'll turn it back to Gail.

Kevin, thank you very much. We're confident that we can deliver our 2021 earnings guidance in the range of $3.99 a share to $4.03 a share. This represents earnings growth of between 7% and 8% of our 2020 base of $3.73 a share. And you may have seen the announcement that our Board of Directors at its January meeting announced raised our quarterly cash dividend to 67.75 cents a share for the first quarter of 2021. That's an increase, folks, of 7.1%. The new quarterly dividend is equivalent to an annual rate of $2.71 a share, and this marks the 18th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings, We're right smack dab 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, Shaw will provide you with more detail on our financials and our first quarter guidance. Shaw.

Thanks, Gail. Our 2020 earnings of $3.79 per share increased 21 cents per share compared to 2019. Our favorable 2020 results were driven by a number of factors, These included the execution of our capital plan, rate adjustment at our Wisconsin utilities, ROE improvement at American Transmission Company, production tax credit in our infrastructure business, and continued emphasis on operating efficiency. These factors helped us to overcome the sales impact of COVID-19 and mild winter weather. and all of our utilities met their financial goals in 2020. The earnings packet placed on our website this morning includes a comparison of 2020 results on page 21. I'll walk through the significant drivers impacting our earnings per share. Starting with our utility operations, we grew our earnings by 22 cents compared to 2019. First, O&M expenses were favorable. This includes $0.08 from lower day-to-day O&M expenses and $0.09 from lower sharing amounts in 2020 at our Wisconsin utilities. Second, despite the impact of COVID-19 and reduced wholesale and other margins, rate adjustments at our Wisconsin utilities continued capital investment and fuel drove a net 21-cent increase in earnings. Third, we had 12 cents of higher depreciation and amortization expense and an estimated 5-cent decrease in margins related to mild winter weather year-over-year. These factors partially offset the favorable items we discussed. Overall, we added 22 cents year-over-year from utility operations. Earnings from our investment in American Transmission Company increased $0.08 per share compared to 2019. Recall that $0.07 of $0.08 were driven due to ROE changes from FERC orders issued in November 2019 and May 2020. $0.04 resulted from the November 2019 order and $0.03 from the May 2020 order. and a penny came mainly from continued capital investment. Earnings at our energy infrastructure segment improved 5 cents in 2020 compared to 2019, primarily from production tax credits related to wind farm acquisitions. These include the Coyote Ridge Wind Farm placed in service at the end of 2019, additional 10% ownership of the Upstream Wind Energy Center, and the Blooming Grove Wind Farm, which came online in early December. Finally, you'll observe that we recorded a $0.09 charge in corporate and other to account for the make-hold premiums we incurred in the fourth quarter as we refinanced certain holding company debt to take advantage of lower interest rates. The remaining $0.05 decrease is related to some tax and other items partially offset by lower interest expense. In summary, WEC improved on our 2019 performance by $0.21 per share. Now I'd like to update you on some other financial items. Our effective income tax rate was 15.9% for 2020, Excluding the benefit of unprotected taxes flowing to customers, our rate was 20.2%. Looking to 2021, we expect our effective income tax rate to be between 13% and 14%. Excluding the benefit of unprotected taxes flowing to customers, we project our 2021 effective tax rate to be between 19% and 20%. As in past years, we expect to be a modest taxpayer in 2021. 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 decreased $149.5 million. Our increase in cash earnings in 2020 more than offset by higher working capital requirements, primarily related to COVID-19, and by higher pension contributions. Total capital expenditures and asset acquisitions for $2.9 billion in 2020, a $345 million increase from 2019. This reflects our investment focus in our regulated utility and contracted renewable businesses at our energy infrastructure segment. In terms of financing activities, in the fourth quarter of 2020, we opportunistically refinanced over $1 billion of holding company debt, reducing the average interest rate of these nodes from 3.3% to 1.5%. We continue to demonstrate our commitment to strong credit quality. As expected, our FFO to debt ratio was 15.4% in 2020. Adjusting for the impacts of voluntary pension contributions and customer arrears related to COVID-19, our FFO to debt was 16.9% in 2020. At the end of 2020, our ratio of holding company debt to total debt was 28%, below our 30% target. In addition, as Gail mentioned, we have no need for additional equity over the five-year forecast period. Finally, let's look at our guidance for the first quarter of 2021. Last year, we earned $1.43 per share in the first quarter. We project first quarter 2021 earnings to be in the range of $1.45 per share to $1.47 per share. We have taken into account mild weather to date, and this forecast assumes normal weather for the rest of the quarter. For full year 2021, we are reaffirming our annual guidance of $3.99 to $4.03 per share. With that, I'll turn it back to Gail.

John, thank you so much. Overall, we're on track and focused on delivering value for our customers and our stockholders. Operator, we're ready to open it up for a little trash talking and a Q&A portion of our conference call today.

Thank you very much. Now we will take your questions. The question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit 1 on your phone. If you are using a speaker phone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from Char Perez with Guggenheim. Your line is open.

I can roll, Char. How are you today?

Hey, sorry to disappoint. It's actually James for sure. Ah, that's all right. Better looking and younger. Yeah, exactly. The easier question. So I guess if we could start on the infrastructure side, you know, you've laid out $2.2 billion going forward. How should we sort of think about the cadence of that? And does the extension of tax credits earlier this month kind of change any of your timing or thoughts there? Any changes in the opportunity sets?

I'm happy to answer those questions. First of all, for the five-year plan, we've laid out $1.8 billion of additional capital in that five-year plan. As I mentioned in the prepared marks, we're going through due diligence on a number of projects right now. We've got a robust pipeline that we're looking at, and because we're so far ahead of schedule on our infrastructure segment right now, we can afford to be very selective and really cherry-pick only the very best projects that meet or exceed our criteria. So long story short, the cadence will continue. Wouldn't surprise me if we have one or two more announcements during the calendar year 2021. And then regarding the change in the tax credits, the extension of the tax credits, really all that does, I think, is give us even more to look at in the pipeline. It certainly does not in any way diminish our opportunity set And remember that we're really utilizing our tax appetite here as a way to continue to grow earnings, continue to improve our environmental footprint, and build optionality for down the road when we're certainly going to need in our retail rate base a more carbon-free energy.

Just so there's no confusion, it is $2.2 billion in the five-year plan. $400 million of that is the Thunderhead project that has been announced already. that the additional 1.8 is just what hasn't been announced yet, just so there's no confusion.

Yep, we have 1.8 billion to look at. Thunderhead is on its way, we hope, by the end of the third quarter.

Perfect. Thanks. And I guess just kind of following on the clean resources side, since you and Char last spoke, we've seen Nexera formally file at the NRC to extend the life of Point Beach. Have you had any conversations with them yet? Are there any general updates there to think about potential recontracting or retirements?

Well, first of all, they're in the very early stages of thinking through what they might want to put together for a life extension at Point Beach. And we have had some very preliminary discussions. But one thing is very clear from our standpoint and Nextera's standpoint, we are going to make the best decision possible from the standpoint of economics for our customers and whether that includes an extension of Point Beach, whether that includes an investment opportunity. But either way, I see us having a robust investment opportunity set as we get into the next decade, one way or another.

Got it. Thanks, guys, and congrats on a strong finish to a tough year.

Thank you for your questions. Appreciate it. Tell Char to behave, okay? Will do.

Your next question comes from Durgis Hopra with Evercore. Your line is open.

Hi, Dragesh. Hey, Gail. Good afternoon. Thanks for taking my question. I'm clear on the quarter. Thanks for the update on 21. Just on the rate case front, Gail, have you been here before? So have you done this in Wisconsin before? Can you just remind us? And what might the options look like? Could you defer the rate increase? Or if I'm thinking about 2022, could you accelerate your cost savings to sort of stay on target with your 5% to 7% EPS growth rate? Just any color around that would be helpful. Thanks, Gail.

Sure. Thank you, Durgash. Appreciate the question. I mean, the short answer is yes, we have had stay outs before. In fact, if you think about what occurred after the acquisition of Integris in 2015, we were out of a rate case for four years. Again, in constructive discussions with the commission staff and the intervener groups. So, again, as I mentioned to you, we're in early stages of discussion right now with the commission staff. We will be talking with all the stakeholder groups. The concept would be rather than potentially filing a rate case on the normal schedule this year, the concept would be is it in everyone's best interest to have a one-year delay in the filings for our Wisconsin utilities. And so we're working on what the outline of that looks like. and whether or not, again, everyone would agree that it's in the best interest of all parties involved for us to push out, given where we're at with the economy, et cetera, for us to push out a rate filing for one year. And I do believe those conversations are constructive, and we should have a final decision, I would think, around the end of the first quarter.

Got it. Thanks, Gail. That's all I had. Thank you.

Thank you. Take care.

Your next question comes from Julian Dumoulin-Smith with Bank of America. Your line is open.

Julian, how are you doing? Great. Thanks for the time, guys. Afternoon. So, listen, incredible cost reductions, right? And so here's what I want to know. How are you guys continuing to reduce costs as you think about this 2% to 3% after a year where so many of your peers died? already brought down costs, and the question is the sustainability of those costs. So if you could elaborate on that. And then separately, just to follow up on the last one, I'll throw it in there, you've already articulated some benefits on O&M. You've talked about your refinancing activities here that certainly have some tailwinds. What other pieces in this, what other ingredients are there in terms of a stay out here that are relevant in these conversations, if you might?

Okay, great questions as always, Julian. Well, first of all, you know, related to the sustainability of O&M reductions, let me be very clear. We have continued runway and I believe strong sustainability for continued O&M reductions. And let me give you three reasons why. I mean, the first is we're pretty damn good at it, number one. Number two, We continue to benefit from putting in common systems across our footprint. Remember, we had the acquisition of Attegris at the end of 2015. Since then, we have done an enormous amount of work to basically put everybody on the same platforms. We put in a new general ledger for every one of the companies. Kevin, just 10 days ago, 12 days ago, we completed a major conversion project. to a brand-new customer information and billing system where all seven of our customer-facing utilities are now on that system. That is going to drive optimization of our call centers, significant cost reduction. So, number one, we are very, very good at financial discipline. Our operating folks are just terrific. Every single area of the company has a cost initiative for 2021 and beyond. And really it's more than a cost initiative. It's an efficiency initiative. So I feel very good about basically our DNA in terms of continuing to drive efficiency and best practice across the enterprise, number one. Number two, just the continued ability to optimize the organization. We still have a runway to go there post the acquisition of Integris. And the example I gave you of a common customer information and billing system I think is a very good example of that. And then thirdly, we've announced, as you know, the retirement of a number of older, less efficient coal-fired power plants. There are significant O&M savings that will derive with the retirement of those plants, particularly over 2023, 2024, and 2025. The retirements are really going to come in that timeframe. But there are millions of dollars of cost savings that as we retire those plants going forward and replace that capacity with much more efficient technology. So that's a long answer to your question, but I hope it gives you some color on, first of all, our success at continuing to drive efficiency, but also the reason why we feel that's sustainable and ongoing.

Right. And then in terms of the rate case itself, I mean, it sounds like you've got the key ingredients to justify not going in for a rate increase, I suppose.

Well, Julian, if we didn't, we'd be talking a whole different story here. We feel good about depending upon everyone's view of whether or not it's in the best interest of the state for us to stay out for another year. We feel very good about our ability to do that again for both our customers and our shareholders.

Yeah, absolutely. Excellent. And that comment on 23 through 25, that relates to Columbia here, just to take in typing?

Oh, gosh. It relates to the four older units at our Oak Creek site. It relates to Columbia. That was our player to be named later in our investor deck. So that's because our Wisconsin Public Service subsidiary is a minority owner at Columbia, and it relates to a unit as well at Wisconsin Public Service.

Okay.

So it's across the fleet. Excellent. All right. We'll leave it there. Thanks, guys.

Take care, Jillian.

Your next question comes from Jeremy Tonnet with JP Morgan. Your line is open.

Greetings, Jeremy. How are you today?

Good. Good afternoon. Thanks for having me.

Oh, it's been nice being here.

Just wanted to kind of start off with a high-level question, if I could. the Biden administration has some new emission reductions goals out there. And I was just wondering if you had any thoughts on them and if this becomes law, how this might impact WAC.

Are you thinking Jeremy specifically about the, the aspirational goal of a carbon free grid by 2035? Is that your thought process?

Yes.

Okay. All right. Well, first of all, I think if you asked anyone in our industry, uh, You never say never, but that is one tall order. I would kind of analogize it to a moonshot, actually. When you think about what it would take, and again, you know, the pace of technology development can change all of this. When you think about what it would practically take to get to a full carbon-free grid by 2035, you would frankly have to have enormous technological change. You think about what levers could you pull to get there, and there are probably four. One might be huge advancement in modular nuclear. One might be continuing advancement in the cost-effectiveness of carbon capture. One might be a breakthrough in long-duration battery storage. And the other would be hydrogen. Again, when you look at where hydrogen is at in terms of its stage of development, hard to think that that could be widely available as a tool in 2035. Modular nuclear is a long way away being widely available. So that kind of leaves you with carbon capture. Uh, that also leaves you with, can there be some more significant advancement in battery technology for longer duration storage? I think those are the elements that we would continue to look at. If I were a betting man, I would say carbon capture is probably further along. Um, But long story short, it's a tall order. And in the meantime, I think the good news is our industry has done so much already, our company has done so much already in emission reduction that our goals mirror the goals in the Paris Climate Accord. So regardless of whether we're totally there in 2035, I think we can continue on the path of reducing emissions. We don't need any change in technology to hit our 2030 goal. of a 70% reduction. So I'm still optimistic about the path of emission reductions, and we'll see about 2035. But I guess my bottom line message is never say never, but it would take very significant technology evolution.

That's a very helpful economic context. I appreciate that. Thank you. You're welcome. And just one last one, if I could, just to clarify here, I might have missed it here, but could you confirm if the guide, the 7% to 8% guide is based off the 373, if that's how we should be thinking about the CAGR here?

Yeah, it's based off the midpoint of our 2020 original guidance, which was 373.

That's great. Thanks so much.

You're welcome. Good questions, Jeremy.

As a reminder, it is star 1 on your telephone keypad to ask a question. Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Hello, Michael. How are you doing today? All right. I'm doing good. Hey, just a phone call.

Well, your technology may not be doing so good, Michael. Operator, unfortunately, I think Michael cut off there.

Okay. Thank you. Your next question comes from Michael Lapid with Goldman Sachs. Your line is open. Thanks for taking my question.

You're welcome. How are you doing? I'm okay. I have two for you. One is, well, one may be for others on the team, one for you. Just curious for you, Michael, There are lots of states that are talking about or putting out restrictions on gas distribution customer demand growth or that would impact gas distribution volumetric growth. I guess my question for you is, A, what's your view on that in general? It's clearly had an impact on kind of the pure play gas utilities out in the market, but also just how investors and how policymakers are thinking about gas distribution businesses. And are you seeing any of that type of activity in the states you serve?

Short answer, and it's a good question, Michael. Short answer is no. In fact, I believe in one of the states we serve, someone is drafting legislation to make sure there is never a ban on the use of natural gas, particularly for home heating. A couple thoughts along those lines. And I'm happy to have Kevin, Shaw, Scott give you their view or add to anything that I might say. First of all, the region we serve, our four-state area with natural gas, well, let me give an example. It's going to get, according to the weather forecast, 32 below in International Falls, Minnesota this Sunday. There's not a heat pump in the world or one under development that could keep you warm at 32 below. So the market share for natural gas heating in each of the four states where we provide natural gas is huge. And on average, in Michigan, Wisconsin, Minnesota, and Illinois, on average, it's almost a 70% market share. So natural gas for home heating has about a 70% market share. There's a reason for that. It's cost effective. It's convenient. It's clean. And in these kind of climates, natural gas is really the best alternative. Now, looking way down the road, and some have said, well, maybe hydrogen will take the place of natural gas. Well, you still have to get the hydrogen to the customers. And as difficult as it would be, as difficult as permitting it is, as difficult as it is to build infrastructure in this country today, I can't imagine it's practical to develop an entirely new distribution network And technologically, we believe with some slight changes, natural gas distribution network could carry hydrogen fuel. So my sense is that the fear about the future of natural gas is a bit overblown, maybe way overblown. But in a climate like ours, in the upper Midwest, natural gas is going to be an important product, I believe, for many years to come. And, Scott, we're still seeing very strong customer growth on the natural gas delivery side of the business.

Yeah, that's correct, Gail. In fact, we are still seeing, you know, especially in Wisconsin, Michigan, and Minnesota, about 1% new customer growth. And we saw a large customer even switch over in the fall from using coal in their industrial process over to natural gas. So we're still seeing really good growth on the customer side in natural gas. Scott, I'd also say –

We're seeing conversions from propane still as well. So in our geographic area, gas will be a part of our future for the near future.

That's a very good point. If you look at market share, I mentioned about a 70% market share for natural gas. Propane is, in our four states, the next most used fuel source. So, yeah, and people are moving off of propane over to our gas distribution network. Michael, I hope that responds.

No, that's super helpful. Just one quick follow-up. Whether organically, meaning via growing the rate base faster than your current plan, or inorganically, would you be willing to tilt the mix of the earnings power of the company even more towards gas versus electric?

Michael, you never say never, but when I think about capital allocation and You know, when the four of us, when Sean, Scott, and Kevin and I look at our opportunities with our team, we see so many significant investment opportunities on the electric side that I don't practically, I think our set of investment opportunities is even greater as electrification continues and as the push toward renewables continues. So, again, you never say never, but our investment opportunity set, I think, is even more significant on the electric side. That's where our capital allocation will continue to grow.

Got it. And then last one, if you'll pardon me. Have you all ever disclosed or would you disclose what you think your excess balance sheet capacity is, meaning savings? How much incremental more investment, whether on the infrastructure segment or at the core utilities in Wisconsin or Illinois or elsewhere, how much incremental investment could you make with your current balance sheet and expected balance sheet before it would require you to seek other external financing that's not just debt financing?

So how much more can we do if we were to issue more equity or not issue more equity?

Yeah, I guess not issue equity. Like, do you have access balance sheet capacity? Do you have the ability to raise your capital plan without actually having the issue?

Well, I'm going to ask Shaw to give her view on this as well. I'll give you my overall kind of high-level opinion, and that is that, you know, we try to marry our capital plan against three very important criteria. The first is what is the need? I mean, most of our assets are regulated assets. You have to prove the need to make those investments. So number one, what is the need? Number two, how do you finance it and maintain the solid credit metrics that we strive to maintain and have maintained? As you know, we have one of the stronger balance sheets in the industry, and we intend to keep it that way. And then number three, if there were an opportunity, would it require more equity? But long story short, we really try to balance the need and the financing to maintain the kind of credit quality. Sean?

Yeah, I totally agree. I think I would just add two more thoughts. One is WEC, you heard me say all the utilities met the financial goals in 2020. Actually, that has been a track record. So in terms of putting money to work, and we deploy $3 billion a year. We earn our allowed ROEs at the utilities, and you generate very healthy internal cash as a result. So that's number one. Number two, you heard us say that for the WECI, the WEC infrastructure investment, we very much focused on using our own tax appetite, We focused on the time horizon when we could get the cash back, and we just tried to take advantage not only the investment opportunity but also the cash flows. So I think overall the combination of strong utility performance and the ability to recover the cash from the wacky infrastructure investment I think really allows us to continue to be on the trajectory that we have been on.

Got it. Thank you, guys. Much appreciated.

You're welcome, Michael. Take care. Same.

Our next question comes from Steve Fleischman with Wolf Research. Your line is open.

How are you doing, Steve? Hi, Gail and everyone. Good afternoon. So just a question in Wisconsin related to the coal shutdowns and regulatory treatment. Right. Could you just remind us what you've done so far with that, and would something related to that potentially be in your stay-out agreement and how you're kind of thinking about that overall?

Yeah, good question, Steve. First of all, if we were to come to a stay-out agreement, it would not involve any discussion or any delineation of a retirement of coal plants because it's outside of the rate case window right now. So again, we're talking about 2023, 2024 for the majority of the retirements that we're talking about, including the one of Columbia that was just announced by Alliant. So there would be no need to address the coal plant retirements in any kind of a stay-out arrangement, if I'm making any sense to you. Secondly, if you think about what we have done So we've retired a fair amount of capacity already. We've retired, I think, 65% of our coal-fired capacity since about 2015. And in essence, the unrecovered book balance of those plants has been fully recovered with the exception of $100 million of unrecovered book balance at Pleasant Prairie, which is a large coal-fired power plant in southeastern Wisconsin. That was our most recent retirement. That $100 million is being securitized. In fact, expect to have a securitization offering this year. Got it.

Okay. Great. And just one other question is on, you know, we're going to have a new FERC, ultimately Democrat majority, and I'm just curious if you have any thoughts on whether there could be another change in transmission policy or ROEs, or you think it will stay relatively stable?

Steve, I'm guessing relatively stable, if not up. And the reason for that is when you talk to, as we have, when you talk to people early now in the Biden administration, there is enormous focus on incentivizing renewable development, as you know, an enormous focus. And I think the appointees that we will see to the federal energy regulatory commission, I'm guessing we'll fully understand that you're not going to reach the administration's goals for renewable development without further incentivizing transmission development. Those two go hand in hand, chicken and egg. I mean, it's got to be done. Um, So it would be almost counter to a huge tailwind of public policy to try to do anything from here that would not continue the return incentives for needed transmission. So my guess is that the overriding public policy will keep things stable or at least stable if not positive at FERC. Great.

Thank you very much. You're welcome, Steve. Appreciate your call. You bet.

Your next question comes from Neil Calton with Wells Fargo. Your line is open.

Hey, Neil. How you doing?

I'm doing great. St. Louis is lovely this time of year.

Well, you're invited to International Falls this weekend.

All right. So anyway, I'm just curious. EVs have been a pretty hot topic recently, right, all in the news. And I'm wondering how you guys are thinking about your investment opportunity around EVs, how soon you need to start planning for the system. Is this, you know, eight to ten years out? Are there going to be quicker needs? Just any kind of insight into how you're thinking about it.

Okay, great question, Neil. Well, first of all, the current – The current governor and the current gubernatorial administration here in Wisconsin has a very keen understanding that in order for the state to continue to make progress on CO2 reductions, there has to be a much stronger pickup in terms of electric vehicle penetrations. I've heard that. I mean, I've had probably three discussions with the governor about this, and he really, really believes that's the case. So do I. So long story short, there are two things going on. First of all, we have filed a modest proposal for EV infrastructure that's pending before the Wisconsin Commission right now. And in addition to that, the Wisconsin Commission has opened up or is opening up a generic proceeding on what is it they should be broadly looking at to try to advance the governor's objective of an accelerated pickup in electric vehicle market share. So very early right now, but we do have a pilot that we've suggested that's getting regulatory review right now. And, Scott, do you want to give just a couple details on that filing?

Yeah, so we've got a pilot out there. It's about $50 million. We provide a couple alternatives on how to also support some of the lower income areas of the state that may be able to help put some of that infrastructure or support that, whether it's through buses or some other ideas there. So it's in the really early stages, but it'd be somewhat of a rebate program that would help actually put some chargers in individual houses.

So early days. Kevin? Some of our larger customers who are looking at EVs and looking at what they want to do in their fleet longer term, so we've got a close relationship with them, and we'll continue doing that in the days ahead.

Kevin makes a good point. We've actually seen a pickup, and we're advising a number of our larger commercial customers who are either thinking about switching over to an all-electric fleet or or who have other needs as EV penetration begins to pick up. So, again, very early days. I don't think you'd see any major impact on our earnings in terms of EV penetration in our region, probably until very late in the 2020s.

A statistic that I looked at here recently, present-day electric CO2 emissions at 34%, transportation, which we're just talking about, is 37%, so just a little bit more already today.

Yeah. Kevin's making a good point. Both in our region and nationally, the utilities have done so much that essentially transportation is now the largest contributor to CO2. It has surpassed, or we've cut more, and so transportation is now the largest contributor, not the utility industry. I'm sorry, Neil, go ahead.

No, no, that was perfect. That was it for me.

Terrific. All right. Thank you, Neal.

And your final question comes from Michael Weinstein with Credit Suisse. Your line is open.

Welcome back, Michael. Can you hear me this time? We can. That's all right. Great. Hey, a quick question about the extension of the ITC and the PTC that just got passed in December, and, you know, we're It looks like there's a decent chance you might have further extensions going forward. I guess the increased economic benefits from tax credit extensions, could that change your view on the targeted business mix between infrastructure and utilities? Could you increase your desire for more projects?

It's a great question, Michael. I will tell you this. We have really tailored up to now. We've really tailored our appetite, no pun intended, for growing the infrastructure business. We've tailored that to two things. The availability of very high-quality projects with strong credit quality off-takers, but also our own tax appetite. So to the extent that our tax appetite is what we projected it to be, then the pace of that business growth will be exactly what we've talked about. On the other hand, we were just talking about this the other day, actually. If we see an increase in the corporate income tax, which some have proposed, as you know, as part of the Biden plan, then we might have a stronger tax appetite. And if you couple that, meaning a stronger tax appetite, with the extension of these ITCs and PTCs, there may be a greater opportunity there But long story short, all of that would have to fall in place. Right now, we're working on the plan we laid out.

That makes total sense. Hey, one other question, too. You know, if you do get a one-year delay for the rate filing, could we expect to see, like, an increased target for O&M savings this year beyond what Scott laid out earlier in the call?

No.

Nope.

Because remember the – That is all about 2022. Gotcha. Gotcha. That's right. Okay. Okay. Thank you very much. All right. Hang in there, Michael. Thank you.

Yep.

All right. Well, I believe that's our final question for the day. We really appreciate you taking part in our conference call. Thank you again for participating. And if you have any more questions, feel free to contact Bestraka. Her direct line, which she gives out to only a few of you, her direct line, 414-221-4639. Thanks, everybody. Take care. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.