This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: and welcome to WEC Energy Group's conference call for fourth quarter and year-end 2021 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 involves risk and uncertainties that are subject to change at any time. Such statements are based on management 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, reference 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 call. And now, it's my pleasure to introduce Gail Clapper, Executive Chairman of WEC Energy Group.
spk12: Well, good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 2021. First, I'd like to introduce, as always, the members of our management team who are here with me today. We have Scott Lomber, who's now our president and chief executive, Shaw Liu, 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 2021 earnings of $4.11 a share. This exceeded the upper end of our most recent guidance, which was $4.07 a share. Our positive results were driven by favorable weather, solid economic recovery in our region, and our continued focus on operating efficiency. Our balance sheet and cash flows remain strong, and as we've discussed, this allows us to fund a highly executable capital plan without issuing equity. I would also note that the earnings we're reporting today are quality earnings with no adjustments. As you know, we've been very active in shaping the future of clean energy. Looking back on 2021, we set some of the most aggressive goals in our industry for reducing carbon emissions. Across our generating fleet, we're targeting a 60% reduction in carbon emissions by 2025 and an 80% reduction by the end of 2030. all from a 2005 baseline. In fact, by the end of 2030, we expect our use of coal for power generation will be immaterial, and our plan calls for a complete exit from coal by the year 2035. Of course, for the longer term, we remain focused on achieving net zero carbon emissions from power generation by 2050. Now, we all recognize that advances in technology will be needed to decarbonize the economy by 2050, And hydrogen, of course, could be a key player, a key part of the solution in the decades ahead. To that end, we announced last week one of the first hydrogen power pilot programs of its kind in the United States. We're joining with the Electric Power Research Institute to test hydrogen as a fuel source at one of our newer natural gas-powered units located in the Upper Peninsula of Michigan. The project will be carried out this year, and the results will be shared across the industry to demonstrate how the use of hydrogen could materially reduce carbon emissions. Switching gears now, we're driving forward on our $17.7 billion ESG progress plan, the largest five-year plan in the company's history. The plan is focused on efficiency, sustainability, and growth. One of the highlights is the planned investment in nearly 2,400 megawatts of renewable capacity over the next five years. These renewable projects will serve the customers of our regulated utilities here in Wisconsin. Overall, we expect the ESG progress plan to support average growth in our asset base of 7% a year, driving earnings growth, dividend growth, and dramatically improved environmental performance. In summary, we believe we're poised 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. we saw a promising recovery throughout 2021 despite the prolonged pandemic. The latest available data show Wisconsin's unemployment rate down at 2.8%. Folks, that's a record low and more than a full percentage point below the national average. Importantly, jobs in the manufacturing sectors across Wisconsin have returned to pre-pandemic levels. And major economic development projects are moving full steam ahead. Haribo, the gummy bear company, is now recruiting workers at its brand new campus in Pleasant Prairie. Komatsu has begun relocating employees to its new state-of-the-art Milwaukee campus. Milwaukee Tools' downtown office tower is set to begin operations this month, and we see more growth ahead. For example, ABB, a global industrial and technology company, and Saputo, a leading dairy products company, have announced plans for major expansions in our region. And finally, you've heard the phrase, a rising tide lifts all boats. Well, I'm pleased to report that one of the most celebrated luxury boat makers in the world, Grand Craft Boats, is relocating its operations from Michigan to the Milwaukee region. You know, J-Lo, George Clooney, Robert Redford, they're among the high-profile clients of Grand Craft. So it'll be interesting to see who shows up, you know, below deck at our next Analyst Day. Bottom line, we remain optimistic about the strength of the regional economy and our outlook for long-term growth. With that, I'll turn the call over to Scott for more details on our utility operations and our infrastructure segment. Scott, all yours.
spk13: Thank you, Gail. Looking back, we made significant progress in 2021. I'll start by covering some developments in Wisconsin. As Gail mentioned, we're continuing to make progress on the transition of our generation fleet in our ESG progress plan. I am pleased to report that our Badger Hollow 1 solar project is now providing energy to our customers. You'll recall that we own 100 megawatts of this project in southwest Wisconsin. We have also made progress on the construction of Badger Hollow 2. Currently, we expect an in-service date in the first quarter of 2023. This factors in a delay of approximately three months due to ongoing supply chain constraints. We do not expect a material change in the construction costs. In addition, the Public Service Commission has approved our plans to build two liquefied natural gas storage facilities in the southeastern part of the state. Construction has started and we plan to bring the facilities into service in late 2023 and mid 2024. We expect this project to save our customers approximately $200 million over time and help ensure reliability during Wisconsin's coldest winters. And we recently signed our first contract for renewable natural gas, or RNG, for our gas distribution business. We'll be tapping into the output of one of our large local dairy farms. The gas supplied each year will directly replace higher emission methane from natural gas that would have entered our pipes. This one contract alone represents 25% of our 2030 goal for methane reduction. The Wisconsin-based company, U.S. Gain, is planning to have RNG flowing to our distribution network by the end of this year. The commission also approved the development of Red Barn, a wind farm in southwestern part of the state. We expect our Wisconsin public service utility to invest approximately $150 million in this project and for it to qualify for production tax credits. When complete, it will provide WPS with 82 megawatts of renewable capacity. And just this past Monday, we filed an application with the commission for approval to acquire a portion of the capacity from West Riverside Energy Center. West Riverside is a combined cycle natural gas plant owned by Alliant Energy. If approved, Wisconsin Public Service would acquire 100 megawatts for approximately $91 million. That's the first of two potential option exercises. We expect the transaction to close in the second quarter of 2023. Looking forward, we expect to file a rate review for our Wisconsin utilities by May. We have no other rate cases planned at this time. Turning now to our infrastructure segment, the 190 megawatt Jayhawk Wind Farm located in Kansas began service in December. We invested approximately $300 million in this project. Overall, we have brought six projects online in our infrastructure segment, representing more than 1,000 megawatts of capacity. And as you'll recall, we expect the Thunderhead Wind Farm to come online for the second quarter and the Sapphire Sky by the end of this year. Including these two projects, We plan to invest a total of $1.9 billion in this segment over the next five years, and we remain ahead of plan. And with that, I'll turn things back to Gail.
spk12: Scott, thanks so much. We're confident that we can deliver our earnings guidance for 2022. We're guiding, as you know, in a range of $4.29 a share to $4.33 a share. The midpoint, $4.31, represents growth of 7.5%. from the midpoint of our original guidance last year. And you may have seen the announcement that our board of directors at its January meeting raised our quarterly cash dividend by 7.4%. We believe this increase will rank in the top decile of our industry. This also marks the 19th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65 to 70% of earnings, 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, Shah will provide you with more detail on our financial results and our first quarter guidance. Shah.
spk09: Thanks, Gail. Turning now to earnings, our 2021 results of $4.11 per share increased 32 cents, or 8.4%, compared to 2020. Our earnings packet includes a comparison of 2021 results on page 17. I'll walk through the significant drivers. Starting with our utility operations, we grew our earnings by 10 cents compared to 2020. First, weather added 4 cents, mostly driven by colder winter weather conditions compared to 2020. Second, continued economic recovery drove a 9 cent increase in earnings. This reflected stronger weather normalized electric sales, as well as the resumption of late payment and other charges. Let me give you some highlights on our weather normalized retail sales. Overall, retail delivery of electricity, excluding the iron ore mine, were up 2.6% compared to 2020. We saw a continued economic rebound in 2021 in our service territories. Small commercial and industrial electric sales were up 4.4% from 2020, and large commercial and industrial sales, excluding the iron ore mine, were up 5.1%. Natural gas deliveries in Wisconsin were relatively flat, excluding gas used for power generation. Lastly, rate relief and additional capital investment contributed $0.14 to earnings. and lower day-to-day O&M drove a $0.03 improvement. These favorable factors were partially offset by $0.17 of higher depreciation and amortization expense and a net $0.03 reduction from fuel costs and other items. Overall, we added $0.10 year-over-year from utility operations. Earnings from our investment in American Transmission Company decreased two cents per share year over year. The positive impact of additional capital investment was more than offset by two factors. A 2020 fur quarter that benefited 2020 earnings and an impairment that we booked in the fourth quarter of 2021 on an investment outside of the ATC service territory. This substantially wrote off all of the goodwill on the project. Earnings at our energy infrastructure segment improved six cents in 2021. This was mostly related to production tax credit from the Blooming Grove and Tatanka Ridge wind farms. Finally, we saw an 18-cent improvement in the corporate and other segment Lower interest expense contributed $0.07 year-over-year. Also, we recognized a $0.04 gain from our investment in a fund devoted to clean energy infrastructure and technology development. The remaining positive variance related to improved right-by-trust performance and some favorable tax and other items. In summary, we improved on our 2020 earnings by $0.32 per share. Looking now at the cash flow statement on page six, net cash provided by operating activities decreased $163 million. The increase in cash earnings was more than offset by working capital requirements, mostly related to higher natural gas prices. As we resume normal collection practices in the spring, we expect working capital to improve throughout the year. Total capital expenditures and asset acquisitions were $2.4 billion in 2021. This represents a $471 million decrease compared to 2020 due primarily to the timing of the in-service date of Thunderhead Wind Farm. Turning now to financing activities, we opportunistically refinanced over $450 million of holding company debt during the fourth quarter. This reduced the average interest rate of these notes from 4.5% to 2.2%. We continue to demonstrate our commitment to strong credit quality. Adjusting for the impacts of voluntary pension contribution and the year-over-year increase in working capital, our FFO to debt was 15.7% in 2021. Finally, let's look at our guidance for sales and earnings. For weather normalized sales in Wisconsin, we're expecting half a percent growth this year in both our electric and natural gas businesses. Continued growth after a very strong year. In terms of 2022 earnings guidance, last year we earned $1.61 per share in the first quarter. We project first quarter 2022 earnings to be in the range of $1.68 per share to $1.70 per share. This forecast assumes normal weather for the rest of the quarter. And as Gail stated, for the full year 2022, we are reaffirming our annual guidance of $4.29 to $4.33 per share. With that, I'll turn it back to Gail.
spk12: Shaw, thank you so much. Overall, we're on track and focused on providing value for our customers and our stockholders. Operator, we're now ready to open it up for the question and answer portion of the call.
spk08: 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 speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as the time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from the line of Shaw Peraza of Guggenheim Partners.
spk12: Rock and roll, Char. How are you doing today?
spk04: How are you doing, Gail? All good. We're good. Excellent. I know this seems like a perennial topic at this point, but any sort of thoughts on the potential end of QIP in Illinois? It seems like efforts to eliminate it are getting traction yet again with obviously a piece of legislation. There was a press conference on Monday. It's scheduled to expire, so What are your thoughts here? I mean, it's a little bit noisy. Just high level would be great.
spk12: Terrific, Shara. Thanks for the question. First of all, this is really nothing new. Each year, late in the session, for the past five years, a bill has been introduced. Very similar bills have been introduced each year for the past five years. We don't expect any significant movement in that piece of legislation. Just exactly as what happened in the last five years. You are correct. Under current law, the QIP rider that allows us to basically begin earning a return on and of after new piping is put into service, that rider is scheduled by law to expire at the end of 2023. So we've got a ways to go. I would say this. We continue to try to educate and I think have had some significant success in helping most people to understand two things. First of all, the QIP rider and the way it works is actually the most cost-effective way for customers to basically have us continue with a very needed pipe upgrade program. And secondly, the Illinois Commerce Commission last year authorized a study. They asked us to hire an independent consulting firm called Keeter. which did more than a year's work in looking at what's needed in Chicago, and they concluded that more than two-thirds, almost 80%, of the remaining gas distribution pipes under Chicago have a useful life of less than 15 years. So the work has to be done. We're doing it the most cost-effective way possible, not concerned about any near-term legislation.
spk04: Okay, perfect. And then maybe just shifting over to the infrastructure segment, seems like it's been, you know, a bit of a longer time since your, you know, your last acquisition like Sapphire Sky versus I guess your prior cadence. Just curious, is this sort of a symptom of anything in particular? Is there fewer opportunities or just a lot of competition, supply chain, returns? Are you seeing projects maybe getting pushed out a little bit ahead of federal policy clarity? Just maybe some thoughts there would be great.
spk12: Now I'm happy to answer that question, Char. First of all, as Char mentioned and Scott, we're way out of plan. Right. So Jayhawk came into service a bit early on budget. Sapphire Sky, which we announced late last year, is under construction, and I expect Sapphire Sky to begin commercial operation at the end of this year. We don't have anything particularly in the plan for this year, not because there's a paucity of projects, We have a robust pipeline that we're looking at. I think some of the uncertainty over federal tax credits may be slowing things down a hair, but we're way ahead of plan. We didn't have anything specific in this year's plan, but we continue to look. We have a robust pipeline of projects, and you will see some continuing effort here. We can be, as you know, very selective because we're so far ahead of plan.
spk04: Got it, got it. And just one real quick modeling question. Is the ATC Holdco Goodwill impairment that's in the driver's slide, just remind me what that is?
spk12: Yeah, I'm happy to. It's an outside the service area investment that years ago the joint venture of Duke and ATC made in California. And we'll let Shaw give you the detail.
spk09: Yeah, basically we jointly own a transmission project. We acquired that back in 2013. And we performed the normal goodwill assessment on that project and decided that it's very prudent for us to write down the majority of the goodwill. So it's a non-cash book entry that we did in the fourth quarter of 2021.
spk04: Got it. Perfect. Thanks, guys. I appreciate it. And Gail, hopefully the quote-unquote no adjustments comment in your prepared remarks was was understood well by the audience. Appreciate it. Thanks, guys. Thank you, sir.
spk08: Your next question comes from the line of Julian DeMolin-Smith of Bank of America.
spk03: Afternoon. Hey, afternoon. Thanks for the time, guys. Appreciate it. Just to clarify the last question a little bit on people in Illinois here. When you say you're not concerned, the CapEx spend that you have over 22 to 26 here, which obviously spans the lapsing of the current program, you're saying that if that program were to go away here, that number ballpark would stay intact?
spk12: Well, what would happen, I mean, first of all, I think the most direct answer to your question is that work is needed for safety and reliability. So we either would continue assuming that the rider was renewed by legislation post the end of 2023, or we would revert to basically annual rate cases. And again, if you recall, in Illinois, the commission there uses forward-looking test periods. So either way, that work's got to continue, and the investment is in the range depending upon the year of $280 to $300 million a year. Got it. Excellent. Thank you.
spk03: And then just pivoting on the transmission side here, just Cardinal Hickory, obviously there's some developments in the courts last week. Just how are you thinking about, you know, options given the Federal Wildlife Preserve, you know, just in terms of alternate routes, timing, CAPEX, recovery, anything you can share there?
spk12: Sure. Happy to. And for those who might not have been following Cardinal Hickory, there is some activity in the courts recently. with an environmental group challenging the permits that were issued by the US Fish and Wildlife Service, by the Iowa Public Service Commission, by the Wisconsin Public Service Commission. So there have been multiple permits that would allow this more than 100 mile line to be built coming out of Iowa into southwestern Wisconsin and then working its way over to the Madison area. So that's essentially a little more than 100 mile line And to show you how long these projects take, that project was first envisioned and first discussed in 2011. So construction has been underway essentially in the Iowa portion. The portion in question where the permits are being challenged is in the southwestern part. It's an environmentally sensitive part of the southwestern section of the state of Wisconsin. It's called the Driftless Area. American Transmission Company, and again, this is partially owned. This line will be partially owned by ITC, ATC, and the Dairyland Power Cooperative. The ATC portion, no one has questioned the permits for that section of the line. So we'll see how all of this works out in court, but long story short, The Wisconsin Commission has reiterated the need for the line and reiterated their belief that the approval was appropriate and needed. We'll see how all this works out in court. At the end of the day, that line is an important part of moving renewable energy across the Midwest and into Wisconsin. So at the end of the day, I'm confident something positive will come out of this. It may be a bit delayed. We'll see what happens in the courts. I hope that helps, Julian.
spk03: No, absolutely. It's good color. Well, I'll leave it there, guys. Thank you again, and best of luck, and hope to see you guys soon.
spk12: Sounds good. Thanks, Julian. Cheers.
spk08: Your next question comes from the line of Jeremy Tone of J.P. Morgan.
spk12: Greetings, Jeremy.
spk02: Hi. It's actually Rich Sunderland on for Jeremy. Can you hear me?
spk12: I can. What have you done with Jeremy?
spk02: Jeremy, sorry to miss, but I'm happy you had time for me today. Just you know, maybe starting around the load growth expectations for 2022, you know, curious on the key drivers there and really how you think about realized recovery from the pandemic in 2021 and, you know, maybe how much conservative is conservatism is baked in there for the 22 outlook.
spk12: We're going to let Scott handle that for you. He and Char on top of those details. I will say this though, we're coming off of just as a reminder, We're coming off a very strong recovery in 2021, and we see continued growth in 2022. Scott, particularly, at least I was impressed by the numbers related to the small C&I segment.
spk13: You're exactly right, Gail. In fact, when we go back and, Sean, I look at our forecast compared to what happened in 2021, we were right on with residential. It hit exactly on. the positive surprise was in small commercial and large commercial. So, you know, we came in almost, our original forecast was about 1.3% growth. We came in at two and a half at a retail less mine. So, you know, very happy with the growth that we saw. And as you look at it, we continue in 2022 to expect residential as people can start coming back to work and you start to see more and more people return to work. Residential will go down a little bit. And then that small commercial to grow, you know, continuing to expand in there. And then once again, large commercial, you know, we almost have a 2% growth in that large commercial sector. So we're seeing really, really good growth. And you can see, as you look at our longer term plan, a lot of good economic growth that Cale talked about on the call. So a lot of good economic growth coming here too.
spk02: Thanks. Appreciate the color there. And then you may be pivoting to this new pilot program in Michigan. What's the long-term target for blending? And how do you think about this program in the context of your entire fleet?
spk12: You're speaking, I believe, of the hydrogen pilot program that we're going to undertake in the Upper Peninsula of Michigan at one of our newer rice units. And just to put all of that in context for everyone, the rice units, it's a technology that's been well proven, fueled by natural gas, modular technology, if you will, does not require a water permit. I mean, these are really advanced, state-of-the-art power generation facilities. And the project is really a pilot project. It's being designed right now. We will actually test burn hydrogen in a mix with natural gas, up to 25% hydrogen, 75% natural gas. And this project will actually be in the field in the fourth quarter of 2023. We with the Electric Power Research Institute will then analyze the results. And as I mentioned in the prepared remarks, The results will be shared across the industry. We're optimistic that this pilot program, one of the first of its kind in the U.S., will demonstrate that hydrogen, with that particular technology, the rice unit technology, could be a major player going forward in decarbonizing the economy.
spk02: Great. Thank you for the time today.
spk12: You're welcome.
spk08: Your next question comes from the mind of Neil Carlton of Wells Fargo Securities.
spk12: Greetings Neil. Neil, are you getting snow or ice where you are?
spk10: We're getting a lot of it, and I'm watching all my neighbors and my wife and son shoveling the driveway right now, so I'm feeling pretty good about this.
spk12: I'm winning. I just got a text from your wife that said, you dog.
spk10: Yeah, bad back. I can't do things anymore. So anyway, just a question on the solar. So obviously Badger Hollow, I guess it slipped a little bit. understandable given all the supply chain issues, et cetera. But you've got quite a bit more solar in the plan as we look at over the next few years. And I'm curious if there's any, at this point, any reason to be concerned about costs or timing from what you're seeing right now as it relates to the additional, I think, 1,300 megawatts that you plan to do over time.
spk12: Yeah, great question, Neil. I think the short answer is with what we're seeing for 2022 and what we have under contract, no significant issues other than perhaps some timing. Down the road, Scott, your thoughts?
spk13: Yeah, down the road, I mean, we're definitely watching, you know, steel prices for the infrastructure and also the solar panels. But, you know, as you look at natural gas prices also, as those prices go up, the economics are still there. So I'm not, you know, we expect that some of the costs will rise and we're monitoring it very closely, as you can imagine, but I don't think it's going to change our plans.
spk12: Okay, I agree with Scott. And, Neil, one other point. The drive to decarbonize the economy is not abating in any way, shape, or form. So, you know, we continue to see those investments as both needed and expected as we go down the road. Perfect. Thank you. Thank you, Neil.
spk08: Your next question comes from the line of Dukesh Chopra of Evercore ISI.
spk00: Greetings, Dragesh. How are you doing? I'm doing well. Thank you for taking my question also. Shaw, this is a modeling question. The $0.04 gain on Clean Energy Fund, can you just elaborate on that? And then what quarter was that gain? And then I'm assuming you're not modeling anything for 2022. That was a multi-part question. I'm sorry.
spk09: That's okay. I think on the second quarter call, I mentioned that we booked $0.03 of gain in the second quarter. Then we picked up another penny in the fourth quarter, so $0.04 for the whole year. When we develop the financial plan, we don't try to build any expectations of anything similar, like investment gains like this. But if the market continues to to point in the right direction, then if we end up having more gains, we'll be happy to book those, but we don't count on those going forward.
spk12: Shaz, right. We'd be delighted to book more gains. I think this was from a re-evaluation, if you will, of one particular investment in the fund that is, you know, these funds, as you know, investing in clean technology, some of them hit, some of them don't. This one hit very, very well and And with the new round of funding and with the valuation, it was perfectly appropriate to revalue our investment.
spk00: Awesome. Thank you for that color. And then just maybe, you know, your peers on a call today talked about, you know, just wanted to sort of be interested in your progress on your, actually your execution on your capital plan for 21. You know, your peers mentioned some supply chain concerns and that to push some of the renewable projects out. Just wondering, are you seeing any of those pressures and how did you actually do in 2021 versus your targeted CapEx plan?
spk12: Well, and we'll ask Scott to give you his view as well. The one impact we had was really more from COVID than it was from supply chain. And that was a large solar farm, a large solar field called Badger Hollow One. And that got delayed. It's now in service. That got delayed several months. And it was a decision that we helped to make. At the point where we were deep in the pandemic in 2021, to continue the construction apace, we would have had to bring in about 150 crew people from outside the state to continue the construction at that point in time. In the middle of the pandemic, we thought that was really not a very good idea. So we agreed to a schedule delay, but it's got no significant cost delay at all, and that's now behind us. No, that's exactly correct. And
spk13: And everything else for 2021, you know, our supply chain worked with our vendors to get everything in line. And we've had a practice here for several years that we are ordering some of the long lead time materials a year, year and a half ahead of time for some of these major projects to make sure we have it. So, and then the only other item was just what we mentioned in our prepared remarks, whereas Badger Hollow 2, you know, we see about a three-month delay right now, but no significant cost at this time. Thank you, guys. Much appreciate the time.
spk12: You're welcome. Thank you, Dregash. Take care.
spk08: Your next question comes from the line of Michael Sullivan of Wolf Research.
spk12: Michael, how's your IT department?
spk05: Oh, yeah, it's fantastic.
spk12: You might kind of reiterate no change in your rating, right, Michael?
spk05: Yes, yeah, yeah, yeah, for sure. You got to go. Yeah, the first question, maybe just if you could give us a sense of what the clean O&M savings number was for 2021 and what you're embedding in 22 guidance.
spk12: Happy to do so. Shaw's got it right in front of her.
spk09: So for the year 2021, we ended with 1.6% down year over year compared to 2020. So we guided earlier in the year to 2-3% and we're right in that range. You had a second part of your question?
spk05: Yeah, what are you assuming in 2022?
spk09: Yeah, for 2022, we guide flat to 1% reduction from 2021.
spk12: Okay, great. And Michael, I'm sorry, I'm sure you recognize this, but in light of the general inflation in the economy, We think that's really, really strong performance. We're very pleased about the plan we have in place to deliver what Shaw's discussing.
spk05: Got it. Okay. And just curious if you could give any latest thoughts on where you think things might go with the pending issue at FERC as it relates to the RTO adder?
spk12: My own guess is And this is just a guess, but my own view is the RTO rider is probably history, but to be replaced by something else, perhaps an incentive type of mechanism, I'm guessing that the RTO rider, as we've known it, probably won't survive. However, a very important point, we have not assumed the continuation at all of the RTO rider in our forecast for 2022 earnings.
spk05: Okay, that's great, thanks. And sorry, just one last one. It looks like the FFO to debt metric ticked down a little bit year over year. Should we think about that as kind of stabilizing around that 15.7%, I think, where it came out as a go-forward target?
spk12: Shaw, your view?
spk09: Yeah, we target the 15% to 16%. measured by Moody's and S&P. So this is right in that neighborhood. And as I said in the prepared remarks, the dip is really driven by year-over-year change of working capital. And that's largely attributed to higher natural gas prices. So we expect that to recover. And we also made a voluntary pension contribution in 2021. So overall, I think we're right in the target range for FFO to debt.
spk05: Great. Thank you very much.
spk12: Thank you, Michael. Take care. Keep an eye on your IT folks.
spk08: Your next question comes from the line of Andrew Weifel of Scotiabank.
spk12: Good afternoon, Andrew.
spk06: Hey, thanks for taking my question. Most of them have been answered. I just want to follow up a little bit on the upcoming Wisconsin rate case. Two quick ones. First is do you see any potential for yet another stay out or agreement to keep rates unchanged? I don't mean to be greedy. You've done a great job managing the customer bills. Just wondering strategically if you want to extend the stay out or if you feel it's time to have a conversation with regulators and interveners like you do every so often.
spk12: It's a great question, Andrew, and I think unanimously we believe it's time to reset, if you will. number of moving parts that are that are in our thinking. I mean, first of all, as you recall, we've announced the retirement of four older coal fired units at our Oak Creek site. These are 1960s vintage units and we've announced the retirement of the first two of those four in 2023 and the second two of the four in 2024. So there'll be retirement there. There'll be cost savings there. And we really have been out of a rate case for so long that it's really just time to step back and reset. And I think the commission staff, the interveners, I mean, we all believe it's just time to take a thorough review again, and we're looking forward to that. Scott?
spk13: And it's going to be a very straightforward rate case. I mean, when you look at our capital investments that we've made, the capital investments that And the majority of them, I think when you look at what's already been approved and at the commission right now, that's about 60% or a little over 60% of the rate base. And then you even add in new services and other reliability capital. Almost all of this has been approved or great capital additions for reliability or decarbonizing the environment. So it's going to be a pretty straightforward rate case as you see us pull the final numbers together here in the next couple months.
spk06: Okay, not to get ahead of that, but are you able to give us any kind of high-level guess of what it might do to rates, directionally or qualitatively?
spk12: Stay tuned. We're pulling everything together. The filing is due by May 1, so we'll certainly have a good conversation with you in advance of that.
spk13: Yeah, and I think the other thing to remember is this is a place where you do two-year forward-looking rate cases. So a lot of our capital projects, when you see that, capital spending, it's going to come in over two years, just like Gail mentioned, the retirement of those plants are over two years. So we'll factor that in, too. So it'll be a multi-year filing we do here.
spk12: Very straightforward case, though. We wouldn't expect, I mean, to have, you know, anything as dramatic in terms of, this is not a case about higher O&M. As Scott said, this is a case about capital, much of which will have already been approved, capital needed for reliability and for decarbonization.
spk06: Very good. And just a quick follow-up. Is it too early to talk about performance-based rate-making in this upcoming case?
spk12: Yeah, and I'm glad you asked. For those of you who've not followed it perhaps quite as closely, the Commission did have an informational hearing just about the concept of performance-based rate-making. That hearing came out of more than a year's worth of work of the governor's task force looking at climate change, looking at decarbonization, looking at what initiatives the state might put in place. But I think it's very clear from the informational hearing that any changes in the process for putting rates in place in Wisconsin is going to be deliberate, going to be thoroughly thought through, and I would not expect that to have any impact on our upcoming rate review.
spk06: Okay, very helpful. Thank you.
spk12: You're welcome. By the way, before we go to the next caller, I just got a text from one of your brethren who says, given your performance, nobody's asking the most important question, will Aaron Rodgers be back in Green Bay next year? The answer to that is I don't know, but Giannis is still with us for the Bucs and rock and roll.
spk08: Your next question comes from the line of Michael Lapettis of Goldman Sachs.
spk01: Hey, guys. Thank you for taking my questions, and I'll leave my John Morant props at home for now. There you go. Really nice night in New York last night. Real quick, just thinking about gas demand. If I go back over the last several years, kind of three, four years or so, weather normalized gas demand in Wisconsin was actually pretty elevated. I can even go back five years. Now this year, you're forecasting about half a percent. And then if I look at your November slide deck, you'll kind of forecast, I think it's around 0.7 to 1% demand growth. Can you just talk to us a little bit about the trajectory, meaning why coming down off that kind of, first of all, what led to the abnormal kind of that 3% plus range from a couple of years ago, and that lasted for several years, and then down to half a percent now kind of as we're coming out of COVID, but then re-ramping back up?
spk12: Yeah, and Scott and I will both take a shot at that for you. Good question, Michael. The easy question, the first piece, is what happened? Why did we not see growth in weather normal gas demand during this past year, during 2021? And as we looked at the data, I think the answer really pops out from the data, and that is the effect of the pandemic. If you think about the most dramatically impacted segment of our customer base for the pandemic, It's small commercial and industrial customers. Many of those premises were just closed during huge swaths of the pandemic. And so they weren't, you know, think of the restaurants that weren't cooking. Think of the stores that were completely closed and not heated to the normal level. So clearly the impact of the pandemic tempered the growth in customer demand for natural gas. But we still think we're going to see a growth trajectory. And, Scott, we're still seeing strong customer growth.
spk13: Yeah, that's exactly right. And when we look at it, we're looking at strong customer growth, about a half a percent, maybe, you know, seven-tenths of a percent. And you can imagine we're factoring in if prices stay a little bit higher, conservation will continue and products continue to become efficient. So looking forward, you know, we're still assuming that half a percent in the future, about seven-tenths to one percent. So good growth. And to Gail's point, remember the pandemic started in about March. So last year there's two months that weren't reflected in the previous year when the pandemic, we didn't have a pandemic. So that's also why 2021 was a little weaker because of just the timing of the pandemic.
spk09: Yeah, I would just add that, Michael, that we came pretty much on top of our forecast last year. So we guided that way. So we came out exactly what we thought it would happen last year.
spk01: Got it. And then just a follow-on question. Like if I look at 2020 and 2021 earnings, both years actually would have been a higher number if I backed out the kind of roughly the $0.08 of debt extinguishment costs that showed up in each year. So the earnings number, like a lot of companies consider that non-recurring, and I respect the fact that you don't back things in and out when you stick with GAAP. But if I think about it, that is something that probably isn't going to happen in 2022 or 2023. I may be wrong there. So it would imply the base would have actually been higher, meaning the 21 starting point or the 20 starting point. But the growth rate into 22 and 23 would actually be a little bit lower just because the starting point is higher. Am I just kind of thinking about that right or they're – Are you looking at the debt tranches at the holdco and saying, hey, look, I'm going to have other refinancings and I'll probably incur other similar-like costs or other moving parts I'm not considering?
spk12: Michael, I'm going to ask Shaw to answer the question about the holdco debt. Let me, if I can, respond a little bit more broadly. Of course, there are a number of moving pieces in any given year. But as you know, some companies in our industry basically adjust their way to a high growth rate. We don't do that. And I'm glad you're asking the question because I think the quality of our earnings and the fact that we don't adjust our way to a higher growth rate, I think that's a differentiator for us. I mean, I really do. And it shows up in things like cash flows. It shows up in things like dividend growth. And so what we're reporting, I mean, we don't nickel and dime you to death. with little adjustments here and there just to hit a growth rate. What we're reporting is high quality and real and GAAP. And with that, I will get off my soapbox and let Shaw respond.
spk09: Michael, I wouldn't just pick out that one item and readjust whatever you're trying to adjust because, to Gil's point, we We very much focused on the quality of earnings and if we see favorable weather we see stronger economic recovery than what we originally forecasted We if we also have some favorable tax resolution happen in 2020 in the year that will remain opportunistic about debt refinancing and just to just to take advantage of the development. So I think that's just the normal course of what we do to manage throughout the year. So I wouldn't take one item out and adjust it out at all.
spk01: Got it. Thank you, guys. Much appreciated. Take care, Michael.
spk08: Your final question comes from the line of Paul Peterson of Glenrock Associates.
spk12: Paul, you changed your last name, did you?
spk14: No, that's common. That's a common misunderstanding. So a lot of my questions have been asked and answered, and I don't want to nickel and dime you guys to death, but just sort of a quick little follow-up here. The six cents for the taxes, how should we think about that going into 2022? Is there any sort of Something unusual there or just how should we think about that going into 2022?
spk12: Sean, your thoughts.
spk09: Yeah, so no, nothing unusual there. As I said in the prepared remarks, that was largely driven by the production tax credit, the additional projects that we brought online. So you know that we expect a couple more projects. coming online one in the middle of the year, the other end of the year. So we expect another $0.08 of pickups from this section. And the only thing I would warn you is I wouldn't do a $0.02 per quarter, because depending on the timeline and everything else, it could be skewed to one quarter versus another. But for the year, we expect another $0.08 increase.
spk14: Awesome. And then just with the goodwill impairment, I know it looks tiny to me. I mean, it looks like it's, what, a penny or something maybe. But I was just a little bit curious. You guys did a test, and it led to a revaluation. But what changed in order to have the test? You don't think of the transmission project in California. But I'm just sort of curious as to what made you guys say, hey, the goodwill doesn't apply anymore. Was there any particular event or anything there that had that? Again, I know it's It's kind of nickel and dime with you guys, but I'm just sort of wondering.
spk12: No, no problem. It was really basically a FERC ROE case that we got a FERC order, and we took another look. Shaw?
spk09: Yeah, so Gail mentioned one of the drivers for the year-over-year change for ATC, but if you're just looking at the Goodwill impairment, We do that every year. We look at the goodwill. We do the evaluation. We look at the assumptions, including forward-looking ROE, capital expenditure opportunities, and all the assumptions around that. The most recent assessment led us to believe that the goodwill should be written off. Nothing abnormal. It's just normal course.
spk14: Right, but that's because basically you guys saw a lower, because a lower ROE had been awarded, it impaired goodwill. Is that how we should think about it? Do I understand you guys correctly or is it something else?
spk09: No, capital expenditure opportunities is nothing unusual. We just look at the net cash flows and terminal value and apply the different assumptions which led to the conclusion that the goodwill should be written off.
spk14: Okay. Well, thanks so much. I appreciate it.
spk12: You're more than welcome. Happy to have your questions. All right. Well, I think we've worn you out. So thanks so much for participating in our conference call today. We appreciate all your questions. And if you have any other questions, feel free to contact Bestraka or direct line 414-221-4639. Thanks, everybody. Take care. So long for now.
spk08: Thank you for participating in today's conference call. You may now disconnect.
Disclaimer