WEC Energy Group, Inc. (WEC) Earnings Call Transcript & Summary

Okay. Welcome, everybody. It looks like most participants have come in. My name is Fraser Hughes. I'm the Chief Exec of GLIO. We have an absolutely fantastic session today moderated by Steve Fleishman of Wolfe Research. Our panel members are really 2 giants of the utility sector: Tom Fanning of Southern Company; and Gale Klappa, of WEC Energy Group. Before I hand over to Steve, a few updates on GLIO. Our membership continues to grow. We are now over 65 members. The membership is made up of listed companies and dedicated listed infrastructure managers. The listed companies own and manage infrastructure assets that amounts to well over $1 trillion. Combined, the listed managers have funds under management of $115 billion. Our long-term opportunity is to grow this $115 billion. Developments in listed infra are often compared to global REITs. Using [ rebased ] AUM growth in REITs, we can see that the first 10 years of growth are similar. The question is what will the next 10 years look like. If we took a similar path, we estimate that AUM in listed infra could grow to between $300 billion and $450 billion in the next 10 years. This will benefit both the listed companies and the managers; but moreover, investors access high-quality infrastructure assets and their management teams. To be successful, we need to carry out our education and promotion work together under the GLIO umbrella. This awareness is done through the GLIO index. The GLIO/GRESB ESG Index, our regular research, the GLIO Journal and our virtual platforms. Please do encourage your networks to join our organization. Now please don't forget, you can still sign up to one-on-one meetings with the listed companies this week. And some housekeeping notes for Steve's panel. [Operator Instructions] Steve, over to you.

Great. Thank you, Fraser. Good to see everyone. Very honored to host this panel as part of the GLIO event. Very excited about some of -- all the activities that GLIO is pushing and the growth ultimately in the infrastructure product that we're certainly supportive of. And I couldn't think of a more fun group and also more esteemed group of CEOs to do this panel with, 2 of the long-time industry leaders. We've got Tom Fanning, who's the Chairman and CEO of Southern Company. Tom's been a leader on -- besides your Southern Company, on a lot of key topics in the sector, national energy policy, I think more recently, cybersecurity, among others, and is also on the Board of the Federal Reserve of Atlanta. And then Gale Klappa, who is the Executive Chair of WEC. And long-time prior to that, CEO of WEC. Gale, among many accolades, is also a part owner of the Milwaukee Bucks and is a great -- if you get a chance, you should listen to his podcast or his interviews as part of that, too; and lo and behold, as some of you know, started his career at Southern Company, too. And I think Gale and Tom probably spent a lot of time with each other back then. And Gale has just got a great long-term track record of financial execution performance over the years at WEC. So Tom and Gale, thanks so much for having -- hosting the panel with me today.

Delighted to be here.

Great to be here.

So we've got a variety of folks on the line, and I thought it would be helpful, maybe, Tom, starting with you, to just give a quick snapshot of Southern Company and maybe one line of what you think makes the company unique.

Yes, terrific. It's real funny. Gale and I did work a lot together. I want to say I had the head strategy role. Gale followed quickly in that. And then Gale went on to CFO of Southern. I followed Gale when he went to Wisconsin. So we did work a lot together, and he is a terrific guy. When I think about Southern Company, it's an amazing company. We've been through -- we're just now finishing a period where my predecessor, David Ratcliffe, another great leader, entered into some really big projects that are now starting to go away. The most recent, the latest one that we were about to finish is the first new nuclear plant in generations of Americans. That is the Plant Vogtle project. We expect to be online with Unit 3 in November of this year and Unit 4 in the next year. So as we emerge from that, it's fascinating to see the trajectory of this company. We're about -- we're a little bit smaller, but we're about the size of the nation of Australia in terms of energy generation. We're that big. We have been earning at about a rate of 6% earnings growth for a period of time, except we've been under a penalty rate while we finished Vogtle. As we emerge, there will be a big step-up in earnings. We leave the penalty rate. And then we will be on a track record that, for the foreseeable future, still looks like 6%. About 5% to 7% is what we're saying. And we'll be $4 or better in earnings per share by 2024. That's what we believe. Not only will our earnings trajectory rise by a great deal. Our financial integrity, likewise, will rise, will be $850 million or so of new free cash flow as a result of finishing these nuclear projects, which it isn't just about risk and return and increased earnings and better-than-expected financial integrity. I think one of the big things that we've been a leader on, we were one of the first companies to declare in America low to no carbon by 2050. We committed in a new way to think about it to net zero by 2050. We said 50% removal of carbon by 2030. We accomplished that in 2020. One of the fascinating things going forward is that the rest of that trajectory is driven, I think, by the Biden administration, will be fascinating as we continue to move away from coal into a net zero future. And just to dimension it, before I became Chairman, we were about 70% of our energy from coal. 2020, I think we were 17%. So we've already made a great transition, more transition to come, a lot of fun for the future.

Great. Thanks, Tom. Gale, let me turn it over to you for a snapshot of WEC and also just anything that you think makes the company unique.

Thank you, Steve. And great fun to be with 2 of the giants in our industry. Tom and I did spend a lot of time together over the years, and he's been a great thought leader for this industry and really has shepherded the company well. No question about that. I would say, if Tom is the leader of the Southern Company, then I could describe myself as helping to guide the northern company, better known as WEC Energy Group. We have retail customers across 4 states in the Upper Midwest, 4.6 million customers to be precise; and we're focused on serving them extremely well. In fact, we have -- I'm very pleased to say, and Steve, as you know and Tom, we have a very long track record of delivering on our promises and a very long track record of strong performance. Just a couple of examples. Our largest utility, We Energies, has been named the most reliable utility in the Midwest for 10 consecutive years. Our customer satisfaction ratings are among the highest in the country, and we've been able to deliver top-decile returns -- top-decile total shareholder returns for way more than a decade in our industry. Tom touched on the future, and I think he's absolutely right. We think we have a very promising road and a lot of significant investment opportunity ahead as companies like Southern and WEC Energy help to lead the clean energy transition. Like Southern, WEC Energy had been fairly reliant on coal in past years, but we have been able to -- just like Southern Company, we've been able to reduce our CO2 emissions by 50% at the end of 2020. We have set a new goal of 55% reduction by 2025 and 70% reduction by 2030. We've also adopted a net carbon zero goal by 2050. So we're well on our way to a clean energy transition. Next 5 years, you will be seeing a major pivot in our capital investment plan in really renewable infrastructure: solar, wind, batteries, perhaps a bit of renewable natural gas, as we continue to make progress toward a net zero carbon economy way down the road. What I would say perhaps makes us unique is that the track record of performance, I firmly believe, will continue, and I believe we have the opportunity and clearly the goal to deliver among the best risk-adjusted returns our industry has to offer.

Great. Great. Thanks, Gale. It's, in many ways, one of the most exciting times to be looking at the sector with a transition to the power fleet to renewables and electrification trends, maybe the biggest thing that's happened since air conditioning started, which did precede my time by the way. I am past that. But at the same time, we've seen the stocks weaken up a lot, I think, on the impact of rising rates and inflation. And so just as investors on the call here today are dealing with that, maybe you could just reaffirm whether the fundamentals of the business are holding up okay. And are you seeing any pressures from higher rates or inflation that really change your fundamental outlooks at all?

Yes, I don't. Having been with the Fed for so many years, and I was also the Chair of the Conference of the Chairs at the big Fed up in D.C., I think what we're seeing right now is a bit of a perturbation in those markets. I don't see continuing higher interest rates. Now are we going to see a 10 year at 3% or 4%? That's what I'm referring to. And I was the Chair of the Conference of Chairs when we made the transition from Janet Yellen to Jay Powell, and Jay Powell remains a great friend. They're going to be a little more relaxed about inflation. They used to say 2% was their goal, and he's saying, well, I don't mind if we go a little bit above 2%. For the longest time, we would have expansionary monetary policy, and we wouldn't hit 2%. They were always puzzled at why they couldn't get inflation going. And as that impacts our industry, I think this notion of reasonable growth plus attractive yield at the very low-risk profile will fit the world's demographic very well. And I think with the kind of yields we're talking about, our investor base is going to remain even more important. And I think our stocks will remain exceedingly attractive for that demographic for time to come. So yes, look, I think you'll see some bumps here and there, but I think this kind of growth with a good yield at lowest risk is going to be great for years to come.

Gale, curious to hear your thoughts. Yes.

Yes. Tom makes a great point. And you look back in history, and some of what we're seeing in the markets kind of reminds me of that old song from Prince. You're partying like it's 1999. When Bitcoin surges, when Tesla's trading at 1,000x earnings, companies like ours, steady, total return vehicles with very low risk, they just don't tend to fare as well in periods of market froth if you will. So I think a part of what we're seeing here is simply the froth in the market. And then as you mentioned, the fear of higher interest rates and a resurgence of inflation. I can tell you that a number of years ago, when I was in the strategy role at Southern, we did a bit of a study on what happens to utility stocks in periods of various levels of inflation. And what we found was that moderate inflation was actually a very favorable climate for utility stocks. Hyperinflation doesn't help anybody. Deflation is a whole different story, but moderate inflation was actually a tailwind for utility stocks. And to Tom's point, and I think he's making a good one, you look at anywhere between 8% and 12% total returns in terms of earnings growth and dividend yield, and you risk adjust that. And I think, over the long term, companies like ours will continue to fare very, very well for investors.

And Steve, I think just to add to Gale's point, what are the characteristics of the industry? I think we're going to see pretty healthy, for us, long-term organic growth. When you think about this notion of move to electricity, get away from imported oil, carbon-based fuels, this isn't a bad time to be in this industry. Lots of capital opportunity as we transition our fleets. I'm feeling pretty good about our cards right now as an industry.

Yes. Amen.

Yes. No, I think -- I know, just to wrap up this topic, is I've noticed that there's not a lot of investor focus on the duration of growth. People are very focused right now on the recovery and on is there any near-term upsides for you. But there's not a lot of excitement about the fact that you might be able -- a company might be able to grow for 3 years or 5 years or 10 years with a lot of visibility. But they certainly cared about that a lot a year or 2 ago, and my guess is, as the recovery seasons, there'll be a focus back on who can continue to grow after the recovery has already happened.

Well -- I'm sorry, Steve.

No, go ahead, Gale.

And to your point and what Tom is saying, I mean, I absolutely agree. If you think about the intersection of public policy and investment opportunity, this industry is one of the few industries in the world that actually benefit from an earnings standpoint and an investment opportunity standpoint in decarbonization. I mean we're at the heart of the drive of public policy to decarbonize the economy. And that, I believe, is going to sustain growth rates of companies like Southern and WEC Energy not just for 3 years, 5 years, but for decades to come.

And growth on a risk-adjusted basis. I think -- now I know, Steve, you want to get into other topics, but this integrated, regulated view where you have stable rate base, generation transmission distribution under one house, highly predictable regulatory environments, man, that's not bad. There are other environments in the United States that are not that lucky.

Yes.

Well, great. Well, that's a great segue into the next topic, particularly as we talk about decarbonization. Is the new administration -- and one of the key tenants of the Biden energy plan is talking about decarbonization by as soon as 2035, or certainly, if not then, then hopefully soon after. There, I think, will be a lot of focus this year on an infrastructure bill. So maybe we could talk a little bit from each of you what you think the Biden administration will likely try to accomplish this year in our -- affecting our sector.

Gale, you want to take it away?

Well, I'll give it a shot, and I know you'll have your thoughts as well, Tom. Well, first of all, as an industry and a number of us have had a considerable amount of interaction, and I think the good news is the Biden administration has been very open to a dialogue with Tom, with all of us in terms of what makes the most sense. Clearly, there is a sense of urgency on the part of the Biden administration to decarbonize. At the same time, I've been very encouraged by a couple of aspects of the discussion. First of all, I think we all know that if you cut things up in time frames, that we can get without major advancement in technology, our industry can largely deliver 70% to 80% reduction in CO2 emissions by 2030. That, by the way, that kind of reduction lines up with the goals of the Paris Climate Accord. So I think we all feel very good about the progress of getting to that significant level of reduction by 2030. To get to 0 by 2035, I think all of us would say and I think the Biden administration people would say, requires technological advancement. And we're going to have to, I think as a country, and I'd be interested in Tom's view on this as well, make some policy choices. One of our fellow CEOs was saying the other day, and I think he made tremendous sense, we may get to a point from the standpoint of what can you get for the best bang for the buck. Might it be incentivizing another electric vehicle, or might it be incentivizing one more ounce of CO2 reduction from a power plant? But I think the real issue be comes down to we have to be reliable. We are the lifeblood of the economy, and you saw what happened in Texas. I know we'll talk about that later. But we're the lifeblood of the economy. We have to be reliable. We have to provide economic service to customers, and we have to do it while decarbonizing. All that's possible. But it's a tall order, frankly, in my view, to get to 2035 at 0 for our industry and still be reliable and still be economic for customers. It's not to say it can't be done. The other part I'm encouraged about is there are more dollars going in at the federal level at DOE to carbon capture research, which I think is the next, most high potential technology to help us get there. There are others. There's talk about hydrogen, but I think that's many more years away. Modular nuclear reactors, we haven't seen one deployed yet in the United States. Then there's carbon capture and longer duration batteries. But there are technologies that I think will get us there by 2050, whether it's absolute 0 by 2035, I think, is another question. Tom?

Yes. It's fascinating. And it's a little unpredictable where we are right now. When Trump was running against Clinton, I worked with both of the campaigns' structuring, helping them think through what their energy policy choices were, and I was on one of the Trump transition teams. Now with Biden, it's been very interesting. Through the campaign, private sector really didn't participate in policy formulation very much at all. And so now after the election, I have been part of his transition teams and now have also met with now Secretary Jennifer Granholm, Gina McCarthy, who kind of has the domestic portion of attacking carbon as an issue. Of course, John Kerry has the international aspect of that. And just to add on, inside the National Security Council, we've been working on cyber and physical security with Anne Neuberger and Liz Sherwood-Randall. These are people that we know quite well. So it's like, all of a sudden, the flower has opened. And now we are engaged in a big way. Here's what I would say. It is very clear that the politics of the current administration are favoring targets like 80% removal by 2030 and net zero by 2035. That is a tall glass of water to drink. We can do it. And as Gale says, there are lots of interesting policy choices. One of the very interesting ones is, look, we've done our modeling. We can get to net zero by 2035. However, there's a big economic elbow, if you will, in the United States that really moves to higher cost away from, say, a 2040 number down to 2035. Why would that elbow exist? Well, we believe for a lot of the reasons Gale says, is that an interesting kind of conundrum. The longer you let technology transformation evolve and become commercial, then the transition actually becomes easier. Now it has to be a major policy decision is, is it more important to get to net zero carbon by 2035 and keep prices lower and resilience, see Texas here recently, higher? Or do we -- I mean, lower? Or do we really allow some time to let these advantages go forward? Southern runs and ran for some time the International Carbon Capture Center. We currently just got 5 more years on the United States domestic Carbon Capture Research Center. We're the biggest customer for R&D with DOE. My sense is that's another potential area for growth. When you look at infrastructure investments, it may be, and I've talked to the folks about this, creating a slice where the United States, along with the private sector, promotes technology innovation. And I think that will be another opportunity for us to go forward. But these big bets, whether we're going to spend $100 million on investing in the newest nuclear technology, I don't think it's going to be SMRs. I think that's more of a niche play in America. I think it's going to be more of the -- what they call the Gen 4 reactors. These are the molten chloride salt reactors that physically can't melt down, and therefore you don't need as much containment structure and may become more economic. But if we're in a headlong rush to 2035, it's going to be very hard to justify new nuclear, even though I think as a policy position that's an important posture to keep in play.

So Steve...

Go ahead, Gale.

Something Tom said really struck a note, and I think it's probably just briefly worth mentioning. If you look back at the history of our industry, and the history of our industry is one of really superior service to -- superior energy service to customers at very competitive prices, if you look back at that history, there's one giant lesson that leaps out, and that is there is no perfect fuel source. And having all of the options available to you is really what has resulted in the best, most economic service to customers. And I think that's something that we must remember as we work down this path toward decarbonization. It can be done. It's just a matter of there is going to be technological innovation, but there's no doubt in my mind that Tom's right, that it will be done at much less cost to society and at no real diminution to reliability if we can have more time to get there. But I think the key is we can get to 70% to 80% without major technological innovations by 2030.

And if you talk about more policy choices, I mean this is a little provocative, but it would be great if the United States could suggest in a regional way optimal energy portfolios that accomplish the best balance of clean, safe, reliable and affordable. In response to a piece of failed legislation in the past, Waxman-Markey, EPRI came out with this idea of Prism, which was the best mix in order to achieve carbon and reliability, takes also into account transmission constraints. They regionalized it with something called Prism 2.0. Ernie Moniz is on our Board. He's the former Secretary of Energy. And I've worked with him on the Quadrennial Energy Plan put out every 4 years by the Department of Energy. Wouldn't it be interesting if instead of fighting through the organized markets being structured on short-run marginal cost curves, if we could, in fact, adopt a posture of a national energy plan, regionalized, that then the states would implement? The advantage we have with our integrated regulated structures that Gale and I are fortunate to share it, that's great. But these organized markets don't do that. The only way I think we're going to get there is not only to take into account this kind of notion of generation but also optimize in an iterative way what the transmission policy of the United States has to be. Those are jointly solved equations. And I think we can get there as the United States, but boy, oh boy, I think there's indirect ways to get there be it taxes, be it carrots and sticks, tax preference items. It's going to be fascinating.

Tom, you shouldn't have turned down that call from Joe Biden.

Yes. On a rotary phone, no less, it sounded like. So that was pretty cool.

Old school, baby.

The -- just I think everyone -- a lot of folks are focused on what might actually be in a bill this year. And I think a lot of -- there's a lot of talk of renewal -- different renewables, incentives and batteries and the like, and we could talk about that. But I'd be curious, hear a lot of talk at administration about transmission, supporting transmission and maybe even some talk of making sure nuclear -- existing nuclear doesn't shut. Just do you think we could see some things around nonrenewables to transmission, nuclear in an infrastructure bill?

I'd love to see them do something to help nuclear. I don't see it. I do see tax preference items that go beyond, say, wind and solar and all that stuff to storage and to R&D credits and a variety of other things. I think they'll do that. It's fascinating to me, though, when I got into kind of the middle of the transition teams, I was expecting, Steve, a lot more leaning into the kind of left position of a carbon tax and a variety of other things, these indirect methods to achieve change. I don't see it right now. And so I think there's -- what I see right now is leadership inside the Biden administration as being more centrist than I think some of the staff would like. So it's a very interesting kind of give and take that we're seeing right now. But I think definitely, look, I think -- I'll bet you'll see something like a clean energy standard and then incentives to promote the change.

Yes, I agree with that. I think it's a no-brainer that there will be additional tax incentives for renewables. I think battery storage will get a kick in terms of additional tax credits and tax incentives, and that makes a ton of sense. Nuclear subsidies, I just don't see it happening either.

I'll bet you those subsidies would be R&D.

Yes, I agree with that. But in terms of supporting existing operating nuclear...

Yes.

Yes, I don't see that coming either. And I think you're going to see more research that the administration will support either directly through DOE and/or through a clean energy standard, more research on carbon capture. Interesting that just last week, and you may have seen this in some of the trade press, President Biden had a meeting with a number of union leaders from unions that support infrastructure building. And he made it very clear with a direct quote, which his spokesman confirmed that he did was, "I'm all for natural gas."

Amen. I absolutely get that. So here is one of the other tugs of war they have. There's this idea that somehow natural gas will go away in the United States. Look, it is so plentiful and so inexpensive, and I think you will see natural gas persist in our generation structures. You will see carbon capture and sequestration attached to the newest generations of combined cycles, et cetera. And then the other kind of cool idea that we're deploying in Alabama is the idea of blending hydrogen in with natural gas. You remember our -- of course, we remember our Kemper County facility, now Plant Ratcliffe, that one can burn 30% natural gas -- I mean, 30% hydrogen in with the natural gas. The one we're building in Alabama can as well. So those are pretty much at-scale applications of a new way to think about that infrastructure. We still need to promote pipelines and sourcing of hydrogen at scale, which doesn't exist today. But man, I think there's potential to get there.

Just that's a great segue into the topic of the future of gas, not just for power but for heating homes and cooking, the LDC business. That's been a debate topic of, if we're electrifying cars, why aren't we electrifying heating and everything else too and decarbonizing that way. How do you see -- both of you see the potential of that? Is that feasible? Is this just kind of a theoretical change that's really not in the real world doable [ or a sense of ]?

Gale, you want to hit that?

I'd be happy to, Tom. I've got 2 very direct thoughts on that subject, and the first, let's talk about anecdotally just what happened last month. So one of the states we serve with natural gas, we serve natural gas customers in 4 states in the upper Midwest. And as you know, it gets cold up here. One of the cities we serve is International Falls, Minnesota. For a week about 2 weeks ago, most nights, the temperature dropped -- forget about the windchill now, the temperature dropped to minus 32 degrees below 0. Never got above 0 during the daytime. Now...

And that's Fahrenheit.

And that's Fahrenheit, folks. That is Fahrenheit. That's cold. There is not -- and look, I would love to see everything electrified. But there is not a heat pump today, electric heat pump today or under development that could keep your house at 68 degrees if it's minus 32 at night and never gets above 0 in the daytime in International Falls, Minnesota. It's just not there. If you look at the cost, of what might -- let's say, you put in a heat pump and back board base -- backup baseboard heating, et cetera, you'd be talking about 6 to 7x the cost of what that customer paid this past few weeks for natural gas. So the truth of the matter is, from a technology standpoint, and you're talking about life and death stuff when it's that cold, you have to have an economical reliable source. So for today -- and that's why a market share of natural gas heating in our 4 state area is above 70%, and a lot of what's not natural gas is propane. So from the standpoint of where we are in terms of being able to keep life moving with those extremely cold temperatures, there is no practical substitute for natural gas today. Now to the idea that natural gas is going away, and Tom's been very eloquent about that, but to the idea that somehow the local natural gas distribution pipeline, the local natural gas distribution networks, to the idea that somehow those are going to become stranded assets, I think really is fallacious and wrong. Two reasons: one, we can continue to make environmental progress in terms of reducing methane emissions. In fact, we were one of the first companies in the country to set a methane reduction goal of our natural gas distribution network. But we can continue to reduce methane emissions by blending renewable natural gas. And you're going to see a lot of that in the days and months and weeks ahead, I believe, across the country. But then let's assume for a minute that hydrogen lives up to its hype. Well, okay, you still have to -- if you can develop green hydrogen, you still have to deliver it to the customer. And with some technical changes and with some investment, we believe that the natural gas distribution networks across the United States could carry hydrogen and would be the choice to carry hydrogen. Just think, Steve and Tom, about is it even practical that you would rebuild or substitute millions of miles of local gas distribution networks with something else. I don't think so. It's just too hard to build an infrastructure, and that infrastructure can be very valuable regardless of whether it's a blend of natural gas and renewable natural gas, a blend of hydrogen and natural gas or even at some point, if economical, all hydrogen.

There's a lot of fascinating chemistry issues that still have to be chased down to determine whether in fact we can use natural gas pipelines to carry hydrogen. There's embrittlement and some other factors. And in fact, one of the big programs -- so Gale, you run the gas distribution company in Chicago, right? We're 2 million customers outside of Chicago. Southern Company is. Nicor is our company. And we're engaged in a long-term program to do safety-related pipeline replacement program. One of the interesting things we're thinking about now is putting in place this safety-related replacement, putting in place pipes that can, in fact, have dual use, like for hydrogen and natural gas. Still need -- there's still a reasonable length of putt to go there to get that done, but I think that does, I think, speak to the growth of this business for a long time. And everything Gale said about the price points, especially up north, of substituting electricity for gas heating, it's way far away from being in the money. Gale will remember what we call the nat line, Gale, right? Isn't that kind of Macon, Georgia, mid-Georgia, East and West?

Yes. Right above the nat line, it doesn't work so good.

That's right. Below the nat line, heat pumps, what is it, it's probably 90% penetration. But above the nat line, that's Macon, Georgia, mid-Georgia and across, gas becomes more and more and more competitive. To where he is, that gets dominant.

To Tom's point, there are no nats up here.

So certainly not the winner.

Of course, I own a home in Maine and it's propane.

Yes. The -- just -- Gale, just -- and Tom, just on the economics of -- that's exciting that gas could be decarbonized through RNG and maybe hydrogen over time. I guess the question would be just how expensive could that end up being. Although I think, obviously, the cost would go down over time.

So Steve, I just saw, in fact, I think it was 2 days ago, our projection of what it would take to be net zero by 2035. And there's still, from a capacity standpoint, a pretty big slug of gas. Now what does that capacity look like? Vast majority are CTs, [ vapors ] that will only run a few hours a year. The other slug of capacity that is combined cycle will have CCS. But you know what it competes with economically is new nuclear.

Yes.

Wow.

If you think about the capital cost, CCS, combined cycle compared to the capital cost of the so-called Gen 4 reactors, they are pretty much in flux, so whichever one wins the future. Right now, we believe that's gas with CCS. Gas will be so important to support the reliability and resiliency needs of intermittent resources. In the southeast, it's going to be mostly solar with some wind.

Yes. And to that point -- and you're also seeing a rethinking in our industry that started a couple of years ago, and I think the Texas situation only underscores the rethinking. And that is a number of companies, Southern Company, Xcel, others are basically now pivoting toward life extension for existing nuclear reactors for the very same reason. If you look at some of the cost curves that Tom is referring to, one of the economic options could well be safe extension of nuclear plants that have turned 60 and otherwise we would have thought would have been retired but can safely be extended in terms of their lives and their operations reliably and safely for 10 to 20 more years.

Great. Well, I want to ask you both one last question before we hit the investor questions for the panel, and that's on ESG. Somehow we actually went through 45 minutes of panel. Didn't say ESG yet. So I -- and it's a focus too of GLIO, I think, too, is an ESG overlay to it. So maybe you could both speak for the sector and the focus on ESG for the sector versus others and then what your company is really focused on achieving on ESG as you look ahead?

I think Gale and I will see this very similarly that ESG, so environmental, I think we've been dealing with that in a very forward leaning way. Governance, I think we both have good governance, and we follow the modern practices. The real discussion has been around the S in the ESG. And I know Gale from his background and branding and everything else and really the fundamentals of Southern Company, 100 years ago, we're a company that identifies with the notion that we must be a citizen wherever we serve, and we measure them in a variety of different ways. We have foundations in our companies. Each company has, I don't know, $160 million right now. Our volunteer hours are $240,000 -- 240,000 hours every year. So we have this very well-defined notion of what do we really do beyond our own bottom line. We always have to be bigger than our bottom line and make sure the communities are better off because we're there. There's different ways to measure and, Steve, it's kind of fun. There's -- there are some indexes right now that start to get at the idea of what is S. I've actually charged our Chief Counsel, Jim Kerr, with the idea of creating our own index, and really thinking through how can you measure the totality of a company's effect on the broader economy, the broader population. And so that's a very interesting idea. To that end, we think we're in such a good position in that regard that I think we were the first companies out to sell sustainability bonds. And now there is an emerging group of investors that will pay up to associate their investment with good sustainable practices. So I'm actually really kind of encouraged by this because I think we've always stood for those principles, we as an industry. And I think it will help this industry with the pools of investment capital that will open up in the future.

Steve, to build on what Tom said, and we're both a bit biased, but I will tell you, as we look around -- and Tom's on a number of outside boards. I'm on a number of outside public company boards. I would say to you, there is no industry in America that is better positioned than our industry on the S and the G. We keep running into -- well, the E. I mean I think it's -- many investors are beginning to realize how well our companies do on the S and G metrics. But they need greater -- particularly the S needs greater definition. I mean, in many ways, ESG is still the Wild West. You have what I call check-the-box investors who, if you have any fossil fuel in near future, they won't invest in you. That I think is a very narrow and probably not very profitable way to run a fund. Then you have those who want to understand what you're doing. But again, the measurements and the metrics and the indices are all over the place. It will continue to improve. The one thing that I think we should continue, particularly on the E side of ESG, we need to continue to talk about the progress this industry has made. The statistics show, for example, that power generation is no longer the single contributor -- single biggest contributor CO2 emissions. It's the transportation sector. This industry has done a lot, and we got a lot more that we can do. But for example, in our situation, and Steve, you and I have talked about this, we have a relatively new -- I think 2010 and 2011 were the in-service dates of our new Oak Creek units, among the most efficient coal-fired power plants in the world, literally. What about the future of that? And how does that fit into an ESG profile? Well, if you think about how far we've come, I mean, by 2025 with the retirements that we've already announced, less than 10% of our revenues and asset base will be tied to coal. And that asset that I talked about, which burns cleanly coal today, is so strategically placed on the transmission network that we have options. Perhaps 1 day, it will be a natural gas coal blend. Maybe 1 day, it'll be hydrogen. But we have options for that most efficient unit to be able to contribute to society and contribute to our mission of reliable economic service. So I think we got to continue to tell the story on the E front. And then help shape, as Tom said, the definition of S because, I will tell you, companies like ours make a huge difference every day in the economic and justice life of society.

And let me give quick examples, and then I guess, we'll probably go to the questions. But even before the social unrest in the United States of the summer, we committed $50 million to HBCUs. And just recently, we announced another $25 million in partnership with Apple to develop a nationwide technology and innovation center that will be located in Atlanta. And so Tim Cook and friends will join in arms with us, and we will create something of value. This idea of divisiveness in America, and perhaps it's been a long time since we've seen it this divisive, I think the private sector, these are arguments I've made at the business roundtable. We are the kind of people that can step into the middle and I think demonstrate by our own actions and hopefully, our leadership for others to come to the middle and kind of bring sense to the chaos that we've seen so much during 2020. In fact, what we say is there's really been 4 epidemics: one is the medical epidemic; two is the economic epidemic; three is the political epidemic; and four is the social. Companies like ours, whether it's Wisconsin or a Southern Company, we can help bring, I think, a more stable America into the future.

Warren Buffett continually says this, and I believe he's right in his letter that came out just a week or so ago. He mentioned never bet against America. We had a slogan years ago when I was an external affairs at Southern, an advertising slogan, which I think is apt for today and apt for this panel. And that is when the future gets here, it will be a bright one.

That's a great one.

And you threw a switch at that point, Gale. We didn't ask him to throw a switch at that point.

He did. The lights came on across the Southeast.

There you go.

Well, I think that Warren Buffett letter also talked very favorably about transmission growth, too, which was kind of exciting to see. So -- well, look, we've got several questions to get to, so I want to make sure we ask those before we have to wrap up. So just to kick off, first question is due to what happened in Texas with outages and a lack of regulation, do you see this as an opportunity?

So I was on Squawk Box, and I wanted to talk about our year-end earnings, and all Joe wanted talk about was what happened in Texas. So if you want to go back and look at that, I think it's on YouTube and all. There's a decent explanation. It's a long story, but number one, utilities planned for certain weather standards. The weather got way beyond what people planned for, and so you had -- it wasn't renewables versus baseload. Everybody had problems, okay? Number one. Number two, the market there is an energy-only market. It's called ERCOT, the Energy Reliability Council of Texas. The state of Texas, roughly speaking, is an energy island, very limited transmission from Texas to other parts of the United States. So I would argue, number one, it was weather-driven; number two, the weather got beyond the standards of generation; and also gas flows and a variety of other things. But the weather made the operations awful. And then number three, the structure of the market, ERCOT, really didn't lend itself to being helped by transmission from outside the state. It was all of those things. It's funny. So after I got off Squawk Box, I got in my car. I got a call from the Situation Room in the White House and with Liz Sherwood-Randall, who, in the National Security Council, runs Homeland Security, "What can we do to help?" And I -- without being [ glib ], I felt like saying get a bunch of blow dryers or something.

On propane. Run them on propane. Yes.

But I believe for the United States, all these big storm restoration efforts. When it takes 10,000 people in an area, I help organize all that. There was nothing we could do. The lines weren't down. It was a matter of the facilities in operation weren't designed to operate in those environments. I think some of that -- I think a lot of that is a market issue.

You do -- I do wonder, though, if a -- if the whole market there was run by an integrated electric utility like each of your companies, would there have just been a better way to prep and communicate and organize? And like -- it's almost like there's so many different people with different roles there that nobody was really maybe running the whole show.

Well, Steve...

Maybe not -- go ahead. Go ahead, Gale.

You're asking a good question, but let's go back to something very fundamental that Tom was kind of referring to. I mean his company and ours are regulated, fully regulated, integrated utilities. To start to answer your question, you're looking at a completely disaggregated industry in Texas. Nobody is responsible for the whole shebang. Okay? But this goes back -- and Tom and I are probably very biased about this, but I think history is starting to show our viewpoint is right. If you look at the Texas market, for that matter, if you look at the California market, where they've also had reliability issues, those market designs incentivize the lowest-cost solution. And I'll give you an example.

In the short run, lowest cost in the short run.

Exactly. Lowest cost in the short run. So I'll give you an example. We have a number of large wind farms in our regulated asset base. And because of the area we serve in and because we are driven to in regulation, reliability at reasonable cost, we invested as part of our design in cold weather packages for the wind farms that we operate in the regulated asset base and that serve our retail customers. Well, by design, those wind farms are able to operate with the cold weather package down to minus 20 degrees Fahrenheit. Well, the wind farms in Texas, which none of them had the cold weather package, didn't think they needed them, didn't want to pay more because of the low-cost solution to build those wind farms, they froze up at 20 above. So I think there's a huge difference and an opportunity here that has to be rethought about the structure of these markets. And there are some things, frankly, that lend themselves to regulation and not free markets. And I think the kind of the integrated, regulated systems that Tom and I are fortunate to work in really do drive to better reliability and better reliability at a reasonable cost and as opposed to a situation like what developed in Texas. And it was not just the power generation. This was a massive infrastructure failure, including water. So I think that...

And one more thing, even as we started to turn the generation back on, the load centers didn't know where the generation was going to come on from because it was completely disaggregated, and so transmission became a problem. It was a real mess.

Yes.

Let me make sure we get to a few other questions because I think we could talk about this topic for a whole hour. But question is on the -- in Washington, is there any discussion of a carbon tax at the national level or changing the dispatch curve to reflect the cost of carbon?

So we have, for decades, incorporated the cost of carbon in our integrated resource planning processes. For those that don't know, this is what Gale and I were just talking about. We go through, periodically, I guess it's every 3 years in Georgia and every other year in Alabama, et cetera, we go through a prolonged process to figure out what is the optimal generation for the next 20 years. So we actually design not only optimal generation portfolios but transmission solutions. We include in that a cost of carbon. So we don't explicitly tax people. It is implied in our calculations. In my discussions with the transition teams at the Biden administration, I'm not saying they're not going to do it, but they seem not to be so interested in that as much as a clean energy standard or something else.

Yes. And actually, Tom is exactly right. That's my sense as well. We, too, include an estimated cost of carbon in all of our future generation planning. And in fact, the Wisconsin Commission, which, as you know, has always been forward looking, constructive, the Wisconsin Commission has actually asked all of the Wisconsin utilities to do so and basically blesses the statistics that we use in our planning related to the impact of the cost of carbon.

Great. A question on what do both of you think about cyber risk was for the sector.

Tom is a cyber expert. I would just simply say it's real.

At one time in my career, Steve, I was the Chief Information Officer. CIO, most days, I thought that stood for career is over. Let me tell you something. It is a very tough thing. Again, I'll keep this just as brief as I can. Southern Company gets attacked about 3 million times a day. Most of our major companies in America are like that. It is all over us. I was on Bartiromo's show, and I told her it's -- for the general public, it's really hard because it's almost like, "Maria, let's go to a beach and look out here over the expansive ocean. And what you're seeing is a submarine battle, where we know there's ongoing lethal activity, but you can't see it until something really bad happens." Here's the thing. I think the -- if you want to go to a document that I think really puts forward America's reimagination of the battlefield, it is the Cyberspace Solarium Commission. I'm effectively the only private sector guy, CEO looking guy on that sector but -- on that commission. But it is bipartisan and, in fact, it is nonpartisan. And in fact, my sense is we have to reimagine how national security is formulated. 87% in America of the critical infrastructure is owned by the private sector. The battles these days are not going to be fought on the planes of Poland with tanks from Russia versus NATO. It's going to be on the communication networks, the electric grid, the financial systems, et cetera. And so the private sector has to join with, collaborate, not share, not cooperate, the federal government to protect the United States and protect our countries. The U.K. actually has a pretty good model of collaboration between the private sector and the federal government.

And what Tom didn't tell you, those 3 million attacks a day, most of them are just him trying to log in. It's just -- no...

I am the ultimate insider threat.

I will say this. One of the encouraging things, and under Tom's leadership and others, I mean, we have a very, very good working relationship with, you name the agency. I mean, as you know, the Democratic National Convention was scheduled to be in Milwaukee this past year, and our folks learned a ton with the interaction. I mean the virtual nature of the convention really wasn't decided until the very last minute. So all of the prep work, all of the cybersecurity work, all of the physical security work that had to be done for us to prepare for the Democratic National Convention was done months in advance with enormous collaboration with Homeland Security, the FBI, White House advisers. And the emphasis on cybersecurity was just phenomenal, and the cooperation and the intelligence was just phenomenal. And the one thing I've been encouraged about, and I'll be very brief here, is I think we have all -- to Tom's point, we've all moved beyond just thinking that we could ever completely protect our networks. We've now gone beyond that. I mean, obviously, we want to protect our networks, but we've gone beyond that to determine how best to basically minimize any kind of damage that might occur if an attack was successful. But Tom's right, and the sophistication of the attacks, mostly by state-sponsored entities is pretty darn sophisticated and growing. So it's...

I just want to do a quick call out. The federal government of the United States in this regard is really terrific. We have patriots like General Paul Nakasone that runs NSC, U.S. Cyber Command. And Neuberger came out of the NSC, and she was Head of the cyber arm of NSC. She is now in the National Security Council in charge of cyber policy. I've been working hand in glove with her over the past few weeks. She's ready to roll out a 100-day plan for the Biden administration on how we can protect critical infrastructure in America. So look forward to that.

Great. Well, we've got a few more questions, but I think we've hit our time. I tried to pull off the impossible, which is to get Tom Fanning done on time on our call, but I failed, sorry. But this was a great discussion, Tom and Gale. Really appreciate you participating in this event. And thank you very much.

Thank you, Steve.

Thank you. I'm going to turn the floor back to Fraser to close this out.

Thanks, Steve, and a really big thank you to Tom, Gale and Steve. It was really a superb discussion, guys. I know you're busy, and we really, really appreciate the time. Last remarks from my side, please do, to the attendees, sign up for Thursday's panels. We have a panel on telecom infrastructure with American Tower and Morgan Stanley. And later in the day, we have a transportation panel with Transurban, Canadian National and First Sentier Investors. And please don't forget to sign up for the one-on-one meetings with the listed companies. Thanks for attending, and I'll see you all on Thursday, I hope. Bye, everyone.

Thanks. Bye, everyone. Good to see you.

So long, everyone.

Yes. Great being with you.

Enjoyed it. Thank you, Tom. Thank you, Steve.

Bye, Gale. Bye, Tom.

Bye.

Thanks, guys.