WEC Energy Group Q1 2023 Earnings Report

WEC Energy Group EPS Results

• Actual EPS: $1.61
• Consensus EPS: $1.58
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $1.79

WEC Energy Group Revenue Results

• Actual Revenue: $2.89 billion
• Expected Revenue: $2.90 billion
• Beat/Miss: Missed by -$11.59 million
• YoY Revenue Growth: -0.70%

WEC Energy Group Announcement Details

• Quarter: Q1 2023
• Date: 5/1/2023
• Time: Before Market Opens
• Conference Call Date: Monday, May 1, 2023
• Conference Call Time: 2:00PM ET

WEC Energy Group (NYSE:WEC) is a Milwaukee, Wisconsin–based regulated energy holding company whose primary businesses are the generation, transmission and distribution of electricity and the distribution of natural gas. The company operates through a set of utility subsidiaries that provide bundled energy service, customer billing and energy-related programs to residential, commercial and industrial customers. As a regulated utility group, WEC’s operations focus on delivering reliable service while managing infrastructure investment and compliance with state and federal utility regulation.

Its utility subsidiaries include well-known regional operators such as We Energies and Wisconsin Public Service, along with Chicago-area natural gas utilities that were part of the Integrys Energy Group acquisition. Collectively, these businesses serve customers across Wisconsin, parts of Illinois and portions of the Upper Peninsula of Michigan, offering local grid services, natural gas delivery and customer energy solutions tailored to regional needs.

WEC Energy Group’s activities span electric generation (including utility-scale and contracted resources), transmission and distribution system maintenance, natural gas distribution and a range of customer-facing services such as energy efficiency programs, demand response and renewable energy offerings. The company has been involved in modernizing its grid infrastructure, investing in reliability and safety upgrades, and integrating more renewable resources while managing the transition away from older fossil-fueled generation assets in line with regulatory and policy developments.

Historically, a notable milestone for the company was the 2015 acquisition of Integrys Energy Group, which expanded its geographic footprint and utility portfolio. Today, the company emphasizes long-term capital investment in infrastructure, regulatory engagement, and operational reliability, while pursuing initiatives related to sustainability and the energy transition under the oversight of its executive leadership and board of directors.

WEC Energy Group Q1 2023 Earnings Call Transcript

Key Takeaways

• WEC Energy reported Q1 earnings of $1.61 per share, pressured by one of the mildest winters on record, but reaffirmed full-year 2023 guidance of $4.58–$4.62 per share assuming normal weather.
• The company’s $20.1 billion ESG Progress Plan—its largest five-year investment on efficiency, sustainability and growth—has secured over $1 billion in Wisconsin approvals since December and is expected to drive 6.5%–7% annual EPS growth through 2027 without issuing new equity.
• On the regulatory front, new rates took effect for Wisconsin utilities and a limited 2024 reopener will recover recent capital projects; rate filings are also pending in Illinois (Peoples & North Shore Gas), Minnesota (7.1% settlement) and Michigan (9.1% request) to support infrastructure investments.
• Key infrastructure milestones include the in-service 82 MW Redbarn Wind Park, approvals for Darien and Qashqinan solar–battery parks, the $102 million West Riverside gas plant purchase, and WECI’s acquisitions of Sapphire Sky wind and Samson I solar projects, with some solar deployments awaiting panel customs release but still on track for late 2023/early 2024 startup.
• The board approved a 7.2% dividend increase, marking the 20th consecutive year of higher payouts and maintaining a target dividend payout ratio of 65%–70% of earnings.

Presentation

[Operator]

Good afternoon, welcome to WEC Energy Group's conference call for first quarter 2023 results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. Before the conference call begins, I remind you that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted.

[Operator]

After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. Now it's my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thank you very much. Live from the heartland. Good afternoon, everyone. Thank you for joining us today as we review our results for the 1st quarter of 2023. First, I'd like to introduce the members of our management team who are here with me today. We have Scott Lauber, our President and Chief Executive, Xia Liu, our Executive Vice President and 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 1st quarter 2023 earnings of $1.61 a share. Weather was a major factor in our lower results for the quarter. We saw one of the mildest winters in the history of the upper Midwest. For example, it was the 2nd warmest 1st quarter in Milwaukee since 1891.

[Gale Klappa, Executive Chairman at WEC Energy Group]

We're confident in our plan for the remainder of the year, and we're reaffirming our guidance for 2023. As a reminder, we're guiding to a range of $4.58-$4.62 a share for the full year. This assumes normal weather going forward. As always, we remain focused on the fundamentals of our business, financial discipline, operating efficiency, and customer satisfaction. Switching gears now, the work on our ESG Progress Plan continues at a steady pace. It's the largest five-year investment plan in our history, totaling $20.1 billion for efficiency, sustainability, and growth. The plan is based on projects that are low risk and highly executable. As we look to the future, it's clear that the mega trend of decarbonization and the need for even greater reliability will drive investment plans that are long and strong.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Scott will provide you with more detail on several specific projects in a moment, but I'm pleased to report that just since last December, the Wisconsin Commission has approved more than $1 billion of new capital investment by our companies. As we've discussed, we project that our ESG Progress Plan will drive compound earnings growth of 6.5%-7% a year from 2023 through 2027. We fully expect to fund our capital plan without any need for new equity. Let's take a brief look at the regional economy. We have good news from the latest data in Wisconsin. In March, the unemployment rate came in at 2.5%. That's a record low for the state and well below the national average. We continue to see major developments in the area.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Just a few weeks ago, in fact, Microsoft announced that it plans to create a new data center campus in our region with an initial investment of $1 billion. This data center complex will be built south of Milwaukee in the technology park that is also being developed by Foxconn. Microsoft will purchase a 315 acre parcel in Area 3 of the park. Local approvals have been received, and we expect Microsoft to close on the land purchase on or before the 31st of July. In the meantime, Microsoft is moving full speed ahead with planning and design work. The decision by Microsoft underscores the strength and the potential of the Wisconsin economy and positions us very well for more growth in the technology sector.

[Gale Klappa, Executive Chairman at WEC Energy Group]

With that, I'll turn the call over to Scott for more information on our regulatory developments, our operations, and our infrastructure segment. Scott, all yours.

[Scott Lauber, President and CEO at WEC Energy Group]

Thank you, Gale. I'd like to start with a few updates on the regulatory front. New rates have been in effect for our Wisconsin utilities since the start of the year. As expected, we're planning to file a limited reopener for 2024 later this quarter. The filing will address the recovery of capital investments for projects going into service this year and in 2024. The return on equity and the equity layer are all set and are not up for consideration. The request will be quite modest, and we expect a decision from the commission by the end of this year. As you recall, we have rate filings under review in Illinois for Peoples Gas and North Shore Gas. The next step will be for the commission staff and interveners to file their direct testimony on May 9th. Hearings are scheduled for early August.

[Scott Lauber, President and CEO at WEC Energy Group]

After 9 years without a rate case at Peoples Gas, we're making these requests for 2024 to support our investment in key infrastructure. With lower natural gas prices, we project customer bills will be flat with 2022. We also have rate reviews in progress at Minnesota Energy Resources in Michigan Gas Utilities. We filed in Minnesota last November, and interim rates went into effect January 1st. I'm pleased to announce that we received a settlement with parties that would result in a 7.1% increase in base rates. That's based on a 9.65% return on equity with an equity layer of 53%. This settlement is subject to Commission approval, which we expect in the next several months. In March, we filed for a base rate increase of 9.1% at Michigan Gas Utilities for 2024.

[Scott Lauber, President and CEO at WEC Energy Group]

This application is primarily driven by our capital investments supporting safety and reliability. Meanwhile, we're making good progress on a number of regulatory capital projects. Red Barn Wind Park went to service last month. The project is providing 82 MW of clean energy capacity to our Wisconsin customers. As Gale noted, we received three significant approvals for the Wisconsin Commission since last December for the Darien Solar Battery Park, West Riverside Energy Center, and Koshkonong Solar Battery Park. We discussed the Darien approval last quarter, and as you recall, the solar park is planned to go in service in 2024. West Riverside is a combined cycle natural gas plant owned by Alliant Energy. In February, we received approval for our purchase of 100 MW of Riverside capacity for approximately $102 million. We expect to close this purchase by the end of the month.

[Scott Lauber, President and CEO at WEC Energy Group]

We have an option to purchase another 100 megawatts of Riverside capacity, we plan to exercise that option later this year. We also received approval for our purchase of Koshkonong Solar Energy Center with plans for 300 megawatts of solar capacity and 165 megawatts of battery storage. We will own 90% of the project with an expected investment of $585 million. We project the solar portion of this facility to go into service in 2025. We also continue on the Badger Hollow Two Solar Facility and the Paris Solar-Battery Park. While Badger Hollow has received some of the solar panels, the remaining panels for projects are currently in Chicago going through the customs process. Assuming timely release of the panels, we expect these solar parks to go into service late this year or early next year.

[Scott Lauber, President and CEO at WEC Energy Group]

For the Paris and Koshkonong projects, we're evaluating the timing of the battery investments. Of course, we'll keep you updated on any future developments. Outside our utilities, we continue to make progress on zero carbon projects in our WEC Infrastructure segment. In February, we completed our acquisition of the Sapphire Sky Wind Energy Center, now in service in Illinois. As a reminder, that project offers 250 megawatts of capacity in total, and we own a 90% share. In February, we added an 80% ownership in the Samson I solar project located in Northeast Texas. The project has a capacity of 250 megawatts. As disclosed previously, Samson I suffered storm damage at the beginning of March, we expect no significant bottom line impact for the property losses.

[Scott Lauber, President and CEO at WEC Energy Group]

The project is currently producing energy at about 70% level and improving every day as we continue to restore the site. With that, I'll turn things back to Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Scott, thank you very much. As you may recall, our board of directors at its January meeting raised our quarterly cash dividend by 7.2%. This marks the 20th consecutive year that our company will reward shareholders with higher dividends. We continue to target a payout ratio of 65%-70% of earnings. We're right in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. Next up, Xia will provide you with more details on our financial results and our second quarter guidance. Xia.

[Xia Liu, EVP and CFO at WEC Energy Group]

Thank you, Gale. Our 2023 first quarter earnings of $1.61 per share decreased $0.18 per share compared to the first quarter of 2022. Our earnings package includes a comparison of first quarter results on page 12. I'll walk through the significant drivers. Starting with our utility operations, our earnings were $0.09 lower compared to the first quarter of 2022. Rate-based growth contributed $0.22 to earnings, driven by continued investment in our ESG Progress Plan. This includes the base rate increase for our Wisconsin utilities, as well as the interim rate increase for Minnesota Energy Resources, both of which were effective January 1, 2023. This favorable margin impact from rate-based growth was more than offset by a number of factors.

[Xia Liu, EVP and CFO at WEC Energy Group]

As Gale noted, we experienced one of the mildest winters in history, which drove a $0.12 decrease in earnings compared to the first quarter of last year. Timing of fuel expense, depreciation and amortization, interest, day-to-day O&M, taxes, and other drove a combined $0.19 negative variance. Before I turn to earnings at the other segments, let me briefly discuss our weather normalized sales. You can find our sales information on page 9 of the earnings package. I'd like to remind you that weather normalization is not a perfect science. Extreme warm weather in the first quarter may not be fully reflected in our weather normalized data. Having said that, weather normal retail natural gas deliveries in Wisconsin excluding natural gas used for power generation were down 1%. Residential usage, again, on a weather normal basis, grew 0.9%. That was ahead of our forecast.

[Xia Liu, EVP and CFO at WEC Energy Group]

Weather normal retail electric delivery excluding the iron ore mine were 1.9% lower. Residential usage was relatively flat compared to last year. Now, at our energy infrastructure segment, earnings were $0.01 lower in the first quarter of 2023 compared to the first quarter of 2022. Production tax credits were higher by $0.03 quarter-over-quarter, resulting from acquisitions of re-renewable generation projects. This increase was largely offset by a pickup that we recorded in the first quarter last year from the resolution of market settlements in the Southwest Power Pool. Finally, you'll see that earnings at our corporate and other segment decreased $0.08, primarily driven by an increase in interest expense and a pickup recorded in the first quarter 2022 from our investment in a clean energy fund. These items were partially offset by favorable rabbi trust performance and some tax and other items.

[Xia Liu, EVP and CFO at WEC Energy Group]

Remember, rabbi trust performance is largely offset in O&M. Looking now at the cash flow statement on page six of the earnings packet, net cash provided by operating activities decreased $281 million. The mild winter and timing of recovery of commodity costs contributed to this decrease. Total capital expenditures and asset acquisitions were $1.3 billion in the first quarter of 2023, an $884 million increase from the first quarter of 2022. This was primarily driven by the acquisition of the Whitewater Natural Gas Power Generation facility in our Wisconsin segment, as well as the Sapphire Sky Wind Energy Center and Samson I Solar Energy Center in our infrastructure segment.

[Xia Liu, EVP and CFO at WEC Energy Group]

In closing, as Gale mentioned earlier, we're reaffirming our 2023 earnings guidance of $4.58-$4.62 per share, assuming normal weather for the rest of the year. To offset the mild first quarter weather impact, we're implementing a variety of initiatives. As a result, we now expect our day-to-day O&M to be 2%-3% higher than 2022 versus our previous expectation of 3%-5% higher. I will also add that largely due to timing of O&M and fuel expense, we expect earnings in the second half of this year to be materially better than the second half of 2022. For the second quarter, we're expecting a range of $0.83-$0.85 per share. This accounts for April weather and assumes normal weather for the rest of the quarter.

[Xia Liu, EVP and CFO at WEC Energy Group]

As a reminder, we earned $0.91 per share in the second quarter last year. With that, I'll turn it back to Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Xia, thank you. Overall, we're on track and focused on providing value for our customers and our stockholders. Operator, we're ready now for the Q&A portion of the call.

[Operator]

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 one 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 time permits. Once again, press Star and then one on your phone to ask a question. Our first question comes from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Afternoon, Shar. You still using those pillowcases?

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

Yeah, they don't match the rest of the house, so that's the issue. How are you doing?

[Gale Klappa, Executive Chairman at WEC Energy Group]

We're fine. How about you?

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

Good. Not too bad, not too bad. Gale, a quick one here. you know, so, like, you know, half a dozen utilities have issued these, like, hybrid convertible notes at pretty attractive rates. I think in some cases it's, like, 200 basis points of, you know, interest rate savings. you know, there's obviously no equity credit there, so, you know, you've seen it even being utilized by some peers that don't need equity. I just want to get your sense from you or Xia, like, whether you see, I guess, any value with these hybrid securities to help fund the five-year plan. Does it make sense? I mean, obviously we're waiting for your Q to be released to see if there's any kind of language around it, but.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, good question, Shar. Clearly there are a number of companies in the sector, even two today, that have announced the use of this cash pay convert product. We've taken a good hard look at it. Let me just say this. If we found, as we go through the course of the remainder of 2023, if we found that it was really advantageous for us, we would certainly take a hard look. We're more than halfway, Xia, through our debt issuance plan for 2023 and doing very well against our budget. Xia?

[Xia Liu, EVP and CFO at WEC Energy Group]

Yeah, not much to add. We're very aware of the transactions. We understand the pros and cons. At this time, we really have not made any decision as whether cash pay convertible notes fit those, fit our criteria. We've done quite a bit financing so far, and we've done really well, better than the planned rates.

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

Just, Xia, I know I don't want to front run the queue, but will there be any language around looking at hybrids potentially as an option to fund the plan or not?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Shar, are you talking about hybrids or are you talking about the cash pay converts or both?

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

These cash pay converts or hybrids or whatever you want to call them at this point.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I don't think there's any language that we're planning in the queue.

[Xia Liu, EVP and CFO at WEC Energy Group]

No, we haven't planned that at this point.

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

Okay, perfect. I appreciate that. Just lastly on Illinois, I mean, obviously, the cases were filed in January. There's not a lot of data points since then. Gas prices have actually come off, which I think hopefully will help the case. It's a tailwind. Any thoughts, I guess, Gale, at this point on potentially settling? How's the dialogue been going? Is there anything we should be thinking about?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah. Way, way too early to even think about or contemplate settlement in the process in Illinois. The process is going along very smoothly. I think the next steps, as Scott Lauber mentioned in his prepared remarks, the next step will be staff and intervener testimony on May 9. So far, you know, we're responding to data requests. The process in Illinois is going exactly as historically they've gone. To your point about commodity costs moving in our favor, and they moved even more in our favor since we filed the case. Long story short, even with the base increase that we're seeking, you combine that with much lower commodity costs, and we expect customer bills to be flat, even granting a full base rate increase for bills in 2024.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Again, we think that's very good news. When you look at just the basic facts of what we're, you know, of what we filed, this will be, as you may recall, the first base rate increase for Peoples Gas since we acquired the company. First base rate increase actually in nine years. Our O&M is about $60 million a year lower than when we actually acquired the company in 2015. Pretty good story.

[Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners]

Perfect. Terrific, guys. Thanks, congrats, great execution so far. Appreciate it.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thank you, Char.

[Operator]

Your next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Julien.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Hey. How you doing? Gale, no dog yet, but We're in the mix. Don't worry.

[Gale Klappa, Executive Chairman at WEC Energy Group]

You stole my question. No dog yet. Okay.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Trying to free up some air, you know? Get wise to you. Listen, let me follow up on where Char was going with that. With respect to the Peoples Gas case here, and just talking a little bit about the future of gas, but also just the CapEx, and just some of the scrutiny on bill pressures. How do you think about moderating bills? I mean, obviously gas is rollover. Any mitigating items, circumstances we should be thinking about on that front? Separately, how do you think and respond to some of the, you know, there's been some op-eds out there, et cetera. Any thoughts as to how you tackle sort of the longer term versus the here and now of investing without the QIP in place in the traditional sense?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, good question, Julien. Let me know. I wanna help you name the dog, so let me know. On the QIP program and the investment in the safety modernization program, the pipe upgrade program that we've been carrying out in Chicago, let me first say that we really welcome the public debate and the policy decision that the Illinois Commerce Commission will make about the future of the program. Just to put it in perspective, on average, we've invested about $280 million a year in upgrading the pipe network under the city of Chicago, which is, by the way, one of the oldest and now most deteriorated natural gas delivery networks in the country.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Long story short, we're almost 36% complete with the pipe upgrade plan, and again, investing about $280 million a year. Those who think we should do something different are banking on electrification. The bets you would have to make to not, in some form, continue the program is that Chicago can completely electrify in less than 15 years. The independent study that the Illinois Commerce Commission has ordered and accepted, the independent engineering study shows that more than 80% of the iron pipes in our delivery network under Chicago have a useful life left of 15 years. Lastly, or 15 years or less. Lastly, there are some who say, "Well, just patch the pipes." Julien, I'm telling you, some of those pipes can't be patched.

[Gale Klappa, Executive Chairman at WEC Energy Group]

When you look at the continued O&M that would be required to patch after patch after patch, it would not, in our estimation, save customers any money. We think there's overwhelming evidence here to continue the program. We would do so under our proposal as an annual base rate increase, if you will, to cover the cost of what we think is a very important program for both the immediate safety of Chicago, secondly, to preserve a long-term future where that delivery network could deliver, say, hydrogen or other no-carbon fuels to keep Chicago warm. I hope that response helps.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Absolutely does. Thank you, Gale. Appreciate it. I will give you naming rights indeed. If I can, though, you betcha. With respect to the process, though, I wanna come back to this super quickly. We've got a new ICC in place, et cetera. I mean, to the extent to which that you're looking for direction here, I mean, this rate case should be the right venue to think about

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

The pace and the sort of the new vision on where things are going, right? There's not some other avenue. I'm just trying to think through how the ICC wants to articulate a response to your proposed spending, if you will. It'll be through the.

[Gale Klappa, Executive Chairman at WEC Energy Group]

There are extensive, as you would expect, and we wanted to have this kind of dialogue. We welcome this kind of dialogue. There are multiple data requests, as there are in any rate review. Particularly, there are data requests about the program, about the need for the program, about the future of the program, et cetera. I agree with you. I think this is the proper forum to have that policy decision made. Everything is proceeding under the normal schedule, if you will, of data requests. Now, as we said earlier, the next formal step would be May nine, when we expect staff and intervener testimony.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Right. Yeah. Thank you for confirming that. We'll look next week, all right? You take care. Thank you.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thanks, Julien. Take care.

[Operator]

Your next question comes from the line of Jeremy Tonet with JPMorgan Chase. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Jeremy, are you moving to Republic Bank or, you know?

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at J.P. Morgan]

Nothing to say there.

[Gale Klappa, Executive Chairman at WEC Energy Group]

There you go.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at J.P. Morgan]

Just wanted to kind of come back, I guess, to, you know, the weather impacts as happened in the quarter and the offsets there. Should we think about this as just kind of O&M being the main tool for offsets over the balance of the year? Just wondering if you could quantify or give any more color there in how that might shape up across the year. I think you said in the back half, it kind of lightens up a bit. Any more color there could be helpful.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, I'd be happy to do that. We'll ask Sha and Scott to give you some specifics. Let me frame a couple of things for you. First of all, you know, we've got a pretty experienced management team. We've been down this road before, so we have a pretty well-tested playbook. The playbook has been implemented. There are O&M initiatives in every group of the company, every department, every section. They have plans, and they have goals. A big part of it, obviously, is related to day-to-day operation and maintenance costs. Another big positive for us, again, compared to our budget and our forecast, is really the interest cost savings that we're seeing.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I'm gonna ask Xia and Scott to kind of briefly walk you through the difference that we see in Q3 and Q4 this year compared to Q3 and Q4 last year when we were deep into our sharing bands with customers. Xia, why don't we start off with you and some specifics, and then we'll ask Scott to talk about the sharing bands that really impacted Q3 and Q4 last year.

[Xia Liu, EVP and CFO at WEC Energy Group]

Sure. Q1 weather was about $0.12 deficit, as I mentioned in the prepared remarks. We've identified O&M reduction targets that can offset $0.04, $0.05, $0.06 of that. We also built some conservative financing assumptions in the plan. In terms of issuing debt at rates lower than the plan or continued execution later this year, we expect the financing savings to be $0.05-$0.06 also. Between those two items, we could offset the Q1 weather deficit. We also have other initiatives we're looking at beyond those two items.

[Scott Lauber, President and CEO at WEC Energy Group]

Sure. Then when you think about the last half of the year, you have to remember the last several years, we've been very fortunate to actually be into a sharing band where we're sharing with customers. I think last year we were able to reduce our fuel request about $54 million. That's quite a bit when you think about charges in the last half of the year. Last half, remember, we had warmer than normal weather, we were able to accelerate or do some additional spending for our customers. We incurred additional O&M costs plus the sharing band. That was meaningful for the last half a year compared to what you see this year coming, shaping up.

[Gale Klappa, Executive Chairman at WEC Energy Group]

To Scott's point, we obviously don't see ourselves into the sharing bands with customers this year. Think in terms of basically $54 million of costs that won't reappear in the third and fourth quarter of 2023 compared to the second half of 2022.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at J.P. Morgan]

Got it. That's very helpful there. Thanks. Just shifting a bit to solar, I know that you touched on this a bit in the prepared remarks, as it relates to solar supply chain, but just wondering, I guess, thoughts on ongoing congressional efforts to revoke the President's two-year solar tariff suspension. Just wondering if you had any thoughts you could share there or just on the supply chain in general.

[Gale Klappa, Executive Chairman at WEC Energy Group]

My understanding is that President Biden said he would veto any effort to undo that particular initiative. I'm not sure that one's going anywhere. In the meantime, as Scott indicated in his prepared remarks, for our Badger Hollow II solar project in Wisconsin for our regulated utility, and for our Paris Solar-Battery Park, again, for our Wisconsin utilities. Scott, we got all the solar panels we need hanging in a warehouse in Chicago.

[Scott Lauber, President and CEO at WEC Energy Group]

They're in the warehouse in Chicago. We're just working with customs to get them out of that warehouse. Of course, for the future projects, we're looking at other alternatives, including U.S. potential options available in the future to source those future projects that the commission has approved.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Jeremy, Scott and I went down to that warehouse one night. The Doberman wouldn't let us in, so. We know all of those panels are there. Got it. That's helpful. Then just one last quick one, if I could, as it relates to transmission and, you know, future MISO tranches may be kind of taking shape in the not too distant future here. Just wondering if you had any updated thoughts on permitting reform or what the, you know, the MISO outlook could mean for WEC down the road. Don't see much of any progress on permitting reform at this stage of the game.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Again, as MISO works its way through all of the stakeholder process on Tranche 2, Phase 1, the early indications are quite favorable in terms of the investment opportunity being even greater than what we saw in, basically Tranche 1. Then in addition to that, I mentioned the major economic development project that was just announced with Microsoft. Any particular upside on transmission or generation needs related to that Microsoft project would be incremental to the plan and not in the current plan. I'm guessing there may be some additional transmission need coming out of that project. Scott?

[Scott Lauber, President and CEO at WEC Energy Group]

No, that's correct, Gale. Also a reminder, Tranche 1 was using a lot of existing right of ways.

[Scott Lauber, President and CEO at WEC Energy Group]

We're very happy using the existing right of ways to be able to get that construction started in an earlier timeframe and that, you know, 25, 26 timeframe.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at J.P. Morgan]

Got it. That's helpful. I'll leave it there. Thank you.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thank you, Jeremy.

[Operator]

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

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hey, Michael.

[Michael Sullivan, Director, Equity Research at Wolfe Research]

Hey, hey Gale, how are you?

[Gale Klappa, Executive Chairman at WEC Energy Group]

We're good. How about you?

[Michael Sullivan, Director, Equity Research at Wolfe Research]

Okay. Yeah, no, doing great. Maybe just back to the O&M. Understand it was gonna tick up a little bit this year. Now you're kind of pulling that back to help offset the weather. As we think beyond 2023, how should we think about the trajectory? I know you have a track record of bringing it down, and this year was kind of the first time in a while it was set to step up.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah. I think when you look at the near-term future past 2023, we're gonna be seeing another chunk of O&M reduction related to the planned retirements. Just as a reminder, we have four older units at our Oak Creek site, units five, six, seven, and eight. Units five and six are scheduled for retirement next year, and then units seven and eight in 2025. Along with that, the retirement will come a substantial chunk of O&M reduction. Scott?

[Scott Lauber, President and CEO at WEC Energy Group]

You're exactly right. As we put on those retirements, O&M will go down. Remember, the driver for the O&M increases this year was as we put in new plants into the system. We added a lot of capital over this last year and to run those new plants, including the new RICE units that we're putting in service, and also the plants in the WEC Infrastructure, all that's additional O&M. Really supporting capital investments.

[Gale Klappa, Executive Chairman at WEC Energy Group]

One other thought, adding on to what Scott is saying, there's another benefit to the investments that we're making that are coming online, particularly the solar investments, that we're in the final stages of completion. Those investments, when they're online and producing energy, actually replace fuel costs. In addition to O&M, chunks of savings coming forward here from the retirement of older coal-fired units, we're also gonna see reductions in fuel costs simply because obviously with solar and wind, the fuel is free.

[Michael Sullivan, Director, Equity Research at Wolfe Research]

Okay. That's very helpful. Appreciate the detail. Just related to that, to the extent that we see any, you know, shifting in timing of the solar with supply chain issues and the panels in the warehouse and all that, How do you kinda react to that? Is there risk? Are you tying that to the coal shutdown retirement, in terms of just earning on those assets and rate base? Are there other things you have to move around? Just what are kind of the other implications across the business to the extent that your solar projects get pushed out a little bit?

[Gale Klappa, Executive Chairman at WEC Energy Group]

To answer the second part of your question on retirements of the four older coal-fired units, we don't see any change in that schedule. That I believe will continue to be a 2024 and 2025 retirement dates for each of those two units. In terms of potential further delays, again, we have to get clearance here, and we've got a plan B if we can't get clearance to finish the solar projects. Remember, these are regulated projects. The commission's very, very supportive of the need for those projects. Scott, we're earning AFUDC during the construction period.

[Scott Lauber, President and CEO at WEC Energy Group]

Correct. We're continuing the construction, so they are site ready when the solar panels get released. Paris and Badger Hollow II, construction is pretty well done on Badger Hollow II. We just need the solar panels, and Paris is moving along nicely. Those panels are ready. It won't take long to pop them on.

[Michael Sullivan, Director, Equity Research at Wolfe Research]

Great. Thanks a lot.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Take care, Michael.

[Operator]

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

[Gale Klappa, Executive Chairman at WEC Energy Group]

Wow, you got the jersey number eight on, Durgesh?

[Durgesh Chopra, Managing Director, Power and Utilities at Evercore ISI]

I don't know about that, Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I know, I know. Still diehard Eagle fan, right?

[Durgesh Chopra, Managing Director, Power and Utilities at Evercore ISI]

It still hurts. Still hurts.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I'm sorry.

[Xia Liu, EVP and CFO at WEC Energy Group]

Okay. We'll be back next year. Just, Gale, I wanted to go back to the reopener. We've had a ton of discussion here as you make the filing. You know, I think Scott mentioned in his opening remarks that it's not for ROE, for equity layer. Maybe can you just talk about the projects that you'll be filing for? Am I right in thinking about that these projects are already approved, so you're not necessarily seeking for prudency of those projects?

[Gale Klappa, Executive Chairman at WEC Energy Group]

No.

[Xia Liu, EVP and CFO at WEC Energy Group]

You know, to the extent that, you know, you can sort of help us frame what CapEx are we looking at, you know, as you file, as you make these filings in the quarter?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Sure. I will ask Scott to help out as well. You are correct. This limited reopener, as defined in the rate order, does not. I mean, the ROE and the equity layer are set, and they're not up for reconsideration. There's roughly, and yes, you are correct. All of the projects that we will be filing for recovery in this limited reopener have already been approved by the commission. That is absolutely correct. Scott, it's about $1 billion of capital that will be coming in, if I recall correctly, into that reopener.

[Scott Lauber, President and CEO at WEC Energy Group]

Yeah. It's approximately that. I don't have the exact number at my fingertips, but when you think about the reopener, it's projects like we talked about. Riverside was approved now. That $102 million, we'll put that into the reopener. The Weston RICE units, those are gonna be in for a full year, so that'll be part of the reopener. Some of these are full year, some of these are actually part of year capital projects.

[Gale Klappa, Executive Chairman at WEC Energy Group]

LNG. One of our-

[Scott Lauber, President and CEO at WEC Energy Group]

Yeah.

[Gale Klappa, Executive Chairman at WEC Energy Group]

LNG projects.

[Scott Lauber, President and CEO at WEC Energy Group]

The LNG projects. It's really across electric and gas on just truing up with the capital additions.

[Durgesh Chopra, Managing Director, Power and Utilities at Evercore ISI]

Got it. Thanks, Scott. Then you've previously talked about O&M savings to be included as part of that request. Is that also part of this limited reopener, filing or could be a part of this limited reopener filing?

[Scott Lauber, President and CEO at WEC Energy Group]

Sure. The O&M piece is really the retirement for that Oak Creek 5 and 6, those older Oak Creek units. Remember last year we filed the case and then we extended them. Now what we're doing is closing those units at the end of May here of 2024. That'll be the O&M reduction that they put in the actual order for us to factor that into the case.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Durgesh, the largest O&M reduction, Scott's exactly right. The largest O&M reduction from the closure of the Oak Creek units really will come when all four units are retired because we won't be retiring the environmental control operation at that site for those older units until all four are offline.

[Durgesh Chopra, Managing Director, Power and Utilities at Evercore ISI]

Got it. That's super helpful, guys. I appreciate the time. Thank you.

[Gale Klappa, Executive Chairman at WEC Energy Group]

You're welcome. Take care, Durgesh Chopra.

[Operator]

Your next question comes from the line of Andrew Weisel with Scotiabank. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Greetings, Andrew.

[Andrew Weisel, Director and Senior Equity Analyst at Scotiabank]

Hey, good afternoon, everybody. First, question on timing of fuel costs. I know I see -$0.07 in the 1Q waterfall. What's your expectation for the full year based on current curves? Do you expect that to fully re-reverse? If so, when?

[Xia Liu, EVP and CFO at WEC Energy Group]

Andrew, this is Xia. We That's purely timing. We expect that to recover in the second quarter and throughout the third and fourth quarter. Remember that last year, like Gale mentioned, we booked quite a bit of fuel expense because of the sharing band, and we don't expect that to happen till we see a pickup in fuel in terms of impact on earnings.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Purely timing, we'll see a second half turnaround.

[Andrew Weisel, Director and Senior Equity Analyst at Scotiabank]

Okay, thanks. Then on usage, Xia, if you could elaborate a little bit on the demand trends. I think you said residential gas came in better than expected, adjusting for weather, but on the electric side, all customer classes were down. How much of that has just been noise around the extreme weather, or do you see any notable changes in demand trends?

[Xia Liu, EVP and CFO at WEC Energy Group]

It's a lot of expected noise around weather normalization, like I said. Just to put it in perspective, the weather normalized residential sales met our forecasted expectations. Those are the higher margin segment. On the C&I front, just a reminder, we have a very diverse mix of industries. We provide essential services like food, paper, plastic processing, and many of which had a really good growth in the first quarter. We don't have exposure to lots of automobile or oil and gas industry. We feel really good about the industry mix, and we really haven't seen any trend of any potential recession in our service territory. We track about a little over 100 large customers regularly.

[Xia Liu, EVP and CFO at WEC Energy Group]

There are four that contributed to almost half of the negative variance in the 1st quarter year-over-year, and two of those were down substantially year-over-year because of non-economic reasons. One had a fire, the other had an outbreak. We expect those to return to normal through the rest of the year, so. Again, weather normal noise played a role in these numbers, so I wouldn't overreact to these numbers right now.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah. Andrew, just to build on to what Xia's saying. When you look at the temperatures across Q1, they were basically two standard deviations away from normal. I can just tell you, not only for our company, but for the industry as a whole, and for those of you who followed us a long time, you've heard me say this a gazillion times. I mean, the weather normalization techniques are far more precise than accurate. The further you get away from in terms of standard deviations from the norm, the less reliable the weather normalization techniques are. So again, just as a general caveat, as Xia said, wouldn't read too much into Q1 numbers.

[Andrew Weisel, Director and Senior Equity Analyst at Scotiabank]

Just wanted to be sure. Thank you very much.

[Gale Klappa, Executive Chairman at WEC Energy Group]

No, thank you.

[Operator]

Your next question comes from the line of Anthony Crowdell with Mizuho. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hey, Anthony.

[Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho]

Good afternoon, Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

You got a dog to name?

[Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho]

Who are you? I was thinking that warehouse Doberman, that may work for Julien.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hey, not a bad idea. I'll take all of your input on naming the dog for Julien. Go right ahead, Anthony.

[Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho]

Andrew and Shar had just took my question on the recession and C&I sales. If I could just pivot, and I think maybe some of your comments earlier on the iron piping in Chicago. I'm just curious, if we think back maybe 10 years ago or 15 years ago when we talked about nuclear generation, if, you know, how we're getting rid of it, and then all of a sudden we've come to the realization of its importance and zero carbon. Do you think we have a similar moment in gas LDCs?

[Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho]

If we do you think that's gonna be more dependent on its location, such as you bring up, you know, colder Midwest area that, hey, there is this recognition that if we wanted to retire it, we have to do it, you know, electrify within 15 years, or that as we get closer to that date, parties realize how valuable the asset is?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah. That's a great question, Anthony. I do think there will be an epiphany moment. Don't know exactly when that epiphany moment will occur, here are a couple of thoughts. The first is, if you think you can electrify completely by, let's say, 15 years from now, you then have to take the next step and say, "How are we going to build the generation that would be needed to replace gas heating? What kind of generation would that be?" Well, think about when gas heating is needed the most. It's the heavy cold winter days in January and February, right? How much solar could you count on, particularly in the Midwest in January and February? How much wind could you count on in January and February? Guess what?

[Gale Klappa, Executive Chairman at WEC Energy Group]

You end up clunking into the plan a tremendous amount of gas-fired power generation. When people start working through that equation, I think there will be quite an epiphany moment. I think that's part of it. Then the other is, as we continue to see the evolution of hydrogen hubs and as we continue to see more and more cost-effectiveness from hydrogen under the IRA, I mean, some gas utilities are already beginning to blend hydrogen with natural gas. We're beginning to blend, I think, in fact, this summer we will begin blending RNG, renewable natural gas, into our network. I think as people begin to think through past the bumper sticker, yes, you're gonna see an epiphany moment about how valuable having that resource will be as we transition to a low and no carbon future.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I mean, think about it another way. We have got to get this transition right to a no carbon future. If we sacrifice reliability in that transition, it will delay the transition for many, many, many years. We're back to all of the above, and we're back to, I think, we will have a moment where everybody recognizes the practical approach to this and the safe approach to this.

[Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho]

Great. Gale, as always, thanks so much.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thank you, Anthony.

[Operator]

Our final question will come from the line of Ashar Khan with Verition. Please go ahead.

[Ashar Khan, Portfolio Manager at Verition Fund Management LLC]

Hi. How are you guys doing? Most of my questions have been answered. I just had a small one. Xia, why are we down quarter-over-quarter in the second quarter? Could you just help me with the variances which you expect in the second quarter?

[Xia Liu, EVP and CFO at WEC Energy Group]

Sure. Be happy to. Financing costs are expected to be higher compared to the Q2 last year. That's a big driver. There is plus and minuses. We do have rate-based growth that's better than last year. Fuel expected to be better last year. Largely offset by financing costs.

[Ashar Khan, Portfolio Manager at Verition Fund Management LLC]

Okay. Thank you so much.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Terrific. Well, folks, I think that concludes... Oops, is there more? I'm sorry.

[Operator]

I'll now turn the call back over to you, Mr. Klappa, for any concluding remarks.

[Gale Klappa, Executive Chairman at WEC Energy Group]

There we go. I jumped the gun. Thank you. Well, that concludes our conference call for today. Thanks so much for participating, as always. If you have additional questions, feel free to contact Beth Straka, 414-221-4639. Thank you, everybody. Take care.

[Operator]

Thank you for joining today's meeting. You may now disconnect.

Participants

Executives

• Gale Klappa, Executive Chairman
• Scott Lauber, President and CEO
• Xia Liu, EVP and CFO

Analysts

• Andrew Weisel, Director and Senior Equity Analyst at Scotiabank
• Anthony Crowdell, Senior Analyst, US Energy – Electric Utilities at Mizuho
• Ashar Khan, Portfolio Manager at Verition Fund Management LLC
• Durgesh Chopra, Managing Director, Power and Utilities at Evercore ISI
• Jeremy Tonet, Executive Director and Senior Equity Research Analyst at J.P. Morgan
• Julien Dumoulin-Smith, Senior Research Analyst at Bank of America
• Michael Sullivan, Director, Equity Research at Wolfe Research
• Shar Pourreza, Senior Managing Director, Equity Research – Power and Utilities at Guggenheim Partners