WEC Energy Group, Inc.

Q1 2023 Earnings Conference Call

5/1/2023

spk00: Good afternoon and 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. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. And now it's my pleasure to introduce Gail Klapa, Executive Chairman of WEC Energy Group.
spk05: Thank you very much. Live from the Heartland, good afternoon, everyone. Thank you for joining us today as we review our results for the first 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, Sha Lu, our executive vice president and chief financial officer, and Bess Straka, senior vice president of corporate communications and investor relations. Now, as you saw from our news release this morning, we reported first 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 winners in the history of the Upper Midwest. For example, it was the second warmest first quarter in Milwaukee since 1891. However, 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 to $4.62 a share for the full year. This assumes normal weather going forward. And 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. And 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. 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 a billion dollars 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% to 7% a year from 2023 through 2027, and we fully expect to fund our capital plan without any need for new equity. Now 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. And we continue to see major developments in the area. 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. And 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.
spk08: Thank you, Gail. 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 re-opener 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. And 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 9. Hearings are scheduled for early August. After nine years without a rate case at Peoples Gas, we're making these requests for 2024 to support our investment in key infrastructure. And 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 and 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. And in March, we filed for a base rate increase of 9.1% at Michigan Gas Utilities for 2024. 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 megawatts of clean energy capacity to our Wisconsin customers. And as Gail noted, we received three significant approvals for the Wisconsin Commission since last December, for the Darien Solar Battery Park, West Riverside Energy Center, and Kashkanaan 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 megawatts of Riverside capacity for approximately $102 million. We expect to close this purchase by the end of the month. We have an option to purchase another 100 megawatts of Riverside capacity, and we plan to exercise that option later this year. We also received approval for our purchase of Kashkanaan Solar Battery Park 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 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 timing release of the panels, we expect these solar parks to go into service late this year or early next year. For the Paris and Kashkhanan 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 complete our acquisition of the Sapphire Sky Wind Farm, now in service in Illinois. As a reminder, that project offers 250 megawatts of capacity in total, and we own a 90% share. Also in February, we added an 80% ownership in the Samson One Solar Project, located in Northeast Texas. The project has a capacity of 250 megawatts. As disclosed previously, Sampson One suffered storm damage at the beginning of March, but we expect no significant bottom line impact for the property losses. 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 Gail.
spk05: Scott, thank you very much. Now, 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 the payout ratio of 65% to 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, Shaw will provide you with more details on our financial results and our second quarter guidance. Xia.
spk01: Thank you, Gail. Our 2023 first quarter earnings of $1.61 per share decreased 18 cents 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 9 cents lower compared to the first quarter of 22. Rate-based growth contributed 22 cents 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. First, as Gail noted, we experienced one of the mildest winters in history, which drove a 12-cent decrease in earnings compared to the first quarter of last year. Additionally, 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 sign. 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%. However, residential usage, again on a weather normal basis, grew 0.9%. That was ahead of our forecast. Weather normal retail electric deliveries, 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 a penny lower in the first quarter of 23 compared to the first quarter of 22. Production tax credits were higher by $0.03 quarter over quarter, resulting from acquisitions of 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 settlement in the Southwest Power Pool. Finally, you'll see that earnings at our corporate and other segments decreased 8 cents, primarily driven by an increase in interest expense and a pickup recorded in the first quarter 22 from our investment in a clean energy fund. These items were partially offset by favorable right-by-trust performance and some tax and other items. Remember, right-by-trust performance is largely offset in O&M. Looking now at the cash flow statement on page 6 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 23, an $884 million increase from the first quarter of 22. 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 Farm and Samsung One solar facility in our infrastructure segment. In closing, as Gail mentioned earlier, we're reaffirming our 2023 earnings guidance of $4.58 to $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 to 3% higher than 2022 versus our previous expectation of 3 to 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 83 to 85 cents per share. This accounts for April weather and assumes normal weather for the rest of the quarter. As a reminder, we earned 91 cents per share in the second quarter last year. With that, I'll turn it back to Gail.
spk05: Shaw, 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.
spk00: Now we will take your questions. The question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit 1 on your phone. If you are using a speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then 1 on your phone to ask a question. Our first question comes from the line of Shora Perez with Guggenheim Partners. Please go ahead.
spk05: Afternoon, Sean. Are you still using those pillowcases?
spk02: Yeah, but they don't match the rest of the house, so that's the issue. How are you doing? We're fine. How about you? Good. Not too bad. Not too bad. So, Gil, a quick one here. So half a dozen utilities have issued these hybrid convertible notes at pretty attractive rates. I think in some cases it's like 200 basis points of interest rate savings. And, 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 Shah, 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 queue to be released to see if there's any kind of language around it.
spk05: Yeah, good question, Shah. And 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. And 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. But we're more than halfway, Shaw, through our debt issuance plan for 2023 and doing very well against our budget. Sha?
spk01: Yeah, not much to add. We're very aware of the transactions. We understand the pros and cons. And at this time, we really have not made any decision as to whether cash pay convertible notes fit our criteria. But we've done quite a bit financing so far, and we've done really well, better than the planned rates.
spk02: And then just, Shaw, 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?
spk05: Shaw, are you talking about hybrids or are you talking about the cash pay converts or both?
spk02: These cash pay converts or hybrids or whatever you want to call them at this point.
spk05: I don't think there's any language that we're planning in the queue.
spk01: No, we haven't planned that at this point.
spk02: Okay, perfect. I appreciate that. And then just lastly, on Illinois, obviously, the cases were filed in January. It's not a lot of data points since then, but gas prices have actually have come off, which I think hopefully will help the case. It's a tailwind. Any thoughts, I guess, Gail, at this point on potentially settling? How's the dialogue been going? Is there anything we should be thinking about?
spk05: 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 mentioned in his prepared remarks, the next step will be staff and interview testimony on May 9. But so far, you know, we're responding to data requests, the process in Illinois is going exactly as historically they've gone. And to your point about commodity costs moving in our favor, and they've moved even more in our favor since we filed the case. But 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. So again, we think that's very good news. And 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 People's Gas since we acquired the company. First base rate increase actually in nine years. And our O&M is about $60 million a year lower than when we actually acquired the company in 2015. So pretty good story.
spk02: Perfect. Terrific, guys. Thanks. Congrats and great execution so far. Appreciate it.
spk05: Thank you, Char.
spk00: Your next question comes from the line of Julian Dumoulin-Smith with Bank of America. Please go ahead.
spk03: Hey, how you doing? Gail, no dog yet, but we'll be in the mix.
spk05: Don't worry. You stole my question. No dog yet. Okay. Trying to preempt them here, you know. Get the last chance.
spk03: Listen, let me follow up on where Shara's going with that. So with respect to the people's 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 has rolled over. Any mitigating items, circumstances we should be thinking about on that front? And then 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?
spk05: Yeah, good question, Julian. And let me know. I want to 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 Uh, we really welcome the public debate and the policy decision that the Illinois commerce commission will make about the future of the program. And just to put it in perspective on average, we've invested about $280 million a year in upgrading the pipe network, uh, 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. So long story short, we're almost 36% complete with the pipe upgrade plan. And again, investing about $280 million a year. Now, those who think we should do something different are banking on electrification. So 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. Because 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. And then lastly, or 15 years or less, and then lastly, there are some who say, well, just patch the pipes. Julian, I'm telling you, some of those pipes can't be patched. And 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. So 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. And then secondly, to preserve a long-term future where that delivery network could deliver say hydrogen or other no carbon fuels to keep Chicago warm. So I hope, I hope that response helps.
spk03: Absolutely does. Thank you, Gail. Appreciate it. I will give you naming rights indeed. If I can though, You betcha. With respect to the process, I want to 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 the pace and 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 or respond to your proposed spending, if you will.
spk05: Well, there are extensive, as you would expect, and we wanted to have this kind of dialogue. We welcome this kind of dialogue. But there are multiple data requests, as there are in any rate review. But particularly, there are data requests about the program, about the need for the program, about the future of the program, et cetera. So I agree with you. I think this is the proper forum to have that policy decision made. and everything is proceeding under the normal schedule, if you will, of data requests. And now, as we said earlier, the next formal step would be May 9 when we expect staff and intervener testimony.
spk03: Right. Yeah. Thank you for confirming that. We'll look next week, all right? You take care. Thank you.
spk05: Thanks, Julian. Take care.
spk00: Your next question comes from the line of Jeremy Tenet with JPMorgan Chase. Please go ahead.
spk05: Jeremy, are you moving to Republic Bank or, you know?
spk06: Nothing to say there. There you go. Just wanted to kind of come back, I guess, to 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? And just wondering if you could quantify or give any more color there and how that might shape up across the year. I think you said in the back half, it kind of lightens up a bit. So any more color there could be helpful.
spk05: Yeah, I'd be happy to do that. And we'll ask Shaw 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. And 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. So 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. And then we're going to ask Sean 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. So Sean, 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.
spk01: Sure. Sure. So Q1 weather was about $0.12 deficit, as I mentioned in the prepared remarks. So 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. So in terms of issuing debt at rates lower than the plan or continued execution later this year, We expect the financing savings to be five to six cents also. So between those two items, we could offset the Q1 weather deficit. But we also have other initiatives we're looking at beyond those two items.
spk08: Sure. And 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. So that's quite a bit when you think about charges in the last half of the year. And last half, remember, we had warmer than normal weather, so we were able to accelerate or do some additional spending for our customers. So we incurred additional O&M costs plus the sharing ban. So that was meaningful for the last half of the year compared to what we see this year shaping up.
spk05: And to Scott's point, we obviously don't see ourselves into the sharing bans with customers this year. So 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. Got it.
spk06: That's very helpful there. Thanks. Just shifting a bit to solar, and I know that you touched on this a bit in the prepared remarks as it relates to the 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.
spk05: Well, my understanding is that President Biden said he would veto any effort to undo that particular initiative So I'm not sure that one's going anywhere. But in the meantime, as Scott indicated in his prepared remarks, for our Badger Hollow 2 solar project in Wisconsin for our regulated utility and for our Paris solar battery project, again, for our Wisconsin utilities. Scott, we got all the solar panels we need hanging in a warehouse in Chicago.
spk08: They're in the warehouse in Chicago. We're just working with Customs. to get them out of that warehouse. And, 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.
spk05: Jeremy, Scott and I went down to that warehouse one night, but the Doberman wouldn't let us in. But we know all of those panels are there.
spk06: Got it. That's helpful. And 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 WECC down the road.
spk05: Don't see much of any progress on permitting reform at this stage of the game. But again, as MISO works its way through all of the stakeholder process on tranche two phase one, the early indications are quite favorable in terms of the investment opportunity being even greater than what we saw in basically tranche one. And 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. And I'm guessing there may be some additional transmission need coming out of that project. Scott?
spk08: No, that's correct, Gail. And also a reminder, tranche one was using a lot of existing right-of-ways. So we're very happy using existing right-of-ways to be able to get that construction started in an earlier timeframe in that, you know, 25, 26 timeframe.
spk06: Got it. That's helpful. I'll leave it there. Thank you.
spk05: Thank you, Jeremy.
spk00: Your next question comes from the line of Michael Sullivan with Wolf Research. Please go ahead.
spk05: Hey, Michael.
spk10: Hey, Gail. How are you?
spk05: We're good. How about you?
spk10: Okay. Yeah, no, doing great. Maybe just back to the O&M. So, understand it was going to 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.
spk05: Yeah, I think when you look at the near-term future past 2023, we're going to be seeing another chunk of O&M reduction related to the planned retirements. And just as a reminder, we have four older units at our Oak Creek site, Units 5, 6, 7, and 8. And Units 5 and 6 are scheduled for retirement next year, and then Units 7 and 8 in 2025. And along with that, the retirement will come a substantial chunk of O&M reduction. Scott?
spk08: No, you're exactly right. As we put on those retirements, O&M will go down. But 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 WECI infrastructure, all that's additional O&M. So really supporting capital investments.
spk05: And 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 were in the final stages of completion. Those investments, when they're online and producing energy, actually replace fuel costs. So in addition to O&M chunks of savings coming forward here from the retirement of older coal-fired units, we're also going to see reductions in fuel costs simply because obviously with solar and wind, the fuel is free.
spk10: Okay, that's very helpful. Appreciate the detail. Just related to that, to the extent that we see any shifting in timing of the solar with supply chain issues and the panels in the warehouse and all that, how do you kind of react to that? Is there risk that – 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 down a little bit?
spk05: Well, 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 2024 and 2025 retirement dates for each of those two units. And then 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. But remember, these are regulated projects. The Commission's very, very supportive of the need for those projects. And, Scott, we're earning AFUDC during the construction period.
spk08: Correct. And we're continuing the construction so they are site-ready when the solar panels get released. So Paris and Badger Hollow 2 construction is pretty well done on Badger Hollow 2. We just need the solar panels, and Paris is moving along nicely. So those panels are ready. It won't take long to pop them on.
spk10: Great. Thanks a lot.
spk08: Take care, Michael.
spk00: Your next question comes from the line of Durgash Chopra with Evercore ISI. Please go ahead.
spk05: Wow. You got the jersey number eight on, Durgash?
spk07: I don't know about that, Gil.
spk05: I know. I know. A still diehard Eagle fan, right? It still hurts. It still hurts. I'm sorry.
spk07: Okay. We'll be back next year. So just, Gail, I wanted to go back to the re-opener. 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? And then, 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?
spk05: Sure. I will ask Scott to help out as well. So you are correct. This limited re-opener, 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 re-opener have already been approved by the Commission. So that is absolutely correct. And Scott, it's about a billion dollars of capital that will be coming in, if I recall correctly, into that re-opener.
spk08: Yeah, it's approximately that. I don't have the exact number at my fingertips, but When you think about the re-opener, it's projects like we talked about. Riverside was approved now. That $102 million, we'll put that into the re-opener. The West and Rice units, those are going to be in for a full year, so that'll be part of the re-opener. So some of these are full year. Some of these are actually part-of-year capital projects. And LNG, one of our LNG projects. The LNG projects. So it's really across electric and gas, just LNG. truing up with the capital additions.
spk07: Got it. Thanks, Scott. And then you've previously talked about O&M savings to be included as part of that request. Is that also part of this limited re-opener filing or could be a part of this limited re-opener filing?
spk08: 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? And now what we're doing is closing those units at the end of May here of 2024. So that'll be the O&M reduction that they put in the actual order for us to factor that into the case.
spk05: And Dragesh, 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 until for those older units until all four are offline.
spk07: Got it. That's super helpful, guys. I appreciate the time. Thank you. You're welcome. Take care, Durgash.
spk00: Your next question comes from the line of Andrew Wiesel with Scotiabank. Please go ahead.
spk05: Greetings, Andrew.
spk11: Hey, good afternoon, everybody. First question on timing of fuel costs. I know I see minus 7 cents in the 1Q waterfall. What's your expectation for the full year based on current curves? Do you expect that to fully reverse? And if so, when?
spk01: Andrew, this is Shaw. 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 Gail mentioned, we booked quite a bit of fuel expense because of the sharing ban, and we don't expect that to happen. So we see a pickup in fuel in terms of impact on earnings.
spk05: So purely timing. We'll see a second half turnaround.
spk11: Okay, thanks. And then on usage, Sha, 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 is just the noise around the extreme weather, or do you see any notable changes in demand trends?
spk01: Yeah, it's a lot of expected noise around weather normalization, like I said. It's So just to put it in perspective, the weather normalized residential sales met our forecasted expectations. So those are the higher margin segments. And on the CNI 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. And we don't have exposure to lots of automobile or oil and gas industries. So we feel really good about the industry mix. And we really haven't seen any trend of any potential recession in our service territory. So we track about a little over 100 large customers regularly. There are four that contributed to almost half of the negative variance in the first quarter, year over year. And two of those were down significantly. substantially year over year because of non-economic reasons. So one had a fire, the other had an outbreak. So we expect those to return to normal through the rest of the year. And again, whether normal noise played a role in these numbers. So I wouldn't overreact to these numbers right now.
spk05: Yeah, Andrea, just to build on to what Shah is saying, when you look at the temperatures across Q1, they were basically two standard deviations away from normal. And 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. And 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 Shaw said, wouldn't read too much into Q1 numbers.
spk11: Okay. Just wanted to be sure. Thank you very much.
spk05: No, thank you.
spk00: Your next question comes from the line of Anthony Crowdell with Mizuho. Please go ahead.
spk05: Hey, Anthony. Good afternoon, Gail.
spk09: Hello.
spk05: You got a dog to name?
spk09: I was thinking that Warehouse Doberman, that may work for Julian.
spk05: Yeah, not a bad idea. I'll take all of your input on naming the dog for Julian, but go right ahead, Anthony.
spk09: Andrew, I 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, how we're getting rid of it, 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? And if we do, do you think that's going to 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?
spk05: Yeah, that's a great question, Anthony. And I do think there will be an epiphany moment. don't know exactly when that epiphany moment will occur, but 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? And 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? So 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? And guess what? 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. And 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. In fact, this summer, we will begin blending RNG, renewable natural gas, into our network. So I think as people begin to think through past the bumper sticker, yes, you're going to see an epiphany moment about how valuable having that resource will be as we transition to a low and no carbon future. I mean, think about it another way. We have got to get this transition right to a no carbon future. And if we sacrifice reliability on that transition, it will delay the transition for many, many, many years. So, 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.
spk09: Great. Kayla, as always, thanks so much.
spk05: Thank you, Anthony.
spk00: Our final question will come from the line of Ashar Khan with Verition. Please go ahead.
spk04: Hi, how are you guys doing? Most of my questions have been answered. I just had a small one. Shaw, 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?
spk01: Sure, be happy to. So financing costs are expected to be higher compared to the Q2 last year, so that's a big driver. There are pluses and minuses, but we do have rate-based growth that's better than last year. Fuel is expected to be better last year, but largely offset by financing costs. Okay.
spk04: Thank you so much.
spk05: Terrific. Well, folks, I think that concludes. Oops. Is there more? I'm sorry.
spk00: I'll now turn the call back over to you, Mr. Kloppe, for any concluding remarks.
spk05: There we go. I jumped the gun. Thank you. Well, that concludes our conference call for today. Thanks so much for participating, as always. And if you have additional questions, feel free to contact Ms. Strzoka, 414-221-4639. Thank you, everybody. Take care.
spk00: Thank you for joining today's meeting. You may now disconnect.
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