WEC Energy Group Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, good afternoon, and welcome to WEC Energy Group's Conference Call for First Quarter 2024 Results.

This call is being recorded for rebroadcast. And all participants are in a listen-only mode at this time. 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.

Before the conference call begins, please note 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.

And now it is my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Live from the Heartland. Good afternoon, everyone. Thank you for joining us today as we review our results for the first quarter of 2024.

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 Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations.

Now as you saw from our news release this morning, we reported first quarter 2024 earnings of $1.97 a share. Throughout the warmest winter in Wisconsin history, we remain laser-focused on financial discipline, operating efficiency and customer satisfaction and we're confident that we can deliver another year of strong results in line with our guidance for 2024. As a reminder, we're guiding to a range of $4.80 to $4.90 a share for the full year. This, of course, assumes normal weather as always going forward. Switching gears now. We're off to a strong start moving forward with our ESG progress plan. It's the largest five-year investment plan in our history, totaling $23.7 billion for efficiency, sustainability and growth.

As we've discussed, the plan is based on projects that are low risk and highly executable. In the past few weeks alone, we filed with the Wisconsin Commission more than $2 billion of projects that are needed to meet customer demand across the region. In addition, just a few days ago, we announced that we plan to purchase a 90% ownership interest in the Delilah I Solar Energy. Delilah is a 300-megawatt solar park in Northeast Texas. It will be the next addition to our WEC Infrastructure segment. We expect to close on Delilah with an investment of $459 million when the project goes into service, and that's currently expected by the end of June. Since the beginning of the year, we also purchased an additional 10% interest in the Samson Solar project, now that's part of the Samson & Delilah development in Northeast Texas. And we plan to increase our ownership in the Maple Flats Solar Energy Center from 80% to 90%.

And just as a reminder, Maple Flats is under development in South Central Illinois. It has an off-take agreement with a Fortune 100 company for all the energy it will produce. The project should be in service by the end of this year. So to sum it up, with Delilah and with the increase in ownership of Samson and Maple Flats, we'll be investing an additional $560 million this year in our Infrastructure segment. As you recall, we're reallocating away from our operations in Illinois, a total of $800 million over the five-year period 2024 through 2028. These high-quality, zero carbon projects clearly go a long way toward achieving that goal. And each of these projects meets our strict financial criteria. Overall, the building blocks of our capital plan show even stronger growth in our regulated electric business. And our plan fully supports our long-term earnings growth rate, which we project to be in the 6.5% to 7% range on a compound average annual basis.

And now turning to the regional economy. The unemployment rate in Wisconsin stands at 3%, continuing a long-running trend below the national average. In fact, Wisconsin recently reached a new record for employment, more people working than at any other time in state history and that includes a record folks for the number of construction jobs. That's a great sign of the growth and the potential we're seeing, particularly in what we call the I-94 corridor. To give you just one example of the new economic activity in the region. Just a few weeks ago, electronic components that are used in fiber broadband networks began rolling off the assembly line at a state-of-the-art facility developed by Sanmina Corporation. These components help form the backbone for high-speed Internet service.

And we want to welcome Eli Lilly to our neighborhood. The pharmaceutical giant is purchasing a new production facility, again, in the I-94 corridor. And speaking of growth, Microsoft is moving full speed ahead on the construction of a massive data center complex in the I-94 corridor south of Milwaukee. In fact, in the next few weeks, Microsoft is planning an event here in the Milwaukee area to discuss its plans for new investments in Wisconsin. So stay tuned. And looking broadly across the landscape, I can tell you that the number of prospects looking at expanding or locating in the Milwaukee 7 region is stronger literally than at any time in the past two decades.

And with that, I'll turn the call over to Scott for more specifics on our regulatory calendar, our capital plan and our operational highlights. Scott, all yours.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Thank you, Gale.

I'd like to start with some updates on the regulatory front. In Wisconsin, we filed new rate reviews for test years 2025 and 2026 on April 12th. Our request focus on addressing three major areas of need. First, improving reliability and reducing outages from increased storm activity; second, supporting Wisconsin's economic growth and job creation through investments in new generation and distribution projects; and lastly, complying with the new EPA mission rules by continuing the transition from coal generation to renewables and natural gas. We expect the decision by the end of the year with new rates effective January 1, 2025. Last month, we submitted filings to the Wisconsin Commission for significant developments to support our electric generation business.

Our proposed projects include two new sources of natural gas generation. The first request is for approval to construct 1,100 megawatts of modern simple cycle combustion turbines at our existing Oak Creek power plant site. The expected investment is $1.2 billion. To support that generation, we are proposing to build a 33-mile lateral with an expected investment of approximately $180 million. This lateral would provide firm reliability of natural gas to the Oak Creek site for those units as well as our Power the Future units that we're converting to natural gas. And to help to share reliability, we are proposing a new storage facility at Oak Creek, with a planned investment of approximately $460 million. This facility would have the capacity to store 2 billion cubic feet a liquefied natural gas to support both our generation and our gas distribution system.

In addition, we requested approval to add 128 megawatts of state-of-the-art generation using reciprocating internal combustion engines, or as we call them, RICE units. We expect to invest approximately $280 million in that project near our Paris Generation Station. As a reminder, these investments are expected to earn AFUDC during the construction period. We also have smaller rate reviews in progress at our two Michigan utilities. Michigan Gas Utilities and Upper Michigan Energy Resources. These applications are primarily driven by our capital investments supporting reliability and safety. As you recall, our discussion last quarter on the recent developments in Illinois. There are three dockets we're actively engaged in at this time.

First, the Illinois Commission granted us a limited rehearing focused on the request to restore $145 million for the safety modernization program in 2024. This mostly relates to emergency work, work that was in progress and work driven by public entities like the City of Chicago. This limited rehearing is now underway, and we expect to receive a final commission order by June 1. The other two outstanding dockets are expected to span at least a year, and we are actively involved. One is a full review of the safety modernization program and the other is an evaluation of the future gas in Illinois. Of course, we'll keep you updated on any further developments.

Now turning to our capital plan. We're making good progress on a number of regulated projects in support of affordable, reliable and clean energy. Arizona LNG storage facility is now in service, this additional 1 Bcf of storage will be necessary during the extreme weather events we see here in Wisconsin. Also, the Wisconsin Commission has approved our purchase of 100 megawatts of additional capacity at West Riverside Energy Center. We expect to invest approximately $100 million to add this capacity to our electric business in the second quarter. At the same time, we're continuing the efforts to phase out older, less efficient coal generation. In fact, I'm happy to report that we're on track to retire Unit 5 and 6 of our Oak Creek power plant later this month. These changes support our goals to reduce greenhouse gas emissions. It's a busy and strong start to the year. Our capital plan is robust and highly executable, and we continue to focus on the fundamentals of our business.

With that, I'll turn things back to Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

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%. This marks, ladies and gentlemen, the 21st consecutive year that our company will reward shareholders with higher dividends. The increase is consistent with our policy of paying out 65% to 70% of our earnings in dividends and underscores our confidence in delivering a bright, sustainable future.

Next up, Xia will provide us with more details on our financial results for the quarter and our guidance for Q number two. Xia?

[Xia Liu, Executive Vice President & Chief Financial Officer at WEC Energy Group]

Thank you, Gale.

Our 2024 first quarter earnings of $1.97 per share increased $0.36 per share compared to the first quarter of 2023. 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 $0.28 higher compared to the first quarter of 2023. Weather had an estimated $0.07 negative impact quarter-over-quarter.

As noted earlier, this past winter was the warmest in Wisconsin history. The milder weather, along with $0.09 from higher depreciation and amortization, interest expense and day-to-day O&M expense were more than offset by the following positive variances. Timing of fuel expense was a $0.09 increase quarter-over-quarter. Our fuel was in a positive recovery position at the end of Q1 this year, compared to an under-recovered position at the end of Q1 last year. And rate base growth contributed $0.35 to earnings quarter-over-quarter. This includes the rate increases from Wisconsin, Illinois and Michigan.

One thing to note, as I mentioned on our year-end call, with the rate design changes at Peoples Gas, base revenues are even more concentrated in the first and fourth quarters when natural gas usage is the highest and this earnings shift is a significant driver for the quarter. Looking ahead, we'll see the opposite shift in Q2 and Q3.

Before I turn to earnings at the Other segment, let me briefly discuss our weather normal sales. You can find our sales information on Page 9 of the earnings package. While weather was historically mild in the quarter, our weather-normal gas and electric deliveries were both relatively flat and overall in line with our forecast. However, on the electric side, our residential and small commercial and industrial segments are currently ahead of forecast. Now at our Energy Infrastructure segment, earnings increased $0.02 in the first quarter of 2024 compared to the first quarter of 2023. Production tax credits were higher quarter-over-quarter resulting from production at our Samsung and Sapphire Sky renewable generation projects, both of which were acquired in February 2023.

Finally, you'll see that earnings at our Corporate and Other segment rose $0.06, primarily driven by timing of tax. In closing, as Gale mentioned earlier, we are reaffirming our 2024 earnings guidance of $4.80 to $4.90 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.

For example, we now expect our 2024 day-to-day O&M to be 3% to 5% higher than 2023 versus our previous expectation of 6% to 7% higher. The lion's share of the reduction is expected to come in the second half of the year. For the second quarter, we're expecting a range of $0.60 to $0.64 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.92 per share in the second quarter last year. While the Q2 guidance range is lower, if you combine Q1 actual and Q2 guidance, we expect to be $0.04 to $0.08 ahead of the first quarter of 2023.

With that, I'll turn it back to Gale.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Great. Thank you, Xia.

And now a final note. We did some quick math this morning. In today marks the 87th time that I've had the privilege of hosting an analyst call, starting back in the day at Brand X and then continuing through the past 21 years here at WEC. Together, we've covered a lot of history and a ton of progress. I can tell you that your thoughtful questions and your thorough analysis have helped us to build and sustain a premier company on a mission that truly matters. And for that, I'm grateful. Going forward on these calls, you'll be hearing from Scott and Xia, they are ready, and it's their time to shine.

And operator, we're now ready for the question-and-answer portion of the call.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Shar Pourreza with Guggenheim Partners. Your line is open.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Rock and roll, Shar.

[Jamieson Ward, Analyst at Guggenheim Partners]

Hi Gale, it's actually Jamieson on for Shar. How are you?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Terrific. What have you done with Shar? Is he in a closet somewhere?

[Jamieson Ward, Analyst at Guggenheim Partners]

The weather got to him. He's on the road as always busy as ever, traveling and a storm got him. I mean, it's only a force of nature that's going to hold him.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

That's true Jamieson.

[Jamieson Ward, Analyst at Guggenheim Partners]

Thank you. So, the first -- the $400 million of the equity in your current five-year plan was put there to true-up utility equity layers? In your current Wisconsin rate cases, you're asking for 53.5% equity or 50 basis points above where you indicate current levels to be. Could we see incremental equity being added to the current plan to true those utilities up that 50 basis points?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I think the short answer is no, Shar -- I'm thinking of Shar in a closet somewhere. Xia, go ahead.

[Xia Liu, Executive Vice President & Chief Financial Officer at WEC Energy Group]

I mean, we filed for 53.5%. We hope to receive 53.5%. If that's the case, we'll look at the equity. But right now, we haven't changed the equity plan.

[Jamieson Ward, Analyst at Guggenheim Partners]

Got it. There's no change now, but if you were to get it, there's the possibility, it's not already included in the plan, I guess, is really what you just clarify.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, but I wouldn't model in at this stage of the game or even after we -- I wouldn't necessarily model in an increase in equity beyond that.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

And I think when you look at it and you look at the details of our filing and -- when you look at the details of the filing and the regulatory ratio, it's about the same as it is this year, right now, you got to look at the financial and the regulatory ratios. Yes. Did that help?

[Jamieson Ward, Analyst at Guggenheim Partners]

Perfect. Very clear. Absolutely. And then one more also on the rate cases. In your last set of Wisconsin cases, the settlements that you negotiated didn't quite hold up as filed, even though those in prior cases had. Given that precedent, but also that you have a new slate of commissioners in office, how should we think about settlements in Wisconsin today? And kind of what are some of the pushes and takes and maybe how should we think about potential timing for a settlement, if any, in these cases? And that's all I got.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Very good. Well, a couple of thoughts on your questions about settlements and timing. First of all, I think that our current a new chair of the commission summer strand has publicly stated that she's very open to stakeholder input and would certainly be open to discussions on settlement. So I think essentially, the door is open for negotiations at the appropriate time. And then in terms of timing itself, historically, the best time for really candid and thorough discussions comes after the staff audit is complete. And Scott, when would you expect on this particular case, the staff audit to come out mid summer, maybe probably?

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Near the end of summer -- at the end of summer.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And of course, a final decision is not statutorily required until December in the case. So there's a window between the time of the staff audit and commission deliberations for all the appropriate stakeholders to get together. I hope that helps.

[Jamieson Ward, Analyst at Guggenheim Partners]

It does. Thank you very much all. I appreciate it. Best of luck Gale in your future endeavors.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you so much.

[Operator]

And we will take our next question from Steve Fleishman with Wolfe Research. Your line is open.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hey Steve.

[Steve Fleishman, Analyst at Wolfe Research]

Gale, well, finally, the day came. Well, I appreciate all 87 of those calls, which I probably either listen to or read the transcript of all of them. So, but wish you the best. But I'm not going to let you get away without answering some questions. So just -- you brought up the Microsoft announcement potentially coming soon and I guess there's already kind of been announcements, but just could you give a little more color kind of what else they might be talking about? Is it -- is there kind of an expansion of maybe the build-out that they're looking at. And just how do we think about just -- are you -- from a supply standpoint, are you basically the supplier for all their electricity? And are you kind of -- how are you making sure that you're kind of doing at the right margins and just how we should think about both the tariff margin capex potential?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah. Terrific. Great question, Steve. I mean, first of all, to answer your second question, yes, we will be the supplier for all of the energy that Microsoft will need at their site inside the Wisconsin Technology Park, which, as you know, is about 20 miles south of our headquarter city. In terms of what's changed, what's different? I mean, Microsoft early on in their whole process here in Wisconsin acquired 315 acres of property adjacent to the area that Foxconn is developing in that technology park. So what you see in our current five year capital plan is the generation that we expect to need to add to essentially serve what is being built and it's being built quickly. I got there are like 10 to 12 cranes active, the construction site is incredibly active right now. But it's active on the first 315 acres, Microsoft has developed.

So we're thinking about that pending ongoing discussions with Microsoft as kind of the first phase because Microsoft has now acquired substantial additional acreage. In fact, they control 1,345 acres now in that technology park. And they're clearly working very hard and have discussions with our folks every single week on as they develop their plans for the rest of that development. And I think we'll hear more from Microsoft on their broader plan for Wisconsin here in the next few weeks. So I hope that helps. And how are we planning to make sure we're serving their needs? I mean, literally, their technical folks and ours are in weekly discussions, very encouraging. Hope that responds, Steve.

[Steve Fleishman, Analyst at Wolfe Research]

Yeah. No, that's great. Just -- can you just remind me just for the first 315 acres, how much capital is in your plan to basically make the investment to serve that?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yeah. Essentially, there's other as we've talked about, there's other significant economic growth in that area as well. So in the capital plan, for -- to meet what we see on the ground. This is not speculation about future economic growth. This is what we see on the ground, what we knew from Microsoft back in November, what we're actually seeing from Herabol, now from Eli Lilly and others, we added 1,400 megawatts of dispatchable capacity to the plan.

[Steve Fleishman, Analyst at Wolfe Research]

Okay. And then one other question just on Illinois. Obviously, the order late last year disappointing, but staff on rehearing seemed okay. So just feeling that likely the commission will be reasonable there. And I guess, maybe more importantly, there's been a lot of labor pushback on the capital -- on the work reductions. And just is that making any impact on just how the state is looking at things for your business?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, I'll ask Scott to give his view on this as well. From my observation, Steve, I would say that every intervener has taken a position. As you say, the staff is supportive of the work continuing that we asked to have allowed to be continued and to be recovered. Virtually all of the interveners have suggested that at least some amount of work continue. But this is the first time on our rehearing that this particular commission is going to make a decision. So time will tell, but we won't have to wait long, Scott, I believe we're looking at probably the end of May.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Yeah, it should -- we should hear something here by the end of May, early part June on the decision here. And I know safety and reliability is at their forefront. And we hear a lot of that in the future of natural gas that they talk about safety and reliability on those cases, too. So looking forward to a good decision, but we'll see what happens.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And Steve, my gut tells me that there's an element of practicality, just Midwest practicality here as it relates to making sure that, that system stays safe.

[Steve Fleishman, Analyst at Wolfe Research]

Great. Thank you very much, and best to you Gale and the team. Thank you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Steve.

[Operator]

And we will take our next question from Neil Kalton with Wells Fargo Securities. Your line is open.

[Neil Kalton, Analyst at Wells Fargo Securities]

Yes. Hi everyone.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hi Neil, how are you doing? How are you doing, Neil?

[Neil Kalton, Analyst at Wells Fargo Securities]

Good. Gale, I'm going to miss you. I'm doing really well. We're going to miss your oozing voice at 1:00 central in the afternoon during rainy season, Wish you the best going forward.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks, Neil. And I'll just put in a plug, you can still listen to courtside with the bucks anytime you want on demand.

[Neil Kalton, Analyst at Wells Fargo Securities]

Absolutely. Absolutely. So anyway, a question just kind of following on, on some of the earlier conversation on the new generation that you're adding about 1,400 megawatts. I understand that's for what you see on the ground. At that point in time, what will the reserve margins look like? Basically, what I'm trying to get at is there seems like there's a lot of additional activity that could happen. And what would your -- what would be your ability to serve or would we be looking at new generation requirements if that were to come online?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, the 14 -- based on the demand forecast we had when we put the five year plan together, remember, we rolled that out in November. Basically, the five-year plan took us to what we call a balanced reserve margin. Meeting the capacity requirements that we're expected to have and to be accredited by MISO. So any -- I think the bottom line for -- at least from my view, and we'll ask Scott to give you his. But the bottom line from my view is if we see, as we roll forward here in the next few months, which I think which we're seeing, I mean, additional economic development and projects going in, then that's going to mean we have to build more. Scott?

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

You're exactly correct, Gale. As we continue to look at it, and we did size our plan with the required reserve margins, looking at the seasonal capacity that's required from the Midwest operator here. So any additional load, we will need some generation to make sure we have that capacity available.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

So stay tuned, Neil. There'll be a new update coming in the fall.

[Neil Kalton, Analyst at Wells Fargo Securities]

Thank you very much.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thanks, Neil.

[Operator]

And we will take our next question from Durgesh Chopra with Evercore ISI. Your line is open.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hi Durgesh.

[Durgesh Chopra, Analyst at Evercore ISI]

Hey Gail, just like Neil said, I'm going to miss hearing your voice as well. Good luck to you.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Durgesh. Appreciate it. And are you pulling for the 76ers?

[Durgesh Chopra, Analyst at Evercore ISI]

I am for every Philly team.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Terrific.

[Durgesh Chopra, Analyst at Evercore ISI]

So listen, so Gale, do you -- I guess, just from your perspective and the team's perspective, do you worry about the pace at which the data center deployment is projected to kind of occur? I'm thinking about how fast they're building you just alluded to your active conversations versus sort of your construction cycle, getting approvals and all the sort of the road blocks or the milestones that you need to kind of check to get the generation there. Is that something that concerns you?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Just in terms of the amount of time it takes to get approvals. Is that what you're referring to, Durgesh?

[Durgesh Chopra, Analyst at Evercore ISI]

Yes. Just the generation, whatever distribution assets you need, the approvals and just the expedited time line of these hyperscalers.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes. Good question. And I would kind of -- and Scott should give you his view as well. I would kind of break it down into three buckets. And the first bucket is obviously availability of equipment. And there -- we're fortunate in that we have already placed a number of orders for some of the key -- particularly key transmission and distribution pieces of equipment that will be needed. Secondly, very positively so in this particular technology park, we're allowed to build certain distribution assets and transmission assets that do not have to take a year of approval. So that's really already underway.

And then the other piece would be just the regulatory approval, and in Wisconsin to get what we call the CPCN, basically approval to build generation. The CPCN can take up to a year. I will say this, I think the staff and the commissioners here in Wisconsin are very aware of the need for speed here and the governor has himself promised Microsoft that the state will do what's necessary to help them be successful here. So clearly, this is major. I mean, clearly, there's a lot of work to be done. But right now, we're off to a really good start. And I think the backdrop here and the regulatory support will be very strong to make sure that we meet the need and serve Foxconn -- all of the folks there, but not only Foxconn, but Microsoft well. Scott?

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

I agree, Gale. And I think the other key is we have the site selection at the Oak Creek site for a significant part of our assets. And we've done a lot of the filings already. So really, things are moving ahead very quickly. But we got a process in place in the orders placed, which is good.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Yes. Scott is actually making a very good point about site selection. I mean, we've had a power generation campus at Oak Creek literally for the last 70 years. We have buffer property there. We have a property that will easily house, particularly the combustion turbines that Scott talked about earlier. The 1,100 megawatts of combustion turbines that will be an important part of the next addition of assets that we need to have. I hope that responds, Durgesh.

[Durgesh Chopra, Analyst at Evercore ISI]

That is very, very helpful. I appreciate all the color there. Thank you. Maybe can I just quickly follow up on Illinois, the limited rehearing? Is there a potential for settlement there?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Sure.

[Durgesh Chopra, Analyst at Evercore ISI]

Can you settle with the parties potentially those Part A and Part B? Does it have to be 0 or 145? Or can it be sort of a spend number, which is in between?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, it can be a spend number anywhere in between. There really is in this limited rehearing process, if you will. There's really no avenue for settlement. But you're right, it's not a binary thing. It's not 0 or 145. The commissioners can use judgment on any number from 0 to 145 or in between.

[Durgesh Chopra, Analyst at Evercore ISI]

Got it. Thanks so much. Appreciate the time.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You take care, Durgesh.

[Operator]

We will take our next question from Carly Davenport with Goldman Sachs. Your line is open.

[Carly Davenport, Analyst at The Goldman Sachs Group]

Hey, good afternoon. Thanks so much for taking the questions.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

You're welcome, Carly. Hey, Carly, you're not old enough to have heard the first of the 75 calls, but we appreciate you calling in on this one.

[Carly Davenport, Analyst at The Goldman Sachs Group]

I'm glad that I made it just in time. We appreciate it. Maybe just to start, I wanted to just ask on the electric sales this quarter, you walked through some of the weather impacts, but anything else that you flag driving some of the C&I load for the quarter, particularly for the larger customers there? And then as you just think about some of these economic development opportunities, how you think about really that timing for an inflection in load growth?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, we've already -- and we will ask Xia to give you, she's got a couple of very good important details, particularly about the large industrial activity that we saw in Q1 here. Let me just say two quick things. First of all, as mild as the weather was and is far from normal as it was, I would suggest that you take the actual weather normal sales numbers with a bit of a grain of salt. Some of you heard me say this forever, but our weather normalization techniques that are used in our industry just don't bear up well when you get 1.5, 2 standard deviations away from norm. So, read our numbers for Q1 on weather normal is more precise than accurate.

Secondly, we've already shown, as you probably saw, as we've gone through some of our plans, we've already shown a nice uptick in annual projections of energy sales starting in 2026. You remember, we basically, for the past decade or so have been growing at 0.5%, 0.7% in terms of annual kilowatt hour sales. We moved that up based on everything we were seeing last November on the ground. We moved that up to 4.5% to 5% starting in 2026. I'm guessing that you'll see that number grow when the plan gets updated as we normally do in the fall. I mean just from everything else that seems to be occurring here post when we put the plan together, last fall. And then in terms of specifics on Q1 in terms of industrial, Xia?

[Xia Liu, Executive Vice President & Chief Financial Officer at WEC Energy Group]

Yes. So, on Q1, so to your point, Carly, the weather normal LC&I electric sales was minus 1.8%, which was behind our forecast. But if you -- we looked pretty hard on the specifics. So it turned out that the underperformance was concentrated in really a couple of customers, one in primary metal, the other in the paper sector. And one of them actually is in the process of transition into a very -- a much bigger expanded presence in the region. So Q1 was kind of a transition period for them. So, that's really just timing. If you excluded those customers, LC&I sales would have been 0.4% higher compared to Q1 last year. So, we're not worried about the LC&I sales trend.

[Carly Davenport, Analyst at The Goldman Sachs Group]

Got it. Okay, that's super helpful. Thank you for that detail.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Carly.

[Carly Davenport, Analyst at The Goldman Sachs Group]

Maybe if I could just squeeze one more in. You referenced the new EPA rules in terms of some spend there in the Wisconsin rate cases just filed. I guess, do you expect those new rules to have any impact on the views on gas capacity additions going forward or the capital needs associated with that?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No, it's a good question. And the short answer is no, compared to what we filed. And I will say a real shout out to our generation and environmental planning folks. They've done a great job of anticipating the new EPA rules. And Scott, based on everything we've seen that's come out in the last couple of weeks, we're right on track.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

No, our plan that we filed and the plan -- we have in our five-year plan lines up right in line with the EPA rules that just came out or finalized. So, I'm very happy to see that come together.

[Carly Davenport, Analyst at The Goldman Sachs Group]

Great. Thank you so much for that color.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Take care, Carly.

[Operator]

And we will take our next question from Anthony Crowdell with Mizuho. Your line is open.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Greetings, Anthony, how are you?

[Anthony Crowdell, Analyst at Mizuho]

Good congratulations and best of luck and best of luck to Shar in the closet also. So great news all around. I guess, also Neil and Steve's question, I apologize if you answered it, just I guess you talked about you have an adequate reserve margin in the service territory and if a large data center hyperscale that comes in, and they eat up that entire reserve margin and now the generations need to get back. Just on the allocation of cost for the data center moving in there and maybe eating up that reserve margin, does the rest of this jurisdiction bear the cost of now building back up the reserve margin?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

No. And I'm glad you asked the question actually because we should be very, very clear about that. First of all, Microsoft has said time and time and again that they want to and will pay their fair share. And we're working on a specific rate for them that will have several components. It will have essentially a component for generation capacity basically, they'll have to pay for their fair share of the generation that's needed. They will have to pay a small amount. There will be a little bit of distribution, but they will pay for the distribution investment that serves them. Energy will be a pass-through as it is for many, many of our large industrial customers that we have on what we call real-time pricing. And so essentially, we're working on very specific components of a rate. It's not hugely -- Scott, it's not hugely dissimilar from what we're doing for other large industrial customers.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Now, it's -- we're laying out a plan for that, like Gale said, they want to pay their fair share. I wouldn't characterize it as them eating into reserve margins. Some of this builders support that. So we always look at our plan and make sure we have the appropriate reserve margin and we look at this economic development. Once again, that's what drove some of the generation here. So I don't think they ate into anything. It's just all additive for everybody here.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

And then, Anthony, as you know well because you've been around a long time, when you have substantial kilowatt hour sales growth, that actually is helpful to your customer base because it spreads those additional costs over a much broader base of kilowatt hour sales. So there's also as we work our way through this, remember that 4.5% to 5% increase that we're projecting in annual kilowatt hour sales starting in 2026. That's also going to be helpful as well to our overall customer base.

[Anthony Crowdell, Analyst at Mizuho]

Got it. And then if I could just one follow-up. Steve's question earlier about maybe some of the pushback in Illinois from the labor group. I'm just wondering, do you believe labor still has maybe the same I don't know political leverage is the right term, but the same maybe sway that they've had in years past. Do you think it's more or just kind of the same? And I'll leave it there.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Anthony, it's very hard to tell. I mean, incrementally one way or the other. But I will say this, labor has and will continue to have, I believe, a strong voice in Illinois, and they are passionate about the need for us to continue the safety modernization program.

[Anthony Crowdell, Analyst at Mizuho]

Great. Thanks again. And again, congratulations.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

All right. Thank you. Appreciate it very much, Anthony. You take care.

[Operator]

And we will take our next question from Paul Patterson with Glenrock Associates. Your line is open.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Hi Paul.

[Paul Patterson, Analyst at Glenrock Associates]

How you doing? Congratulations.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you.

[Paul Patterson, Analyst at Glenrock Associates]

So I guess my question is the future of gas. You brought it up. And I know it's kind of early procedurally, but any sense as to when that might be wrapped up in Illinois?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

A long time. What is going on right now and started a couple of months ago is really what they would call a scoping phase. So they're having almost weekly meetings to identify and get broad input on all the different sub subjects or sub subject matters that should have broad discussion from all the stakeholders going forward. So the scoping itself, I think, is going to take until mid-summer. Our guess is probably when do you think, Scott? At least a year.

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Yeah. It's supposed to -- the scoping is going to go to about the end of August, and then it will be another year after that, that they built through the investigation and the policy that may have to come out of it. But one of the things the ICC is really doing though is making sure they hear everybody's voice in this. So they're getting a lot of people involved, which is good to get all the different issues and circumstances on the table. So they're trying to be a real robust process here.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I did notice, Paul yesterday or day before that one of the environmental groups and again, multiple stakeholders taking place in the scoping process. But one of the environmental groups on the record did say that they believe there would have to be a very long transition and that natural gas would play a significant role for a long period of time, which I thought was both practical, accurate and encouraging.

[Paul Patterson, Analyst at Glenrock Associates]

Yeah. And I guess, also considering that so much of your capex is safety-oriented. I would assume that it doesn't really -- the idea that this is going on doesn't really probably impact your current investment in the business? If you follow...

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

I think that's reasonably -- yeah, that's reasonably accurate, Paul. Yes.

[Paul Patterson, Analyst at Glenrock Associates]

Okay. And then just one of the things that we've been seeing a lot of officials talking about recently for commissioner about, a lot about this enhanced grid enhancement technologies. And I was just wondering how you guys as an industry leader are thinking about the deployment of this and how it might impact the industry as you guys are thinking about just longer term, what do you guys see this as being -- how it might be playing a role or not in your business?

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Well, early days, Paul, but my sense, and we'll get Scott for you as well, my sense is probably the first application maybe in transmission. What do you think, Scott?

[Scott J. Lauber, President & Chief Executive Officer at WEC Energy Group]

Yeah. We're going to have a lot of technology on the system. So it's hard to decide what exactly new technology will be coming, but we have a lot of automation that we put on the system that you can really see are very effective when there is a storm that rolls through. So I think the technology will continue to improve and I think transmission and whether you do dynamic line ratings and stuff, you're going to continue to see the benefits of technology. And I think just like anything else, it continues to evolve here and we get better and better at it.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

In near-term, as Scott has mentioned the dynamic line ratings, I think, pay attention to that because I think that could be very helpful. But there's a lot -- as you know, there's a lot of R&D underway to try to enhance both reliability and stability. So I hope that gives you at least a broad answer to the question, Paul.

[Paul Patterson, Analyst at Glenrock Associates]

Absolutely. I appreciate it. Once again, congratulations, and good luck.

[Gale E. Klappa, Executive Chairman at WEC Energy Group]

Thank you, Paul. You take care. All right. Well, folks, that concludes our conference call for today. Thank you so much for taking part. If you have more questions, feel free to contact Beth Straka. She can be reached at 414-221-4639. So long, everybody.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Gale E. Klappa, Executive Chairman
• Scott J. Lauber, President & Chief Executive Officer
• Xia Liu, Executive Vice President & Chief Financial Officer

Analysts

• Jamieson Ward, Guggenheim Partners
• Steve Fleishman, Wolfe Research
• Neil Kalton, Wells Fargo Securities
• Durgesh Chopra, Evercore ISI
• Carly Davenport, The Goldman Sachs Group, Inc.
• Anthony Crowdell, Mizuho
• Paul Patterson, Glenrock Associates