WEC Energy Group Q2 2023 Earnings Report

WEC Energy Group EPS Results

• Actual EPS: $0.92
• Consensus EPS: $0.85
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $0.91

WEC Energy Group Revenue Results

• Actual Revenue: $1.83 billion
• Expected Revenue: $2.05 billion
• Beat/Miss: Missed by -$223.30 million
• YoY Revenue Growth: -14.00%

WEC Energy Group Announcement Details

• Quarter: Q2 2023
• Date: 8/1/2023
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 1, 2023
• Conference Call Time: 2:00PM ET

WEC Energy Group (NYSE:WEC) is a diversified energy holding company headquartered in Milwaukee, Wisconsin. Through its utility subsidiaries, the company generates and distributes electricity and delivers natural gas to residential, commercial, and industrial customers.

WEC Energy Group serves customers primarily in Wisconsin, Illinois, Michigan, and Minnesota. Its operating companies include We Energies, Wisconsin Public Service, Upper Michigan Energy Resources, Minnesota Energy Resources, Michigan Gas Utilities, North Shore Gas, and Peoples Gas. The company’s energy portfolio includes a mix of natural gas, renewable, hydroelectric, and other generation resources, along with transmission and distribution infrastructure.

The company traces its history to Wisconsin Energy Corporation and adopted the WEC Energy Group name in 2015 following the combination of Wisconsin Energy and Integrys Energy Group. WEC Energy Group is led by President and Chief Executive Officer Scott J. Lauber.

WEC Energy Group Q2 2023 Earnings Call Transcript

Key Takeaways

• In Q2 2023, WEC Energy Group reported $0.92 EPS and reaffirmed its full-year guidance of $4.58–$4.62 per share, with Q3 guidance at $0.88–$0.90 assuming normal weather.
• The company outlined a $20.1 billion ESG progress plan to quadruple renewable generation and add efficient gas capacity, projecting annual EPS growth of 6.5–7% without issuing new equity.
• WEC will support Microsoft’s initial $1 billion data center campus in the Wisconsin Innovation Park, treating related infrastructure investments as incremental to the current five-year plan.
• Key regulatory updates include Wisconsin’s 2024 rate reopener, Illinois filings recommending a 9.83% ROE at Peoples Gas, and expected settlements in Minnesota and Michigan by year-end.
• Through H1 2023, capital expenditures rose to $2.1 billion—driven by the acquisition of the 100 MW West Riverside plant, 128 MW at Weston, and ongoing solar projects—with Q4 poised to benefit from lower O&M and fuel costs.

Presentation

[Operator]

Good afternoon, welcome to WEC Energy Group's Conference Call for Q2 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]

Well, good afternoon, everyone. Thank you for joining us today as we review our results for Q2 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 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 Q2, 2023 earnings of $0.92 a share. After a down first quarter, marked by one of the warmest winters on record, we delivered solid results in the Q2, and we're firmly on track for a strong 2023. Today, we're reaffirming our guidance for the year. The range is $4.58-$4.62 a share.

[Gale Klappa, Executive Chairman at WEC Energy Group]

This, of course, assumes normal weather going forward. As always, we're focused on the fundamentals of our business: financial discipline, operating efficiency, and customer satisfaction. During the Q2, we also continued to move forward on our major initiatives, including the investments outlined in our $20.1 billion ESG Progress Plan. As we've discussed, the plan is based on projects that are low risk and highly executable. We expect to quadruple the amount of renewable generation for our regulated customers, add highly efficient gas field capacity to ensure reliability, and continue to harden our delivery networks. Scott will provide you with more detail on several specific projects in just a moment. As a reminder, we project that our ESG Progress Plan will drive growth and earnings per share of 6.5%-7% a year.

[Gale Klappa, Executive Chairman at WEC Energy Group]

As we've discussed, there is no need to issue equity for this $20.1 billion five-year plan. Over the past few months, many of you have asked about the trajectory of our next five-year plan. Our updated plan will cover the period 2024 through 2028. If growth and demand for capacity and energy drives our next capital plan significantly higher, we'll evaluate all our financing options. In addition to incremental debt and refinancing opportunities, our options could include accessing the equity market through our dividend reinvestment plans, employee benefit plans, and at the market programs. I would stress that at this point, we do not see the need for any block equity offering. As a reminder, any equity need would be driven by growth and would support our long-term growth projections.

[Gale Klappa, Executive Chairman at WEC Energy Group]

As you would expect, we're on schedule with the development of our next five-year plan, and as usual, we'll share the details with you in the fall. Now, let's take a brief look. We'll switch gears and take a brief look at our regional economy. We're still seeing a very strong labor market in Wisconsin. In June, the state added 7,000 private sector jobs. The unemployment rate came in at 2.5%, well below the national average, and the labor force participation rate rose for the fourth straight month in Wisconsin to 65.3%. Very solid numbers. We're also encouraged by the pipeline of economic activity in our region. Last quarter, you heard that Microsoft plans to make an initial investment of $1 billion to create a new data center campus.

[Gale Klappa, Executive Chairman at WEC Energy Group]

This new complex will be built south of Milwaukee in the Wisconsin Innovation Park, where Foxconn is located. Microsoft has purchased 315 acres in Area Three of the park and is moving full speed ahead. In fact, earthwork at the site began just a few days ago. Along with American Transmission Company, we're working closely, in fact, on a weekly basis with Microsoft to determine the full extent of the energy infrastructure that will be needed to serve this development. We're excited about supporting Microsoft as the company moves forward with a major technology investment, and we'll update you as the planning proceeds. With that, I'll turn the call over to Scott for more information on our regulatory developments and on our operations. 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. In May, we filed a limited reopener to set 2024 rates for our Wisconsin utilities. The filings address the recovery of capital investments for certain projects going into service this year and in 2024. These are renewable facilities, RICE generation, and LNG reliability investments.

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

The projects have already been approved by the Wisconsin Commission. The return on equity and the equity layer are all set and are not up for consideration as part of this proceeding. 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. After nine years without a base rate case at Peoples Gas, we're making these requests for 2024 to support our investments in critical infrastructure. In mid-July, the staff filed its rebuttal testimony, recommending a 9.83% return on equity and an equity layer of 50.83% for Peoples Gas. This was consistent with the initial recommendations from the staff. We expect a final decision by the end of the year.

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

Moving to the other states, we are very pleased that we have reached a settlement agreement at our rate reviews at both Minnesota Energy Resources and Michigan Gas Utilities. The Minnesota Commission is considering a settlement that would provide a 7.1% increase in base rates. As a quick reminder, that's based on a 9.65% return on equity, with an equity layer of 53%. We're pleased to update you that in Michigan, we have reached a unanimous settlement, and the details will be made public later this week. We expect final commission approval by the end of the year. Meanwhile, we're continuing progress on a number of regulated capital projects. At the beginning of June, we closed on our first option of West Riverside Energy Center for $95 million.

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

This adds 100 MW of efficient combined cycle natural gas generation to our portfolio. As you recall, this plant is in operation, and the purchase price was based on book value. In the next few weeks, we plan to file a request to purchase another 100 MW of Riverside capacity under our remaining option. We also put 128 MW of new natural gas generation online last month. As you recall, we invested $170 million to build this generation at our existing Weston Power Plant site in northern Wisconsin. The facility uses seven Reciprocating Internal Combustion Engines, or as we call them, RICE units. Elsewhere in the State, work continues on the Badger Hollow II Solar Facility and the Paris and Darien Solar Battery Parks. The Badger Hollow II site has begun receiving panels using non-Chinese polysilicon.

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

We continue to work on securing customs release of panels from a bonded warehouse in Chicago, and we're still expecting Badger Hollow II to go into service late this year or early next year, with Paris Solar Park to follow. In addition, work has begun on the Darien Solar Facility, which is planned to go into service in 2024. We'll keep you posted and updated on future developments. With that, I'll turn you back to Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Scott, thanks very much. As you may recall, our board of directors at its January meeting raised our quarterly cash dividend by 7.2%. We believe this continues to rank our dividend growth in the top decile of our industry. We're targeting 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 detail on our financial results and unveil our third Q3 guidance. Xia, all yours.

[Xia Liu, CFO at WEC Energy Group]

Thanks, Gale. Our 2023 Q2 earnings of $0.92 per share increased $0.01 per share compared to the Q2 of 2022. Our earnings package includes a comparison of Q2 results on page 15. I'll walk through the significant drivers. Our earnings from utility operations were $0.04 above the Q2 of 2022. First, weather had an estimated $0.05 negative impact quarter-over-quarter. Higher depreciation and amortization expense and interest expense added another $0.09 of negative variance. These negative variances were more than offset in the quarter. Rate-based growth contributed $0.11 to earnings. 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.

[Xia Liu, CFO at WEC Energy Group]

Additionally, timing of fuel expense improved our earnings by $0.05, and lower day-to-day O&M, taxes, and other items resulted in a $0.02 improvement. Before I turn to earnings at the other segment, let me briefly discuss our weather-normalized sales for the quarter. You can find this sales information on page 11 of the earnings package. Retail electric deliveries in Wisconsin, excluding the iron ore mine, were down 0.6% on a weather-normal basis. This was driven by lower sales volumes to large commercial and industrial customers. Residential usage, again, on a weather-normal basis, was flat quarter-over-quarter, which is in line with our forecast. Also, sales to our small commercial and industrial customers were up 1.4%, which is ahead of forecast. Earnings at our energy infrastructure segment improved $0.02 in the 2Q 2023 compared to the 2Q 2022.

[Xia Liu, CFO at WEC Energy Group]

This was largely driven by higher Production Tax Credits as a result of the acquisition of renewable projects. Finally, you'll see that earnings at our corporate and other segments decreased $0.05, primarily driven by an increase in interest expense. This was partially offset by favorable Rabbi Trust performance and some tax and other items. Remember, Rabbi Trust performance is largely offset in O&M. Overall, we improved on our Q2 performance by $0.01 per share compared to last year, and by $0.08 per share compared to the midpoint of our Q2 guidance. Looking now at the cash flow statement on page 6 of the earnings package, net cash provided by operating activities was relatively flat compared to the prior year.

[Xia Liu, CFO at WEC Energy Group]

Total capital expenditures and asset acquisitions were $2.1 billion during the first half of 2023, an increase of more than $1 billion from the first half of 2022. This was primarily driven by acquisitions of generation projects in our regulated and infrastructure segments. Now, let me give you the guidance for the Q3. We're expecting a range of $0.88-$0.90 per share. This accounts for July weather and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.96 per share in the third Q3 last year, which included a +$0.02 from weather and a $0.05 pickup related to the resolution of the MISO ROE complaint.

[Xia Liu, CFO at WEC Energy Group]

As Gale 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. As a reminder, largely due to timing of O&M and fuel expense, we expect earnings in Q4 to be materially better than Q4 of 2022. With that, I'll turn it back to Gale.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Great, 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 question-and-answer portion of the call.

[Operator]

We will now take your questions. The question-and-answer session will be conducted electronically. To ask a question, please press the st 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 S and then one on your phone to ask a question. Our first question will come from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hey, Julien. Julien, before we start-

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

Hey, good-

[Gale Klappa, Executive Chairman at WEC Energy Group]

Before we start, I know a great puppy trainer, so just, you know, let me know. Julien, are you still with us?

[Operator]

Julien, your line is open.

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

Can you hear me now? Darius, go for it.

[Gale Klappa, Executive Chairman at WEC Energy Group]

We can.

[Operator]

We can.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I thought I heard a dog barking in the back there, Julien.

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

Oh, you can. Sorry. Sorry about that. I don't know what happened. I thought I was on mute, or off mute there, but go figure. All right, anyway.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I was just saying, Julien, Julien, I was just saying that I know a great puppy trainer, so let me know.

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

All right. I'm going to put it duly noted, sir. Duly noted. I appreciate it. By the way, congrats, guys, on, on all the, on the updates there. Really nicely done. I mean,

[Gale Klappa, Executive Chairman at WEC Energy Group]

Thank you.

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

... to that effect, when you think, when you think about the settlement here in Michigan, how do you think about Illinois here and the ability to settle that out, at least in part here, as you get through the bulk of, of the hearings here in the near term? Any opportunities and also any thoughts here on the legislative side, going into 2024, for gas in Illinois as well?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Okay. Appreciate the questions, Julien, very much. Tackle the first one first, and that's any potential or possibility for a rate settlement in our Peoples Gas and North Shore Gas cases in Illinois. As many of you know, the way the process really unfolds during normal rate reviews in Illinois, historically, settlement windows really don't occur, or really don't open until the administrative law judge has prepared a draft order. And if I remember correctly, the schedule for that administrative law judge draft order, probably looks like late October, early November. Scott is agreeing that that's the case. If there's a settlement opportunity, I think those discussions would take place probably in the November timeframe. We'll see.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Again, as Scott mentioned in his prepared remarks, the staff has reiterated its position with a 9.83% return on equity recommendation, and an equity layer higher than what we have at Peoples Gas today. I hope that responds to your question. As far as legislation related to gas in Illinois, we'll just have to see, you know, what takes place. First things first, you know, we continue to work on a positive resolution of the cases currently pending before the Illinois Commerce Commission. Hope that helps, Julien.

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

Certainly does. Then quickly, if I can, any thoughts about converts here? I mean, I heard your opening comments, Gale. Just curious if open to following the trend across the space.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, well, as we look at our financing package that will be needed to support our, our new five-year capital plan. I mean, we'll look at it. It could be part of the mix, but again, I think it really depends upon the, the circumstances at the time. We haven't ruled it out. We've followed the, we've followed the, the companies that have used this particular financing, and I think you saw one announced today, as a matter of fact. You know, we haven't ruled it out, we haven't ruled it in, but it certainly will be part of what we look at going forward.

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

Awesome. We'll leave it there. I'll follow up with you, Gale. All right? Take care.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Sounds, sounds good. Thanks, Julien.

[Operator]

Your next question will come from the line of Shar Pourreza with Guggenheim Partners. Please go ahead.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Shar, you didn't-

[Shar Pourreza, Analyst at Guggenheim Partners]

Hey, guys.

[Gale Klappa, Executive Chairman at WEC Energy Group]

You didn't do any, you didn't do any permanent damage to those Porsches, did you?

[Shar Pourreza, Analyst at Guggenheim Partners]

You'll have to ask Southern Company that, not me.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Well, I noticed, I noticed they're taking a charge this quarter, so I was a little worried about what you did down there.

[Shar Pourreza, Analyst at Guggenheim Partners]

We'll have to wait for that one. Thanks again.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I know you mentioned the Microsoft facility could be in service by late 2024, early 2025, which obviously, that overlaps with your existing five-year plan through 2027. Should we be thinking about Microsoft-related investments as something that's separate and incremental to the current five-year plan? Is the focus on really maintaining that, you know, 7.7% asset-based growth as you manage customer affordability? You know, in other words, so could other base spending be pushed out to make room for Microsoft-related spending. Thanks.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Well, great question, Shar. First off, I, I don't think really, just given the magnitude of the construction that Microsoft seems to be planning, my own belief is we won't see the Microsoft campus in operation in 2024. I think that's just too much of a stretch. My guess, although the company is still very much in its refining its plans, my guess is Q4 2025, early 2026, would be my guess for the first element of the plan that Microsoft is putting together to be operational. Secondly, to your, to your question about would the Microsoft investment that we need to make to support their energy needs and reliability, would that, would that investment be incremental to the plan? Absolutely incremental to the plan.

[Gale Klappa, Executive Chairman at WEC Energy Group]

I don't think there's any question about that, 'cause it was not in our current five-year plan. Although there are many moving pieces at this stage of the game, but I would just say this is a really positive, exciting opportunity for a major new high-tech investment in our State.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, perfect. It shouldn't look at it as crowding out other base-related spending as you're managing rates and would be incremental?

[Gale Klappa, Executive Chairman at WEC Energy Group]

No, absolutely. I mean, think about... It, it's a great question, Shar, but I would think about it this way: I mean, clearly, with the way our customer rates are set, demand from Microsoft, I mean, essentially, I mean, given the rate charges that Microsoft would receive, they will pay their fair share of whatever additional capacity and energy is needed. It, it wouldn't be a crowd-out type of a type of a factor at all, in my opinion.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, perfect. Then just on the equity comment, Gale, I just want to get a little bit of a better sense on timing and, and, and the trigger. Is it like, would it be Microsoft-related spending? 'Cause I have to imagine if the facility is a, whatever, 2025, 2026 facility, the generation needs would be, you know, before that, transmission and, and distribution needs would be before that. What's the trigger for incremental equity? Is it Microsoft or is there other things we should be thinking about?

[Gale Klappa, Executive Chairman at WEC Energy Group]

I, I think it's, it's both. I mean, certainly-

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay

[Gale Klappa, Executive Chairman at WEC Energy Group]

... if we need to add significant capacity to support Microsoft's operation here. There are other things going on. Other, you know, other economic developments that have, that have occurred. For example, I mean, we talk a lot about Haribo, but they are now up and running, and they've told us they will produce £132 million of gummy bears in the next 12-month period. There's a good bit of economic activity going on. If you think about, if you think about transmission, we're gonna start to see in the next 5-year plan, the impact of Tranche 1 from the MISO planning process. I think we're gonna see an uptick in transmission investments. I think we're gonna see, clearly, some additional capacity need. We need to continue to harden our distribution networks.

[Gale Klappa, Executive Chairman at WEC Energy Group]

There are a lot of moving pieces, and all of them moving in a direction of a stronger, capital budget, and as Scott and I have talked about, stronger for longer in terms of our, of our continuing growth projections.

[Shar Pourreza, Analyst at Guggenheim Partners]

Okay, perfect. I guess, we'll wait for EEI. Should be an interesting update. For the record, Gale, I did not crash any Porsches. Thanks, guys.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Rock and roll, Shar.

[Operator]

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

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hi, Durgesh. How you doing?

[Durgesh Chopra, Analyst at Evercore ISI]

Hey, good afternoon, Gale. I'm, I'm doing just fine. Thanks for asking. Hey, just, Xia, sorry if I missed it, but what drove the $0.08 variance versus guidance? Like, what, what, what are the kind of the tailwinds you had, which then drove the beat versus your guidance in the quarter?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Sha told me it was superior management. She probably has a more granular answer.

[Xia Liu, CFO at WEC Energy Group]

It was, it's a little better fuel and quite a bit better O&M. Weather was actually slightly negative compared to normal, but it's better fuel, better O&M, and a couple of other items.

[Durgesh Chopra, Analyst at Evercore ISI]

Got it. I mean, I guess in terms of, you know, the guidance for back half of the year, I'm just thinking about, like, how are you positioned versus, you know, versus your guidance there? I mean, it's better O&M versus your plan, correct?

[Xia Liu, CFO at WEC Energy Group]

Yeah. We, we, we see quite a bit of O&M tailwind coming in in the Q4. We'll expect to see O&M to be much better than Q4 last year. We, we expect fuel to be better and, you know, additional PTCs and other items. Quite a bit of O&M and fuel tailwind in the Q4.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Dergues, just to add on to what Xia is saying, if you recall, there were a number of very significant items in Q4 last year that will not repeat in Q4 this year. There's a very major difference as we compare the comps for Q4 of 2022 and what we expect to happen in Q4 of this year.

[Xia Liu, CFO at WEC Energy Group]

Remember, we guided 2%-3% higher on day-to-day O&M this year compared to last year. You see some quarter-to-quarter variances, but for the year, we still expect that to be 2%-3% higher than last year.

[Durgesh Chopra, Analyst at Evercore ISI]

Understood. Thanks for all that additional color. Maybe just Xia, I know we recently talked about, you know, transferability and the implications to FFO, and there was a lot of discussion, you know, amongst your peers on how that should be treated. Maybe just any additional color or thoughts there, progress you're making with other stakeholders on, you know, how you're going to treat the transferability as cash flow?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, we'll get-- we'll ask Xia to give you the detail on this, but I would say one very important point to kind of kick off the answer is that our entire industry is really aligned ar-around what we believe is the proper treatment of these ongoing transfers that will happen across the industry, the ongoing sale of Production Tax Credits. That alignment across the industry has really resulted, and I think, Xia, a very thorough and very solid white paper.

[Xia Liu, CFO at WEC Energy Group]

Yeah, EEI developed a very comprehensive white paper, really outlined the views from SASB, from the Big Four accounting firms, from the over, like Gale said, the industry. They shared the white paper with the rating agencies. All that is to say, I think everybody is aligned in terms of, you know, we, we plan to follow GAAP, and the transferability would go through income tax provision on income statement, therefore, would be picked up as FFO. We are looking forward to continuing to work with the rating agencies on this issue. I will say, though, is, we would not issue equity just to address that transferability item. That's something we'll continue to work with the rating agencies on.

[Durgesh Chopra, Analyst at Evercore ISI]

Got it. Thanks. It sounds like discussion is underway there. Appreciate that color as well. Thank you, guys.

[Gale Klappa, Executive Chairman at WEC Energy Group]

All right. Take care, Durgesh.

[Operator]

Again, for any questions, please press S one on your telephone keypad. Our next question will come from the line of Anthony Crowdell with Mizuho. Please go ahead.

[Anthony Crowdell, Senior U.S. Energy Analyst at Mizuho]

Good afternoon, Gale, Xia, Scott.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Hello.

[Anthony Crowdell, Senior U.S. Energy Analyst at Mizuho]

No, no, no dogs, no Porsches, but plenty of gummy bears here. Maybe two housekeeping items I had on the PDF page 12 of your release. Just curious if you'd give us some more color? The decline in large commercial industrial sales, maybe I have the wrong view, I typically view them as maybe, like, weather agnostic, but yet, they've come in 3%. Just thoughts on that?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, a couple thoughts, and, and we'll ask Xia to give you some chapter and verse on some specifics. Two things that, that as we've looked at the data, and, and again, we have a very granular breakdown of the major industrial sectors that we serve. Let me first say, most people, just as you mentioned, Anthony, look at large commercial and industrial as fairly weather insensitive, fairly, as you said, fairly weather agnostic. I will say, though, and you've heard me say this a gazillion times, the, the weather normalization is more, it's more precise than accurate.

[Gale Klappa, Executive Chairman at WEC Energy Group]

As we look at kind of the backdrop of the economy in Wisconsin, as we look to-- look at the jobs that have been added, and as we kind of look at the industrial sectors, I, I would describe the industrial economy in Wisconsin for the first half of 2023 as really fairly flat. There were a couple of major customers who had outages, planned outages, etc., that affected the numbers, but, but I, I. The 3% seems, on a weather normal basis, seems a little draconian to me. I think Scott and I, with Xia, have really worked through this, and we, we kind of look at it as kind of first half flat. Having said that, the most recent data is pretty encouraging. Xia?

[Xia Liu, CFO at WEC Energy Group]

Yeah, just to put it in perspective, in Q1, we saw a -3.9% quarter-over-quarter. Q2, that number became better to -3.1%, like you pointed out, Anthony. I think if you look at Q2 by month, June was fairly close to the forecast. If you look at the last four weeks compared to the last 13 weeks or even the prior four weeks, we're seeing lots of green. Actually, everything was picking up. We are very cautiously optimistic that the large CNI will come back in the second half of the year, so nothing to worry too much about. I would just say that on residential, it's pretty flat year-over-year, and but it's fairly better than prior to COVID, and that's the sticky point on the residential usage.

[Xia Liu, CFO at WEC Energy Group]

Small CNI, actually, year to date, is on par with, with last year. Those are higher margin segments.

[Anthony Crowdell, Senior U.S. Energy Analyst at Mizuho]

Great. Just lastly, I, you've been very clear on what would cause you to issue more equity. Xia, you had said it's, it's not so much to if it was to defecate, I don't want to say, put the words in your mouth, but like, the credit agency, it's more for growth. Is it fair to say that if you got to the point where there was more growth that had to be financed, that you would finance that a cap structure that's probably equal to what you have at the regulated utilities? Or is there an opportunity that you would look to over-equitize, I guess, is the term some are using, if you had the additional to get some growth going on?

[Xia Liu, CFO at WEC Energy Group]

I think the first and foremost is that we're still developing the capital plan, so the numbers are, we're still developing it. Like Gale said in his prepared remarks, if growth, capital growth is significantly higher, we wouldn't mind turning on the, the employee benefit plans, the DRIP plans, and rely on maybe ATM, but we don't see any block sales at this point, number 1. Number 2, we are very confident in our long-term EPS growth forecast. We don't expect any equity sales to dilute the long-term EPS growth. I'll also say that we're very mindful about the rating agencies, and we want to work with them, but the equity would be to support growth.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Very good descrip- description that Xia's just made. I, I will say, you know, she also mentioned, and I would just reiterate, for the one item, on FFO to debt that might affect a, a, a rating at one particular agency, we wouldn't issue equity simply to chase that particular item.

[Xia Liu, CFO at WEC Energy Group]

That's the transferability.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Right.

[Xia Liu, CFO at WEC Energy Group]

Tax transferability. Yep.

[Anthony Crowdell, Senior U.S. Energy Analyst at Mizuho]

Great. Thanks for the clarity, and again, congrats on a great quarter.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Great. Thank you. Good to see you.

[Operator]

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

[Gale Klappa, Executive Chairman at WEC Energy Group]

Rock and roll, Michael. How you doing?

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

Hey, Gale. I'm doing great, thanks. Wanted to just circle back to the, the Microsoft and just what, what you're seeing in terms of long-term sales growth potential there. Then maybe if you could just, you know, compare and contrast, what this looks like relative to, you know, there was, there was a lot of excitement around the Foxconn, build-out a couple of years ago. I know different companies, different situations, but, just in terms of how you think about that from a, from a planning standpoint, with another, you know, big name company coming to your, service territory.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Yeah, great question, Michael. let me just phrase it this way. I think we will certainly know by the fall, and, and certainly in time for our new five-year capital plan, what the time period between now and, say, 2020, 2030 will look like in terms of Microsoft's capacity and energy needs. I mean, they are, I mentioned in my prepared remarks, they are full speed ahead. I mean, they purchased the 315 acres in a very short period of time in that technology park. Earthwork has already begun. They are still refining their plans. Everything we're hearing from Microsoft would indicate that the, that they're, they're planning a very major investment here, and they need to do it in a relatively short time frame.

[Gale Klappa, Executive Chairman at WEC Energy Group]

There's really no question in our minds about how, how strong the intention and how strong the momentum is from the Microsoft development. As it relates to Foxconn, well, back in 2017, they announced a long-term, very, very significant plan. They were talking about 10,000 jobs over, over 10-12 years or 10-13 years. They were talking about $10 billion of investment. At this stage of the game, Foxconn, which is working in Area I of that Park, Foxconn has invested over $1 billion and has over 1,000 employees. While they have been slower to ramp up and their business plan has changed almost completely from the original thinking, they are still growing, in that area.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Microsoft's, I think, they're really not talking at the moment about a long-term, 10-15 year plan like Foxconn was. They're talking about, at least at the beginning here, they've called it an initial investment, that they really want to get moving on, and that would affect our next 5-year capital plan. Does that respond to your question, Michael?

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

Yeah, yeah, super helpful. Just as a follow-on, I think someone asked earlier, or there's been a couple of questions around new capacity needs and new generation that you might have to build, and given the quick turnaround time, is further delaying any currently planned retirements, contemplated at all, if things are looking kind of tight from a time frame perspective?

[Gale Klappa, Executive Chairman at WEC Energy Group]

Mm-hmm. Well, that's a great question, and we're looking at all of that. We'll let Scott give you his view on that.

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

That's a great question. We're going through the planning process right now. You know, we're evaluating what our capacity needs are, and, you know, MISO has changed its capacity needs over the, the seasonal approach, too, which will also affect our capital plans as we look at it this fall. Right now, nothing to announce. We're just going through the analysis.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Scott has made a really good point that we shouldn't gloss over, though, and that is, as MISO has looked at its responsibility to ensure reliability, they really are changing their capacity rules that all of us need to abide by, and it will have we believe it will have a particular effect on our winter capacity reserves, and that's all being factored into our new five-year capital plan.

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

Got it. Okay. Very helpful. Thanks. Thanks a lot.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Take care, Michael.

[Operator]

With that, I'll turn the call back over to Gale Klappa for any closing remarks.

[Gale Klappa, Executive Chairman at WEC Energy Group]

Terrific. Well, that concludes our conference call for today. Thanks so much for being with us. If you have any additional questions, feel free to call Beth Straka. She can be reached most days, no, every day at 414-221-4639. Thanks, everybody. Take care.

[Operator]

That will conclude today's call. Thank you all for joining. You may now disconnect.

Participants

Executives

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

Analysts

• Anthony Crowdell, Senior U.S. Energy Analyst at Mizuho
• Durgesh Chopra, Analyst at Evercore ISI
• Julien Dumoulin-Smith, Analyst at Bank of America
• Michael Sullivan, Director of Equity Research at Wolfe Research
• Shar Pourreza, Analyst at Guggenheim Partners