WEC Energy Group Inc (WEC) — Q1 2020 Earnings Call Transcript

Good afternoon, everyone. Thank you for joining us today, as we review our results for the opening quarter of 2020. I certainly hope that you and your families are all doing well and staying healthy. First, I'd like to introduce the members of our management team who are on the call with me today. We have Kevin Fletcher, President and CEO and Scott Lauber, our Chief Financial Officer. Now, as you saw from our news release this morning, we reported first quarter 2020 earnings of $1.43 a share, a strong performance despite lower natural gas demand during a mild first quarter. The result underscores our focus on operating efficiently and executing our capital investment plan. Scott will discuss our metrics in more detail a bit later in the call. Of course, as we plan for the long-term success of our company, we're also focused on providing essential service throughout the COVID-19 pandemic. As you would expect, the health of our employees and communities remains our top priority. We've adopted numerous measures to minimize health risks and instill in our employees the importance of following the CDC guidelines. Stay at home orders, as many of you know, were issued across our four states in late March. Keep in mind that the full effect of the virus hit Wisconsin and Illinois relatively late. And the hardest hit parts of Michigan are outside of our service area. Given that timing, we saw only a minimal impact from the pandemic on our first quarter results. I’d also like to point out that we took action to further control costs even before the virus struck. The first quarter happened to be one of the warmest on record of the past century. When we saw mild weather at the beginning of January, we set the wheels in motion to reduce expenses in areas of our business that would not affect safety, reliability or customer satisfaction. Now stepping back, as we look more broadly at our business mix, approximately 38% of our pre-tax margin for the full year comes from our natural gas delivery business across our four-state area. Also, a third of our earnings for the full year typically come in the first quarter. So with a strong start to the year, we're about as well-positioned as we can be to deal with the uncertainties ahead. Many of you have also asked about the status of the major economic development projects that have been announced in our region. The short answer is Rock On. A good example is the high-tech campus that Foxconn is building south of Milwaukee. The Gen 6 fabrication plant for LCD panels is fully enclosed now, and internal build-out is underway. The smart manufacturing facility is also taking shape, with production of components for enterprise servers and racks expected to begin in the fourth quarter of this year. In addition, the external structure for Foxconn's Network Operation Center is being erected as we speak. And to help fight the pandemic, Foxconn and Medtronic have announced that Foxconn will produce a line of Medtronic ventilators in our state starting this summer. Obviously, we're keeping a close eye on local economic trends and customer demand for energy. Based on what we're seeing today, I do not expect any diminishment in our long-term earnings growth rate of 5% to 7% a year. With minor adjustments, our $15 billion capital plan remains on track. I'd like to highlight one area of that capital plan that is progressing well ahead of schedule. That's our Energy Infrastructure segment. You may have seen the announcement that we're increasing our ownership interest from 80% to 90% in the Blooming Grove, Thunderhead and Upstream Wind Farms. Pending all regulatory approvals, we plan to invest another $118 million for an additional 75 megawatts of capacity. A focus for our infrastructure segment, we've now committed over 40% of the total in our five-year plan, and that plan just began in January. In short, our overall capital plan is low risk and highly executable. We have ample liquidity, no need to issue new equity. In fact, our available liquidity at the end of April has risen to $2.6 billion. And finally, I'd like to cover one other positive development from the first quarter. Just a few weeks ago, we announced the next important steps in our succession planning process. We're very pleased that Scott Lauber will become our Chief Operating Officer effective June 1. In his new role, Scott will have senior oversight responsibility for power generation, infrastructure and fuels, information technology, supply chain, supplier diversity and major projects. He also will be named President of Michigan Gas Utilities and Minnesota Energy Resources, and he will continue to serve as he has, as a member of the Office of the Chair. We're also welcoming, as you’ve heard a new addition to the team, Xia Liu, who will be joining the company as our new Chief Financial Officer, effective June 1. So I'm sure you know Xia most recently served in the same capacity at CenterPoint Energy. Xia brings a tremendous amount of depth and experience to the new role. She began her industry career at Southern Company as a financial analyst back in 1998. During her career, she also served as the Chief Financial Officer of two Southern Company subsidiaries, Gulf Power and Georgia Power, and as the Senior Vice President of Finance and Treasurer for Southern Company. Xia will also be a member of our Office of the Chair. These new appointments will bring additional depth and experience to an already strong leadership team, a team that as you know, has delivered exceptional results over many years. Now I'll turn the call over to Kevin for details on our first quarter operations. Kevin, all yours.

Thank you, Gale. I'd like to start by highlighting the work of our dedicated employees, who are providing safe and reliable service throughout this health crisis. We've sharply curtailed work inside customers’ homes, and 80% of our employees are now working remotely or in the field. Our employees are adapting to these changes using technology, following health precautions and continuing to work efficiently. The remote work that's making our company safer would not have been possible without our recent technology investments. Although we still have a long road ahead of us, I'm encouraged by the processes and procedures we have put in place across our companies. Our incident management team and occupational health and support services employees have been instrumental in executing our business continuity plans and developing new processes to address changing conditions. We’re working hard to support our customers through this crisis, and I'm grateful that we've also been able to contribute through our foundations to organizations on the front lines, including local charities, hospitals, domestic violence shelters, food pantries and youth programs. Through these donations and matching gifts, we're providing more than $2 million to COVID-19 relief efforts. It's our way of thanking the people and organizations that sustain our communities. Despite these challenges, we continue to make progress on key initiatives. Importantly, we have no active rate cases at this time, which is a real positive in our current environment. As you may know, the pandemic has made it necessary to stop disconnections and place a moratorium on new late payment charges for customers. Our regulators have been supportive and we're working through the specific mechanisms for future recovery. In Wisconsin, the Public Service Commission has made it clear that we are authorized to defer foregone late payment charges, uncollectible expenses, and incremental pandemic-related costs. To be clear, this covers all related expenses in our residential as well as our commercial and industrial sectors. Turning now to our projects, we're on track to add utility-scale solar generation to our portfolio. You may recall that we’ve already broken ground on two solar projects for Wisconsin Public Service, which will provide us with 200 megawatts of capacity. Our Two Creeks Solar Project remains on time to begin producing energy by the end of this year. Our Badger Hollow I Solar project is experiencing a modest delay, but we'll continue to earn allowance for funds used during construction. And we expect it to be operational by the end of April 2021 in time for the MISO capacity auction. In February, the Public Service Commission of Wisconsin approved our investment in Badger Hollow II. Once complete, the solar park will provide We Energies with 100 megawatts of renewable capacity. We expect to invest $130 million in this project. And I'm sure that many of you have heard that the Democratic National Convention has moved from July to August. We've completed a thorough review of our network in preparation for the potential influx of delegates, and overall, we're in very good shape. And with that, I'll turn it back to Gale.

Kevin, thank you very much. As we look to the remainder of the year, our earnings guidance for 2020 stands at $3.71 to $3.75 a share. As I mentioned earlier, our actions today that put us in a very good position to achieve those results. So today, we are reaffirming our guidance for 2020. Again our guidance stands at $3.71 to $3.75 a share. Also, a quick reminder about our dividend. In January, our Board of Directors declared a quarterly cash dividend of $63.25 a share, that's an increase of 7.2% over the previous quarterly rate. We continue to target a payout ratio as we've mentioned often of 65% to 70% of earnings. We're in the middle of that range right now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. And now, with details on our first quarter results and more information on our outlook for the remainder of 2020, here is our CFO and about to be COO; Scott Lauber. Scott?

Thank you, Gale. Our 2020 first quarter earnings of $1.43 per share increased $0.10 per share compared to the first quarter of 2019. This result was driven by our continued emphasis on cost control, a modest rate increase at our Wisconsin utilities and additional capital investments. We estimate that the mild winter weather conditions accounted for a $0.10 drag on the first quarter earnings compared to last year. The earnings packet placed on our website this morning includes a comparison of the first quarter 2020 and 2019 results. I’ll first focus on operating income by segment and then other income, interest expense, and income taxes. Referring to Page 8 of the earnings packet, our consolidated operating income for the first quarter of 2020 was $627 million, compared to operating income of $543 million in the first quarter of 2019, an increase of $84 million. After adjusting for the impact of the 2019 tax repairs, operating income increased by $43 million. My segment update will focus on the remaining $43 million increase in operating income, which excludes the 2019 tax repair benefit. At our Wisconsin segment, adjusted operating income increased $25 million. This was driven by several factors. First, operating and maintenance expense decreased $41 million, largely due to savings from the retirement of the Presque Isle power plant a year ago, additional cost control measures and lower benefit costs. Second, our Wisconsin segment margins were $5.8 million lower. This factored in our recent rate order as well as positive fuel recovery. These positive drivers were more than offset by $41.2 million negative weather variants. And finally, depreciation expense increased $8.1 million as we continue to execute on our capital plan. In Illinois, operating income increased $23.7 million, driven by a $19.7 million decrease in operating and maintenance expense net of riders. This is driven by lower repair and maintenance work due to milder winter temperatures, lower benefit costs, and cost control. Operating income at our other state segment decreased $4.1 million, due to the mild first quarter. Turning now to our energy infrastructure segment. Operating income at this segment was down $1.2 million. As expected, Bishop Hill, Upstream and Coyote Ridge did not provide a material impact on operating income. Recall that a significant portion of earnings from these wind farms comes in the form of production tax credits, which are recognized as an offset to income tax expense. With Coyote Ridge coming online late last year, these production tax credits contributed approximately $0.03 per share to our earnings in the first quarter of 2020, compared to $0.02 in the first quarter of 2019. Combining these changes and excluding the impact of 2019 tax repairs, operating income increased $43 million. Earnings for our investment in the American Transmission Company totaled $39.8 million, an increase of $3.7 million. Higher earnings were driven by continued capital investment. Recall that our investment is now earning a return on equity of 10.38%. This is per the November 2019 FERC rule. Other income net decreased by $25.3 million, mainly driven by investment losses related to our deferred benefit plans. These investment losses were partially offset by the lower benefit expense noted in our operating segments. Interest expense increased $5 million, primarily driven by incremental long-term debt issuances at the subsidiary level to fund our capital investment program. Our consolidated income tax expense net of the 2019 tax repairs decreased $15.7 million. Lower tax expense was driven by the positive tax effect of refunding unprotected tax benefits following our recent Wisconsin rates decision. This year, we expect our effective income tax rate to be between 16% and 17%. Excluding the flow back of the unprotected benefits, we expect our 2020 effective tax rate to be between 20% and 21%. Currently, we expect to be a modest taxpayer in 2020. Our projections show that we'll be able to efficiently utilize our tax position with our current capital plan. At this time, I'd like to address our sales and earnings forecast for the balance of 2020. Based on what we have seen in April, we are adjusting our 2020 sales forecast. Specifically, on the electric side, our forecast now assumes a 4% increase in residential sales volumes in the second quarter, trending to an increase of 0.5% by the fourth quarter. For small commercial industrial customers, we are assuming an 8% reduction in the second quarter trending to a reduction of 3% for the fourth quarter. And finally, for our large commercial industrial customers, we are assuming an 18% reduction in the second quarter, trending to a reduction of 7% by the fourth quarter. Overall, based on these assumptions, we are forecasting the total retail electric volumes, excluding the iron ore mine to decrease by approximately 5% for the remaining nine months, compared to our original forecast. These revised volumes translate to a reduction of approximately $70 million to $80 million in pre-tax margin for the year. We believe that we have the ability to absorb this margin compression through temporary initiatives, as well as multiple cost savings and efficiency measures across the enterprise. As Gale stated earlier, these initiatives will not compromise our commitment to safety, reliability and customer satisfaction. So we are confident in reaffirming our annual guidance of $3.71 to $3.75 per share. Given that the stay-at-home orders are still in place in our region, we are providing second quarter 2020 guidance of $0.58 per share to $0.62 per share. This assumes normal weather for the rest of the quarter. In last year's second quarter, we earned $0.74 per share. We've obviously projected declining sales volumes, and there are timing differences related to fuel cost recovery. With that, I'll turn things back to Gale.

Thank you very much. Overall, we're on track and focused on delivering value for our customers and our stockholders. Operator, we're ready now to open it up for the question-and-answer portion of the call.

Rock and roll, Shahriar. How are you today?

Oh, not too bad. How you doing?

Yes. We're hunkered down doing well.

That's great to hear. So a couple of questions. You touched on this a bit in your prepared remarks Gale. But can you give us a little bit more color and a high-level, how you're sort of thinking about the duration of the downturn? How long are you thinking the recovery is going to take? And maybe just talk about, a little bit about the sustainability of your levers this downturn is more protracted, right? So any risks to the 5% growth, any CapEx opportunities that become maybe secondary in nature, if this downturn is more projected than your own internal planning assumptions?

Well, great question Shahriar. Let me first say that I think we have been appropriately conservative in terms of our view of how quick recovery might take place, and what the extent of the recovery would be in the near-term. Scott covered with you our base assumptions in terms of sales declines. My sense is that if in the region, we can get the economy restarted by June, that things will evolve in fits and starts. As I mean, clearly as you know, two-thirds of the economy is driven by consumer demand. I think the real question for everybody is, how confident will the consumer be in going back to their semi-normal buying patterns? Having said all of that, I mean, I think we're appropriately conservative in terms of what we expect to happen to our electric and gas sales volumes. We're confident in our levers and in the dozens and dozens of initiatives that we have across the enterprise to become even more efficient. We're learning things here, as 80% of our workforce is operating remotely, if you will. So we feel very good about our ability to drive additional efficiency and cost reductions throughout the business. And we're prepared obviously to pivot either way, if the recovery is quicker then that’s all to the benefit, but I think we have been appropriately conservative. In terms of the capital plan, when you think about the elements of our capital plan, they are really all about reliability. So, I don’t see any real need or for that matter, I still see the need to continue that capital plan focused on reliability and improved customer service. The infrastructure segment will be unaffected, as best I can tell. And so long story short, we really don’t see any threat right now to our long-term earnings growth rate projection of 5% to 7% a year. I hope Shahriar that responds.

No, it does. I just wanted to confirm your conservative approach is always evident, so thank you for that. Since you mentioned the infrastructure segment, are you seeing any new opportunities arising from the current economic challenges? You are ahead in filling your capital budget. Are any developers facing financial difficulties or looking to exit projects, particularly since you have an advantage with your tax appetite? Could the current economic situation actually benefit that segment?

I would say it's a little too early to give you a definitive answer, but the early indications are yes, that there will be some additional high-quality projects. And remember, we are very particular about the kind of projects we're willing to take on in the infrastructure segment. But I would say that, given the sharp contraction on the economy, given the fact that some folks obviously need cash, I think we're going to see more opportunity. We will be very selective, though, as we work through that opportunity. But I do think there will be additional projects that we will take a hard look at.

Got it. Terrific. And then just lastly, can you just remind us if ATC receives a Transco adder? And if so, do you have any thoughts yet on the recent FERC NOPR proposal to remove? As we kind of understand it, it would be kind of a wash if they increase the RTO membership added by 50 bps. So how - are we sort of thinking about this correctly?

I think so. Although, I believe that one of the proposals and Scott and Kevin can echo me on this, I think one of the proposals is for there to be a 100 basis point adder for RTO participation. Right now, essentially ATC is getting a 50 basis point adder. So there's a possibility there, Scott, I think of another 50 basis points in the mix.

Yes, that's exactly correct from what I'm reading right now. So there's potential there.

Got it. Well, thanks so much guys. And congrats, Scott and Xia on the new roles, and I'm sure Xia will get a little bit more rest at night. So congrats guys.

Thank you.

Hey Shahriar, I'm a night owl. So don't count on that.

I know that. You guys, congrats.

Thank you.

Greetings, Durgesh. How are you doing?

Hey, good morning, Gale. Doing great. Good afternoon, rather. Thanks for taking my question. I actually have a two into the weeds question, so I'll apologize upfront. The first one, as I understand, I see the $13.5 million in Wisconsin segment on Slide 8 that is, the $13.5 million decline in fuel savings. As I understand it, you were allowed to retain roughly $15 million versus your authorized demand, any fuel savings that you might have? Can you just comment on what of that $15 million, if any, have you utilized in the first quarter?

I think virtually all of it, because of the timing of fuel recovery, Scott?

Correct. This is a $13.5 million better in the first quarter. And once again, it's a lot of it due to the timing of the fuel recoveries. As you recall historically, there's a pattern of the fuel recoveries at Wisconsin Electric, that you usually over collect in the first and second quarters, under collect in the third and then swings back in the fourth quarter. And we just really had some positive fuel recoveries with the price of natural gas and our operating fuel cost in the first quarter. So we are ahead of the plan in this first quarter, specifically, compared to last year and compared to our original guidance that we set.

So Durgesh, what that really means is, you won't see as big a pickup in Q2, because we’ve really eaten the full amount into Q1, because of again, the timing and the collapse of oil and gas prices.

Got it. That's what I thought. And then just maybe, Scott, any additional color on the other O&M category, the $22.3 million, what is that made up of? And how is that tracking perhaps versus your original guidance?

Yes. So the other O&M and what we did is we broke it out, because we've talked about this before, the offset of some of that deferred compensation is in the Rabbi Trust. So this O&M is really the day-to-day savings that we're seeing from the multitude of operating savings across the footprint. And this is specifically what's related to the majority of its what related to Wisconsin segment and there's more in Illinois and in the smaller utilities also. So that's the day-to-day stuff.

Okay, perfect. Thank you, Scott, and congratulations.

Thank you.

Thank you, Durgesh.

Greetings, Julien.

Good afternoon. I appreciate it, you guys taking the time. Perhaps, let me take this as a couple clarification commentary perhaps a little bit of step forward. When you're thinking about the cost reductions to offset, I think you talked about $70 million, $80 million of pre-tax here. How do you think about the sustainability that into '21? And then subsequently, how do you think about this meshing into the regulatory process at large in Wisconsin? I'll leave it open-ended. There's a lot of ways you could interpret that.

In terms of sustainability, I want to revisit our track record. As you may remember, we reduced our day-to-day operation and maintenance costs by 7.3% in 2019 compared to 2018. Our plan for this year was to achieve an additional reduction of 2% to 3% beyond what we accomplished in 2019. We have implemented numerous measures across the business and have learned new ways to achieve long-term sustainable cost reductions during the pandemic. I believe our costs will continue to decline. Our history of sustainable cost reductions should give you confidence that a significant portion of what we are experiencing now will be lasting. This not only enhances the efficiency and operation of the business but also benefits customers in the long run by alleviating pressure on retail rates. This allows us to continue making important reliability investments as part of our $15 billion capital plan. Kevin, Scott, do you have anything else to add?

Gale, this is Kevin. Let me first say, I'm extremely proud of what our employees are doing and how they’ve rallied during this COVID virus epidemic. But Gale, you just mentioned that we're looking at day-in and day-out what we can do to be more effective and more efficient, and we're finding a lot of those opportunities. And as you said, I believe they will be sustainable as we move forward.

Thank you, Kevin.

Got it. Excellent. And then if I can follow-up just quickly. Strategically, I know you talked about the infrastructure opportunities a moment ago. But how do you think about the landscape today as it stands? We've heard folks kind of backing away broadly from strategic opportunities, given the backdrop of late, but obviously, there's been a lot of valuations in relative valuations, et cetera. How do you think about the opportunity today more holistically and beyond that infrastructure?

So, you're specifically asking about Julien, opportunities in the infrastructure segment.

I was thinking beyond that, really. I know you just made comments about a robust set of opportunities on the infrastructure side. But I'm thinking strategically beyond that more corporate level?

Well, good question. And I think the answer will be boringly repetitive because we have a set of criteria, as you know, that we use to look at any potential strategic or acquisition opportunity. And I'll just repeat them quickly, so we put everybody to sleep. But these are important, at least in my judgment. Following these criteria, in our sector, in our industry, I think, if you can follow these criteria and actually execute on them, I think you create shareholder value. If you don't, then I think the story gets a little bit more muddy. So our really set in stone criteria are, we would have to believe that anything we would acquire will be accretive in the first full year after closing. We're not going to trash the balance sheet to do it, we worked very hard to have one of the strongest balance sheets in the industry, and we’re not going to make something accretive by thrashing the balance sheet. And then thirdly, and I think Julien, this would be the gating question right now, as we look at the landscape, we’d have to believe that the growth rate of anything that we would acquire would have to be as strong as our own organic growth rate or stronger. Read that 5% to 7% earnings per share growth a year, that right now would be, I think the biggest gating question for us, as we look at anything around the landscape. I hope that responds to your question.

Yes. Absolutely. Thank you for the time guys, and do well.

Thank you.

Hey, Steve.

Hey, Gale. Good afternoon. Just maybe a little bit more color on sales, particularly if you have data for the month of April. If what overall sales do and by class, so we have an idea?

Yes, we do have data for April, and I'm happy to share it. Last time we spoke, I mentioned that we're monitoring the MISO Midwest operator data for the 14 States in the central region of the country. From March 24, when the stay-at-home order in Wisconsin was announced, through May 2, the kilowatt hours sent out in the MISO area decreased by just over 8%. On our end, we've performed slightly better, with a reduction of around 7% for the same period. We've consistently outperformed the MISO footprint day by day. Additionally, we are experiencing a significant increase in residential usage. Scott, would you like to provide more insights on that?

Yes. So, we are looking at our residential usage. And like we've done before, we track our entire system and our large customers in residential using our automatic meter reading. And really looking at the data, we are seeing anywhere to at least 5% plus and some weeks on the residential usage. So when we put our forecast together, looking at 4% is more of a realistic estimate to be a little conservative. And as you go through the customer classes, the large commercial and customers that we look at and we track as the 17 major segments that we're looking at in our area, and we get reports weekly on it. And we're seeing between 16% and 18% down there, and that's what we factored into our guidance here in the second quarter. And then the third segment is really that small commercial area that we're seeing down probably about 6% to 8%. So that's how we factored it in.

Okay. That was it for me. I appreciate it.

Thank you.

You're welcome, Steve.

Greetings. Michael, how are you today?

I'm doing okay, Gale. Thank you very much. Congratulations Scott and Xia.

Thank you.

On the $70 million to $80 million reduction in sales, now that's based on second quarter being the worst it is and things getting better throughout the year. Can you kind of ballpark where things might be if, let's say the second quarter turns out to be like the whole year, turns out to be in the second quarter, you know the third and fourth quarter as well same kind of reductions?

We're doing a little meatball math here, as we think about responding appropriately to your question.

Yes. So if you would take that second quarter trended out and carry the whole year, that may be another $10 million to $15 million. And that's, the ballpark number we've been thinking about here, if that would be the case scenario. I mean, once again, we're seeing things start up and then kind of go back down and we anticipate as the stay at home orders start to open up, we'll see some movement here. But we do have those kinds of bookends here and we're watching it every day.

I think Scott is exactly right. As we've done our sensitivities, even if the second quarter became the third quarter and the fourth quarter, I think we're still under a $100 million in terms of pre-tax margin loss.

The summer time has already been factored in this?

Yes. Yes, absolutely.

Right. And also, is it apply to both electric and gas customers now that gas would be much of a factor? I’m curious if it's only electric.

Yes. No, we factored in both gas and electric. I would remind you, though, that the second and third quarters for gas deliveries are very minimal. Our big quarters, obviously, are the heating seasons, so Q1 and Q4 for natural gas. But we have factored in. And again, I mean our natural gas deliveries were largely unaffected by the pandemic in Q1. But we have factored in some reduction in Q4, assuming the world is not back to total normal for gas deliveries.

Gale, I’d add too, in my prepared remarks, and we still are expecting the Democratic National Convention to come here. And if it does and the markets open up, then there will be a lot of kilowatt hour usage during that summer period as well, which will help.

I think I missed this before, I heard something about regulatory treatments for COVID-19 expenses. Right now, you have residential escrow accounting in Wisconsin and a Rider in Illinois for at least for bad debt. Are there any other mechanisms being discussed or contemplated?

Yes. First of all, the Wisconsin commission was the first in the country to basically set up a regulatory mechanism. We are being asked, all the Wisconsin utilities are being asked to track and defer direct additional expenses related to response to the COVID pandemic number one. And number two, since we've all agreed not to disconnect any customers during the pandemic, we're going to be allowed to defer and track for future potential recovery, any late fees that we cannot levy and resulting bad debt. But as you say, for Wisconsin, we already have escrow accounting for residential bad debt. And then you pop to Illinois, there's a docket underway right now. In fact, there are dockets really underway in each of the four states. The next for this along would probably be Illinois, where again, no disconnects, no new late fee payments. And the commission there is going to ramp up that docket sometime in the next few weeks. But I’d remind you, we are decoupled in the natural gas delivery only in Illinois, and we are decoupled in Illinois. So that's obviously helpful as well. Scott, anything to add?

And in Illinois also, there was already in place collection of bad debt expense for both residential and commercial industrial in Illinois. So that's already in place.

There's a bill rider that's historically been in place there.

Just my curiosity, I know that Amazon Development Center and warehouse right, it just got started up recently, just time. Is that seeing any kind of maybe ramped-up activity that beyond that you were expecting or any plans for doing something more there?

Matter of fact, yes. There's another site that Amazon is looking at right now in one of the suburbs. That would be their site for same-day delivery. That's going through citing an approval process right now, but it's an existing warehouse. And my understanding is it's about 400,000 square feet. So yes, Amazon is actively looking at potential expansion here as well.

Thank you very much, guys.

You're welcome. Thank you.

Greetings, Andrew. How are you today?

Hey, everyone. I’m good. How are you guys?

We're good.

First a question for Gale. What would you say the odds are of the NBA resuming the season?

Great question. Here's what I can tell you. The league very much wants to resume. They've talked about even potentially restarting a part of the season as late as August. But I think there's a very strong desire on behalf of the league to in some way shape or form get to a meaningful playoff. Now, having said that, my own personal guess is if that does happen, it would be a broadcast-only event without fans in the stands. But if I were a betting man, I would say odds are better than 50-50 that there will be some resumption of the current NBA season, even if it means a delay in starting the next season.

All right, I hope so, as much as I love reading about utilities, I do miss sports.

Yes. And if you're a partial owner of the Bucks and they win the championship, you might get a ring. This would be pretty cool.

All right. So, next question. On the first quarter weather, I see the earnings package shows a roughly $45 million hit year-over-year. What would that be versus normal?

Oh, gosh, it is about $0.07, compared to normal. So about $28 million, $29 million.

Yes. $28 million to $30 million.

Okay. So, in terms of the cost savings you mentioned you're going to start to look for some stuff, or you started to look in January. You're saying roughly $70 million to $80 million from the coronavirus and roughly $30 million from weather versus normal. Is that right? And that compares to your guidance of 2% to 3%, which would be roughly $25 million to $35 million? Did I get those numbers about right?

Yes, you're in the ballpark. Absolutely.

Okay, great. Can you go back to 2008 and 2009 and remind us of the incremental cost savings you were able to identify during that downturn?

Oh, good lord. Are you trying to say Andrew, we're old? Is that the question?

I'm saying you’re consistent.

Well, I don't remember the specific number on O&M savings, but I can tell you this. Industrial energy usage during 2009 dropped by 10% compared to 2008. And small commercial and industrial got devastated as well. There was no real uptick like we're seeing now in residential. So I would say actually, based on our '09 experience and my memory, what we had to accomplish in terms of cost reductions and additional efficiency in '09 was probably as great or greater than what we're looking at potentially today. Scott?

Yes. No, Gale, you're exactly right. And '08, '09 was a little different period there. But, once again, we executed and we achieved our earnings guidance and we earned our returns on our utilities.

I think a part of this is our general operating philosophy. I mean, when you focus as a mantra and as a management focus day-in, day-out on the fundamentals and executing the fundamentals, as efficiently as you can, it really gives you good insight into where you can drive additional reductions, additional cost control, additional efficiency, both short-term and long-term. I think one of the factors that I would cite for our success is really every day, we try to get better at the fundamentals of our business. And that's really the focus of what our operating teams do every day. So I think that's a big factor. Understanding exactly what's driving your costs and understanding exactly, not just top down but bottom-up as well on how we can get better every day.

Okay, great. Then one last one, if I may. On liquidity, I believe you said $2.6 billion as of a few days ago. That's up quite a bit from the end of March or yearend. Can you remind us what you've done to bolster that? And the way you see the world today, do you think you're done in terms of capital raises for the year?

Scott, I’ll let you handle that one.

So actually, the cash flow has been positive so far. And we did issue a small debt at our small utilities about $110 million that helps with the liquidity. Overall, MERC/MGU in total it was $110 million. So we will still have some issuances through remaining of the year, as we look at financing now that we have multiple items in the infrastructure segment, we'll be looking at that and also potentially some holding company debt. So we're evaluating it right now and looking at the timing, but the rates are coming down a little, so that looks good. But right now the additional liquidity was good cash flow and additional debt at the smaller utilities.

Great. Thank you very much.

You're welcome.

Jeremy, how are you?

Good. Thanks for having me. I think you've touched on industrial and specifically Foxconn activity at the start of the call here. But just wondering, if you could share anymore color on current and expected industrial activity going forward here? And I guess if you see the potential for any lingering impacts from the whole COVID-19 situation on post-2020 industrial level?

The honest answer is that we don't know. Until we observe how consumers respond after the economic shutdown, it's nearly impossible to make a definitive assessment. However, every major economic development expansion project announced in the past two years, such as Foxconn, is progressing well and maintaining its commitments. In fact, we recently learned that one of the significant announcements we made about a year and a half ago will have an even larger footprint, which is one reason I don’t foresee a decline in our long-term growth rate. We have substantial capital projects underway, particularly concerning customer growth and expansion. On a more optimistic note, I anticipate a reconfiguration of supply chains, resulting in greater productivity and increased domestic production. One lesson learned is that we cannot rely solely on Chinese production for most of the antibiotics prescribed in the U.S. Over the next few years, I expect to see more production facilities established in the U.S., and I believe Wisconsin will be particularly well-positioned to benefit from this shift.

That's very helpful. Thanks. And just one more if I could. I'm just wondering if you see COVID impacting the timing of pipe replacement in Illinois, kind of both from a rate increase perspective and an economic development perspective.

Well, I will say this, given the stay at home orders, we have shifted a little bit in Illinois some of the pipe replacement work and actually to very much to our benefit and customers' benefit. So the plan was to really upgrade the piping systems in a number of neighborhoods starting in the first quarter. Now, though, the Chicago loop is deserted, and we were able to get some permits to do work we would have done at a later time, but was on the schedule in the Chicago loop. We are far more productive with that work than you can possibly imagine, because there's simply no traffic and nothing to disrupt the timing of the work. So from the standpoint of actually being even more efficient and getting some work done that eventually, absolutely, had to be done in the Chicago loop, the pandemic has actually been helpful to us in terms of shifting that work. It is slowing down, obviously some of the work in the neighborhoods, but we're really pleased that we've been able to get a real leg up on work in the loop. Kevin, Scott, anything to add to that?

Yes. Gale, I would add, it makes sense, excuse me, Scott, for doing so because as you just mentioned, moving away from the neighborhood. So I'm allowed us to not have as much interaction with going inside the homes, because in addition to the pipe replacement we're also moving meters from inside to outside. So with the COVID-19, we made a decision to minimize that and focus attention where we could be more productive, as you just mentioned.

That's a very helpful color. Thank you.

You're welcome.

Hey, Gale, glad to hear you and your family are all well. Thank you for taking my question. And congrats to Scott again on his new role within the company's leadership team.

No, absolutely not. Not in this environment. Maybe five or seven years from now. We'll talk about that.

I appreciate that. Thank you very much. Just what I wanted to hear.

I’ll discuss the demand and the revenue impact, which is around $75 million. I want to ensure I understand the positives and negatives. In Wisconsin, there was a $22 million operational and maintenance benefit. In Illinois, it was nearly $20 million, so that's about $42 million in total. This means you are more than halfway to the operational and maintenance cost reductions that would balance out the demand weakness. Are you indicating that this is the total operational and maintenance reduction you'd implement, or are you considering cutting more than this, as per the original plan?

Great question, and let’s backup for a minute. Remember, our initial plan embedded in our earnings guidance and our forecast for the year, was a reduction in O&M of 2% to 3%. So some of what you’re quoting for Q1 results really was part of the plan. So when you look at, what we’re talking about here was the $70 million to $80 million projection for our base case in terms of pre-tax margin reduction, and offsets that we expect to achieve through O&M savings. That’s over and above the 2% to 3%. Scott?

Yes, that’s exactly right. So, we had a great first quarter on our O&M control, and that was really needed to offset some of the weather that we had. But the O&M for the rest of the year, we’re going to continue to take cost out as we talked about to achieve that.

Got it. So I guess my question is, is the total O&M reduction kind of the another 3% to 5% in addition to the original 2% to 3% that you had targeted? Is that kind of the right way? Or maybe it's easier if we just put this in dollar millions and kind of go from there?

Yes. I think percentage-wise you're pretty much on it. Yes. But we'd assume 2% to 3%, then if you add the $70 million to $80 million on top of that, yes, you're in the ballpark.

Got it. Okay. And you think kind of a sustainable into 2021 and beyond? I mean, kind of a permanent reduction in O&M, which would obviously go to back to the customer will go tall?

Yes, that's exactly correct.

Got it. Okay, guys. Thank you, Gale. Much appreciate it. And I hope your Bucks are playing soon.

Yes. Thank you, Michael.

Good afternoon. How are you doing?

I’m about good. But just to sort of follow-up on a few questions here. You said that the O&M savings, a big chunk of them are sustainable. Could you give a little bit more of a quantification on that? Or if you can't, can you sort of qualify, give us a sense as to where you're seeing the savings longer-term, the longer-term stuff?

It's a bit early for me to provide a specific answer. We expect to achieve between $70 million to $80 million in cost savings this year, but it’s uncertain how much of that will be sustainable. However, I believe many companies in our industry are experiencing similar situations. Working remotely has been effective for us, and as Kevin mentioned earlier, our customer satisfaction levels are at an all-time high. Our team has adapted well to this environment. For instance, we’ve realized that we won’t require as many physical facilities as we previously anticipated, which means our expansion plans may no longer be necessary. We'll continue to evaluate this throughout the year. Looking back at our history, I noted a more than 7% decline in sustainable operational and maintenance costs from 2019 compared to 2018, and we anticipate a permanent reduction of 2% to 3% this year, which may exceed those expectations.

Okay. And then sort of following-up on the question about Illinois and the pipe replacement program. As you know, there was a resolution that passed the city council. And do you think that the changes that you're talking about will ameliorate, I guess their concerns as articulated, I guess in this resolution? Do you follow what I'm saying? I mean, how should we think about that resolution, I guess?

This resolution is the same one that was passed last year, so we are now in the second year of it. For those unfamiliar, the resolution asks the governor to evaluate the cost and effectiveness of the pipe replacement program. The main concern from several council members is affordability, but there is a strong counterpoint to that. If we look at customer gas bills in Illinois since the legislation was enacted to promote faster pipe replacement, those bills have actually decreased. We have not created an affordability crisis. Once the program is complete, which will take some time, the system will operate more efficiently, which should also benefit customer bills. Additionally, we have submitted an independent study, known as the Kiefner study, to the Illinois Commerce Commission. They requested a thorough review of our pipe replacement program. The Kiefner study indicates that the aging pipes under Chicago have a shorter useful life than we expected, with an average remaining life of just 15 years. The study recommended that we speed up the work even more than we currently plan. While it's challenging to increase the pace significantly, especially outside of extraordinary circumstances, the evidence now points to an even greater need for this program, as confirmed by an international engineering firm. Moreover, there is no heating cost crisis compared to when this program began.

Excellent. Thanks so much for clarifying that. And then just, I know you get the deferral back to Wisconsin. I know you get the deferral on the electric and gas side there due to COVID and everything. But could you just give us a flavor as to what your actual experience is in terms of people paying their bills on time over the last month or so? Or do you have any trends or any data you could share with us in terms of what you're seeing in terms of the bill pay?

Paul, really nothing yet, in that. Remember, we're under a residential disconnect moratorium in all of our cold weather states, that usually runs through April 15. So we wouldn't have seen any major difference in terms of collectability or disconnections through tax day, normal tax day anyway. So we're really only looking at about a two-week period since then. And I don't think the data Scott is meaningful on that two-week period.

No. It's pretty early yet. Normally, we see a little reduction in those remaining two weeks, we saw a small increase, but it's really early yet. So we're watching it very closely like everything else.

Awesome. Great. Thanks so much, guys. Hang in there.

You're welcome, Paul. Thank you very much. We really appreciate your questions. That concludes our conference call for today. If you have any additional questions, feel free to contact Beth Straka, Head of our Investor Relations Group. She can be reached at 414-221-4639. Thanks, everybody. Stay safe and take care.