WEC Energy Group Inc (WEC) — Q1 2023 Earnings Call Transcript

Thank you very much. Live from the Heartland. Good afternoon, everyone. Thank you for joining us today. As we review our results for our first quarter of 2023. First, I'd like to introduce the members of our management team, who are here with me today. We have Scott Lauber, our President and Chief Executive; Xia Liu, our Executive Vice President and 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 2023 earnings of $1.61 a share. Weather was a major factor in our lower results for the quarter. We saw one of the mildest winters in the history of the upper Midwest. For example, it was the second warmest first quarter in Milwaukee since 1891. However, we're confident in our plan for the remainder of the year and we're reaffirming our guidance for 2023. As a reminder, we're guiding to a range of $4.58 to $4.62 a share for the full year. This assumes normal weather going forward. And as always, we remain focused on the fundamentals of our business, financial discipline, operating efficiency, and customer satisfaction. Switching gears now, the work on our ESG progress plan continues at a steady pace. It's the largest five-year investment plan in our history totaling $20.1 billion for efficiency, sustainability, and growth. The plan is based on projects that are low-risk and highly executable. And as we look to the future, it's clear that the megatrend of decarbonization and the need for even greater reliability will drive investment plans that are robust and strong. Scott will provide you with more detail on several specific projects in a moment, but I'm pleased to report that just since last December, the Wisconsin Commission has approved more than $1 billion of new capital investment by our companies. As we've discussed, we project that our ESG progress plan will drive compound earnings growth of 6.5% to 7% a year from 2023 through 2027 and we fully expect to fund our capital plan without any need for new equity. Now let's take a brief look at the regional economy. We have good news from the latest data in Wisconsin. In March, the unemployment rate came in at 2.5%, that's a record low for the state and well below the national average. And we continue to see major developments in the area. Just a few weeks ago, in fact, Microsoft announced that it plans to create a new data center campus in our region with an initial investment of $1 billion. This data center complex will be built South of Milwaukee in the technology park that is also being developed by Foxconn. Microsoft will purchase a 315-acre parcel in area three of the park. Local approvals have been received and we expect Microsoft to close on the land purchase on or before the 31st of July. In the meantime, Microsoft is moving full speed ahead with planning and design work. The decision by Microsoft underscores the strength and potential of the Wisconsin economy and positions us very well for more growth in the technology sector. And with that, I'll turn the call over to Scott for more information on our regulatory developments, our operations and our infrastructure segment. Scott, all yours.

Thank you, Gale. I'd like to start with a few updates on the regulatory front. New rates have been in effect for our Wisconsin utilities since the start of the year. As expected, we're planning to file a limited re-opener for 2024 later this quarter. The filing will address the recovery of capital investments for projects going into service this year and in 2024. The return on equity and the equity layer are all set and are not up for consideration. The request will be quite modest and we expect a decision from the commission by the end of this year. And as you recall, we have rate filings under review in Illinois for Peoples Gas and North Shore Gas. The next step will be for the commissioned staff and interveners to file their direct testimony on May 9; hearings are scheduled for early August. After nine years without a rate case at Peoples Gas, we're making these requests for 2024 to support our investment in key infrastructure. And with lower natural gas prices, we project customer bills will be flat with 2022. We also have rate reviews and progress at Minnesota Energy Resources and Michigan Gas Utilities. We filed in Minnesota last November and interim rates went into effect January 1. I'm pleased to announce that we received a settlement with parties that would result in a 7.1% increase in base rates, that's based on a 9.65% return on equity with an equity layer of 53%. This settlement is subject to commission approval, which we expect in the next several months. And in March, we filed for a base rate increase of 9.1% at Michigan Gas Utilities for 2024. This application is primarily driven by our capital investments supporting safety and reliability. Meanwhile, we're making good progress on a number of regulatory capital projects. Red Barn Wind Park went into service last month; the project is providing 82 megawatts of clean energy capacity to our Wisconsin customers. And as Gale noted, we received three significant approvals from the Wisconsin Commission since last December: for the Darien Solar-Battery Park, West Riverside Energy Center, and Koshkonong Solar Battery Park. We discussed the Darien approval last quarter and as you recall, the Solar Park is planned to go into service in 2024. West Riverside is a combined cycle natural gas plant owned by Alliant Energy. In February, we received approval for our purchase of 100 megawatts of Riverside capacity for approximately $102 million. We expect to close this purchase by the end of the month. We have an option to purchase another 100 megawatts of Riverside capacity, and we have planned to exercise that option later this year. We also received approval for our purchase of Koshkonong Solar Battery Park. With plans for 300 megawatts of solar capacity and 165 megawatts of battery storage, we will own 90% of the project with an expected investment of $585 million. We project the solar portion of this facility to go into service in 2025. We also continue on the Badger Hollow 2 solar facility and the Paris Solar Battery Park. While Badger Hollow has received some of the solar panels, the remaining panels for projects are currently in Chicago going through the customs process. Assuming timely release of the panels, we expect these solar parks to go into service late this year or early next year. For the Paris and Koshkonong projects, we're evaluating the timing of the battery investments. Of course, we'll keep you updated on any future developments. Outside of utilities, we continue to make progress on zero carbon projects in our WEC infrastructure segment. In February, we completed our acquisition of a Sapphire Sky Wind farm, now in service in Illinois. As a reminder, that project offers 250 megawatts of capacity in total, and we own a 90% share. Also in February, we added an 80% ownership in the Samson 1 solar project located in Northeast Texas. The project has a capacity of 250 megawatts. As disclosed previously, Samson 1 suffered storm damage at the beginning of March, but we expect no significant bottom-line impact from the property losses. The project is currently producing energy at about a 70% level and improving every day as we continue to restore the site. With that, I'll turn things back to Gale.

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

Thank you, Gale. Our 2023 first-quarter earnings of $1.61 per share decreased $0.18 per share compared to the first quarter of 2022. Our earnings package includes a comparison of first-quarter results on page 12. I'll walk through the significant drivers. Starting with our utility operations, our earnings were $0.09 lower compared to the first quarter of ‘22. Rate-based growth contributed $0.22 to earnings, driven by continued investment in our ESG progress plan. This includes the base rate increase for our Wisconsin utilities, as well as the interim rate increase for Minnesota Energy Resources, both of which were effective January 1, 2023. This favorable margin impact from rate-based growth was more than offset by a number of factors. First, as Gale noted, we experienced one of the mildest winters in history, which drove a $0.12 decrease in earnings compared to the first quarter of last year. Additionally, the timing of fuel expense, depreciation and amortization interest, day-to-day O&M, taxes, and other items drove a combined $0.19 negative variance. Before I turn to earnings at the other segments, let me briefly discuss our weather normalized sales. You can find our sales information on page nine of the earnings package. I'd like to remind you that weather normalization is not a perfect sign. Extreme warm weather in the first quarter may not be fully reflected in our weather normalized data. Having said that, weather-normed retail natural gas deliveries in Wisconsin, excluding natural gas used for power generation, were down 1%. However, residential usage, again on a weather-normalized basis grew 0.9%. That was ahead of our forecast. Weather-normalized retail electric deliveries, excluding the iron ore mine were 1.9% lower. Residential usage was relatively flat compared to last year. Now at our Energy Infrastructure segment, earnings were $0.01 lower in the first quarter of ’23 compared to the first quarter of ’22. Production tax credits were higher by $0.03 quarter-over-quarter, resulting from acquisitions of renewable generation projects. This increase was largely offset by a pickup that we recorded in the first quarter last year from the resolution of market settlements in the Southwest Power Pool. Finally, you'll see that earnings at our corporate and other segment decreased $0.08, primarily driven by an increase in interest expense and a pickup recorded in the first quarter ‘22 from our investment in the clean energy fund. These items were partially offset by favorable rabbi trust performance and some tax and other items. Remember, rabbi trust performance is largely offset in O&M. Looking now at the cash flow statement on page six of the earnings package, net cash provided by operating activities decreased $281 million. The mild winter and timing of recovery of commodity costs contributed to this decrease. Total capital expenditures and asset acquisitions were $1.3 billion in the first quarter of ‘23, an $884 million increase from the first quarter of ‘22. This was primarily driven by the acquisition of the Whitewater Natural Gas Power Generation facility in our Wisconsin segment, as well as the Sapphire Sky Wind farm and Samson 1 solar facility in our infrastructure segment. In closing, 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. To offset the mild first-quarter weather impact, we're implementing a variety of initiatives. As a result, we now expect our day-to-day O&M to be 2% to 3% higher than 2022 versus our previous expectation of 3% to 5% higher. I will also add that largely due to the timing of O&M and fuel expense, we expect earnings in the second half of this year to be materially better than the second half of 2022. For the second quarter, we're expecting a range of $0.83 to $0.85 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. As a reminder, we earned $0.91 per share in the second quarter last year. With that, I'll turn it back to Gale.

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

Good afternoon, Shar. Are you still using those pillowcases?

Yes. But they don't match the rest of the house though, that's the issue. How are you doing?

We're fine. How about you?

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

Yes. A good question, Shar. And clearly, there are a number of companies in the sector even too today announcing the use of this cash pay convert product. We've taken a good hard look at it and let me just say this, if we found that it was really advantageous for us, we would certainly take a hard look. But we're more than halfway through our debt issuance plan for 2023 and doing very well against our budget. Xia?

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

And then just Xia, I don't want to jump ahead, but will there be any discussion about considering hybrids as a potential option to fund the plan?

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

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

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

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

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

Yes. Way too early to even think about or contemplate settlement in the process in Illinois. The process has been going along very smoothly. I think the next steps, as Scott mentioned in his prepared remarks, the next step will be staff and intervenor testimony on May 9. But so far, we're responding to data requests. The process in Illinois is going exactly as historically they've gone. And to your point about commodity costs moving in our favor, they moved even more in our favor since we filed the case. But long story short, even with the base increase that we're seeking, you combine that with much lower commodity costs, and we expect customer bills to be flat even granting a full base rate increase for 2024 for bills in 2024. So, again, we think that's very good news. And when you look at just the basic facts of what we've filed, this will be, as you may recall, the first base rate increase for Peoples Gas since we acquired the company, and the first base rate increase actually in nine years. And our O&M is about $60 million a year lower than when we acquired the company in 2015. So, a pretty good story.

Perfect. Terrific, guys. Thanks. Congrats and a great execution so far. Appreciate it.

Thank you, Shar.

Hey. How are you doing? Gale, no dog yet, but we'll be able to handle it.

You stole my question. No dog yet, okay.

I want to clarify a few points. Following up on what Shar mentioned, regarding the Peoples case, I'm talking about the future of gas and the capital expenditures as well as the scrutiny on bill pressures. How do you view the moderation of bills? Gas prices have declined, but are there any factors we should consider on that front? Additionally, given the operating expenses we've observed, what are your thoughts on balancing long-term investments with immediate needs, especially in the absence of the traditional QIP?

Yes, that's a good question, Julien. I’d be happy to help you with naming the dog. Regarding the QIP program and our investments in safety modernization, particularly the pipe upgrade initiative we're implementing in Chicago, we really appreciate the public discussion and the policy decision that the Illinois Commerce Commission will make about the program's future. To give you some context, we've been investing about $280 million each year to upgrade the aging and deteriorating natural gas delivery network in Chicago. Currently, we are nearly 36% through our pipe upgrade plan while continuing to invest around $280 million annually. Those who believe we should take a different approach are relying heavily on electrification. Therefore, to justify not continuing the program, one would need to assume that Chicago can fully electrify in under 15 years. The independent study commissioned by the Illinois Commerce Commission indicates that over 80% of the iron pipes in our delivery network have a remaining useful life of 15 years or less. Additionally, some suggest simply patching the pipes, but I must emphasize that many of these pipes cannot be patched. When considering the ongoing operation and maintenance costs associated with repeated patching, it would not save customers any money in our view. We believe there is strong evidence to proceed with the program. Our proposal includes an annual base rate increase to fund this crucial initiative, which is essential for both the immediate safety of Chicago and for ensuring a long-term future that could involve delivering hydrogen or other no-carbon fuels to keep the city warm. I hope this answer is helpful.

Absolutely does. Thank you, Gale. I appreciate it. I will give you naming rights indeed. If I can, though, you bet you. With respect to the process, I want to come back to this super quickly. We have a new ICC in place. To the extent that you're looking for direction here, this rate case should be the right venue to consider the pace and the new vision for where things are going. There's not another avenue; I'm just trying to think through how the ICC wants to articulate a response to your proposed spending. It will…

Well, there are extensive, as you would expect, and we wanted to have this kind of dialog. We welcome this kind of dialog. But there are multiple data requests as there are in any rate review, but particularly there are data requests about the program, about the need for the program, about the future of the program, etc. So, I agree with you. I think this is the proper forum to have that policy decision made. And everything is proceeding under the normal schedule, if you will, of data requests. And now, as we said earlier, the next formal step would be May 9 when we expect the staff and intervenor testimony.

Right. Yes, thank you for color. And we’ll look next week, right? You take care. Thank you.

Thanks, Julien. Take care.

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

Nothing to say there.

There you go.

I wanted to return to the topic of the weather impacts that occurred during the quarter and the offsets related to them. Should we consider O&M as the primary means for offsetting these impacts for the remainder of the year? Additionally, could you provide any quantification or further insights on this and how it may develop throughout the year? I recall you mentioning that things might ease up a bit in the second half, so any additional details would be appreciated.

Yes, we would be glad to provide that information, and I will turn it over to Xia for some specifics. First, I want to highlight that we have a very experienced management team and we have navigated similar situations in the past. Our well-established playbook has been put into action, and there are operational and maintenance initiatives across all areas of the company, including every department and section. Each of them has their own plans and goals. A significant aspect of this is focused on day-to-day operating and maintenance costs. Additionally, we are benefiting from interest cost savings, which is a positive compared to our budget and forecast. Now, I will ask Xia and Scott to briefly discuss the differences we observed in the third and fourth quarters of this year versus the same periods last year, during which we were heavily involved in our sharing arrangements with customers. Xia, could you start with the specifics? Then, we will have Scott discuss the sharing arrangements that significantly affected the third and fourth quarters last year.

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

Sure. When considering the second half of the year, it's important to note that over the past few years, we've been fortunate to be in a position where we're sharing benefits with our customers. Last year, we managed to lower our fuel requests by about $54 million, which is significant when thinking about the charges for the latter half of the year. Additionally, during that period, we experienced warmer-than-normal weather, allowing us to accelerate or increase spending for our customers. As a result, we incurred extra operational and maintenance costs along with the sharing benefits. This was impactful for the second half of the year compared to what we anticipate for the upcoming year.

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

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

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

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

Jeremy, Scott and I went down to that warehouse one night, but the Doberman wouldn't let us in. So, we know all of those panels are there.

Got it. That's helpful. And then just one last quick one if I could, as it relates to transmission and future MISO tranches maybe, kind of, taking shape in the not-too-distant future here. Just wondering if you had any updated thoughts on permitting, reform or what the MISO outlook could mean for WEC down the road?

Don't see much of any progress on permitting reform at this stage of the game. But again, as MISO works its way through all of the stakeholder process, on Tranche 2 Phase 1, the early indications are quite favorable in terms of the investment opportunity being even greater than what we saw in basically Tranche 1. And then in addition to that, I mentioned the major economic development project that was just announced with Microsoft; any particular upside on transmission or generation needs related to that Microsoft project would be incremental to the plan and not in the current plan. And I'm guessing there may be some additional transmission need coming out of that project. Scott?

No, that's correct, Gale. And also a reminder, Tranche 1 was using a lot of existing right of ways. So we're very happy using existing right of ways to be able to get that construction started in an earlier timeframe in that ‘25, ‘26 time frame.

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

Thank you, Jeremy.

Hey, Michael.

Hey, Gale. How are you?

We're good. How about you?

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

Yes. I think when you look at the near-term future past 2023, we're going to be seeing another chunk of O&M reduction related to the planned retirements. And just as a reminder, we have four older units at our Oak Creek site, Units 5, 6, 7, and 8. Units 5 and 6 are scheduled for retirement next year, and then Units 7 and 8 in 2025. And along with that, the retirement will come a substantial chunk of O&M reduction. Scott?

No, you're exactly right. As we implement those retirements, operational and maintenance costs will decrease. However, keep in mind that the primary reason for the increase in operational and maintenance costs this year was due to the addition of new plants to our system. We invested a significant amount of capital over the past year to operate those new plants, including the new rice units that we are bringing online, as well as the plants and related infrastructure, all of which contribute to additional operational and maintenance costs. This is largely driven by our capital investments.

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

Thank you for the detailed information. In relation to the potential delays in solar projects due to supply chain challenges with panels and warehouses, how are you addressing those issues? Is this linked to the retirement of coal facilities in terms of earnings from those assets and rate base, or are there other adjustments you need to consider? What other implications might arise for the business if your solar projects experience some postponement?

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

Correct. And we're continuing the construction, so they are site-ready when the solar panels get released. So, Paris and Badger Hollow II construction is pretty well done. And Badger Hollow II, we just need the solar panels, and Paris is moving along nicely. So, those panels are ready; it won't take long to pop them up.

Great. Thanks a lot.

Take care, Michael.

Wow. You've got the Jersey number eight on, Durgesh?

I don't know about that, Gale.

I know. I know. Still die-hard Eagle fan, right?

It still hurts, it still hurts.

I'm sorry.

Okay. We'll be back next year. Gale, I wanted to revisit the re-opener. We've had extensive discussions as you prepare the filing. Scott mentioned in his opening remarks that it’s not regarding the return on equity for the equity layer. Can you discuss the projects you will be filing for? Am I correct in assuming that these projects are already approved, so you’re not necessarily seeking approval for prudency? Also, if you could provide some context on the capital expenditures we can expect as you file these documents this quarter?

Sure, I will ask Scott to assist as well. You are right; this limited reopener, as defined in the rate order, does not reconsider the ROE and the equity layer, which are already established. Yes, all the projects we will be filing for recovery in this limited reopener have already received commission approval. That is absolutely correct. Scott, if I remember correctly, it's about $1 billion of capital that will be involved in that reopener.

Yes. It's approximately that; I don't have the exact number at my fingertips. But when you think about the reopener, it's projects like we talked about Riverside was approved; now that $102 million we'll put that into the reopener. The Western rice units, those are going to be in for a full year, so that'll be part of the reopener. So, some of these are full-year, some of these are actually part of the year capital projects.

And LNG, one of our LNG projects.

Yes. The LNG projects. So, it's really across electric and gas, just truing up with the capital additions.

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

Sure. The O&M aspect pertains to the retirement of Oak Creek units 5 and 6, which are older units. Last year, we filed a case and subsequently extended it. Now, we plan to close those units at the end of May 2024. This will result in the O&M reduction that we included in the actual order to be considered in the case.

Durgesh, the largest reduction in O&M will come from the closure of the Oak Creek units when all four units are retired. We will not retire the environmental control operation at that site for those older units until all four are offline.

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

You're welcome. Take care, Durgesh.

Greetings, Andrew.

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

Andrew, this is Xia. That's purely timing. We expect that to recover in the second quarter and continue improving through the third and fourth quarters. Remember that last year, as Gale mentioned, we had significant fuel expenses due to the sharing band, and we don't anticipate that happening again. Therefore, we expect to see an increase in fuel's impact on earnings.

So, purely timing. We'll see a second-half turnaround.

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

Yes. There's a lot of accepted noise regarding weather normalization. To clarify, the weather-normalized residential sales met our predicted expectations, focusing on the higher-margin segments. On the commercial and industrial side, we have a diverse mix of industries that provide essential services such as food, paper, and plastic processing, many of which experienced significant growth in the first quarter. We are not heavily exposed to the automobile or oil and gas sectors, which gives us confidence in our industry mix. Additionally, we haven't observed any signs of a potential recession in our service territory. We regularly monitor just over 100 large customers, which accounted for nearly half of the negative variance year-over-year in the first quarter. Notably, two of those customers experienced substantial declines due to non-economic factors, including a fire and an outbreak. We anticipate these customers will return to normal operations throughout the year. Weather normalization noise influenced these numbers, so I wouldn't respond too strongly to them right now.

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

Okay. Just wanted to be sure. Thank you very much.

No, thank you.

Hey, Anthony.

Good afternoon, Gale.

We've got a dog to name?

I was thinking that warehouse Doberman. That may work for Julien.

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

So, Andrew, Xia just addressed my question about the recession and C&I sales. If I could switch topics, I'm curious about your earlier comments on iron piping in Chicago. If we think back about 10 or 15 years ago when we discussed getting rid of nuclear generation, we eventually recognized its significance in achieving zero carbon. Do you think we're experiencing a similar realization with gas LDC? If that's the case, do you believe it will depend more on the locations, like the colder Midwest, where there's a growing understanding that if we want to retire it, we need to electrify within 15 years? As we approach that timeline, do you think the parties will appreciate how valuable the asset is?

That's a great question, Anthony. I believe there will be a moment of realization. While I can't pinpoint when that will happen, I'd like to share a couple of thoughts. First, if we aim to fully electrify within the next 15 years, we need to consider how we will generate enough energy to replace gas heating. We should think about when gas heating is most necessary, which is during the cold winter months of January and February. Therefore, how much solar energy can we rely on in the Midwest during that time? How much wind energy will be available then? Ultimately, this leads to a significant reliance on gas-fired power generation. Once people start to analyze this situation, I think that realization will become apparent. Additionally, as hydrogen hubs evolve and as hydrogen becomes more cost-effective due to the IRA, some gas utilities are already mixing hydrogen with natural gas. This summer, we will also begin blending renewable natural gas into our network. As stakeholders start to see beyond the surface-level discussions, I believe there will be a moment of insight regarding the value of these resources in our transition to a low or zero-carbon future. It’s crucial to get this transition right, as sacrificing reliability could postpone it significantly. In the end, we need a comprehensive approach, and I believe we will eventually reach a consensus about the practical and safe methods for this transition.

Great, Gale, as always. Thanks so much.

Thank you, Anthony.

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

Sure, I'd be happy to. So, financing costs are expected to be higher compared to Q2 last year. So, that's a big driver. There are pluses and minuses, but we do have rate base growth that's better than last year. Fuel is expected to be better than last year, but largely offset by financing costs.

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

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