WEC Energy Group Inc (WEC) — Q1 2025 Earnings Call Transcript

Good afternoon, everyone, and thank you for joining us today as we review our results for the first quarter of 2025. Here with me are 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 first quarter 2025 earnings of $2.27 a share. We're off to a solid start to the year. We remain laser-focused on reliability, financial discipline, and customer satisfaction. And we're on track to deliver another year of strong results in line with our 2025 earnings guidance of $5.17 to $5.27 a share. This, of course, assumes normal weather going forward. We continue to target a 5% to 7% long-term compound annual growth rate, supported by a robust capital plan, driven by strong Epic growth in our region. In Wisconsin, the unemployment rate stands at 3.2%, continuing a long-running trend below the national average. As we've discussed, we're continuing to see significant economic development along the I-94 corridor between Milwaukee and Chicago. Microsoft is making good progress on this large data center complex in Southeast Wisconsin. Work has continued in the first phase of the project, and we have confidence in our five-year forecast of 1.8 gigawatts of demand growth in Southeastern Wisconsin. As you recall from last quarter, just north of Milwaukee, Cloverleaf has announced plans to develop approximately 1,700 acres for another large data center campus. Cloverleaf has projected at least 1 gigawatt of electric demand for this development. We have not incorporated any of this investment related to Cloverleaf in our capital plan just yet. So stay tuned for the updated capital plan on our third quarter earnings call. And there is other notable growth in Wisconsin. As a reminder, Eli Lilly has announced a $3 billion investment in its manufacturing facility in Wisconsin. And just recently, Uline announced another expansion in Southeast Wisconsin. The company plans to build a 1.2 million square foot warehouse and distribution facility. We're also off to a strong start on our current capital plan. It's the largest five-year investment plan in our history, totaling $28 billion dedicated to economic growth and reliability. As we've discussed, it's based on projects that are low risk and highly executable. On the tariff front, we're evaluating the impacts of tariffs on our supply chain and capital plan. For our $28 billion capital plan, we estimate the tariff exposure is approximately 2% to 3% overall. As you can expect, we are actively engaged to mitigate efforts and mitigation efforts through our contracts and various suppliers. Fortunately, we have diversity in our business mix, capital plan, and supply chain that should help to mitigate the overall effects on our customers. Our company has successfully navigated past periods of uncertainty and challenges, and you can certainly expect us to aim to do the same for this current environment. Now let me give you a few updates on our projects. In early March, the Darien solar project went into service. This adds 225 megawatts of renewable generation to our regulated portfolio with an investment of approximately $427 million. Currently, we have two solar projects in the construction phase, Cash Kanan, a 300-megawatt project in Southern Wisconsin and Renegade, a 100-megawatt project in the Upper Peninsula of Michigan. We expect both of these projects to be placed into service next year. In addition, the Wisconsin Public Service Commission has approved our purchase of 90% of the high noon solar and battery project for approximately $883 million. Construction is expected to be completed in 2027. Of course, we are closely monitoring the federal developments related to the Inflation Reduction Act, and we're actively seeking to safe harbor the projects in our capital plan. At WEC Infrastructure, we closed on the Harden 3 solar projects in February. We invested approximately $406 million for 90% ownership of the project, which has a total capacity of 250 megawatts. As a reminder, this project fulfills our five-year planned investment at WEC Infrastructure. Overall, we have a lot of confidence in our ability to execute on our capital plan. Now turning to the regulatory front. As a reminder, we currently have no active rate cases. In Wisconsin, at the end of March, we filed a new tariff proposal with the Public Service Commission to accommodate the economic growth we've discussed. The proposed very large customer, or VLC tariff, would meet the needs of our very large load customers while protecting all of our other customers. Our proposal would apply to customers with 500 megawatts or more of forecasted new load. The customer commits to subscribing to a portion of one or more dedicated generation resources. The terms of the agreements are 20 years for wind and solar and the depreciable life for natural gas and battery storage assets. As filed, the tariffs provide for a fixed return on equity of 10.48% and an equity ratio of 57%. In addition, there are several other charges these customers are responsible for: administrative charges, energy charges, transmission charges, and distribution charges. The proposed tariff is designed so that no cost to serve these very large customers would be subsidized by or shifted to other customers. We worked with these large customers in the design of the tariff to include the financial parameters. We believe this tariff is a key component to help make Wisconsin a prime spot for data center investments. We expect a decision by the commission by the second quarter of next year. In Illinois, we received the Illinois Commerce Commission's decision on our safety modernization program in February. The commission lifted the pause on our work and directed Peoples Gas to focus on replacing all cast iron and ductile iron pipe that is a diameter under 36 inches by January 1, 2035. The Commission also directed its staff to appoint a safety monitor to provide oversight by July of this year. Like other capital projects, our investments in pipe replacement will be reviewed in future rate proceedings. Under this pipe replacement program, approximately 1,100 miles of older pipe, some dating back to the mid-1800s, will need to be replaced. We are currently developing engineering plans to execute the order. We'll factor the updated pipeline replacement program capital into our fall update. Next up, Xia will provide more details on our financials.

Thank you, Scott. Our first quarter 2025 earnings of $2.27 per share reflects a $0.30 increase compared to the first quarter of 2024. 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, earnings were $0.28 higher versus the first quarter of 2024. Weather positively impacted quarter-over-quarter earnings by approximately $0.18. Compared to normal conditions, we estimate that weather had a $0.01 positive impact in the first quarter of 2025 compared to a $0.17 negative impact in the first quarter of 2024. Recall that our 2024 winter was the warmest in Wisconsin history on record. Rate-based growth contributed $0.20 more to earnings. This was driven primarily by the Wisconsin rate review outcome that was effective on January 1, 2025. Tax and other items added another $0.04. These positive drivers were partially offset by a total of $0.14 from O&M expense, depreciation and amortization, and timing of fuel expense. Our day-to-day O&M for the year is still expected to grow 8% to 10% when compared to actual O&M in 2024. As a reminder, this year-over-year growth is largely driven by a few factors: our continued focus on commission-approved vegetation management, new assets coming online, and measures we took last year to offset the mild weather impact. And let me give you some color on our weather-normal retail electric deliveries, excluding the iron ore mine. Compared to last Q1 and adjusting for the leap year, we saw 7% growth this quarter, led by the large commercial and industrial class, which grew 2.3% in the quarter. This is right in line with our forecast. Remember, we expect our weather-normal annual electric sales growth to reach 4.5% to 5% starting in 2027, and we're on track to reach that over the next couple of years. At American Transmission Company, earnings increased $0.02 compared to the first quarter of '24. $0.01 was related to continued capital investment, and the other $0.01 is related to a modest gain from selling an interest in a transmission line in California in the first quarter of this year. Turning to our Energy Infrastructure segment, earnings increased $0.05 in the first quarter of '25 compared to the first quarter of 2024, largely from higher production tax credits. Remember, we completed our investment in the Maple flats and Delilah solar projects in the fourth quarter of 2024, as well as the Harden 3 solar project this February. Next, you'll see that earnings from the Corporate and Other segment decreased $0.03. This was driven by higher interest expense, partially offset by favorable tax timing and other items. Finally, there was $0.02 of dilution primarily associated with our common equity issuances. We issued about $200 million in 2024 and about $140 million in Q1 this year. Including the Q1 issuances, as a reminder, we expect to raise a total of $700 million to $800 million of common equity in 2025 via our ATM program as well as the dividend reinvestment and employee benefit plans. This is part of the $2.7 billion to $3.2 billion total common equity we expect to issue through 2029 to finance the capital investment. As we refresh our capital plan this fall, we continue to expect any incremental capital will be funded with 50% equity content. Finally, let me comment on earnings guidance. As Scott mentioned earlier, we are reaffirming our 2025 earnings guidance of $5.17 to $5.27 per share, assuming normal weather for the rest of the year. We are also reaffirming our long-term EPS CAGR of 6.5% to 7%. For the second quarter, we are expecting a range of $0.63 to $0.69 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. With that, I'll turn it back to Scott.

Thank you, Xia. Now as you may recall, our Board at its January meeting increased the dividend by 6.9%. This marks the 22nd consecutive year that our shareholders will be rewarded with higher dividends. Overall, we're optimistic about continued growth in our region and our company's growth and future. Operator, we are now ready for the question-and-answer portion of the call.

It's Brian Russo on for Julian.

Sounds good. How are you doing?

Thanks. Just on the recent MISO capacity auction results, could we get your thoughts on your base generation CapEx spend or any upside CapEx maybe for data centers? And then how that plays into the whole long-term strategy for the power of the future assets and Port Washington and maybe also the nuclear PPA negotiations.

Here, there's a lot built into that. When you looked at the MISO auction, especially when you look at the summer part of the auction, it was really a tight auction. Overall, we were long on one company and a little bit short on the other, but nothing material, all in the right direction overall. We build to make sure we have enough capacity to meet their demand. And that’s why we’ve been working with very large customers and looking at our forecast for several years now, as we get orders in place to build new generation capacity. So as we think about it, looking forward, we are looking forward to some of the decisions by the commission, and we expect end of June or early July on some of the additional gas generation needs that we have from the combustion turbines and the right units that are at the commission to help us build that needed capacity to meet this large customer load along with the other economic development in the region. So we are actively working to procure. We already started talking about 2030, 2031 and how we look at the capacity needs. As you start thinking about our part of the future assets and some of the other assets that we have, we are looking at and we have successfully tested gas at about a 30% blend on the power of the future coal units. We’re also looking for plans to make that 100% gas by 2029. And the same thing looking at the Weston 4 units, converting it to gas. So we’re looking at how we strategically have the capacity in the region, which also includes the capacity we'll get from batteries and wind and solar. So we’re planning and looking into the future to make sure we’re ahead of that capacity option. Does that help you?

Yes, it does. Thank you very much.

Hey, Andrew.

Hey, good afternoon. First question. In Illinois, the ICC recently concluded its review of the pipeline safety modernization program. The red authorized you to replace a good amount of the older pipe. I know it's not exactly the same as the prior program, but it might represent some upside to the CapEx. Scott, I know you mentioned that we'll have to wait for the CapEx refresh this fall. But my question is, any early thoughts on roughly how big of an opportunity that might be and how quickly you might be able to get those efforts going? I know you have to rehire, retrain, and redeploy, I think, thousands of employees, so you can't just do it immediately, but when might that work start to resume?

That's a great question. Currently, we're assessing our projects, some of which have become outdated and are undergoing the permitting process again. We're exploring the possibility of starting a few of them this year. We're also in the midst of the hiring process and planning. We anticipate the program will gain momentum in 2026 and 2027, reaching what we believe will be a steady rate by 2028. We're still finalizing our projections for 2028, but we expect it to exceed $500 million annually moving forward. Previously, our program was around $280 million to $300 million. To complete this program by early 2035, substantial investment is necessary as we expect to extend closer to the 2040 timeline. The ramp-up will occur in 2026 and 2027, with the goal of achieving that steady rate by 2028.

Okay, great. Next, on Microsoft, I think you briefly mentioned that things are going smoothly there. Can you just elaborate on that, maybe what you're hearing and seeing from the company? I know there's a lot of questions among investors about pauses of various phases and potential global slowdown, all those types of questions. Maybe if you could just tell us how your latest conversations with them have been going both around the current Phase 1 that goes through '26 and what the company is doing and seeing around those future phases in your neck of the woods?

Sure. With Microsoft, we've been working with them for a couple of years now, and they reiterated to us that the economic development and the demand we have in our forecast over the five-year period that supports that Southeastern Wisconsin 1.8 gigawatts is still solid. We have worked with them on building the substation through our American Transmission Company, and that work progresses. So I have no concerns that, that site is still going to be very, very strong and a very core part of Microsoft's development. I learned a lot just listening to the Microsoft conference call because they talk about timing and going in and out of some of their build cycles and how they manage it. It sounds like now with AI and all the hyperscalers being the talk and how it affects the electric utilities. People are talking about it a lot more, but I think they've always managed it. I encourage you to listen to the Microsoft conference call; I thought it was really interesting how they described some of the things, but I have no concerns in Southeastern Wisconsin here.

Okay, great. Appreciate the comment there. One last one, if I may. If I could squeeze one in for Xia. On equity, $140 million in the quarter. Obviously, that's a bit less than the 25% of the full year guidance. You mentioned that $700 million to $800 million. How should we think about that? Is that any kind of reflection on the market uncertainty in tariffs, view on your stock price, or maybe a function of cash needs ramping up as the year goes on? Any thoughts on the timing there?

Yeah. Andrew, it's all of the above. We're targeting $700 million to $800 million. So stock price plays a role in that through access to the ATM program. Our cash needs play a role. So we're managing it very, very tightly, but we feel very confident that through our ATM and the employee benefit plans, we could access the $700 million to $800 million fairly easily throughout the rest of the year.

Great. Thank you very much, everybody.

Thank you.

Hi, good afternoon, Jeremy.

Good afternoon. The IRA has been in focus for the market for some time here in tax credit transferability as well. Just wondering any updated thoughts you can provide here if transferability or other products to the IRA were to be repealed and how you think about this would impact in the plan or offsets that you could offer?

Sure. I’ll start, and then Xia can walk you through a little bit more of the numbers. When you think of the IRA and a lot of projects that we have in our plan, we've been anticipating those IRA benefits. Many of our customers are anticipating them too. Remember, all the PTCs and ITCs for the projects going forward go back to our customers. While I could see there being a phase-out of the IRA and PTCs and ITCs in the future, they're pretty well integrated into many of the projects people have assumed going forward. Transferability provides other ways to look at moving those tax benefits to others, whether it's through tax equity or transferability. Tax equity is just a little more complicated and ends up in the same situation. It’s more costly for our customers, while transferability has been very lean and easy to execute. Fortunately, we've been able to benefit some of our local companies too, with those tax benefits. Hopefully, there’s a transition period, and transferability stays for a while because I think it’s really beneficial for our customers. Xia can give you a little more detail on some of the numbers.

Absolutely. So on the phase-out point, as Scott mentioned, we're actively seeking to safe harbor the upcoming renewable projects. Once we do that, hopefully, we could qualify the project for 100% of PTCs through at least 2029. We have been able to transfer about $200 million of PTCs annually to third parties over the past several years. As we build more projects, that number ramps up slightly in the plan. If transferability were to only impact projects put in service from 2026 or 2027 or later, we would have very limited credits that we would not be able to sell. Thus, we think the impact would be pretty limited. Also, if transferability were repealed, it would make renewable projects more costly for the customers, so we would have to take a step back and think about the optimal generation project mix from a customer affordability standpoint. Overall, we're managing it just fine but watching developments closely and actively.

Okay, got it. So the FFO impact is something that you think would be manageable in the grand scheme of things, everything you talked about?

Yeah, depending on the law, absolutely.

We're all anxiously waiting to see the final line.

Yeah.

Got it. And then I just want to pivot towards the BLC tariff. I think it's key that customers are involved in the creation here, right? Just wondering as it stands how you think that impacts Wisconsin. And how does Wisconsin stand relative to other states in trying to win this business with this tariff? Just wondering if you could expand on that.

I think the key is you hit it. We worked with our very large customers with the basic understanding that we cannot have this very large load subsidized at all by any other customers. So we worked on the fundamentals, and that's how we came up with the tariff. It's a fair tariff for our customers, our very large customers, and for our shareholders. It's a balanced approach. We've heard from some developers that it's a very fair and straightforward tariff. I'm very happy with it. I think our team did a great job and really appreciate both sides as we balanced it through with the large customers and our internal team. So I'm really optimistic about it.

Got it, great. Thank you for that.

Thank you.

Good afternoon.

Hey, just two quick questions. One is really strong residential electric load growth there. I think 5.5%. Just wondering if you go through some of the drivers? Or was that mainly driven by weather?

Yeah. Xia's looked at these numbers. Remember, last year was such a warm first quarter. The growth is just getting back to normal weather. I'm happy to see normal. I think when you look at the normalization for the quarter, there was also an anomaly of how the weather affected last year's normalization because it was so extreme; we had the warmest weather in like 134 years. We're seeing good customer growth and good customer connections. I don't think there's anything to read one way or the other other than some pretty extreme weather between last year and this year. Xia, anything to add?

No, it's mostly weather-driven.

Great. And then if I could just follow up on Cloverleaf. You gave some acreage and maybe projected about a 1 gigawatt of demand. Just curious, would that mostly be met with gas or a combination of gas and renewables or any clarity you can provide on the generation needs there?

Sure. A couple of things: yes, it's about 1,700 acres of development. They initially talked about 1 gigawatt of load, but we expect they can hold up to probably about 3.5 gigawatts of load. Full relief is in the process of marketing the land and the location. We expect in the next couple of months to see who potentially is a longer-term purchaser of that spot or a purchaser of that location. Then we'll work on the details of the generation mix; hopefully, it factors into our fall update in the third quarter call of the capital plan. Things are moving along very well there. I think it will be a combination, of course, of gas and renewables because you need that firm capacity. I also think they’ll have some renewables in there too to help with the energy part of the bill. We anticipate a combination, but more to come as we continue to work with that and whoever purchased that location.

And the timing of when that load would come online, that would be something we get more on the third quarter call?

Correct. They’re trying to move very fast to get that purchaser in the next couple of months, and then we'll have more clarity as we work with them to develop their plans. We've been working with the potential purchasers of the sites. I can't mention any names, of course, but all high-quality companies, and they're just reviewing the plans we would have to serve those sites.

Great. Thanks for taking my questions.

Absolutely. Thank you.

Good afternoon.

Hey, good afternoon. I wanted to start with maybe just a little more color on where you're seeing the tariff impacts in your capital plan? And it's primarily around the renewables. Just remind us kind of what the process is for updating costs on that front as you seek to recover?

Sure, sure. As we think about our capital plan, a lot of the electric and gas distribution is mainly domestically sourced. When you start thinking about some of the remaining part of our plan, largely in the generation, about 50% to 60% is labor, and the rest are materials. We have to see final clarity on the tariffs. The solar for the near-term projects, we're very comfortable with; they're in flight. We have processes and manufacturing and panels lined up. The longer-term projects, of course, we've been working with other developers and suppliers to really onshore a lot of the production of these panels. The challenge is where to source the polysilicon and the wafers, the cells, etc. If there were to be a cost increase, we would notify our regulators, the commission, as soon as possible of that cost increase, then go through a prudency review process, which we've done at other projects for force majeure situations. We don't currently have anything notable to discuss. On the other aspect, the last item are the batteries. The smaller part of our generation plan is the battery, which is around $1 billion. In fact, we have our first battery installation going in at the end of this month, about 100 megawatts of that. Those batteries are a little more tricky across the industry. We'll manage the batteries as we get more clarity on the tariffs and work with vendors on those batteries, also with some of the very large customers looking at renewables and batteries too, as they examine PCAs and long-term generation needs. We're looking at all of the above, but the biggest potential charges from the tariffs could relate to batteries or solar projects.

Appreciate the color there, very helpful. And then I wanted to ask also on the reconciliation bill potential impacts of a lower corporate tax rate. Can you give us any sense there if that were to happen?

Sure, Xia can provide you with the details. It's essentially the same as what we discussed a few years ago regarding the lower tax rate. Generally, you will see many benefits returned to our customers from that lower tax rate through the regulatory model. Additionally, there will be slightly reduced tax shielding at the parent company for some deductions and interest expenses. That's the overall summary. I don't anticipate a significant impact as last time there was a more substantial tax change. Xia, do you have anything further to add?

Yeah. I think Michael and Steve published a report which correctly stated the potential impact. Long-term benefits for customers because customers would pay less under that situation, but it would have some earnings impact, particularly for the tax shield earnings benefit from the noncustomer deductions at the holding company that would decrease over the longer term. Overall, earnings would improve for the utilities because your rate base would be higher over the longer term. In terms of cash flows, obviously, with a lower corporate tax rate, you would collect less from customers. So, everything else being equal, there would be slightly less cash flow for the company overall. We're watching that very closely. In case we go that way, we will be ready to handle it.

Okay, great. Appreciate the shot. Take care.

Thanks, Mike.

Good afternoon.

Hey, good afternoon. Thanks for taking the questions. Maybe just the commentary on the data center front in terms of your conversations with customers was super clear. Could you talk a little bit about conversations with other large load customers outside of the data center industry? Anything changing there in terms of their plans to progress on new projects either from a timing or a magnitude of their power needs perspective? And then any sort of dispersion across the diverse set of industries that you serve would be helpful.

Sure. Thanks for the question, Carly. As we look at it, and as you know, we are attracting customers from about 16 to 17 sectors. We have relationships with our large customers. Most customers are currently cautious about what's going on with the tariffs and are seeking clarity. Unemployment remains constant at 3.2%, significantly below the national average, and the substantial projects outside of the data centers are still progressing. There are expansions in housing development in Southeastern Wisconsin from companies like Eli Lilly. It looks very positive and constructive. The question is likely going to be how customers respond as they gain more clarity on what's happening with tariffs, but I’d say we remain cautiously optimistic. Xia has analyzed the first quarter, and I’ll let her walk through what we’re seeing with the large group in the first quarter.

Yeah, Carly, we follow about 16 different sectors in the state. They cover food, paper, printing, health services, and education. Out of the 16, 10 of those had quarter-over-quarter positive growth, some with double-digit growth. There were two or three sectors that experienced negative growth, but those were driven by individual decisions made by those customers. Overall, we remain very optimistic about the long-term growth in our region.

Great. Thanks so much for the comprehensive answer there. Then just a quick follow-up on the conversation earlier on Illinois. Just on the future of gas, anything that stood out from the most recent series of workshops there that you think could impact the final outcome early next year?

I would say right now, I haven't seen anything that has gone one way or the other. The workshops we've seen have been postponed, but everyone appreciates the economic development needs for gas. They've approved our pipe replacement program for very large pipes, which I think is positive. I'm not expecting anything I’ve seen recently to change the momentum.

Great. Thank you so much for your time.

Absolutely. Thank you.

Good afternoon.

Hey, good afternoon. Thanks for taking my questions. Just, Scott, a lot of eyes on the tariff filing in Wisconsin, the VLT filing. Maybe just a little bit of color on the higher ROE. How do you come up with 70 basis points higher than the current authorized rate and the customer feedback on that higher ROE? Any color or thoughts there would be really appreciated.

Sure. Remember, we worked with the customers to come up with this agreement on the ROEs and the equity layers. When you think about it, it's long-term, so we're talking 20 years to the depreciable life, which could be up to 30 years or more on some of these projects. They look for certainty. We don’t know what the future will bring, but we think the ROEs, when considering interest rates over a long period, are among the lowest now at 9.8%. Locking in a higher rate at 10.48% is reasonable for both sides to lock into that number. But remember, this is for 20 to 30 years, so it's a significant investment, and it gives them certainty for their modeling. Hope that's helpful.

Yes, it does. Thank you. And then maybe just quickly, in Illinois, can you just remind us the higher $500 million per year rate which you get to in '27, '28, that is not going to be recovered by a tracker, correct? That's Slide 1. And if not, what's the rate case strategy on covering that higher level of spending as it is wrapping up quite a bit?

Correct. You are correct that this will not be covered under our tracker. In Illinois, we will need to file forward-looking test years on the rate case. We're evaluating when our next test year filing will be. We'll have to forecast that into the test year. It's a forward-looking test year, but it also allows the commission and the ICC to review our plans, along with having that safety monitor on-site to review our projects as they go in. I think this adds color and opportunities to improve the prudency on a front-end basis as we go through these capital projects. It will be more of an ongoing annual rate case strategy in the future.

Thank you for taking the questions, Scott.

Thank you. That concludes our conference call for today. If you have any more questions, please feel free to reach out to Beth Straka at 414-221-4639.