Q1 2023 WEC Energy Group Inc Earnings Call
Participants
Gale E. Klappa; Executive Chairman of the Board; WEC Energy Group, Inc.
Scott J. Lauber; President, CEO & Director; WEC Energy Group, Inc.
Xia Liu; Executive VP & CFO; WEC Energy Group, Inc.
Andrew Marc Weisel; Analyst; Scotiabank Global Banking and Markets, Research Division
Anthony Christopher Crowdell; Executive Director; Mizuho Securities USA LLC, Research Division
Durgesh Chopra; MD and Head of Power & Utilities Research; Evercore ISI Institutional Equities, Research Division
Jeremy Bryan Tonet; Senior Analyst; JPMorgan Chase & Co, Research Division
Julien Patrick Dumoulin-Smith; Director and Head of the US Power, Utilities & Alternative Energy Equity Research; BofA Securities, Research Division
Michael P. Sullivan; VP of Equity Research; Wolfe Research, LLC
Shahriar Pourreza; MD and Head of North American Power; Guggenheim Securities, LLC, Research Division
Unidentified Analyst
Presentation
Operator
Good afternoon, and welcome to WEC Energy Group's Conference Call for First Quarter 2023 Results. This call is being recorded for rebroadcast. (Operator Instructions)
Before the conference call begins, I remind you that all statements in the presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions, referenced earnings per share will be based on diluted earnings per share, unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately 2 hours after the conclusion of this call.
And now it's my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.
Gale E. Klappa
Thank you very much. Live from the Heartland. Good afternoon, everyone. Thank you for joining us today as we review our results for the 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 5-year investment plan in our history, totaling $28.1 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 mega trend of decarbonization and the need for even greater reliability will drive investment plans that are long 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 3 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 the 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.
Scott J. Lauber
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 reopener 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 commission staff and interveners to file their direct testimony on May 9. Hearings are scheduled for early August. After 9 years without a rate case at Peoples Gas, who are 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 in 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 to service last month. The project is providing 82 megawatts of clean energy capacity to our Wisconsin customers. And as Gale noted, we received 3 significant approvals for the Wisconsin Commission since last December for the Dairyland Solar Battery Park, West Riverside Energy Center and Koshkonong Solar Battery Parks. We discussed the Dairyland approval last quarter. And as you recall, the solar park is planned to go in 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 plan 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 II 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 timing 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 the 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 for the property losses. The project is currently producing energy at about 70% level and improving every day as we continue to restore the site.
With that, I'll turn things back to Gale.
Gale E. Klappa
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?
Xia Liu
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 include the 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 base 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, timing of fuel expense, depreciation and amortization interest, day-to-day O&M, taxes and other 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 9 of the earnings package. I'd like to remind you that weather normalization is not a perfect science, extreme warm weather in the first quarter may not be fully reflected in our weather-normalized data. Having said that, Weather-normal retail natural gas deliveries in Wisconsin, excluding natural gas used for power generation, were down 1%. However, residential usage, again on a weather-normal basis, grew 0.9%. That was ahead of our forecast. Weather-normal 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 settlement 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 a clean energy fund. These items were partially offset by favorable rabbi buy 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 6 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, and $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 are 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 are 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 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.
Gale E. Klappa
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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Shar Pourreza with Guggenheim Partners.
Gale E. Klappa
Afternoon, Shar. You're still using those pillow cases?
Shahriar Pourreza
Yes. But they don't match the rest of the house, so that's the issue. How are you doing?
Gale E. Klappa
We're fine. How about you?
Shahriar Pourreza
Good. Not too bad, not too bad. So Gale, a quick one here. So half a dozen utilities have issued these like 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 from your shot like whether you see, I guess, any value with these hybrid securities to help fund the 5-year plan? Does it make sense? I mean obviously, we're waiting for your Q to be released to see if there's any kind of language around it, but.
Gale E. Klappa
Yes, good question, Shar. And clearly, there are a number of companies in the sector even 2 today that have announced 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 -- as we go through the course of the remainder of 2023, if we found that it was really advantageous for us, we would certainly take a hard look. But we're -- we're more than halfway, Shar through our debt issuance plan for 2023 and doing very well against our budget.
Xia?
Xia Liu
Yes, not much to add. We're very aware of the transaction. We understand the pros and cons. And at this time, we really have not made any decision as to whether cash pay convertible notes fit those -- fit our criteria. But we've done quite a bit financing so far, and we've done really well, better than the planned rates. So.
Shahriar Pourreza
And then just in short, I know I don't want to front run the queue, but is there -- will there be any language around looking at hybrids potentially as an option to fund the plan or not?
Gale E. Klappa
Shar, are you talking about hybrids? Are you talking about the cash pay converts or both?
Shahriar Pourreza
These cash pay converts or hybrids or whatever you want to call them at this point.
Gale E. Klappa
I don't think there's any language that we're planning in the Q or...
Xia Liu
No. We haven't planned that at this point.
Shahriar Pourreza
Okay. Perfect. I appreciate that. And then just lastly on Illinois, obviously, the cases were filed in January. There's not a lot of data points since then, but gas prices have actually have 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? Do you see anything we should be thinking about?
Gale E. Klappa
Way, way too early to even think about or contemplate settlement in the process in Illinois. The process is 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 are 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, and 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 2020 -- 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're -- of what we filed. This will be, as you may recall, the first base rate increase for Peoples Gas since we acquired the company, first base rate increase actually in 9 years. And our O&M is about $60 million a year lower than when we actually acquired the company in 2015. So a pretty good story.
Shahriar Pourreza
Perfect. Congrats on great execution so far. I appreciate it.
Operator
Your next question comes from the line of Julien Dumoulin-Smith with Bank of America.
Julien Patrick Dumoulin-Smith
Listen, let me follow up on where Shar would go with that. So with respect to the Peoples case here and just talking a little bit about the future of gas, but also just the CapEx and just some of the scrutiny on bill pressures. How do you think about moderating bills? I mean, obviously, gas has rolled over any mitigating items, circumstances we should be thinking about on that front? And definitely, how do you think and respond to some of the -- there's been some (inaudible) out there, et cetera. Any thoughts as to how you tackle sort of the longer term versus the here and now of investing without the QIP in place in the traditional sense?
Gale E. Klappa
Yes. Good question, Julien. On the QIP program and the investment in the safety modernization program, the pipe upgrade program that we've been carrying out in Chicago. Let me first say that we really welcome the public debate and the policy decision that the Illinois Commerce Commission will make about the future of the program. And just to put it in perspective, on average, we've invested about $280 million a year in upgrading the pipe network under the city of Chicago, which is, by the way, one of the oldest and now most deteriorated natural gas delivery networks in the country. So long story short, we're almost 36% complete with the pipe upgrade plan and again, investing about $280 million a year.
Now, those who think we should do something different are banking on electrification. So the bets you would have to make to not, in some form, continue the program is that Chicago can completely electrify in less than 15 years because the independent study that the Illinois Commerce Commission has ordered and accepted, the independent engineering study shows that more than 80% of the iron pipes and our delivery network under Chicago have a useful life left of 15 years. And then lastly -- or 15 years or less.
And then lastly, there are some who say, well, just patch the pipes. Julien, I'm telling you some of those pipes can't be patched. And when you look at the continued O&M that would be required to patch after patch after patch, it would not, in our estimation, save customers any money. So we think there's overwhelming evidence here to continue the program, we would do so under our proposal as an annual base rate increase, if you will, to cover the cost of what we think is a very important program for both the immediate safety of Chicago. And then secondly, to preserve a long-term future, where that delivery network could deliver, say, hydrogen or other no carbon fuels to keep Chicago warm. So I hope that response helps.
Julien Patrick Dumoulin-Smith
Absolutely does. I appreciate it. With respect to the process, I want to come back to this super quickly. We've got a new ICC in place, et cetera. I mean to the extent to which that you're looking for direction here, I mean, this rate case should be the right venue to think about the pace and the sort of the new vision on where things are going, right? There's not some other avenue? I'm just trying to think through the -- how the ICC wants to articulate a response to your proposed spending, if you will? It will be through the case.
Gale E. Klappa
There are extensive, as you would expect, and we wanted to have this kind of dialogue. We welcome this kind of dialogue, 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, et cetera. 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 staff and intervenor testimony.
Julien Patrick Dumoulin-Smith
Right. Yes. Thank you for confirming that. And we'll look next week. All right. You take care.
Operator
Your next question comes from the line of Jeremy Tonet with JPMorgan Chase.
Gale E. Klappa
Jeremy, are you moving to -- Jeremy, are you removing the Republic Bank or?
Jeremy Bryan Tonet
Nothing to say there. Just wanted to kind of come back, I guess, to the weather impacts as happened in the quarter and the offset there. Should we think about this as just kind of O&M being the main tool for offsets over the balance of the year? I'm just wondering if you could quantify or give any more color there and how that might shape up across the year, I think you said in the back half, it kind of lightens up a bit. So any more color there could be helpful.
Gale E. Klappa
Yes, I'd be happy to do that, and we'll ask Xia to give you some specifics. Let me frame a couple of things for you.
First of all, we've got a pretty experienced management team. We've been down this road before. So we have a pretty well-tested playbook and the playbook has been implemented. There are O&M initiatives in every group of the company, every department, every section. They have plans and they have goals. So a big part of it, obviously, is related to day-to-day operation and maintenance costs.
Another big positive for us, again, compared to our budget and our forecast is really the interest cost savings that we're seeing. And then we're going to ask Xia and Scott to kind of briefly walk you through the difference that we see in Q3 and Q4 this year compared to Q3 and Q4 of last year when we were deep into our sharing bands with customers. So Xia, why don't we start off with you and some specifics and then we'll let -- I'll ask Scott to talk about the sharing bands that really impacted Q3 and Q4 last year.
Xia Liu
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 2 items, we could offset the Q1 weather deficit. But we also have other initiatives we're looking at beyond those 2 items.
Scott J. Lauber
Sure. And then when you think about the last half of the year, you have to remember the last several years, we've been very fortunate to actually be into a sharing band where we're sharing with customers. I think last year, we were able to reduce our fuel request about $54 million. So that's quite a bit when you think about charges in the last half of the year. And last half, remember, we had warmer than normal weather, so we were able to accelerate or do some additional spending for our customers. So we incurred additional O&M costs plus the sharing band. So that was meaningful for the last half of the year compared to what you see this year come and shaping up.
Gale E. Klappa
And to Scott's point, we obviously don't see ourselves into 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.
Jeremy Bryan Tonet
Got it. That's very helpful there. 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 progressional efforts to revoke the present 2-year solar tariff suspension. Just wondering if you had any thoughts you could share there or just on the supply chain in general.
Gale E. Klappa
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.
Scott J. Lauber
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.
Gale E. Klappa
Jeremy, Scott and I went down to that warehouse one night, but the Doberman wouldn't let us in. So -- but we know all of those panels are there.
Jeremy Bryan Tonet
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 permitting reform or with the MISO outlook could mean for wet down the road?
Gale E. Klappa
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, Tranche 2 Phase I, 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?
Scott J. Lauber
No, that's correct, Gale. And also a reminder, Tranche 1 was using a lot of existing right of away. So we're very happy using existing right if aways to be able to get that construction started in an earlier time frame in that '25, '26 time frame.
Operator
Your next question comes from the line of Michael Sullivan with Wolfe Research.
Michael P. Sullivan
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.
Gale E. Klappa
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 4 older units at our Oak Creek site, units 5, 6, 7 and 8. And 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?
Scott J. Lauber
No, you're exactly right. As we put on those retirements, O&M will go down. But remember, the driver for the O&M increases this year as we put in new plants into the system. We added a lot of capital over this last year and to run those new plants, including the new race units that we're putting in service and also the plants in Milwaukee infrastructure, all of that's additional O&M. So really supporting capital investments.
Gale E. Klappa
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.
Michael P. Sullivan
Okay. That's very helpful. I appreciate the detail. Just related to that, to the extent that we see any shifting in timing of the solar with supply chain issues and the panels in the warehouse and all that. Does -- how do you kind of react to that? Is there a risk that -- is that -- are you tying that to the coal shutdown retirements in terms of just earning on those assets and rate base? Are there other things you have to move around? Just what are kind of the other implications across the business to the extent that your solar projects get pushed down a little bit?
Gale E. Klappa
Well, to answer the second part of your question on retirements of the 4 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 2 units.
And then in terms of 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.
Scott J. Lauber
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. On Badger Hollow II, we just need the solar panels and Paris is moving along nicely. So those panels already. Won't take long to pop them on.
Operator
Your next question comes from the line of Durgesh Chopra with Evercore ISI.
Gale E. Klappa
Wow, you got the Jersey #8 on. Durgesh?
Durgesh Chopra
I don't know. I don't know about that, Gale.
Gale E. Klappa
I know. I know. Still die hard Eagle fan, right?
Durgesh Chopra
It's still hurts, still hurts.
Gale E. Klappa
I'm sorry.
Durgesh Chopra
Okay, yes, we'll be back next year.
So just Gale, I wanted to go back to the reopener. We've had a ton of discussion here as you make the filing. I think Scott mentioned in his opening remarks that it's not for ROE for equity layer. Maybe can you just talk about the projects that you will be filing for? Am I right in thinking about that these projects are already approved so you're not necessarily seeking for prudency of those projects? And then to the extent that you can sort of help us frame what CapEx would -- are we looking at as you file -- as you make these filings in the quarter?
Gale E. Klappa
Sure. We'll ask Scott to help out as well.
So you are correct. This limited reopener as defined in the rate order, does not -- I mean, the ROE and the equity layer are set and they're not up for reconsideration. There's roughly and yes, you are correct, all of the projects that we will be filing for recovery in this limited reopener have already been approved by the commission. So that is absolutely correct.
And Scott, it's about $1 billion of capital that will be coming in, if I recall correctly, into that reopener.
Scott J. Lauber
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 Weston Race Units those are going to be in for a full year. So that will be part of the reopener. So some of these are full year, some of these are actually part of a year capital projects.
Gale E. Klappa
And LNG? One of our LNG's projects.
Scott J. Lauber
The LNG projects. So it's really across electric and gas and just truing up with the capital additions.
Durgesh Chopra
Got it. 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 this limited reopener filing?
Scott J. Lauber
Sure that the real -- the O&M piece is really the retirement for the Oak Creek 5 and 6, those older Oak Creek units. Remember, last year, we filed the case and then we extended them and now what we're doing is closing those units at the end of May here of 2024. So that will be the O&M reduction that we put in the actual order for us to factor that into the case.
Gale E. Klappa
And Durgesh, the largest O&M reduction. Scott's exactly right. The largest O&M reduction from the closure of the Oak Creek units really will come all 4 units are retired because we won't be retiring the environmental control operation at that site for those older units until all 4 are off-line.
Operator
Your next question comes from the line of Andrew Weisel with Scotiabank.
Andrew Marc Weisel
First, a question on timing of fuel cost. I know a 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?
Xia Liu
Andrew, this is Xia. We -- that's purely timing. We expect that to recover in the second quarter and throughout the third and fourth quarter. Remember that last year, like Gale mentioned, we booked quite a bit of fuel expense because of the sharing band, and we don't expect that to happen. So we see a pickup in fuel in terms of impact on earnings.
Gale E. Klappa
So purely timing. We'll see a second half turnaround.
Andrew Marc Weisel
Okay. And then on usage, Xia, if you could elaborate a little bit on the demand trend. 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 has just been noise around the extreme weather? Or do you see any notable changes in demand trends?
Xia Liu
Yes, a lot of expected noise around weather normalization, like I said, just to put it in perspective, the weather-normalized residential sales met our forecasted expectations. So those are the higher-margin segment.
And on the C&I front, we -- just a reminder, we have a very diverse mix of industries. We call provide essential services like food, paper, plastic processing and many of which had a really good growth in the first quarter and we don't have exposure to lots of automobile or oil and gas industry. So we feel really good about the industry mix and we really haven't seen any trends of any potential recession in our service territory. So we track about a little over 100 large customers regularly. There are 4 that contributed to almost half of the negative variance in the first quarter year-over-year, and 2 of those were down substantially year-over-year because of noneconomic reasons.
So one had a fire, the other had an outbreak. So we expect those to return to normal through the rest of the year. So -- and again, whether normal noise played a role in these numbers. So I wouldn't overreact to these numbers right now.
Gale E. Klappa
Yes. Andrew, just to build on to what Xia's saying, when you look at the temperatures across Q1, they were basically 2 standard deviations away from normal. And I can just tell you, not only for our company but for the industry as a whole, and for those of you who followed us a long time, you've heard me say this a gazillion times. I mean 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, I wouldn't read too much in the Q1 numbers.
Operator
Your next question comes from the line of Anthony Crowdell with Mizuho.
Gale E. Klappa
You got a dog to name?
Anthony Christopher Crowdell
I was thinking that warehouse Doberman, that may work for Julien.
Gale E. Klappa
And not a bad idea. I'll take all of your input on naming the dog for Julien, but go Anthony.
Anthony Christopher Crowdell
Andrew, Xia had just took my question on the recession in C&I sales. If I could just pivot and I think maybe some of your comments earlier on the iron piping in Chicago. I'm just curious, if we think back maybe 10 years ago or 15 years ago, when we talked about nuclear generation, how we're getting rid of it? How we're getting rid of it? And then all of a sudden, we've come to the realization of its importance and zero carbon. Do you think we have a similar moment in gas LDCs? And if we do, do you think that's going to be more dependent on its locations such as you bring up colder Midwest area that, hey, there is this recognition that if we wanted to retire it, we have to do it, electrified within 15 years were that as we get closer to that the parties realize how valuable the asset is?
Gale E. Klappa
Yes. That's a great question, Anthony. And I do think there will be an epiphany moment. Don't know exactly when that epiphany moment will occur, but here are a couple of thoughts. The first is if you think you can electrify completely by, let's say, 15 years from now, you then have to take the next step and say, how are we going to build the generation that would be needed to replace gas heating. And what kind of generation would that be?
Well, think about when gas heating is needed the most. It's the heavy cold winter days in January and February, right? So how much solar could you count on particularly in the Midwest in January and February? How much wind could you count on in January and February? And guess what? You end up clicking into the plan a tremendous amount of gas-fired power generation. When people start working through that equation, I think there will be quite an epiphany moment. I think that's part of it.
And then the other is, as we continue to see the evolution of hydrogen hubs and as we continue to see more and more cost effectiveness from hydrogen under the IRA. I mean some gas utilities are already beginning to blend hydrogen with natural gas, we're beginning to blend. In fact, this summer, we will begin blending RNG, renewable natural gas into our network.
So I think as people begin to think through past the bumper sticker, yes, you're going to see an epiphany moment about how valuable having that resource will be as we transition to a low and no carbon future. I mean, think about it another way. We have got to get this transition right to no-carbon future. And if we sacrifice reliability in that transition, it will delay the transition for many, many, many years. So we're back to all of the above and we're back to -- I think we will have a moment where everybody recognizes the practical approach to this and the safe approach to this.
Operator
Our final question will come from the line of [Ashar Khan] with [Parisian].
Unidentified Analyst
Most of my questions have been answered. I just had a small one. So, why are we down quarter-over-quarter in the second quarter? Could you just help me with the variances which you expect in the second quarter?
Xia Liu
Sure. Be happy to. So financing costs are expected to be higher compared to the Q2 last year. So that's a big driver. There is plus and minuses, but we do have rate base growth that's better than last year, fuel is expected to be better last year, but largely offset by financing costs.
Gale E. Klappa
Terrific. Well, folks, I think that concludes -- is there more? I'm sorry.
Operator
I'll now turn the call back over to you, Mr. Klappa for any concluding remarks.
Gale E. Klappa
There we go. I jump the gun. Thank you. Well, that concludes our conference call for today. Thanks so much for participating, as always. If you have additional questions, feel free to contact Beth Straka at (414) 221-4639. Thank you, everybody. Take care.
Operator
Thank you for joining today's meeting. You may now disconnect.
