Good afternoon, and welcome to WEC Energy Group's Conference Call for First Quarter 2020 Results. This call is being recorded for rebroadcast and all participants are in a listen only mode at this time. Before the conference call begins, I remind you that all statements in the presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10 ks 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 is my pleasure to introduce Gale Clappa, Executive Chairman of WEC Energy Group.
Good afternoon, everyone. Thank you for joining us today as we review our results for the opening quarter of 2020. I certainly hope that you and your families are all doing well and staying healthy. First, I'd like to introduce the members of our management team who are on the call with me today. We have Kevin Fletcher, President and CEO and Scott Lauber, our Chief Financial Officer.
Now as you saw from our news release this morning, we reported Q1 2020 earnings of $1.43 a share, a strong performance despite lower natural gas demand during a mild Q1. The result underscores our focus on operating efficiently and executing our capital investment plan. Scott will discuss our metrics in more detail a bit later in the call. Of course, as we plan for the long term success of our company, we're also focused on providing essential service throughout the COVID-nineteen pandemic. As you would expect, the health of our employees and communities remains our top priority.
We've adopted numerous measures to minimize health risks and instilled in our employees the importance of following the CDC guidelines. Stay at home orders, as many of you know, were issued across our 4 states in late March. Keep in mind that the full effect of the virus hit Wisconsin and Illinois relatively late and the hardest hit parts of Michigan are outside of our service area. Given that timing, we saw only a minimal impact from the pandemic on our Q1 results. Would also like to point out that we took action to further control costs even before the virus struck.
The Q1 happened to be
one of the warmest on record in the
past century. When we saw mild weather at the beginning of January, we set the wheels in motion to reduce expenses in areas of our business that would not affect safety, reliability or customer satisfaction. Now stepping back, as we look more broadly at our business mix, approximately 38% of our pre tax margin for the full year comes from our natural gas delivery business across our 4 state area. Also a third of our earnings for the full year typically come in the Q1. So with a strong start to the year, we're about as well positioned as we can be to deal with the uncertainties ahead.
Many of you have also asked about the status of the major economic development projects that have been announced in our region. The short answer is rock on. A good example is the high-tech campus that Foxconn is building south of Milwaukee. The Gen 6 fabrication plant for LCD panels is fully enclosed now and internal build out is underway. Smart manufacturing facility is also taking shape with production of components for enterprise servers and racks expected to begin in the Q4 of this year.
In addition, the external structure for Fox Con's network operations center is being erected as we speak. And to help fight the pandemic, Foxconn and Medtronic have announced that Foxconn will produce a line of Medtronic ventilators in our state starting this summer. Obviously, we're keeping a close eye on local economic trends and customer demand for energy. Based on what we're seeing today, I do not expect any diminution in our long term earnings growth rate of 5% to 7% a year. With minor adjustments, our $15,000,000,000 capital plan remains on track.
I'd like to highlight one area of that capital plan that is progressing well ahead of schedule. That's our Energy Infrastructure segment. May have seen the announcement that we're increasing our ownership interest from 80% to 90% in the Blooming Grove, Thunderhead and Upstream Wind Farms. Pending all regulatory approvals, we plan to invest another $118,000,000 for an additional 75 megawatts of capacity. Folks for our infrastructure segment, we've now committed over 40% of the total in our 5 year plan and that plan just began in January.
In short, our overall capital plan is low risk and highly executable. We have ample liquidity, no need to issue new equity. In fact, our available liquidity at the end of April has risen to $2,600,000,000 And finally, I'd like to cover one other positive development from the Q1. Just a few weeks ago, we announced the next important steps in our succession planning process. We're very pleased that Scott Lauber will become our Chief Operating Officer effective June 1.
In his new role, Scott will have senior oversight responsibility for power generation, like infrastructure and fuels, information technology, supply chain, supplier diversity and major projects. He also will be named President of Michigan Gas Utilities and Minnesota Energy Resources,
and he
will continue to serve as he has as a member of the Office of the Chair. We're also welcoming, as you have heard, a new addition to the team. Xia Liu will be joining the company as our new Chief Financial Officer effective June 1. As I'm sure you know, Xia most recently served in the same capacity at CenterPoint Energy. Shaw brings a tremendous amount of depth and experience to the new role.
She began her industry career at Southern Company as a financial analyst back in 1998. During her career, she also served as the Chief Financial Officer of 2 Southern Company subsidiaries, Gulf Power and Georgia Power, and as the Senior Vice President of Finance and Treasurer for Southern Company. Shaw will also be a member of
our
Office of the Chair. These new appointments will bring additional depth and experience to an already strong leadership team, a team that as you know has delivered exceptional results over many, many years. And now I'll turn the call over to Kevin for details on our Q1 operations. Kevin, all yours.
Thank you, Gail. I'd like to start by highlighting the work of our dedicated employees who are providing safe and reliable service throughout this health crisis. We have sharply curtailed work inside customers' homes and 80% of our employees are now working remotely or in the field. Our employees are adapting to these changes using technology, following health precautions and continuing to work efficiently. The remote work that's making our company safer would not have been possible without our recent technology investments.
Although we still have a long road ahead of us, I'm encouraged by the processes and procedures we have put in place across our companies. Our incident management team and occupational health and support services employees have been instrumental in executing our business continuity plans and developing new processes to address changing conditions. We are working hard to support our customers through this crisis, and I'm grateful that we've also been able to contribute to organizations on the front lines, including local United Way's, hospitals, domestic violence shelters, food pantries and youth programs. Through these donations and matching gifts, we're providing more than $2,000,000 to COVID-nineteen relief efforts. It's our way of thanking the people and organizations that sustain our communities.
Despite these challenges, we continue to make progress on key initiatives. Importantly, we have no active rate cases at this time, which is a real positive in our current environment. As you may know, the pandemic has made it necessary to stop disconnections and place a moratorium on new late payment charges for customers. Our regulators have been supported, and we're working through the specific mechanisms for future recovery. In Wisconsin, the Public Service Commission has made it clear that we are authorized to defer foregone late payment charges, uncollectible expense and incremental pandemic related costs.
To be clear, this covers all related expenses in our residential as well as our commercial and industrial sectors. Turning now to our projects. We're on track to add utility scale solar generation to our portfolio. You may recall that we have already broken ground on 2 solar projects for Wisconsin Public Service, which will provide us with 200 megawatts of capacity. Our Two Creek solar project remains on time to begin producing energy by the end of this year.
Our Badger Hollow I solar project is experiencing a modest delay, but we'll continue to earn allowance for funds used during construction and we expect it to be operational by the end of April 2021 in time for the MISO capacity option. In February, the Public Service Commission of Wisconsin approved our investment in Badger Hollow 2. Once complete, the solar park will provide We Energies with 100 megawatts of renewable capacity. We expect to invest $130,000,000 in this project. And I'm sure that many of you have heard that the Democratic National Convention has moved from July to August.
We've completed a thorough review of our network in preparation for the potential influx of delegates, and overall, we're in very good shape. And with that, I'll turn it back to Gail.
Kevin, thank you very much. As we look to the remainder of the year, our earnings guidance for 2020 stands at $3.71 to 3 $0.75 a share. As I mentioned earlier, our actions to date have put us in a very good position to achieve those results. So today, we are reaffirming our guidance for 2020. Again, our guidance stands at $3.71 to $3.75 a share.
Also a quick reminder about our dividend. In January, our Board of Directors declared a quarterly cash dividend of $0.6325 a share. That's an increase of 7.2% over the previous quarterly rate. We continue to target a payout ratio as we've mentioned often of 65% to 70% of earnings. We're at the middle of that range right now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share.
And now with details on our Q1 results and more information on our outlook for the remainder of 2020, here's our CFO and about to be COO, Scott Lauber. Scott?
Thank you, Gail. Our 20 2Q1 earnings of $1.43 per share increased $0.10 per share compared to the Q1 of 2019. This result was driven by our continued emphasis on cost control, a modest rate increase at our Wisconsin utilities and additional capital investment. We estimate that the mild winter weather conditions accounted for a $0.10 drag on the Q1 earnings compared to last year. The earnings packet placed on our website this morning includes a comparison of the Q1 2020 2019 results.
I'll first focus on operating income by segment and then other income, interest expense and income taxes. Referring to Page 8 of the earnings packet, our consolidated operating income for the Q1 of 2020 was $627,000,000 compared to operating income of $543,000,000 in the Q1 of 2019, an increase of $84,000,000 After adjusting for the impact of the 2019 tax repairs, operating income increased by $43,000,000 My segment update will focus on the remaining $43,000,000 increase in operating income, which excludes the 2019 tax repair benefit. At our Wisconsin segment, adjusted operating income increased $25,000,000 This was driven by several factors. First, operating and maintenance expense decreased $41,000,000 largely due to savings from the retirement of the Presque Isle power plant a year ago, additional cost control measures and lower benefit costs. 2nd, our Wisconsin segment margins were $5,800,000 lower.
This factored in our recent rate order as well as positive fuel recovery. These positive drivers were more than offset by 41 $200,000 negative weather variance. And finally, depreciation expense increased $8,100,000 as we continue to execute on our capital plan. In Illinois, operating income increased $23,700,000 driven by a $19,700,000 decrease in operating and maintenance expense net of riders. This was driven by lower repair and maintenance work due to milder winter temperatures, lower benefit cost and cost control.
Operating income at our Other State segment decreased $4,100,000 due to the mild first quarter. Turning now to our Energy Infrastructure segment. Operating income at this segment was down $1,200,000 As expected, Bishop Hill, Upstream and Coyote Ridge did not provide a material impact on operating income. Recall that a significant portion of earnings from these wind farms come in the form of production tax credits, which are recognized as an offset to income tax expense. With Coyote Ridge coming online late last year, these protection tax credits contributed approximately $0.03 per share to our earnings in the Q1 of 2020 compared to $0.02 in the Q1 of 2019.
Combining these changes and excluding the impact of 2019 tax repairs, operating income increased $43,000,000 Earnings from our investment in American Transmission Company totaled 39 $800,000 an increase of $3,700,000 Higher earnings were driven by continued capital investment. Recall that our investment is now earning a return on equity of 10.38%. This is for the November 2019 FERC ruling. Other income net decreased by $25,300,000 mainly driven by investment losses related to our deferred benefit plans. These investment losses were partially offset the lower benefit expense noted in our operating segments.
Interest expense increased $5,000,000 primarily driven by incremental long term debt issuances at the subsidiary level to fund our capital investment program. Our consolidated income tax expense net of the 2019 tax repairs decreased $15,700,000 Lower tax expense was driven by the positive tax effect of refunding unprotected tax benefits following our recent Wisconsin rate decision. This year, we expect our effective income tax rate to be between 16% 17%. Excluding the flowback of the unprotected benefits, we expect our 2020 effective tax rate to be between 20% 21%. Currently, we expect to be a modest taxpayer in 2020.
Our projections show that we'll be able to efficiently utilize our tax position with our current capital plan. At this time, I'd like to address our sales and earnings forecast for the balance of 2020. Based upon what we have seen in April, we are adjusting our 2020 sales forecast. Specifically on the electric side, our forecast now assumes a 4% increase in residential sales volumes in the second quarter, trending to an increase of 1 half of 1 percent by the 4th quarter. For small commercial industrial customers, we are assuming an 8% reduction in the Q2, trending to a reduction of 3% by the 4th quarter.
And finally, for our large commercial industrial customers, we are assuming an 18% reduction in the 2nd quarter, trending to a reduction of 7% by the 4th quarter. Overall, based on these assumptions, we are forecasting the total retail electric volumes, excluding the iron ore mine, to decrease by approximately 5% for the remaining 9 months compared to our original forecast. These revised volumes translate to a reduction of approximately $70,000,000 to $80,000,000 in pretax margin for the year. We believe that we have the ability to absorb this margin compression through temporary initiatives as well as multiple cost savings and efficiency measures across the enterprise. As Gail stated earlier, these initiatives will not compromise our commitment to safety, reliability and customer satisfaction.
So we are confident in reaffirming our annual guidance of $3.71 to $3.75 per share. Given that the stay at home orders are still in place in our region, we are providing Q2 2020 guidance of $0.58 per share to $0.62 per share. This assumes normal weather for the rest of the quarter. In last year's Q2, we earned $0.74 per share. We've obviously projected declining sales volumes and there are timing differences related to fuel cost recovery.
With that, I'll turn things back to Gail. Thank you very much. Overall, we're on track and focused on delivering value for our customers
and our stockholders. Operator, we're ready now to open it up for the question and answer portion of the call.
Thank you. Now we will take your questions. The question and answer session will be conducted electronically. Your first question comes from Shar Pourreza with Guggenheim Partners. Your line is open.
Rock and roll, Shar. How are you today?
Not too bad. How are you doing?
Yes. We're hunkered down, doing well.
That's great to hear. That's great to hear. So a couple of questions. You touched on this a bit in your prepared remarks, Gale. But can you give us a little bit more color at a high level, how you're sort of thinking about the duration of the downturn?
I. E. How long are you thinking a recovery is going to take? And maybe just talk about a little bit about the sustainability of your levers if this downturn is more protracted, right? So any risk to the 5% growth?
Any CapEx opportunities that become maybe secondary in nature? If this downturn is more projected than your own internal planning assumptions?
Well, great question, Shar. Let me first say that I think we have been appropriately conservative in terms of our view of how quick a recovery might take place and what the extent of the recovery would be in the near term. Scott covered with you our base assumptions in terms of sales declines. My sense is that if in the region we can get the economy restarted by June, that things will evolve in fits and starts. As I mean clearly as you know 2 thirds of the economy is driven by consumer demand.
And I think the real question for everybody is how confident will the consumer be in going back to their semi normal buying patterns. Having said all of that, I mean, I think we're appropriately conservative in terms of what we expect to happen to our electric and gas sales volumes. We're confident in our levers and in the dozens and dozens of initiatives that we have across the enterprise to become even more efficient. We're learning things here as 80% of our workforce is operating remotely, if you will. So we feel very good about our ability to drive additional efficiency and cost reductions throughout the business.
And we're prepared obviously to pivot either way if the recovery is quicker, then that's you know, that's all to the benefit. But I think we've been appropriately conservative. In terms of the capital plan, when you think about the elements of our capital plan, they're really all about reliability. So I don't see any really need or for that matter, I do see the need to continue with that capital plan focused on reliability and improved customer service. The infrastructure segment will be unaffected as best I can tell.
And so long story short, we really don't see any threat right now to our long term earnings growth rate projection of 5% to 7% a year. I hope Sharla responds.
No, it does. And I just wanted to confirm that in your conservative vendors always comes to light. So thank you for that. Let me just since you touched on the infrastructure segment, are you seeing this economic dislocation sort of is it driving any new opportunities in that segment? I mean, you're well ahead of filling that capital budget.
Are any developers facing any cash crunchers, people looking to get out of projects, especially given you have an obviously an advantage with your tax appetite. So can you have a contra effect where the what you're seeing in the economy actually play into the hands of that segment?
I would say it's a little too early to give you a definitive answer, but the early indications are yes, that there will be some additional high quality projects. And remember, we are very particular about kind of projects we're willing to take on in the infrastructure segment. But I would say that given the sharp contraction in the economy, given the fact that some folks obviously need cash, I think we're going to see more opportunity. We will be very selective though as we work through that opportunity. But I do think there will be additional projects that we will take a hard look at.
Got it. Terrific. And then just lastly, can you just remind us if ATC receives a Transco adder? And if so, do you have any thoughts yet on the recent FERC's NOPR proposal to remove it? As we kind of understand it, it would be kind of a wash if they increase the RTL membership added by 50 bps.
So how are we sort
of thinking about this correctly?
I think so, although I believe that one of the proposals and Scott and Kevin can echo me on this. I think one of the proposals is for there to be a 100 basis point adder for RTO participation. Right now, essentially
ATC is getting
a 50 basis point adder. So there's a possibility there, Scott, I think of another 50 basis points in the mix.
Yes, that's exactly correct. Yes, from what I'm reading right now. So there's potential there.
Got
it. Well, thanks so much guys and congrats, Scott and Sean on the new bowls and I'm sure Sean will get
a little bit more rest
at night work at WACC. So congrats guys.
Thank you. Hey, Shar, I'm a night owl, so don't count on
that. I know that. To you guys, congrats. Thank you.
Your next question comes from Durgesh Chopra with Evercore ISI. Your line is open.
Greetings, Durgesh. How are you doing?
Hey, good morning, Gail. Doing great. Good afternoon, brother. Thanks for taking my question. I actually have 2 into the weeds question, so I'll apologize upfront.
The first one, on the as I understand, I see the $13,500,000 in Wisconsin segment on Slide 8 that is. The $13,500,000 decline in fuel savings. As I understand it, you were allowed to retain roughly 15,000,000 dollars versus your authorized amount in any fuel savings that you might have. Can you just comment on what of that $15,000,000 if any have you utilized in the Q1?
I think virtually all of it because of the timing of fuel recoveries, Scott? Correct. This is $13,500,000 better in
the Q1. And once again, it's a lot of it due to the timing of the fuel recoveries. As you recall, historically, there's a pattern of the fuel recoveries at Wisconsin Electric that you usually over collect in the 1st and second quarters, under collect in the 3rd and then swings back in the 4th quarter. And we just really had some positive fuel recoveries with the price of natural gas and operating expense our operating fuel cost in the Q1. So we're ahead of the plan in this Q1 specifically compared to last year and compared to our original guidance that we set.
So Durgesh what that really means is you won't see as big a pickup in Q2 because we've really eaten the full amount into Q1 because of again of the timing and the collapse of oil and gas prices. Exactly.
Got it. That's what I thought. And then just maybe, Scott, any additional color on the other O and M category, the $22,300,000 what is that made up of and how is that tracking perhaps versus your original guidance?
Yes. So the other O and M and what we did is we broke it out because we've talked about this before the offset of some of that deferred compensation is in the rabbi trust. So this O and M is really the day to day savings that we're seeing from the multitude of operating savings across the footprint. And this is specifically what's related to majority of it's what related to Wisconsin segment and there's more in Illinois and in the smaller utilities also. So that's the day to day stuff.
Okay, perfect. Thank you, Scott, and congratulations.
Thank you. Thank you, Dinesh.
Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open. [SPEAKER JULIEN
DUMOULIN SMITH:] Greetings, Julien. [SPEAKER JULIEN DUMOULIN SMITH:]
Hey, good afternoon. Appreciate you guys taking the time. Perhaps let me take this as a couple of clarifications to the commentary and perhaps move it a step forward. When you're thinking about the cost reductions to offset, I think the you talked about $70,000,000 to $80,000,000 of pretax here. How do you think about the sustainability of that into 2021?
And then subsequently, how do you think about this meshing into the regulatory process at large in Wisconsin? I'll leave it open ended. There's a lot of ways you could interpret that.
Okay. Well, in terms of sustainability, let me just go back and talk for a second about our track record. As you may recall, our day to day what we call our day to day operation and maintenance costs, We reduced those by 7.3% in 2019 over 2018. Our forecast and plan for this year was an additional 2% to 3% reduction over and above what we achieved in 2019. And now we have put in as we mentioned, I mean literally hundreds of measures across the enterprise.
We're learning some things here in terms of additional possibilities for long term sustainable cost reduction through what we've been forced to operate through the pandemic here. So costs, I believe, are going to come down. I would just point to our track record of sustainable cost reductions to give you some confidence that a big chunk of what we're seeing here I think will be sustainable. And of course that not only benefits the efficiency in the operation of the business, but also over the long term benefits customers because it takes pressure off retail rates and allows us to continue without pressure on retail rates the kinds of important reliability investments that we're making in our $15,000,000,000 capital plan. Kevin, Scott, anything else you'd like to add?
No.
Hey, Gil, this is Kevin. Let me first say I've been extremely proud of what our employees are doing and how they've rallied during this COVID virus epidemic. But and Gail, you just mentioned that we're looking at day in and day out what we can do to be more effective and more efficient, and we're finding a lot of those opportunities. And as you said, I believe they will be sustainable as we move forward.
Thank you, Kevin.
Got it. Excellent. And then if I can follow-up just quickly. Strategically, I know you talked about infrastructure opportunities a moment ago, but how do you think about the landscape today as we've heard folks kind of backing away broadly from strategic opportunities given the backdrop of late, but obviously there's been a lot of gyrations in relative valuations, etcetera. How do you think about the opportunity today more holistically and beyond that infrastructure?
So you're specifically asking about, Julien, opportunities in the infrastructure segment?
I was thinking beyond that really. I know you just made comments about robust set of opportunities on the infrastructure side, but I'm thinking strategically beyond that more corporate level.
Well, good question. And I think the answer will be boringly repetitive because we have a set of criteria, as you know, that we use to look at any potential strategic or acquisition opportunity. And I'll just repeat them quickly, so we put everybody to sleep. But these are important, at least in my judgment. Following these criteria in our sector, in our industry, I think if you can follow these criteria and actually execute on them, I think you create shareholder value.
If you don't, then I think the story gets a little bit more money. So our really set in stone criteria are we would have to believe that anything we would acquire would be accretive in the 1st full year after closing. We're not going to trash the balance sheet to do it. We worked very hard to have one of the strongest balance sheets in the industry and we're not going to make something accretive by trashing the balance sheet. And then thirdly, and I think, Julian, this would be the gating up the gating question right now as we look at the landscape.
We'd have to believe that the growth rate of anything that we would acquire would have to be as strong as our own organic growth rate or stronger, read that 5% to 7% earnings per share growth a year. That right now would be I think the biggest gating question for us as we look at anything around the landscape. Hope that responds to your question.
Absolutely. Thank you for the time guys and be well.
Thank you. Thank you.
Your next question comes from Steve Fleishman with Wolfe Research. Your line is open.
Hey Steve.
Hey, Gail. Good afternoon. Just maybe a little bit more color on sales, particularly if you have data for the month of April, like what did overall sales do and by class, so we have an idea?
Roger, let me try to Yes. We do have April data, happy to share it with you. Last time we chatted, I met last time we chatted, I mentioned to you that we're also looking day to day at the MISO, Midwest operator data for the 14 states in the broad middle swath of the country. So if you look at from March 24, which was the date of the announcement of the stay at home order in Wisconsin through May 2, basically kilowatt hours send out in the MISO footprint was down just over 8%. We've consistently day to day done a little bit better than that.
And I think through the same dates March 24 through May 2, we're down right around 7%. So we've consistently done day in, day out a bit better than what we're seeing across the MISO footprint. And we are seeing an uptick pretty significantly in residential usage. Scott, would you like to talk about that? Yes.
So we are looking at our residential usage and like we've done before we track our tire system and our large customers
in residential. Using our automatic meter reading and really looking at the data, we are seeing anywhere to at least 5% plus on some weeks on the residential usage. So when we put our forecast together, looking at 4% is more of realistic estimate to be a little conservative. And as you go through the customer classes, the large commercial and customers that we look at and we track, as you know the 17 major segments that we're looking at in our area and we get reports weekly on it and we're seeing between 16% 18% down there.
And that's what we factored into our guidance here in the Q2. And then the 3rd segment is really that small commercial area
that we're seeing down probably about 6% to 8%. So that's
how we factored it in.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Greetings, Michael. How are you today?
I'm doing okay, Gail. Thank you very much. Congratulations, Scott and Shah.
Thank you.
Hey, on the $7,000,000 to
$8,000,000 reduction in sales, that's based on second quarter being the worst of it and then things getting better throughout the year. Can you kind of ballpark where things might be if, let's say, the Q2 turns out to be like the whole year turns out to be the 2nd quarter, the 3rd and the 4th quarter as well, same kind of reductions?
We're We're doing a little meatball math here as we think about responding appropriately to your question.
Yes. So if you would take that Q2 trended out and it would carry the whole year that may be another $10,000,000 to $15,000,000 and that's the ballpark number we've been thinking about here, if that would be the case scenario. I mean, once again, we're seeing things start up and then kind of go back down. And we anticipate as the stay at home orders start to open up, we'll see some movement here. But we were we do have those kind of bookends here and we're watching it every day.
I think Scott is exactly right. As we've done our sensitivities, even if the Q2 became the Q3 and the 4th I think we're still under $100,000,000 in terms of pre tax margin loss.
Yes, the summertime has already been factored in?
Yes, yes, absolutely.
Right. And also is it applied to both electric and gas customers, not that gas would be much of a factor, curious if it's only electric?
Yes. No, we factored in both gas and electric. I would remind you though that the second and third quarters for gas deliveries are very minimal. Our big quarters obviously are the heating seasons. So Q1 and Q4 for natural gas.
But we have factored in, again, I mean our natural gas deliveries were largely unaffected by the pandemic in Q1, but we have factored in some reduction in Q4 assuming the world is not back to total normal for gas deliveries. Gail,
I would add too in my prepared remarks that we still are expecting the Democratic National Convention to come here. And if it does and the markets open up, then there will be a lot of kilowatt hour usage during that summer period as well, which will help.
I think I missed this before.
I heard something about regulatory treatment for COVID-nineteen expenses. Like right now you have residential escrow accounting in Wisconsin and a rider for at least for bad debt. Is there any are there any other mechanisms being discussed or contemplated at this point?
Yes. First of all, the Wisconsin Commission was the 1st in the country to basically set up a regulatory mechanism. We are being asked all the Wisconsin utilities are being asked to track and defer direct additional expenses related to response to the COVID pandemic, number 1. And number 2, since we've all agreed not to disconnect any customers during the pandemic, We're going to be allowed to defer and track for future potential recovery any late fees that we cannot levy and resulting bad debt. But as you say for Wisconsin, we already have escrow accounting for residential bad debt.
And you pop to Illinois, there's a docket underway right now. In fact, there are kind of their dockets really underway in each of the 4 states. The next furthest along would probably be Illinois, where again no disconnects, no late no new late fee payments. And the commission there is going to wrap up that docket sometime in the next few weeks. So but I would remind you that we are decoupled in it's natural gas delivery only in Illinois and we are decoupled in Illinois.
So that's obviously helpful as well. Scott, anything to add? Yes.
And in Illinois also, there was already in place collection of bad debt expense for both residential and commercial industrial in Illinois. So that's already in place.
There's a Bill Ryder that's historically been in place there.
Just out of curiosity, the Amazon fulfillment center, the warehouse, right, that just got started up recently, just in time, Is that seeing any kind of maybe ramped up activity beyond what you were expecting or any plans for doing something more there?
Matter of fact, yes. There is another site that Amazon is looking at right now in one of the suburbs. That would be their site for same day delivery. That's going through citing an approval process right now, but it's an existing warehouse. So and my understanding is it's about 400,000 square feet.
So yes, Amazon is actively looking at potential expansion here as well.
Great. Thank you very much guys.
You're welcome. Thank you. Thank you.
Your next question comes from Andrew Weisel with Scotiabank. Your line is open.
Greetings, Andrew. How are you today?
Hey, everyone. Good. How are you guys?
We are good.
Good. Good. First, a question for Gail. What would you say the odds are of the NBA resuming this season?
Great question. Here's what I can tell you. The league very much wants to resume. They've talked about even potentially restarting a part of the season as late as August.
But I
think there's a very strong desire on behalf of the league to in some way shape or form get to a meaningful playoff. Now having said that, my own personal guess is if that does happen it would be a broadcast only event without fans in the stands. But if I were a betting man, I would say odds are better than fifty-fifty that there will be some resumption of the current NBA season, even if it means a delay in starting the next season.
All right. I hope so. As much as I love reading about utilities, I do miss sports. Yes. And then the question.
If you're a partial owner of the box and they win the championship, you might get a ring. This would be pretty cool.
All right. So next question, on the Q1 weather, I see the earnings package shows a roughly $45,000,000 hit year over year. What would that be versus normal?
It was about oh, gosh, it was about $0.07 compared to normal. So about $28,000,000 $29,000,000 Yes,
dollars 28,000,000 to $30,000,000 Yes.
Okay. So in terms of the cost savings, you mentioned you're to start to look for some stuff or you started to look in January. You're saying roughly $70,000,000 to $80,000,000 from the coronavirus and roughly 30,000,000 dollars from weather versus normal. Is that right? And that compares to your guidance of 2% to 3%, which would be roughly $25,000,000 to 35,000,000 Did I get those numbers about right?
Yes, you're in the ballpark, absolutely.
Okay, great. Then can you going back as you guys have generally been there for quite some time. Can you go back to 2,008, 2,009 and remind us of how much you were able to identify as far as incremental cost savings during that downturn?
Good Lord. Are you trying to say, Andrew, we're old? Is that the question?
I'm saying you're consistent.
I don't remember the specific number on O and M savings, but I can tell you this, industrial energy usage during 2,009 dropped by 10% compared to 2,008. So we had and small commercial and industrial got devastated as well. There was no real uptick like we're seeing now in residential. So I would say actually based on our 2009 experience in my memory, what we had to accomplish in terms of cost reductions and additional efficiency in 2009 was probably as greater or greater than what we're looking at potentially today. Scott?
Yes. No, Gale, you're exactly right. And 2008, 2009 was a little different period there. But once again, we executed and we achieved our earnings guidance and we earned our returns in our utilities.
I think a part of this is our general operating philosophy. I mean when you focus as a mantra and as a management focus day in, day out on the fundamentals and executing the fundamentals as efficiently as you can, it really gives you good insight into where you can drive additional reductions, additional cost control, additional efficiency, both short term and long term. I think one of the factors that I would cite is our for our success is really every day we try to get better at the fundamentals of our business and that's really the focus of what our operating teams do every day. So I think that's a big factor understanding exactly what's driving your costs and understanding exactly not just top down, but bottom up as well on how we can get better every day.
Okay, great. Then one last one, if I may. On liquidity, I believe you said $2,600,000,000 as of a few days ago. That's up quite a bit from the end of March to year end. Can you remind us what you've done to bolster that?
And the way you see the world today, do you think you're done in terms of capital raises for the year?
Scott, we'll let you handle that one.
Yes. So actually, the cash flow has been positive so far. And we did issue a small debt at our small utilities about $110,000,000 that helped with the liquidity overall. Burke and MGU in total was $110,000,000 So we will still have some issuances the remaining of the year as we look at financing now that we have multiple items in the infrastructure segment, we'll be looking at that and also potentially some holding company debt. So we're evaluating it right now and looking at the timing, but the rates are coming down a little, so that looks good.
But right now the additional liquidity was good cash flow and additional debt at the smaller utilities.
Great. Thank you very much.
You're welcome.
Your next question comes from Jeremy Tonet with JPMorgan. Your line is
open. Jeremy, how are you?
Good. Thanks for having me. I think you touched on industrial and specifically Foxconn activity at the start of the call here. But just wondering if you could share any more color on current and expected industrial activity going forward here. And I guess if you see the potential for any lingering impacts from the whole COVID-nineteen situation on post-twenty 20 industrial load?
Well, the honest answer is we don't know. Until we see how the consumer comes out of this shutdown of the economy, it's really almost impossible to tell overall. But having said that, every one of the major economic development expansion projects that we've announced in the last 2 years are as I mentioned with Foxconn is a good example, are rocking and rolling and going forward with the same commitment. In fact, one of the and I won't mention their name because it's not public yet, but one of the major announcements we've made on the economic development front about a year and a half ago, we've just learned the footprint is going to be even larger. So that's one of the reasons why I don't see a diminution in our long term growth rate.
We've got major capital projects on the way. And I will tell you in terms of customer growth, customer expansion. The other thing I will tell you on the more optimistic or even more optimistic side, I already believe that we're going to see a reshaping of the supply chains with much more productivity and much more production coming into the U. S. I think one of the lessons that everybody has learned is nothing against China, but we can't be dependent on Chinese production for all of the antibiotics that are prescribed in the U.
S. Or the great majority of them. I think you're going to see a reshaping of the supply chain again with more production coming in the U. S. Over the next few years and Wisconsin will be particularly well suited to take advantage of that in my view.
That's very helpful. Thanks. And just one more if I could. Just wondering if you see COVID impacting the timing of pipe replacement in Illinois kind of both from a rate increase perspective and an economic development perspective?
Well, I will say this, given the stay at home orders, we have shifted a little bit in Illinois some of the pipe replacement work and actually to very much to our benefit and customers benefit. So the plan was to really upgrade the piping systems in a number of neighborhoods starting in the Q1. Now though the Chicago Loop is deserted and we're able to we were able to get some permits to do work we would have done at a later time, but was on the schedule in the Chicago loop. We are far more productive with that work than you can possibly imagine because there's simply no traffic and nothing to disrupt the timing of the work. So from the standpoint of actually being even more efficient and getting some work done that eventually absolutely had to be done in the Chicago loop, the pandemic has actually been helpful to us in terms of shifting that work.
It is slowing down obviously some of the work in the neighborhoods, but we're really pleased that we've been able to get a real leg up on working the loop. Kevin, Scott, anything to add to that?
Yes, Gail, I would add it made sense, excuse me, Scott, for doing so because as you just mentioned, moving away from the neighborhood some allowed us to not have as much interaction with going inside the homes because in addition to the pipe replacement, we're also moving meters from inside to outside. So with the COVID-nineteen, we made a decision to minimize that and focus attention where we could be more productive, as you just mentioned.
That's very helpful color. Thank you.
You're welcome.
Your next question comes from Michael Lapides with Goldman Sachs. Your line is open.
Hey, guys. Thank you for taking. Hey, Gail. I'm glad to hear you and your family are all well. And congrats to Scott again on his new role within the company's leadership team.
Hey, Michael. Michael, do you think we got to give him a raise?
No, no, no, no, no. Absolutely not. Not in this environment, maybe 5 or 7 years from now. We'll talk about that.
Very good. Appreciate that, Michael. Thank you very much. Just what I wanted to hear.
Hey, all right. I'll talk about demand and the revenue impact being around 75,000,000 or so. And I just want to make sure I'm thinking about the puts and the takes. So in Wisconsin, you had $22,000,000 of O and M benefit. In Illinois, you had almost $20,000,000 So call it $42,000,000 total.
So you're kind of half more than halfway to the O and M cost reductions that would offset the demand weakness. Are you saying that that's all the O and M you would take out? Or are you saying that you would take out even more than that because that's what the original plan already had?
Great question and let's back up for a minute. Remember our initial plan embedded in our earnings guidance and our forecast for the year was a reduction in O and M of 2% to 3%. So some of what you're quoting for Q1 results really was part of the plan. So when you look at what we're talking about here with the $70,000,000 to $80,000,000 projection for our base case in terms of pre tax margin reduction and offsets that we expect to achieve through O and M savings, that's over and above the 2% to 3%. Scott?
Yes, that's exactly right. So we had a great Q1 on our O and M control and that was really needed to offset some of the weather that we had. But the O and M for the rest of the year, we're going to need continue to take cost out as we talked about to achieve that.
Got it. So I guess my question is, is the total O and M reduction kind of another 3% to 5% in addition to the original 2% to 3% that you had targeted? Is that kind of the right way? Or maybe it's easier if we just put this in dollar millions and kind of go from there?
Yes. I think percentage wise you're pretty much on it. Yes. We'd assume 2% to 3%. Then if you add the $70,000,000 to $80,000,000 on top of that, yes, you're in the ballpark.
Got it. Okay. And you think some of that is sustainable into 2021 and beyond, meaning kind of a permanent reduction in O and M, which would obviously improve back to the customer over time?
I'm sorry, you were very muffled there, Michael. I did not catch your question.
Okay. And you assume some
of that is permanent, that incremental O and M reduction, meaning that it would last into 2021 and beyond?
Yes, that's exactly correct.
Got it. Okay, guys. Thank you, Gail. Much appreciated. And I hope your bucks are playing soon.
Yes. Thank you, Michael.
Your last question comes from the line of Paul Patterson with Glenrock. Your line is open.
Good afternoon. How are you doing?
What's you up to today? Anything good, Paul?
I don't know about good. But just to sort of follow-up on a few questions here. You said that the O and M savings, a big chunk of them are sustainable. Could you give a little bit more of a quantification on that? Or if you can't, can you sort of quantify give us a sense as to where you're seeing this savings longer term, the longer term stuff?
Well, it's a little bit early to give you a precise answer. The $70,000,000 to $80,000,000 of cost savings that we expect to achieve this year on what on exactly what amount of that is sustainable. But I will tell you that and I think this is the case for many of our brethren across the industry. Now that we're having to operate as remotely as we are and we're doing very well. I mean, as Kevin mentioned earlier, actually our customer satisfaction levels are the highest I've ever seen and we generally have very high customer satisfaction.
I think we're our folks have managed to operate very effectively in this environment. So for example, and we will be shaking this all out as we continue to watch and observe over the course of the rest of the year. But I'll give you one specific example. We're not going to need as many physical facilities as we once thought we would need. And there were some expansion plans on the drawing board.
I don't think we're going to need that. I don't believe we're going to need all of them, maybe none of them, but as an example. So we'll see how this goes, but I would just point you back to our track record. I mentioned earlier more than a 7% decline in sustainable O and M reduction 2019 over 2018, 2% to 3% that we believe was going to be permanent this year and I think it will be more than that.
Okay. And then following up on the question about Illinois and the pipe replacement program. As you know, there was a resolution that passed the city council. And do you think that the changes that you're talking about will ameliorate their, I guess, their concerns as articulated, I guess, in this resolution? Do you follow what I'm saying?
I mean, how should we think about that resolution, I guess?
Well, this was the same resolution that was passed a year ago. So now we're in the 2nd year of the same resolution. For those of you who are not familiar with it, the resolution basically asked the governor to look into the cost and effectiveness of the pipe replacement program. The major concern as we understand it from a few of the council members is affordability. And there's a very, very good answer to that and that is that if you look at customer bills, customer gas bills in Illinois starting in the year that this legislation was passed that incentivized utilities in Illinois to accelerate the pipe replacement program, customer bills are actually down.
So we have not created an affordability crisis in any way shape or form. Once completed and it's going to take a while, the system will be more efficient. That should be helpful in terms of customer bills. And in addition to that, we have just provided to the Illinois Commerce Commission an independent study from a worldwide nationally and internationally known engineering firm that the commission asked us to basically take a hard look at the execution of our pipe replacement program. So we've just presented the it's called the Kiefner study, KIEFNER.
You may want to take a look at that. It should be on the Illinois Commerce Commission website or a summary of it certainly should be. But the bottom line is the Kiefner study indicated that the aging pipes underneath Chicago are have a useful life even shorter than what we had anticipated. And the average useful life remaining according to the Kiefer study is 15 years. So Kiefer actually recommended in its study to the Illinois Commerce Commission that we accelerate the work to an even greater degree than we're trying to do now.
I don't know practically other than a pandemic where you can do a lot more work in the loop. I don't know how practical a significant additional acceleration is. But long story short, there's even more evidence now of the need for the program, number 1, verified by an outside international engineering firm. Number 2, there is no heating cost crisis compared to when this program started.
Excellent. Thanks so much for clarifying that. And then just on I know you guys have deferraled back to Wisconsin. I know you guys have deferral on the electric and gas side there, but due to COVID and everything, but could you just give us a flavor as to what your actual experience is in terms of people paying their bills on time over the last month or so? Or do you have any trends or any data you could share with us in terms of what you're seeing in terms of bill pay?
Paul, really nothing yet in that. Remember, we are under a residential disconnect moratorium
in
all of our cold weather states that usually runs through April 15. So we wouldn't have seen any major difference in terms of collectability or disconnections through tax day, normal tax day anyway. So we're really only looking at about a 2 week period since then and I don't think the data Scott is meaningful in that 2 week period.
No, it's pretty early yet. Normally we see a little reduction in those remaining 2 weeks. We saw a small increase, but it's really early yet. So we're watching it very closely like everything else.
Awesome. Great. Thanks so much guys. Hang in there.
You're welcome. You too, Paul. Thank you very much. Well, folks, we really appreciate your questions. That concludes our conference call for today.
If you have any additional questions, if you feel I cannot talk anymore, you wore me out here. Feel free to contact Beth Straka, Head of our Investor Relations group, and she can be reached at 414-221 4639. Thanks everybody. Stay safe and take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now