WEC Energy Group - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 topped expectations: revenue $3.15B and diluted EPS $2.27 vs S&P Global consensus of $2.81B and $2.18, respectively; EPS and revenue beats were driven by colder winter (vs 2024), rate-based growth in Wisconsin, and higher retail electric usage, while O&M and D&A were headwinds. Estimates marked with * below are from S&P Global.
• Guidance reaffirmed: FY25 EPS $5.17–$5.27; management also guided Q2 EPS to $0.63–$0.69 and reiterated 6.5%–7% LT EPS CAGR.
• Demand growth narrative strengthened: Microsoft data center Phase 1 progressing; WEC forecasts 1.8 GW 5-year demand growth in SE Wisconsin and highlighted the proposed Cloverleaf campus (initially ~1 GW, potentially larger) as incremental to plan.
• Regulatory/commercial catalysts: Proposed Very Large Customer (VLC) tariff in Wisconsin with fixed ROE 10.48% and 57% equity layer to align large-load cost responsibility; Illinois pipeline safety modernization decision enables ramp toward >$500M annual gas capex by 2028.
• Capital execution: Darien Solar (225 MW) in service; closed 90% of Hardin III Solar for ~$406M; capex plan remains $28B over five years with equity funding of $700–$800M in 2025 via ATM/DRIP.

What Went Well and What Went Wrong

• What Went Well

  • Strong beat vs consensus: Q1 EPS $2.27 vs $2.18*; revenue $3.15B vs $2.81B*. Weather, rate-based growth, and higher retail deliveries contributed to the upside.
  • Demand backdrop: “We have confidence in our 5-year forecast of 1.8 gigawatts of demand growth in Southeastern Wisconsin” (CEO). MSFT project momentum and early-stage Cloverleaf campus support medium-term growth.
  • Renewables execution: Darien Solar (225 MW) placed in service; 90% of Hardin III Solar (250 MW) acquired for ~$406M, enhancing PTC-driven earnings at Infrastructure segment.

• What Went Wrong

  • Cost inflation/O&M ramp: Day-to-day O&M expected to grow 8%–10% YoY in 2025 due to vegetation management and assets entering service, pressuring margins despite revenue growth.
  • Tariff/headwind watch: Management estimates 2%–3% exposure of the $28B capex plan to tariffs, with batteries/solar components the most sensitive; mitigation via contracting and onshoring in progress.
  • Fuel/tax/other items: Earnings drivers included offsets from higher D&A/interest and timing of fuel expense; EBITDA slightly missed consensus despite top-line beat (actual $1.309B vs $1.333B*), pointing to cost/other items [GetEstimates Q1 2025].

Transcript

Operator (participant)

Good afternoon and welcome to WEC Energy Group's Conference Call for First Quarter 2025 Results. This call is being recorded for rebroadcast, and all participants are in a listen-only mode at this time. After the presentation, this 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 two hours after the conclusion of this call. Before the conference call begins, please note 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 discussion, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. It is my pleasure to introduce Scott Lauber, President and Chief Executive Officer of WEC Energy Group. Please go ahead.

Scott Lauber (President and CEO)

Good afternoon, everyone, and thank you for joining us today as we review our results for the first quarter of 2025. Here with me are Xia Liu, our Chief Financial Officer, and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported first quarter 2025 earnings of $2.27 a share. We're off to a solid start to the year. We remain laser-focused on reliability, financial discipline, and customer satisfaction, and we're on track to deliver another year of strong results in line with our 2025 earnings guidance of $5.17-$5.27 a share. This, of course, assumes normal weather going forward. We continue to target a 6.5%-7% long-term compound annual growth rate, supported by our robust capital plan driven by strong economic growth in our region.

In Wisconsin, the unemployment rate stands at 3.2%, continuing a long-running trend below the national average. And as we have discussed, we are continuing to see significant economic development along the I-94 corridor between Milwaukee and Chicago. Microsoft is making good progress on its large data center complex in southeast Wisconsin. Work has continued in the first phase of the project, and we have confidence in our five-year forecast of 1.8 gigawatts of demand growth in southeastern Wisconsin. As you recall from last quarter, just to the north of Milwaukee, Cloverleaf has announced plans to develop approximately 1,700 acres for another large data center campus. Cloverleaf has projected at least 1 gigawatt of electric demand for this development. We have not incorporated any of this investment related to Cloverleaf in our capital plan just yet, so stay tuned for the updated capital plan on our third quarter earnings call.

There is other notable growth in Wisconsin. As a reminder, Eli Lilly has announced a $3 billion expansion of its manufacturing facility in Wisconsin. Just recently, ULINE announced another expansion in southeastern Wisconsin. The company plans to build a 1.2 million sq ft warehouse and distribution facility. We're also off to a strong start on our current capital plan. It's the largest five-year investment plan in our history, totaling $28 billion dedicated to economic growth and reliability. As we've discussed, it's based on projects that are low risk and highly executable. On the tariff front, we're evaluating the impacts of tariffs on our supply chain and capital plan. For our $28 billion capital plan, we estimate the tariff exposure is approximately 2%-3% overall. As you can expect, we are actively engaged to mitigate efforts and mitigation efforts through our contracts and various suppliers.

Fortunately, we have diversity in our business mix, capital plan, and supply chain that should help to mitigate the overall effects on our customers. Our company has successfully navigated past periods of uncertainty and challenges, and you can certainly expect us to aim to do the same for this current environment. Now let me give you a few updates on our projects. In early March, the Darien Solar Project went into service. This adds 225 megawatts of renewable generation to our regulated portfolio with an investment of approximately $427 million. Currently, we have two solar projects in construction phase: Kashkanan, a 300 megawatt project in southern Wisconsin, and Renegade, a 100 megawatt project in the Upper Peninsula of Michigan. We expect both of these projects to be placed into service next year.

In addition, the Wisconsin Public Service Commission has approved our purchase of 90% of the Hyundai Solar and Battery project for approximately $883 million. Construction is expected to be completed in 2027. Of course, we are closely monitoring the federal developments related to the Inflation Reduction Act, and we're actively seeking to safe harbor the projects in our capital plan. At WEC Infrastructure, we closed on the Harden III Solar Project in February. We invested approximately $406 million for 90% ownership of the project, which has a total capacity of 250 megawatts. As a reminder, this project fulfills our five-year planned investment at WEC Infrastructure. Overall, we have a lot of confidence in our ability to execute on our capital plan. Now turning to the regulatory front. As a reminder, we currently have no active rate cases.

In Wisconsin, at the end of March, we filed a new tariff proposal with the Public Service Commission to accommodate the economic growth we've discussed. The proposed very large customer, or VLC tariff, would meet the needs of our very large load customers while protecting all of our other customers. Our proposal would apply to customers with 500 megawatts or more of forecasted new load. The customer commits to subscribing to a portion of one or more dedicated generation resources. The terms of the agreements are 20 years for wind and solar, and the depreciable lives for natural gas and battery storage assets. As filed, the tariffs provide for a fixed return on equity of 10.48% and an equity ratio of 57%. In addition, there are several other charges these customers are responsible for: administrative charges, energy charges, transmission charges, and distribution charges.

The proposed tariff is designed so that no cost to serve these very large customers would be subsidized by or shifted to other customers. We worked with these large customers in the design of the tariff, which included the financial parameters. We believe this tariff is a key component to help make Wisconsin a prime spot for data center investments. We expect the decision by the Commission by the second quarter of next year. In Illinois, we received the Illinois Commerce Commission's decision on our safety modernization program in February. The Commission lifted the pause on our work and directed Peoples Gas to focus on replacing all cast iron and ductile iron pipe that is a diameter under 36 inches by January 1, 2035. The Commission also directed its staff to appoint a safety monitor to provide oversight by July of this year.

Like other capital projects, our investments in pipe replacement will be reviewed in future rate proceedings. Under this pipe replacement program, approximately 1,100 miles of older pipe, some dating back to the mid-1800s, will need to be replaced. We are currently developing engineering plans to execute the order. We will factor the updated pipeline replacement program capital into our fall update. Next up, Xia will provide more details on our financials.

Xia Liu (CFO)

Thank you, Scott. Our first quarter 2025 earnings of $2.27 per share reflects a $0.30 increase compared to the first quarter of 2024. Our earnings packet includes a comparison of first quarter results on page 12. I'll walk through the significant drivers. Starting with our utility operations, earnings were $0.28 higher versus the first quarter of 2024. Weather positively impacted quarter-over-quarter earnings by approximately $0.18. Compared to normal conditions, we estimate that weather had a $0.01 positive impact in the first quarter of 2025 compared to a $0.17 negative impact in the first quarter of 2024. Recall that our 2024 winter was the warmest in Wisconsin history on record. Rate-based growth contributed $0.20 more to earnings. This was driven primarily by the Wisconsin Rate Review outcome that was effective on January 1, 2025. Tax and other items added another $0.04.

These positive drivers were partially offset by a total of $0.14 from O&M expense, depreciation and amortization, and timing of fuel expense. Our day-to-day O&M for the year is still expected to grow 8%-10% when compared to actual O&M in 2024. As a reminder, this year-over-year growth is largely driven by a few factors. Our continued focus on Commission-approved vegetation management, new assets coming online, and measures we took last year to offset the mild weather impact. And let me give you some color on our weather normal retail electric deliveries, excluding the iron ore mine. Compared to last Q1 and adjusting for leap year, we saw 0.7% growth this quarter, led by the large commercial and industrial class, which grew 2.3% in a quarter. This is right in line with our forecast.

Remember, we expect our weather normal annual electric sales growth to reach 4.5%-5% starting in 2027, and we're on track to reach that over the next couple of years. At American Transmission Company, earnings increased $0.02 compared to the first quarter of 2024. One cent was related to continued capital investment, and the other penny is related to a modest gain from selling an interest in the past 15 transmission lines in California in the first quarter this year. Turning to our energy infrastructure segment, earnings increased $0.05 in the first quarter of 2025 compared to the first quarter of 2024, largely from higher production tax credits. Remember, we completed our investment in the Maple Flats and Delilah Solar projects in the fourth quarter of 2024, as well as the Harden III Solar Project this February.

Next, you'll see that earnings from the corporate and other segment decreased $0.03. This was driven by higher interest expense, partially offset by favorable tax timing and other items. Finally, there was $0.02 cents of dilution primarily associated with our common equity issuances. We issued about $200 million in 2024 and about $140 million in Q1 this year. Including the Q1 issuances, as a reminder, we expect to raise a total of $700 million - $800 million of common equity in 2025 via our ATM program, as well as the dividend reinvestment and employee benefit plans. This is a part of the $2.7-$3.2 billion total common equity we expect to issue through 2029 to finance the capital investment. As we refresh our capital plan this fall, we continue to expect any incremental capital will be funded with 50% equity content. Finally, let me comment on earnings guidance.

As Scott mentioned earlier, we are reaffirming our 2025 earnings guidance of $5.17-$5.27 per share, assuming normal weather for the rest of the year. We're also reaffirming our long-term EPS CAGR of 6.5%-7%. For the second quarter, we're expecting a range of $0.63-$0.69 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. With that, I'll turn it back to Scott.

Scott Lauber (President and CEO)

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

Operator (participant)

Thank you. Now we will take your questions. The question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit one on your phone. If you are using a speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from Julian Demulin Smith of Jefferies. Your line is open.

Brian Russo (Managing Director and Senior Equity Research Analyst)

Yeah, hi, it's Brian Russo on for Julian.

Scott Lauber (President and CEO)

Sounds good. How are you doing?

Brian Russo (Managing Director and Senior Equity Research Analyst)

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

Scott Lauber (President and CEO)

Sure, there's a lot built into that. When you looked at the MISO auction, especially when you looked at the summer part of the auction, it was really a tight auction. Overall, we were long on one company and a little bit short on the other, but nothing material, all in the right kind of all in the right direction overall. We build to make sure we have enough capacity to meet our demand, and that's why we've been working with our very large customers and looking at our forecast for, oh, several years now as we get orders in place to build new generation capacity.

As we think about it looking forward, we are looking forward to some of the decisions by the Commission, and we expect, oh, end of June, early July here on some of the additional gas generation needs that we have from the combustion turbines and the RICE units that are at the Commission to help us build that needed capacity to meet this large customer load along with the other economic development in the region. We are actively working to procure, and we've already started talking about 2030, 2031, and how we look at the capacity needs.

As you start thinking about our Power of the Future assets and some of the other assets that we have, we are looking at, and we have successfully tested gas at about 30% blend on the Power of the Future coal units, and we're looking at our plans to make that 100% gas by 2029, and the same thing looking at the Weston 4 units converting it to gas. We are looking at how do we strategically have the capacity in the region, which also includes the capacity we'll get from batteries and wind and solar. We are planning, and we're looking to the future to make sure we're ahead of that capacity auction. Does that help you?

Brian Russo (Managing Director and Senior Equity Research Analyst)

Yeah, yes, it does. Thank you very much.

Operator (participant)

The next question comes from Andrew Weisel with Scotiabank. Your line is open.

Scott Lauber (President and CEO)

Hey, Andrew.

Andrew Weisel (Managing Director)

Hey, good afternoon.

Scott Lauber (President and CEO)

Good afternoon.

Andrew Weisel (Managing Director)

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

Scott Lauber (President and CEO)

Oh, excellent question. We can give you a little color what we're looking at now. We're going through the process, and we had a couple of projects that, of course, were stale that we're running back through some of the permitting processes. You have to go through the permitting process, and we're going through to see if we can kick off a few of them this year. Of course, we're going through that hiring process and our planning. We'll see the program ramp up in 2026 and 2027 and get to what we think will be a full run rate. We're still pulling the numbers together in 2028, but we expect that'll probably be a little over $500 million a year going forward. Remember, our old program was about $280 million - $300 million.

In order to get this program completed by the beginning of 2035, we really have a lot of spending to do because we were expecting it to be closer to that 2040 timeframe. It will be ramping up over 2026 and 2027, with hopefully we get to that run rate in 2028.

Andrew Weisel (Managing Director)

Okay, great. Next, on Microsoft, I think you briefly mentioned that things are going smoothly there. Can you just elaborate on that, maybe what you're hearing and seeing from the company? I know there's a lot of questions among investors about pauses of various phases and potential global slowdown, all those types of questions. Maybe if you could just tell us how your latest conversations with them have been going, both around the current phase one that goes through 2026 and what the company is doing and seeing around those future phases in your neck of the woods.

Scott Lauber (President and CEO)

Sure. Microsoft, we've been working with them for a couple of years now, and they reiterated to us that the economic development and the demand that we have in our forecast over the five-year period that supports that southeastern Wisconsin, that 1.8 gigawatts is still solid. We have worked with them on building substation ourselves at American Transmission Company, and that work progresses. I have no concerns that that site is still going to be very strong and a very core part of Microsoft's development. I learned a lot just listening to the Microsoft conference call because they talk about timing and going in and out of some of their build cycles and how they manage it.

It just sounds like now with AI and all the hyperscalers being the talk and how it affects the electric utilities, people are talking about it a lot more, but I think they've always managed it. I encourage you to listen to the Microsoft conference call. I thought it was really interesting how they described some of the things, but I have no concerns in southeastern Wisconsin here.

Andrew Weisel (Managing Director)

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

Xia Liu (CFO)

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

Andrew Weisel (Managing Director)

Great. Thank you very much, everybody.

Scott Lauber (President and CEO)

Thank you.

Operator (participant)

The next question comes from Jeremy Tonet with J.P. Morgan. Your line is open.

Jeremy Tonet (Managing Director and Equity Research Analyst)

Hi, good afternoon.

Scott Lauber (President and CEO)

Hey, Jeremy. Good afternoon.

Jeremy Tonet (Managing Director and Equity Research Analyst)

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

Scott Lauber (President and CEO)

Sure. I'll start, and then Xia can walk you through a little bit more of the numbers. When you think of the IRA and a lot of projects that we have in our plan, we've been anticipating the IRA benefits, and I think a lot of our customers are anticipating too. Remember, all the PTCs and ITCs for the projects going forward go back to our customers. I could see that there would be a phase-out of the IRA and PTCs and ITCs in the future, but it's pretty well integrated in a lot of the projects that people had assumed going forward. Transferability, there's other ways to look at moving those tax benefits to others, whether it's tax equity or transferability. Tax equity is just a little more complicated. It ends up in the same result.

I think it's a little more costly for our customers, where transferability has been very clean and easy to execute. Actually, we've been able to benefit some of our local companies too with the benefits of those tax benefits. Hopefully, there's a transition period, and transferability stays for a while because I think it's really beneficial to our customers. Xia can give you a little more detail on some of the numbers.

Xia Liu (CFO)

Absolutely. On the phase-out point, like Scott mentioned, we're actively seeking safe harboring, the upcoming renewable projects. Once we do that, hopefully, we could qualify the project for 100% of PTCs through at least 2029. We're actively seeking that. In terms of the transferability, as you knew that we have been able to transfer about $200 million of PTCs annually to third parties over the past several years. As we build more projects, that number ramps up slightly in the plan. However, if you think about the projects, we have almost 80% of the planned PTC transfer from projects already in service from 2025 and prior. As we all know, we don't believe Congress likes to change the economics of projects already placed in service.

Assume that, depending on the law, obviously, but assume that transferability were to only impact projects put in service from 2026 or 2027 or later, we would have very limited credits that we would not be able to sell. We think the impact would be pretty limited. Also, like Scott mentioned, for the utility projects, if transferability were repealed, it would make renewable projects more costly for the customers. I think we would have to take a step back and think about the optimal generation project mix from a customer affordability standpoint. I think all in all, we're managing it, but watching the development, but also managing very actively. We're not concerned at this point.

Jeremy Tonet (Managing Director and Equity Research Analyst)

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

Xia Liu (CFO)

Yeah, depending on the law, yeah, absolutely.

Scott Lauber (President and CEO)

Yeah, we're all anxiously waiting to see what the final law is.

Xia Liu (CFO)

Yeah.

Jeremy Tonet (Managing Director and Equity Research Analyst)

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

Scott Lauber (President and CEO)

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

Jeremy Tonet (Managing Director and Equity Research Analyst)

Got it. Great. Thank you for that.

Scott Lauber (President and CEO)

Thank you.

Operator (participant)

The next question comes from Anthony Crowdell with Mizuho. Your line is open.

Anthony Crowdell (Managing Director)

Hey, good afternoon, team.

Scott Lauber (President and CEO)

Good afternoon.

Anthony Crowdell (Managing Director)

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

Scott Lauber (President and CEO)

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

Xia Liu (CFO)

No, it's all mostly weather-driven.

Anthony Crowdell (Managing Director)

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

Scott Lauber (President and CEO)

Sure. A couple of things is one, yeah, it's about 1,700 acres of developing. They talked initially about one gigawatt of load we expect. They also say that they can hold up to probably about 3.5 gigawatts of load. Cloverleaf is in the process of marketing the land and the location. We expect in the next couple of months to see who potentially is a longer-term purchaser of that spot or a purchaser of that location. We will work on the details of the generation mix of that that will hopefully factor in then to our fall update in the third quarter call of the capital plan. Things are moving along very well there. I think it'll be a combination, of course, of gas and renewables just because you need that firm capacity ability.

But I also think they'll have some renewables in there too just to help with the energy part of the bill too. I think it'll be a combination, but more to come as we continue to work with that and whoever purchased that location.

Anthony Crowdell (Managing Director)

The timing of when maybe that load would come online, that was something we'd get more on the third quarter call?

Scott Lauber (President and CEO)

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

Anthony Crowdell (Managing Director)

Great. Thanks for taking my questions.

Scott Lauber (President and CEO)

Absolutely. Thank you.

Operator (participant)

The next question comes from Michael Sullivan with Wolfe Research. Your line is open.

Michael Sullivan (Director of Equity Research)

Hey, good afternoon.

Scott Lauber (President and CEO)

Good afternoon, Michael. How are you?

Michael Sullivan (Director of Equity Research)

Hey, Scott. Doing well, thanks. Wanted to start with maybe just a little more color on where you're seeing the tariff impacts in your capital plan, and if it's primarily around the renewables, just remind us kind of what the process is for updating costs on that front as you seek to recover.

Scott Lauber (President and CEO)

Sure. Sure. As you think about it, as we look at our capital plan, a lot of the electric and gas distribution is mainly domestically sourced. When you start thinking about some of the remaining part of our plan, largely in the generation, a lot of it's labor, probably 50%-60% is labor, but then the remaining are the materials. Of course, we have to see final clarity on the tariffs. The solar for the near-term projects, if you're very comfortable, those are in flight. We got processes and manufacturing and panels lined up. The farther ones out, of course, we have been working with other developers and suppliers to really onshore a lot of the production of these panels. The challenge, of course, is where do you get the polysilicon and the wafers, the cells, etc.? We have been working with everyone to get that.

If there would be a cost increase, we would, of course, notify our regulators, the commission, as soon as possible of that cost increase and then go through a prudency review process, which we've done on other projects for Force Majeure situations. At this time, we don't have anything notable to talk about. On the other aspect, probably the last item are the batteries. Remember, the smallest part of our generation plan is probably the batteries, a little under $1 billion. In fact, we have our first battery installation going in the end of this month, about 100 megawatts of that. Those batteries are a little more tricky across the industry, and we'll just manage the batteries as we get some more clarity on the tariffs. Of course, we're working with vendors on those batteries.

Of course, working with some of the very large customers also, we could see them looking at renewables and batteries too as they look at PCAs and long-term generation needs. We are kind of looking at all of the above, but probably the biggest potential charges coming from the tariffs could relate to batteries or the solar projects.

Michael Sullivan (Director of Equity Research)

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

Scott Lauber (President and CEO)

Sure. Xia can walk you through the details. It's basically the same that we kind of went through several years ago with the lower tax rate, right? In general, you are going to get a lot of the benefits will go back to our customers for that lower tax rate through the regulatory model. In general, then there will be a little less of a tax shield at the parent company for some of the deductions up there and the interest expense. That is kind of the high-level story. I do not think, remember last time it was a little bigger change in taxes, so I do not think it is going to be that big of an effect. Xia, any additional color?

Xia Liu (CFO)

Yeah. I think Michael and Steve published a report which really correctly stated the potential impact. Like Scott mentioned, long-term benefit for customers because customers would pay less under that situation. It would have some earnings impact, particularly for the tax shield earnings benefit from the non-customer deductions at the holding company that would decrease over the longer term. The earnings would increase at the utility because your rate base would be higher over the longer term. In terms of the cash flows, obviously, the lower the corporate tax rate, you would collect less from the customer. Everything else being equal, there would be slightly less cash flow for the company overall. I think we're watching that very closely. In case that we went that way, we would be ready to handle and deal with it.

Michael Sullivan (Director of Equity Research)

Okay. Great. Appreciate the shout-out. Take care.

Scott Lauber (President and CEO)

Thanks, Michael.

Operator (participant)

The next question comes from Carly Davenport with Goldman Sachs. Your line is open.

Carly Davenport (VP of Equity Research)

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

Scott Lauber (President and CEO)

Sure. Thanks for the question, Carly. As we look at it, and as you know, we are tracking customers in about 16, 17 sectors, and we have relationships that we talk to our large customers. I'd say right now, most of the customers are cautious on what's going on with the tariffs and what kind of clarity. I think people are cautious before they overreact one way or the other. You saw our unemployment in Wisconsin at 3.2%, way below the national average. The large, significant projects outside of the data centers are still progressing, and people are the Eli Lilly, etc. There's still a lot of expansion and housing development in southeastern Wisconsin. As you drive around, it still looks very positive and constructive.

I think the question's going to be as people see more clarity on what's going on with tariffs, etc., that'll be a question on people's mind. Cautiously optimistic, I would say. I think Xia has analyzed the first quarter on where we're seeing. I'll let Xia walk you through what we're seeing on the large group in the first quarter.

Xia Liu (CFO)

Yeah. Carly, we are all over that. As you know, we follow about 16 different sectors in the state. It covers from food, paper, printing, all the way to health services and education. Out of the 16, 10 of those had a quarter-over-quarter positive growth, some with double-digit growth. There are two or three sectors that experience some negative growth. I think they're not driven by macro environment, mostly driven by the individual decisions made by those customers. Overall, we think we remain very optimistic about the long-term growth in our region.

Carly Davenport (VP of Equity Research)

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

Scott Lauber (President and CEO)

I would say right now, I haven't seen anything that has gone one way or the other. I mean, the workshops, as you know, got postponed now, not the workshops, but the final decision to next year. I think everyone's looking at the economic development and what's needed for gas. They've approved our pipe replacement program for these very large pipe. I think that's positive. I'm not expecting anything that I've seen recently to change that momentum.

Carly Davenport (VP of Equity Research)

Great. Thank you so much for the time.

Scott Lauber (President and CEO)

Absolutely. Thank you.

Operator (participant)

Your final question comes from Durgesh Chopra with Evercore ISI. Your line is open.

Durgesh Chopra (Managing Director)

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

Scott Lauber (President and CEO)

Sure. Sure. Remember, we worked with the customers at coming up with this agreement on the ROEs and the equity layers. When you think about it, it's a long term. We are talking 20 years to the depreciable life, which should be up to 30 years or more on some of these projects. They are looking for certainty, and we do not know what the future would bring. We think the ROEs, when you look at interest rates over a long period of time, are near one of the lower spots now at that 9.8. Having something locked in for a longer period of time, we came up with that 10.48 and thought it was reasonable for both of us to lock into that number. Remember, this is for 20 years - 30 years. It's a long investment, but it also gives them certainty on what they're putting into their models.

Durgesh Chopra (Managing Director)

Thank you.

Scott Lauber (President and CEO)

That makes sense.

Sounds like that's helpful.

Durgesh Chopra (Managing Director)

Yep, it does. Thank you. Maybe just quickly, in Illinois, can you just remind us the higher $500 million per year rate that you get to in 2027-2028? That is not going to be recovered by a tracker, correct? That is part one. If not, what is the rate case strategy on recovering that higher level of spending? Because it is indeed wrapping up quite a bit.

Scott Lauber (President and CEO)

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

Durgesh Chopra (Managing Director)

Got it. Thank you for taking my questions, Scott.

Scott Lauber (President and CEO)

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

Operator (participant)

This concludes today's conference call. Thank you for joining. You may now disconnect.