WEC Energy Group, Inc.

Good afternoon and welcome to WEC Energy Group's conference call for fourth quarter and year-end 2018 results. This call is being recorded for broadcast 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-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. And now it is my pleasure to introduce Gail Klapa, Executive Chairman of WEC Energy Group.

Good afternoon, everyone. Thank you for joining us today. as we review our results for calendar year 2018. First, I'd like to make sure that everyone is familiar with the recent changes we made at the most senior level of our organization. The Board of Directors has approved the creation of the Office of the Chair, staffed by four company veterans. We'll work together as a team to write the next chapter of our company's growth and service to customers. As of February 1, my title changed to Executive Chairman. I've agreed to stay in this role for the next three years. And as Executive Chair, I'll take the lead on board governance, corporate strategy, investor relations, and economic development. I'm also delighted that Kevin Fletcher has been promoted to Chief Executive. Kevin is a member of the Office of the Chair and will serve on the WEC Energy Group Board of Directors. Kevin will continue to report directly to me, and his main focus will be the direction and performance of our seven customer-facing utilities. In addition, the Office of the Chair includes Rick Kuester, Rick continues to serve as Senior Executive Vice President. He will have broad responsibility for the company's capital investment plan, information technology, and power generation. Last but not least, Scott Lauber. Scott has been named Senior Executive Vice President, Chief Financial Officer, and Treasurer. He will be responsible for all of our finance-related functions. This team, as you know, has delivered industry-leading results over many years. with a clear commitment to reliability, customer satisfaction, and shareholder value. Our focus remains on the fundamentals of our business and on developing the next generation of leadership for our company. And now I'd like to introduce the members of our management team who are here in the room with us today. We have Scott Lauber, our Chief Financial Officer, Bill Gutt, our Controller, Peggy Kelsey, Executive Vice President and General Counsel, Beth Straka, Senior Vice President of Corporate Communications and Investor Relations, and, of course, Kevin Fletcher, President and CEO of WEC Energy Group. Now, Scott will discuss our financial results in detail in just a moment, but as you saw from our news release this morning, we reported full-year 2018 earnings of $3.34 a share. Overall, we're very pleased with our performance during this past year. On virtually every meaningful measure, we made significant progress. We delivered solid earnings and dividend growth, We reached milestones in network reliability, customer satisfaction, and company support. We made significant strides upgrading the natural gas infrastructure in Chicago and building a long-term solution for the power supply in Michigan's Upper Peninsula. We were again named one of the 100 best corporate citizens in America by Corporate Responsibility Magazine, and we made real progress in reducing our carbon dioxide emissions. In fact, we're on track to exceed our goal of a 40% reduction below 2005 levels by the year 2030. Now we expect to achieve that goal by 2023. And we've set our sights on an 80% reduction by the year 2050. Last year alone, we retired nearly 1,500 megawatts of older, less efficient coal-fired generation. All in all, the company continues to perform at a very high level. During 2018, we also identified several promising investments in our infrastructure segment. On December 28th, we acquired an 80% interest in the Coyote Ridge Wind Farm that's located in Brookings County, South Dakota. This wind farm is currently being built by Avangrid Renewables and is expected to be in service before the end of 2019. Coyote Ridge will consist of 39 turbines with a capacity of roughly 97 megawatts. We expect to invest approximately $145 million for our 80% share of the wind farm. Unique to this transaction, we will be entitled to 99% of the tax benefits. We paid $60 million in December, with the final payment coming due after commercial operation is achieved. Under the tax rules, we expect the wind farm to qualify for production tax credits and for 100% bonus depreciation. The project has a 12-year offtake agreement with Google, Google Energy LLC, for all of the energy produced. Now for a quick update on our previously announced investment in the Bishop Hill III Wind Energy Center. As you recall, in late June, we announced an agreement to acquire 80% in the Bishop Hill III wind farm located in Henry County, Illinois. We closed on that acquisition in late August. Then this past December, we took advantage of an opportunity to increase our equity interest. We now have a 90% ownership interest in Bishop Hill III. As a reminder, this wind farm was developed by Invenergy and was placed into service in May of 2018. It consists of 53 turbines with a capacity of 132 megawatts. In total, our investment is $166 million. This project has a very long-term, 22-year offtake agreement with one of our current wholesale customers, WPPI Energy. WPPI, of course, is based here in Wisconsin and has 51 member utilities. Turning quickly now to our investment in the Upstream Wind Energy Center, on August 20th, we received approval from the Federal Energy Regulatory Commission to purchase an 80% ownership interest in the Upstream project. closed on this transaction just about a month ago on January 10 at a purchase price of $276 million. As a reminder, Upstream is located in Antelope County, Nebraska, and consists of 81 turbines with a capacity of approximately 200 megawatts. The project has a long-term 10-year offtake agreement with an affiliate of Allianz, which is an A-rated publicly traded company. We're very encouraged about these investments in renewable energy, We expect the return on these investments to be higher than our regulated returns, and specifically, we're projecting an unlevered internal rate of return above 8% or in the mid-teens on a levered basis. And we're projecting returns on equity based on a 50-50 capital structure at or above our retail returns. I would remind everyone, though, that these infrastructure investments make up just a small piece of our overall five-year capital plan. As you know, we have a tax appetite and we're being very selective as we vet future projects. We're only interested in projects that do not change our risk profile and achieve our financial returns. We're also making progress on our quest to add utility-scale solar generation to our portfolio of regulated assets. To refresh your memory, on May 31 of 2018, our Wisconsin Public Service subsidiary, along with Madison Gas and Electric, filed a joint application with the Wisconsin Commission to purchase 300 megawatts of solar generation at two locations right here in Wisconsin. The Badger Hollow Solar Farm will be located in southwestern part of the state, in Iowa County, and will be developed by Invenergy. The Two Creek Solar Project will be located in the city of Two Rivers in northeastern Wisconsin, and actually that's near the Point Beach Nuclear Power Plant. The Two Creeks project is being developed by Nextera. Our Wisconsin Public Service Company will own 100 megawatts at each site, with an expected investment of approximately $260 million. We expect a decision from the Wisconsin Commission in March or early April, and with regulatory approval, the projects could be in commercial service by the end of 2020. As many of you know, over the past few years, utility-scale solar has increased in efficiency and prices have dropped by nearly 70%, making it a cost-effective option now for our customers, an option that also fits well with our summer peak demand curve and with our plan to significantly reduce carbon dioxide emissions. In addition, we recently received approval from the Wisconsin Commission for two renewable energy pilot programs, The Solar Now program, as we call it, and the dedicated renewable energy resource pilot could bring another 185 megawatts of clean solar and wind energy to our regulated portfolio of assets. And the Solar Now program will provide us with valuable insight into operating distributed generation. And now let's switch gears for a bit and take a look at the economy in our region. Wisconsin's published unemployment rate has been 3% or lower since February of last year. And folks, that's the longest stretch of near full employment in state history. The state continues also to witness significant economic development. For example, just in November, Amazon announced plans for a new state-of-the-art fulfillment center in Oak Creek, a suburb of Milwaukee. Amazon plans to invest $200 million in the project. a 2.6 million square foot facility on 75 acres. Amazon expects to employ 1,500 workers at this site. Distribution Center is scheduled to open in early 2020 and will feature state-of-the-art robotics to pack, pick, and ship small items to customers. And looking just a few miles further south of Milwaukee, Foxconn has made tangible progress on its high-tech manufacturing and research campus. So far, Foxconn has invested $200 million in Wisconsin. They've moved 4 million cubic yards of dirt so far in the construction of the Wiscon Valley Science and Technology Park. The first building on the campus is now complete. It's a 120,000 square foot multipurpose building. To date, more than 1,000 jobs have been created in support of the project. And Foxconn has also expanded its presence across the state. buying buildings in Green Bay, in Eau Claire and Racine, buildings that are expected to become Foxconn Innovation Centers. In addition, we're beginning to see the positive ripple effect that we expected, with multiple commercial and industrial announcements spurring economic growth within just a few miles of the Foxconn campus. Now, as you know, over the past few weeks, there's been a good deal of speculation about Foxconn's future plans for Wisconsin. Just a few days ago, Foxconn issued a clarifying statement noting that its plans do include a fabrication plant and filling 13,000 jobs. But a number of you have asked whether a potential change in direction by Foxconn could impact the growth we're forecasting or our capital spending plans. The short answer is we've remained very conservative in our projections. In fact, we weren't projecting a significant ramp-up from Foxconn until 2023. And now I'll turn the call over to Kevin for some additional insight on our operations and our regulatory calendar for 2019. Kevin, all yours.

Thank you, Gail. First, I have some good news to share. Our largest subsidiary, WeEnergies, was named the most reliable electric utility in the Midwest for the eighth year running. That's a testament to our employees and our focus on building and maintaining resilient infrastructure. And our employees did an excellent job keeping our customers warm during the polar vortex last month. We hit record peaks for natural gas distribution in our Wisconsin, Minnesota, and Michigan service territories. In addition, we achieved the highest customer satisfaction ratings in the nation in J.D. Power's survey of large business and industrial customers served by electric utilities across the country. We also were named by Forbes magazine as one of America's best employers for diversity for 2019. Now I'd like to briefly review where we stand in our four state jurisdictions. As we look ahead in Wisconsin, we plan to file a general rate case for all of our Wisconsin utilities this spring. We would expect that new retail rates would go into effect in January of 2020. As a reminder, customers have benefited from a base rate freeze for the past four years and more recently from tax reform. In fact, after factoring in our fuel cost and federal tax reform, our retail rates in Wisconsin are actually lower today than they were in 2015. Turning to Illinois, we continue to make progress on the People's Gas System Modernization Plan. As a reminder, this program is critical to providing our Chicago customers with a natural gas delivery network that is modern, safe, and reliable. For many years to come, we'll be replacing outdated natural gas piping, some of which was installed more than a century ago, with state-of-the-art materials. This past year, we invested approximately $295 million in the effort. and we expect the project to continue through 2035. And now a word about our Minnesota utility, Minnesota Energy Resources. On December 26th of last year, the Commission approved a rate increase of $3.1 million, or 1.26%, effective January 1st, 2018. The order also increased the equity ratio to 50.9%, and the allowed return on equity to 9.7%. The Minnesota Attorney General has requested a review of the authorized ROE in the order. Now we'll turn to Michigan. We're nearing completion of the new natural gas fire generation in the Upper Peninsula. Engineering, procurement, and construction are essentially complete. Startup is well underway, and we anticipate commercial operation as planned in the second quarter of this year. And at that time or soon thereafter, we'll expect to retire our coal-fired power plant at Presque Isle. We're investing $266 million in 10 reciprocating internal combustion engines, or as we call them, RICE units. They'll be capable of generating a total of 180 megawatts of electricity. These units, which will be owned by one of our Michigan utilities, Upper Michigan Energy Resources, will provide a cost-effective, long-term power supply for the customers in the Upper Peninsula. And with that, I'll turn it back to Gil.

Gil, thank you very much. The new year's off to a strong start. We're on track to meet our 2019 guidance. If you recall, that's in a range of $3.48 a share to $3.52 a share. This guidance translates to a growth rate between 6.1% and 7.3% off our 2018 base of $3.28 a share. Recall that the $3.28 was the midpoint of our original guidance for 2018. And finally, a word about our dividend policy. At its January meeting, our Board of Directors raised the quarterly cash dividend to 59 cents per share. That's an increase of 6.8% over the previous rate. The new quarterly dividend is equivalent to an annual rate of $2.36 a share. This will mark the 16th consecutive year that our company will reward our shareholders with higher dividends. We continue to target a payout ratio of 65% to 70% of earnings. smack dab in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. And now with details on our 2018 results and our outlook for 2019 is our famous CFO, Scott Lauber.

Scott? Thanks, Gail. Our 2018 gap earnings were $3.34 per share compared to $3.79 per share in 2017. The 2017 results included the impact of tax reform on on the company's non-utility assets and assets of the parent company. Excluding this deferred tax benefit, our 2017 adjusted earnings were $3.14 per share. Comparable results for 2018 were $3.34 per share with no adjustments. This represents an increase of 20 cents per share or 6.4% over our adjusted earnings for 2017. For the rest of my presentation, I'll refer exclusively to adjusted earnings for 2017. Our solid 2018 results were largely driven by additional capital investment, effective cost control, and higher sales volumes. Earnings benefited from both warmer than normal summer weather and colder than normal winter across all of our jurisdictions. The favorable weather coupled with economic growth drove energy use significantly above our forecasts. The earnings packet placed on our website this morning includes a comparison of fourth quarter and full year 2018 and 2017 results. My focus will be on the full year beginning with operating income by segment and then other income, interest expense, and income taxes. Referring to page 13 of the earnings packet, our consolidated operating income for 2018 was $1,468,000,000 as compared to operating income of $1,000,000,000 $776 million in 2017, a decrease of $308 million. Excluding two tax items, operating income actually increased by $88 million. We have a breakout of these items for your reference on page 9 and 10 of the earnings package. Recall that as part of our Wisconsin settlement, we agreed to apply the benefits of tax repairs to offset the growth of certain regulatory asset balances. That plan continues to proceed as expected. We now project that the transmission escrow balance excludes the impact of the tax items. Starting with the Wisconsin segment, the increase in operating income, net of tax adjustments was $53.1 million. Higher sales volume drove a $92.1 million increase in margins. This was partially offset by a $28.1 million increase in depreciation expense and a $7.4 million increase in operations and maintenance expense. The increase in O&M expense was largely driven by two items. The first item was a $7 million expense related to staff reductions as we continue to streamline, process, and reshape our generation portfolio. Second, we accrued $64.6 million more in 2018 related to the earning sharing mechanism we have in place at our Wisconsin utilities. This was a result of our strong performance in 2018. Excluding these two items, operations and maintenance expense actually decreased $64.2 million driven by the closing of coal plants and effective cost control across the business. In Illinois, operating income increased $5.4 million net of tax adjustments. The increase was primarily driven by our continued investment in the People's Gas System Modernization Program. Excluding the impact of tax reform, operating income in our other state segment increased $22.4 million. Higher sales volumes resulting from colder winter weather Customer growth drove a $10 million increase year over year. We also benefited from an increase in revenues due to the Minnesota rate case. Recall that interim rates have been in place since January 1st, 2018. The remaining increase of $4.8 million was attributable to a favorable judgment received on a property tax matter. Turning now to our energy infrastructure segment. Excluding the impact of tax reform, Operating income at this segment was up $15.7 million. Bluewater Natural Gas Holding, which was acquired on June 30, 2017, contributed $13.6 million to the increase in operating income. The remaining increase was driven by additional investments in our Power of the Future plans. The results also reflect the acquisition of our interest in Bishop Hill in the fall of 2018. Recall that a portion of the earnings for this facility come in the form of production tax credits and is recognized as an offset to income tax expense. Operating loss at our corporate and other segment increased by $8.3 million. The change is primarily due to an impairment recorded on some non-regulated assets that we inherited from the Integris acquisition. Combining these changes and excluding the two tax items I discussed, operating income increased $88 million. Earnings from our investment in American Transmission Company totaled $136.7 million, a decrease of $17.6 million as compared to 2017. Excluding the impact from the tax reform, our equity earnings increased by $16.7 million. Higher earnings were driven by continued capital investment and the absence of a FERC audit expense that was recorded in 2017. Other income net decreased by $3.4 million year over year. Our net interest expense increased $29.4 million, primarily driven by higher debt balances related to our continued capital investment and slightly higher interest rates. Our adjusted consolidated income tax expense decreased $420 million. As previously discussed, lower tax expense was driven by the impact of tax reform and the flow through of tax repairs. the effective tax rate was 13.8% in 2018. Excluding the benefits of tax repairs, our effective tax rate would have been 24%. Looking forward to 2019, we expect our effective income tax rate to be between 10.5% and 11.5%. Excluding the benefits of tax repairs, we expect our 2019 effective tax rate to be between 20% and 21%. We are projecting a lower rate in 2019 because of production tax credits from our infrastructure investments. We now expect to be a partial taxpayer in 2020. Looking now at the cash flow statement on page 8 of the earnings package, net cash provided by operating activities increased $367 million during 2018. Stronger earnings contributed to the increase in cash provided by operating activities. Our capital expenditures were approximately $2.1 billion for the 2018, a $156 million increase from 2017, reflecting continued investment in our core business. In 2018, our FFO to debt was 20.7% due to strong cash flow as previously discussed. Looking forward, we continue to expect FFO to debt to be in the range of 16 to 18%. We're using cash to satisfy any shares required for 401k plans, options, and other programs. Going forward, we do not expect to issue any additional shares. We paid $697 million in common dividends during 2018, an increase of $41 million over 2017, which reflects the increase to the annualized dividend level in 2018. Turning now to sales, we continue to see customer growth across our system. At the end of 2018, our utilities were serving approximately 11,000 more electric and 19,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volumes are shown on a comparative basis, pages 16 and 17 of the earnings package. Overall, retail deliveries of electricity, excluding the iron ore mine, were up 2.6% from 2017, and on a weather-normalized basis, retail deliveries were up 1.2%. Natural gas deliveries in Wisconsin increased 9.1% versus 2017. This excludes gas used for power generation. Natural gas deliveries in Wisconsin grew by 4.3% on a weather normalized basis. Overall, electric and natural gas volumes were above our expectations for 2018. And now I'll briefly touch on our 2019 sales forecast for the state of Wisconsin, our largest segment. We are forecasting a slight increase of 3 tenths of 1% in weather normalized retail electric deliveries, excluding the iron ore mine. We project Wisconsin weather normalized retail gas deliveries, excluding gas used for power generation, to increase by 8 tenths of 1%. And finally, let's look at the first quarter of 2019 guidance. In the first quarter last year, we earned $1.23 per share. The first quarter of 2018 was helped by approximately 4 cents of positive fuel recoveries related to market conditions. Taking this factor into account, we project first quarter 2019 earnings to be in the range of $1.23 per share to $1.25 per share. This assumes normal weather for the rest of the quarter. With that, I'll turn things back to Gail.

Scott, thank you very much. Overall, we're on track and focused on delivering value for our customers and our stockholders. I might add, the Milwaukee Bucks have the best record in the NBA, so operator, we're ready to rock and open it up now for the question and answer portion of our call.

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 1 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 Prayful Mehta with Citi Group. Your line is open.

Afternoon, Prayful.

How are you?

How are you today?

Good, good. Thank you for taking the question and appreciate your comments on Foxconn. I wouldn't get into that because you've already addressed it on the call. I wanted to get a little bit more specific in terms of that cash tax comment that you made earlier and the fact that you will become partial cash taxpayer in 2020. I was looking at the cash flow statement and there is a meaningful deferred tax add back right now that is benefiting cash flows and operating cash flows. How does that cash flow get impacted as you move towards more of being a cash taxpayer and does that mean any pressure on your credit metrics in that 2020-21 timeframe?

Well, great question, and I'll ask Scott to address it first of all, though, just to kind of frame the answer in context for you. We're saying now that we're projecting to be a partial cash taxpayer in 2020, but that assumes no additional investments in the infrastructure segment that would provide, in essence, additional tax credits. So, That's a snapshot in time today, just taking into account the infrastructure investments that we've already announced.

Scott? Yeah, that's exactly it, Gail. And when you look at it and you look at the cash flow statement, the cash flow statement is never as straightforward as you would hope because there's a lot of different pieces, how the money we are saving on taxes, some of it is flowing against regulatory assets, et cetera. We didn't pay cash taxes in 2017 or 2018, and right now we don't expect in 2019, and like Gail said, a partial in 2020. So some of these cash taxes, I mean, the deferred taxes, that's a long unwind as we look across it as we work into a rate case.

Some of that unwind goes out 15 and 20 years, right?

Gotcha. So there isn't, you don't foresee in the 2021 timeframe any pressure on credit that given your high growth and your investment, is there any kind of need for equity is what I'm trying to get at, I guess, through the credit question.

No, and that's why we're being real diligent on these infrastructure projects that push this out to 2020 now.

But no additional plans for equity, period, end of story.

Okay, good. Always good to clarify. I guess the other question I wanted to get was, you had this slide where you talked about load growth, and this was in your January updates. And you seem to have like a higher load growth projection on slide 25 of that deck in that 22-23 timeframe of 1.2 to 1.5%, both on the electric and gas side. Just wanted to understand what's driving that increase. Is it the industrial load that you're seeing or is it something else that's driving that load growth? And how would that correlate with the 5% to 7% growth that you're talking about more generally on the earning side?

Okay, great question. Let me try to... give there two or three pieces to the answer. And the first is that I mentioned that we're already seeing a significant amount of ripple effect economic development, partially from the Foxconn investments that are going on. Also, if you recall, we've had other major investments announced just in the last 24 months. In addition to Foxconn, The German candy manufacturer Haribo is coming in with one of the largest confectionery plants in North America. They're going to be breaking ground later this year, so we'll see some uptick from that development later on in our forecast period. I mentioned Amazon, which will be cranking up in late 2020. Milwaukee Electric Tool is just adding another huge expansion. And then in the fall of this past year, we announced Komatsu, a major mining manufacturing company, going to build a huge manufacturing complex just south of downtown Milwaukee in the Harbor District. You put that together with the other economic development projects that are some smaller but also very meaningful that we're already seeing in the pipeline and have been announced, and those factors are driving an uptick in our projection of sales growth for the latter part of this five-year forecast period. Scott, anything to add to that?

No, that's exactly it. It takes a while because these are Just starting construction, all of these.

And all of that will still, we believe, keep us in that 5% to 7% earnings per share growth.

Gotcha. That's great. Much appreciated, guys. Thank you.

Thank you.

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Afternoon, Michael. How are you doing today?

Very good. How are you doing?

We're sitting here and stuck in a snow bank, about a foot of snow out there.

Hey, I had a question about the infrastructure business. I think in the past you said you wanted to grow that to about 3% of the total asset base. Could you just remind us what is the goal and timeframe for that goal and where you stand now versus that goal?

Well, what we talked about really when we said about 3% of the asset base is that it's a small percentage of our total five-year capital plan. So in the five-year capital plan, in essence, we've got just over a billion dollars budgeted for this particular segment of capital spending. Basically, the one we just announced, the Coyote Ridge project, is the project that would have been a 2019 project, that's already done. We already have the contract signed. The project will come in line. We've come online, we believe, toward the end of 2019. So we're a good ways along with Bishop Hill, with Upstream, and with Coyote Ridge. You know, we're, I would say, about 40% toward that goal, Scott.

Yeah, you're exactly right. We have it. have all the projects announced that we have in our capital spending through 2019 already. And right now we're looking at 3% was really in the five-year plan that we're talking. And remember, we really look at that blue water gas storage as really extension of our Wisconsin business because it feeds all our Wisconsin utilities.

And Michael, as I've mentioned to you, we can be given our competitive advantage with our tax appetite and the strength of our balance sheet and our ability to use the production tax credits to We're in a very competitive position. So as we vet future projects, we have a really robust list of future projects to choose from. As I mentioned, we will be very selective. We're only going to invest in this segment in projects that we have an incredibly high confidence level in, in terms of not changing our risk profile, but with offtake agreements with some of the best, most robust companies in the country.

Right, understood. In fact, I think if I recall, you had previously said you'd be a non-cash taxpayer through 20, or I think it was only through 2019. Now, through the end of 2019, is that it? This is in a slightly extended period now, right, that you're going to be a non-cash taxpayer?

That's exactly correct. So as soon as we announced the last deal here, that moved us to 2020, to Coyote Ridge.

Okay, so I mean the lack of, I guess the ability of these projects to avoid equity is, you know, reduces the, as long as they're not harming the credit rating or putting pressure on the balance sheet in any kind of way, are really a lower cost of capital, right?

Actually, in an interesting way, they're helpful to our FFO to DELT calculation because of the bonus depreciation. So basically the cash comes back from these investments very, very quickly.

Right, understood. All right, thank you very much.

Great, thank you, Michael.

Your next question comes from Michael Lapid with Goldman Sachs. Your line is open.

Hey, guys. Thanks for taking my question, and congrats so far on your Milwaukee Bucks. We'll see. Season's got a long way to go.

We just got the big dude from your Pelicans.

You know what? Let's not go there. As a Grizzlies fan originally and turned into a Pelicans fan, I'm just in depression land when it comes to the NBA right now. And I live in New York, which makes it even worse. Real quick, where do you think you're tracking for the next one to two years on your CapEx plan original targets that you laid out around the EI timeframe? Do you think you're tracking ahead? Do you think you're tracking in line? Do you think you're tracking below? And if different than where you originally laid out, I know it's not been very long since you put that out there. But if it's different, where and how?

No, I think it's a good question, Michael, and I think the honest answer is we're exactly where we thought we would be in terms of the capital spending plan over the five-year period. We're on track. Projects we had identified for 2019 are all underway. I mean, again, remember we refreshed our capital plan back October, November 2019, Very little has changed. We're right on target where we want to be. Kevin, Scott?

Probably the only one is our last announcement on the infrastructure was filled in our 2019 bucket, so we can even be more selective as we go forward.

In terms of all of our regulated capital spending plans, we're right on target. Everything is exactly as we hoped it would be.

Got it. And another question. I know no one likes to litigate rate cases on earnings conference calls, but As we think about this year from a regulatory construct and path perspective, is there anything else to think about besides the Wisconsin rate cases? And do you see these rate cases as being significant items in the course of the company, or do you see these relative to kind of historical trends or other companies in the state or the region as being kind of less urgent or less impactful relative to what you see elsewhere around the U.S.? ?

Oh, gosh. Compared to what we see elsewhere around the U.S., rate cases in Wisconsin are generally more genteel, if you will. And as we've said, we would expect the rate filings in Wisconsin this year, and I'll ask Kevin to comment in a second, the rate filings this year to be pretty modest in their asks. so I don't see a ton of drama surrounding these particular rate cases. Kevin?

Again, I'll say you summed it up very well. We're certainly in the process of evaluating our rate case and our options now, and as you said, I think it would be in line with inflation and nothing major there.

Got it. Thank you, guys. Much appreciated.

You're welcome, Michael. Take care.

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

Greetings, Michael. How are you doing today? Yeah, I'm doing great. How are you guys all doing? We're doing well. Great. Maybe just one quick follow-up to start on the rate case side of things. I just wanted to clarify, the reason you're filing in Wisconsin is because you were required per the last settlement agreement, or there actually is a need? Would you have filed otherwise anyways?

Well, to directly answer your question, there is a specific order point in the last rate agreement, the last rate settlement, that requires us to file a rate case, I believe, by the 2nd of April of 2019. So there is a regulatory requirement. Would we have filed anyway? You know, maybe, maybe not. But clearly, it will be a good time to I mean, there are a number of tweaks that we think would be helpful in terms of rate design, in terms of a number of other accounting issues, et cetera, et cetera. So I don't know that we wouldn't have filed anyway, but it really is a moot point in that there is an order requiring us to file by April.

Okay, great. And then just a separate one on the O&M side of things, obviously a pretty big driver again in 2018 for you all. Just Curious how we should think about that, maybe on a normalized percentage basis, and then maybe what you're targeting for this year on the cost-cutting side?

Sure, I'd be happy to. Let me first explain the backdrop, and that is that in 2019, we will reap a full year worth of savings from the closure of the Pleasant Prairie Power Plant. Remember, a large coal-fired plant of that kind requires a very significant amount of annual operating and maintenance costs. Wisconsin Public Service closed the Pulliam Power Plant, a jointly owned unit called Edgewater, jointly owned with other Wisconsin utilities that closed in the fall as well. And then we expect, as Kevin mentioned, the new power supply, the rice units that should go commercial in the spring of this year, and that will allow us to retire Presque Isle power plant up in the upper peninsula of Michigan, way up north. You put all of those O&M savings together, and we expect another leg down in operation and maintenance costs in 2019 compared to 2018. Kevin, I'm thinking in the 3% to 4% range.

That's correct, yeah. The ballpark of what we're looking at is very similar to what we did this year. Right. Okay, great.

Appreciate the caller. You're welcome.

Again, if you would like to ask a question, it is star, then 1 on your telephone keypad. Your next question comes from Vadula Murty with Avon Capital. Your line is open.

Rock and roll, Vadula. Hey, Gail. How are you? I'm good. How are you doing?

I'm okay.

Wait, wait, wait. No, no. Vadula, I always ask you that, and I never get wonderful and award-winning.

Okay. Wonderful and award-winning. Yay.

Excellent.

Anyway, let's see. A few things. One... If I'm not mistaken, I think I saw something relating to the Illinois gas utility with the main replacement program that you've been discussing and that the ICC staff may have some issues in terms of some investments or expenses that they don't think have some questions about. Can you just kind of elaborate on that a little bit?

Sure, I'd be happy to, Vidula. The matter you're referring to relates to the capital investment that was made for the system modernization during calendar year 2015. And if you recall, our acquisition of Integris, which included the People's Gas Company, took place, I think we closed on June 29, 2015. So as the Commission looks at retrospectively, the prudency of the program and how it was run, how the investment program was run in 2015. Remember, we had the company for six months. The prior management had the company for six months. And essentially, what the commission staff is saying is that they don't think the program was run as efficiently as it should have been, certainly prior to the acquisition. And that's what the issue is. So we'll work our way through that. I'm not overly alarmed. It's just a matter of getting through this particular process, and this is an annual review, which is part of the regulatory compact there. So it's something we're very familiar with, but it really relates to the 2015 investment in which we only had six months of operation of People's Gas.

Does that mean that has 16 and 17 already been reviewed, and... has basically been resolved, or are those going to be reviewed going forward?

It'll be reviewed in the future. Right now, they're focused on 2015. Okay. But remember, Vidula, we've made very significant improvements in the management of that program. Okay.

No, I understand that. My second question kind of ties to what Profil was asking about in terms of the uptick on the sales forecast. You know, to the extent that I understand that it seems to tie into when you would expect a lot of Foxconn and all the ancillaries to basically be, you know, pretty much up and running or at the position where they are, you know, fully deployed or mature or whatever term you want to use. You know, when I take a look at the math, you know, with about roughly a little over $4 billion, I think, at that time of gross margin between Wisconsin Electric and Wisconsin Gas, a 1%, 1.2% uptick versus underlying is about $40 to $50 million in terms of gross margin or almost 10 cents a share compounding. So to the extent, I'm just wondering about the potential variability of that sales forecast given the leverage that it would show in the back end as it ties into being able to continue the 5-7 that you've been able to do.

Well, let me take a shot at that, and we'll also ask Scott to chime in, and Kevin, if you have anything as well. First of all, let me reemphasize that the economic growth we're seeing, yes, Foxconn is a significant piece of it, but it's a lot more than Foxconn. When you see the growth in the corridor between Milwaukee and Chicago, it is significant with or without Foxconn. In fact, for example, the polar vortex days we had here just last week clearly are pointing to the need for some additional capital in that corridor just for natural gas consumption and reliability. without Foxconn consuming one therm today. So my sense is, yes, we're ramping up just a bit our sales forecast for the outer years of the five-year plan. But recall that that'll all get factored into rates. So I think you may be, and Scott, if you'll comment on this, I think you may be thinking a little too more granularly than you should be about the gross margin impact.

Scott? No, that's... Yes, when you look at the volumes, and that's a sales forecast, I think when we talked at EEI, these are the larger industrial customers that are coming, the Amazons, the Foxcons, the Haribos. That's the lower margin. When you look at industrial classes, those are the lower margin classes. So the margin isn't quite there. But what we did put in the forecast is we only put known projects down there. So we don't know where the additional jobs, if that'll be additional housing, or the secondary suppliers, so we did not add that into the forecast, whether it be the capital to put those in or the volumes associated with it. But the volumes here are really showing more in that industrial segment, and I expect that a few years after that we'll start seeing in the smaller groups those volumes coming in. But it all does get worked into rate cases or allow us to continue to keep rates where they're at.

Gil, I would just add that that certainly has been a growth part of our service territory. And with that, in any economic development project, like you mentioned, the multiplier effect is going to be there. So that also is what's factored in as we look forward into the future.

And to Kevin's point, we've already seen two big announcements about health care facilities, hospitals and medical complexes being built within miles of the Foxconn campus. Just last week, there was an announcement of a new hotel and a new distribution center and a new brew pub, by the way. So, you know, you need to get out here.

I will definitely do that in the summertime. One last thing. When you referred to the utility-scale solar, my recollection is that the new governor is particularly interested in utility-scale solar as part of renewables and utilities. I presume that the filing that you're going to have asking for approval is simply step one of a more developed program going forward. I'm wondering if you can tell us what your sense is, how you think that program would develop in terms of further utility scale rate-based solar development.

Well, first of all, as you know, one step at a time, and as I mentioned in the prepared remarks, we should we should receive a Commission decision on the utility scale solar projects that we have put in front of the Commission for approval. We expect the decision certainly by end of March or early April. Then, as we've developed our internal plans, depending upon that approval, and I'm very optimistic about that, you could see us as a next step submitting a request for utility scale solar for Wisconsin Electric. The one that's in front of the commission today is for our Wisconsin Public Service subsidiary based in Green Bay. And then I mentioned we have a couple, we just received approval for a couple of pilot programs that are pretty sizable and it could bring up to 185 megawatts of additional wind and solar to our regulated portfolio. So one step at a time, Wisconsin public service approval up and coming, we trust. Then we are going to work hard on these two pilot projects that the commission approved before the end of last year, and potentially you'll see a filing also for Wisconsin Electric for utility-scale solar.

And those are reflected in the five-year forecast for capital and growth. That is absolutely right. Thank you very much. Thank you.

Your next question comes from Andrew Weisel with Scotia Howard. Your line is open.

Afternoon, Andrew. How are you? Hi. Very good. Thank you. Just a few questions on the regulatory front to elaborate on your comments. You mentioned a little bit of the rate design and tariff things that you might want to reconsider with this upcoming rate case in addition to the revenue increase. Can you elaborate what specifically as far as rate design might you be looking to improve and How, well, I'll leave it there for now. What rate design issues are on your mind?

I would just say watch this space. We're all obviously putting final touches together on our plans. But for example, there's a real-time pricing program that the commission approved a couple of years ago that has to get reviewed again. We think that's something that the commission will take a hard look at and we will have some ideas. So that's one good example, and that's been a very popular program with our larger industrial customers. So that's just one example of a rate design type of an issue that will have good discussion with the commission. But watch this space.

Okay, fair enough. Then any changes to the commission you've seen? It's only, you know, not even halfway through February, but with the new governor and potential changes to the commission, the staff, policies, mentality, anything new? that you foresee coming up in the rate case that might be a little different than the last few times you've gone through?

Well, I think it's pretty clear what areas of emphasis we'll be looking at in the rate case and the staff and the commissioners will be looking at. I think my honest thought at this point is essentially steady as she goes. Great. I'm sorry? No, I was just asking Kevin or Scott if they had any other thoughts.

No, I agree with that, Gil. Nothing else to add.

Good. Consistent would certainly be a good thing in your state. My last question is you've been on a pretty steady two-year cycle for the rate cases as far as filings. Should we see the big pickup in demand where industrial and the trickle down to residential and commercial, might there be opportunity to have less frequent rate cases, or do you think this two-year cycle is going to be continuing for the foreseeable future?

Well, first of all, remember, we've had a rate freeze for four years. So we really have, in some ways, deviated from the every-other-year rate case cycle. I will say, historically, the Commission has wanted all of the Wisconsin utilities to file a case every two years. Whether that approach is still something the Commission wants, we'll have to see, because obviously we will have a new chair of the Commission here by March, and there's a new staff director, etc. So I would guess, though, because the Wisconsin Commission has been so consistent in its approach over the years, I would guess that we probably will continue on an every-two-year cycle.

Very good. Thank you.

Thank you.

Your last question comes from Paul Ridsen with KeyBank. Your line is open.

Hi, Paul. Gil, how are you? We're great. How are you doing?

Just a quick clarification question. You said O&M should be down 3% to 4%. What's the normalized number to bake into that?

Well, let's see. I think the day-to-day O&M that we manage, if I remember correctly, and Scott, if I'm off here, please correct me, because it's an easy number to remember. I think for 2018, our day-to-day O&M expenses totaled $1,234,000,000, 1, 2, 3, 4. So that's the base on which we're talking about to reduce maybe 3% to 4%. Scott, am I correct?

Yeah, you're exactly correct. And we break down the O&M when the 10K comes out, and we break it out into more detail there because there's other items that are regulatory in nature that are amortizations that come to the total number. So what Gail's quoting is that day-to-day O&M.

And then I think earlier, can you just review some of the things you said were unusual in the 18 O&M?

Unusual in the 18 O&M. Well, you've got to think about, I mean, there's some confusion about where tax repairs are impacting. That's a biggie.

So when you look at the O&M in the earnings packet, you try to break out how the tax repairs are pulled out of those and have it. I think what you're talking about is we really only had a part of a year of our retirement of the one coal plant in 2018 and now, the Pleasant Prairie coal plant will have a full year next year. And this year, in the second quarter, we expect that other coal plants in the Upper Peninsula, Presque Isle, to close, and there should be savings for that. So those are the two unique items we talked about earlier in the call.

There was nothing in sharing?

The sharing is a separate line item, correct. That's the $67 million of sharing this year.

Very significant customer benefit to come in 2019 because of the company's performance last year. Thank you very much. Terrific. Thank you so much. Well, it looks like that concludes our conference call for today. Thank you so much for participating. If you have any questions, feel free to call Bestraka, 414-221-4639. Thanks, everybody. Take care.

This concludes today's conference call.