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.