Good afternoon, and welcome to WEC Energy Group's Conference Call for Fourth Quarter and Year End 2019 Results. This call is being recorded for rebroadcast and all participants are in a listen-only mode at this time.

Before the conference call begins, I'll 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 opened to analysts for questions-and-answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com.

A replay will be available approximately 2 hours after the conclusion of this call. And now it is my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group..

Good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 2019. First, I'd like to introduce the members of our management team who are here with me today.

We have Kevin Fletcher, President and CEO; Scott Lauber, Chief Financial Officer; Bill Guc, our Controller; Peggy Kelsey, Executive Vice President and General Counsel; Tony Reese, Treasurer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. 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 2019 earnings of $3.58 a share, and I'm pleased to report that we delivered a record year on virtually every meaningful measure of performance. Our customer satisfaction was swift recovery from severe July storms that caused extensive damage to our system.

As we review our financial results, our balance sheet continues to strengthen. In fact, our ratio of holding company debt to total debt now stands at 28% that beats our 30% goal. In 2019, we also eliminated regulatory assets for transmission costs, and we continued to leverage the benefits of tax reform for both customers and shareholders.

In addition, we worked effectively to settle our Wisconsin rate reviews, which represent approximately 70% of our regulated assets. We also took our environmental efforts a step further. We set a new goal in 2019 to reduce the rate of methane emissions from our natural gas distribution system by 30% per mile by the year 2030.

Our ongoing work to modernize Chicago's natural gas delivery network is key to achieving this goal, and we continue to analyze our climate-related risks and opportunities. In fact, the recent Moody's report focused on the risk exposure of regulated utilities to heat stress, water stress and extreme rainfall.

I'm pleased to note that WEC Energy ranks among the lowest risk companies in our sector. During 2019, we also reached a number of significant milestones in our Infrastructure segment. The Coyote Ridge Wind Farm is now in service in South Dakota and will contribute a full year of earnings in 2020.

As you may recall Coyote Ridge consists of 39 turbines with a capacity of roughly 97 megawatts. We invested approximately $145 million for our 80% share of the windfarm and we’re entitled to 99% of the tax benefits. As you know, a significant portion of our earnings from this facility come in the form of production tax credits.

Project has a 12 year off-take agreement with Google Energy LLC for all of the energy produced. We also announced back in September that we will acquire an 80% ownership interest in the Thunderhead Wind Energy Center for $338 million. Invenergy is developing this project in Nebraska and we expect it to be in service at the end of 2020.

The site will consist of 108 GE wind turbines with a combined capacity of 300 megawatts. The project has a long-term off-take agreement with AT&T for a 100% of the energy produced. We expect Thunderhead will qualify for production tax credits and a 100% bonus depreciation. Then earlier this week, folks, we announced plans for another new development.

We've agreed to acquire an 80% ownership interest in the Blooming Grove Wind Farm for $345 million. Invenergy is developing this project in Illinois with commercial operation expected to begin by the end of this year. The site will host 94 wind turbines with a total capacity of 250 megawatts.

Blooming Grove has a 12 year off-take agreement with affiliates of two multinational companies with our investment grade. We expect that Blooming Grove will be eligible for a 100% bonus depreciation as well as production tax credits.

Overall, we're very encouraged about these investments in renewable energy, which will serve strong businesses for years to come. We expect a return on these investments to be higher than our regulated returns. Of course, we’re being very selective as we vet future projects.

We're only interested in projects that achieve our financial return metrics and do not change our risk profile. Now let's take a brief look at the regional economy that’s supporting our company's longer-term growth.

Wisconsin's unemployment remains near record lows for the state and we continue to see strong economic development projects in the pipeline. Foxconn is moving forward with its plan to create a high-tech campus in Racine County, South of Milwaukee. Work on a Generation 6 fabrication plant for liquid crystal display screens is progressing.

The fab, which spans about 1 million square feet is now enclosed and work is beginning on the internal structures. Foundations are also in place for a high-capacity data center. In addition, Foxconn has announced plans for a smart manufacturing facility.

Construction crews began lifting the exterior walls into place for the smart manufacturing plant earlier this week. Based on public data, we estimate that Foxconn's investment in Wisconsin over the past two years has risen to approximately $500 million.

Turning a bit further South in the Kenosha area, Uline has announced plans to invest $130 million in two new facilities and bring approximately 350 new jobs to the area. Uline as you may know, is a leading distributor of shipping, industrial and packaging supplies with headquarters here in Wisconsin.

In addition, Milwaukee Tool has announced another expansion. Milwaukee Tool will invest $100 million in a large multipurpose campus Northwest of the city in Menomonee Falls. The company also committed to adding 870 jobs in Wisconsin by the year 2025. These are exciting times.

We look forward to more economic development and opportunity across the region. Now, I'll turn the call over to Kevin for more insight on our operations and our regulatory calendar. Kevin, all yours..

Thank you, Gale. First, I'd like to share some good news. Our largest subsidiary, We Energies was named the most reliable electric utility in the Midwest for the ninth year running. Wisconsin Public Service also was recognized for the first time for outstanding reliability performance.

Now, I'll briefly review where we stand in our four state jurisdictions. As you’ll recall, in March of last year, we filed a proposal with the Public Service Commission of Wisconsin to set customer rates for We Energies and Wisconsin Public Service.

And in August, we entered into settlement agreements with the Citizens Utility Board of Wisconsin, the Wisconsin Industrial Energy Group and Clean Wisconsin. On December the 19th, the Commission issued its written order of firming those settlement agreements and setting rates for the next two years. New rates went into effect on January the 1st.

During 2019, we also continued to make progress in developing solar generation for our regulated businesses in Wisconsin. You may recall that in Wisconsin we're planning a total of 300 megawatts of utility scale solar capacity, the first facilities of this size in the state.

We’ve broken ground on two solar projects for Wisconsin Public Service, Two Creeks and Badger Hollow launch. Our share will total 200 megawatts for an expected investment of approximately $260 million. Both projects are scheduled to begin producing energy by the end of this year.

And this past August, at We Energies we filed with the Wisconsin Commission for approval to acquire 100 megawatts of capacity at the Badger Hollow II Solar Farm. The projected investment would be $130 million. We expect to receive the Commission's decision this spring.

We also see efficient natural gas storage, another important part of our regulated business strategy. In particular Wisconsin needs more natural gas peaking capacity at the highest demand times on the coldest days.

We're continuing to evaluate site plans for two liquefied natural gas facilities to help to meet our customers’ needs during the winter peak. We expect to invest approximately $370 million in these projects. If approved by the Wisconsin Commission, construction is expected to begin in the summer of 2021.

Turning to Illinois, we continue making progress on the Peoples Gas System Modernization Program. This program is critical to providing our Chicago customers with a natural gas delivery network that is modern, safe and reliable.

We're approximately 28% complete with our replacement of outdated, corroded natural gas piping, some of which was installed more than a century ago. We continue to project an investment of $280 million to $300 million per year on average in this program. Now, let's turn to Michigan.

In 2019, we completed our new natural gas-fired power plants in Michigan's Upper Peninsula on time and on budget. These plants are now providing a cost-effective, long-term power supply for our customers in the Upper Peninsula. With these new units operating, we were able to retire our older, less efficient coal-fired plant at Presque Isle.

This resulted in significant operations and maintenance savings and reduced CO2 emissions. Taking a broader look across our business, we continue to focus on operating efficiency and financial discipline. As a whole, we exceeded our 2019 goal to reduce our day-to-day operation and maintenance costs.

Our goal was a reduction of 4% and we actually achieved a 7% reduction. We have set a goal to further reduce our O&M by an incremental 2% to 3% in 2020 as well. And with that, I'll turn it back to Gale..

Kevin, thank you very much. As you'll recall, ladies and gentlemen, our 2020 guidance is in a range of $3.71 a share to $3.75 a share. This translates to an earnings growth of between 6% and 7.1% of our 2019 base of $3.50 a share. Recall, $3.50 a share was the midpoint of our original guidance for 2019. And finally, a word about our dividend policy.

At its January meeting, our Board of Directors raised the quarterly cash dividend of 63.25 cents a share for the first quarter of 2020. That's an increase of 7.2%. New quarterly dividend is equivalent to an annual rate of $2.53 a share. This marks the 17th consecutive year that our company will reward shareholders with higher dividends.

We continue to target a payout ratio of 65% to 70% of earnings. We are right in the middle of that range now and so I expect our dividend growth will continues to be in line with the growth in our earnings per share. And now, with details on our 2019 results and our outlook for 2020 is our CFO, Scott Lauber.

Scott?.

Thank you, Gale. Our 2019 earnings for $3.58 per share increased $0.24 per share compared to 2018, a 7.2% increase. In 2019, we benefited from additional capital investment, reduction in tax credit and continued emphasis on cost control.

While all of our utilities met their financial goals, our Wisconsin utilities earned their fully-allowed ROE and customers will see the benefit going forward through the sharing mechanism. We posted the earnings packet to our website this morning. It includes a comparison of fourth quarter and full-year 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 10 of the earnings packet, our consolidated operating income for 2019 was $1.530 billion as compared to operating income of $1.470 billion in 2018, an increase of $63 million.

Recall that as part of our previous rate settlement in Wisconsin, we agreed to apply the benefits of tax repairs to offset the growth of certain regulatory assets. The plan continued through year-end. And as we expected, the transmission escrow asset balance at We Energies was eliminated.

My update will focus on changes in operating income by segment excluding the impact of tax repairs and our adoption of the new lease accounting rules. Starting with the Wisconsin segment, operating income increased $42 million net of these adjustments.

Lower operation and maintenance expense resulted in approximately $105 million increase in operating income driven by efficiencies and effective cost control across the enterprise. This positive impact on operating income was largely offset by a few items.

First, lower sales volume due to primarily cooler summer weather conditions accounted for approximately $26 million decrease in operating income. Second, depreciation and amortization increased $35 million as we continued to execute on our capital plan. And finally, operating income was reduced by a $22 million tax item that flow through operating.

This was fully offset by a reduction in tax expense. In Illinois, operating income increased by $36 million, primarily as a result of our continued investment in the safety and reliability of the Peoples Gas System. Operating income at our other state segment decreased $3.5 million. Turning now to our Energy Infrastructure segment.

Operating income at this segment was up $800,000 driven by additional investment in our Power the Future plans. As expected, the Bishop Hill, Upstream and Coyote Ridge Wind Farms did not have a material impact on operating income.

Recall, a significant portion of earnings from these wind farms come in the form of production tax credits, which are recognized as an offset to income tax expense. These production tax credits contributed approximately $0.08 per share to our earnings for the year compared to $0.01 in 2018.

The operating loss at our Corporate and Other segment increased by $12 million. This variance reflects a $5.3 million gain that we recorded in 2018 related to the sale of a legacy business, as well as an impairment recorded in the fourth quarter of 2019 on assets that we inherited from the Integrys acquisition.

Combining these variances and excluding the impact of tax repairs and the new lease rules, consolidated operating income increased $62.8 million. Earnings from our investment in American Transmission Company totaled over $128 million, a decrease of $9.1 million as compared to 2018.

Our earnings from ATC decreased by $19 million as a result of a recent FERC order addressing the MISO complaints. Going forward, we're recording ATC earnings, assuming a 10.38% return on equity. This includes a 50 basis point added for our participation in MISO.

Other income net increased by $32 million driven by investment gains associated with our benefit plans. Note that these investment gains partially offset the benefit expense included in our operating segment. The remaining increase relates to the non-service cost component of our pension and benefit plans.

Our net interest expense increased by $53 million, mostly due to higher long-term debt balances to fund the capital investment. This excludes the impact of the new lease guidance. Our consolidated income tax expense, net of tax repairs, decreased by $42 million.

The major drivers were production tax credits from our wind investments and the 2018 tax reform item that I mentioned earlier. Our 2019 effective tax rate was 9.9%. Excluding the benefits of tax repairs, our 2019 effective tax rate would have been 20.6%. Looking forward, we expect that 2020 effective tax rate to be in the range of 16% to 17%.

This includes the effects of the unprotected tax benefits that are being refunded to customers following our recent Wisconsin rate decision. Excluding these benefits, we expect our 2020 effective tax rate to be between 20% and 21%. At this time, we expect to be a modest taxpayer in 2020.

Our projection show that we will be able to efficiently utilize our tax position with our capital plan. Turning to our cash flow statement. Our FFO-to-debt was 18.5% in 2019. Looking ahead, we expect FFO-to-debt to be in the range of 16% to 18%. We're using cash to satisfy any shares required for our 401(K) plan, options and other programs.

Going forward, we do not expect to issue any additional shares. Total capital expenditures and asset acquisitions were $2.5 billion in 2019, a $112 million increase from 2018. Turning now to sales. We continue to see customer growth across our system.

At the end of 2019, our utilities were serving approximately 10,000 more electric and 14,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volumes are shown on Page 13 and 14 of the earnings packet.

Overall, retail deliveries of electricity, excluding the iron ore mine were down 2.8% compared to 2018, and at a weather-normal basis, deliveries were down 1.7%. Natural gas deliveries in Wisconsin increased 2.6% versus 2018 and by 1.8% on a weather-normal basis. This excludes gas used for power generation.

And now I'll briefly touch on our 2020 sales forecast for our Wisconsin segment. We are forecasting a slight decrease of one-half of 1% in weather-normalized retail electric deliveries, excluding the iron ore mine. We project the Wisconsin weather-normalized retail gas deliveries to increase by seven-tenth of 1%.

This excludes gas used for power generation, and of course, both of these projections are adjusted for leap year in 2020. Finally, let's look at our guidance for the first quarter of 2020. Last year, we earned $1.33 per share in the first quarter. As you recall, this included approximately $0.04 related to the colder-than-normal weather in 2019.

Factoring in this and the 16% warmer-than-normal January, we project first quarter 2020 earnings to be in the range of $1.32 per share to a $1.34 per share. This assumes normal weather for the rest of the quarter. And with that, I will turn the things back to Gale..

Scott, thank you very much. Overall, we're continuing to perform at a high level, on track and focused on delivering value for our customers and our stockholders. Operator, we're ready now to open it up for the question-and-answer portion of the call..

[Operator Instructions]. Your first question comes from Shahriar Pourreza with Guggenheim Partners. Your line is open. .

So let me -- just a couple questions here. You guys are backfilling this infrastructure capital budget relatively fast especially with last week's acquisition. What's the spending shape look like given sort of these recent opportunities i.e.

is there any opportunities to provide upside to your current guide or is this just kind of an acceleration of that spend? And then Scott, I know you mentioned on the cash tax position being a partial payer. But does that include last week's acquisition? Just wanted to get a little bit of clarity there..

Well, Shahriar, we will be happy to answer those questions. First, I would view our announcement this week on Blooming Grove, basically an acceleration of a five year plan.

If you kind of looked at what we've accomplished so far with what we believe are very high quality projects, we're almost -- we're about 38% already in terms of the projects that we've agreed to acquire, right about 38% of the spending we projected at our five year plan. But I would view it as an acceleration and I will tell you why.

Our five year plan, which projected about $1.8 billion in this particular segment of capital spending essentially was a happy marriage of the high quality projects that we saw, that we really had a strong interest in, coupled with our ability to utilize all of the tax benefits. If you put all that together, it kind of shook out at $1.8 billion.

So Scott, I would view this as an acceleration..

Right. It's just it's just the timing. And when you look at the tax position, and we see a very small taxpayer, it’s going to be under $15 million, $20 million, because of the tax rules, there are still some tax payments that are made. But as you know, we're slowly starting with the PTC's work into 2021 1Q. So that'll not be a full taxpayer in 2021.

But still when you look at our five year plan, a lot of capacity is on our tax side. .

And Shahriar remember, this particular wind farm doesn't come into service until the very end of 2020. .

And then just on the regulated renewable, there's obviously a lot that you're doing there.

Can I just get a sense on how this could impact your decision to exercise the West Riverside option to purchase maybe up to 200 megawatts of that plant? Is there sort of a read-through on that option, and whether you would exercise it?.

No, I wouldn't do any read-through on that. That is still something that we're analyzing, still something we're taking a look at. As we continue to review our demand forecasts, our needs, the impact of renewables, but that is still something that's on the tables Shahriar..

And then just lastly, Gale, a little bit more of a policy question. I mean obviously we had a Commission announcement last -- a couple of weeks ago around resignation. So we're obviously likely going to see a bit of a democratic shift with Evers’ appointment.

Is there kind of any read-throughs that we should be thinking about from a policy standpoint as it looks like the majority may change, business as usual or could this kind of accelerate some of the solar decarbonization plans that are out there?.

My own sense is, I would look at any additional appointments of the Commission largely as business as usual. But I will say, and remind everyone that the Governor has appointed a climate task force. He has announced a aspirational goal late last year to basically have carbon-free electricity by 2050.

In this task force in which our company is represented, had its actual first meeting just a week or so ago. So, during this year, I think you will see some policy recommendations related to decarbonization coming out of this task force.

In many ways the Public Service Commission would in all probability need to implement some of those policy changes that they were adopted. But the policy shift that I would see coming, if there is one, would really come through the Governor's task force on climate change, if that makes sense to you..

Your next question comes from Greg Gordon with Evercore ISI. Your line is open..

Can we unpack the O&M performance a little bit because it really is quite impressive? If I look at Page 8 of your release, I think you’re telling me I should be looking at the O&M as adjusted for impact of the flow-through of tax repairs, right? That's like the clean number..

Yes. That's right..

And it’s down dramatically. And although more so I think because when I look at the rabbi trust activity, that's basically offset in O&M by an offsetting adjustment in O&M. So, if I adjust it for the rabbi trust activity, the O&M comparison would be even better than it looks, is that -- I think that's correct.

And if so, can you unpack for us what the sort of structural savings are that are now flowing through on a full year basis from the activities you pursued or sort of permanent benefits? And I think there's more to come with the investments you've made in technology and things like that.

So, I am just wondering, A, what's the structural improvement in O&M and where they do come from? And B, what the follow-on from continued activities on that front?.

Would be happy to. Let me frame all of this for you and then we're going to let Scott and Kevin weigh in on some of details. But we did have an exceptional quarter in terms of continued efficiencies across the business and there are a couple of factors that I think are important here.

The first is that, during 2019, we saw essentially pretty much a full-year benefit of the implementation of our ERP system across the entire enterprise. So, that was helpful. And we're continuing -- as people get used to that new system, we're continuing to see efficiencies and benefits that we thought we would.

And then compared to Q4 of a year ago, compared to Q4 of 2018 for example, there were there were significant O&M savings related to the closer of coal fired power plants.

Remember in -- we've basically over the last several months, in year and a half or so, we've retired three old or less efficient coal fired power plants, units at Presque Isle, up in the Upper Peninsula of Michigan where the latest to be retired in the spring of 2019.

We have the Pulliam plant near Green Bay retired and we had Pleasant Prairie retired. So we're seeing -- in the fourth quarter we saw O&M benefits flow through from no longer having to incur O&M for the operation of those plants. Then we had some of our technology investments continue to kick in.

And as Kevin said, we're projecting additional O&M savings that we think we're going to gain here. And we're on track to gain in 2020. So Scott, Kevin, anything you’d like to add. .

You already mentioned the ERP. If you look at common platforms across our system in the fourth quarter of this year, we will complete our customer information system to have that across all of our companies. We have already seen even this past year some savings from what we had in place already.

But in addition to that, through last year and focusing on the future, just looking at process improvement, so as we look across like the jurisdictions, do benchmarking, we're looking at common standards and where it makes sense, so to have a proactive and the similar approaches across our system.

That has produced some positive results for us on our O&M reduction, and it will continue to. .

Scott?.

I don't think there is anything else. It is across the enterprise, though. Everyone has a O&M takeout, opportunities and efficiencies to gain. .

And we're doing that Greg, which I'm very pleased about and I thought we would be able to. We're doing that while increasing customer satisfaction. So that's one of the reasons I mentioned earlier in my remarks. As we tracked our operational and financial performance, we had a record year across virtually every meaningful measure of performance. .

So there is an incremental improvement on run rate O&M as you get to the sort of fully baked savings from the coal plant closures. And then there's incremental O&M benefits but from the -- that you think you'll get from the ERP and also from the rollout of the CIS amongst other things. .

You nailed it. That's exactly right. .

Your next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open..

So just following up on Greg's question here. I think that's really germane. Can we dig in a little bit further to the prospects to sustain these levels of cost reductions? I mean they're really quite dramatic. I mean I think Greg emphasized it enough.

But the point being, how sustainable are these given how outsized they appear to be relative to the balance, not just on a trailing basis but prospectively for ‘20 here as you think through the balance of your playing period.

And maybe even to push the point a bit further, how identified is it just -- not just in '20, but through the balance of the year financial period that you're forecasting in terms of these levels of reductions?.

Well, I'll take a stab at that, certainly Scott can add anything he would like to and Kevin as well. But let me say this, we believe and I think our track record demonstrates that the kind of cost savings that you saw, that we continue to believe we're going to continue on a downward path, those are very sustainable.

We wouldn't be publicly committing to them if we didn't think we could absolutely sustain them. So again, we took 7% of the day-to-day O&M out of the business in 2019, 2% to 3% projected reduction in 2020. And again, we're doing this I think in a very highly planned and deliberate way. And a good chunk of it is coming really from two areas.

One we mentioned before that we're getting the full benefit of now, and that's the O&M takeout from the closure of less efficient coal-fired power plants. The other is the investment in technology. So my view guys would be highly sustainable. .

Gale, I'd agree, we just mentioned a couple of things that we're doing, but let me add one more on the customer service side, though, we have and are investing in our AMI infrastructure and we've seen savings from having that in place to reduce the rolls of truck that will continue. And we'll see those opportunities ahead in the upcoming years.

Also leveraging technology like mobile apps as an example, as we get that out into our customers we will be able to have more interaction with our customers and give them opportunities to pay their bills online, minimize paper billing, things of that nature.

So I would agree that sustainability of that is built into a lot of what we're doing on customer service side, especially with the things that I just mentioned..

Let me if I can please, to jump a little further. What about the compounding nature of that trajectory right? 2% to 3% is impressive, but through your forecast, do you anticipate compounding of that trajectory? And then perhaps the really relevant second question is, you've done it before.

How do we think about the cadence of rate cases? I know we're getting out a little bit but just given the scale of cost reductions here, certainly the question doesn't seem too early in terms of across any one of your jurisdictions given the enterprise wide cost reductions that are contemplated here? I mean, i.e., pushing them out..

I'm chuckling because we just got through the rate reviews for 70% of our regulated assets. .

I know, I recognize it but then the cost reductions are incredible. .

Well, we appreciate that. Let me say this, historically, as you know, in Wisconsin, the Commission has liked and has really requested in every two year cadence for rate reviews. But that's not to say that set in concrete. We'll take a look at it as we go forward and see where we are, see where the Commission’s sentiment is, et cetera.

But long story short, we feel very good about our ability to execute. And again, do so in a way that maintains high reliability and high levels of customer satisfaction..

Okay, too early to tell. .

Your next question comes from Michael Sullivan with Wolfe Research. .

Just one more on the O&M. What do you guys assume for earned ROEs now that you've got this kind of different sharing band where you can over earn a little bit before you get back to customers.

Where does this -- these O&M savings targets put you on a earned ROE basis?.

We're assuming as we have in the past that we earn the allowed rates of return in each one of our retail jurisdictions..

Okay.

Sorry, just to clarify, is that like at the electric utilities, is it 10%, or up to the 10.25% that you can do before sharing?.

Right now we're assuming 10%..

Okay. And then over to the sales growth. So, I think for 2020, electric, you're forecasting down a little bit and if we go back to some of your EEI slides, there’s supposed to be a tick up in the next couple years and more so as you get into ‘22, ‘23.

Can you just give us some color around key milestones that we should be looking for on economic growth that that's going to reach that from down a little bit to up close to overall percent?.

Yes. Happy to, Michael. First of all, the uptick that we continue to project -- and it’s a pretty slight uptick, the uptick that we're projecting in the 2022, 2023 timeframe is really driven by the amazing economic development projects that I talked about a little earlier in our remarks.

We have not seen any slowdown in terms of the number of economic development projects, the amount of new construction, just the continuing economic growth or the pipeline of projects that are being announced here in Southeastern Wisconsin in particular. So, we still feel pretty confident about the uptick in the longer-term.

The shorter-term meaning for 2020, is really driven by like for example, the large industrial segment. It's really driven by the interviews that our people have with our key account customers and feedback into our projections. It's also driven a bit by weather normalization. Remember, we had two warmer-than-normal summers back-to-back.

So you look at weather normalization, you look at conservation, you look at real-time feedback from our major industrial customers and you put it all together and it's like it's in there, that's what comes out. So, in total, a very modest decline, I believe Scott one-half of 1% is what we're projecting on retail absent the mines..

Correct. So, a very modest decline. And once again, the projections that we have in the investor book are really the only projects that we know. It doesn't include the residential and secondary that we expect to come from it. It's just the known projects that have actually started turning curve already.

So, it just takes a while to build a building and start using it. So, we expect those -- those are still on track to become. And like Gale said, our forecast is really out there talking to our customers and really fine-tuning it and the information we have, it’s the best information we have. .

And we are still projecting -- even with the modest 0.5% decline, we're still projecting 6% to 7% EPS growth..

Your next question comes from Praful Mehta with Citigroup. Your line is open..

So, maybe just I guess the O&M point has been already debated and answered. So, appreciate that. I think on the energy infrastructure side, the $1.8 billion that was planned, you said you accelerated it with this latest acquisition.

Do you expect with the tax appetite being what it is further down the road, do you expect that size increase through the 2024 timeframe, or do you expect the 1.8% to still will be the cap?.

At the moment, again, we will continue to look at this. But at the moment, I would view this as an acceleration and the $1.8 billion for the 5 years is still what we're looking at..

And then, when we think about the tax appetite and you said that you would be small tax payer, how should we think about that taxpaying capacity in the '22, '24 timeframe? Is that you’re still a small tax payer at that point or is that capacity increasing over time?.

Well, when you still look and you work everything in, we would still be a small taxpayer getting into that, being in that frame of time if we execute on all these capital projects, largely because of some of the tax rules that are out there, you still have to be a minimal taxpayer for some of the reasons.

But we need to execute on all these capital projects to get to that level..

Given the tax rules as Scott said, it’s highly unlikely that we will ever in a sustained period of time get to absolute zero. So when we say modest taxpayer, for example, I think Scott mentioned $15 million to $20 million this year. So I hope that puts things in context for you..

Yes, no, it does and I appreciate that. And then just finally, in terms of credit, and the holdco debt side, I think you started by saying you've got improving credit, and your holdco debt is now down to 28%.

Is there any target we should be thinking about around the holdco debt level and also the FFO-to-debt kind of credit that we should be thinking more longer term?.

We’ll let Scott answer that. We do have an internal an internal cap on where we want to go or where we don't want to go with holdco credit -- holdco debt. .

So we look at that holdco, that holdco debt, it's down to 28%. Our target is to keep it below 30%. Now, if there's an opportunity, one year it may pop up or down, but -- and we feel comfortable of those ranges in our forecast here. And the FFO-to-debt in that 16 to 18 range.

Now, last year, we had 18.5 but remember we were at in a sharing opportunity at Wisconsin utilities, that money will go back eventually to customers. So, next year may be on the lower end of that range, but still within that 16 to 18 range. .

And that range as you know, well supports our current credit ratings..

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

Just want to elaborate on the contracted infrastructure projects.

So as of now what percent of 2020 EPS will come from that segment? And let's assume the five year plan stays at 1.8, it seems like the bias might be to the upside, what percent of earnings would be coming from that segment in five years?.

Well I can give you the number for this year. And obviously, well, we can do a little bit of public math here. But long story short, we got in 2019 about $0.02 a quarter of earnings from our infrastructure investments.

Given the addition this year, a full year earnings for Coyote Ridge which went into service at the end of 2019, I would expect about $0.03 a quarter, Scott?.

About $0.03 a quarter. And remember the other projects we announced here in December of next year. So some impact but not a lot. .

And then bigger picture, how big are you willing to let that segment be? Obviously they're high quality contracted assets. But they're not the regulated rate base contracts.

So do you have sort of a mental ceiling of how big that could be as far as earnings mix?.

Yes, we do. At the moment, I would say that our internal plan would hold that segment of our business down to about 10% of our earnings..

Okay, very good. Then just one last one on that same topic. You said you've accelerated the spending, but you're not increasing it.

What's the limiting factor of why you're not increasing it? Is it balance sheet opportunity for specific projects? Is it that 10% ceiling you just mentioned? How do you balance those?.

It's the happy marriage between the quality projects that we see in the pipeline that we are very interested in, and our tax appetite. If you put it all together and the $1.8 billion shakes out to something that we can -- we think we can both add quality projects to achieve and maximize our tax position..

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

Just on the last round of questioning, is there a reason why you won't -- or you aren't considering tax equity for continued expansion, considering the tax upside?.

No, I mean certainly we would be open to something like that in the future if the economics worked out. Right now the economics favor exactly what we're doing. .

Got you. And on ATC, has there been any impact on long-term planning from the FERC's action on ROE in MISO. .

Short answer is no. And I think that….

You don’t think that had an effect?.

Not yet because, as you know, it's now all up in the air again. So, these are -- as you know very well, transmission projects have a long gestation period. So, I wouldn't expect there to be some kind of a knee-jerk reaction in the first 30 or 60 days, particularly with all the appeals going on and the uncertainty of what the final result will be. .

Exactly Gale, and we're recording a 10.38, remember that long-term plan, we were assuming 10.2. So, 10.38 is a little north of that..

And I may have missed this before, but where do you guys stand in terms of dividend payout ratio targets? And what's the future growth rate for dividends, is it just going to track along with EPS at this point?.

Our policy is to pay out in a range of 65% to 70% of earnings. So a dividend payout ratio that is 65% to 70% of earnings. As I mentioned earlier, we right smacked that in the middle of that range right now. So we would project that dividend growth would be in-line with the growth in earnings per share..

Your next question comes from Michael Lapides with GS. Your line is open..

Hey, Gale, thank you for taking my question. Congrats on a great quarter. I actually have several, they're all gas related, and I'll just kind of rattle them off. First of all, your gas demand forecast of, I think, it's 0.7%. Can you remind me when the last time you did sub-1% gas demand growth in Wisconsin? That's the first question.

The second question is, where do you stand on the permitting and regulatory approval for their gas LNG facility at Wisconsin that you talked about a couple of months ago or a while ago? And then finally, any incremental thoughts on the need for new gas fired generation, either as partly transformation we're just meet demand part?.

All right, we'll be happy to try to take those up one by one. I think weather-normal, we were at 1.8 on retail gas. So we had a 1.8% growth in retail gas consumption on a weather-normal basis in 2019. You could probably go back in terms of when were we last below 1%.

Whatever year that gas -- natural gas prices got to double-digits, I think we did not grow meaningfully at all in terms of natural gas demand from the retail side of the business.

Scott?.

Yes, exactly. When you think about it, yes, we've had 3% to 4% growth last year it was 1.8%. But now what we're really forecasting is really the customer growth aspect, not assuming any more conservation, but also assuming that people don't turn their houses from 69 to 74. People are going to stay comfortable.

And we've also seen a lot of conversions the last couple of years from industrial for their own environmental goals to go convert from coal and oil to natural gas, so you only convert only once. So basically our forecast now is based on customer growth..

And Michael on the LNG as far as the approval process, it's underway. And as I said in my prepared comments, we expect approval and we would begin construction in the summer of 2021 for operations in 2023..

And then on the gas intervention side and kind of thinking about the mix of gas versus coal fired generation?.

Mix of gas versus coal fired?.

In terms of thinking about new gas generation needs….

Well, as you know, we have an option with Alliant to buy into some point between now and say 2024 a portion of their new gas-fired combined cycle that's being built right now. That option is still on the table. We haven't made a final decision. Beyond that, we don't have any plans to propose any construction of new gas-fired generation.

And of course, regardless of whether we add gas-fired generation or not, the percentage of gas-fired generation in our total mix will be going up and coal will be coming down as we've already retired about 40% of our existing coal-fired generating capacity..

Your next question comes from Greg Gordon with Evercore ISI. Your line is open..

I just wanted to go back to the comment on what your expectations are as they sort of bake into your earnings growth aspiration, the 5 to 7. You said that you're targeting the authorized ROE without and not assuming that you maximize your opportunity to get into the higher end of the range.

Should we assume that the midpoint of your guidance represents earning the authorized return and sort of like the high-end represents the ability to achieve other factors like earning that extra 25 basis points? Or if I'm not thinking about it correctly, can you give us some guidance as how you're thinking about that opportunity and what it might mean for your earnings outlook?.

Great question, Greg. Everyone in the room is nodding their head, you've got it. If we were modeling it, as we know you would be, we would assume fully authorized rate of return gets us to the midpoint of the guidance and then upside from there if we were to get into sharing..

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

One last question I forgot to ask this. This is more of a strategic question. But around the country, you are seeing some cities ban improvements on natural gas distribution systems and pulling through full electrification of heating and everything else.

And obviously the views from the Upper Midwest winter is little bit different than place like California. But do you have any view on where this all is going in terms of natural gas infrastructure, spending and you guys are -- you're kind of the experts of the turnaround business there..

Well, it's a very good question, and I think you are correct. In the less -- in the warmer climate and the more tempered climates, there's clearly a push by some of the more active environmentalists, not only move away from coal but now we have a beyond gas campaign that we're seeing.

For us, I think Michael it comes back to pure practicality and the recognition that if it's 40 below in the Upper Peninsula of Michigan, a heat pump is simply not going to keep your house warm, or even if it did, it would be so incredibly expensive that you simply couldn't deal with it.

So for our Upper Midwest area and with the market share that we have for home and commercial heating with natural gas, I just don't see a major turn away from that for many, many years to come. I think the other piece of it is natural gas heating, natural gas furnaces continue to get even more efficient.

And there are better ways, I think in terms of running the economy and continuing to reduce CO2 emissions. And if you look now at across the U.S. and in the upper Midwest, the number one contributor to CO2 emissions is no longer power generation, for example, it's transportation.

I think the low hanging fruit here in terms of continuing to de-carbonize the economy, particularly in a region like the one we serve, is not moving away from natural gas home heating, it's actually electrification for vehicles. Kevin, I don't know if you have any view on that..

Gale, I think you summed it up very well. The other thing that I just will add is as technology continues to evolve on the gas side we'll continue to be in a part of that and looking at it. But I think you summarized our position and our philosophy very well..

Hope that responds to your question, Michael..

Great, thank you very much. Talk to you soon..

You next question comes from Vedula Murti with Avon Capital. Your line is open. .

I wanted to make sure I understood, because there's a line item and I just want to make sure you can explain it to me.

Can you explain to me what kind of how the rabbi trust works kind of how its funded, it's duration and kind of how it replicate itself over supplies?.

Sure. We'll be happy to take a stab at it. I'm going to let Scott do that. I will say this we have to make sure that all of you don't look at the rabbi trust in isolation. As in many ways, the rabbi trust is -- the earnings in the rabbi trust offset the cost of some of our benefit plans. And I think conceptually that's an important point to remember.

Scott?.

Yes, that's exactly right Gale. So the rabbi trust is really set up by Integrys and we inherited that investment vehicle. And that is related to some of the deferred compensation that individuals from Integrys have earned through the years.

So what's a rabbi trust does is what we do is we try to match the best we can, the expense of deferred comp that's in the utilities with the investments in this rabbi trust. So if the rabbi trust goes up $1, usually the deferred comp expense goes up $1 or vice versa. So it's really trying to match that. We have those funds.

They're tied up specifically for the deferred comp, so there's nothing else we can use for them. So we have to do it and we thought the best thing to do was try to mirror and match the hedging as much as possible. Like Gail said though, you can't look at it in isolation. Just for accounting purposes, it has to be on this line how it’s recorded..

And Vedula, so far and again we've inherited that in 2015 with the Integrys acquisition. So far our strategies, our matching strategy, if you will, has our matching strategy, if you will, is worked exceptionally well..

So as I think about this, is the variance here tied to stock market performance, performance of Wisconsin Equity, Wisconsin Energy, the equity specifically? Or what creates the variances, both up and down in this?.

And again, we'll let Scott give you more detail. But long story short, we know what investment options are people who've got the deferred comp are in. In other words, we know what investment options they have selected. We can blend that with our investment options in the rabbi trust..

And a lot of the investment options are dealing with equities in the deferred comp, and that's what we're trying to match it the best we can. It's not perfect. But the best we can with equities in the rabbi trust. And so far the correlation has been pretty high….

99% and really good….

And so this is a static thing going forward, there's no new participants or incremental?.

No new participant….

It's static and it slowly goes down as participants withdraw from the old Integrys deferred comp. So it's slowly going down..

And I guess also I guess then the other thing, obviously, this is clearly part of strategies in terms of the income tax expense line in terms of the wind credits and everything like that. Clearly, if we take a look at Page 10, say major, that's a very important positive factor and year-over-year is very large increase.

How should we be thinking about that in terms of within the earnings guidance range variance going forward there?.

We can certainly give you the comparison of what we achieved in terms of the infrastructure segment earnings in 2019 versus our projection in 2020. As I mentioned earlier, the infrastructure segment gave us about $0.02 a share uptick in earnings each quarter during 2019.

And with the addition of Coyote Ridge Wind Farm in South Dakota, which went commercial at the end of last year and will give us a full year this year, we would expect $0.03 a quarter from the infrastructure investments in wind..

Yes. And I think overall when you look at it, including the unprotected we're giving back in the credits to our customers, that effective tax rate is in that 16% to 17% range..

And to clarify, what's going to be an incremental penny a quarter in 2020 in terms of the earnings..

So given the fully diluted share count, it would appear then that that variance should be something similar not as dramatic year-over-year?.

Yes, that's exactly right..

And your next question comes from Andrew Levi with Exoduspoint..

So just kind of following Michael Weinstein's question, and just on kind of natural gas, I guess -- and you kind of answered it already. But I would say just in the context of ESG and obviously, ESG is not to be favoring natural gas.

So maybe just explain how you with that? And then separately, I agree with everything that you have said earlier about nat gas. Just kind of looking at kind of the last step and if you look at LDCs or companies that are very heavy natural gas, their stocks have not done as well of lately and the multiples have come down.

And so I'm just wondering kind of where your head is at? And at the right price, would you add gas distribution customers to your mix beyond what you have already obviously in the large LDC in Illinois and the smaller ones in Wisconsin?.

Well, good question, Andy. You know you never say never, but let me put it this way. At the right price, obviously, hitting the free that we've talked about for acquisitions, and we would always take a hard look.

I would go because you recognized if you're making an acquisition of any kind of company, LDC or not, you are basically making a very long-term bet. Our assets, as you know, are very long-lived assets. So would, and I'm saying this just theoretically.

If an LDC in the Northern North Dakota came up for sale at the right price, we probably would be a lot more interested in that than if it was in the San Diego..

And just as far as ESG and how you kind of think maybe, obviously, it's an evolving idea or investment basis.

Do you think as far as natural gas, they've gone for an update but it may not be the right way to look at it and there are other things to focus on the ESG side?.

Well, again a good question, Andy. My sense and we've done dozens of ESG business. Right now, and I think for the foreseeable future, the ESG focus infrastructure companies like ours, seems to be heavily, heavily focused on CO2 emissions and what your plan is to basically decarbonize the generation fleet.

That swamps any other kind of discussion that we have had with any ESG-oriented investor. And again, we have hundreds of these discussions over the course of the last couple years. In fact, everyone now, whether you are ESG focused or not, everyone is beginning to ask ESG questions.

But I would say that in 99 out of 100 meetings, the real focus is really on CO2 emissions and there we've got a great story to tell. The other thing that I would point out, we're one of the first utilities in the country to set a methane reduction goal.

And I think you are going to be seeing, because the climate scientists, as you know, really believe that methane emissions are far, far more potent perhaps 25 times more potent than CO2 as a greenhouse gas, I think you are going to be seeing some increasing focus on methane emissions and they are the kind of upgrade work we're doing to modernize the natural gas distribution network, particularly in Chicago is really important.

So those are the kinds of -- that's the flavor of what we're hearing in our ESG business today, Andy..

And your last question comes from the line of Paul Patterson with Glenrock Associates. Your line is open..

So let me ask you something here, just to follow up on Vedula's question. The rabbi trust, if I understand your answers, basically is offset by deferred comp expense to do really isn't any net income benefit of any significance you see driving earnings going forward or in terms of results for 2019.

Am I understanding it correctly?.

Correct. 2019 may have been an anomaly because we have so much O&M coming out of the utility that we're into the sharing. But for the most part, there's no benefit from that at all. But it would have been a small amount, and nothing Paul that we're planning on in terms of benefit for 2020..

And then in terms of Foxconn, there's some local articles about the Foxconn administration, looking at renegotiating the tax benefits, because of I guess the way the Foxconn thing has been sort of rolling out.

And I'm just wondering if you had anything to share on that, or what does that mean in terms of the outlook for the Foxconn economic development contributions that you guys have been expecting past this?.

And let me let me just reiterate first what I mentioned in our prepared remarks. In that over the past two years, Foxconn has invested already over $500 million in Wisconsin. I can tell you, again, I've said before focus on what's going on the campus rather than the media reports. But I can tell you, I was actually with the governor yesterday.

He and I appeared together at an economic development conference here in Milwaukee. And he went out of his way to say that he believes his responsibility is to help make Foxconn successful in Wisconsin. So again, that's as of 9:30 yesterday morning and a very definitive comment from the governor himself..

And then finally the wind transaction with Google as the off-take, that's for the life of the project.

Is that correct?.

So that would be a 12 year off-take agreement..

That's 12 years, okay. And then just speaking, given the credit quality of Google and stuff, just to make sure I understand this, that's a better rate of return that you're getting. You guys perceived -- you guys expect to get a better return associated with that project than what you're getting in a regulated business.

Do I understand you guys right in that?.

You understand this absolutely correctly. And the experience that we've had so far with the other infrastructure investments that are operational experienced in 2019 is proving that out..

Okay, awesome. Thanks so much. .

You're welcome. Thanks for the call. All right. Well, folks, that concludes our long conference call for today. Thank you so much for participating. If you have any other questions, we're always available. Please contact Beth Straka at 414-221-4639. Take care everybody..

Ladies and gentlemen, this concludes today's conference calls. Thank you for participating. You may now disconnect..