Good afternoon and welcome to WEC Energy Group's Conference Call for First Quarter 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 remind you that all statements in the presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10 ks and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available And now it's 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 the opening quarter of 2019. First, as always, I'd like to introduce the members of our management team who are here with me today. We have Kevin Fletcher, President and CEO of WEC Energy Group Scott Lauber, our Chief Financial Officer Bill Gutt, our Controller Peggy Kelsey, Executive Vice President and General Counsel and Beth Straka, Senior Vice President, Corporate Communications and Investor Relations. Scott will discuss our financial results in detail a bit later in the call.
As you saw from our news release this morning, we reported Q1 2019 earnings of $1.33 a share. Our performance was driven by colder than normal weather, a strong economy and a continuing focus on operating efficiency across our system of companies. I might add that our people and our technology performed exceptionally well during the polar vortex cold snap that gripped the region during January. As wind chills in late January dropped to near 50 degrees below 0, customer demand for natural gas hit new all time records across our service areas in Wisconsin, Michigan and Minnesota. Our gas distribution networks were truly put to the test and when it counted most we delivered.
We also made real progress on a number of other important initiatives during the quarter. We completed our new natural gas fired power plants in Michigan's Upper Peninsula time and on budget. With the new units online, we were able to retire our older, less efficient coal fired plant at Presque Isle. And here in Wisconsin, we received approval from the Wisconsin Public Service Commission for 2 major solar farms. These facilities will be among the largest solar installations in the Midwest and will support our effort to reduce greenhouse gas emissions while maintaining reliable cost effective infrastructure.
You can learn more about our generation reshaping plan in the climate report that we just published just this last week. In addition, our regulatory calendar is on track with rate filings in Wisconsin during the quarter. Kevin will provide you with an update on that front in just a moment. And as I mentioned earlier, we're benefiting from a thriving economy here in Wisconsin. The state's unemployment rate came in at 3% or less during each month of this year's Q1 and new proposed investments are promising additional development and jobs.
For example, global healthcare firm Fresenius Kabi recently announced that it will build a flagship facility for its U. S. Distribution operations in the southeastern corner of our state. Also to Milwaukee, Foxconn plans to restart construction as planned after the winter break on Phase 1 of its high-tech manufacturing and research campus in Racine County. Astrand announced during the quarter that a centerpiece of Phase 1 will be a Gen 6 fabrication plant.
That Gen 6 plant will produce liquid crystal display panels in various sizes up to perhaps 90 inches Production is expected to begin by the end of 2020. And in a matter of weeks, the company plans to issue initial bid packages for that Gen 6 facility and for construction of a new data center as well as research and development labs. We're already seeing the positive ripple effect of Foxconn's commitment to Wisconsin. More than 30 additional investment projects have been announced in the vicinity of the Foxconn campus, including hotels, medical centers and more than 2,700 housing units. These 30 plus projects should result in more than $900,000,000 of new private 19.
Kevin, all yours.
Thank you, Gail. I'd like to start by highlighting the work our employees are doing to provide excellent customer care and reliable service. Just last month, our WEC Energy Group companies placed in the top quartile in the American customer satisfaction index for energy utilities. And as Gail mentioned, we're making progress across our companies on key initiatives. I'll review where we stand in our 4 state jurisdictions.
Here in Wisconsin, we're now on track to add utility scale solar generation to our portfolio of regulated assets. You'll recall that on May 31 last year, 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 2 locations. Earlier this month, the commission approved our proposal and we received a written order on April 18. The Badger Hollow Solar Farm will be located in the southwestern part of the state in Iowa County and will be developed and constructed by Invenergy. The Two Creeks solar project is being developed and constructed by NextEra in Northeastern Wisconsin.
Wisconsin Public Service will own a total of 200 megawatts, 100 megawatt at each site with an expected investment of approximately $260,000,000 We expect these projects to enter commercial service by the end of 2020. Now I'll touch on our rate filings. On March 28, we filed proposal with the Wisconsin Public Service Commission to set customer rates for our Wisconsin utilities. The request comes after a 4 year base rate freeze, a freeze that has resulted in lower customer bills while maintaining world class reliability and shaping a cleaner energy future. First, I'll discuss the request we're making to set We Energy's customers' rates for electricity for 2020 2021.
You can refer to the last two pages of the earnings packet for details on our natural gas and steam filings. Using savings from tax reform, we are targeting an increase in the typical monthly electric bill of approximately 2.9% in 2020 and an additional 2.9 percent in 2021. There are 3 primary cost drivers for our proposed We Energy's electric increases. Number 1, higher transmission charges. Remember, the amounts collected in rates have been capped since 2010.
Number 2, revenue the commission assumed that We Energies would receive from MISO starting in 2015 that was not received and number 3, increased cost associated with the agreement to purchase energy from the Point Beach Nuclear Plant. This agreement was approved by the commission in 2000 and 7 when we sold Point Beach and credited customers a total of $670,000,000 over a 3 year period. Now on to Wisconsin Public Service. The rate proposal includes our acquisition of approximately 60 megawatts of the Forward Wind Energy Center in 20 18, as well as our investment in the 2 solar facilities. It also includes the ongoing modernization of the electric system by upgrading and moving underground 2,000 miles of electric distribution lines.
We've already seen higher reliability in Northern Wisconsin as a result of these upgrades. With the tax savings and other credits applied, the typical electric bill would increase by approximately 4.9% in 2020 and an additional 4.9% in 2021. Even with the increases, Wisconsin Public Service average bills would remain well below the consistent with Wisconsin Commission's prior decisions. We expect final orders by the end of the year with new rates effective in January of 2020. Turning to Michigan, Upper Michigan Energy Resources has begun commercial operations of its new gas powered generation stations on March 31.
We've invested approximately $255,000,000 in these new facilities. Half of the investment will be covered by 20 year agreement with Cliffs Natural Resources and the other half will be covered in retail rates. This generation solution is expected to save customers nearly $600,000,000 over the next 30 years. Looking to Illinois, the Peoples Gas System Modernization Program is roughly a quarter complete. As we improve safety and reliability, we continue to focus on efficiency and excellent customer care.
Earlier this month, a national customer study found Peoples Gas to be one of the energy companies that's easiest to do business with in America. And finally, an update on Minnesota Energy Resources. As you may remember from our last call, the Minnesota Attorney General requested a review of the return on equity that the Public Utilities Commission had approved in December. The commission has chosen not to take up this request, so our Minnesota ROE stands at 9.7%. And with that, I'll turn it
back to Gail. Kevin, thank you very much. The company continues to perform at a high level. And as we look to the remainder of the year, we're on track to meet the upper end of our 2019 guidance. As a reminder, our guidance range is $3.48 a share to $3.52 a share.
$5.2 a share and again we're guiding to the upper end. This translates to a growth rate between 6.1% and 7.3% off the midpoint of our original 20 18 guidance. And finally, a reminder about our dividend. This January meeting, our Board of Directors raised the quarterly cash dividend to $0.59 a share. That's an increase of 6.8% over the previous rate.
Folks, this marks the 16th consecutive year that our shareholders will enjoy higher dividends. We continue to target a payout ratio of 65% to 70% of earnings. We're in the middle of that range right now. So I expect our dividend growth will continue to be in line with the growth in our earnings per share. And now with details on our Q1 results and outlook for the remainder of the year, here's our trustee CFO, Scott Lauber.
Scott?
Thank you, Gail. Our 2019 Q1 earnings of $1.33 per share increased $0.10 per share compared to the Q1 of 2018. Higher earnings were largely driven by the colder than normal winter weather. Additional capital investment and our continued emphasis on cost control also had favorable impact on earnings. The earnings packet placed on our website this morning includes a comparison of Q1 2019 2018 results.
I'll first focus on operating income by segment and then other income, interest expense and income taxes. Referring to Page 8 of the earnings packet, our consolidated operating income for the Q1 of 2019 was $542,800,000 compared to operating income of $545,100,000 in the Q1 of 2018, a decrease of $2,300,000 Adjusting for the impact of tax repairs and our adoption of the new lease accounting rules, operating income actually increased by $2,400,000 We have a breakout of these items for your reference on Page 8 of the earnings packet. Neither of these items impacted our net income. 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. Plan continues and our expectation remains that the transmission escrow balance at Wisconsin Electric will be reduced to 0 by the end of this year.
In January, we adopted the new lease accounting standard. While it had no impact on our net income, it does affect our segment reporting. 2 separate items affect year over year comparability. 1st, the presentation of our intercompany lease related to the Power of the Future assets were impacted. The leases are fully eliminated in consolidation.
However, the contracts are treated differently in 2019 across our business segments. The second item is a smaller purchase power agreement, which had an impact of approximately $1,000,000 reclassified between operating income and interest. Have adjusted of these items in a separate column on Page 8 of the earnings packet. My segment update will focus on the remaining $2,400,000 increase in operating income, which excludes the impact of tax repairs and the new lease accounting rules. Starting with the Wisconsin segment, the increase in operating income net of these adjustments was $5,600,000 Higher sales volumes drove a 20 point $7,000,000 increase in margins.
This was partially offset by $11,600,000 negative fuel impact and a $7,700,000 increase in depreciation expense. In Illinois, operating income decreased $9,700,000 driven by a $16,000,000 increase in operations and maintenance expense. This was due to higher weather related work repair, benefit costs and timing between quarters. Margins increased $11,000,000 as a result of our continued investment in the Peoples Gas System Modernization Program. Operating income in our other stake segments increased $5,300,000 driven by an increase in margin due to colder weather.
Turning now to our Energy Infrastructure segment. Operating income in this segment was down $300,000 As expected, Bishop Hill and Upstream Wind Farms did not have a material impact on operating income. However, a significant portion of the earnings for these facilities come in the form of production tax credits and are recognized as an offset to income tax expense. These production tax credits add approximately $0.02 per share. The operating loss at our corporate and other segment improved by $1,500,000 Reminding these changes and excluding the impact of tax repairs and the new lease rules, operating income increased $2,400,000 Earnings from our investment from American Transmission Company totaled $36,100,000 an increase of $3,300,000 as compared to the Q1 of 2018.
Higher earnings were driven by continued capital investments. Other income net increased by $23,400,000 driven by higher AFUDC related to the new rice generation in Michigan's Upper Peninsula and an increase in investment gains associated with our benefit plans. Note that these investment gains partially offset the benefit expense including in our operating segments. Excluding the impact of the new lease accounting, our net interest expense increased $16,800,000 primarily driven by our continued capital investment and slightly higher interest rates. Our consolidated income tax expense net of tax repairs decreased 17 point This was driven by wind production tax credits related to our recent acquisitions of the Bishop Hill and upstream wind generation facilities in addition to various smaller tax items.
We expect our effective income tax rate to be between 10.5% and 11.5% this year. Excluding the benefits of tax repairs, we expect our 2019 effective tax rate to be between 20% 21%. At this time, we expect to be a partial taxpayer in 2020. Looking now at the cash flow statement on Page 6 of the earnings packet. Net cash provided by operating activities decreased $158,000,000 The decrease was driven by higher working capital levels due to colder weather and tax reform refunds to customers.
In the Q1 of 2018, we had not yet begun refunding amounts to customers related to tax reform. Total capital expenditures and asset acquisitions were $627,000,000 for the Q1 of 2019, a $187,000,000 increase from 2018. This reflects our investment focus in our regulated utility and energy infrastructure business. Our adjusted debt to capital ratio was 53% at the end of the Q1, a decrease from the 53.4% at the end of 2018. Our calculations continue to treat half of the WEC Energy Group 2,007 subordinate notes as common equity.
We're using cash to satisfy any shares required for our 401 plans, options and other programs. Going forward, we do not expect to issue any additional shares. We paid $186,200,000 in common dividends during the Q1 of 2019, an increase of $12,000,000 over the same period in 2018, which reflects the increase in the annualized dividend level that was effective in the Q1. Turning now to sales, we continue to see customer growth across our system. At the end of the Q1 of 2019, our utilities were serving approximately 11,000 more electric and 22,000 more natural gas customers compared to a year ago.
Retail electric and natural gas sales volume are shown on a comparative basis on Page 10 of the earnings packet. Natural gas deliveries in Wisconsin increased 7% versus the Q1 of 2018. This excludes gas used for power generation. Net gas deliveries in Wisconsin grew by 2.6% on a weather normal basis. Overall, our retail deliveries of electricity excluding the iron ore mine were up 0.5% from the Q1 of 2018.
And on a weather normal basis, retail deliveries were down 0.4%. Finally, a quick reminder on the earnings guidance. We are reaffirming our earnings guidance of $3.48 to $3.52 per share with an expectation of reaching the top end of the range. This assumes normal weather for the remainder of the year. Now looking at the guidance for the Q2.
In the Q2 last year, we earned $0.73 per share, which included approximately 0 point 04 our Q2 2019 earnings to be in the range of $0.70 to $0.72 per share. This takes into account April weather and 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. And just a brief side note for those of you listening in from Boston, I just want to let you know the Milwaukee Bucks are ready to rumble. So fear the deer folks. And operator, we're ready to open it up now for the question and answer portion of the call.
Thank you. Now we will take your questions. The question and answer session will be conducted electronically. And your first question comes from Greg Gordon with Evercore ISI. Your line is open.
Rock and roll, Greg. How are you today?
I'll tell you tomorrow after the draft, okay, Gail? We need
to keep up the date. All right. There you go.
Just a few questions, and I can take this offline if Scott doesn't have this handy. But when you look at the investment gains in other income net of the increased expense, overall, do you know what the net contribution was offhand? And if not, I'll take it offline.
Scott? Yes. I think the investment gains was probably in the ballpark about $15,000,000 to $16,000,000 But remember, those investment gains are really offset expenses that are up in the operating segment. So there's kind of a it's just really how we're reporting the information that required to report it by segments down there, but it's really an offset to the operating up above.
Yes, Greg, and to Scott's point, you really have to look at the 2 different pieces together to really get a good picture.
I agree completely. That's why I asked.
Okay. Terrific. Thank you, Greg. What else was on your mind today?
The I guess the second thing on my mind was taking into account the tax repairs agreement and the way you're flowing that through, how much have you reduced the regulatory asset balance that that's impacting and how and what's that trajectory expected to look like?
Well considerably on the and Scott can fill us in as well. But on the big one, the transmission escrow balance, which was over $200,000,000 We've more than cut that in half and we're expecting it to be 0 in terms of the remaining escrow balance by the end of 2019. It's a great story.
And then once that's at 0, does the is the agreement sort of complete or what happens then?
Well, it will be all that will be decided in the rate case with new rates effective January 1, 2020.
Perfect. Great. That's a great answer. And then forgive me if I don't know the answer to this because I haven't read it thoroughly. But looking in the rate case, what are some of the other key sort of second level things that you're looking to try to achieve?
Are there any significant incremental changes in your generation portfolio that you're asking for in terms of deployment of new capital or retirement of incremental existing coal plants and what are some of the big drivers there underneath the surface?
Well, Greg, I think Kevin covered the 3 big drivers in the responsive to your question. First of all, in the Wisconsin Public Service rate case, part of the driver for that rate case is really 2 renewable projects. One is the acquisition of a portion of the forward wind energy center that Kevin mentioned and then the other would be included in our rate case would be the investment in the 2 new solar projects that we covered during the prepared remarks, the 2 creeks and the Badger Hollow solar projects. That's a pretty sizable investment, Kevin, and that would be a part of our rate ask at Wisconsin Public Service.
And the only other one that I would add, Gail, which I mentioned is the SMRP project, the renewable project where we're undergrounding a couple of 1,000 miles of overhead distribution to underground. We'll be looking to put that into our rate base as well.
In addition, the little higher equity layer that we highlighted in there, but that's about 1% and we've done it for other cases and now just support our balance sheet even better. Right.
So we're asking for an increase in the upper end. We have a range now as you know for the equity layer that the commission has approved. We're looking for a bit of an increase in the equity layer itself. And again as Scott said, this has been approved in prior cases here in the state. I hope that helps, Greg.
It does. Thank you very much. Take care.
You're welcome.
Your next question comes from Shahriar Pourreza with Guggenheim Partners. Your line is open.
Hey, Shahriar.
Hey, guys. Hey, guys. Hey, guys. Hey, guys. Hey, guys.
Hey, guys. Hey, guys. Hey, guys. Hey, guys. Hey, guys.
Hey, guys.
Hey, guys. Hey, guys. Hey, guys. Hey, guys. Hey, guys.
Yes, it's not Friday yet. Okay. So Gail, thanks for the sort of the update around Fox Con, but maybe we could just touch a little bit about sort of the noise we're seeing in the headlines around the governor and potentially looking to revise terms of the state contracts. I think you sort of highlights changes with the business plan hiring. This is obviously, Gail, this is your baby.
You're very close to the situation. How difficult would it be for the governor to reopen the contract legislatively, especially you've got a Republican controlled legislator? Is this just noise? How should we think about this?
Well, great question, Shahriar. I appreciate it. Three observations to directly answer your question. First of all, we have now for the first time in almost a decade in Wisconsin divided government. So one can expect I think a fair amount of rhetoric, newspaper headlines, political discussions that we haven't been overly used to over the course of the last decade.
I would characterize much of that as just the normal back and forth in a divided government in a political climate of a divided government. And my suggestion to all of you would be kind of ignore the rhetoric and look precisely at what's happening on the ground. Interestingly enough, as I mentioned during our prepared remarks, Foxconn is moving forward and is now clearly defined what they want to accomplish over the next 18 months in Phase 1 of the project. It's significant including the addition of a major data center. And as you recall, they're still standing by their longer term projection of creating 13,000 jobs.
But to put a finer point on it, we have been as you know very conservative in our projections. In fact, I don't think Scott had any significant ramp up in demand from the Foxconn campus until the last year of our 5 year plan. And we only had a very small amount of ripple effect, if you will, of additional economic development and additional jobs and additional demand. What we're seeing so far already has far surpassed in terms of the ripple effect what we had planned in our projections for the 5th year. So my view is kind of steady as she goes, be a lot of political talk.
Let's focus on really what's happening on the ground. I hope that helps Shar.
No, it does. And then I appreciate you addressing that, because I know it's been a topic a little with investors. So I appreciate that. And then just I know Gail you've highlighted shifting to infrastructure. You've highlighted more than a dozen sort of wind opportunities that are under evaluation, very similar to the South Dakota deal with Google.
You've hit 40% of your spending of what you've bucketed for about $1,000,000,000 Are you seeing sort of enough opportunities that could be incremental to plan or as we're modeling this, should we just think about this as being more front end loaded growth? And then just secondary to that question is, Trustee Scott said, you guys are going to be in a tax position by 2020. But if some of these projects sort of hit fruition, how should we think about your current cash tax position post these projects?
Well, Shahriar, we still have a great question. We still have a robust pipeline of projects that we're doing a fair amount as you can imagine of due diligence on right now. It wouldn't surprise me in the least if you saw over the next 4 to 6 months another major announcement. So we still have plenty of opportunity here and as Scott mentioned in his prepared remarks right now if we did nothing else, we would be a partial cash taxpayer in 2020. Another announcement would push us out into 2021.
So we're segment, Thanks, guys. Yes.
Thank you, sir. Thank you, sir. Thank you, Thanks guys.
Yes. Thank you, sir.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Good afternoon, Michael. How are you today?
All right. Doing good. Hey, on the wind tax credits, you noticed that the operating income from the infrastructure business is kind of flat for the year over year. And understood the new projects aren't going to contribute that much, so that's understood. But with the new projects in service over the next year, how will that affect future quarters net operating income line?
And just want to confirm that the tax credit line will that $17,000,000 increase should be persistent throughout the year, right?
We'll ask Scott to give you more detail. My view would be you pretty much got to ignore in this instance you pretty much got to ignore the operating income line and look at where the earnings are flowing from and it's largely the production tax credits.
Yes, that's exactly right. So the production tax credits like I said, it added about $0.02 to the wind when you looked at it. Now there's a few other items in that tax line, some settlement of some previous items and just some quarterly spreading that's required by the GAAP accounting that we planned in our forecast. But I think the key here is that $0.02 that we got that relates production to tax rate. That's about what we're going to expect assuming normal win.
And also, I mean, we're hearing a lot about how it's been a pretty bad year for wind in general. Is that affected the projects at all, affected the output, affected any of this or is it all just tax credit driven?
Well, it would have, I mean because these are production tax credits, the level of wind obviously is going to affect your income from the tax credits themselves. I will say though when we looked at and we looked at pretty great detail, Kevin Scott and Rick Kuester and I, when we looked at the results of the Q1 and remember the upstream wind farm was not in service during all of the Q1. I think it came in 2nd week of January, Scott or 3rd week of January. So we had Bishop Hill in service for the whole quarter and we had upstream in service for a portion of the quarter. And we were very pleased.
Overall, it was very close to budget.
Okay. And one last question for me is the weather versus normal. You guys provided provide any kind of impact versus normal instead of just year over year?
Mike, yes. You probably heard me say this a 1000000 times. The weather normalization techniques in our industry are just not very good. I mean it's the best we've got, but they're just not very good. And looking at 1 quarter is really can really be misleading.
So I'm not sure frankly as good as work as our folks do. I just don't believe the weather normalization numbers. I don't think our retail was down. But just think about one, in fact, Kevin and I were talking about this just a few minutes ago. Think about one side impact of the polar vortex couple of days that we had.
Well, most schools, many commercial businesses actually closed. So weather normalization can't possibly factor in that kind of extreme closure. And so I'm not overly worried. In fact, I mean we did see the huge spike in gas obviously and one would expect that. We're up in residential usage of electricity weather normal.
Well everybody stayed home. So I wouldn't be overly concerned about 1 quarter and I still have I think you have to look at a very long period of time to get any kind of normal results from our weather normalization effort. I don't know, Kevin, if you've got anything to add to that.
And I would agree with exactly what you said, Gail, not really anything to add. Yes.
So I think in general weather was probably $0.04 to $0.05 just the pure weather effect that helped us in the quarter. When you look at it by really Wisconsin has that weather because there's that decoupling, Illinois has decoupling, but between Wisconsin, Michigan and Minnesota, it's probably about $0.04 to $0.05
And Mike, the thing I'm most happy about is our system delivered. I mean when you look at some of the shortages and some of the please for conservation when it was 50 degrees below 0 with the wind chill, I mean we really held up, some other states did not. And I'm very pleased with how our company performed.
Yes, I was going to say the same thing too. If you look at just our neighboring states, there was a request for conservation in that standpoint. We did extremely well, not only to our system, but our employees as well, whether through that polar vortex very effectively, very proud of that.
Great. Thank you very
much. Thanks, Mike.
Your next question comes from Julien Dumoulin
Good. Excellent. Thank you. So perhaps to pick up on a slightly different thread, little bit tricky, but curious, how do you think about settlement prospects here at this point? Clearly, your peers in the state were pretty prompt to getting something together.
What are some of the important nuances to consider in a given case? You've already kind of talked about the key capital items. What are the other variables when you think about it? And obviously, given this would be the inaugural effort to use the new legislation, And any other considerations that we should just be aware of as we move through this for the first time?
Well, good question, Julian. Let me just say this, we are very early in the process right now. I can't imagine there would be any meaningful settlement discussions until after the staff completes its normal audit of our data. And we're going through the garden variety normal data response is right now in terms of just verifying our numbers, clarifying their questions on our numbers etcetera. So when you say others did something in terms of settlements fairly early in the process, maybe they were 3, 4 or 5 months into the process.
But it's simply, Julien, too early to tell. Obviously, we will have what we hope will be productive discussions with the other parties in the case, with the staff itself. But at this stage of the game, it's just way too early to tell. And again, I wouldn't I just wouldn't imagine any productive or meaningful discussions on settlement until after the normal audit is complete and we're still going through the data requests as per a normal schedule right now.
Got it. All right, understood. And then moving back to state politics a little bit. Can you explain a little bit of the back and forth and sort of your expectations for
what is to come around,
El Anouac and sort of the intriguing back and forth between the courts and legislature that's going on as best you understand it?
Sure. Well, I would just say this. Obviously, we all would like the issues surrounding the Governor's appointments to be resolved as soon as possible. I think the encouraging thing here is the Wisconsin Supreme Court has now taken up the case, not just from the standpoint of whether or not a stay is appropriate, but they are taking up the case on its merits. And the Wisconsin Supreme Court has already established a briefing and hearing schedule.
And my best guesstimate is that the Wisconsin Supreme Court will resolve this in the relatively near future, I'm guessing in the second quarter, early third quarter. So I think that's good news. The Wisconsin Supreme Court now has this in its jurisdiction and they're taking it seriously and they've set a schedule to move forward pretty expeditiously, Julien.
Got it. And to be extra clear about this, that would in theory depending on the outcome, there could be an outcome that actually puts her back in the role effective immediately?
There certainly could be, yes.
Yes. Okay, excellent. Well, I will leave it there. Thank you all very much.
Thank you, Julian. Appreciate your time.
Your next question comes from Michael Lapides with Goldman Sachs. Your line is open.
Hey, Gail. Hey, guys. Hey, Michael. Yes, sir.
You're welcome. Michael, for Kevin's benefit, could you explain the difference between miss and beat?
Miss is for all the Auburn fans on the line, what they're going to do when we think about the SEC title game. Beat is what all of us Alabama fans are going to do when we think about what happens in the 3rd or 4th weekend of November every year.
Does that work? Well,
I'm a Georgia Tech guy, but I got that analogy. Thank you.
I figured you would. I have an easy question for you guys real quickly. Is there when you're looking at your coal generation fleet, and I don't mean the power to power the future units, but the rest of the fleet, is there given what's happened in both renewable costs and with natural gas and gas generation, Is there an opportunity in the next 3 to 5 years or so for you to retire incremental coal units and potentially save customers money as well as having an environmental impact? And if so, which potential units would you see as where the biggest opportunity for that could emerge?
Even the Georgia Tech brand probably wouldn't answer that entire question, Michael. But certainly, I mean, we look at we review our fleet on an ongoing basis. We look at our costs. We look at the additional capital that might have to be put into these units to keep them running. And I think the short answer, Kevin, that is there a potential opportunity over the next 5 years to retire additional coal units?
I think the potential answer is yes. We've done a lot already, Kevin. Well, as I was going to
say the same, Gil, if you look at what we've done since 2017, we've retired 8 40 megawatts and we've done it based on evaluating the criteria that you just mentioned. And as technology continues to change, we'll continue that evaluation. And assuming that the things work out and the decisions that was made evident by our analysis, we would continue to look at it. But that certainly do not have any specific ones that we're looking at right now that I want to talk about.
And I will say Michael to your question, we're already remember we set a goal of reducing carbon emissions by 40% by the year 2,030. We're now thinking based on what we've accomplished and what we're seeing that we may hit that goal by as early as the end of 2023. And seeing that progress we then set a longer term goal of an 80% reduction by the year 2,050. And if you have the time, I think just perusing our climate report that we just published might be helpful to you to kind of show you the various pathways that we think might work to get us to that 80% reduction, Michael.
No. And that's
That pathway
from Our report shows different options and technologies that are needed to help us to advance to reach that 80% goal.
No. And that was honestly one of the better versions of a report like that I've seen because unlike some of the others, it was easy to understand and easy to make through. I just keep thinking to myself, if you keep adding renewables and if the gas output in the state continues to rise utilization rates or capacity factors, it will weigh on coal capacity factors and at some point you hit a tipping point where because it's a heavy fixed cost business, meaning running a coal plant that just the economics don't work like they used to. And that's kind of what it was I was actually thinking about that report and going through it when I asked that question a little bit of this is still a state that uses a lot of coal generation and just trying to think about how that will significantly change. And one of the ways it does is clearly through the retirements and the other way it does is through asset additions of different fuel types, but those tend to be a little bit of a circular reference.
Right. And Michael, one of the thought along those lines that might be useful. You are correct. The economics are very different than they were even 5 years ago. But you still have to have and what we experienced in late January in the polar vortex is a great example of this.
You still have to have a backbone system that you can dispatch to keep the lights on. And one of the things that was amazing to us is on the morning of the coldest day in January, remember I mentioned wind chills near minus 50. In the Midwest based on MISO's data 6,000 megawatts of wind did not operate. It wasn't because there wasn't wind, it was because in some cases at minus 20, the designs of the steel towers are such that the units have to shut down, the wind turbines have to shut down. So this is a complicated complex subject and the lessons that Kevin and Scott and others and I have learned from it is the idea of having a balanced portfolio while continuing to improve your environmental performance is just Kevin just essential.
It certainly is Gale and I'd like to correct the number I spoke to a minute ago. I believe I said 800 megawatts of coal units have been retired. That's actually 18.40. So I will misspoke there, but you're exactly right, Gail, in your summary that we have to have the balanced approach for the first conditions because we have to have the consistent and reliable energy at all times for our customers.
Got it. Thank you, guys. Much appreciated.
You're welcome. Thank you, Michael.
Your next question comes from Praful Mehta with Citigroup. Your line is open.
Hi, Praful. How are you today?
Hi, Praful.
How are you today? So I guess I wanted to touch on the ripple effects point that you brought up. Clearly, you're seeing a lot going on and maybe even more than what you originally kind of thought about. How would that fit in with the growth profile that you've kind of laid out longer term? You're clearly hitting the upper end this year, but as you think about the 5% to 7% percent and I guess some of this you've kind of addressed in previous questions as well, but wanted to get at how we should think about that range going forward and what are the pushes and pulls that could help us kind of triangulate what you kind of hit in the out years?
Well, good question. And I think Scott and Kevin, please feel free to add your thoughts as well. I think the first two things that come to mind are we have obviously a very modest rate ask in front of the Wisconsin Commission for our 2 largest companies. So the outcome of that rate case obviously will have an impact going forward. We're very optimistic about it.
And then secondly, remember that we have in place and I suspect it will stay in place and earnings sharing mechanism such that customers get benefit if we earn above our allowed rate of return. So for now, Scott, I think probably our best advice might be think about our continuing a 5% to 7% growth range.
Yes, absolutely. And the other item we'll be watching closely is where the ROEs end up for our transmission assets, transmission investment.
And is still deciding the ROE question what the appropriate band of ROE should be for transmission investments really many of them in the past. These cases have been around for almost 5 years and going forward as well. There I think we have been I hope conservative in our future projections, but time will tell.
Got you. That's very helpful. And then just in terms of the ask itself around the higher equity and the ROE, is the base case 5% to 7% based on the ask or is it based on somewhere in between? How should we think about depending on what the outcome is, how would that kind of fit into the 5% to 7%?
Well, I think the honest answer to that is, we just have to see the outcome. We have to see what type of additional investments the commission is comfortable with us making. I think our plan is very solid, but a number of a significant amount of the rate ask is tied to the capital investments that we're planning to make like the solar farms, for example. So it's like Ragu, it's all in there. And but I continue to believe any kind of a reasonable outcome of the rate case that we will continue to be able to deliver the kind of returns that you're accustomed to us delivering and that customers will continue to see the kind of reliability we've been delivering.
And I would just add from my prepared remarks to the request for both Wisconsin Public Service and We Energy is a very straightforward from that perspective. So from that, then we should be okay as we move forward.
I think so too, Kevin. Thank you. Hope that answers your question, Praful.
It does. I appreciate that. And just one final thing, more broadly, and this is more industry, just on the M and A side, there has been quite a quietening down at the corporate M and A level or kind of M and A in general around the conversations. Is that something that you've seen as well in terms of just more focused on the organic growth? Clearly, the stories are quite strong for a lot of companies like yourselves.
Is there a reduced conversation around the M and A theme or do you just think that it's just we don't hear about it?
Well, I can only give you my perspective. I would say to be candid with you, you haven't seen a lot of movement in M and A in the last 12 or 18 months. I think in part because many of the companies have had the issue equity and don't have the balance sheets to make significant acquisitions. On the other hand, we have a strong balance sheet, but we would continue to apply the 3 criteria that you probably are very familiar with that we've applied to any kind of review of any potential acquisition. And that's very simply threefold.
Number 1, we would have to believe after a lot of due diligence that we could make the acquisition accretive to earnings per share in the 1st full calendar year after closing. Number 2, that we would want it to be largely credit neutral and by that we mean, we're not going to trash our balance sheet simply to get bigger. Because acquisitions in our industry in my mind are all about getting better as well as bigger. So we wouldn't trash the balance sheet. Would we take a small one notch downgrade for the right deal?
Maybe. Would we take a full category downgrade? No. And then thirdly, we would want the organic growth rate of anything that we would acquire to be at least as strong as our own organic growth rate. I think if you apply those 3 criteria, 1st of all, not much meets those 3 criteria.
But if you do apply those criteria and we will and do rigorously, then I think if there was something that met those criteria, you'd actually be doing something both for your customers and shareholders.
That's very thoughtful and appreciate the diligence and the discipline around the M and A. Thank you for that.
You're more than welcome.
Your next question comes from Paul Patterson with Glenrock Associates. Your line is open.
Hey, Paul. How are you today?
All right. How are you doing?
Doing fine.
So just a quick follow-up on Julian's question on the Supreme Court proceeding. When do you guys expect the Supreme Court to act on the POC issue? And if you are willing to, do you guys have any sense as to how they might if you guys handicapped how they might actually rule?
Well, they have as I said right now, the Supreme Court just recently took up the case. They have set a briefing and hearing schedule. They have not set a timeframe for a final decision, but the speed with which they took up the case would indicate to us that and I'm guessing here but end of Q2 early Q3 is when we might get a decision. My sense is they will act as quickly as a Supreme Court would normally act with a sense of urgency in this particular case. And no, we don't have any particular insight into how they will make a final decision.
But again I think it's encouraging that the Supreme Court stepped in without being asked to say this is important enough to make a decision in a timely manner.
Okay.
And then the what happens to Nowak in the meantime? Is she still is she allowed to get into the building or what?
To my knowledge, she has been asked not to return to her office until all of this is resolved.
Okay. And then just with respect to Illinois, I guess this week I think the Chicago City Council sort of passed a resolution, I guess, voicing some concern about the infrastructure plan. Obviously, they don't have any direct authority over Peoples. But just in general, I mean, any thoughts about that? I mean, clearly, it's pretty much the service territory of Peoples.
How should we think about that? Or do you what would you say about that?
Sure. Couple of things. First of all, the city council did not pass the resolution. It was a committee of the city council. And it was simply a I mean, the hearing which took place, Kevin, I think yesterday.
We had an opportunity to present the compelling facts behind this program. There were a significant number of labor and other groups that testified during open mic. Testimony may be a wrong word, but appeared and talked in the open mic period about the importance of this program. So I mean, we're not overly concerned. There are there have been, as you know, a number of articles in cranes and I hate to use the word fake news, but that's about what it is with cranes.
But I think we've responded to those very well. And the compelling piece here is just how important from a safety and efficiency standpoint this program is. And I think that message is beginning to carry the day. So we're not overly concerned. It's business as usual and we're doing this as quickly and as effectively as we possibly can.
Okay, great. I appreciate it. Thanks so much. You're welcome.
And your last question comes from Vedula Murti with Avon Capital. Your line is open.
Greetings, Vedula.
Hi, Gale. How are you?
We're good. How are you doing?
I'm doing fine. Thank you.
Good. A few things.
When we're taking a look at the quarter over quarter changes and you've mentioned particularly on the income tax expense line, the wind credits that were favorable by $17,700,000 on Page 8 of the earnings packet. I guess, I'm wondering if we were to think about this within your annual guidance of $348,000,000 to $352,000,000 dollars the $17,700,000 variance in 1Q, what would that end up being annualized at the end of the year? I just don't know. I doubt you can just take 17.7x4 or something like that.
If we could, you wouldn't be asking the question, Vanila.
Yes, exactly. Yes. The tax line, it's pretty unique this quarter and a lot of it we had factored already into our guidance and all of it had been basically factored into our guidance. The true wind piece as it relates to actual production was that $0.02 a little over $6,500,000 There's other items that relate to some accounting rules, plus some clarification of miscellaneous various other items that flow through that line, which I called a little unique in this Q1. So you can't take that and multiply it by that.
The true production tax credit that we anticipate is about $6,000,000 to $7,000,000 a quarter going forward.
I missed that very last part $6,000,000 to $7,000,000 a quarter as opposed
to $3,000,000 for the production tax credits for our infrastructure wins.
Yes.
I want to make sure, thinking about this properly such that if I look at the same table and the same line item in 2Q, 3Q and 4Q in terms of the benefits, what is the run rate that under the buttresses the $3.48 to $3.52 if I'm generally speaking with some type of range for that line item?
Well, and we're still comfortable, I guess the way to look at it, we're still comfortable with our overall effective tax rate at that 10.5% to 11.5 I think that would be the best for you to put in your model. If you exclude the tax repairs, it's in my prepared remarks the 20% to 21%. I think that's probably the best way to look at it because those are still good as our forecast.
There's a lot of ins and outs to Scott's point in that line. So I think Scott's right. If I were in your shoes, I would model the what we say we expect our effective tax rate to be for the year.
But is it fair to say that this quarter in particular was somewhat elevated and concentrated as opposed to normal?
Yes, I think it was somewhat elevated. I don't have the tax rate straight in front of me. I think it's in there. So our tax rate came in about 20.1%. So you got to just factor it all in.
It is going to be a little higher, but it's maybe a little higher in this quarter. So there's a unique accounting that is there. I think the key is to look at the overall tax rate.
Okay. In terms of the 5 year capital plan, the energy infrastructure pile, though it's always been like maybe 9% or as I recall or something like that.
I think it's 11% in our 5 year plan.
Okay. Clearly, you're running way ahead on a pro rata run rate and you alluded to the menu of prospects that you're looking at. Why is it not reasonable for us to expect that that number that's currently within the 5 year plan will end up having to be elevated at some point in time either next year when you update CapEx or some other time in between now and then?
Well, a couple of things. First of all, we have, as I mentioned, a pretty robust pipeline of opportunity, but we also need to look at a number of other factors, including our tax appetite. So we're being very particular and cherry picking only the very best projects that we think have really solid business cases behind them, really solid off takers for all the wind. So there are a number of factors here that we take a look at. The best projects, the tax appetite, essentially what other investment opportunities we might have.
So I wouldn't yes, we're way ahead of schedule. We're pleased about that. The projects I think are first rate, but I wouldn't necessarily assume that we're going to blow the doors off just because we've had some early success here. At the same time, I'm optimistic that we can fill up that portion of our capital plan with very high quality projects.
Okay. And I guess maybe one last thing regarding Peoples Gas. Obviously, Paul asked about some of the current press and activity. Can you update us on the audit that is going on with regards to I think the period where I think it was partially pre your ownership and partially your ownership for the 1st year and where the status is of that? And then when that's concluded then remind me how the next audit gets initiated in terms of review?
Sure. What you're referring to in terms of the current audit in the year in which we were partial owner for the second half of the year, that's the 2015 reconciliation audit that and I would just point out that under the way this program works, there is a basically a reconciliation and audit review after the fact every year. So we can expect every year that the commission will exercise its proper oversight over how the program was managed in the prior year. It just so happens that 2015 is still outstanding. There is now a proposed from the administrative law judge, a proposed resolution, very modest amount of change that the administrative law judge is recommending.
And again, we weren't in that company for the first half of the year. So we didn't have an opportunity when we didn't own the company to make some of the improvements we've already made. But you can expect an annual audit as normal. That's just how the program works. And I think it's certainly appropriate for there to be an annual audit.
So the 2016 audit for the full year where 1st full year where you owned it, that will commence upon the completion of the current audit, correct?
I suspect that's right. No schedule has yet been set, but I suspect that's right.
Okay. Thank you very much and hey, good luck to the Bucks, okay?
Go Bucks. Thank you Vedula.
All
right. Thank you.
All right, folks. That concludes our conference call for today. Thank you so much for participating. It's always a blast. If you have any more information or I'm sorry, if you have more information or questions, feel free to contact Beth Straka, our direct line 414-22146 39.
Thanks everybody. Goodbye.
This concludes today's conference call. You may now disconnect.