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-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted.
After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call. 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 Guc, 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 first quarter 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 zero, 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, when it counted most, we delivered. We've 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 on time and on budget. With the new units online, we were able to retire our older, less efficient coal-fired plant at Presque Isle. Here in Wisconsin, we received approval from the Wisconsin Public Service Commission for two 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 and cost-effective infrastructure. You can learn more about our generation reshaping plan in the climate report that we just published this last week. 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. 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 first quarter. 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.
Closer to Milwaukee, Foxconn plans to restart construction as planned after the winter break on phase I of its high-tech manufacturing and research campus in Racine County. Foxconn announced during the quarter that a centerpiece of phase I will be a Gen 6 fabrication plant. That Gen 6 plant will produce liquid crystal display panels in various sizes, up to perhaps 90 in. Production is expected to begin by the end of 2020. 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+ projects should result in more than $900 million of new private capital investment. Now I'll turn the call over to Kevin for details on our operations and our regulatory calendar for 2019. Kevin, all yours.
Thank you, Gale. 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. As Gale mentioned, we're making progress across our companies on key initiatives. I'll review where we stand in our four-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 31st of last year, our Wisconsin Public Service subsidiary, along with Madison Gas and Electric, filed a joint application with the Wisconsin Commission to purchase 300 MW of solar generation at two locations. Earlier this month, the commission approved our proposal. We received a written order on April 18th.
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 MW, 100 MW at each site, with an expected investment of approximately $260 million. We expect these projects to enter commercial service by the end of 2020. I'll touch on our rate filings. On March 28th, we filed a proposal with the Wisconsin Public Service Commission to set customer rates for our Wisconsin utilities. The request comes after a four-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 Energies customers' rates for electricity for 2020 and 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% in 2021. There are three primary cost drivers for our proposed We Energies electric increases. Number one, higher transmission charges. Remember, the amounts collected in rates have been capped since 2010. Number two, revenue the commission assumed We Energies would receive from MISO starting in 2015 that was not received. Number three, increased cost associated with the agreement to purchase energy from the Point Beach nuclear plant.
This agreement was approved by the commission in 2007 when we sold Point Beach and credited customers a total of $670 million over a three-year period. On to Wisconsin Public Service. The rate proposal includes our acquisition of approximately 60 MW of the Forward Wind Energy Center in 2018, as well as our investment in the two solar facilities. It also includes the ongoing modernization of the electric system by upgrading and moving underground 2,000 mi 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 current state and national averages.
To support our strong balance sheet, we are seeking a slightly higher equity component in these rate reviews, 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 31st. We've invested approximately $255 million in these new facilities. Half of the investment will be covered by a 20-year agreement with Cliffs Natural Resources, the other half will be covered in retail rates. This generation solution is expected to save customers nearly $600 million 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. 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%. With that, I'll turn it back to Gale.
Kevin, thank you very much. The company continues to perform at a high level. 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. 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 2018 guidance. 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%-70% of earnings.
We're in the middle of that range right now, I expect our dividend growth will continue to be in line with the growth in our earnings per share. Now with details on our first quarter results and our outlook for the remainder of the year, here's our trusty CFO, Scott Lauber. Scott?
Thank you, Gale. Our 2019 first quarter earnings of $1.33 per share increased $0.10 per share compared to the first quarter 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 first quarter 2019 and 2018 results. I'll first focus on operating income by segment then other income, interest expense and income taxes. Referring to page eight of the earnings packet, our consolidated operating income for the first quarter of 2019 was $542.8 million, compared to operating income of $545.1 million in the first quarter of 2018, a decrease of $2.3 million. Adjusting for the impact of tax repairs and our adoption of the new lease accounting rules, operating income actually increased by $2.4 million.
We have a breakout of these items for your reference on page eight 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 zero 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. Two separate items affect year-over-year comparability. First, 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 million, reclassified between operating income and interest. We have adjustment of these items in a separate column on page eight of the earnings packet. My segment update will focus on the remaining $2.4 million 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 $5.6 million. Higher sales volumes drove a $20.7 million increase in margins. This was partially offset by $11.6 million negative fuel impact and a $7.7 million increase in depreciation expense. In Illinois, operating income decreased $9.7 million, driven by a $16 million increase in operations and maintenance expense. This was due to higher weather-related work repair, benefit costs, and timing between quarters.
Margins increased $11 million as a result of our continued investment in the Peoples Gas System Modernization Program. Operating income in our other state segments increased $5.3 million, 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 segments improved by $1.5 million. Netting these changes and excluding the impact of tax repairs and the new lease rules, operating income increased $2.4 million.
Earnings from our investment in American Transmission Company totaled $36.1 million, an increase of $3.3 million as compared to the first quarter of 2018. Higher earnings were driven by continued capital investment. Other income net increased by $23.4 million, 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 impacts of the new lease accounting, our net interest expense increased to $16.8 million, primarily driven by our continued capital investment and slightly higher interest rates. Our consolidated income tax expense, net of tax repairs, decreased $17.7 million. 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% and 21%. At this time, we expect to be a partial taxpayer in 2020. Looking now at the cash flow statement on page six of the earnings packet. Net cash provided by operating activities decreased $158 million. The decrease was driven by higher working capital levels due to colder weather and tax reform refunds to customers. In the first quarter of 2018, we had not yet begun refunding amounts to customers related to tax reform. Total capital expenditures and asset acquisitions were $627 million for the first quarter of 2019, a $187 million 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 first quarter, a decrease from the 53.4% at the end of 2018. Our calculations continue to treat half of the WEC Energy Group 2007 subordinate notes as common equity. We're using cash to satisfy any shares required for our 401(k) plans, options, and other programs. Going forward, we do not expect to issue any additional shares. We paid $186.2 million in common dividends during the first quarter of 2019, an increase of $12 million over the same period in 2018, which reflects the increase in the annualized dividend level that was effective in the first quarter. Turning now to sales. We continue to see customer growth across our system. At the end of the first quarter 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 first quarter 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 1/2 of 1% from the first quarter of 2018. On a weather normal basis, retail deliveries were down 4/10 of 1%. Finally, a quick reminder on the earnings guidance. We are reaffirming our earnings guidance of $3.48- $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 second quarter.
In the second quarter last year, we earned $0.73 per share, which included approximately $0.04 from weather. Taking the weather into account, we expect our second quarter 2019 earnings to be in the range of $0.70-$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 Gale.
Scott, thank you very much. Overall, we're on track and focused on delivering value for our customers and our stockholders. 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. Fear the deer, folks. 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. To ask a question, please press the star key followed by the digit one on your phone. If you are using a speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question comes from 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, Gale?
All right. There you go.
Just a few questions. I can take this offline if Scott doesn't have this handy. 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? If not, I'll take it offline.
Scott?
Yeah. I think the investment gains was probably in the ballpark of about $15 million-$16 million. Remember, those investment gains are really offset expenses that are up in the operating segment. It's just really how we're reporting the information that required to report it by segments down there. It's really an offset to the operating up above.
Okay.
Yeah, Greg, to Scott's point, you really have to look at the two different pieces together to really get a good picture.
I agree completely. That's why I asked. Yeah.
Okay. Terrific. Thank you, Greg. What else was on your mind today?
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 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 million, we've more than cut that in half, and we're expecting it to be zero in terms of the remaining escrow balance by the end of 2019. It's a great story.
Once that's at zero, is the agreement sort of complete? Or what happens then?
Well, all that will be decided in the rate case with new rates effective January 1 of 2020.
Perfect. Great. That's a great answer. 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? What are some of the big drivers there underneath the surface?
Well, Greg, I think Kevin covered the three big drivers in the Wisconsin Electric rate case, in his prepared remarks. A couple of things that might be responsive to your question. First of all, in the Wisconsin Public Service rate case, part of the driver for that rate case is really two renewable projects. One is the acquisition of a portion of the Forward Wind Energy Center that Kevin mentioned. Then the other would be included in our rate case, would be the investment in the two new solar projects that we covered during the prepared remarks, the Two 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.
The only other one that I would add, Gale, which I mentioned, is our SMRP project, the renewable project where we're undergrounding a couple of thousand miles of overhead distribution to underground. We'll be looking to put that into our rate base as well.
Okay.
In addition, the little higher equity layer-
Right
That we highlighted in there, but that's about 1%, and they've done it for other cases, and that'll just support our balance sheet even better.
Right. 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. 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 Shar Pourreza with Guggenheim Partners. Your line is open.
Hey, Shar.
Hey, guys.
Are you working today?
Yes. It's not Friday yet.
Oh, okay.
Gale, thanks for the update around Foxconn, 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 he sort of highlights changes with the business plan hiring. This is obviously, Gale, this is your baby. You're very close to this situation. How difficult would it be for the governor to reopen the contract legislatively, especially that you've got a Republican-controlled legislature? Is this just noise? How should we think about this?
Great question, Shar. 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. 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. 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. It has now clearly defined what they want to accomplish over the next 18 months in phase I of the project.
It's significant, including the addition of a major data center. As you recall, they're still standing by their longer-term projection of creating 13,000 jobs. 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 five-year plan. 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 fifth year.
Right.
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. I appreciate you addressing that, because I know it's been a topic a little bit with investors. I appreciate that. I know, Gale, 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 billion. Are you seeing sort of enough opportunities that could be incremental to plan? As we're modeling this, should we just think about this as being more front-end loaded growth? Secondary to that question is, Trustee Scott said you guys are going to be in a tax position by 2020.
If some of these projects sort of hit fruition, how should we think about your current cash tax position post these projects?
Well, Shar, 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 four to six months another major announcement. We still have plenty of opportunity here. 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. We're continuing to work on basically filling the bucket in that segment, that infrastructure segment that you see in our five-year plan, and I'm very optimistic about it.
Got it. That's great. I'll echo Greg's comments around the draft, with the better New York team. Thanks, guys.
Thank you, Shar.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Afternoon, Michael.
Hey, guys.
How are you today?
All right. Doing good. On the wind tax credits, you notice that the operating income from the infrastructure business is kind of flat for the year-over-year. Understood the new projects aren't going to contribute that much. That's understood. With the new projects in service over the next year, how will that affect future quarters net operating income line? Just want to confirm that the tax credit line, that $17 million increase should be persistent throughout the year, right?
We'll ask Scott to give you more detail. My view would be, 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.
That's exactly right. The production tax credits, like I said, it added about $0.02 to the wind when you looked at it. 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. I think the key here is that $0.02 that we got that relates to production tax credit. That's about what we could expect assuming normal wind.
Right. Also, we're hearing a lot about how it's been a pretty bad year for wind in general. Has that affected the projects at all, or affected the output? Affected any of this, or is it all just tax credit driven?
Well, because these are production tax credits, the level of wind obviously is-
Right.
Going to affect your income from the tax credits themselves. I will say, though, when we looked at, and we looked at in pretty great detail, Kevin, Scott, and Rick Kuester and I. When we looked at the results of the first quarter, and remember, the Upstream wind farm was not in service during all of the first quarter. I think it came in the second week of January, Scott, or third week of January. 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. One last question from me is the weather versus normal. Can you provide any kind of impact versus normal instead of just year-over-year?
Oh, Mike, yeah. You've probably heard me say this a million times. The weather normalization techniques in our industry are just not very good. It's the best we've got, but they're just not very good. Looking at one quarter can really be misleading. 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. Just think about one, in fact, Kevin and I were talking about this just a few minutes ago. Think about one side impact of a polar vortex couple of days that we had. Well, most schools, many commercial businesses, actually closed. Weather normalization can't possibly factor in that kind of extreme closure.
Right.
I'm not overly worried. In fact, 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.
That's right.
I wouldn't be overly concerned about one quarter, and 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.
I would agree with exactly what you said. Not really anything to add. Yep.
I think in general, weather was probably $0.04-$0.05, just the pure weather effect that helped us in the quarter. When you look at it by really Wisconsin had that weather because there's that decoupling. Illinois had decoupling. Between Wisconsin, Michigan, and Minnesota, it's probably about $0.04-$0.05.
Mike, the thing I'm most happy about is our system delivered. When you look at some of the shortages and some of the pleas for conservation when it was 50 degrees below zero with the wind chill, we really held up. Some other states did not, and I'm very pleased at how our company performed.
I was going to say the same thing, too. If you look at just our neighboring states, there was a request for the conservation from that standpoint. We did extremely well, not only to our system, but our employees as well. Weathered through that Polar Vortex very effectively. Very proud of that.
Amen.
Great. Thank you very much.
Thanks, Mike.
Your next question comes from Julien Dumoulin with Bank of America Merrill Lynch. Your line is open.
Thanks, Julien.
Hey, good afternoon, everyone.
How you doing, Julien?
Good. Excellent. Thank you. Perhaps to pick up on a slightly different thread, a 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 at 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? Obviously, given this would be the inaugural effort to use the new legislation, any other considerations that we should just be aware of as we move through this for the first time?
Well, good question, Julien. 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. We're going through the garden variety normal data responses right now in terms of just verifying their numbers, clarifying their questions on our numbers, et cetera. When you say others did something in terms of settlements fairly early in the process, maybe they were three, four, or five months into the process. 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. At this stage of the game, it's just way too early to tell.
Again, I just wouldn't imagine any productive or meaningful discussions on settlement until after the normal audit is complete. We're still going through the data requests as per a normal schedule right now.
Got it. All right. Understood. Moving back to state politics here 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 Ellen Nowak and sort of the intriguing back and forth between the courts and the legislature that's going on, as best you understand it?
Sure. Well, I will 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. 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 end of second quarter, early third quarter. 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. 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. Yep.
Yeah. Okay, excellent. Well, I will leave it there. Thank you all very much.
Thank you, Julien. Appreciate your time.
Your next question comes from Michael Lapides with Goldman Sachs. Your line is open.
Hey, Gale. Hey, guys. Hey, guys. Thank you for taking.
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 third or fourth weekend of November every year. Does that work?
Well, I'm a Georgia Tech guy. I got that analogy. Thank you.
I figured you would. I have an easy question for you guys, real quickly. When you're looking at your coal generation fleet, and I don't mean the 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 three to five years or so for you to retire incremental coal units and potentially save customers money as well as having an environmental impact? If so, which potential units would you see as where the biggest opportunity for that could emerge?
Even a Georgia Tech grad probably wouldn't answer that entire question, Michael. Certainly, 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. I think the short answer, Kevin, that is there a potential opportunity over the next five 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, Gale, if you look at what we've done since 2017, we've retired 840 MW, and we've done it based on evaluating the criteria that you just mentioned. As technology continues to change, we'll continue that evaluation. Assuming that the things work out and the decisions that was made evident by our analysis, we would continue to look at it. I certainly do not have any specific ones that we're looking at right now that I want to talk about.
I will say, Michael, to your question, you remember we set a goal of reducing carbon emissions by 40% by the year 2030. 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. Seeing that progress, we then set a longer-term goal of an 80% reduction by the year 2050. 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.
That pathway from our report shows different options and technologies that are needed to help us to advance to reach that 80% goal.
No, 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, the economics don't work like they used to.
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. Michael, one other thought along those lines that might be useful. You are correct. The economics are very different than they were even five years ago. You still have to have, 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.
You do.
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 -50, in the Midwest, based on MISO's data, 6,000 MW of wind did not operate. It wasn't because there wasn't wind. It was because, in some cases, at -20, the designs of the steel towers are such that the units have to shut down. The wind turbines have to shut down. This is a complicated, complex subject. 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, Kevin, just essential.
It certainly is, Gale, I'd like to correct a number I spoke to a minute ago. I believe I said 800 MW of coal units have been retired. That's actually 1,840 MW. I little misspoke there, but you're exactly right, Gale, in your summary, that we have to have the balanced approach for the diverse conditions because we have to have the consistent and reliable energy at all times for our customers.
The other line has gone.
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 doing today?
Thanks so much. Good. Thank you for all the Q&A. Really appreciate all the color and input so far.
You're welcome. What's on your pretty mind?
Thank you. 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%-7%, 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. 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 two largest companies. The outcome of that rate case obviously will have an impact going forward. We're very optimistic about it. Secondly, remember that we have in place, and I suspect it will stay in place, an earnings sharing mechanism such that customers get benefit if we earn above our allowed rate of return. For now, Scott, I think probably our best advice might be, think about our continuing a 5%-7% growth range.
Yeah. Absolutely. The other item we'll be watching closely is where the ROEs end up for our transmission assets and transmission investment.
Very good point. If you remember, Praful, the Federal Energy Regulatory Commission has had a number of cases in front of it 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 five years, and going forward as well. I think we have been, I hope, conservative in our future projections, but time will tell.
Gotcha. That's very helpful. Just in terms of the ask itself around the higher equity and the ROE, is the base case five to seven 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 five to seven?
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's very solid, but 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. It's like Ragú. It's all in there. I continue to believe with 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.
Gale, I'll just add from my prepared remarks too, that the request for both Wisconsin Public Service and We Energies are very straightforward.
Yeah.
From that perspective. From that, 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. Just one final thing, more broadly, this is more industry, just on the M&A side, there has been quite a quietening down at the corporate M&A level or kind of M&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&A theme, or do you just think that it's just we don't hear about it?
I can only give you my perspective. I would say, to be candid with you haven't seen a lot of movement in M&A in the last 12 or 18 months, I think in part because many of the companies have had to issue equity and don't have the balance sheets to make significant acquisitions. On the other hand, we have a strong balance sheet, we would continue to apply the three criteria that you probably are very familiar with, that we've applied to any kind of review of any potential acquisition, that's very simply threefold. Number one, we would have to believe after a lot of due diligence that we could make the acquisition accretive to earnings per share in the first full calendar year after closing.
Number two, that we would want it to be largely credit neutral. 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. 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. 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 three criteria, first of all, not much meets those three criteria.
If you do apply those criteria, and we will and do rigorously, I think if there was something that met those criteria, you'd actually be doing something both for your customers and your shareholders.
That's very thoughtful. Appreciate the diligence and the discipline around the M&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.
Hi, Paul. How are you today?
All right. How you doing?
Doing fine.
Just a quick follow-up on Julien's question on the Supreme Court proceeding. When do you guys expect the Supreme Court to act on the PSC issue? If you are willing to, do you guys have any sense as to how they might, have you guys handicapped how they might actually rule?
Well, 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 time frame for a final decision. The speed with which they took up the case would indicate to us that, and I'm guessing here, but end of second quarter, early third quarter 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. No, we don't have any particular insight into how they will make a final decision. 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. Then what happens to Nowak in the meantime? Is she allowed to enter the building or what's?
To my knowledge, she has been asked not to return to her office until all of this is resolved.
Okay. Then just with respect to Illinois, I guess this week, I think, the Chicago City Council passed a resolution, I guess, voicing some concern about the infrastructure plan. Obviously, they don't have any direct authority over Peoples. Just in general, any thoughts about that? Clearly, it's pretty much the service territory of Peoples. How should we think about that, or 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. It was simply the hearing, which took place, Kevin, I think yesterday.
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. We're not overly concerned. There have been, as you know, a number of articles in Crain's. I hate to use the word fake news, but that's about what it is with Crain's. I think we've responded to those very well. The compelling piece here is just how important from a safety and efficiency standpoint this program is. I think that message is beginning to carry the day. 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.
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 you doing?
I'm doing fine. Thank you.
Good.
A few things. When we're taking a look at the quarter-over-quarter changes, you mentioned particularly on the income tax expense line, the wind credits that were favorable by $17.7 million on page eight of the earnings packet. I'm wondering if we were to think about this within your annual guidance of $348-$352, the $17.7 million variance in 1 Q, what would that end up being annualized at the end of the year? I doubt you can just take 17.7x4 or something like that.
If we could, you wouldn't be asking the question, Vedula.
Yeah, exactly.
Yeah. The tax line is 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 $6.5 million. 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'd call it a little unique in this first quarter. You can't take that and multiply it by that. The true production tax credit that we anticipate is about $6 million-$7 million a quarter going forward.
I missed that very last part. $6 million-$7 million a quarter as opposed to-
Per quarter.
Per quarter.
For the production tax credits for our infrastructure wind.
Yeah.
I want to make sure I'm 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 buttresses the $348-$352, if I'm generally speaking, in some type of range for that line item?
Well, I guess the way to look at it, we're still comfortable with our overall effective tax rate at that 10.5%-11.5%. I think that would be the best way to put in your model.
Yeah.
If you exclude the tax effects, it might prepare to marks to 20%-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. I think Scott's right. If I were in your shoes, I would model what we say we expect our effective tax rate to be for the year.
Is it fair to say that this quarter in particular was somewhat elevated and concentrated as opposed to normal?
Yeah, I think it was somewhat elevated. I don't have the tax rates right in front of me. I think it's in there. Our tax rate, well, it came in about 20.1%. You got to just factor it all in. It is going to be a little higher, but it's maybe a little higher this quarter. There's some unique accounting items there. I think the key is to look at the overall tax rate.
Okay. In terms of the five-year capital plan, the energy infrastructure pile, though, it's always been maybe 9%, as I recall, or something like that.
I think it's 11% in our five-year plan.
Okay. Clearly you're running way ahead on a pro rata run rate. 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 five-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. We also need to look at a number of other factors, including our tax appetite. We're being very particular in cherry-picking only the very best projects that we think have really solid business cases behind them, really solid offtakers for all the wind. 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. Yes, we're way ahead of schedule. We're pleased about that. The projects, I think, are first rate. 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. 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 first year, and where the status is of that? When that's concluded, remind me how the next audit gets initiated in terms of review.
Sure. Well, 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. I would just point out that under the way this program works, there is basically a reconciliation and audit review after the fact every year. 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, from the administrative law judge, a proposed resolution, a very modest amount of change that the administrative law judge is recommending.
Again, we weren't in that company for the first half of the year, we didn't have an opportunity when we didn't own the company to make some of the improvements we've already made. You can expect an annual audit as normal. That's just how the program works, I think it's certainly appropriate for there to be an annual audit.
The 2016 audit for the first 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. hey, good luck to the Bucks, okay?
Yeah, 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 more information or questions, feel free to contact Beth Straka. Her direct line, 414-221-4639. Thanks, everybody. Goodbye.
This concludes today's conference call. You may now disconnect.