威斯康辛能源 (WEC) 2016 Q3 法說會逐字稿

Good afternoon and welcome to WEC Energy Group's conference call for third-quarter 2016 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 this 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 discussion reference 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 of our remarks will be available approximately 2 hours after the conclusion of this call.

And now it is my pleasure to introduce Allen Leverett, President and Chief Executive Officer of WEC Energy Group.

Hello, everyone, thank you for joining us today as we review our results for the third quarter of the year. But first I want to introduce the members of our team who are with me here today. Scott Lauber, our Chief Financial Officer; Jim Schubilske our Treasurer; Susan Martin, our General Counsel; Bill Guc, our Controller; Beth Straka finally, our Senior Vice President of Corporate Communications and Investor Relations.

So with that let's start with our third-quarter 2016 results. We reported adjusted third-quarter earnings of $0.69 per share, that compares with adjusted earnings of $0.58 per share in the third quarter of 2015. Our adjusted earnings exclude merger-related costs.

The weather here in southeastern Wisconsin was the second warmest in 84 years. Scott will review the most significant drivers for the quarter with you in a moment. In addition to our third-quarter earnings we have two positive developments to share with you.

First, we reached an uncontested settlement with the Michigan Public Service Commission staff, the Michigan Attorney General and other interveners to form a Michigan only utility. This utility will be named the Upper Michigan Energy Resources Company, or UMERC for short. We expect UMERC will provide electric and natural gas service to current customers of Wisconsin Electric and Wisconsin Public Service in the upper Peninsula of Michigan.

At this point we believe UMERC will begin operation on January 1 of next year. The formation of UMERC is another step that is required to allow us to begin a certificate of necessity proceeding for our proposed generation solution in the upper Peninsula of Michigan.

We are proposing a $255 million investment and 175 megawatts of natural gas-fired generation. UMERC would own and operate the reciprocating internal combustion engines which would provide a long-term generation solution for reliable and low-cost power for customers in the upper Peninsula, including the mines owned by Cliffs Resources.

Now we expect to file our proposal with the Michigan Commission in November and we are targeting commercial operation in 2019. At that time or soon after we expect to be in a position to retire our coal-fired Presque Isle power plant.

The second positive development relates to our earnings outlook. Based on the positive third-quarter results, largely driven by weather, we now expect our 2016 earnings to be at the upper end of our guidance range of $2.88 to $2.94.

Now we only had one ongoing rate case this year. This was our Minnesota gas utilities rate case. There we recently received a final decision from the Minnesota Commission authorizing a 9.11% return on equity. The revenue increase is approximately 3% or an estimated $6.8 million. And this is in line with our expectations for the case. Early next year we will evaluate our rate case plans for all of our utilities.

Next I want to mention a recent development at the FERC level which impacts our earnings at ATC. On September 28, FERC voted to affirm a prior ALJ recommendation of a 10.32% base ROE in the first MISO ROE complaint. Effective January 2015 we qualified for a 50 basis point adder for being a MISO member, increasing our ROE to 10.82%. The resolution of this first complaint for the period from November of 2013 through February 11 of 2015, resulted in an increase in pretax earnings of approximately $1.4 million.

Looking ahead we expect an order in the second quarter of 2017 in the second MISO complaint case where the ALJ recommended a base ROE of 9.7%. Again, we qualify for the 50 basis point adder which would increase the recommended ROE to 10.2%. We believe this is an appropriate assumption going forward.

Now a reminder on our dividend. In January of this year our Board declared a quarterly cash dividend of $0.495 a share, an increase of 8.2% over the previous quarterly dividend. Our annual dividend rate stands at $1.98 a share and our yield is at approximately the industry average. We continue to target a payout ratio of 65% to 70% of earnings. Given that we are in this range now I expect our dividend growth will be in line with our earnings per share growth.

Finally I want to review our updated five-year capital forecast. This plan now reflects a range of $9 billion to $9.5 billion, which is $1.6 billion more than the plan we presented at EEI last November. This plan does not include a potential natural gas storage investment that we are continuing to pursue. I would also remind you that these figures do not include ATC's capital spending plan.

In addition to the projects outlined for you earlier, we have continued to identify the need for infrastructure improvements including our gas facilities in Chicago. We have included updated five-year capital investment forecast charts in the back of the earnings packet.

Now with details on our third-quarter results and a financial outlook here is our Chief Financial Officer, Scott Lauber.

Thank you, Allen. Our 2016 third-quarter GAAP earnings were $0.68 per share compared with $0.58 per share in the third quarter of 2015. Third-quarter results in both 2016 and 2015 include a full quarter of earnings from the Integrys companies. Excluding $0.01 of acquisition cost in 2016, adjusted earnings per share increased by $0.11 from $0.58 per share in the third quarter of 2015 to $.69 per share in the third quarter of 2016. You may recall that we reported adjusted earnings of $0.61 per share in the third quarter last year.

For purposes of comparing 2016 and 2015 third-quarter earnings on a consistent basis, the calculation of adjusted earnings per share for the third quarter of 2015 now includes Integrys earnings, all interest expense related to the acquisition financing and all shares issued in conjunction with the acquisition. As a result the comparable adjusted earnings per share value for 2015 is now $0.58 per share.

The earnings packet placed on our website this morning includes the results of the Integrys companies and has full GAAP to adjusted reconciliation. First I will focus on operating income by segment and then discuss other income, interest expense and income taxes.

Referring to page 10 of the earnings packet, our consolidated operating income for the third quarter adjusted for costs related to the acquisition of Integrys was $402.5 million as compared to $351.8 million in 2015, an increase of $50.7 million.

Starting with the Wisconsin segment, operating income in the third quarter totaled $299.1 million for 2016, an increase of $42.5 million from the third quarter of 2015. The improved quarter-over-quarter results for the Wisconsin segment was driven primarily by significantly warmer than normal weather and timing of positive fuel recoveries.

In the third quarter of 2016 our Illinois segment had $11.7 million of operating income, an increase of $8.2 million compared to the $3.5 million of operating income recognized during the third -- the 2015 third quarter. The increase in operating income was driven primarily by continued investment in the gas system modernization program.

Operating income for our other stage segment improved $2.7 million in part due to cost controls. Operating income at the W.E. Power segment was up $500,000 when compared to 2015. This increase reflects additional investment at our Power the Future plant.

Our corporate and other segment realized an adjusted operating loss of $1 million this quarter compared to an adjusted operating income of $2.2 million in the third quarter of 2015. Taking the changes of these segments together, we arrive at $50.7 million increase in adjusted operating income.

During the third quarter of 2016 earnings from our investment in American Transmission Company totaled $38.3 million, a decrease of $1.7 million from the same quarter last year. The lower equity earnings were driven by the recent FERC order and ALJ recommendations related to the ATC ROE reviews.

Our other income net decreased by $3.6 million largely related to lower AFUDC which was caused primarily by timing of capital expenditures. Our net interest expense decreased $4.1 million; interest expense decreased quarter over quarter primarily as a result of the repurchase of a portion of the Integrys 6.11% Junior notes earlier this year. Those notes were replaced with lower interest rate short-term debt.

Increased quarter-over-quarter operating income was the primary driver for the $15.7 million increase in our adjusted consolidated income tax expense. We anticipate that our annual effective tax rate for 2016 will be between 37.5% and 38.5%.

Combining all these items brings us to adjusted earnings of $219.1 million or $0.69 per share for the third quarter of 2016 compared to $185 million or $0.58 per share for the third quarter of 2015.

On a year-to-date basis GAAP earnings were $2.35 per share compared with $1.78 per share for nine months ended September 30, 2015. Excluding acquisition costs adjusted earnings per share increased $0.33 from $2.03 per share in 2015 to $2.36 per share in 2016.

Year-to-date results in 2016 include the impacts of the Integrys acquisition. Recall that 2015 year-to-date results include only one quarter of Integrys earnings.

Net cash provided by operating activities increased $647.5 million during the first nine months of 2016. This increase was driven primarily by $526 million of net cash flows for the operating activities of Integrys for the nine months ended September 30, 2016. The remaining increase was driven by a decrease in contributions to employee benefit plans. As previously discussed, we contributed $100 million to our qualified pension trust in 2015 and we did not make a contribution in 2016.

Our capital expenditures totaled $1 billion during the nine months ended September 30, 2016. A $208.3 million increase compared to the same period in 2015. The largest increase was related to capital investments at the Integrys companies.

Our debt to capital ratio was 51.4% at the end of September an increase from the 50.1% adjusted debt to capital ratio reported at the end of June.

Effective at the end of the third quarter we no longer are adjusting equity for any portion of the legacy Integrys hybrid instruments. Our calculations continue to treat half of the WEC Energy Group 2007 Series A junior subordinate notes as common equity. We are 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 also paid $468.6 million in common dividends during the nine months ended September 30, 2016, an increase of $157.7 million over the same period last year. Higher dividends were driven by the increase in shares outstanding related to the Integrys acquisition and an increase in the dividend rate compared to the first nine months of 2015. Since the beginning of 2015 we increased our quarterly dividend 17.2% from $0.4225 per share to the current level of $0.495 per share.

Moving to sales, we continue to see customer growth across our system. At the end of September our Wisconsin utilities were serving about 7,000 more electric customers and nearly 13,000 more natural gas customers compared to a year ago. Our natural gas utilities in Illinois, Michigan and Minnesota are serving approximately 18,000 more customers compared to a year ago.

Now let's discuss delivered volumes. For comparative purposes year-to-date electric volume information reflects results for both Wisconsin Electric and Wisconsin Public Service. Weather normalized deliveries are adjusted to factor out the effects of leap year. Actual third-quarter retail electric deliveries, excluding the iron ore mines, increased 4.1%. On a weather normalized basis retail deliveries of electricity were flat compared to the third quarter of 2015.

Looking at the individual customer segments, actual residential deliveries rose 8.1% while weather normalized residential deliveries decreased 5/10 of 1%. Across our small commercial industrial group actual deliveries increased 3.6% while weather normalized quarterly deliveries increased 7/10 of 1%.

In the large commercial industrial segment deliveries for the third quarter of 2016 increased 2.2%. Excluding the iron ore mines large commercial industrial deliveries increased 8/10 of 1%.

We see continued improvement in several important sectors of Wisconsin's economy including paper and paper products, food processing and chemical processing. Year-to-date whether normalized retail deliveries, excluding the iron ore mines, increased 3/10 of 1%.

Now an update on our natural gas deliveries. As you may recall, our Illinois segment has a decoupling mechanism and its margins are less affected by weather. Looking at Wisconsin, our largest segment, year-to-date retail gas deliveries, excluding gas used for power generation, decreased 3% compared to the same period in 2015 due primarily to warmer weather.

On a whether normalized basis year-to-date retail gas deliveries, excluding gas used for power generation, were up 2.8%. Overall our normalized results for gas and electric sales in 2016 were slightly above our expectations.

Turning now to our earnings forecast. We expect our 2016 earnings to be at the upper end of our guidance of $2.88 per share to $2.94 per share. The guidance excludes the $0.01 per share of acquisition-related cost in the third quarter as well as any potential acquisition-related costs that may arise during the fourth quarter. This projection assumes normal weather for the balance of the year and reflects the mild first-quarter weather as well as the very warm third-quarter weather conditions.

A couple of key points as we look at the annual guidance. First, the very warm weather in the third quarter was mainly in Southeastern Wisconsin. And the majority of the weather-related margins and positive fuel recoveries were in the Wisconsin Electric Service territory. This was a benefit to Wisconsin Electric in the third quarter of about $0.08.

As you recall, Wisconsin Electric and Wisconsin Gas have an earnings sharing mechanism in place as part of the acquisition order and therefore limit the overall earnings potential for the year. In addition, we expect an increase in maintenance expense items in the fourth quarter compared to last year. Again, we expect our 2016 earnings to be at the upper end of our $2.88 per share to $2.94 per share guidance range. With that I will turn things back to Allen.

Thank you, Scott. Now before we take your questions I want to take a moment to thank Colleen Henderson for her 21 years of dedicated service to the Company. Now it has been my pleasure to work with Colleen for 13 of these 21 years. Colleen will be retiring from the Company in January.

Colleen has been our primary contact with all of you as well as the other members of the investment community. She leaves a legacy of what I believe is one of the best Investor Relations programs in our industry. So please join me in wishing Colleen a long, happy and healthy retirement.

Operator, we are ready for the question-and-answer portion of our conference call.

(Operator Instructions). Greg Gordon, Evercore ISI.

I wanted to say congratulations as well to Colleen, you will be missed. Gosh, I think you have been doing this since I was in diapers in this business and I (multiple speakers).

Thanks a lot.

(Laughter) you have run one of the best-in-class operations in IR. So congratulations on that.

Thank you.

I do have a question on the fourth-quarter earnings and then a question on CapEx. So first, you guys earned -- I think you earned $0.63 in the fourth quarter last year, so if I just do that basic math, if you had a flat year you would be slightly above the high end of the range.

Is the reason that you don't expect that to happen because you will be in a refund position on the sharing? Or because you have found opportunities to do accelerated expense programs where they benefit customers? Or some combination of both or is there another item that I am not thinking about.

So let me start, Greg, on the fourth-quarter earnings question, then I will let Scott expand on a couple of points. So you touched on one of the issues which is the sharing mechanism at Wisconsin Electric. When I say sharing mechanism, the earnings sharing mechanism at Wisconsin Electric and Wisconsin Gas.

And just to keep in mind, that is about 60% of our regulated utilities, so 60% of our earnings would be subject to that earnings sharing mechanism. So we certainly expect that mechanism to kick in and there would be some sharing. In fact we already approved some sharing in the third quarter.

So that is the first factor that will impact -- we expect will impact the fourth quarter, you touched on that. The other thing, Greg, that I would just emphasize -- and Scott talked about this a little bit in his remarks.

But remember, the electric fuel recovery mechanisms that we have at Wisconsin Electric and Wisconsin Public Service, they have a dead band. So in dollar terms it is say a plus or minus $15 million at Wisconsin Electric, it is a plus or minus $6 million at Wisconsin Public Service.

And so once you get above those positive recovery levels all of the dollars go dollar for dollar above that level back to refunds for customers. Unlike the third quarter of last year, we actually went all the way to the top of those bands in the third quarter of this year. In the fourth quarter of last year -- we had to get well into the fourth quarter before we hit those levels. So that will also introduce another timing difference or earnings timing difference, if you will, in third quarter as opposed to fourth.

And the last thing is related to O&M spend. And what really happened, Greg -- it seems like every quarter we talk a lot about the weather. But in the fourth quarter of 2015, that was a very mild weather quarter. And as a result, in order to hit the financial commitments we had we actually had to cut back a bit on O&M spending. So I view the O&M spent run rate that we had in the fourth quarter of 2015 as being a little abnormal, meaning abnormally low.

What I think we'll see in the fourth quarter this year is more of a normal run rate for the business the way it is configured now. So I think those three factors, the earnings sharing mechanisms, hitting the top of the positive recovery bands on the fuel in the third quarter, and finally that difference in O&M timing, I think all of those will impact the fourth quarter. I don't know, Scott, if you want to spend any time at all on the sharing mechanisms?

Yes, we can just cover that just a little bit. So Wisconsin Electric and Wisconsin Gas have a sharing mechanism. And remember, there is an authorizer allowed return at Wisconsin Electric of about 10.2% ROE and then we share the first 50 basis points above that. So we can theoretically earn up to the 10.45%. And then anything about that or the sharing part of it will be used to basically amortize some of the transmission assets that we have on our balance sheet, that was part of the acquisition order.

So that is part of the sharing mechanism that will happen as we look at the fourth quarter again and tie it all together. As we look at the earnings in the fourth quarter last year, if you factor in the interest expense, it's about $0.62 on a comparable basis and the fuel that Allen talked about, that is about $0.03. So you get down to that $0.59 and the O&M getting back to a normal run rate and maintenance is about $0.02 to $0.03. So it gets into that $0.57 to $0.59 range.

Got you. Thank you.

So, Greg, I think you also had a question on capital.

Yes, so you did mention it in your comments at the open of the call. Can you talk a little bit more about specifically what kind of projects you have identified. I think at this point you have pretty much fully offset the $1 billion impact of bonus depreciation from the tax package that was passed last December.

And I think you have even, if I count increases in the 2019 and 2020 CapEx forecast, have now basically gotten back into the sort of positive territory on total rate base additions relative to the impact of bonus.

So can you talk about where you are in your thought process on updating your CapEx? You said there was still, A, what are the things that you have put into the plan that you think are beneficial for customers? And, B, what is still being -- you talk about I think at least one type of capital program that is still under consideration that hasn't been rolled out yet?

Right. Okay, well, in terms of the way the numbers break down, so overall if we look at our five-year capital plan it is about $1.6 billion more than the plan that was laid out in November of 2015 at EEI. So you are exactly right, Greg, it would offset the $1 billion -- roughly $1 billion cash impact, the bonus depreciation plus another say $550 million on top of that.

So just to give you a sense for the types of things, Greg, that are in the $1.6 billion. So we alluded to one of them in the call; so there is $255 million for the generation in Michigan. I'd certainly see that as a benefit to the customers in the UP and also a benefit to the customers in Wisconsin because once we retire Presque Isle there will be about a $40 million O&M savings associated with retiring that plant.

Also in the generation category we have made the assumption, we also expect that as soon as we can or are allowed to by MISO we will want to proceed to retire the Pulliam Plant, which is a coal plant in the Green Bay area. And that will leave a generation need in Wisconsin Public Service and we'll have an option to invest. We have a generation option in the Riverside power plant that Alliant is building, that is about $100 million. So exercising that first option.

On the electric distribution side, I think we have talked before about the system modernization and reliability program in the Wisconsin Public Service territory. So we are going to finish the first phase and do a second phase that will be about $100 million. That is a very popular program, we have seen quite significant reliability benefits for the distribution customers in Wisconsin Public Service.

On the gas distribution side, just to give you one example, I am sure you and the other listeners on the call are very familiar with what is going on with FEMSA and the new rules that are coming on gas storage. We believe we are going to require about a $50 million program at the Manlove storage field in Illinois to do well workovers and to put in the subsurface safety valves. So that is another $50 million.

And then just to give you a couple of other examples, a number of software projects that we believe are going to result in O&M savings, so a short cycle work management system in Illinois. We are also going to move to automated meters at our Michigan gas utility as well as our Minnesota gas utility. So as you can tell from that littany, I mean there is quite a number of things that are in that list. And I believe, our team believes, that they will all be beneficial to customers either from a cost standpoint or a liability or both.

Fantastic, thank you, guys.

Steve Fleishman, Wolfe Research.

Colleen, congrats from me as well.

Thanks, Steve.

Just briefly, the higher capital plan for Illinois, will that be just recovered the same way it has been done under the legislation for the gas system?

Well, at this point, Steve, I would expect that the roughly $50 million for the storage field, that we would do that under traditional regulation as opposed to using the rider mechanism.

Okay. Okay, that was all I had. Thank you.

Jonathan Arnold, Deutsche Bank.

Colleen, our best wishes as well. Thank you for all your help over the years.

Thank you very much, Jonathan. And thanks to Caroline, too.

She joins me in those wishes. So just quickly on -- you gave a number I think of $0.08 of weather in the quarter in the prepared remarks. I was just curious whether that was net of any of the accrued sharing that you had in the quarter or just could we break that down a little further?

Yes, sure. The $0.08 in Wisconsin Electric is really just looking at the margin itself and the fuel recovery. So there is about $0.03 positive fuel recoveries in the third quarter that wasn't really expected usually, like Allen said, was in the fourth quarter.

In addition, the other $0.05 was the weather margin related in Wisconsin Electric's territory. The warm weather in Wisconsin was mainly -- it was across the state, but mainly that is southeastern Wisconsin was about 50% warmer than normal. So quite an extreme warm weather over the quarter.

Okay, great. Thank you for that. And then I guess I think Greg got most of my other things, but just may I ask what should we anticipate incrementally at least in broad terms from you guys at EEI in a week or so?

Well, I think in terms of the broad numbers you have them. So in terms of the capital forecast we have laid that out today. I think Scott and Beth and Colleen will be prepared to lay out, give you further detail behind those numbers. But in terms of the broad numbers you have them, Jonathan.

Okay. So just more fleshing out the details on the CapEx, etc.?

That is exactly right, Jonathan.

Great, thank you, guys.

Michael Weinstein, Credit Suisse.

Congratulations, Colleen; you will definitely be missed and I am sure that --.

Thank you very much.

Looking forward to working with Beth again closer and everything so it will be great. In terms of the CapEx plan, are you -- what can you say about the longer-term 5% to 7% growth rate post 2016? And the impact of it on that.

Right. I think if you take -- and I think it is important I mention this on the call, but if you take the capital that I talked about for the retail utilities plus the capital plan for ATC, we view that as being supportive of the 5% to 7% range, Michael.

Okay, so within and supportive.

Correct.

Are you going to be updating the 10-year capital projection plan at EEI or --?

Yes, we are pulling that together right now, working with the operations and the presidents just to lay out the remaining five years of that plan.

Okay, thank you very much.

We will have something at EEI.

Great.

Michael Lapides, Goldman Sachs.

Congrats on a great quarter and year to date. One question, if I look at the year to date numbers in the earnings packet, one of the things that doesn't really stand out a lot is the impact of O&M, right. So when you give kind of the small verbal not verbal -- the small written descriptions on page 11 of what the contribution at each segment to potentially lower O&M.

It is actually not that big of a number and that strikes me just at first glance a little bit surprising given you are not even a year and a half post merger. I'm just curious, is that being embedded somewhere else or are you not seeing much in the way of O&M reductions post Integrys? I'm trying to just think this through a little bit.

Yes, I mean there is some O&M sprinkled throughout so we are seeing O&M in all the different segments, Wisconsin, Illinois, the other states. And remember, Allen talked about some of the sharing mechanisms and that we booked a little bit in the quarter, about $18 million. That is actually an acceleration of transmission costs, so that is buried in that O&M number also.

Got it, okay. And is that a - that $18 million, is that all you have taken for the year so far or was there any taken in the first half?

No, that is all that was taken for the year and of course that all depends upon the fourth quarter.

Got it. One other thing. If I think about what is kind of going on in the various businesses, and I know you updated capital spending, but your CapEx outlook at ATC kind of has a little bit of a mini cliff, meaning CapEx is elevated and then and in another year, year and a half from now it kind of declines significantly down to the $400 million level or so at the ATC consolidated level.

Do you still see that happening? Do you see anything in the horizon that could drive much of an uptick at ATC that could kind of fill that? Or do you just simply expect ATC growth to slow down a bit?

Yes, let me maybe talk about that, Michael, in two pieces. So inside the footprint -- when I say inside the footprint that would be inside Wisconsin and the UP in Michigan. I mean you are right, you are going to see or we expect to see somewhat of a deceleration or a lowering in the spending at ATC. However, if you look at the 10-year numbers, the last cycle when they updated their 10-year plan it was [3.7 to 4.5], this cycle it is [3.6 to 4.4].

So if you look over a 10-year period the 10-year numbers aren't that different. But in terms of the annual averages those are -- I would expect they are going to come down somewhat, Michael, because the very, very large, very, very significant reliability projects inside the footprint, a lot of those, a lot of those are done.

Now perhaps as generation patterns change in the state because of clean power plants, perhaps you could see an uptick again. But right now we expect it to come down somewhat. So that is inside the footprint.

Outside the footprint we are certainly pursuing other investments and we have talked about -- on previous calls we've talked about that a little bit. So that is one of the reasons why a number of years ago, because of what we saw coming with inside the footprint, why we wanted to start pursuing some things outside of Wisconsin and Michigan.

Got it. One last question, how are you thinking -- and I know you said in your prepared remarks that you will give a little bit of an update on this on the fourth-quarter call. But just curious about your thoughts on whether you would file cases in Wisconsin.

And I guess a little bit of my question is more of a legal or regulatory one. Do you have to file a case in Wisconsin next year? Or if you don't feel the need you can stay out for another year or so?

Well, I think from a practical standpoint, and let's just put the legalities aside. I think from a practical standpoint, Michael, anything we do whether we would decide to file or not to file we would want to reach agreement with the Commission staff about that. So just putting legalities aside.

So I think whatever we do, whichever one of those paths we go down, we would want to do that with the agreement of the staff. And then just to reiterate what I was saying earlier on the call, we would start having those conversations early in the New Year with the staff.

Got it. Thank you, Allen. Much appreciated. And I can't leave this call without just saying, Colleen, I'm going to keep this short. Thank you.

You are welcome. Thank you, Michael.

Paul Ridzon, KeyBanc.

Congratulations, Colleen, it has been great working with you.

Great, thank you.

I don't know if you went over this, but what was the refund in the third quarter? And what do you expect in the fourth quarter assuming normal weather?

Well, there were no refunds. What we did, Paul, just to be clear, is we accrued under the sharing mechanism -- we accrued $18 million pretax in the third quarter. And then based upon the fourth-quarter results we get to a final number, the $18 million could increase, it could decrease because the accounting period you look at for sharing is the calendar year.

Yes, and there is really not a refund, it is really just paying down a regulatory asset or reducing a future rate increase. So it is not like we are going to give cash back to customers, we will be able to reduce or not increase rates in the future related to it.

Got it, thank you very much.

Paul Patterson, Glenrock Associates.

Congratulations, Colleen.

Thank you, Paul.

Thanks so much for your help over the years. Let me just circle back on the gas CapEx numbers. Was it right to understand that about $50 million is the amount that won't be going through the -- it will be more of a traditional sort of rate case approach, is that right?

No, and let me just sort of clarify it to make sure everybody understands. So I expect next year, if you look at the system modernization program, so this would be basically the replacement of the cast-iron mains to new meters, whatnot. But that will be nearly $300 million of spending in 2017. And that will go -- going back to Steve Fleishman's question, that $300 million will go through the QIP rider.

In addition to that, I expect that we are going to have to spend $50 million on the safety-related things at the Manlove storage field. Now that $50 million, Paul, I think it is spread, Scott, over three or four years. It is spread out a few years, but at this point I would not expect to put that $50 million through the QIP writer. I hope that wasn't clear as mud.

Okay. No, no, I understand that.

(Multiple speakers).

Okay, and then the other amount is -- I mean let me ask you this. So the increase that we see over what you guys had in September was like $130 million is about -- the $50 million, annually speaking that is, I don't know, that is over several years, so that is only part of it. And the other amount, is it the AMRP that is -- what is the incremental difference I guess from what you guys (multiple speakers)?

The other part is a variety of different items. And like Allen said, those items -- I mean it ranges from additional infrastructure work to some meters that are outside of the footprint, also some software in there. So those there do not go through the rider. However, we do have depreciation on an ongoing basis and that is really filling in some of that normal depreciation in the area.

Okay. And then there was I guess a filing regarding methane mapping that I think [hub] is suggesting would substantially increase the efficiency of this AMR -- this accelerated main replacement program. So you have any comments on that or I mean is that any -- do you guys -- what do you guys think about that?

Well, just to be clear, so this is related to methane leaks on a gas distribution system in Chicago. And my understanding of the approach that the team uses there to prioritize projects, it already takes into account leak rates, methane leak rates. So there is already the attempt to build into that process that variable, if you will, in trying to reduce methane leaks.

So I would view that we are already trying to address that in the way we do the prioritization. Certainly if there is a better more precise way to factor that into the process, that certainly is something we can consider. But it is already being considered in the current prioritization process.

Okay. Okay, great. And then there was this -- in Michigan there is discussion of increasing transmission with Ontario. And they see that as a potential to lower rates and what have you. And I was just wondering is there any opportunity there or any impact associated with -- do you guys have any thoughts about that? I think it is the Upper Peninsula that they are talking about. Any thoughts about that or any color on that?

Yes, not a lot of color that I could give you, Paul. My understanding was that this would be a study that the state government there would kick off and look at the feasibility of that, what would it cost, etc. But not any real color that I can give around that.

Okay, great. Thanks so much and congratulations again, Colleen.

Thank you.

Andy Levi, Avon Capital.

Colleen, 20 years I think, right? 25, how long have you been IR?

21 -- 21.

21, okay 21 years. 21 years, okay. I've been doing this longer than you, pretty scary. But thank you for everything, Colleen. You've always been very good to me. So I will never -- it is not forgotten, I appreciate it.

And then most of my questions were answered. I just have two questions. Just Allen in general, obviously you added a lot of CapEx, you filled everything in, it is like $1.9 billion a year. Any reason to think as you get more comfortable in 2017 that the growth rate could go higher?

Well, I think as I look at the capital spending in response to one of the previous questions, we certainly view that what we put on the table for retail CapEx and the retail utilities, what ATC has put on the table for inside the footprint, we all view that as being supportive of the earnings per share guidance range.

The way I would answer your question, Andy, to actually kick ourselves up in that range we are going to need to be able to be successful with some of these transmission developments outside of the traditional footprint at ATC.

So I think if I certainly saw in a significant way some successes outside the footprint at ATC, that would certainly give me some comfort to push our forecast up but still within that 5% to 7% range.

Okay. Because the $1.9 billion or plus year seems much higher than what it was when you originally came out with the growth rate. And then so by the time you got to like [19] or [20] it adds a couple cents, a couple cents, a couple cents every year.

Right.

Is that (multiple speakers) -- go ahead.

Go-ahead, Andy, I am sorry.

No, no, no, so I was just kind of doing some dumb math which I am really good at. And -- emphasizing the dumb part (multiple speakers). Go ahead.

Two things though that I think you should keep in mind, Andy, one is remember we had this additional bonus depreciation has kind of been in the middle here. So that was a $1 billion cash tax impact.

The other thing that perhaps people don't talk about quite as much, since we talked about a 5% to 7% earnings per share growth range we have seen allowed rates of return, most notably the allowed rate of return in FERC go down.

So there have sort of been some put and takes. Certainly there have been some increases in our projected level of capital spending, those are the puts. The takes, we certainly had bonus [depreciation] and some reduction in allowed rate of return.

Okay. That explains that. And then the last question I had is around Point Beach. And how does the contract (technical difficulty) NextEra? Does the contract start to -- does it start to increase I guess in price next year? Is that how it works?

Yes. And then so maybe just sort of go back, because I think a lot of people may not have the history with Point Beach with the PTA and with the sale of the asset. So, and I'm sure you remember, Andy, but for the benefit of others on the call. So back in 2000 -- actually December of 2006 we announced the sale of the plant and some asserted PPAs with NextEra. We went through a very protracted contested case proceeding in Wisconsin leading up to the actual financial closing of the sale in 2007.

Now during that protracted or long contested case proceeding the Commission approved not only the sale of the nuclear plant with two units, so both of the units. But they also reviewed and approved the PPAs. And there were refunds of the above book and the proceeds that we got above book for the plant as well as the excess nuclear decommissioning funds that were in the trust.

So the PPAs as well as the sale all went -- all were reviewed in that proceeding. And then ever since then these PPA payments have been consistently recovered in the fuel clause. So I think all that background, all that context is important. And I think, Scott, maybe you could fill in -- I mean I don't know if we have the specific numbers in terms of at least the next two years what happens with the (technical difficulty). I don't have them handy.

Yes, so they increase slightly in 2017 and 2018 about 1% and it's not until like 2019 or 2020 that we going up at a 6% rate.

Okay. So beginning in 2019 rates start to increase 6% to 7% a year, but it is not until 2019. So there is no issue in 2017 or 2018 as far as what you file and having to worry about I guess not rate fatigue but rates going up too fast. So in 2019 when you have the 6% to 7% increase, and that goes over like a 10-year period, right, where the rates increase every year 6% or 7% beginning in 2019, is that right?

Yes.

So with that being the case, on a -- I guess just for the Wisconsin -- the legacy customer, right? Obviously not for the Integrys customer. But for that portion that goes up beginning in 2019 what is that as far as an overall rate increase? Because it's obviously just a portion of your total generation. Would you be able to figure that out? Is that a number that you know?

Well, as you got to 2019, so the figures that Scott talked about, if you do it in a total rate, if you look at it in total rates, my recollection is it's about a 1.25%, somewhere that range, a 1.25% uplift on total rates.

Okay, that should actually (inaudible), because that's actually I guess probably the only question I should have asked because that was more than I wanted to know. Okay. Well, thank you very much and I will see you guys in a week. Colleen, bon voyage, enjoy.

Thank you.

Michael Lapides, Goldman Sachs.

Real quick, Scott, the increase in CapEx, should we assume there is a pro forma increase therefore in the benefit you will get an bonus D&A? Kind of just thinking about it pro rata that whatever bonus D&A assumptions are they go up by a little bit of the percent change in CapEx that you are increasing by?

Correct. So the bonus appreciation is through 2019 and the new additional CapEx would qualify for the bonus.

Okay. So what were you all saying bonus D&A was and what do you think it will be now? I am just trying to think about the cash flow impact for you.

Yes. So when you look at it the $1 billion was with the original plan. I'm sure it is a couple hundred million dollars more. We will probably be a cash taxpayer in like 2018.

Got it, okay, guys. Thank you, Scott. Much appreciated.

Okay, well thank you very much for your questions. That concludes our conference call for this afternoon. Certainly if you have any more questions, please contact Beth Straka or Colleen Henderson, 414-221-2592. Thank you.