WEC Energy Group, Inc. (WEC) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for waiting and welcome to WEC Energy Group's Conference Call to review the 2015 Third Quarter 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 will read the forward-looking language. All statements in this presentation, other than historical facts, are forward-looking statements that involve risks and uncertainties, which 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 statement, factors described in WEC Energy Group's and Integrys Holding's latest Form 10-Ks and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, WEC has posted on its website a package of detailed financial information at wecenergygroup.com. A replay of our remarks will be available approximately two hours after the conclusion of this call. And now it's my pleasure to introduce Mr. Gale Klappa, Chairman of the Board and Chief Executive Officer of WEC Energy Group. Gale E. Klappa - Chairman & Chief Executive Officer: Colleen, thank you very much. Good afternoon, everyone. And thank you for joining us today, as we review our results for the third quarter. This, of course, is our first full quarter as a newly combined company. We formed WEC Energy Group on June 29 when we closed our acquisition of Integrys. I'll update you on our progress as a new company in just a moment. But first as always, I'd like to introduce the members of our management team who are here with me today. We have Allen Leverett, President of WEC Energy Group; Pat Keyes, our Chief Financial Officer; Susan Martin, General Counsel; Scott Lauber, Treasurer; and Beth Straka, Senior Vice President for Corporate Communications and Investor Relations. We also have one new member of our senior team with us today, Bill Guc. Bill is our new Vice President and Controller. He has more than 20 years of solid experience in our industry. Prior to the acquisition, he served as Treasurer of Integrys. Bill, welcome aboard. Turning now to the third quarter, and I'd like to remind you that we're reporting our legacy Wisconsin Energy results only through the remainder of 2015. So the financial results and the guidance that we'll be discussing have been adjusted to remove the impact of the acquisition. Pat will review our results in detail in just a few minutes. But as you saw from our news release this morning, we reported Wisconsin Energy adjusted standalone earnings of $0.61 a share for the third quarter of this year. That compares with adjusted earnings of $0.57 a share for the third quarter of 2014. We delivered strong results through an unusual pattern of summer weather, a cool July, a cool August, followed by an unseasonably warm September. Taking a quick look at the state of the economy, Wisconsin's unemployment rate fell to 4.3% in September, well below the national average and the lowest rate of unemployment we've seen here since back in April of 2001. And in the latest survey of the climate for business, Wisconsin was ranked the 12th best state for business by Chief Executive Magazine. This ranking represents a huge leap forward since 2010, when the state came in at 41st. In this year's third quarter, residential use of electricity surged by 11.5% compared to last year's abnormally cool summer. Also, our small commercial and industrial segment grew slightly with electricity use rising by 1.6% over the third quarter of a year ago. And deliveries of electricity to our large commercial and industrial customers, excluding the iron ore mines rose by 0.6% in the quarter. Several sectors continued to show strength including food processing, printing and to Mrs. Robinson (4:12), plastics. In addition, we continue to see an uptick in customer growth across our system. We Energies is serving 6,000 more electric customers and 10,000 more natural gas customers today than we were a year ago. Now, I'd like to spend just a few minutes discussing our plans for the future of the new WEC Energy Group. When we first considered the opportunity to acquire Integrys, we weighed it against our three important criteria for evaluating any potential acquisition. And after considerable due diligence, we found that it met or exceeded all three criteria. First, it would be accretive to earnings per share in the first full calendar year after closing. Second, it would be largely credit-neutral. And third, the long-term growth rate would be equal to or greater than Wisconsin Energy's standalone growth rate. And, of course, over the past year, a number of similar deals have been announced, several as you know, in just the past few months. We're pleased that the metrics for our transaction compare very favorably to these recent announcements. We also see tremendous opportunity in the framework of the new company. WEC Energy Group has the scale, scope, technical depth, geographic reach and financial resources to thrive in our consolidating industry. We plan to leverage these strengths to deliver operational and financial benefits to all of our stakeholders, from the customers and communities we serve to the people we employ to the shareholders who count on us to create value. And with our proven leadership team, we'll incorporate best practices across the organization to streamline the operations and reduce costs. WEC Energy Group is now the eighth largest natural gas distribution company in America and one of the 15th largest investor-owned utility systems in the United States with significant opportunities for growth. Bottom line, we have the same top management team, but now with a new platform for growth, a platform focused on the energy infrastructure needs of 4.4 million customers across the Midwest. Now, let's touch on some of the key financial measures for the new company. For starters, we issued $1.5 billion of parent company debt to help finance the transaction. The all-in interest cost for the debt was 2.21% annually, an outstanding result and clearly lower than we had expected. So, for 2016, we now project growth in earnings per share for the combined company to be in the range of 6% to 8%. 6% to 8% earnings growth for next year assumes that Wisconsin Energy standalone delivers earnings of $2.72 a share this year. For the longer term, we see earnings per share growth of 5% to 7% annually, driven by operating efficiency, financial discipline and infrastructure investments that the region needs for reliability and for improved environmental performance. And on the subject of infrastructure upgrades, you may recall that we originally projected capital spending for the combined company in the range of $1.3 billion to $1.4 billion a year for the remainder of the decade and actually beyond. Now, about 120 days into the company, as we look at the spectrum of projects that need to be addressed to deliver industry-leading reliability, we're seeing even stronger investment opportunities. And in the latter part of the decade, our capital investments could range above $1.5 billion a year. With the few other minor changes to our estimates, we continue to project longer term earnings per share growth in the 5% to 7% a year range and we're comfortable at the midpoint of that range. Lastly, a reminder about our dividend policy. In June, our board of directors raised the quarterly dividend to $0.4575 a share, an increase of 8.3% over the previous quarterly rate. This is equivalent to an annual rate of $1.83 a share. You may recall this was our second dividend increase during 2015. In total, we've raised the dividend by 17.3% this year. Going forward, we're targeting as you may have heard us say a payout ratio of 65% to 70% of earnings and we expect dividend growth to be in line with growth in earnings per share. Looking forward, we expect to return to our normal pattern of dividend action. Management typically brings the dividend proposal to the board in January of each year and we would expect to do so in January of 2016. Now, I'd like to spend just a few minutes discussing some of our operational highlights in the past quarter. First, I'm pleased to report that just two weeks ago We Energies was named the most reliable utility in the Midwest for the fifth year in a row. And in recent national studies of large utility systems, We Energies is ranked in the top quartile of the Midwest for customer service and power quality and in the top quartile nationally for customer service. In addition, Wisconsin Public Service was ranked number two in the Midwest for overall customer satisfaction among midsized utilities. We're also making progress on the Accelerated Main Replacement Project at Peoples Gas in Chicago. As you recall, this is one of the largest infrastructure modernization programs in the country. The program calls for the replacement of approximately 2,000 miles of Chicago's aging gas pipelines over the next 20 years. Some of those pipes ladies and gentlemen literally date back to the days of Abraham Lincoln. One of our most immediate and important goals is to improve the management and the performance of this project. Since we closed the acquisition, we put in place an entirely new senior leadership team at Peoples, and we built an in-house construction management group with extensive project experience. They determined that the best approach for the Main Replacement program in Chicago is a fresh start. So over the past 100 days, we've transitioned the management of the project from an outside contractor to our experienced in-house team. We've also engaged a nationally known firm to help us conduct an independent review of the cost, scope and schedule for the program. We expect to submit this review and our recommendations to the Illinois Commerce Commission by the end of November. I'm confident that the steps we're taking will ensure that Chicagoans will have a safe, modern, natural gas delivery system that they deserve. Then on the natural gas distribution side of our business in Wisconsin, I'm pleased to announce that our West Central Gas pipeline project is now complete and, as of November 1, in service. This was the largest expansion of our natural gas distribution network in company history. 85-mile line addresses reliability concerns and allows us to add a significant number of customers in the areas where propane use is the heaviest. The project came in on time and actually better than budget at just under $130 million, excluding allowance for funds used during construction. On the power generation side of our business, you may recall that we're working to add fuel flexibility at our Oak Creek expansion units. These units were initially permitted to burn bituminous coal, but given the current cost differential between bituminous coal and Powder River Basin coal, blending the two types of fuel could save our customers between $25 million and $50 million a year in fuel cost, depending on the blend. We're working now to expand our coal storage capability at the Oak Creek site and the first capital improvements inside the plant began in September during a planned outage for one of the two units. We plan to upgrade the second unit during the first quarter of next year. Our share of these investments for the new Oak Creek units is targeted at approximately $80 million, again excluding allowance for funds used during construction. Next, the conversion of our Valley Power Plant from coal to natural gas is now more than 97% complete with only tuning and just punch list items remaining for the project. So our conversion costs will be $60 million to $62 million excluding allowance for funds used during construction. We expect to complete the work at the Valley Plant on time and on budget within the next 30 days. We also continue to make good progress on the major construction work at our Twin Falls hydroelectric plant on the border of Wisconsin and Michigan's Upper Peninsula. After more than 100 years of operation, we're building a new powerhouse and adding spillway capacity that will meet current federal standards. Overall, the project is on time and on budget with approximately 60% of the construction now complete. We're targeting commercial operation for the summer of 2016 and we're forecasting a total investment of $60 million to $65 million, again excluding allowance for funds used during construction. Looking ahead, we continue to see significant investment opportunities as we upgrade our aging distribution networks and focus on delivering the future. We plan to provide you, as we promised, with more details on our capital investment plans for the next 10 years at the EEI Conference in just a few days. Turning to our transmission business, WEC Energy Group, I would remind you, is now a 60% owner of American Transmission Company. And as you may have seen, ATC recently updated its 10-year capital plan. The plan has slightly lower growth in the near term, but it calls for ATC to invest $3.7 billion to $4.5 billion between now and 2024 to bolster the reliability of the grid. This latest projection is up from the previous 10-year plan. That previous plan, as you recall, had an investment ranging from $3.3 billion to $3.9 billion. As I've said in the past, we welcome the opportunity to increase our commitment to the transmission business. On a final note, we've completed our evaluation of the compressed natural gas business that we inherited with the acquisition of Integrys. That business is known as Trillium CNG. We've determined that the enterprise has value, but does not fit our focus on our core regulated business. As a result, we're now seeking a new owner for Trillium. So in summary, ladies and gentlemen, these are exciting times, filled with opportunity for our company, and we believe we have a very bright future ahead. Now, for more details on our third quarter performance and our outlook for the remainder of the year, here's our Chief Financial Officer, Pat Keyes. Pat? J. Patrick Keyes - Chief Financial Officer, Director & Executive VP: Thank you, Gale. As Gale mentioned, our 2015 third quarter Wisconsin Energy standalone adjusted earnings were $0.61 a share. That compares to adjusted earnings of $0.57 a share for the corresponding quarter in 2014. Our adjusted earnings exclude the Integrys company's earnings and the impacts of the acquisition. They are also adjusted for the shares issued in connection with the merger. To facilitate comparisons with last year's third quarter, my discussion of results will focus primarily on legacy Wisconsin Energy. The earnings packet placed on our website this morning includes the results of the Integrys company and has a full GAAP to adjusted reconciliation. We will continue this practice for the remainder of 2015. First, I'll focus on operating income for Wisconsin Energy and then discuss other income, interest expense and income taxes. Third quarter adjusted consolidated operating income was $262.2 million as compared with adjusted income of $249.1 million in 2014. That's an improvement of $13.1 million. Starting with Utility Energy, adjusted operating income in the third quarter totaled $168.5 million for 2015, an improvement of $10.1 million from the third quarter of 2014. On a quarter-over-quarter basis, weather helped our earnings by $27.6 million. We had a warmer than normal September in 2015 and a very cool third quarter in 2014. We were also helped by $12 million of improved fuel recoveries and $10.1 million from the impact of the 2015 rate case. On the downside, we saw an increase in utility operations and maintenance costs of $36 million, primarily driven by increased regulatory amortizations, the timing of projects and certain benefits costs. And we also saw increased depreciation expense of $3.6 million associated with higher capital expenditures. Combining these and other factors results in a $10.1 million increase in adjusted utility operating income in the third quarter of 2015 compared with the same quarter last year. Our non-utility operating income was $93.2 million, which is $1.2 million higher than the prior year due to additional investment in our Oak Creek expansion units. Our adjusted corporate and other improved slightly by $1.8 million over the previous year. Taking these changes together, you arrive at Wisconsin Energy's third quarter adjusted operating income of $262.2 million. This is a $13.1 million improvement over the third quarter of 2014. During the third quarter of this year, earnings from our investment in American Transmission Company totaled $17.6 million, a decline of $400,000 compared to the same period in the prior year. As we previously mentioned, ATC has established reserves in light of recent appeals to the FERC regarding authorized returns for regional transmission organizations. These earnings only reflect Wisconsin Energy's standalone share of ATC's results. Other income net increased by $900,000, driven by higher AFUDC, and our adjusted net interest expense increased by $700,000, primarily because of higher utility debt levels. Wisconsin Energy's standalone income tax expense rose by $4 million for the quarter. We expect that Wisconsin Energy's standalone effective tax rate for the calendar year will be between 37% and 38%. WEC Energy Group's effective income tax rate, driven by a onetime adjustment related to the acquisition of Integrys, is expected to be between 38% and 39% for 2015. Combining all of these items brings you to adjusted net income of $138.2 million, or $0.61 a share for the third quarter of 2015. Turning now to operating cash flows. We have provided information in your earnings packet for the consolidated WEC Energy Group exclusively on a GAAP basis and, thus, this includes three months of result from Integrys. We believe this will be a more accurate indicator of the cash position of the company. During the first nine months of 2015, WEC Energy Group's operating cash flow totaled $1.073 billion, which is a $39 million improvement over the first nine months of 2014. Operating cash flows were helped by improved working capital, lower natural gas prices dropped accounts receivable balances and reduced the cost of gas and storage. Legacy Wisconsin Energy's year-to-date operating cash flows in 2015 were about $100 million lower as compared to 2014. As previously discussed, we contributed $100 million to our pension plans in 2015. No such contributions were made during 2014. Our adjusted debt-to-capital ratio as of September 30, 2015 is 50.3%. This ratio reflects the Integrys acquisition and treats half of the WEC Energy Group's hybrid securities as common equity, which is consistent with past presentations. We continue to use cash to satisfy any shares required for our 401(k) plan, options, and other programs. Going forward, we do not expect to issue any additional shares. For comparison purposes, the sales information I'll discuss next will reflect results for We Energies only. Actual third quarter retail deliveries rose by 0.9%. Excluding the iron ore mines, retail deliveries increased by 4.4%. Weather-normalized retail deliveries, again excluding iron ore mines, were flat compared to the third quarter of 2014. Looking at the individual customer segments, we saw weather-normalized residential deliveries rise by 1.4%, and as Gale mentioned, actual residential deliveries rose by 11.5%. Across our small commercial and industrial group, weather-normal quarterly deliveries fell by 0.7%. Actual deliveries rose by 1.6%. And in the large commercial and industrial segment, deliveries for the third quarter of 2015 fell by 8.2%. Excluding the iron ore mines, large commercial and industrial deliveries rose by 0.6%. Our year-to-date weather-normalized retail gas deliveries, excluding gas used for power generation dropped 0.4% compared to the same period in 2014. Our actual gas deliveries, again, excluding gas used for power generation were down 6.7% compared to the polar vortex driven gas sales last year. Moving to other items of interest. In September of 2015, Wisconsin Gas issued a $200 million, 10-year bond at a coupon of 3.53%. In part, this new bond is replacing $125 million bond with a coupon of 5.2% that comes due in December. Turning now to our 2015 earnings forecast. For the remainder of the year, we will continue to guide based on adjusted standalone earnings for Wisconsin Energy. And again, for your reference, adjusted earnings exclude the results of Integrys, exclude the impacts of the acquisition and adjust for the additional shares that were issued as part of the acquisition. Wisconsin Energy's adjusted earnings through the third quarter are $2.10 per share. Taking into account the impact of a relatively warm October as we enter the heating season and assuming normal weather for the rest of the quarter, we project our fourth quarter adjusted earnings to be $0.62 per share. Thus, the 2015 adjusted earnings forecast for Wisconsin Energy is $2.72 a share. At $2.72, Wisconsin Energy's regulated utilities will earn at or near their allowed rates of return. So again, we project our fourth quarter adjusted earnings to be $0.62 per share. Finally, I'd like to announce our earnings guidance for 2016. As Gale mentioned, we forecast earnings per share growth for WEC Energy Group to be in the range of 6% to 8% off a projected base of $2.72 a share. Therefore, our guidance for 2016 is in the range from $2.88 a share to $2.94 a share. This projection assumes normal weather and excludes any potential remaining acquisition-related costs. Again, our guidance for 2016 is $2.88 per share to $2.94 per share. And with that, I will turn things back to Gale. Gale E. Klappa - Chairman & Chief Executive Officer: Terrific. Pat, thank you. Overall, we're solidly on track and focused on delivering value for our customers and our stockholders.

And now we would like to take your questions. Your first question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: Hi, Jonathan. How are you today? Well, Jonathan, I know it's tough. J. Patrick Keyes - Chief Financial Officer, Director & Executive VP: Or muted.

And Jonathan, please make sure your line is not on mute. Gale E. Klappa - Chairman & Chief Executive Officer: First-time caller, long-time listener I think. All right. Why don't we go to the next call?

Yes, sir. Your next question comes from the line of Julien Dumoulin-Smith with UBS. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: How's your mute button, Julien?

Hey. Good afternoon. I'm still here. Gale E. Klappa - Chairman & Chief Executive Officer: Good. How are you doing?

Quite well. Thank you. Perhaps just to kick off the conversation, the comment on the latter part of the decade, around the $1.5 billion, could you, one, elaborate around what would be driving that? What would the investment be? Where would it be oriented? And then also confirm for us, would that require equity or is the balance sheet in a sufficient place to deal with the incremental capital? Gale E. Klappa - Chairman & Chief Executive Officer: First of all, let me just reiterate, no expectation of additional equity, period. And then, in terms of the types of projects that we're seeing, we'll give you some really granular detail at the EEI Conference on the 10-year capital spending and on the uptick that we're seeing in the latter part of the decade. But let me just say, in general, we're seeing additional requirements, additional capital spending for upgrades and expansion particularly with natural gas in Wisconsin, and for that matter, in Minnesota. So, they're really infrastructure projects; they're the kinds of things we have been talking about. But as we looked across – as I mentioned, across the spectrum of projects now with the new combined company, we're really seeing infrastructure needs that are going to drive the capital spending higher. Now, if you recall, as we made the acquisition, we indicated that we would – our number one priority, if there were legitimate needed projects, would be to deploy some of our positive free cash flow to that type of investment. So, basically, what we're saying is that over the course of the last 120 days, as we've really refined our estimates and looked at the spectrum of projects, we're seeing higher capital spend out in those years, largely delivery networks, a lot of it gas.

Got it. Excellent. And then, let me cut back, and I know this is a little preempting next week a bit, but you talk about the fresh start, to use your words, does that impact the timing of the CapEx on the people side of the business, and perhaps what drove you to come to that conclusion? Can you elaborate a little bit on what exactly that means? Gale E. Klappa - Chairman & Chief Executive Officer: The answer is certainly for this year and for the near term, I wouldn't expect any change in the capital projections for Peoples Gas. And from the standpoint – and let me explain. There are only so many streets you can dig up in Chicago at one time. So in essence, we are physically limited as to how much progress you can make in any given year in terms of the gas-main replacement program of those 2,000 miles of pipes under the streets of Chicago. So that – I mean, there's a governing factor that is driven mostly by just the physical capability of how many streets can you dig up and repair. That's number one. Number two, related to the fresh start, I mean, as you may recall, there was a Commission-mandated audit of the management of the program. It was a rather critical audit. The prior management had outsourced the management of this project, and we really felt like bringing in an experienced construction management team was very important to the future of the project and to managing that project well. And that team has looked at the project controls and all of the other issues that they found, and that's why we've decided to go back with a fresh start, with a whole new bottoms-up analysis, and you will see when we file publicly on November 30 what our long-term cost projections are and what our immediate priorities will be.

Excellent. Thank you all. See you soon. Gale E. Klappa - Chairman & Chief Executive Officer: Look forward to it.

Your next question comes from the line of Jim von Riesemann with Mizuho Securities. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: How are you doing, Jim.

I'm good. How are you, Gale? Gale E. Klappa - Chairman & Chief Executive Officer: We're good.

Hey, I'm looking for some Bucks tickets. Know anyone who could get me some? Okay. On to more important topics. First thing, besides the Bucks, Trillium book value and the tax basis and what your expected uses of proceeds are? Gale E. Klappa - Chairman & Chief Executive Officer: We'll talk to Allen about that, but I believe the book value is around $130 million.

Okay. That's basically similar? Gale E. Klappa - Chairman & Chief Executive Officer: No, it's probably three-quarters of that.

Okay. Switching over to cash flow, I'm not trying to become a debt analyst, but the – and you guys over the years have been very helpful with earnings guidance and dividend expectations, but less so on the cash flow side of things. So when you look at your FFO productions, can you just book-end how much of that FFO comes from, say, Power the Future, and then if you add in Illinois, relative to the total FFO amount? Gale E. Klappa - Chairman & Chief Executive Officer: Jim, we don't have that kind of detail in the room with us today. I mean, we can...

Okay. Gale E. Klappa - Chairman & Chief Executive Officer: We can, off line, kind of give you some broad estimates, but we just don't have – I mean, we want to give you the right kind of answers. We just don't have that specificity in the room with us today. The entire brain thrust is here, but we don't have that kind of specificity.

Okay. And then are you seeing any – well, we'll talk about that offline. But as a follow-up to that, are you seeing any calls on your cash in the near term to intermediate term? Intermediate being defined as, say, two years to three years. This year, you did your pension contribution for the first time. Is there any changes with respect to like deferred taxes and the like? Gale E. Klappa - Chairman & Chief Executive Officer: Well, obviously, the short answer is no. However, there's going to be a lot of developments particularly towards the end of the year, and specifically related to whether or not Congress renews or extends bonus depreciation.

Right. Gale E. Klappa - Chairman & Chief Executive Officer: For many companies including ours, that's a very big number. Now, from a cash standpoint, we have not factored in the potential uptick of bonus appreciation, again, from a cash standpoint in 2016 or beyond. We're just very conservative from that standpoint. We're not going to make any assumptions until we see the legislation actually signed and in place. But those are very – those could be – that could be a very big swing.

No, I get it. Okay. And then the last question still on this debt analyst path, fixed debt versus variable debt. If I did my math correctly on the combined entity, the debt is basically entirely fixed that you have. I think there's a few resets that switch over to variable in the next three years to five years. But nothing really to get worked up about in the event that Fed finally decides to start moving rates. Is that correct? Gale E. Klappa - Chairman & Chief Executive Officer: Oh, gosh, yeah. I mean, the lion's share of our debt is absolutely fixed. You are correct. There are a couple of hybrid issuances, one at legacy WEC, one at Integrys, that could switch over in 2017 and 2016, 2017 for us, 2017 for legacy WEC, 2016 for Integrys that could switch over. But they switch over even if the Fed raised rates a little at incredibly low levels, like LIBOR plus 2.12%. I mean, so they're very competitive, if they do – when they do switch over.

Super. That's all I had. Thanks, guys. See you in Florida. Gale E. Klappa - Chairman & Chief Executive Officer: Look forward to it.

Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead.

Hi, good afternoon, Gale. Gale E. Klappa - Chairman & Chief Executive Officer: Hello, Jonathan. Did that mute button sick?

There's some rumor I might have fallen asleep here. Gale E. Klappa - Chairman & Chief Executive Officer: We were that scintillating in the call, huh?

I thought I needed to refute that. Gale E. Klappa - Chairman & Chief Executive Officer: How are you doing, Jonathan, other than those naps are wonderful.

Yeah. So, one – just a couple of small things, your O&M, as we think about pro forma and where it came in, in the quarter. Is $500 million a quarter a decent run rate expectation, just as we're wrestling with the pro forma model? Gale E. Klappa - Chairman & Chief Executive Officer: We're looking at each other here. It's within the ballpark, maybe a hair high, but it's within the ballpark.

Okay. Thank you. And then, we have one other. Just as we think about TEG in fourth quarter and try unfolding that in, we're likely to see a dilution in Q4, or possibly accretion given the winter waiting? Gale E. Klappa - Chairman & Chief Executive Officer: So, I wouldn't think you'd see dilution in Q4, but remember, one of the reasons why, Jonathan, we're focusing on legacy WEC performance for the remainder of the year is there are – as we go through purchase price accounting, as we go through transition costs, as we go through any remaining acquisition costs, which should be very small at this point, there are a lot of moving pieces and a lot of one-time things that affect the Integrys performance financially from a reporting standpoint in the fourth quarter. So, again, we think it's almost fruitless to try to give you a GAAP number, and to concentrate on the GAAP number for the Integrys performance in the fourth quarter. Having said that, January 1, 2016 is combined company rock and roll.

So, from 2016, you're going to give – you're not going to keep doing this through the year after the close or anything like that? Gale E. Klappa - Chairman & Chief Executive Officer: Absolutely not. You will see combined results. That's what we will focus on. That's what we report. And Jonathan, that's what our earnings guidance that Pat just gave you for 2016 is based on.

Yeah. Good. Okay. Great. Well, thank you very much, and thanks for the insights. Gale E. Klappa - Chairman & Chief Executive Officer: You're welcome, Jonathan. J. Patrick Keyes - Chief Financial Officer, Director & Executive VP: (35:14).

Your next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: Hey, Paul.

Hey. How are you doing? Gale E. Klappa - Chairman & Chief Executive Officer: We're great. How about you, Paul?

I'm managing... Gale E. Klappa - Chairman & Chief Executive Officer: Now, the last time I asked about wonderful and award-winning, and you weren't quite there.

Well, I'm always striving. Always striving (35:34). Gale E. Klappa - Chairman & Chief Executive Officer: All right. Okay. We'll try to be helpful.

I want to turn to the accelerated main replacement program in Illinois. Gale E. Klappa - Chairman & Chief Executive Officer: Sure.

So now it looks like the projections are that it'll be considerably more CapEx, I would assume. Could you give us a flavor for how much we should be seeing annually that being driven by and just sort of the causation that we're seeing there and also the rate impact, I guess, cumulatively over this period of time? I mean, it just seems like a lot that we're reading about. Gale E. Klappa - Chairman & Chief Executive Officer: All right. And I appreciate you're asking the question. Let me clarify two or three very key points here. First of all, this was designed initially to be a 20-year program. When we walked into the door after the acquisition, there had been an estimate, a revised estimate made by the previous outsourced firm that the cost might rise to as much as, say, $8 billion over the 20-year period. I don't think the previous management had confidence in that estimate. We did not have confidence in that estimate. That's why we brought in our experienced team and another outside nationally known firm to basically take a complete bottoms-up review. Having said that, the legislation that enables this program to move forward with current and appropriate cost recovery caps the amount of capital spending on this program at roughly $250 million a year. From what I have seen personally over the last 120 days, it would be extremely difficult. I mentioned earlier there are only so many streets you can dig up, and you can't do a lot of this work in the dead of winter. So, from a weather standpoint and just a sheer congestion and major city standpoint, I don't think you could technically just physically spend much more than about $250 million a year anyway. So, I wouldn't make the assumption. I think it'd be an inappropriate assumption that we would be spending much more on that advanced main replacement program in any given year than $250 million to $300 million.

Okay. Gale E. Klappa - Chairman & Chief Executive Officer: Does that help, Paul?

It does help. And I guess in terms of that $8 billion number which clearly you guys are reviewing, I mean, when do you think we're going to get or when will you guys get a better idea about what the – would you be able to share with us what you think the actual number will be? And I'm just wondering, I mean, you talk about digging up streets and stuff. I mean, there are some things that you hear about and which you could do things without digging up the street, if you follow me, in terms of like liner or stuff and what have you, I don't know. I'm just wondering whether or not... Gale E. Klappa - Chairman & Chief Executive Officer: We're going to try fracking down there.

Well, that will solve some transportation issues. Gale E. Klappa - Chairman & Chief Executive Officer: That'll solve the problem, exactly. I mean, there are – there's something called keyhole technology which we are experimenting with right now. But having said that, just the sheer logistics, I would still believe that given the weather constraints and the sheer logistics, we're probably physically capped at the $250 million to $300 million a year. Now, you asked, when are we going to see more specific estimates? Well, the date is November 30. We've promised the Illinois Commerce Commission that we will file on November 30, our longer-term cost estimates for the 20-year period. Now, as you know, trying to estimate precisely the cost of the construction program that is going to span 20 years, you know the only thing we're going to be is wrong. So, we will probably give a range of values. We'll probably have a low case, a medium case, and a high case. And then I would expect that what we will really focus on is, okay, those are projections but what are we going to do in the next three years to make the most progress in getting that natural gas delivery system as safe and efficient as possible? I think you'll see a broad range for a lengthy period of time, so low case, high case, medium case. And then we will really focus on what we plan to do in the next three years and what the cost of that is, and what the progress will be. And all of that look forward to November 30.

Okay. Gale E. Klappa - Chairman & Chief Executive Officer: Now in terms of rate impact, and I think – I'm glad you asked that question. The legislation basically caps at that $250 million to $300 million a year. Caps consumer rate increases at an average of 4%. But it's very important to understand what that 4% is based on. That 4% is based on what we call base rates. So, base rates make up like less than a third of a residential customer's gas bill. The rest is the commodity. So we're not talking about tremendous rate pressure here. We're talking about 4% off of – we're talking about basically 4% on a third of the total customer bill each year.

Okay. Great. And then I guess just, when you say the 20 years, I mean this project's been going on for some time. I mean... Gale E. Klappa - Chairman & Chief Executive Officer: Not really.

...or it hasn't? Because I mean, so we're not talking 2030, or are we talking – what is the date and time we're talking about I guess? Gale E. Klappa - Chairman & Chief Executive Officer: Officially, I mean there was some work done I think in 2012 and 2013, but basically under the legislation, really March 2014. I think that the hope was that a lot could be accomplished by 2030. Again, we're taking a hard, fresh bottoms-up look at this, but we're talking about a very extensive period of time. And the one thing – and I've spent a lot of time personally in Chicago with the team over the last couple of months, and the one thing that is very clear to me is that from the Mayor's office to the common council to the Illinois Commerce Commission, there is outstanding and common agreement that this program has to move forward. It has to be done efficiently. It has to be managed well, but Chicago has to have the modern efficient system that it deserves.

Okay. Thanks so much. Gale E. Klappa - Chairman & Chief Executive Officer: You're more than welcome, Paul.

Your next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: Rock and roll, Michael. Michael Jay Lapides - Goldman Sachs & Co.: Hey, Gale. Congrats on a good quarter. Real quickly, just when you think about transmission spend and the CapEx change at ATC, can you frame how much of the near-term, meaning the next two to three years, has changed relative to what was prior – previously in the public domain? J. Patrick Keyes - Chief Financial Officer, Director & Executive VP: There's very little change. I mean, when you look at 10-year plan to 10-year plan, Michael, there's really very little change in the frontend. I'm sure you've seen these – if you look at the 10-year estimates, the previous estimates were in the range of $3.3 million to $3.9 million. The new estimates are in the range of $3.7 million to $4.5 million. So over a 10-year period, they're talking about somewhat more capital spending. But in the very short term, which I think was the source of your question, two years to three years, not seeing a heck of a lot of change, which is kind of what you would expect, because these projects take a long time to get approved and then they're typically multi-year in nature. Michael Jay Lapides - Goldman Sachs & Co.: And when you think about the next two to three, three to four years at ATC, how much of those projects have already received siting, already received permitting, are kind of close to shovel-ready or are virtually shovel-ready now? Allen L. Leverett - President & Director: Well, I would say anything two years out is virtually... Gale E. Klappa - Chairman & Chief Executive Officer: Done, yeah. Allen L. Leverett - President & Director: ...is already – you've gone through the approvals, because again going back to what I said, the projects are typically multi-year. And then as you get farther and farther out obviously, less and less would already have gone through the regulatory process. Michael Jay Lapides - Goldman Sachs & Co.: Got it. Gale E. Klappa - Chairman & Chief Executive Officer: Yeah. Allen is exactly right. If you think about the gestation period on some of these larger projects, they can be – from conceptual, design to approval, they could be five years. So, I think you could clearly conclude what Allen is saying that the next couple of two, three years, virtually everything they've included is largely through the approval process. Michael Jay Lapides - Goldman Sachs & Co.: Got it. And when you're looking at demand on the gas utility side, how different do you see demand, or how much do you expect demand to differ in Wisconsin relative to Illinois and some of the other Integrys service areas? Gale E. Klappa - Chairman & Chief Executive Officer: Well, I would expect, given normal weather conditions, demand in Wisconsin and Minnesota and, to some extent, Michigan to grow more strongly than Illinois simply because there's just not a lot of propane use in the City of Illinois. By contrast, Wisconsin, Michigan and Minnesota are three of the 10 heaviest using – heaviest propane using states in the U.S. And, for example, in Minnesota, recently, there was legislation passed that in essence reduces the upfront hook-up cost for customers to switch over to the natural gas delivery network that allows more of those capital costs to be basically put into rate base as opposed to the individual customer having to pay more or hooking into the system, and that was done because of the very significant concern in Minnesota about what happened in 2014 during the polar vortex with propane supplies. So, we would expect Wisconsin, Minnesota and Michigan, in terms of gas demand and growth in gas customers, to be stronger. Michael Jay Lapides - Goldman Sachs & Co.: Got it. Thanks, guys. Much appreciated. Gale E. Klappa - Chairman & Chief Executive Officer: You're welcome. See you in Florida, Michael. Michael Jay Lapides - Goldman Sachs & Co.: Sounds great.

Your final question comes from the line of Paul Ridzon with KeyBanc. Please go ahead. Gale E. Klappa - Chairman & Chief Executive Officer: Hello, Paul. How are you today?

Well, Gale. Yourself? Gale E. Klappa - Chairman & Chief Executive Officer: We're doing well. (46:04).

Oh, yeah. You got me, I'm not going to go there, okay? Now, that you've had kind of a few months to digest the transaction, can you kind of give us an update on maybe what you're seeing as potential synergy opportunities? Gale E. Klappa - Chairman & Chief Executive Officer: Well, let me start by saying that we really have not had any major negative surprises. Essentially, I think we did a good job of due diligence in what we're seeing in terms of the best practices, in terms of driving costs down, in terms of more efficient operations. I think all the potential we saw is really there. So, I would first say the one upside for the past 120 days is the clear identification of infrastructure upgrades beyond what we thought in our due diligence and that led to what I discussed about the higher capital spending on rate base opportunities here in the latter part of the decade. In terms of cost reductions, remember this transaction was far more about growth than about cost reductions. The cost reductions we have estimated basically will be needed in any given year to help us make sure we earn our allowed rates of return. So, again, I don't want to make – I want to make sure that no one is thinking that there are going to be huge cost savings that are then going to somehow result in earnings above the allowed rates of return. That's not the plan, and that's not what we're seeing. I will say this, though, I think long term, there will be significant and tangible savings. There's no question about that. And even in Wisconsin, let me reiterate what we said earlier, and that is over the next 10 years, I see in a combination of capital cost savings and O&M savings, at least $1 billion of cost savings. Again, that's a combination of capital and O&M. And the first tangible result of that was when we were able to – with the Commission's approval, we were able to take off the table the need for Wisconsin Public Service to build a Fox 3, which was a combined cycle natural gas unit that had been planned. And that's a $600 million investment that we can postpone for a very long time. So that's a tangible savings for customers right there. We will see, over time, for example, in just having to build only one, and it's being built by Integrys right now, only one new major customer information and billing system, the project is called ICE, and those projects are about $120 million, $150 million a pop. Well, we're only going to need to build one of them, and that's being built right now. So, you can see all across our operations how we can drive cost savings over time. I hope that responds to your question.

It does. And can you – for a while, it seemed as though mining frac sand had some upside to it. What's the status of that industry? Gale E. Klappa - Chairman & Chief Executive Officer: We have about 110 frac sand, mining or processing operations in the Western part of Wisconsin. That is up from literally 10, five years ago. So that industry literally has just burgeoned over the course of the past five years, 10 to 110. Now, those 110 operations because of the price of oil, and lesser demand for frac sand, those operations are down. I think we're seeing about – of those we are serving today with natural gas, about an 11% decline this year in their natural gas demand. However, we were not serving anywhere near all of those 110 operations because we didn't have the infrastructure backbone to support that. I mentioned earlier, that our West Central Gas expansion project is now complete; that 85-mile line. That will allow us to sign up more of those operations. So, we're going to see growth in the therms that we deliver to that industry in Western Wisconsin over time, simply because we weren't serving that many of them during the boom times. As I said, they are down about 11% in terms of therms now, but we're going to be serving more of them, now that we have completed the West Central line. In fact, one of the major frac sand operators has just signed a contract with us to switch over from propane to natural gas. And remember, the ones we're not serving now are basically drying their sand with propane and their preference would be to move to less costly, more predictable natural gas. Does that respond to your question?

Perfectly. And then, lastly, just on the fresh look on main replacement, which way do you think that $8 billion number goes? Gale E. Klappa - Chairman & Chief Executive Officer: When we have a firm number and file it on November 30, you'll be the first to know.

I look forward to your call. Gale E. Klappa - Chairman & Chief Executive Officer: Terrific. Thank you very much.

Thank you.