Good afternoon, and welcome to WEC Energy Group's Conference Call for Second Quarter 2018 Results. This call is being recorded for rebroadcast and all participants are in a listen only mode at this time. Before the conference call begins, I remind you that all statements in the presentation other than historical facts are forward looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10 ks and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions, 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 information, financial, is posted at wecenergygroup.com. A replay will be available approximately 2 hours after the conclusion of this call. And it is now my pleasure to introduce Gail Quatha, Chairman and Chief Executive Officer of WEC Energy Group.
Hot town, summer in the city. Good afternoon, everybody. Stroke that he suffered last October. Alan remains in very good physical condition, and he continues to be engaged in intensive speech therapy. He's really working hard.
In fact, Alan has engaged in more than 700 hours of speech therapy in the past 9 months, and he has continued to make progress. Now many of you have asked about our succession planning in the event that Alan can't or chooses not to return as CEO. As I mentioned to you on our last call, we conduct rigorous succession planning discussions with our Board on a regular basis, and we've done so for many years. So I can assure you that we have a solid plan B in place if Alan does not assume his previous role. The plan would involve a number of internal promotions.
We would have great continuity going forward, and the Board and I are very comfortable with what I call Plan B. We will continue to monitor the situation during the Q3 this year, and we'll certainly keep you up to date on any new developments. Now I'd like to introduce the members of our management team who are here with me today. We have Scott Lauber, our Chief Financial Officer Jim Przybylski, our Treasurer Bill Dutt, Controller Peggy Kelsey, Executive Vice President and General Counsel and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations. As you saw from our news release this morning, we reported Q2 earnings of $0.73 a share.
This compares with $0.63 a share for the Q2 last year. Our results were bolstered by effective cost management, stronger natural gas sales during a cool spring, and a warm start to summer that drove electricity use above our forecast. In addition, a stronger economy across the region resulted in slightly higher demand for energy from our industrial customers. Scott will provide you with more details in just a few minutes, but I will say that one of the striking conclusions from our first half results is the significant increase in weather normalized demand for natural gas, up 5.4% year to date. Now let's take a brief look at the economic conditions in our region.
Wisconsin's unemployment rate declined to 2.8% in May, a record low for the state. Unemployment ticked up slightly to 2.9% in June, but we have now recorded 5 consecutive months with the unemployment rate under 3%. That, folks, has never happened before in Wisconsin history, and we continue to see positive economic development news across the state as well. On June 28, Foxconn Technology Group held a groundbreaking ceremony for its $10,000,000,000 high-tech manufacturing campus that will be located in Racine County, just south of Milwaukee. Excavation work is already well underway.
The plan is to move 4,000,000 cubic yards of soil. And to put that in perspective, the soil removed from the excavation site would wrap completely around the equator if you pile the soil approximately 1 foot wide by 1 foot high. Next month, construction also will begin on the first building of this 22,000,000 square foot project. In addition, Foxconn has purchased an office building in Milwaukee for its North American headquarters, and the company recently announced that it will expand its operations with innovation centers in Green Bay and Eau Claire, pretty cool stuff. And just this past week, the Wisconsin Commission approved the building of a new transmission line that will be needed to strengthen the network for a number of customers including Foxconn in the southeastern part of the state.
American Transmission Company plans to invest approximately $117,000,000 in the project. I might add that we're also making some very promising investments. On June 28, we announced an agreement to acquire an 80% ownership interest in the Bishop Hill III Wind Energy Center that's located in Henry County, Illinois. The wind farm was developed by Invenergy. It was just placed into service in May.
Bishop Hill consists of 53 General Electric turbines with a capacity of 132 megawatts. Our 80% share of the investment will be approximately $148,000,000 The project has a 22 year offtake agreement with 1 of our current wholesale power customers, WPPI Energy. So this investment really is a logical extension of our core wholesale power business. WPPI based in Sun Prairie, Wisconsin has been a significant wholesale customer of ours for years, and we're pleased to extend that relationship with a new efficient renewable asset that exists within the MISO footprint. Under the new tax rules, our investment in Bishop Hill will qualify for production tax credits and for 100% bonus depreciation.
We expect our return on this investment will be actually higher than our regulated returns. We're projecting an unlevered internal rate of return above 8%. We filed for approval from the Federal Energy Regulatory Commission earlier this month and expect to close on the investment in October. As always, we'll keep you updated as developments unfold. Now for a brief update on our planned investment in the Upstream Wind Energy Center.
Back in mid June, you recall, we filed with the Federal Energy Regulatory Commission for approval to purchase an 80% ownership interest in this project. As a reminder, the wind farm is located in Antelope County, Nebraska and consists of 81 GE wind turbines with a capacity of approximately 200 megawatts. Our share of the total purchase price is expected to be $280,000,000 The project has a long term 10 year offtake agreement with an affiliate of Allianz, which as you know is an A rated publicly traded company. We expect to close on the purchase in early 2019 after construction is complete. Now for those of you who follow the details of our capital investment plan, you'll recall that we're also proposing to add utility scale solar generation to our portfolio of regulated assets.
On May 31, our Wisconsin Public Service subsidiary along with Madison Gas and Electric filed a joint application with the Wisconsin Commission to purchase 300 megawatts of solar generation at 2 locations. The Badger Hollow Solar Farm will be located in Southwestern Wisconsin in Iowa County and will be developed by Invenergy. The Two Creeks solar project will be located in the city of Two Rivers, that's in Northeastern Wisconsin near the Point Beach Nuclear Power Plant. The Two Creeks project is being developed by NextEra Energy Resources. Our Wisconsin Public Service subsidiary will own 100 megawatts at each site with an investment of approximately $260,000,000 Pending regulatory approvals, construction for both projects is expected to begin next spring with commercial operation by the end of 2020.
Over the past few years, as many of you have followed, utility scale solar has increased in efficiency and prices have dropped by nearly 70 percent, making it a cost effective option for our customers, an option that also fits well with our summer peak demand curve and with our plan to significantly reduce carbon dioxide emissions. As we continue to make these renewable investments and retire older, less efficient coal fired generation, we expect to achieve our goal of reducing carbon dioxide emissions by 40%, well in advance of our 2,030 target. And today, I'm pleased to report that we're taking our efforts a step further. We set a new long term goal for carbon dioxide emissions. Our goal is an 80% reduction in CO2 emissions below 2,005 levels by the year 2,050.
You can learn more about our plans to We'll be releasing that report tomorrow morning. We'll be releasing that report tomorrow morning. Now an update on the outcome of tax reform in Wisconsin. In late May, we received a final written order from the commission. For electric customers of We Energies, 80% of the tax benefit will be used to reduce the regulatory asset from transmission costs that we've already incurred but not yet billed to customers.
The remaining 20% will be refunded to customers in the form of bill credits. For electric customers of Wisconsin Public Service, 40% of the tax benefit will be used to offset several regulatory asset balances and 60% will be refunded in the form of bill credits. For our natural gas customers in Wisconsin, the full amount of the tax savings will flow to customers through bill credits. We believe these were thoughtful, balanced decisions by the commission. Wisconsin customers began seeing their bill credits this month.
Now with these decisions, tax reform treatment in our largest jurisdictions has now been finalized, and all decisions across our four state area are in line with what we expected. Turning now to Illinois. We continue to make real progress on the Peoples Gas System Modernization Program. This program is critical to providing our Chicago customers with a natural gas delivery network that is modern, safe and reliable. We're on track to invest approximately $290,000,000 in the effort during 2018, and the overall project is now approximately 25% complete.
Now an update on our operations in Minnesota. In mid October last year, Minnesota Energy rate case with the Minnesota Public Utilities Commission. Interim rates are currently in place and hearings on the case were held in mid July. We expect the final commission decision by year end. I would add that we're also making excellent progress on our gas expansion project in the Rochester area where the Mayo Clinic is growing rapidly.
We've completed the first phase of a multiyear plan to strengthen and expand our infrastructure for natural gas delivery and the 2nd phase, installing a new high pressure system is on budget and well underway. Next, we'll turn to Michigan. As a reminder, we obtained final regulatory approval last October for the construction of new natural gas fired generation in the Upper Peninsula. Procurement is 67% complete and construction stands at 21% complete. Our plan is to bring the new units into commercial service by the Q2 of next year, that's 2019, and at that time or soon thereafter, we expect to retire our coal fired power plant at Presque Isle.
We're investing about $266,000,000 in 10 reciprocating internal combustion engines or as we call them, RICE units. They'll be capable of generating a total of 180 megawatts of electricity. These units, which will be owned by one of our Michigan utilities, Upper Michigan Energy Resources, will provide a cost effective long term power supply for customers in Michigan's Upper Peninsula. And just one final note on the quarter. In May, Corporate Responsibility Magazine recognized us again for our environmental, social and governance practices and named us one of the 100 best corporate citizens in the United States.
Now with details on our second quarter our outlook for the remainder of the year, another good corporate citizen, our Chief Financial Officer, Scott Lauber. Scott?
Thank you, Gail. Our 2018 Q2 earnings of $0.73 per share were $0.10 per share higher than the Q2 of 2017. These favorable results were largely driven by higher sales volumes and continued effective cost control. Cooler than normal spring temperatures led to higher natural gas sales and electric sales were helped by a warm start to summer. We estimate that sales driven by weather and strong economy contributed approximately $0.07 to the quarter compared to our expectations, with approximately $0.04 of that related to weather.
The earnings packet placed on our website this morning includes of 2nd quarter and year to date results for 2018 2017. My focus will be on the quarter, beginning with operating income by segment and then other income, interest expense and income taxes. Referring to Page 9 of the earnings packet, our consolidated operating income for the Q2 of 2018 was $330,800,000 compared to $362,200,000 during the Q2 of 2017, a decrease of $31,400,000 Excluding 2 tax items totaling $66,500,000 operating income actually increased $35,100,000 The first tax item reflects the benefit of tax repairs, which was part of our Wisconsin rate settlement. And the second item relates to the 2017 federal tax legislation. We have a breakout of these items for your reference on Page 78 of the earnings package.
Recall that as part of our Wisconsin settlement, we agreed to utilize the benefits of tax repairs to offset the growth of certain regulatory asset balances. The plan is proceeding as expected. And then regarding the benefits of tax reform, we currently project that the transmission escrow balance at Wisconsin Electric will be reduced from approximately $220,000,000 to $40,000,000 or less by the end of 2019. Excluding the impact of these tax items, operating income increased $35,100,000 By segment update, we'll focus on this $35,100,000 increase in operating income as shown on Page 9 of the packet. Starting with the Wisconsin segment, the increase in operating income net of the tax related adjustments was $22,600,000 Higher sales volumes drove $26,400,000 increase in margins.
In Illinois, operating income increased $1,000,000 net of tax adjustments. The increase was primarily driven by continued investment in the Peoples Gas System Modernization Program. The remaining increase in operating income at our other states segment was about $4,000,000 largely driven by cooler than normal spring weather conditions. Turning to our non utility infrastructure segment. Excluding the impacts of tax reform, operating income at this segment increased by $6,300,000 Remember that this segment contains the operations of Bluewater Natural Gas Holding, which was acquired on June 30 last year as well as WePower.
Bluewater Natural Gas Holding contributed $5,700,000 to the increase in operating income in the Q2 of 2018. The operating loss at our Corporate and Other segment was $6,500,000 for the Q2 of 2018, an improvement of $1,200,000 compared to the Q2 of last year. Combining these changes and excluding the 2 tax items, as I discussed, operating income increased $35,100,000 Earnings from our investment in American Transmission Company totaled $28,700,000 a decrease of $13,100,000 as compared to the Q2 of last year. Excluding the $9,400,000 impact from tax reform, our equity earnings decreased $3,700,000 driven by a charge recorded at ATC related to the final resolution of a FERC audit. Other income net increased by $18,300,000 quarter over quarter.
This was due primarily to a decrease in the non service cost component of our pension and benefit plans. Historically, this item was reflected in operation and maintenance expense. However, a new accounting rule required it to be reclassified to other income in both years. Our net interest expense increased $6,600,000 quarter over quarter, primarily by continuing capital investment and higher interest rates. Our consolidated income tax decreased 64 $7,000,000,000 As previously discussed, lower tax expense was driven by the impact of tax reform and the flow through of tax repairs.
We now expect our effective income tax rate will be between 15% 16% this year. Excluding the benefits related to tax repairs, we expect the effective tax rate would be between 22% 23%. Now as you may recall, that we had been expecting to become a cash taxpayer this year. However, based on our latest forecast, we don't expect to pay cash taxes until the end of 2019. This change is largely driven by the benefits of bonus depreciation from our investment in Bishop Hill and upstream wind projects.
Combining all of these items brings us to earnings of $231,000,000 or $0.73 per share for the Q2 of 2018 compared to earnings of $199,100,000 or $0.63 per share for the Q2 of 2017. Looking at the cash flow statement on Page 6 of the earnings package. Net cash provided by operating activities increased $246,500,000 during the 1st 6 months of 2018. Recall that we made $100,000,000 contribution to our pension plan in the first half of twenty seventeen. Higher earnings and a reduction in working capital also contributed to the increase in cash provided by operating activities.
Our capital expenditures totaled $915,500,000 during the first half of twenty eighteen, a $125,500,000 increase compared to the same period in 2017 as we continue to execute on our capital plan. Our adjusted debt to capital ratio was 51.5 percent at the end of the second quarter, a decrease from the 52.5% at the end of 2017. Our calculation continues to half of the WC Energy Group 2,007 subordinate notes as common equity. We are using cash to satisfy any shares required for our 401 plans, options and other programs. Going forward, we do not expect to issue any additional shares.
We continue to expect the FFO to debt to be in the range of 16% to 18%. We paid $348,700,000 in common dividends during the 1st 6 months of 2018, an increase of $20,400,000 over the same period last year. Higher dividends were driven by the 6.25 percent increase in the dividend level compared to the first half of twenty seventeen. Moving to sales, we continue to see customer growth across our system. At the end of June, our utilities were serving approximately 10,000 more electric and 15,000 more natural gas customers than they did the same time a year ago.
Retail electric and natural gas sales volumes are shown on a comparative basis on page 1314 of the earnings package. Overall, retail deliveries of electricity for our Wisconsin and Michigan utilities, excluding the iron ore mine, are up 2.9% for the quarter and on a weather normalized basis, retail deliveries were up 1.7%. Natural gas deliveries in Wisconsin increased 18.2% versus the Q2 of 2017. This excludes gas used for power generation. Natural gas deliveries in Wisconsin grew 6.6% on a weather normalized basis.
Weather normalized electric and gas sales volumes were above our expectations for the first half of twenty eighteen. Finally, an update on our earnings guidance. Due to our favorable year to date results, we are raising full year earnings guidance to $3.32 per share assuming normal weather for the remainder of the year. And we are reaffirming our long term earnings per share growth of 5% to 7%. As you recall, our long term growth rate is based off the midpoint of our 2017 earnings guidance of $3.09 a share.
We expect our Q3 2018 earnings per share to be in the range of $0.68 to $0.70 That takes into account July weather and assumes normal weather for the rest of the quarter. With that, I'll turn things back to Gail.
Scott, thank you very much. We're still standing and we're focused on delivering value for our customers and our stockholders. Operator, we're ready now for the question and answer portion of the conference call.
Now we will take your questions. The question and answer session will be conducted electronically. Your first question is from the line of Greg Gordon with Evercore ISI.
I'm good, Gail. Cancel your Christmas plans because it's Packers Jets 1 o'clock on December 23 in Meadowlands and
I'll be there. I'll be there. I'll be there.
Couple of questions. Can you talk a little bit about the success you've had in executing these infrastructure investments outside the core utility? It strikes me that these returns look very good and that may be in part to a competitive advantage you have because you're one of the few utility holding companies left with tax appetite that's able to actually transact on wind farms and consume those attributes. But then you also just articulated a slight move out in when you're a cash taxpayer. So can you just frame up why this is a good opportunity for you?
And you've scoped it at sort of 8% of your total capital over the current 5 year plan. Is there a chance that that grows? Is that about where you think you're going to end up? That's my first question.
Yes. Good questions, Greg. Appreciate you asking. I mean, first of all, you may recall when we rolled out our new 5 year capital plan late last fall, right before the EEI conference, we introduced this energy infrastructure category and we put about $900,000,000 into that category out of an $11,800,000,000 total capital budget. So yes, it's roughly 8%, 9% of our total capital spending.
Since then and given some of the impacts of tax reform, given the fact that other companies in the industry are finding themselves in a position to sell assets, I think we do have a competitive advantage. I mean, first of all, our balance sheet is strong. We don't have to issue equity to finance this $11,800,000,000 capital plan, and we do have the tax appetite. So when you look at the whole array of opportunities that we're seeing in the marketplace, actually, Greg, the opportunities that we're seeing, 2 of which we've obviously just announced in the last couple of months, the opportunities that we're seeing to basically acquire high quality assets that don't change our risk profile, those opportunities are greater than we thought they would be back last fall. Again, it's a small percentage of our total capital budget.
When we roll out the new 5 year plan this fall, if I were a betting man, I would think we would increase that the amount devoted to that particular segment a bit. But again, keeping all this in perspective, we're being opportunistic with good high quality assets here. But the driver, I mean, this is a great opportunistic situation for us, but the driver is still core investment in our regulated businesses. I hope that helps, Greg.
Yes, it definitely does. And my second question is just with regard to the evolution of the Foxconn project. You guys in your last sort of formal update said you thought that would be a $10,000,000,000 projects and create 13,000 direct jobs and about 22,000 indirect jobs throughout the state. But when I talk analysts who focus 100% of their time on the semiconductor industry, like there's just a debate there as to what type of facility actually gets built, whether it's a facility that is a Gen 6 fab or a Gen 10 fab and is Corning going to co locate a gas facility in the state or not because that would be the gating factor towards the larger 10.5 facility. So can you give us a sense of whether you're still confident that those round numbers reflect the commitment to dollars invested in jobs or whether there's some sort of a bid ask spread in terms of what they ultimately build in terms of what types of products they're building, whether it's smartphones or TVs and whether that means it's less jobs, more jobs, etcetera?
Yes. Great questions, Greg. Let me answer it 2 ways. I mean, obviously, I've been very involved in this project personally. And within the last 2 weeks in a meeting with Foxconn senior people, they strongly reiterated their commitment to a $10,000,000,000 investment and the hiring of 13,000 jobs.
They also, when President Trump came for the groundbreaking ceremony on June 28, they made a public commitment a $10,000,000,000 investment and 13,000 jobs with the President standing right there. So what they are saying is that the mix of products that they're thinking of producing here changes as their assessment of the marketplace changes. So they may build something a hair different than their original projections, at least that's what they're telling us. But in terms of their ultimate commitment of a $10,000,000,000 investment and 13,000 jobs, that remains staunchly unchanged and remains firmly in place. And when you see the 100 of 1,000,000 of dollars that are already being spent, and the gigantic amount of earth that's already being moved, I think it brings all that to reality, Greg.
Great. That's very clear. Thanks, Gail. Have a great day.
You too. Take care, Greg.
Your next question is from the line of Julien Dumoulin Smith with Bank of America. [SPEAKER
JULIEN DUMOULIN SMITH:]
Hey, good afternoon. [SPEAKER JULIEN DUMOULIN
SMITH:] Greetings, Julien. How are you today?
Good. Thank you very much. So perhaps just to turn to the more regulatory side of things. Can you discuss a little bit how the legislative mechanism passed in terms of settlements kind of changes your process in terms of the next rate case? I mean that both in terms of going into the next rate case filing itself as well as just subsequently through it.
Just
question. And I think I would answer that 2 ways for you, Julian. First of all, it really does not change our fundamental approach to a rate filing or to discussions about a rate settlement. What I think the legislation does do is makes it easier and clearer for the commission to accept a non unanimous settlement. And that's the real key here in that legislation.
There was some debate when we went through the last rate settlement, as you recall, which we're now in a rate freeze going on 4 years. There was some debate about whether or not the Public Service Commission had the statutory authority to vote on and approve a settlement that was not completely unanimous among all the parties. This legislation that was passed makes it clear that they can vote on and can decide on a settlement that is not joined by every single party. So I think that's the big difference that the legislation has enabled.
Excellent. All right. And turning back to a couple of little nuance y things. First, with what you mentioned to Greg here, the wind investments, just can you elaborate a little bit more as to why they're better? And also, I suppose implicitly, you continue to have appetite given that you still have 2020 onwards tax appetite?
And actually late 2019 onwards, yes. And what Julian, why they're better than what?
Well, the unlevered 8%, that sounds better than what you would get on a kind of traditional utility basis.
Yes. No question. We're seeing in both these investments that we've announced, we're projecting given the contracts and the details of the contracts, we're projecting better IRRs than you would see in a normal regulated investment. And also because both of these wind projects are eligible for 100% bonus depreciation, the cash return is very significant. So I think, again, given the overall conditions in the industry with a number of companies trying to repair their balance sheets, where we can be opportunistic because of the strength of our balance sheet and our tax appetite, we're seeing very solid projects that don't change our risk profile.
And so we intend to continue to look very carefully at projects in front of us and be opportunistic with something that we think will benefit our shareholders with a portion of our capital spending. Scott, anything to add?
No, you hit it right on the head, Gail. The tax appetite really does help bring that project, getting that cash back from bonus depreciation early on.
Excellent. And to that point actually just to clarify this, I mean the STLRITC, the commenced construction safe harbor, I mean is that still too early to ask you about implications given the tax upside you all have and obviously, your interest at least on the utility side for solar?
Well, it probably if you think about the non utility side, it probably gives us a little longer runway to look at projects. On the utility side, what we propose and what we will propose actually fits under the prior time frame for the tax credits. So I don't think it would change anything on the utility side necessarily. I think it gives us a little bit longer runway on the non utility side if we make some solar investments on that in that part of the business.
Your next question is from the line of Michael Weinstein with Credit Suisse.
Hi, guys.
Michael, when do we get our gig on Fox Sports?
I'm ready to go.
I'm ready to move out there. Let me know when you're ready.
All right.
Can you just talk about how much of the increase in guidance is due to weather and or one time in nature?
I think Scott gave you a nice quick breakdown of that in his prepared remarks. Scott?
Well, when you look at the weather for the quarter, I mean, the weather was about $0.04 and the rest is growth. So we raised the top end of the guidance $0.02 really reflecting a combination of the growth that we're seeing and along with the weather. But we didn't raise it any more than the $0.02 because we do have some projects, some maintenance projects that we're looking at for the fall of this year, including some forestry and maintenance that was above and beyond last year expenses and also a little headwind on fuel coming up.
Right. So this is why the guidance is still based on 2017. It's not really the long term guidance, right? It's
not the 'eighteen
number. Yes. And Michael, I think you can look forward, I mean, historically, in the fall, when we've unveiled a new 5 year capital spending plan, we also give you some sense of what our of updating and rebasing our long term earnings growth rate. And so I think you'll see us do that on the next quarter's call as well.
Great. And also the increase, the new goal of 80% by 2,050, when can we expect to see that start to be reflected in forward capital plans?
Well, we already have a very good question. We already have a capital plan in place that gets us probably by about 2023 to the 40% reduction. Remember, our first target was a 40% reduction below 2,005 levels by the year 2,030. The capital plan that we're executing now actually gets us there in terms of that 40% reduction by about 2023. So then heading toward a 2,050 goal of 80% reduction, I think you can start we can start seeing some of that capital being injected into our plan 2024 and beyond.
Your next question is from the line of Steve Fleishman with Wolfe Research.
Hi, Steve. How are you?
Good, Gail. How are you doing?
Doing fine.
I was curious your thoughts, one of your neighboring utilities just worked out a deal, the Orion deal, Duane Arnold with NxThera with the nuclear. And you obviously have maybe somewhat similar situation with different circumstances. So could you maybe give a take on whether something like that might make sense for you guys with Point Beach?
Sure. I'd be happy to. First of all, I think you're right. The circumstances are a bit different between the two utilities. If you think about our power supply coming from Point Beach, and right now, we have a contract in place for all of the output of the 2 Point Beach units for the remainder of their lives, which looks like 2,030 and 2,033 for the 2 units.
So the first unit would retire in 2,030, the second at the end of 2,030 3. Those Point Beach units are producing about 22% of our total power supply for our retail customers. That's a very significant portion of our of the energy we're delivering. And of course, it's carbon free and it's dispatchable and basically runs, as you know, as a baseload unit 20 four 7. So it runs and dispatches carbon free energy regardless of whether the sun is shining or whether the wind is blowing.
So it's a very important component today of our power supply and of our ongoing efforts to reduce carbon emissions. So you never say never in terms of doing a buyout like what our one of our other utility friends has done. But at the moment, I don't see that in our future in part because it's a little bit different situation in terms of the magnitude of the power supply we're getting from Point Beach. I hope that responds, Steve.
Yes, that's great. And just want to go back to a prior question. So on your next quarter call, you plan to refresh the long term capital plan and the long term growth rate?
Yes, yes. Because that will
be right before the EI meeting where we can dive into great detail with you and yes, that's our plan.
Okay. Okay. Thank you.
Great. Thanks, Steve.
Your next question is from the line of Praful Mehta with Citigroup.
Hi, guys. Good afternoon.
Hi, Praful. How are you?
Good. So I think you made a point on the call to talk about load growth or sales growth, especially on the gas side. So I wanted to get a little bit more perspective on what's driving that. And secondly, does that is that a sustainable kind of growth level that will give you more headroom to kind of increase CapEx? How should we think about that?
Well, it's a great question and it has been one of the positive upside surprises for us. Really over the last 3 years, if you look at and we try to weather normalize, but you've heard me say before, there are real deficiencies in how our industry weather normalizes sales. So I'm always reluctant to talk about 1 quarter of weather normalized data, but we now have 2.5 years of weather normalized data, which is showing real continued growth in gas deliveries and customer use of natural gas. I think, Scott, we were up like 3.7% and then another 3.7%. So you talk about 'sixteen and 'seventeen being about 3.7% increases on a weather normal basis.
And then as you heard Scott and me say, we had a robust growth in weather normalized demand in the first half of this year. So it's very hard to tell whether or not that trend will continue. But clearly, the trend has exceeded our expectations. And when you look at and Scott and I really dove into this in great detail the other day. When you look at to try to answer the question, what is driving this demand for natural gas beyond our expectations?
And it's not just one sector. It's like every sector we looked at was green. Every sector we looked at was showing significant increases. So that combined with customer growth, I mean, we're serving about 15,000 natural gas customers, more than what we were serving at this time a year ago. So I don't want to be overly optimistic here, but what we've seen for the last basically 10 quarters certainly would indicate that there is some other trend going on here, which we haven't seen before, driving natural gas usage higher.
Now what that means for capital spending? I mean, obviously, we will take a hard look as we always do as we roll out our new 5 year plan, And you may see some modest increase in capital spending on the gas side simply because of the infrastructure needs. And for example, we've already applied to the Wisconsin Commission for 2 projects that would strengthen the natural gas delivery network in the Racine area where Foxconn is and many others are now beginning project work. We simply don't have a strong enough natural gas delivery network to handle all that demand in that part of the state. So there's another $140,000,000 of capital already that was not in our previous forecast.
I hope that's a long answer to your question. I hope it helps.
That is very helpful and a very interesting trend. So I would love to learn more on future calls as well. And for a second question, I just wanted to understand a little bit more on the taxes side. As you become a cash taxpayer in that 'nineteen, 'twenty timeframe, just wanted to understand what is the impact to the FFO? Like how much is the year over year impact at that point that you expect?
And the reason for the question is, I'm just trying to figure out the FFO to debt kind of trajectory impact of that change and how are you filling that gap? I'm assuming there's something else that's helping fill that FFO gap. So just a little bit of color on that would be helpful.
That's a good question. When you look and our assumptions are that we are partial taxpayers in 2019 and going forward factoring all in the production tax credit. So we're still at that 16 FFO to debt or a little bit north of that. So if we find other projects to have additional tax savings that would just increase us and put us higher in the FFO range.
That's the net effect of additional projects. It raises basically from say 16, it raises it higher, which is a good thing.
If you can get some additional tax bonus depreciation projects. Right.
Got you. That's very helpful. Thanks, guys.
You're welcome.
Your next question is from the line of Shar Pourreza with Guggenheim Space.
Hey, Shar, somebody told me a rumor that based on one of your mentors, you were starting to take Thursdays off now. Is that true?
I will not admit this on a public line. Just one quick around Foxconn and sort of the obviously the groundbreaking. The last discussions we had was, obviously the potential for rooftop solar in the 100 megawatt to 150 megawatt range. And I think there was some discussions around whether it would be technically feasible and whether it would pass building codes. Is there any sort of updates that you've had around with discussions around this potential?
Shar, what I can tell you and you've got a great memory. What I can tell you is, we are still in active discussions with Foxconn about the configuration of their electric service, the basic
Got it. And that, depending on how the active discussions go, that's something that would that be bid through an RFP process or would that be something that would naturally come to you guys?
Well, I guess there are 2 options. 1 would be a self build by Fox Con. The other would be that we would basically make the investment. And again, too early to really give you a concrete answer at this point, except other than everything's on the table and we're looking to how this best works for both parties.
Got it. That's helpful. And then just on is there any updates on incremental storage opportunities at the utilities?
Incremental gas storage opportunities?
That's right, yes.
No, other than that energy infrastructure category that we've developed, I mean, one of the range of options we look at for that category for potential investment is gas storage, but nothing new to report on that front today.
Okay, terrific. Thanks. I'm going to go take the rest of the day off. I appreciate it.
See you guys.
Your next question is from the line of Jonathan Arnold with Deutsche Bank.
They tell me, Jonathan, you never
take the day off.
All right.
Well, no, no, maybe not Thursday. So on the just a couple of numbers questions that we wanted to chase down. The other income line where you talked about the lower non service pension OPEB cost and it's affecting both years. It didn't seem like the 2017 17 number line changed this quarter whereas it did last quarter. So I'm just trying to get a sense of how big was that driver and what else was going on in the $18,000,000 there?
Yes, that's a good question. There's a lot of stuff that goes through the other income and deduction line here. And unfortunately, some of these items are being reclassed between O and M and this other line. So it gets really confusing. And when we manage the business, we really look at both of them together.
So last quarter, what also goes through here is a couple of items that swing between quarters like we have an investment in some deferred funds out there like it's a rabbi trust for some deferred comp and that also fluctuates between quarters. But year to date, this the reclass of this non service cost for the pension was the biggest number at about $10,000,000 on a year to date basis. So there's a variety of items that go both ways, including some miscellaneous interest income and the deferral related to our forward wind farm. When we put that into the rates in Wisconsin, we were allowed to defer a few of those costs to offset. And unfortunately that goes in this line also.
So there's a mixture of stuff in there, but this is the biggest item for the quarter
and for
the year to date that really came out.
That pension driver, you just said about $10,000,000 year to date. Was that actually a change or was it just the reclass?
It was a reclass out of O and M down here. The benefits last year, a couple of items of why the pension is down. The fund did well last year. The assets grew, so their earnings are better this year. The interest expense is down a little bit.
And we did combine some plans into the Medicare Plan A for some other post employment retirement plans. So there was some savings there also. Jonathan, what you're seeing in that category is a
lot of accounting noise. And you're going to see that quarter. There's just so many items that swing around. And then as Scott said, the new accounting rule required us to reclassify as well. So we try to strip all that out for you as best we can, so that you can see what's going on.
But it also masks all of these things also mask how we're doing on what I call true operation and maintenance costs. And we're still on target there. We said we would expect about a 3% to 4% decline in 2018 over 2017 through O and M and we're right on target to achieve that.
Great. That's helpful. Thank you. And then just one other thing, you'd mentioned this, you had some audit resolution at ATC. Was that a material item?
And is it just this quarter or was a material item? And is it just this quarter or was there some follow on there?
Yes. It's just a very small item for the quarter here. We just when you back out the tax reform stuff, it was negative and you don't anticipate it to be negative. So it was about $3,000,000 for the quarter.
Great. Thank you for that. Sorry for the detail.
No problem. Not at all. Good questions, Jonathan.
Your next question is from the line of Paul Ridzon with KeyBanc.
Good afternoon.
Hello. How are you? Can you
hear me?
I can, Paul. How are you?
Okay. Good. Just that last question. Is that what period was that audit related to?
Boy, it goes all the way back to 2,004, I think. It was a long period of time.
It was before the Internet. No, I'm kidding.
So it was sort of like 2,004 up through like 2015 or 2016.
And that was $2,700,000 you said?
It was a $3,000,000 hit for the quarter.
Okay. And then, Gail, you said when you give us a new CapEx deck, we could see more non utility infrastructure. Do you think that higher level would be incremental to your utility plan or are you going to pull some utility back and add the higher return non utility?
No, I think very good question. But what we're seeing in terms of the needed investment in our utility core infrastructure, I don't see us pulling that back because those projects are needed. So no, I wouldn't see a diminution, if you will. We're not going to take capital spending plan away from the core utilities to move it into this particular category. So if anything, there might be a bit of an upside, because I think what we're seeing here again in terms of our utility core investments, those are needed projects for reliability.
So that would stay steady as she goes. So you might see it, but I think you might see a bit of an uptick if the conditions we're seeing persist in the other category. And again to keep all this in perspective, today, it's like 8% to 9% of an $11,800,000,000 capital plan. But I think it again reflects the strength of the company that we can take opportunistic advantage of these kinds of good assets.
How much more can you grow the CapEx without issuing equity?
Well, we'll take a look at it, but and again, our plan is not to issue equity, but as your earnings grow and as you get bonus depreciation from some of these projects, it gives you some room. Yes.
And we track all the metrics that we talked about before, our FFO to debt and the holding company debt to total to get around that 30%. So those are our metrics that we're looking at.
Just I think you answered this one, Tom, I just want to make sure. Did you say you're going to rebase the 5% to 7% growth or reconsider the 5% to 7% growth?
No, rebase. I mean, right now, our 5% to 7% long term growth rate is based off, as Scott said, the midpoint of our 2017 original guidance. So as we move forward to another year on capital spending, we'll rebase our long term growth rate off a newer number.
But is the 5% to 7% up for reconsideration?
Based on everything we're seeing, no, I think 5% to 7% will stay intact.
Thank you for that clarification.
You're welcome. Good questions.
Your next question is from the line of Andrew Levi with Exoddis Point.
Hey, Gal. How are you doing?
I'm good, Andy. Are you Exoddis or Exodus?
Exodus. Exoddis for a millennium.
Oh, impressive. Yes.
So as I listen, I mean, and obviously as I've seen the last two quarters kind of in, the raise in CapEx, obviously what you're saying about refreshing everything at EEI and also most importantly in some ways looking at the top line growth that hopefully will continue into the Q3. It sounds like at the very least when you rebase and I assume I don't want to kind of preview that, but you'll kind of be towards the high end of your growth rate going forward, 6% to 7%. Is that the hope based on especially if you do get that top line growth?
Andy, stay tuned. We'll be happy to discuss in detail on the next call.
Okay.
I tried.
Thank you.
Yes, you did. Nice try, Andy.
Your next question is from the line of Shahriar Khan with Laurentian.
Pretty good and congratulations, great result. I wanted to know again, is there some way that one can translate like the sales growth in the gas businesses, I would say, tremendous. Is there some way to quantify that say, 2% growth in sales in gas equates to this much in earnings growth? Is there some kind of rule of thumb that one can apply to convert the sales growth into earnings growth?
Yes. Generally, we can do that. But I would caution you and Scott can we'll let Scott give you his rule of thumb. But I would caution you that we are somewhat earnings capped because we have sharing mechanisms in place for all three of our Wisconsin utilities, including Wisconsin Gas. Wisconsin Electric has a gas component and Wisconsin Public Service has a gas component.
So all things being equal, we can give you a rule of thumb, but anything above our allowed rates of return, we properly share with customers. So I would just throw in a word of caution in terms of just blindly using the rule of thumb because again, we're in a promised area that I think is very healthy for everyone where earnings above our allowed return of shares. Scott?
Yes. No, that's exactly correct, Dale. And when you look at sales, if you look at sales across all the sectors and you have about a 1% sales growth residential, small commercial and transportation in Wisconsin, that equals to about 0.75 dollars or $3,000,000 pre tax. So, it's about $3,000,000 pre tax for 1% growth in all the sectors.
Okay.
Okay. And so just on the point that you mentioned Gale, so I'm assuming this year you would be based on this really strong start to the year, you would be in the sharing mechanisms in all those territories. Is that a fair assumption?
Assuming normal weather and normal expenses that we're projecting going forward for the remainder of the year, yes, I would expect we would be in sharing in all three of the companies.
Thank you so much.
You're more than welcome. Great questions.
Your final question is from the line of Vadula Murti with Avon Capital.
Long time no talk to Vadula. How are you?
I'm well. Thank you very Couple of things. 1, going back to natural gas question. I mean, over a period of time, and I don't and I think this is true in Illinois, but I wasn't sure about Wisconsin about how trends had moved towards wanting to move increasingly to a larger fixed charge, less variable charge and moving increasingly to a decoupled model. And I'm wondering right now if you can remind me how decoupled or undecoupled you are in Wisconsin, which is helping, I guess, the uplift here and whether in fact going forward as you go through various rate cases, whether you want to whatever exposure you currently have, you'd like to maintain or whether you want to take this opportunity in fact to move even further into a decoupled scenario given at least what we've historically seen as long term natural gas trends?
Vedula, let me kind of tackle that in 2 elements. First of all, we'll talk about our largest gas delivery jurisdictions, Illinois and Wisconsin. In Illinois, there's been a decoupling plan in place for many, many years, and it works quite well. But Illinois is basically decoupled and I expect it will stay that way for decades to come. In Wisconsin, we are not decoupled.
And I really don't sense in terms of the regulatory backdrop here any big appetite to move toward decoupling at all. And frankly, I think the coupling can be a mixed bag. First of all, getting the details of coupling right is a big deal. They've done a good job of that in Illinois. Here, I think the growth we're seeing and the growth we continue to expect to see, that growth really aligns the company and its business plan with economic growth.
So for Wisconsin, I think we're going to continue to see treatment. I don't see us moving to decoupling, certainly not in the next rate case.
Okay. And to follow-up on Jonathan Arnold's question about all those cumulative accounting noise issues on pension, OPEB, etcetera. If I looked at the release and everything correctly, I think it was about $0.06 I think at least for this quarter, if that's correct, that was a positive benefit. And I'm just wondering how we then think about that as we roll forward terms of either normalization or sustainability, whatever it is?
Scott? Yes. And when you look at that and when we really factored all that is all that in, we were really looking at that as part of our O and M expenses and really consolidating it altogether. So the offset, when you do the math, it looks like O and M expenses is not down as far as you would think, and that's because some of these reclasses. So I really looked at them together, and I think together you have a good picture of where we are when we give the guidance on being down about 3% to 4%.
Yes, I think Scott's right. We kind of have to piece through the details of these two pictures, put it all back together and we're still on track for about the 3% to 4% decline that we had projected in O and M expenses compared to last year.
And 2 other last things.
1, in Illinois, if I'm not mistaken, there's a ROE adjustment mechanism based on levels of interest rates. And can you just remind me how that works, where you guys stand and when it get how that gets refreshed if we go into a higher interest rate environment in the future? And then I have one last question.
Vedula, I'll suggest you save that question for Exelon because in Illinois that rate adjustment tied to, I think, 10 year treasury rates applies only at this point in time to electric, not to natural gas.
Okay. That's good to know. And secondarily, in terms of the utility CapEx, the current plan for 11.8, I think you indicated that through the period, there is no net external equity in that DRIP and everything like that is basically able to be funded internally. If we roll forward, at what level of CapEx does that then start needing to, at least on the margin, need to have some marginal incremental equity for rolling at $11,800,000,000 over the current 5 years. I mean kind of where is like the line where you start thinking you may need something, is this like 13?
I'm just making up a number, but I'm just want to kind of get your sense of that.
Well, we'll have a lot more detail for you on the next call as we refresh the capital plan. Remember though, some of the investments we're making now push out the time frame in which we become a cash taxpayer, and some of these investments also give us 100% bonus depreciation. So you really need to put all of the elements in there, and pretty soon it's Ragu and it's all in there. But I can tell you this, I think we have some room because of the investments we're making for some increase in the capital plan over 5 years with no equity issuances, and our plan is no equity issuances. No DRIP, we don't need it.
The amount of outstanding shares we have today are going to be the outstanding shares we have tomorrow. Time you talk about it. You will. Thank you Vedula. You take care.
Well, folks, that concludes our conference call for today. Really appreciate you participating. If you have any other questions, feel free to call Beth Straka, and her direct line is 414-221-4139. Take care, everybody. Bye bye.