Good afternoon, 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 listen-only mode at this time. Before the conference call begins, a reminder that all statements in the presentation other than historical facts are forward-looking statements that involve risks and uncertainties that are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10-K and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated. During the discussions, 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 two hours after the conclusion of this call. It is now my pleasure to introduce Gale Klappa, Chairman and Chief Executive Officer of WEC Energy Group.
Hot town summer in the city. Good afternoon, everybody. Thank you for joining us today as we review our 2018 second quarter results. First, I know that all of you are interested in an update on Allen Leverett's recovery from the stroke that he suffered last October. Allen remains in very good physical condition, and he continues to be engaged in intensive speech therapy. He's really working hard. In fact, Allen is engaged in more than 700 hours of speech therapy in the past nine months, and he has continued to make progress. Many of you have asked about our succession planning in the event that Allen 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.
I can assure you that we have a solid plan B in place if Allen 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 third quarter of this year, and we'll certainly keep you up to date on any new developments. 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 Guc, 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 second quarter earnings of $0.73 a share.
This compares with $0.63 a share for the second quarter 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. 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 five consecutive months with the unemployment rate under 3%.
That, folks, has never happened before in Wisconsin history. We continue to see positive economic development news across the state as well. On June 28th, Foxconn Technology Group held a groundbreaking ceremony for its $10 billion 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 four million cubic yards of soil. To put that in perspective, the soil removed from the excavation site would wrap completely around the equator if you pile the soil approximately one foot wide by one foot high. Next month, construction also will begin on the first building of this 22-million-square-foot project. In addition, Foxconn has purchased an office building in downtown 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. 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 million in the project. I might add that we're also making some very promising investments. On June 28th, we announced an agreement to acquire an 80% ownership interest in the Bishop Hill 3 wind energy center that's located in Henry County, Illinois. The wind farm was developed by Invenergy and was just placed into service in May. Bishop Hill consists of 53 General Electric turbines with a capacity of 132 MW. Our 80% share of the investment will be approximately $148 million. The project has a 22-year offtake agreement with one of our current wholesale power customers, WPPI Energy.
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 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 million. 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. 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 two 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 million. 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%, 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 2030 target. Today, I'm pleased to report that we're taking our efforts a step further. We've set a new long-term goal for carbon dioxide emissions. Our goal is an 80% reduction in CO2 emissions below 2005 levels by the year 2050. You can learn more about our plans to achieve that goal in our corporate responsibility report.
We'll be releasing that report tomorrow morning. 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 the 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.
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 million in the effort during 2018, and the overall project is now approximately 25% complete. An update on our operations in Minnesota. In mid-October last year, Minnesota Energy Resources filed a 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 second phase, installing a new high-pressure system, is on budget and well underway. 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 second quarter 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 million 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. 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. With details on our second quarter and our outlook for the remainder of the year, another good corporate citizen, our Chief Financial Officer, Scott Lauber. Scott?
Thank you, Gale. Our 2018 second quarter earnings of $0.73 per share were $0.10 per share higher than the second quarter 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 a comparison of second quarter and year-to-date results for 2018 and 2017. My focus will be on the quarter, beginning with operating income by segment, then other income, interest expense, and income taxes.
Referring to page nine of the earnings packet, our consolidated operating income for the second quarter of 2018 was $330.8 million, compared to $362.2 million during the second quarter of 2017, a decrease of $31.4 million. Excluding two tax items totaling $66.5 million, operating income actually increased $35.1 million. 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 seven and eight 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.
Regarding the benefits of tax reform, we currently project that the transmission escrow balance at Wisconsin Electric will be reduced from approximately $220 million to $40 million or less by the end of 2019. Excluding the impact of these tax items, operating income increased $35.1 million. By segment update, we'll focus on this $35.1 million increase in operating income, as shown on page nine of the packet. Starting with the Wisconsin segment, the increase in operating income, net of the tax-related adjustments, was $22.6 million. Higher sales volumes drove $26.4 million increase in margins. In Illinois, operating income increased $1 million, 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 State segment was about $4 million, 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 $6.3 million. Remember that this segment contains the operations of Bluewater Natural Gas Holding, which was acquired on June 30th of last year, as well as We Power. Bluewater Natural Gas Holding contributed $5.7 million to the increase in operating income in the second quarter of 2018. The operating loss at our Corporate and Other segment was $6.5 million for the second quarter of 2018, an improvement of $1.2 million compared to the second quarter of last year. Combining these changes and excluding the two tax items, as I discussed, operating income increased $35.1 million. Earnings for our investment in American Transmission Company totaled $28.7 million, a decrease of $13.1 million as compared to the second quarter of last year.
Excluding the $9.4 million impact from tax reform, our equity earnings decreased $3.7 million, driven by a charge recorded at ATC related to the final resolution of a FERC audit. Other income net increased by $18.3 million 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. A new accounting rule required it to be reclassified to other income in both years. Our net interest expense increased $6.6 million quarter-over-quarter, primarily by continuing capital investment and higher interest rates. Our consolidated income tax decreased $64.7 million. 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% and 16% this year.
Excluding the benefits related to tax repairs, we expect the effective tax rate would be between 22% and 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 million, or $0.73 per share for the second quarter of 2018, compared to earnings of $199.1 million or $0.63 per share for the second quarter of 2017. Looking at the cash flow statement on page six of the earnings package, net cash provided by operating activities increased $246.5 million during the first six months of 2018.
Recall that we made $100 million contribution to our pension plan in the first half of 2017. Higher earnings and a reduction in working capital also contributed to the increase in cash provided by operating activities. Our capital expenditures totaled $915.5 million during the first half of 2018, a $125.5 million 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% at the end of the second quarter, a decrease from the 52.5% at the end of 2017. Our calculation continues to treat half of the WEC Energy Group 2007 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%-18%. We paid $348.7 million in common dividends during the first six months of 2018, an increase of $20.4 million over the same period last year. Higher dividends were driven by the 6.25% increase in the dividend level compared to the first half of 2017. 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 13 and 14 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 second quarter 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 2018. 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%-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 third quarter 2018 earnings per share to be in the range of $0.68-$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 Gale.
Scott, thank you very much. We're still standing. 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.
We will take your question. The question-and-answer session will be conducted electronically. To ask a question, please press star key, followed by the digit one on your phone. If you are using a speakerphone, turn off your mute function to allow your signal to reach our equipment. We will take as many questions as time permits. Once again, press star and then one on your phone to ask a question. Your first question is on the line of Greg Gordon with Evercore ISI.
Hey, Greg. How are you?
I'm good, Gale. Cancel your Christmas plans because it's Packers-Jets, 1:00 P.M. on December 23rd in Meadowlands.
I'll be there.
A couple 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, 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. You also just articulated a slight move out in when you're a cash taxpayer. Can you just frame up why this is a good opportunity for you? You've scoped it at sort of 8% of your total capital over the current five-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.
Good questions, Greg. Appreciate you asking. I mean, first of all, you may recall when we rolled out our new five-year capital plan late last fall, right before the EEI conference, we introduced this energy infrastructure category, and we put about $900 million into that category out of an $11.8 billion total capital budget. It's roughly 8%-9% of our total capital spending. Since then, 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 $11.8 billion capital plan, and we do have the tax appetite.
When you look at the whole array of opportunities that we're seeing in the marketplace, actually, Greg, the opportunities that we're seeing, two 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 five-year plan this fall, if I were a betting man, I would think we would increase the amount devoted to that particular segment a bit. Again, keeping all this in perspective, we're being opportunistic with good high-quality assets here. 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. Thanks. 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 billion project and create 13,000 direct jobs and about 22,000 indirect jobs throughout the state. When I talk to analysts who focus 100% of their time on the semiconductor industry, there's a debate there as to what type of facility actually gets built, whether it's 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.
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, et cetera?
Yeah. Great questions, Greg. Let me answer it two ways. I mean, obviously, I've been very involved in this project personally, and within the last two weeks in a meeting with the Foxconn senior people, they strongly reiterated their commitment to a $10 billion investment and the hiring of 13,000 jobs. They also, when President Trump came for the groundbreaking ceremony on June 28th, they made a public commitment to a $10 billion investment and 13,000 jobs with the president standing right there. 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. They may build something a hair different than their original projections. At least that's what they're telling us.
In terms of their ultimate commitment of a $10 billion investment and 13,000 jobs, that remains staunchly unchanged and remains firmly in place. When you see the hundreds of millions 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, Gale. Have a great day.
You too. Take care, Greg.
Your next question is from the line of Julien Dumoulin-Smith with Bank of America.
Hey, good afternoon.
Greetings, Julien. How are you today?
Good. Thank you very much. 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 want to understand that legislation and what it means exactly a little bit more clearly.
I appreciate the question. I think I would answer that two ways for you, Julien. 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. 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 four 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. I think that's the big difference that the legislation has enabled.
Excellent. All righty, turning back to a couple little nuancy 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? Also, I suppose implicitly, you continue to have appetite given that you still have 20 onwards tax appetite.
Actually late 2019 onwards, yes. Julien, why they're better than what?
The unlevered 8% that sounds better than what you would get on a kind of traditional utility basis.
Yes.
Yeah.
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. Also because both of these wind projects are eligible for 100% bonus depreciation, the cash return is very significant. 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. 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?
You hit it right on the head, Gale, with the tax appetite really does help bring that project, getting that cash back from bonus depreciation early on.
Excellent. To that point, actually, just to clarify this, I mean the solar ITC, the commence construction safe harbor, I mean, is that still too early to ask you about implications given the tax appetite you all have and obviously your interest at least on the utility side for solar?
Well, 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 timeframe for the tax credits. 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 in that part of the business.
Excellent. Thank you.
Thank you, Julien.
Your next question is on 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?
When you look at the weather for the quarter, I mean, the weather was about $0.04 and the rest is growth. 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. We didn't raise it any more than the $0.02 because we do have 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.
All right. This is why the guidance is still based on 2017. It's a long-term guidance, right? It's not.
Yeah, the long-term guidance.
the 2018 number. Yeah.
Michael, I think you can look forward, I mean, historically, in the fall when we've unveiled a new five-year capital spending plan, we also give you some sense of updating and rebasing our long-term earnings growth rate. I think you'll see us do that on the next quarter's call as well.
Great. Hey, also the increase, the new goal of 80% by 2050, when can we expect to see that start to be reflected in forward capital plans?
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 2005 levels by the year 2030. The capital plan that we're executing now actually gets us there in terms of that 40% reduction by about 2023. Heading toward a 2050 goal of 80% reduction, I think we can start seeing some of that capital being injected into our plan 2024 and beyond.
Okay, great. Thank you.
You're welcome.
Your next question is on the line of Steve Fleishman with Wolfe Research.
Hi, Steve. How are you?
Good, Gale. How you doing?
Doing fine.
I was curious your thoughts of one of your neighboring utilities just worked out a deal, the Alliant deal, Duane Arnold with NextEra with the nuclear. You obviously have maybe somewhat similar situation with different circumstances. Could you maybe give a take on whether something like that might make sense for you guys at Point Beach?
Sure. 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, right now we have a contract in place for all of the output of the two Point Beach units for the remainder of their lives, which looks like 2030 and 2033 for the two units. The first unit would retire in 2030, the second at the end of 2033. Those Point Beach units are producing about 22% of our total power supply for our retail customers. That's a very significant portion of the energy we're delivering. Of course, it's carbon free, and it's dispatchable and basically runs, as you know, as a base load unit 24/7.
It runs and dispatches carbon-free energy regardless of whether the sun is shining or whether the wind is blowing. It's a very important component today of our power supply and of our ongoing efforts to reduce carbon emissions. You never say never, in terms of doing a buyout like what one of our other utility friends has done. 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.
Yeah, that's great. Just want to go back to a prior question. On your next quarter call, you plan to refresh the long-term capital plan and the long-term growth rate?
Yep. Because that'll be right before the EEI meeting where we can dive into great detail with you. Yes, that's our plan.
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. I think you made a point on the call to talk about load growth or sales growth, especially on the gas side. I wanted to get a little bit more perspective on what's driving that, and secondly, is that a sustainable kind of growth level that'll give you more headroom to kind of increase CapEx? How should we think about that?
It's a great question, and it has been one of the positive upside surprises for us. Really over the last three 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. I'm always reluctant to talk about one quarter of weather normalized data. We now have two and a half 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%. You talk about 2016 and 2017 being about 3.7% increases on a weather normal basis. Then as you heard Scott and me say, we had a robust growth in weather normalized demand in the first half of this year.
It's very hard to tell whether or not that trend will continue, clearly the trend has exceeded our expectations. When Scott and I really dove into this in great detail the other day, to try to answer the question, what is driving this demand for natural gas beyond our expectations? 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. 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. I don't want to be overly optimistic here.
What we've seen for the last, basically 10 quarters, certainly would indicate that there's some other trend going on here, which we haven't seen before, driving natural gas usage higher. 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 five-year plan. You may see some modest increase in capital spending on the gas side simply because of the infrastructure needs. For example, we've already applied to the Wisconsin Commission for two 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.
There's another $140 million 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. Would love to learn more on future calls as well. 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 2019, 2020 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? 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. Just a little bit of color on that would be helpful.
That's a good question. When you look, our assumptions are that we are partial taxpayers in 2019 and going forward, factoring all in the production tax credit. We're still at that 16 FFO to debt or a little bit north of that. 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.
Yeah.
It raises basically from, say 16, it raises it higher, which is a good thing.
If we can get some additional tax bonus depreciation projects.
Right.
Got you. That's very helpful. Thanks, guys.
You're welcome.
Your next question is on the line of Shar Pourreza with the Guggenheim.
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. Thanks for taking my question. 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 100-150 MW 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 with discussions around this potential?
Shar, what I can tell you. You've got a great memory. What I can tell you is.
Okay
We are still in active discussions with Foxconn about the configuration of their electric service, the basic elements of their rates, and whether or not there's any opportunity for solar. Continuing discussions, nothing new yet to report, continuing active discussions.
Got it. That, depending on how the active discussions go, 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 two options. One would be a self-build by Foxconn, the other would be that we would basically make the investment. 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. Then is there any updates on incremental storage opportunities at the utilities?
Incremental gas storage opportunities?
That's right. Yeah.
No, other than that energy infrastructure category that we've developed, one of the range of options we look at for that category for potential investment is gas storage. 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.
Good afternoon, guys
you never take the day off.
All right. Well, maybe not Thursday. 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 affecting both years. It didn't seem like the 2017 number line changed this quarter, whereas it did last quarter. Just trying to get a sense of how big was that driver and what else was going on in the $18 million there?
Yeah. That's a good question. There's a lot of stuff that goes through the other income and deduction line here. Unfortunately, some of these items are being reclassed between O&M and this other line, so it gets really confusing. When we manage the business, we really look at both of them together. Last quarter, what also goes through here is a couple 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. Year to date, the reclass of this non-service cost for the pension was the biggest number at about $10 million on a year-to-date basis. 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, unfortunately, that goes in this line also. There's a mixture of stuff in there. This was the biggest item for the quarter and for the year-to-date that really came out.
That pension driver, you just said about $10 million year-to-date. Was that actually a change or was it just a reclass?
It was a reclass out of O&M down here. The benefits last year, a couple items of why the pension is down. The fund did well last year. The assets grew, their earnings are better this year. The interest expense is down a little bit. We did combine some plans into the Medicare Part A for some other post-employment retirement plans. There was some savings there also.
Jonathan, what you're seeing in that category is a lot of accounting noise, you're going to see that every quarter. There are just so many items that swing around. Then, as Scott said, the new accounting rule required us to reclassify as well. We try to sort all that out for you as best we can so that you can see what's going on. All of these things also mask how we're doing on what I call true operation and maintenance costs. We're still on target there. We said we would expect about a 3%-4% decline in 2018 over 2017 true O&M, we're right on target to achieve that.
Great. That's helpful. Thank you. Just one other thing, you'd mentioned you had some audit resolution at ATC. Was that a material item, and is it just this quarter, or was there some follow on there?
Yeah. It's just a very small item for the quarter here. When you back out the tax reform stuff, it was negative, and you don't anticipate it to be a negative. It was about $3 million 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, what period was that audit related to?
Boy, it goes all the way back to 2004, I think. It was a long period of time.
It was before the internet. No, I'm kidding.
It was from, like, 2004 up through 2015 or 2016.
That was $2.7 million, you said?
It was a $3 million hit for the quarter.
Okay. Then, Gale, 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. Very good question. 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. 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. 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. That would stay steady as she goes. I think you might see a bit of an uptick if the conditions we're seeing persist in the other category. Again, to keep all this in perspective, today it's like 8%-9% of an $11.8 billion capital plan.
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. 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.
We track all the metrics that we talked about before, our FFO to debt and the holding company debt to total debt around that 30%. Those are our metrics that we're looking at.
I think you answered this once already, just want to make sure. Did you say you're going to rebase the 5%-7% growth or reconsider the 5%-7% growth?
No, rebase. Right now, our 5%-7% long-term growth rate is based off, as Scott said, the midpoint of our 2017 original guidance. As we move forward to another year on capital spending, we'll rebase our long-term growth rate off a newer number.
Is the 5%-7% up for reconsideration?
Based on everything we're seeing, no, I think 5%-7% will stay intact.
Thank you for that clarification.
You're welcome. Good questions.
Your next question is from the line of Andrew Levy with ExodusPoint.
Hey, Gale. How you doing?
I'm good, Andy. Are you Exodus or Exodus?
Exodus.
Okay.
Like Exodus from Millennium.
Oh, impressive, yeah.
ExodusPoint. There you go. As I listen, and obviously as I've seen the last 2 quarters come 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 third quarter. It sounds like at the very least, when you rebase, and I assume, I don't want to preview that, but you'll be towards the high end of your growth rate going forward, 6%-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.
You did good. Nice try, Andy.
Your next question is from the line of [Shah Khan] with [Meridian].
Shah how are you today?
Pretty good. Congratulations, great result. I wanted to know, again, is there some way that one can translate the sales growth in the gas businesses? I would say tremendous. Is there some way to quantify that, say, a 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?
Yeah, generally we can do that, I would caution you, and 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. 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. 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 are shared. Scott?
Yeah. No, that's exactly correct, Gale. When you look at sales, if you look at sales across all the sectors, you have about a 1% sales growth in residential, small commercial, and transportation in Wisconsin. That equals to about three quarters of a cent or $3 million pre-tax. It's about $3 million pre-tax for 1% growth in all the sectors.
Okay. Just on the point that you mentioned, Gale, I'm assuming this year, 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 Vedula Murti with Avon Capital.
Long time no talk to you Vedula . How are you?
I'm well, thank you very much.
Good.
A couple of things. One, going back to the natural gas question. Over a period of time, 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. I'm wondering right now if you can remind me how decoupled or un-decoupled 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 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 two 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. Illinois is basically decoupled, and I expect it will stay that way for decades to come. In Wisconsin, we are not decoupled. I really don't sense, in terms of the regulatory backdrop here, any big appetite to move toward decoupling at all. Frankly, I think decoupling 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.
For Wisconsin, I think we're going to continue to see the same type of regulatory environment and backdrop and the same type of regulatory treatment. I don't see us moving to decoupling, certainly not in the next rate case.
Okay, to follow up on Jonathan Arnold's question about all those cumulative accounting noise issues on pension, OPEB, et cetera. 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. I'm just wondering how we then think about that as we roll forward in terms of either normalization or sustainability, whatever it is.
Scott?
Yeah. When you look at that, when we really factored all that in, we were really looking at that as part of our O&M expenses and really consolidating it all together. The offset, when you do the math, it looks like O&M expenses is not down as far as you would think, and that's because some of these reclasses. 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%-4%.
Yeah, I think Scott's right. We kind of have to piece through the details of these two pictures, put it all back together, we're still on track for about the 3%-4% decline that we had projected in O&M expenses compared to last year.
Two other last things. One, in Illinois, if I'm not mistaken, there's a ROE adjustment mechanism based on levels of interest rates. Can you just remind me how that works, where you guys stand, and how that gets refreshed if we go into a higher interest rate environment in the future? 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. Secondarily, in terms of the utility CapEx, the current plan for $11.8 billion, 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. As 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? If we're rolling at $11.8 billion over the current five years, where's the line where you start thinking you may need something if this is like 13? I'm just making up a number. I 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 timeframe in which we become a cash taxpayer, and some of these investments also give us 100% bonus depreciation. You really need to put all of the elements in there, and pretty soon it's RAGÚ and it's all in there. 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 five 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.
Thank you very much. Give my best to Allen the next time you talk to him.
Sure 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. Her direct line is 414-221-4639. Take care, everybody. Bye-bye.