Good afternoon, and welcome to WEC Energy Group's Conference Call for First 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 expectation at the time that 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 Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be opened to analysts for questions and answers. In conjunction with this call, a package of detailed financial information is posted at wecenergygroup.com. A replay will be available approximately 2 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.
Mr. Kwappa, the floor is yours.
Thank you very much. Good afternoon, everyone, and thank you for joining us today as we review our results for the opening quarter of 2018. But first, I know that all of you are interested in an update on Allen Leverett's recovery from the stroke he suffered last October. I can report that Allen is in very good physical condition and he continues to be engaged in intensive speech therapy at a leading rehabilitation center. The center specializes in helping patients who are having difficulty speaking fluently.
Over the past few months, Alan has continued to make progress. He's working hard
and he
remains upbeat and determined. Now many of you have also asked about our succession planning in the event that Alan can't or chooses not to return as CEO. As you would expect, we conduct rigorous succession planning discussions with our Board on a regular basis. Gosh, we've done so for many, 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 and we'll certainly keep you up to date on any new developments. And 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, Treasurer Bill Gutt, 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 Q1 earnings of $1.23 a share, well ahead of guidance.
Stronger than expected demand for natural gas and electricity, a strengthening economy and efficiency gains across our system were the major factors in our solid first quarter performance. Scott will provide you with more details in just a few minutes, but first I'd like to update you on a number of recent developments. Just yesterday, we signed an agreement to acquire an 80% ownership interest in the upstream wind energy center. This wind farm is currently being built by Invenergy in Antelope County, Nebraska. Upstream will consist of 81 GE wind turbines with a capacity of 200 megawatts.
We plan to invest approximately $280,000,000 for our 80% ownership stake. Key permits and local approvals have been obtained for construction and operation and we expect to close the transaction in early upstream will qualify for 100% bonus depreciation and for production tax credits. The project has a long term 10 year offtake agreement with a company that has a strong investment grade credit rating. We project this $280,000,000 investment will earn a return similar to that of our regulated utilities. The transaction, of course, is subject to approval by the Federal Energy Regulatory Commission.
I'm also pleased to inform you that on March 1, the Wisconsin Public Service Commission approved the purchase of the Forward Wind Energy Center. Our Wisconsin Public Service utility, along with several partners, closed the transaction on April 2. We now own 44.6 percent of this facility with an investment of approximately $80,000,000 Our customers will soon see real savings because the purchase of the wind farm eliminates a higher cost power purchase agreement. And now an update on tax reform proceedings that recently took place in Wisconsin. As you may recall, the commission order that approved our rate settlement last fall contemplated the potential impact of tax reform.
The order recommended that benefits from a lower tax rate be used to reduce our regulatory asset balances, particularly those for uncollected transmission costs. In filings over the past few months, we proposed a formal plan with several options for the commission to consider. Last Thursday, the Wisconsin Commission determined that 80% of the tax benefit would be used to offset regulatory asset balances with the remaining 20% to be refunded in the form of bill credits. This decision applies to the electric customers of both We Energies and Wisconsin Public Service. For decision by the commission.
Also on the regulatory front in Wisconsin, we expect to file for construction authority for our first solar farm by the end of the second quarter. Over the past few years, as you may know, 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 very well with our summer peak demand curve and with our plan to significantly reduce carbon dioxide emissions. Our effort to reshape our generating fleet for a clean reliable future is especially important at this time of great economic potential for the state of Wisconsin. The unemployment rate in Wisconsin reached a record low of 2.9% in March. That's the 8th lowest unemployment rate in America.
Meanwhile, more people are working in Wisconsin, more people have jobs in Wisconsin than at any other time in state history. And we're seeing additional potential as Foxconn Technology Group has begun its $10,000,000,000 investment in a massive high-tech manufacturing campus south of Milwaukee. Foxconn's construction team has set a goal to have 60% of the project completed by Wisconsin based companies and 70% of the job hours worked by Wisconsin residents. Of course, we have plans that are now being developed and underway to provide both natural gas and electric infrastructure to the area that is now being called Wisconsin Valley. The large scale development will provide additional investment opportunities for us including approximately $140,000,000 of gas projects and $120,000,000 of transmission upgrades now being planned by American Transmission Company.
And one final Wisconsin note, you may have read that several interveners in last year's rate settlement have asked the commission to require a deferral of the non fuel savings from the closure of the Pleasant Prairie power plant. They seem concerned that during the year and next, we will reap some type of windfall from eliminating the operating costs of the plant. So to clear up any confusion, there is no possibility of a windfall because we agreed to an earnings cap We continue to make real progress on the Peoples Gas System Modernization Plan. As a reminder, this program is critical to providing customers with a natural gas delivery network that is modern, safe and reliable. For many years to come, we'll be replacing outdated natural gas piping, some of which was installed back in the day of Abraham Lincoln with state of the art materials.
We're currently on track to invest $290,000,000 in the effort during calendar year 2018. In addition, we've been working with the Illinois Commission on a bill credit to flow savings from the new federal tax law back to customers. And on April 19, the commission voted unanimously to approve the proposed bill rider. The rider takes into account the impact of federal tax savings, which are partially offset by an increase in Illinois state taxes. Our typical Chicago gas customer will see a savings of approximately $2 per month.
And now an update on our operations in Minnesota. We requested an increase in base rates of approximately $12,600,000 or 5%. Interim rates have been in place since the beginning of this year and on April 1, those interim rates were adjusted to incorporate the positive impact of tax reform. A final decision on new permanent rates in Minnesota is expected by the end of this year. I might add that we're 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 next we'll turn to Michigan. As a reminder, we obtained a final regulatory approval on October 25 last year for the construction of new natural gas fired generation in the Upper Peninsula. The project stands now at 42% complete. Our plan is to bring the new units into commercial service by mid-twenty 19 and at that time or soon thereafter, we expect to retire our coal fired power plant at Presque Isle.
This project calls for a $266,000,000 investment 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 the Upper Peninsula. And regarding tax reform for our Michigan utilities, we're working through a multi step process to flow the benefits back to customers. And finally, a reminder about our dividend.
At our January meeting, the Board of Directors raised the quarterly cash dividend to $0.5525 per share. That's an increase of 6.25 percent over the previous dividend rate. Our annualized dividend now stands at $2.21 per share. And folks, this marks the 15th consecutive year that our stockholders will enjoy higher dividends. We continue to target a payout ratio of 65% to 70% of earnings.
We're right in the middle of that range now. So I expect our dividend growth will continue to be in line with the growth in our earnings per share. And now with details on our Q1 results and our outlook for the remainder of 2018, here's our Chief Financial Officer, Scott Lauber. Scott?
Thank you, Gail. Our 2018 Q1 earnings grew to $1.23 per share compared to $1.12 per share in the Q1 of 2017. Our favorable results were largely driven by colder weather quarter over quarter, effective cost control and return on additional capital investment. The earnings packet placed on our website this morning includes a comparison of Q1 2018 2017 results. I'll first focus on operating income and then discuss other income, interest expense and income taxes.
Referring to Page 8 of the earnings packet, our consolidated operating income for the Q1 of 2018 was $545,100,000 compared to operating income of $614,700,000 for the Q1 of 2017, a decrease of $69,600,000 Excluding 2 tax items totaling $120,000,000 operating income actually increased 50,400,000 The first tax item relates to the effect of tax reform. And the second item is the benefit of tax repairs as part of our Wisconsin rate settlement. You'll recall that our regulated utilities are currently deferring the benefits associated with the Tax Cuts and Jobs Act of 2017. These benefits will ultimately be returned to customers. The accounting for this charge results in lower income tax expense and an offset to operating revenues.
As part of our Wisconsin rate resettlement, we also agreed to use the benefits tax repairs to offset the growth of certain regulatory asset balances. These escrow balances represent costs Wisconsin Electric incurred to provide electric service, but were set aside for future recovery. So here's how it affects our financial reporting. The income statement accounting for tax repairs does 3 things. It decreases income tax expense, increases O and M and reduces operating revenues related to these regulatory balances.
All of this has no effect on net income. I'd like to refer you to Page 7 of the earnings package where you can see each of the line items. Excluding the impact of these items, operating income increased $50,400,000 The following segments discussed will now focus only on the remaining $50,400,000 increase in operating income. Starting with our Wisconsin segment, the remaining increase in operating income was $30,200,000 The impact from colder winter weather increased margins $20,400,000 and lower operations and maintenance expense contributed an additional $11,900,000 In the Q1 of 2018, the remaining increase in operating income in our Illinois segment was $6,800,000 compared to the Q1 of 2017. This was primarily driven by continued investment in the gas system modernization program and lower operations and maintenance expense.
Due to decoupling, the colder weather did not have a significant impact on Illinois margins. The remaining increase in operating income at our other states segment was $8,200,000 The change was primarily due to colder winter weather quarter over quarter and lower operations and maintenance expense. Turning to our non utility energy infrastructure segment. Excluding the impact of tax reform, operating income at this segment increased $8,200,000 Remember that this segment contains the operation of Blue Water Natural Gas Holding, which was acquired on June 30 last year as well as the results of We Power. Bluewater Natural Gas Holding contributed $7,800,000 in the increase of operating income in the Q1 of 2018.
The operating loss at our corporate and other segment increased $3,000,000 quarter over quarter. We transferred completed software assets from our centralized service company to our regulated utilities. Accordingly, the return on these assets is now recognized by our regulated utilities. Excluding the two tax items we discussed, operating income increased $50,400,000 Earnings from our investment in American Transmission Company totaled $32,800,000 a decrease of $9,100,000 compared to the Q1 of last year. Excluding the $10,700,000 impact of tax reform, our equity earnings grew $1,600,000 due to continued capital investment.
Our other income net decreased net decreased by $10,800,000 quarter over quarter, driven by a decrease in gains on investments. Our net interest expense increased $2,000,000 quarter over quarter, primarily driven by higher debt levels resulting from continued capital investments and higher short term interest rates. Our consolidated income taxes decreased $125,000,000 As previously discussed, lower tax expense was driven by the impact of tax reform and the flow through of tax repairs. We expect our effective income tax rate will be between 13% and 14% this year. Excluding the benefit of related tax repairs, we expect the effective tax rate to be between 21% 22%.
Combining all these items brings us to earnings of $390,100,000 or $1.23 per share for the Q1 of 2018 compared to earnings of $356,600,000 or $1.12 per share for the Q1 of 2017. Looking at the cash flow statement on Page 6 of the earnings package, net cash provided by operating activities increased $179,000,000 during the Q1 of 2018. Recall that we made a $100,000,000 contribution to our pension plan in the Q1 of last year. Also, earnings improved quarter over quarter. Our capital expenditures totaled $440,000,000 in the Q1, a $110,000,000 increase compared to the Q1 of 2017 as we continue to execute on our capital plan.
Our adjusted debt to capital ratio was 51.4 percent at the end of the Q1, a decrease from the 52.5% at the end of 2017. Our calculation continues to treat half of the WSE Energy Group 2007 supported 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 our FFO to debt metric to be in the range of 16% to 18%.
We paid $174,000,000 in common dividends during the Q1 of 2018, an increase of $10,000,000 over the Q1 of last year. Higher dividends were driven by the 6.25% increase in the dividend level compared to the Q1 of 2017. Now a brief update on sales. We see continued customer growth across our system. At the end of the Q1, our Illinois our utilities were serving approximately 9,000 more electric customers and 27,000 more natural gas customers than they did a year ago.
Sales volume are shown on a comparative basis on Page 10 of the earnings package. Overall, retail deliveries of electricity for our Wisconsin and Michigan utilities, excluding the iron ore mine, were up 1.6% and were level with the Q1 of 2017 on a weather normal basis. Natural gas deliveries in Wisconsin, excluding gas used for power generation increased 11.2%. On a weather normal basis and excluding gas used for generation, natural gas deliveries in Wisconsin grew by 4.9 percent and were above our expectations. Finally, an update on earnings guidance.
We are affirming our 2018 earnings guidance of $3.26 a share to $3.30 a share with an expectation of reaching the top end of the range, assuming normal weather for the remainder of the year. We expect our Q2 2018 earnings per share to be in the range of $0.64 to $0.66 That takes into account April 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. Overall, we're on track and focused on delivering value for our customers and our stockholders. Operator, we're ready now for the question and answer portion of the
Your first question comes from the line of Greg Gordon from Evercore.
So I just want to know
Hey, Greg. Greg? Yes, sir. You must have directed the Jets draft. You had a good draft.
Well, I told them they had to pick a quarterback that would be able to throw over the heads of the 2 corners that the Green Bay Packers drafted.
These guys got good vertical leap, Greg.
Excellent. Sorry about your bucks, by the way. But on to the questions, the can you talk a little bit more about the strategic rationale behind the wind purchase? Because the way that you described it, it's not clear to me that you're selling that power back to your utilities or that that's sort of an asset that would ultimately be requested to go into rate base? And if so, to whom is the PPA with if that's disclosable and how should we think about that?
Because it seems like a step out from your normal sort of band of how you think
about your strategy. No, I appreciate the question.
It's a very good question.
First of all, we have, as you probably saw when you look through the basic description of our capital plan over the next 5 years, the $11,800,000,000 capital plan that we're projecting for the next 5 years, we have a segment in there that we basically call energy infrastructure. And we put that in there frankly because we're beginning to see some opportunities, if you will, for the potential purchase of assets that some other companies are divesting, but they're good assets, They're assets that don't change our risk profile and that's a very important point with us as you know. But that there are assets that can add to earnings that can help us deploy capital in a very good way that don't add to rate pressure at the retail level in Wisconsin or anywhere else. And in this case, although I think we're under a confidentiality agreement on the exact name of the off taker, There is a 10 year offtake with this particular upstream property with A rated publicly traded company. So they take all of the off take for the entire 10 year contract.
And of course, it does qualify, as I mentioned, for 100% bonus depreciation and for the production tax credits. So we thought this was a really interesting opportunity for us. It's kind of the first major project that we're putting into that infrastructure category. But I want to emphasize that while it may be just a hair different than what we've done in the past, we're not going to change our risk profile by stretching for assets that don't fit the kind of return and risk adjusted returns that we've always tried to deliver. So this may be the first of a number that you see in that category.
But again, the concept is taking advantage of some opportunities, but not changing our risk profile. And down the road, we're going to need carbon free energy as well. So I wouldn't rule out 10 or 15 years from now thinking about putting that asset in the rate base, but that's not the current thinking. The current thinking is that this is a solid asset without ever entering into rate base in Wisconsin. Does that make sense to you, Greg?
Perfectly. And on that note, since I don't really have any questions specific to the quarter, you're, as usual, off to a great start for the year in terms of your earnings goals. This is actually a debate that investors do have from time to time when looking at the current retail rate that your customers pay versus others in the region and thinking about as you deploy capital, how are you incrementally going to be able to make that cost effective and people sometimes talk about the escalator in your nuclear contract as being a headwind for that. Can you talk about the future levers you have to pull to continue to be able to offer a cost effective product as you do deploy capital inside the utility? Because in conversations I've had with you, you seem pretty confident that there's a long runway to be able to do that where others may are more
We will be in 2019 next year, we will be in year We will be in 2019 next year, we will be in year number 4 of a retail rate freeze in Wisconsin. During that 4 year period, virtually every utility around us has had to raise rates. And when you look at our rates now, in fact, the Wisconsin Commission just put out a draft energy assessment. They do this every several years and they talk now about Wisconsin the Wisconsin Commission in its draft report just last week talked about how the average bill in Wisconsin for the median income person in Wisconsin is lower than the region. So we're starting to see the competitive we're starting to see others that provide electricity in the region have to raise rates as they move into their cycle of significant building.
So I feel very good about where we're headed from a competitive standpoint in offering a competitively priced product, number 1. Number 2, how we can continue to do that, I mean I believe we have a long runway of O and M cost savings ahead of us. We've announced, for example, 2 more power plant closures, the Pulliam plant at Wisconsin Public Service in Green Bay and of course we've been planning to close the Presque Isle power plant for a number of years. You put the O and M for those plants together and you're talking about close to $100,000,000 annual O and M. So we have a lot of cost saving initiatives, we have a lot of efficiency initiatives that are really coming out of our acquisition of Entegris plus the opportunity now to actually green our fleet and save O and M cost.
So I feel very good about deploying the capital plan that we've laid out the $11,800,000,000 plan over the next 5 years without any significant rate pressure in Wisconsin.
Your next question comes from the line of Shahriar Pourreza with Guggenheim Partners.
Good morning, Shahriar.
So just a real quick question on the tax filing. How does just remind us how the verbal order from last week sort of compares to your plan assumptions, mainly focusing on the uncollected transmission cost balance. I mean, I guess, at a cursory level, it looks like it's more constructive than what you assumed from your plan. So there's obviously some cash flow positive cash flow impacts. And then also, is there any impact to the timing of your next rate case?
Sharon, on your second question, no. There's no timing on the impact of the next rate case resulting from the tax reform decision by the commission, none whatsoever. And in terms of how we view that compared to plan, if you recall, during the filings over the last few months, we proposed several alternatives for the commission. And I guess I would view the commission's decision as I mentioned in the prepared remarks as both balanced and thoughtful. I think it's right down the center of the fairway.
Scott?
No, that's correct. It's 80% applied to those regulatory assets, largely the transmission asset at Wisconsin Electric. And what that will do is, as you know, the balance at that account was going to be about $220,000,000 at the end of 2019, applying the benefits that the commission did on tax reform here, we'll lower it and then you put the benefits that we receive for tax reform for the American Transmission Company, that balance at the end of 2 years will be about $40,000,000 So make significant progress on reducing that balance.
We thought it was a very
I'm sorry. Go ahead, Sharra.
No, no, sorry. Go. You go. I'll start
we thought it was a very again, a very thoughtful reason decision and really will make a big, big dent, as Scott said, in that unrecovered balance for transmission costs. And by the way, I wanted you to know that Greg promised if you were checking on him on Thursday, he'd be working.
We'll see about that.
I appreciate that. And then just let me ask you on Foxconn. Maybe if you sort of think about the growth trajectory that you guys have out there and what's within plan, Can you just, Gail, talk a little bit about some of the incremental opportunities, mainly on potential rooftop solar with Fox Con, incremental gas distribution needs. So as Fox Con facility continues to progress, how we should think about items that may not be embedded in your outlook?
Yes, good question, Shar. First of all, a little bit of background. Earth moving at the site, at the Foxconn campus site will begin in the next few weeks and so much soil has to be moved during the excavation process that excavation in and of itself will take until August of 'nineteen to complete. If you take a standard football field, the 100 yard football field, enough earth has to be moved to basically fill that football field 1475 times. I mean this is just an enormous, enormous project.
So basically, all of the field work will begin in just a few weeks. I would think that we would start to see peak construction in 2020. And yes, there will be and there are incremental investment opportunities for us both related to electricity and natural gas. But the bigger surprise for us really is the level of natural gas demand. I think I may have mentioned in my prepared remarks that there's probably an additional $120,000,000 of investment that we're going to need in natural gas delivery in the infrastructure there to get gas to that complex and to the development that is now we're now starting to see as you would imagine, we're now starting to see other developments announced.
Someone just announced the new hotel just 6 miles from the Foxconn So we're going to see the spin off or the ripple effect development soon. An American transmission company has already filed for about $120,000,000 transmission upgrade and there will be more to come. Now in terms of our sales numbers though, Scott will update in the fall when we have our new capital plan, we'll update our sales growth projections that will probably start to see some reasonable incremental demand from Foxconn, I would say late 2020, 2021.
Helpful, Gail. And then just one last thing on sort of incremental opportunities. I think you've highlighted before in the past and you touched a little bit about the win. But given what you've seen is a lot of your peers that have been looking to mitigate some of their equity needs as a result of tax reform and other various scenarios. Is there also sort of an opportunity for you to look And is that something you'd
be interested in looking at?
Shar, the short answer is yes, but we will not do an investment that changes our risk profile. So but there are a number of opportunities really even in the Midwest that we're seeing today that we would not have seen last year simply because of the impact of tax reform and other companies wanting, as you say, to mitigate the need for new equity. We're in a very fortunate position where we don't need new equity and we have some ability to take advantage of the opportunity to buy really strong assets that don't change our risk profile. So I guess as they would say in the U. K, watch this space.
Got
Your next question comes from the line of Michael Weinstein with Credit Suisse.
Hi, Gavin. Hi,
Michael. I'm good, Michael. Did you apply for your job at Fox Sports?
They recruited me, but I'm going to have to turn it down for now.
There you go.
Hey, I heard from Michigan that there is a development of a winter peak, almost a double peak in that state that effectively what it does is it lowers the capacity factor that could be applied to solar. In other words, it wouldn't get as much of a maybe as a lower capacity factor as a result of the double peak. Just wondering, I guess in that state, they're talking about a 50% cap factor. I think in Wisconsin, you guys are talking about a 70%. I mean, have you heard anything like along these lines?
No, not at this point. And right now, for and again it's MISO that basically assigns the capacity factor. And right now to the best of our knowledge, that remains at 70% in Wisconsin.
Okay. And on Foxtrot's move, have you heard anything at this early stage about maybe additional companies looking to move to this stage to be part of the ecosystem that's being developed there at this point? I think you call it West Valley or Wisconsin Valley?
Yes, Wisconsin Valley. It's the Midwest version of Silicon Valley. There has been nothing specific announced yet, but I can tell you just from being involved in the project that there are multiple companies that would be that would become a need to become part of the Foxconn supply chain that are in the early stages of figuring out how they're going to locate and become actually part of that supply chain. But I am encouraged by one other development and that is Foxconn is really looking hard at a number of Wisconsin companies to become part of their supply chain. So companies that are existing here that would get more revenue, more production, more income by becoming part of the supply chain.
So I think it's going to be a combination of a number of companies moving to the state, but also a number of companies that are going to get additional business from the fact that they will be suppliers to Foxconn. But I think you'll start to see some announcements here in the next few months.
Great. Thank you. And I'm glad to hear that Alan is doing well. All right.
Bye now. Thank you, Mike.
Your next question comes from the line of Julien Dumoulin Smith from Bank of America Merrill Lynch.
Afternoon, Julien. Hey, afternoon. Thanks for taking the time.
You're welcome.
So wanted to follow-up a little bit on the balance sheet here, FFO to debt. I you guys talked about a 16% to 18% ratio. Just going back to Shar's question for a quick minute here, can you elaborate a little bit on where that puts you within that range, given the outcome of the tax reform and the sharing that you all described with the transmission costs? And then I suppose secondarily,
I suppose there's a small piece
of that, but the $280,000,000 associated with Invenergy, I suppose it doesn't really move the needle all that much against the backdrop of that. But I suppose one could be perceived as offsetting the other.
No, and I don't think so.
First of
all, let Scott handle the 16% to 18%.
Yes.
So the 16% to 18%, it's going to move around a little in there. I would say, in 2018, because we are part clear cash taxpayer, not a full year, we'll be at the top end of that 2018, maybe even squeak in to close to 2019 later on in the plan. It's in that 16% it's right in the middle of the range, I would say.
But it's certainly not down in the 15% area. I mean, we're above that. And at some point, as Scott said, we might even see 19%.
Early on in the plan here, while we're not paying taxes. So that's what we're looking at other opportunities on the tax front too. We have a tax appetite to help.
Exactly. And in terms of the up stream wind energy center that we just announced, that could be a couple of cents a share. So it's not $0.20 a share, but it's I think it's indicative of the fact that we are seeing some opportunities, again, that don't change our risk profile where we can deploy capital.
Right. And in fact, actually just to specify that since you bring it up, when you say the return from our symbol, the ROE is sort of the upfront earned ROE there, as you say, a couple of cents is relatively comparable, right? That is correct. Excellent. And in fact, if I can keep going on that, I mean, you alluded to it already here and tax appetite.
I mean, in stepping into this contracted renewable world, clearly there is a desire for those paying cash taxes out there to absorb some of those tax attributes. Is that something we could very well see you kind of as a step 2 in the strategy?
It's certainly a possibility, Julian, absolutely.
Got it. Excellent. And then anything with respect to green tariffs for your own customers as you think about kind of satiating the demand from this evolving customer base?
Well, couple of points on that. We already have a pretty successful green tariff. It's called energy for tomorrow. And we have no issue with expanding that tariff whatsoever as a number of our customers want to have some or all of their energy be green But I do see there are some additional potential opportunities for us to make investments with customers where we would own the renewable and they would be an off taker. So a lot of interest there, a lot of changes in the marketplace as both solar and wind have become more cost effective.
Got it. All right. Thank you all. Okay, Julien. Thank you.
Your next question comes from the line of Praful Mehta with Citigroup.
Good afternoon. How are you?
Very good. How are you?
We're doing well.
Excellent. Well, thanks for all the detailed answers so far. I just had a clarification on the FFO to debt question and around the Wisconsin tax reform settlement. Just to understand how much is the amortization and how much is the customer refund that you're resuming right now over the next few years as a part of that tax reform settlement?
Well, Scott is looking for a particular piece of information. I'll try to give you the answer to the first question. On our transmission escrow balance, we're just north of $200,000,000 going into 2018. And I think as Scott said earlier, with the basically with 80% of the benefits of tax reform flowing to reduce that transmission escrow coupled with the fact that there's going to be lower a benefit from tax reform from American Transmission Company as well that will have lower that balance. We think we'll take it all the way down to around $40,000,000 by the end of 2019.
Yes, that is correct. So if you look at Wisconsin Electric, the electric customers, it's about $70,000,000 that's going to go against the regulatory asset with about $10,000,000 to $12,000,000 going back as bill credits. And then Wisconsin Public Service will have about $28,000,000 going against the regulatory assets and about $5,000,000 going back as bill credits. And then the rest of the system, as Gail said, all the gas is going to go back as bill credits. So in total, when you look at electric and gas together, it's about $50,000,000 going as bill credits to our customers and about nearly $100,000,000 going against the balance sheet.
I got you. So that's helpful. So that $50,000,000 that's going back to the bill credit is effectively a reduction in FFO that's incorporated in your FFO to debt metrics as we think about your 16 to 18?
Correct and exactly. So this is an annual number that's the 2018 effect and then the similar 2019.
And that's how we get from over 200 down to 40 in that escrow balance for transmission.
Got you. That's super helpful detail. Thank you. And then just more a big picture just stepping back question. In terms of the renewable asset purchases, I know you've talked about the ROE, but in terms of an IRR, I just wanted to think about given the cash tax profile, I guess you want a cash tax there in 2018.
So the returns get pushed out a little bit in terms of if your ability to utilize the tax attributes of these assets. What kind of IRR thresholds are you looking at as you look at renewable purchases?
Yes. Well, I think you may have one little fact just slightly off. Yes.
So this transaction will close in 2019. February we think of 2019. Yes. And we'll be a full cash taxpayer then. We'll get the full benefits of the production tax credits.
And we'll also since this is not considered utility property, it's outside the utility, we'll get 100% bonus depreciation also on those assets. And we're looking at and we look at it if
we were buying in the utility as what that regulated return would be around that 10%, 11%. Yes, we'll probably finance this on a just like we do our normal assets, 50% equity, 50% debt if that helps.
And that's all internal funding of the equity, no external shares we're issuing.
Correct. Got you. That's helpful. So that lines up well, I guess, with your cash tax profile in 2019 in terms of the close of this deal? Exactly.
You must have been in the room when
we were talking about this.
I guess the final just a final question. I heard you mentioned a little bit of opportunity around the midstream side and looking at some assets on that side or an opportunity on that side. Is that something you're looking at as a cash transaction? Is that how you're thinking of it? And if yes, what kind of holding company debt would you be looking to kind of take on as you look at some of these transactions?
Well, I think one of your colleagues brought that up as a potential example. Let me go back to our 5 year capital plan. And when you look at the pie chart that breaks down our $11,800,000,000 of capital spend over the next 5 years, you will see a segment called Energy Infrastructure. And that segment is designed for us to deploy capital into the types of things we're talking about opportunistically. So whether that's a fully contracted midstream pipe or whether that's a fully contracted wind farm or whether that's an investment with a customer that we would invest in solar, or gas storage.
So there's a whole range of energy infrastructure type projects that we are going to be analyzing and looking at as part of that 5 year capital plan. This is the first entry into that segment.
Right. So in addition, we're looking at our holding company debt and like Gail said over that 5 year plan that holding company debt to total debt to be 30% or less. Now if some great opportunities come earlier in the plan that percentage may go up a little bit and then we'll work it back down like we have done in the past when opportunities exist. So we did blue water gas storage. Now we have this one.
If there's other opportunities out there we can take advantage of and get a return without changing the profile, we'll be looking at that. Right.
But the general concept is, as Scott just said so well, holding company debt to total debt at about 30%.
Yes. Got you. Super helpful, guys. Thank you.
You're more than welcome. Great questions.
Your next question comes from the line of Paul Ridzon with KeyBanc.
I think you probably just answered my question, but this upstream is not incremental capital. It was already baked into the forecast with a placeholder?
That is correct. Yes.
And then you alluded to the fact that you're kicking tires out there. How big could this get?
Well, again, we've nailed down a segment for the next 5 years and the total amount in that segment, Scott, is roughly
It's approximately $1,000,000,000 over that 5 years.
Yeah. So I would and I think there are opportunities that could certainly take us to that level over the 5 year period. So think about for the next 5 years, think about and maybe an incremental $700,000,000 on top of where we are today.
And where is upstream going to sit in the corporate structure?
It will be a separate sum.
It will be in that infrastructure segment where we have our WePower assets, our Bluewater holding and then this will also be in the infrastructure segment. Right.
So it will be a separate sub in the infrastructure segment.
And then just to clarify,
I think I heard
you say no external equity but possibly tax equity?
No external equity. It will all be funded internally. It does we do have the benefits of the production tax credits since we are a cash taxpayer starting at the end of 2018.
Yes, so read our lips, no new equity issuance.
But you could did you say you like the way tax equity investors?
If an opportunity exists then we could get a reasonable return, yes.
It would have to be both of those things and overall not changing our risk profile. And if you'd like to go to Antelope County, Nebraska to see upstream under construction, we'd be happy to take you there.
I think I'll pass on that one.
All right. Go Cavs.
Thank you, Paul.
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Hey, Gail. Hey, Scott. How are you doing? How are you, Michael? I'm fine.
I'll take you up on the Nebraska invite. It's one of the 7 states in the union I've not been to.
All right.
There you go.
But let's find a Saturday in college football.
That'd be good. That'd be excellent.
One or two questions. Want to make sure I understood some of the Foxconn comments. Are you effectively raising your $11 plus 1,000,000,000 CapEx guidance for the next few years based on some of the commentary about gas infrastructure needs and ATC related needs for Foxconn?
Not yet. I mean that may come depending upon the ancillary development, the additional development that we think will occur in that area. But at the moment, we're sticking with the 11
$800,000,000 Got it. And just to make sure I understand the net cash impact of all of the different tax reform items that are kind of floating around. How should we think about what that does to just total cash flow over the next 1 or 2 years? How much does that bring cash flow down?
Yes. So there's a couple of items. One, the bill credits that we're giving on an annual basis is going to be approximately 50,000,000 in 2018 2019. Now the other cash flow item is with the change in tax reform, we were going to be a cash taxpayer in 2019 and that moved up to 2018. So that's probably another, I would say $80,000,000 to $100,000,000 additional cash flow drag on the system that we have factored in into our FFO to debt metrics.
Electric bill credits of $50,000,000 Yes, that's is really the electric bill credits, the $50,000,000
Yes, that's electric and gas
bill credits, correct. That's together, electric and gas.
Got it. One question on solar, want to make sure I understand, how are
you all what do you think kind
of like the levelized cost of solar in Wisconsin likely is? Well, you're
but under $1300 in installed KW.
Okay. And capacity factors that get you into a if it were a PPA or if it were a rate based asset, are we talking about something in the 30s per megawatt hour or above or below that level?
Yes.
Ballpark, dollars 0.03 Yes.
Okay. Okay. Thank you, guys. Much appreciated.
You're more than welcome, Michael.
Your next question comes from the line of Carolyn Bone with Deutsche Bank.
Greetings, Carolyn.
Good afternoon. So a lot of my questions have been answered, but I thought I'd just ask, you've obviously had a lot of success driving lower O and M since the Entegris deal. And I know going forward, you expect to see a lot of savings from plant closures. But I was just wondering if you could talk a little bit more in detail about what's been driving the cost reductions, particularly in Q1?
Well, I wouldn't just be happy to chat about that. I wouldn't necessarily separate out Q1 from any of the other type of progress that we've made because Q1 was a continuation of really the efforts that we've had underway since the acquisition of Entegris. So let me start first by saying the Entegris acquisition has allowed us to really streamline operations across our 7 operating utilities. We now have 6 of the 7 companies on the same billing platform. I mean, just to give you an example, now that we have most of our companies on the same customer information and billing system, we can optimize our call centers.
We can reduce costs and improve quality. And that's just one example of thousands of examples of what the broader footprint and platform that we have now that we're the 8th largest gas distributor in America and one of the 13 largest publicly traded utility systems in the country with 4,500,000 customers. I mean, we just have tremendous opportunities that continue to surface related to driving efficiency and cost savings across the system. So we are I don't think there's any question about it. We are exceeding our initial projections on cost savings and efficiencies from the Entegris acquisition.
But it is not one single thing. I mean, it is every area where we're seeing gains and where our managers are really doing a good job driving efficiency. It's every single group, it's every single department, it's every single area of the company. And I'm looking at our new Executive Vice President, General Counsel on legal cause. No, I'm kidding.
That will come too.
All right. Thank you.
I guess then my other question is just on you mentioned obviously the stories about customers asking for you guys to defer non fuel savings related to the Prairie. And I was just curious as to when you expect the PSC to actually rule on that?
Well, first of all, my understanding of this particular docket is that the commission has 60 days from the receipt of the request to decide even whether to take up the issue. So we will make a response shortly to the request. But again, when you look at the request, it's really I mean, we're being very consistent with the rate settlement and our promises in the rate settlement. I mean we said for example multiple times during the process of the rate review last year that in order to maintain the financial integrity of the company and freeze rates we would have to cut about $115,000,000 of costs out of the company. Well, the closure of Pleasant Prairie is just one of many initiatives.
And I think that somehow as I mentioned there may be some concern that, oh my goodness, we'll have some windfall. But as you know, as part of the rate settlement, we're earnings capped. So there will be no windfall here.
Right, right. Okay. Thanks. And then actually just one follow-up on the wind deal. Are you guys so you guys are going to be buying an operating project once it's completed or actually involved in the building?
Sorry to just clarify that.
No, very good question. We will be buying 80% of an operating project once it starts operating.
Okay. All right. Thanks very much.
You're more than welcome. Very good questions.
And your last question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board.
Dan, you still have a job. That's fantastic.
Well, for another week or 2, I guess.
How are you, Dan? Long time no talk to.
Pretty good. How are you doing? We're fine.
So Carol stole some of my questions. I was going to ask about the O and M. Earlier you mentioned the $100,000,000 from shutting down Presque Isle and I guess Pleasant Prairie, I think.
No, on Pulliam in Green Bay.
Oh, Pulliam, okay. So is that a gross savings or is that because you're going to have some additional costs from the new gas plant and etcetera. So is that the gross savings or the net savings or how should we
end this
No, that would be simply just the O and M reduction from the closure of the plant. So in your terminology, it would be gross savings. Okay. I don't think they're gross, but you know.
Right, right. But that's not the total that's not the bottom line impact you'll see from those closures because they're like for example in Michigan you'll have the new plant operating costs which would be lower probably than the coal costs, but still
substantially lower.
Yes, substantially lower, yes. But you're correct. Your analysis is correct.
And when's the timing for both of those again to close?
Well, we will the plan is to close Pulliam as soon as American Transmission Company completes the transmission upgrade in that area, which we're hoping will be in the Q4 of this year. But certainly by year end would be our plan. And then on Presque Isle, essentially the gating factor there is completion of the RICE units that we talked about these reciprocal internal combustion engines and we would expect to be able to close Presque Isle by mid to late 2019.
Okay. That's all I had. Thank you.
You want to go to Antelope County, Dan?
Not in the winter, but maybe sometime I'll stop by.
That sounds good, Dan. Let us know so we don't scare you out there.
Okay.
Thank you.
Thank you, Dan.
Bye.
Bye bye. All right. Well, I think that, ladies and gentlemen, wraps us up. It concludes our conference call for today. Thank you again for participating.
If you have any additional questions, feel free to contact Beth Straka and her direct line is 414-221-4639. Thanks everybody. Bye bye.