威斯康辛能源 (WEC) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to WEC Energy Group's Conference Call for Second Quarter 2018 Results. This call is being recorded for rebroadcast. (Operator Instructions)

Before the conference call begins, I'll 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 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, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed information financial is posted at wecenergygroup.com. A replay will be available approximately 2 hours after the conclusion of this call.

And it is now my pleasure to introduce 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.

But 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 has engaged in more than 700 hours of speech therapy in the past 9 months and he has continued to make progress.

Now many of you have asked about our succession planning in the event that 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. So I can assure 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.

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 Schubilske, 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 the cooler spring and a warm start to summer that drove electricity use above our forecast. In addition, a stronger economy across the region resulted in slightly higher demand for energy from our industrial customers. Scott will provide you with more details in just a few minutes, but I will say that one of the striking conclusions from our first half results is the significant increase in weather-normalized demand for natural gas, up 5.4% year-to-date.

Now let's take a brief look at the economic conditions in our region. Wisconsin's unemployment rate declined to 2.8% in May, a record low for the state. Unemployment ticked up slightly to 2.9% in June. But we have now recorded 5 consecutive months with the unemployment rate under 3%. That, folks, has never happened before in Wisconsin history, and we continue to see positive economic development news across the state as well.

On June 28, Foxconn Technology Group held a groundbreaking ceremony for its $10 billion high-tech manufacturing campus that will be located in Racine County just south of Milwaukee. Excavation work is already well underway. A plan is to move 4 million cubic yards of soil. And to put that in perspective, the soil removed from the excavation site would wrap completely around the equator if you piled the soil approximately 1 foot wide by 1 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.

And just this past week, the Wisconsin Commission approved the building of a new transmission line that will be needed to strengthen the network for a number of customers, including Foxconn, in the southeastern part of the state. American Transmission Company plans to invest approximately $117 million in the project.

I might add that we're also making some very promising investments. On June 28, we announced an agreement to acquire an 80% ownership interest in the Bishop Hill III Wind Energy Centre, that's located in Henry County, Illinois. The wind farm was developed by Invenergy. It was just placed into service in May. Bishop Hill consists of 53 General Electric turbines with a capacity of 132 megawatts. Our 80% share of the investment will be approximately $148 million. The project has a 22-year offtake agreement with one of our current wholesale power customers, WPPI Energy. So this investment really is a logical extension of our core wholesale power business. WPPI, based in Sun Prairie, Wisconsin, has been a significant wholesale customer of ours for years and we're pleased to extend that relationship with a new efficient renewable asset that exists within the MISO footprint.

Under the new tax rules, our investment in Bishop Hill will qualify for production tax credits and for 100% bonus depreciation. We expect our return on this investment will be actually higher than our regulated returns. We're projecting an unlevered internal rate of return above 8%.

We filed for approval from the Federal Energy Regulatory Commission earlier this month and expect to close on the investment in October. As always, we'll keep you updated as developments unfold.

And now for a brief update on our planned investment in the Upstream Wind Energy Center. Back in mid-June, you recall, we filed with the Federal Energy Regulatory Commission for approval to purchase an 80% ownership interest in this project. As a reminder, the wind farm is located in Antelope County, Nebraska, and consist 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.

Now for those of you who follow the details of our capital investment plan, you'll recall that we're also proposing to add utility-scale solar generation to our portfolio of regulated assets.

On May 31, our Wisconsin Public Service subsidiary, along with Madison Gas and Electric, filed a joint application with the Wisconsin Commission to purchase 300 megawatts of solar generation at 2 locations. The Badger Hollow Solar Farm will be located in Southwestern Wisconsin in Iowa County, and will be developed by Invenergy. The Two Creeks Solar Project will be located in the City of Two Rivers, that's in Northeastern Wisconsin, near the Point Beach Nuclear Power Plant. The Two Creeks project is being developed by NextEra Energy Resources. Our Wisconsin Public Service subsidiary will own 100 megawatts at each site with an investment of approximately $260 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.

And today, I'm pleased to report that we're taking our efforts a step further. We set a new, long-term goal for carbon dioxide emissions. Our goal is an 80% reduction in CO2 emissions below 2005 levels by the year 2050. You can learn more about our plans to achieve that goal in our corporate responsibility report and we will be releasing that report tomorrow morning.

Now an update on the outcome of tax reform in Wisconsin. In late May, we received a final written order from the commission. For electric customers of We Energies, 80% of the tax benefit will be used to reduce the regulatory asset from transmission costs that we've already incurred but not yet billed the consumers. The remaining 20% will be refunded to customers in the form of bill credits. For electric customers of Wisconsin Public Service, 40% of the tax benefit will be used to offset several regulatory asset balances and 60% will be refunded in the form of bill credits. For our natural gas customers in Wisconsin, the full amount of the tax savings will flow to customers through bill credits. We believe these were thoughtful, balanced decisions by the commission. Wisconsin customers began seeing their bill credits this month. Now with these decisions, tax reform treatment in our largest jurisdictions has now been finalized and all decisions across our four-state area are in line with what we expected.

Turning now to Illinois. We continue to make real progress on the Peoples Gas System Modernization Program. This program is critical to providing our Chicago customers with a natural gas delivery network that is modern, safe and reliable. We're on track to invest approximately $290 million in the effort during 2018. And the overall project is now approximately 25% complete.

Now an update on our operations in Minnesota. In mid-October last year, Minnesota Energy 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 decisions 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.

Next, we'll turn to Michigan. As a reminder, we obtained final regulatory approval last October for the construction of new natural gas-fired generation in the Upper Peninsula. Procurement is 67% complete and construction stands at 21% complete. Our plan is to bring the new units into commercial service by the 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 are investing about $266 million in 10 reciprocating internal combustion engines, or as we call them, RICE units. They will be capable of generating a total of 180 megawatts of electricity. These units, which will be owned by one of our Michigan utilities, Upper Michigan Energy Resources, will provide a cost-effective, long-term power supply for customers in Michigan's Upper Peninsula. And just one final note on the quarter, in May, Corporate Responsibility Magazine recognized us again for our environmental, social and governance practices and named us 1 of the 100 Best Corporate Citizens in the United States.

Now 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 and then other income, interest expense and income taxes.

Referring to Page 9 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 2 tax items totaling $66.5 million, operating income actually increased $35.1 million. The first tax item reflects the benefit of tax repairs, which is 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 7 and 8 of the earnings package.

Recall that as part of our Wisconsin settlement, we agreed to utilize the benefits of tax repairs to offset the growth of certain regulatory asset balances. The plan is proceeding as expected. And then, regarding the benefits of tax reform, we currently project that the transmission escrow balance at Wisconsin Electric will be reduced from approximately $220 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 9 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 is primarily driven by continued investment in the Peoples Gas System Modernization Program. The remaining increase in operating income in our Other States segment was about $4 million, largely driven by cooler-than-normal spring weather conditions.

Turning to our nonutility infrastructure segment. Excluding the impact 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 30 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.

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 2 tax items, as I discussed, operating income increased $35.1 million.

Earnings from 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 the 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. However, 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've 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 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 6 of the earnings package. Net cash provided by operating activities increased $246.5 million during the first 6 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(k) plans, options and other programs. Going forward, we do not expect to issue any additional shares. We continue to expect the FFO-to-debt to be in the range of 16% to 18%.

We paid $348.7 million in common dividends during the first 6 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've continued 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 goal of 5% to 7%. As you recall, our long-term growth rate is based off the midpoint of our 2017 earnings guidance of $3.09 a share.

We expect our third quarter 2018 earnings per share to be in the range of $0.68 to $0.70. That takes into account July weather and assumes normal weather for the rest of the quarter.

With that, I'll turn things back to Gale

Scott, thank you very much. We're still standing and we're focused on delivering value for our customers and our stockholders. Operator, we're ready now for the question-and-answer portion of the conference call.

(Operator Instructions) Our first question is from the line of Greg Gordon with Evercore ISI.

A couple of questions. Can you talk a little bit about the success you've had in executing these infrastructure investments outside the core utility? It strikes me that you see these returns look very good and they may be part of a competitive advantage you have because you're one of the few utility holding companies left with tax appetite that's able to actually transact on wind farms and consume those attributes. But then you also just articulated a slight moveout and when you're a cash taxpayer. So can you just frame up why this is a good opportunity for you? And you've scoped it as sort of 8% of your total capital over the current 5-year plan, is there a chance that, that grows? Is that about where you think you're going to end up? That's my first question.

Yes. Good questions, Greg. I appreciate you asking. First of all, you may recall when we rolled out our new 5-year capital plan late last fall, right, before the EEI conference, we introduced this energy infrastructure category and we put about $900 million into that category out of an $11.8 billion total capital budget. So yes, it's roughly 8%, 9% of our total capital spending. Since then, and given some of the impacts of tax reform, given the fact that other companies in the industry are finding themselves in a position to sell assets, I think we do have a competitive advantage. And 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. So when you look at the whole array of opportunities that we're seeing in the marketplace, actually, Greg, the opportunities that we're seeing, two of which we obviously just announced in the last couple of months, the opportunities that we're seeing to basically acquire high-quality assets that don't change our risk profile, those opportunities are greater than we thought they would be back last fall. Again, it's a small percentage of our total capital budget. When we roll out the new 5-year plan this fall, if I were a betting man, I would think we would increase that the amount devoted to that particular segment a bit. But again, keeping all this in perspective, we're being opportunistic with good high-quality assets here with the driver and this is a great opportunistic situation for us, but the driver is still core investment in our regulated businesses. I hope that helps, Greg.

Yes, it definitely does. And my second question is just with regard to the evolution of the Foxconn, 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. But when I talked to analysts, who focused 100% of their time on the semiconductor industry, like there's just -- there's a debate there as to what type of facility actually gets built, whether it's a facility that is a gen 6 fab or a gen 10 fab, and is Corning going to colocate a gas facility in the state or not because that would be the gating factor towards the larger 10.5 facility. So can you give us a sense of whether you're still confident that those round numbers reflect the commitment to dollars invested in jobs? Or whether there's some sort of a bid-ask spread in terms of what they ultimately build in terms of what types of products they're building whether it's smartphones or TVs and whether that means it's less jobs, more jobs, et cetera?

Great questions, Greg. Let me answer it 2 ways. And obviously, I have been very involved in this project, personally. And within the last 2 weeks, in a meeting with Foxconn senior people, they strongly reiterated their commitment to a $10 billion investment and the hiring of 13,000 jobs. They also, when President Trump came for the groundbreaking ceremony on June 28, they made a public commitment to a $10 billion investment and 13,000 jobs with the President standing right there. So what they're saying is that the mix of products that they are thinking of producing here changes as their assessment of the marketplace changes. So they may build something here different than their original projections, at least that's what they're telling us. But in terms of their ultimate commitment of a $10 billion investment and 13,000 jobs, that remains staunchly unchanged and remains firmly in place. And 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.

The next question is from the line of Julien Dumoulin-Smith with Bank of America.

So perhaps just to turn to the more regulatory side of things, can you discuss a little bit how the legislative mechanism pass in terms of settlements kind of changes your process in terms of the next rate case? I mean that both in terms of going the next rate case filing itself as well as just subsequently through it. I just want to understand that legislation and what it means exactly a bit more clearly.

I appreciate the question, and I think I would have answered that 2 ways for you, Julian. First of all, it really does not change our fundamental approach to a rate filing or to discussions about a rate settlement. What I think the legislation does do is makes it easier and clearer for the commission to accept a nonunanimous settlement. And that's the real key here in that legislation. There was some debate when we went through the last rate settlement, as you recall, which we're now in a rate freeze going on 4 years, there was some debate about whether or not the Public Service Commission had the statutory authority to vote on and approve a settlement that was not completely unanimous among all the parties. This legislation that was passed makes it clear that they can vote on and can decide on the settlement that is not joined by every single party. So I think that's the big difference that the legislation has enabled.

Excellent. All right. And turning back to a couple of little nuancey things. First, with what you've mentioned to Greg here. The wind investments, just can you elaborate a little bit more as to why they are better? And also I suppose implicitly you continue to have appetite given that you still have a '20 onwards tax appetite?

And actually late '19 onwards, yes. Julien, why they're better than what?

Well, the unlevered 8% that sounds better than what you would get on kind of a traditional utility basis.

Yes. No question. We're seeing, in both these investments that we've announced, we're projecting, given the contracts and the details of the contracts, we're projecting better IRRs than you would see on a normal regulated investment. And also because both of these wind projects are eligible for 100% bonus depreciation, the cash return is very significant. So I think, again, given the overall conditions in the industry, with the number of companies trying to repair their balance sheets, where we can be opportunistic because of the strength of our balance sheets and our tax appetite, we're seeing very solid projects that don't change our risk profile. And so we intend to continue to look very carefully at projects in front of us and be opportunistic with something that we think will benefit our shareholders with a portion of our capital spending. Scott, anything to add?

No. You hit it right on the head, Gale. The tax appetite really does help bring that projects getting that cash back from bonus depreciation early on.

Excellent. And to that point actually, just to clarify this, I mean, the solar ITC, the commenced 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, it probably -- if you think about the nonutility side, it probably gives us a little longer runway to look at projects. On the utility side, what we proposed and what we will propose actually fits under the prior time frame for the tax credits. So I don't think it would change anything on the utility side necessarily. But I think it gives us a little bit longer runway on the nonutility side if we make some solar investments in that part of the business.

Your next question is from the line of Michael Weinstein with Crédit Suisse.

Can you just talk about how much of the increase in guidance is due to weather and/or onetime in nature?

I think Scott gave you a nice quick breakdown of that in his prepared remarks.

Well, when you look at the weather for the quarter, I mean, the weather was about $0.04 and the rest is growth. So we raised the top end of the guidance $0.02, really reflecting a combination of the growth that we're seeing and along with the weather. But we didn't raise it any more than the $0.02 because we do have some projects, some maintenance projects that we're looking at for the fall this of 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. So this is why the guidance is still based on 2017. It's not really in the long-term guidance, right? It's not the '18 number. Yes.

Yes, the long-term guidance.

And Michael, I think you can look forward, I mean, historically, in the fall, when we've unveiled the new 5-year capital spending plan, we'll also give you some sense of what our -- updating and rebasing our long-term earnings growth rate. And so I think you'll see us do that on the next quarter's call as well.

Great. And also the increase, the new goal of 80% by 2050, when can we expect to see that start to be reflected in forward capital plans?

Well, we already have -- a very good question. We already have a capital plan in place that gets us probably by about 2023 to the 40% reduction. Remember our first target was a 40% reduction below 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. So then heading towards a 2050 goal of 80% reduction, I think you can start -- we can start seeing some of that capital being injected into our plan 2024 and beyond.

Your next question is from the line of Steve Fleishman with Wolfe Research.

I was curious, your thoughts, one of your neighboring utilities just worked out a deal, the Alliant deal, doing an RO with NextEra with the nuclear, and you obviously have maybe somewhat similar situation with different circumstances. So could you maybe give or 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 2 utilities. If you think about our power supply coming from Point Beach, and right now, we have a contract in place for all of the output of the 2 Point Beach units for the remainder of their lives, which looks like 2030 and 2033 for the 2 units. So 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 our -- of the energy we're delivering. And of course, it's carbon-free and it's dispatchable and basically runs, as you know, as a base load unit 24/7. So it runs and dispatches carbon-free energy regardless of whether the sun is shining or whether the wind is blowing. So it's a very important component today of our power supply and of our ongoing efforts to reduce carbon emissions. So you never say never in terms of doing a buyout like what one of our utility friends has done. But at the moment, I don't see that in our future in part because it's a little bit different situation in terms of the magnitude of the power supply we're getting from Point Beach. I hope that was fine, Steve.

Yes, that's great. And I just want to go back to a prior question. So on your next quarter call, you plan to refresh the long-term capital plan and the long-term growth rate?

Yes, yes. Because that will be right before the EEI meeting, where we can dive into great detail with you, and yes, that's our plan.

Your next question is from the line of Praful Mehta with Citigroup.

So I think you made a point on the call to talk about load growth or sales growth, especially on the gas side. So I wanted to get a little bit more perspective on what's driving that. And secondly, does that -- is that a sustainable kind of growth level that would give you more headroom to kind of increase CapEx? How should we think about that?

That's a great question and it has been one of the positive upside surprises for us. Really, over the last 3 years, if you look at -- and we try to weather-normalize, but you've heard me say before, there are real deficiencies in how our industry weather-normalizes sales. So I'm always reluctant to talk about 1 quarter of weather-normalized data, but we now have 2.5 years of weather-normalized data, which is showing real, continued growth in gas deliveries and customer use of natural gas. I think Scott, we were up like 3.7% and then another 3.7%, so you talk about '16 and '17 being about 3.7% increases on a weather-normal basis. And then as you heard Scott and me say, we had a robust growth in weather-normalized demand in the first half of this year. So it's very hard to tell whether or not that trend will continue, but clearly, the trend has exceeded our expectations. And when you look at it, Scott and I really dove into this in great detail the other day. When you look at, to try to answer the question, what is driving this demand for natural gas beyond our expectations? And it's not just one sector, it's like every sector we looked at was green. Every sector we looked at, we're showing significant increases. So that, combined with customer growth, and we're serving about 15,000 natural gas customers, more than what we were serving at this time a year ago. So I don't want to be overly optimistic here, but what we've seen from the last, basically, 10 quarters, certainly would indicate that there is some other trend going on here which we haven't seen before, driving natural gas usage higher. Now what that means for capital spending, I mean, obviously, we will take a hard look, as we always do, as we roll out our new 5-year plan and you may see some modest increase in capital spending on the gas side simply because of the infrastructure needs. And for example, we have already applied to Wisconsin Commission for 2 projects that would strengthen the natural gas delivery network in the Racine area, where Foxconn and many others are now beginning project work. We simply don't have a strong enough natural gas delivery network to handle all that demand in that part of the state. So there's another $140 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.

It's very helpful and a very interesting trend so we'd love to learn more on future calls as well. And for a second question, I just want to understand a little bit more on the taxes side. As you become a cash taxpayer in that '19 to '20 time frame, just wanted to understand, what is the impact to the FFO? Like how much is the year-over-year impact at that point that you expect? And the reason for the question is, I'm just trying to figure out the FFO-to-debt kind of trajectory impact off that change. And how are you filling that gap? I'm assuming there's something else that's helping fill that FFO gap, so just a little bit color on that would be helpful.

That's a good question. When you look, and our assumptions are that we are partial taxpayers in 2019 and going forward, factoring all in the production tax credit, so we are still at that 16% FFO-to-debt or a little bit north of that. So if we find other projects that have additional tax savings, that would just increase us or put us higher in the FFO range.

That's the net effect of additional projects. It raises, basically from, say 16%, it raises it higher, which is a good thing.

If we can get some additional tax bonus appreciation projects.

Your next question is from the line of Shahr Pourreza with Guggenheim Space.

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 to 150 megawatt range, and I think there was some discussions around whether it would be technically feasible and whether it would pass building codes. Is there any sort of updates that you've had around with discussions around this potential?

Shahr, what I can tell you, and you got a great memory. What I can tell you is, we're 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. So continuing discussions, nothing new yet to report but continuing active discussions.

Got it. And that, depending on how the active discussions go, that's something that -- would that be bid through an RFP process? Or would that be something that would naturally come to you guys?

Well, I guess, there are 2 options. One would be a self-bill by Foxconn, the other would be that we would basically make the investment. And again, too early to really give you a concrete answer at this point except other than everything's on the table and we're looking to how this best works for both parties.

Got it. That's helpful. And then just on, is there any updates on incremental storage opportunities at the utilities?

Incremental gas storage opportunities?

That's right. Yes.

No. Other than that energy infrastructure category that we've developed, I mean, one of the range of options we look at for that category for potential investment, is gas storage, but nothing new to report on that front today.

Your next question is from the line of Jonathan Arnold with Deutsche Bank.

So on the -- just a couple of numbers questions that we wanted to chase down. The other income line where you talked about the lower non-service pension overhead costs, and it's affecting both years. It didn't seem like the 2017 number or line changed this quarter, whereas it did last quarter. So I'm just trying to get a sense of how big was that driver? And what else is going on in the $18 million there?

Yes, that's a good question. There's a lot of stuff that goes through the other income and deduction line here. And unfortunately, some of these items are being reclassed between O&M and these other lines, so it gets really confusing. And when we manage the business, we really look at both of them together. So last quarter, what also goes through here is a couple of items that swing between quarters like we have an investment and some deferred funds out there. Like it was a Rabbi Trust for some deferred comp. And that also fluctuates between corners. But year-to-date, this -- the re-class of this non-service cost for the pension was the biggest number at about $10 million on a year-to-date basis. So there's a variety of items that go both ways, including some miscellaneous interest income and the deferral related to our Forward wind farm. When we put that into rates in Wisconsin, we were allowed to defer a few of those costs to offset and unfortunately, that goes in this line also. So there's a mixture of stuff in there, but this is the biggest item for the quarter and for the year-to-date that really came out.

That pension driver, you just said about $10 million year-to-date. Was that actually a change? Or was it just a re-class?

It's -- it was a re-class out of O&M down here. The benefits last year, a couple of items on why the pension is down. The fund did well last year, the assets grew so their earnings are better this year. The interest expense is down a little bit and we did combine some plans into the Medicare plan A for some other post-employment retirement plans so there were some savings there also.

Jonathan, what you're seeing in that category is a lot of accounting noise and we're going to probably see that -- you're going to see that every quarter. There's just so many items that swing around. And then as Scott said, the new accounting rule required us to reclassify as well. So we try to spitball that out for you as best we can so that you can see what's going on. But it also masks -- all of these things also mask how we're doing on what I call true operation and maintenance costs. And we're still on target there. We said we would expect about a 3% to 4% decline in 2018 over 2017 through O&M, and we're right on target to achieve that.

Okay. That's helpful. And then just one other thing you've mentioned is, you have some audit resolution at ATC. Was that a material item? And is it just this quarter? Or was this all on...

Yes. It's just a very small item for the quarter here. We backed out the tax reform stuff that was negative and we don't anticipate being negative. So it's about $3 million for the quarter.

Your next question is from the line of Paul Ridzon with KeyBanc.

Just on the last question, is that -- 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.

So it was like say, 2004 up through like 2015 or '16.

And that was $2.7 million you said?

It was a $3 million hit for the quarter.

Okay. And then, Gale, you said when you give us a new CapEx deck, we could see more nonutility 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 nonutility?

No. I think -- a very good question. But what we're seeing in terms of the needed investment on our utility core infrastructure, I don't see us pulling that back because those projects are needed. So no, I wouldn't see a dimunition, if you will. We are not going to take capital spending plan away from the core utilities to move it into this particular category. So if anything, there might be a bit of an upside because I think, what we're seeing here, again, in terms of our utility core investments, those are needed projects for reliability. So that would stay steady as she goes. So you might see it -- but I think you might see a bit of an uptick if the conditions we're seeing persist in the other category. And again, to keep all these in perspective, today, it's like 8% to 9% of an $11.8 billion capital plan. But I think, it again reflects the strength of the company that we can take opportunistic advantage of these kinds of good assets.

How much more can you grow the CapEx without issuing equity?

Well, we'll take a look at it. But -- and again, our plan is not to issue equity, but as your earnings grow and as you get bonus depreciation from some of these projects, it gives you some room.

Yes. And we track all the metrics that we talked about before. FFO-to-debt and the holding company debt, in total, you'll get around that 30%. So those are metrics that we're looking at.

Okay. Just -- I think you answered this one already, just want to make sure. Did you say, you're going to rebase the 5% to 7% growth or reconsider the 5% to 7% growth?

No. Rebase. I mean, right now, our 5% to 7% long-term growth rate is based off, as Scott said, the midpoint of our 2017 original guidance. So as we move forward to another year on capital spending, we'll rebase our long-term growth rate off a newer number.

But is the 5% to 7% up for reconsideration?

Based on everything we're seeing, no, I think, 5% to 7% will stay intact.

Your next question is from the line of Andrew Levi with ExodusPoint.

So as I listen, I mean -- 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 EEIs and also, most importantly, in some ways looking at the top line growth and hopefully it will continue into the third quarter, it sounds like at the very least, when you rebase, and I assume, I don't want to kind of preview that but would it kind of be towards the high end of your growth rate going forward, 6% to 7%. Is that the hope based on, especially, if you do get that top line growth?

Andy, stay tuned. We'll be happy to discuss in detail on the next call.

Your next question is from the line of Ashar Khan with Verition.

I wanted to know, again, is there some way that one can translate like the sales growth in the gas businesses, I would say are tremendous. Is there some way to quantify that, say, 2% growth in sales in gas equates to this much in earnings growth? Is there some kind of rule of thumb that one can apply to convert the sales growth into earnings growth?

Yes, generally, we can do that but I would caution you and Scott can -- we'll let Scott give you his rule of thumb, but I would caution you that we are somewhat earnings capped. Because we have sharing mechanisms in place for all 3 of our Wisconsin utilities, including Wisconsin Gas. Wisconsin Electric has a gas component and Wisconsin Public Service has a gas component. So all things being equal, we can give you a rule of thumb, but anything above our allowed rates of return, we properly share with customers. So I would just throw in a word of caution in terms of just blindly using rule of thumb because, again, we are in a promised area that I think is very healthy for everyone where earnings above our allowed return are shared. Scott?

Yes. No, that's exactly correct, Gale. And when you look at sales across all the sectors, then you have about a 1% sales growth in residential, small commercial and transportation in Wisconsin. That equals to about $0.0075 or $3 million pretax. So it's about $3 million of pretax or 1% growth in all the sectors.

Okay, okay. And so just on the point that you mentioned, Gale, so I'm assuming this year you would be, based on this really strong start to the year, you would be on 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 3 of the companies.

Your final question is from the line of Vedula Murti with Avon Capital.

A couple of things. One, going back to the natural gas question. I mean, over a period of time, and I don't -- and I think this is true with Illinois, but I'm not so sure about Wisconsin, about how trends have moved towards wanting to move increasingly to a larger fixed charge, less variable charge and moving increasingly to a decoupled model. And I'm wondering right now if you can remind me of how decoupled or undecoupled you are in Wisconsin, which is helping, I guess, the uplift here in whether going forward as you go through various rate cases, whether you want to -- whatever exposure you currently have, you'd like to maintain or whether you want to take this opportunity, in fact, to move even further into a decoupled scenario given, at least what we've historically seen is long-term natural gas trends.

Vedula, let me kind of tackle that in 2 elements. First of all, we'll talk about our largest gas delivery jurisdictions, Illinois and Wisconsin. In Illinois, there's been a decoupling plan in place for many, many years and it works quite well. But Illinois is basically decoupled, and I expect it will stay that way for decades to come. In Wisconsin, we are not decoupled. And I really don't sense, in terms of the regulatory backdrop here, any big appetite to move toward decoupling at all. And frankly, I think decoupling can be a mixed bag. First of all, getting the details of coupling right is a big deal. We've done a good job of that in Illinois. Here, I think the growth we're seeing and the growth we continue to expect to see, that growth really aligns the company and its business plan with economic growth. So for Wisconsin, I think we're going to continue to see 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. And to follow up on Jonathan Arnold's question about all those cumulative accounting noise issues, pension, OPEB, et cetera, if I looked at the release and everything correctly, I think there was about $0.06, I think, at least for this quarter, if I'm -- if that's correct, that was a positive benefit. And I'm just wondering how we can think about that as we roll forward in terms of either normalization or sustainable, whatever it is.

Scott?

Yes. And when you look at that, we really factored all that is -- all that in. We were really looking at that as part of our O&M expenses and really consolidating it all together. So 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. So I really look 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% or 4%.

Yes. I think -- Scott's right. We kind of have to piece through the details of these 2 pictures, put it all back together and we're still on track for about the 3% to 4% decline that we had projected in O&M expenses compared to last year.

And 2 other last things. One, in Illinois, if I'm not mistaken, there's ROE adjustment mechanism based on levels of interest rates. And can you just remind me how that works where you guys stand? And when it get -- how that gets refreshed if we go into a higher interest rate environment in the future? And then I have one last question.

Vedula, I'll suggest you save that question for Exelon. Because in Illinois, that rate adjustment tied to, I think, 10-year treasury rates. It applies only, at this point in time, to electric, not to natural gas.

Okay, that's good to know. And secondarily, in terms of the utility CapEx to 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 for rolling at $11.8 billion over the current 5 years? I mean, kind of where is like the line where you start thinking, you may need something, is it like 13, I'm just picking up a number. I just want to try and to get your sense on that.

Well, we'll have a lot more details for you on the next call as we refresh the capital plan. Remember though, some of the investments we're making now push out the time frame in which we should become a tax -- a cash taxpayer. And some of these investments also give us 100% bonus depreciation. So you really need to put all of the elements in there. And pretty soon, it's ragu, and it's all in there. But I can tell you this, I think we have some room because of the investments we are making or some increase in the capital plan over 5 years with no equity issuances and our plan is no equity issuances, no drift, we don't need it. None of the outstanding shares we have today are going to be outstanding shares we have tomorrow.

Well, folks, that concludes our conference call for today. We really appreciate you participating. If you have any other questions, feel free to call Beth Straka and her direct line is (414) 221-4639. Take care, everybody. Bye-bye.