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WEC Energy Group Inc  (NYSE:WEC)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to WEC Energy Group's Conference Call for Third 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 all that 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 the 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 financial information is posted at wecenergygroup.com. A replay will be available approximately two hours after the conclusion of this call.

And now, it's my pleasure to introduce Gale Klappa, Chairman and Chief Executive Officer of WEC Energy Group.

Gale E. Klappa -- Chairman and Chief Executive Officer

Good afternoon, everyone. Thank you for joining us today, as we review our 2018 third quarter results. But first, a quick personnel update. As we announced earlier this month, Allen Leverett, who has been on medical leave since suffering a stroke last October, has resigned from active duty with the Company. Allen will continue to serve on our Board of Directors, and I'm delighted that Allen will continue to bring his insight and his experience to our deliberations.

In light of Allen's decision to resign, our Board has elected Kevin Fletcher as the new President of WEC Energy Group. Kevin has more than 40 years of experience in the energy industry, most recently as President of W Energies and Wisconsin Public Service, our largest subsidiaries. His main focus will be on the operating and financial performance of our seven customer-facing utilities and he will report directly to me.

I've had the privilege of knowing and working with Kevin for the past 25 years. With his experience in engineering, operations, customer service and economic development and, of course, a strong focus on financial discipline, Kevin will provide great continuity for our organization going forward. For those of you who haven't met Kevin, he will be on hand with us at the EEI meetings in San Francisco and we're both looking forward to seeing you there.

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; Bill Guc, our Controller; Peggy Kelsey, Executive Vice President and General Counsel; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations.

Now, as you saw from our news release this morning, we reported third quarter earnings of $0.74 a share. This compares with $0.68 a share for the third quarter last year. Our strong performance was principally driven by three factors. First, higher demand for electricity and natural gas, reflecting a robust economy across the region, warmer than normal summer temperatures and our continued focus on efficiency and cost control throughout our operations. Scott will provide you with more details on the quarter in just a few minutes.

But first, let's take a brief look at the economic conditions right here in the Heartland. Wisconsin's unemployment rate has been at 3% or lower for the past eight months. That's the longest stretch of near full employment in state history. The state has also witnessed significant growth in the manufacturing sector in the past year, and I believe there are even greater opportunities ahead.

For example, in late September, Komatsu Mining announced plans for a new development here in Milwaukee. Komatsu, as many of you know, a global leader in heavy construction and mining equipment has agreed to develop 43 acres for a state-of-the-art manufacturing facility and a new corporate office. Komatsu will invest $300 million of the project, which will have a defining impact on Milwaukee's Harbor District. The site is expected to be eventually housing more than a 1,000 workers.

And looking just south of Milwaukee, four months have now passed since Foxconn's official groundbreaking for the Wisconn Valley Science and Technology Park. In that time, a tremendous amount of progress has been made on this $10 billion high-tech manufacturing campus. Everyday now now brings an average of 400 workers to the site, about 3.5 million cubic yards of soil have been excavated and work has begun on the first building. The wall panels for that building were designed and assembled right here in Wisconsin. And to-date, more than 90% of all the contracts for the Foxconn development have been awarded to Wisconsin-based companies. As some of you may know, Foxconn is also planning to expand its reach in Wisconsin with innovation centers in Milwaukee, Green Bay, Eau Claire and Racine. We're just beginning folks to see the tremendous catalytic effect of Foxconn's investment plans for the region.

And next, I'd like to touch on our WEC Energy growth plan and the investment opportunities we see unfolding over the next several years. You may recall that our capital budget, which includes our share of American Transmission's capital spending was $13.4 billion for the five-year period 2018 through 2022. Today, we're announcing an updated five-year capital forecast for the years 2019 through 2023. Our new capital investment plan stands at $14.1 billion, an increase of $700 million over the previous five-year plan. We look forward to sharing all the details of our $14.1 billion plan with you at the upcoming EEI conference.

As you may have seen though from our earnings packet that we released this morning, we have growing opportunities in our natural gas delivery and energy infrastructure segments. Overall, I would say that our investment plan is exactly what you would expect it to be, solid low-risk projects, highly executable with no big bets.

Today, we're also reaffirming our long-term earnings growth rate of 5% to 7%, and we're updating the base for that growth rate. The new base is $3.28 a share. That's the midpoint of our original guidance for 2018. So folks when you put all the pieces together, our new capital plan should support an earnings-per-share growth rate in the low 6% range.

Switching gears now to our current capital projects. We're making real progress across the board on our electric and gas network upgrades, our generation projects and on our non-utility infrastructure segment. As you recall in late June, we announced an agreement to acquire an 80% ownership interest in the Bishop Hill III Wind Energy Center, that's located in Henry County, Illinois. We received approval from the Federal Energy Regulatory Commission on August 29, and two days later, we closed on the acquisition.

Then in early October, we took advantage of an opportunity to increase our equity interest by an additional 10%. Pending FERC approval, we will have a 90% ownership interest in this wind farm. As a reminder, this wind facility was developed by Invenergy and was placed in the service this past May. It consists of 53 general electric turbines with a capacity of a 132 megawatts. In total, our investment is expected to be a $166 million. The project has a long-term 22-year offtake agreement with one of our current wholesale customers, WPPI Energy. So this investment is really a logical extension of our core wholesale power business.

And now for a brief update on our planned investment in the Upstream Wind Energy Center. On June 15, we filed with the Federal Energy Regulatory Commission for approval to purchase an 80% ownership interest in the Upstream project. This wind farm is located in Antelope County, Nebraska. It consists of 81 GE wind turbines with a capacity of approximately 200 megawatts. Our purchase price is expected to be $280 million, and again, that purchase price, the $280 million is reflected in our infrastructure segment in our new five-year plan.

The project has a long-term tenure offtake agreement with an affiliate of Allianz, which is A-rated publicly traded company. We expect to close on the purchase in early 2019 after construction is complete. Under the new tax rules, our original investments in these two wind farms qualify for production tax credits and 100% bonus depreciation. We expect the return on these investments to be higher than our regulated returns. Specifically, we're projecting an unlevered internal rate of return above 8% or in the mid-teens on a levered basis, and we're projecting returns on equity based on a 50-50 capital structure at or above our retail returns.

We're also making progress in our quest to add utility scale solar generation to our portfolio of regulated assets. To refresh your memory, on May 31, our Wisconsin Public Service subsidiary, along with Madison Gas and Electric, filed a joint application with the Wisconsin Commission to purchase 300 megawatts of solar generation at two locations. The Badger Hollow Solar Farm will be located in Southwestern Wisconsin in Iowa County and will be developed by Invenergy. The Two Creeks project will be located in the City of Two Rivers in Northeastern Wisconsin near the Point Beach Nuclear Power Plant. The Two Creeks project is being developed by NextEra. Our Wisconsin Public Service subsidiary will own a 100 megawatts at each site with an investment of approximately $260 million. Pending regulatory approvals, we expect construction for both projects to begin next spring with commercial operation by the end of 2020.

Over the past few years, 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. Our investments in zero-carbon generation will support our aggressive long-term goal to reduce CO2 emissions by 80% below 2005 levels by the year 2050.

Turning now to Illinois, as I've said before, the Peoples Gas System Modernization 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 $270 million in the effort this year, the overall project is now approximately 26% complete. And now a word about our Minnesota utility. In October of last year, Minnesota Energy Resources filed a rate case with the Public Utilities Commission. Interim rates are currently in place and hearings in the case were held in mid-July. We expect the Commission decision by year-end.

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. Engineering and procurement are essentially complete now and construction stands at 65% complete. Our plan is to bring the new units into commercial service in the second quarter of 2019, and at that time or soon thereafter, we expect to retire our coal-fired power plant at Presque Isle. We're investing $266 million in 10 reciprocating internal combustion engines or as we call them RICE units. They are capable of generating a total of a 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 you can say it with me, we're on time and on budget.

And finally, a reminder about our dividend. At our January meeting this past winter, the Board of Directors raised the quarterly cash dividend to $0.5525 per share. That's an increase of 6.25% over the previous dividend rate. And as is typical, our Board will assess our dividend plans for 2019 coming up in December.

And now with details on our third quarter results and our outlook for the remainder of 2018, here's our Chief Financial Officer, the famous, Scott Lauber.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Gale. Our 2018 third quarter earnings of $0.74 per share were $0.06 per share higher than the third quarter of 2017. These favorable results were largely driven by higher sales volumes and continued effective cost control. Warmer than normal summer temperatures, coupled with strong growth in the region, drove electricity use above our forecasts. The earnings packet placed on our website this morning includes a comparison of third 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 nine of the earnings packet, our consolidated operating income for the third quarter of 2018 was $303 million compared to $392 million during the third quarter of 2017, a decrease of $89 million. Excluding two tax items, totaling $93 million, operating income actually increased $4 million. As previously discussed on the last two calls, the first tax item reflects the benefit of tax repairs, which was part of our 2017 Wisconsin rate settlement and the second item relates to the Federal tax legislation. We have a breakout of these items for your reference on page seven and eight of the earnings package.

Recall that as part of our Wisconsin settlement, we agreed to apply the benefits of tax repairs to offset the growth of certain regulatory asset balances. The plan is proceeding as expected. And then, regarding the benefit 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. As of September 30, 2018, the balance stands at about a $125 million, nearly a $100 million reduction from the year-end 2017.

By segment update, we'll focus on the $4 million increase in operating income as shown on page nine of the packet. Starting with the Wisconsin segment, the increase in operating income, net of tax adjustments, was $6.5 million. Higher sales volumes drove approximately $34 million increase in margins. This was partially offset by the $20.2 million increase in operation and maintenance expense and a $7 million increase in depreciation expense.

The increase in operations and maintenance expense was largely driven by two items. The first item was a $7.9 million expense related to staff reductions as we continue to streamline processes and reshape our generation portfolio. Second, we accrued $15 million related to the earnings sharing mechanism we have in place at our Wisconsin utilities. This was a result of our strong performance year-to-date.

In Illinois, operating income increased $800,000, net of tax adjustments. The increase was primarily driven by our continued investment in the Peoples Gas System Modernization Program. Recall that this program is necessary to replace approximately 2,000 miles of cast iron pipes in practically one of every two streets in Chicago. Excluding the impact of tax reform, operating loss at our other states segment increased $4 million, largely due to the timing of expenses in the quarter.

Turning to our non-utility energy infrastructure segment, excluding the impact of tax reform, operating income at this segment increased by $800,000, mostly due to additional investment in our Power the Future plans. As a reminder, this segment also contains the operations of Bluewater Natural Gas Holding, which was acquired on June 30, 2017 and one month of operation at Bishop Hill III Wind Energy Center. The operating loss at our corporate and other segment increased to $400,000 in the third quarter of 2018. Combining these changes and excluding the two tax items I discussed, operating income increased $4 million.

Earnings from our investment in American Transmission Company totaled $33.7 million, a decrease of $5.5 million as compared to the third quarter of last year. Excluding the $8.4 million impact from tax reform, our equity earnings increased $2.9 million, driven by continued capital investment. Other income net increased by $8.3 million quarter-over-quarter. This was largely due to decrease in the non-service cost component of our pension and benefit plans. Historically, the non-service cost component of these plans reflected an operations and maintenance expense. However, a new accounting rule required it to be reclassified to other income in both years.

Our net interest expense increased $8.2 million quarter-over-quarter, primarily driven by continued capital investments and slightly higher interest rates. Our consolidated income taxes decreased by a $113 million. 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 14% and 15% this year. Excluding the benefits related to tax repairs, we expect the effective tax rate would be between 24% and 25%. These are generally in line with the expectations we provided on the last quarter call. Consistent with last quarter, we expect to be a cash taxpayer by the end of 2019.

Looking at the cash flow statement on page six of the earnings package, net cash provided by operating activities increased $263 million during the first nine months of 2018. Recall that we made a $100 million contribution to our pension plan in 2017. Higher earnings as well as a decline in working capital contributed to the increase in cash provided by operating activities.

Our capital expenditures totaled approximately $1.5 billion during the first nine months of 2018, a $181 million increase compared to the same period in 2017, as we continue to execute our capital plan. Our adjusted debt-to-capital ratio was 52.3% at the end of the third quarter, a decrease from the 52.5% at the end of 2017. We continue 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 and we continue to expect FFO-to-debt to be in the range of 16% to 18%.

We paid $523 million in common dividends during the first nine months of 2018, an increase of $30.6 million over the same period last year. Higher dividends were driven by the 6.25% increase in the dividend level compared to the first nine months of 2017.

Moving to sales, we continue to see customer growth across our system. At the end of September, our utilities were serving approximately 11,000 more electric and 15,000 more natural gas customers than they did the same time a year ago. Retail electric and natural gas volumes are shown on a comparative basis on page 13, 14 of the earnings package.

Overall, retail deliveries of electricity, excluding the iron ore mine, were up 6% for the quarter and on a weather-normalized basis, retail deliveries were up 2.6%. Natural gas deliveries in Wisconsin increased 3.5% versus the third quarter of 2017. This excludes gas used for power generation. Natural gas deliveries in Wisconsin grew by 3.3% on a weather-normalized basis. Weather-normalized electric and natural gas volumes were above our expectations for the first nine months of 2018.

Turning now to our earnings forecasts. We are reaffirming our 2018 earnings guidance of $3.32 a share. As always, this projection assumes normal weather for remainder of the year, and as a reminder, our Wisconsin utilities are subject to an earnings sharing mechanism. I'm looking forward to seeing many of you at EEI in sharing details of our capital plan, which should continue to support our ability to grow efficiently the business.

With that, I'll turn things back to Gale.

Gale E. Klappa -- Chairman and Chief Executive Officer

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.

Questions and Answers:

Operator

Now we will take your questions. The question-and-answer session will be conducted electronically. (Operator Instructions) Your first question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.

Gale E. Klappa -- Chairman and Chief Executive Officer

Hi, Julien, how are you?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Good. Good afternoon. Congratulations.

Gale E. Klappa -- Chairman and Chief Executive Officer

Thank you, sir.

Julien Dumoulin-Smith -- Analyst

Absolutely. I should add my congrats to Kevin there as well. So perhaps, with that, I'd love to hear a little bit more on the CapEx plan articulated here. I know you addressed specifically the returns profile already. Just curious, is that ROE change over time or is that pretty consistent as far as the criteria that you're employing and as best you understand the investments that you've already committed to, that it's pretty consistent at that 50-50 at or above utility returns? And then also within that, if you could comment, have you -- what portion of the energy infrastructure CapEx that you've delineated have you already sort of identified? I know that you've got at least one project named already thus far.

Gale E. Klappa -- Chairman and Chief Executive Officer

Yeah. Very good questions, Julien. Thank you. First of all, in terms of the return criteria that we're using, let me back up and say that I view this whole infrastructure segment that we've introduced over the last 24 months really as a sign of how strong the Company is. As you know, we're one of the few companies in the industry that does not have to issue equity to finance our growth, that has a tax appetite and we are seeing, because of just the backdrop in the industry, I believe, we're seeing very, very good assets that we're able to take a look at and able to be very discerning in terms of the particular projects that we would actually bring into the segment. So long story short, certainly cash returns, IRRs and ROEs are all an integral part of how we look at these projects. And I do see the projects when we talk about at or above our retail rate of return for these projects, we're really looking at an average return over the course of the life of the projects. So that's, I hope, answering one of your questions. In many cases, the returns are somewhat higher in the early years. But when we look at this, we're looking at consistent returns on average across the life of the assets.

And then in terms of the projects that we already have basically under way, you remember last year, we closed on the Bluewater Natural Gas Storage asset and then this year, we added the Bishop Hill III book, first at 80% ownership interest, now at 90% ownership interest and we're also contractually committed to bring on-board next year after construction is complete the Upstream Wind Energy Center in Antelope County, Nebraska. So in essence, one way to look at it is with Upstream coming on-stream next year, about 20% of the segment amount for the next five years is already in-house, if you will. And we have a number of projects in the pipeline that we're looking at, some of which I think will come to fruition, but we have a very good robust pipeline of projects that we're taking a look at. Rest assured, we will be disciplined. We're not going to do something that materially changes our risk profile and we're not going to do something that does not meet our return criteria. I hope that helps, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Absolutely. And just a quick follow-up clarification. Just with respect to the precise succession timing as you all think about it and don't mean to pin you down here and now, but how are you thinking about it, just the timeline here, if you will?

Gale E. Klappa -- Chairman and Chief Executive Officer

For CEO succession?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Yeah. Just to make sure we've got that clear.

Gale E. Klappa -- Chairman and Chief Executive Officer

Okay, sure. Well, we have no -- we have not set a timetable for any additional change at the CEO level. So I think Julien you'll have me around to ask questions to -- for quite a while.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Excellent. Okay, I'll leave it there. Thank you.

Gale E. Klappa -- Chairman and Chief Executive Officer

Very good. Thank you, Julien.

Operator

Your next question comes from Greg Gordon with Evercore. Your line is open.

Gale E. Klappa -- Chairman and Chief Executive Officer

Good morning. Good morning, Greg. Yeah. How are you doing, Greg?

Greg Gordon -- Evercore -- Analyst

I'm good. Before we -- I ask you any questions, do you have any questions for me about the jets?

Gale E. Klappa -- Chairman and Chief Executive Officer

I kind of do, but we'll save those for later.

Greg Gordon -- Evercore -- Analyst

Great.

Gale E. Klappa -- Chairman and Chief Executive Officer

By the way, my bucks are 7.0.

Greg Gordon -- Evercore -- Analyst

They do look good, basketball is not New York's forte right now, that is for sure. So I've got a couple of questions. The first is, I know that and I asked you about this on the second quarter call, so I'd just love your observations after another quarter has gone by. I know that there's a lot of activity out at the Foxconn site, but there continues to be some question about exactly what they are going to build there. Now, I know they're committed at a high level to a level of investment and a level of job creation, but the level of sort of economic demand pull for energy that comes from both that side and from the follow-on investment for the supply chain will be a big driver for what you ultimately have to invest to serve the region. And so I'm wondering at this point, given that the increase in the CapEx budget, while substantial wasn't demonstrably in the core electricity business. What you're waiting for in terms of visibility so that we can then get a sense of what you're going to need to invest to support the economic growth that comes from that?

Gale E. Klappa -- Chairman and Chief Executive Officer

Good questions all, Greg, and kind of let me take them one at a time. First of all, let me try to clarify the changes in our five-year capital plan compared to the previous plan for 2018 through 2022. What you see basically is an increase in the natural gas delivery segment because, again, we are seeing growth across the board in terms of all of our customer segments in terms of natural gas demand. That includes about a $140 million of capital that we expect to spend in the area that Foxconn is being developed.

So when you look at our capital spending, our focus remains clearly on the regulated business and the growth opportunities that we need to serve customers reliably in the regulated business. The increase in the natural gas delivery segment was somewhat offset by a slight decrease in transmission. And there, American Transmission is coming off of two very large projects that they're completing inside the footprint. And as you know, some of the transmission is a bit episodic and project-by-project, so the downturn we're seeing here in the American Transmission Company piece of the budget is really just reflecting the completion of two very large capital projects.

On the energy infrastructure piece that we've talked about, it's only 10% of our projected capital spending for the next five years. So I just want to make sure that everyone understands. Our focus is still clearly on the growth in the regulated business and the investments we need to maintain reliability and great customer service, but we do see growth, particularly in the natural gas delivery segment.

Now, to Foxconn itself. They are in the final stages of completing their design for that entire campus. And our technical people meet with their folks literally every week. The changes that they have made so far have really had no material effect on the projected demand for electricity that we're seeing. I mean, we are -- we've been seeing for a number of months as they refine their designs, demand of about a 180 megawatts and that's still in place. So I think, to be honest with you, and we've seen some articles that this frankly are absolute hit pieces, there's a lot going on right now, just tremendous progress on the campus and across the state. And in fact just a few weeks ago, the Chairman of Foxconn committed to a $100 million contribution to the engineering school at the University of Wisconsin in Madison. So they are full speed ahead from everything we can tell. And in terms of the catalytic effect that I mentioned, there's already been announced, in the area, within a few miles of where the Foxconn Campus is going to be, it's already been announced $300 million of additional capital investment by non-related parties, medical complexes, hospitals, hotels, business parks, it's really amazing to see the immediate catalytic effect and I think we're just at the front end of it. So that's kind of my summation of where we are. And again, from everything we can tell, even though their design has changed a bit, the fact that they're building what they call a Gen-6 instead of a Gen 10-5 fabrication facility hasn't changed what we're seeing in terms of either their demand for electricity or the catalytic effect that we're seeing that we expected to see. And let me just put one number to it. We did a study, this was not a government study, this was something that we did with an outside econometric firm. And if Foxconn delivers on all the promises that is made, we expected to, and earns all the state tax credits, we would expect $54 billion over the next 15 years of new economic activity for the state, $54 billion, which would be about a return of 18 to 1 on the state tax credits. So that's my summation. Greg. I hope that helps.

Greg Gordon -- Evercore -- Analyst

It does. Thanks. That's -- I'll hop off there. That's really thorough. Thank you.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Gale E. Klappa -- Chairman and Chief Executive Officer

Good afternoon, Michael. How are you doing?

Michael Weinstein -- Credit Suisse -- Analyst

Hi, guys. Hey, Gale. How are you doing?

Gale E. Klappa -- Chairman and Chief Executive Officer

We're good.

Michael Weinstein -- Credit Suisse -- Analyst

Glad to hear it. Hey, if the returns are very similar to regulated returns on the energy infrastructure business, why eliminate the 10%? Is there any risk that is not current that might want you -- that might force you to limit to 10% or make it desirable to limit it in some way?

Gale E. Klappa -- Chairman and Chief Executive Officer

Michael, if I'm understanding your question, is there any risk that we see that might put the 10% returns in danger? Again, we're only looking at --

Michael Weinstein -- Credit Suisse -- Analyst

No. I'm thinking that 10% -- like when they get to 10% of earnings, I think that's what you were referring to before, right?

Gale E. Klappa -- Chairman and Chief Executive Officer

No. What I meant was 10% of our capital spending plan for the next five years.

Michael Weinstein -- Credit Suisse -- Analyst

Okay. And why limit it to that? Why have any limitations on it, if it's only the same kind of the returns as the utilities?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, to be honest with you, we are seeing enough significant opportunity directly in our retail regulated business that we're also seeing increased capital opportunities there. So we want to keep a reasonable balance here. If we saw some incredible opportunity that put us above the 10% of capital spending in that segment in the next five years, we would certainly do it. But I think that's a reasonable estimate at this point, and again in part because we're also seeing really good opportunities in our core.

Michael Weinstein -- Credit Suisse -- Analyst

Got you. And also the $140 million that you alluded to for extra gas spending and it's directly tied to the Foxconn site. Is that like -- is that for primary service to Foxconn itself or is that secondary service to surrounding community needs or growing community needs or is it some combination of both? And then a follow-up question to that would be, you also said that this is just the very beginning stages of something that could be huge. Is that also the same -- is the $140 million also the beginning of some potentially huge opportunity, just the tip of the iceberg, if you will?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, Michael, just to be clear, the $140 million that we've actually filed for approval, the $140 million of gas distribution projects that we filed for approval with the Commission represents the additional investment that we think we're going to need to accommodate the economic growth in the region. So it's Foxconn plus, if you will. So that's about a $140 million investment, two separate gas distribution projects because we simply don't have enough infrastructure in terms of natural gas delivery in that area right now to accommodate both Foxconn's growth and the additional growth we're starting to see. Could the natural gas delivery segment grow even faster? If we see additional economic growth beyond what we're projecting in that area, yes. But at the moment, I think that initial $140 million investment will cover us for the next several years.

Michael Weinstein -- Credit Suisse -- Analyst

Got you. Okay. Thank you very much.

Gale E. Klappa -- Chairman and Chief Executive Officer

Thank you, Michael.

Operator

Your next question comes from Praful Mehta with Citigroup. Your line is open.

Praful Mehta -- Citigroup -- Analyst

Thanks so much. Hi guys.

Gale E. Klappa -- Chairman and Chief Executive Officer

How are you doing?

Praful Mehta -- Citigroup -- Analyst

Hi. Good. Well, thanks for taking my question. I guess, the catalytic effect was actually quite an interesting point and clearly sounds like a big opportunity around Foxconn going forward. How should we think about it though from a growth and opportunity perspective? Is that -- if that plays out, is that increasing your growth from the 6% going forward or do you think about it more as maintaining the 6%, but helping keep the bill pressure down through that cycle? How you -- how should we kind of frame the opportunity from a utility perspective?

Gale E. Klappa -- Chairman and Chief Executive Officer

Great question, and I think it's the latter. I mean, first of all, there is no question in my mind that all the economic development we're seeing, I mentioned Komatsu, which is a major project right in the Harbor District in Milwaukee, there's HARIBO, the candy company that's coming to Southeastern Wisconsin, Milwaukee Electric Tool has had two major expansions. Amazon, a couple of years ago, built a huge distribution center and is expanding -- or has expanded that distribution center. So all of that really is -- and the investment opportunity for infrastructure, a regulated infrastructure that we need to make to support all that growth, I think that is, in my mind, basically giving us an even longer runway to our 5% to 7% or in the middle of the range low 6% growth rate. And definitely with stronger kilowatt hour sales, and you'll see as we roll out our plans in more detail at EEI, you'll see we've raised our projected growth rate of sales for both natural gas and electricity a bit. That's also helping to keep rate pressure down, no question about it.

Praful Mehta -- Citigroup -- Analyst

Got you. Thanks, that's helpful color. And then secondly, I mean given all this opportunity that you have around investment both on the regulated and the unregulated side, the -- I guess, the constraining factor must be the balance sheet and the credit. And so just to understand that, you're clearly getting to be a cash taxpayer by '19, so I guess at some point, the metrics would come a little bit of pressure in 2021, as you become a cash taxpayer. Should we think about that as the constraining factor in terms of how much you can push from a credit perspective or HoldCo debt perspective? How should we think about credit in the context of this opportunity?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, I'll start out and I'm going to ask Scott for his view to give you as well. I would say this, I mean -- and we did say we would expect, absent any other infrastructure projects, that we would become a tax -- a cash taxpayer next year. But again, we have the tax appetite to be able to take on some very good projects that don't change our risk profile. So I don't particularly see -- we're going to maintain a strong balance sheet, we're going to maintain our credit rating, we're going to maintain the FFO metrics where we need them to be, but I don't see that as a huge deterrent at this point.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

No, no, you're exactly correct, Gale. We're -- that 16 to 18 FFO to debt is right in line, in fact, we're running at the high-end of that this year. And as you look at opportunities and you take a 100% bonus depreciation, perhaps another project or two will even help our FFO in the other years. So we're comfortable in that 16 to 18, we just want to be realistic in the opportunities and how we roll out our capital plan.

Praful Mehta -- Citigroup -- Analyst

Got you. Thanks, Scott. So you don't see it even in 2021 any pressure to that 16 to 18 coming down or staying at the lower end of that 16 to 18?

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

No, not at --

Gale E. Klappa -- Chairman and Chief Executive Officer

Not this time. No.

Praful Mehta -- Citigroup -- Analyst

All right, great. Much appreciated, guys. Thanks so much.

Gale E. Klappa -- Chairman and Chief Executive Officer

Thank you for your question.

Operator

Your next question comes from Michael Lapides with Goldman Sachs. Your line is open.

Michael Lapides -- Goldman Sachs -- Analyst

Hey, Gale, thanks for taking my question.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome, Michael.

Michael Lapides -- Goldman Sachs -- Analyst

Actually, I have one small housekeeping item, which is, if I look at your $3.32 in EPS guidance for the year and then the $2.70-ish or so you've done year-to-date, that implies $0.62 for the fourth quarter. That's below fourth quarter last year by decent chunk. Just curious, was there something in the fourth quarter last year that was unusual or abnormal that was a benefit that you might not get in this fourth quarter or is there something else fundamental or just one-time in nature that's happening this fourth quarter?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, good question, Michael. And I think I'll ask Scott to give you some details on this, but long story short, our performance at the Wisconsin utilities has been very strong this year. And you remember the earnings sharing mechanism that we have in place with anything above our allowed retail rate of return. So in essence, any outperformance that we would have in the fourth quarter of this year would basically be subject to the earnings sharing and therefore not flow through to our bottom-line earnings per share report. So you have to take into account where we were last year with earnings sharing and where we were this year. Scott?

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, that's exactly it. So going into last year's fourth quarter, we were not in the earnings sharing and between fuel and weather, we gained about $0.09 and just started to get into that sharing mechanism of about $2 million. And like Gale said, we're near the top of that 50-50 band now, so the opportunity for additional $0.09 doesn't exist.

Michael Lapides -- Goldman Sachs -- Analyst

Got it, OK. One other thing. I'm going to sound like a broken record, you can go back and read transcripts for the last 2.5 years --

Gale E. Klappa -- Chairman and Chief Executive Officer

When I can't get to sleep at night, I go back and, where were the Michael questions.

Michael Lapides -- Goldman Sachs -- Analyst

Well, it's the same question every time because your demand growth numbers are clearly conservative, they have been for 2, 2.5, almost 3 years on the gas side. Any thoughts on the fact that they maybe also conservative on the electric side as well? And what would have to happen to make your rebase higher?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, I think when you see all the details of our capital plan and our projections going forward, we have rebased a little bit. We were basically projecting flat, almost 0% to 0.5% electric demand growth. I think Scott is adding almost a 1% to that in terms of annual expectation of electric demand growth in light of the opportunity we're seeing. And then we're also rebasing up just a hair our natural gas expectation for growth as well.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct and this last year across the board in every class we're seeing that natural gas. So having stable gas prices, I don't -- residential customer growth is good, but still as appliances get replaced, they are just becoming more efficient. So I just have a hard time seeing residential continue to grow at that same pace year-over-year other than new customers.

Michael Lapides -- Goldman Sachs -- Analyst

Got it, guys. Thank you. Much appreciated, Gale, Scott.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome, Michael. See you soon.

Operator

Your next question comes from Jonathan Arnold with Deutsche Bank. Your line is open.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, Jonathan.

Jonathan Arnold -- Deutsche Bank -- Analyst

Hi, guys.

Gale E. Klappa -- Chairman and Chief Executive Officer

Jonathan, a question for you. I've been meaning to ask, how's your mom doing in England?

Jonathan Arnold -- Deutsche Bank -- Analyst

Yeah. Just fine. Just fine. Thank you, Gale. They haven't deported me yet, but we'll see how we go about.

Gale E. Klappa -- Chairman and Chief Executive Officer

She is still getting good electricity from my former company, I take it.

Jonathan Arnold -- Deutsche Bank -- Analyst

Yes, indeed. So just on the capital plan, you gave us the 10% number. I mean, this might be something you'd rather save for EEI, but when you showed the graphic before, the energy infrastructure was 8% of the sort of capital plan, excluding transmission. Are we now talking about 10% on the same basis or is it 10% of the 14.1?

Gale E. Klappa -- Chairman and Chief Executive Officer

No, it's 10% of the 14.1.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay, great. Thank you for that. And then on transmission, just looking back, I think what you had said was that you were booking 10.82%, but you expect it to migrate to something like 10.2% ROE at some point. My question is, what point in your sort of projection of this earnings, the 6% level, do you see that migration happening? And then, if you have any comments on this related machinations out of FERC on the model?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, Jonathan, you're correct on both counts. We're still booking because that's the allowed rate of return today, the 10.82% on our earnings from American Transmission Company. As you know, there have been a number of complaints from around the country pending at the Federal Energy Regulatory Commission from customers asking whether or not the current allowed rates of return on transmission all over the US are quote-unquote in the zone of reasonableness or not. As you know -- I mean, FERC has begun to take some action. The first indication of where they might go just came probably 10 days, two weeks ago when they began looking at the complaint that's on their docket from the Northeastern United States, the Northeastern utilities, if you will, and FERC has laid out four-comment, a proposed new methodology, which kind of combines four different metrics as opposed to just a single metric that they had been using In the past.

Again, I think it's going to be a while before we get any clarity from the Federal Energy Regulatory Commission because I believe, first of all, there's a 60-day comment period that puts us close to the end of December. So I would expect them to take some kind of action in the first half or first quarter of next year. And then I would guess that the Midwestern complaints would be on the docket after that. So -- but we are still assuming that the 10.2% will come down and our conservative estimate right now is 10.2%. And that 10.2% is embedded in our 5% to 7% growth rate, Scott?

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct. So we haven't made a final determination on when we think it will go down yet, but for our five-year plan, we assume that it goes to the 10.2%, which that includes the 50 basis point add for being part of MISO.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay, great. Thank you for that clarity. And then just on the -- you gave some pretty explicit guidance on where you see earnings within the range. Do you see with this plan a reasonably linear trajectory or is it possible to start out higher, migrate lower, we have less visibility at the back end, just any -- or is that -- was that intended more throughout the planned type of level?

Gale E. Klappa -- Chairman and Chief Executive Officer

Really was intended pretty much to be linear throughout the plan.

Jonathan Arnold -- Deutsche Bank -- Analyst

Okay, great. That's all I have. Thank you, Gale.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome, Jonathan.

Operator

Your next question comes from Paul Ridzon with KeyBanc. Your line is open.

Paul Ridzon -- KeyBanc -- Analyst

Perfect. How are you, Gale?

Gale E. Klappa -- Chairman and Chief Executive Officer

We're good. How are you, Paul?

Paul Ridzon -- KeyBanc -- Analyst

Good, good. Just along the lines of the previous question, the 10% of the CapEx budget being for infrastructure segment, is that constrained at all by your statement that you won't issue equity? I mean, if you're willing to issue equity, could you make that bigger?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, if we wanted to issue equity, we could make it bigger, I assume. But again, we are being very, very disciplined in terms of the projects that we want to bring into this segment. So I think the reason we landed on this particular number for the energy infrastructure segment and the reason we ended up at 10% of our expected capital spend over the next five years with basically 20% of it already done is that's about the quality of the projects we're looking at. I mean, I think since we're being very disciplined and very risk-averse here and we're not going to change our risk profile, that amount is about what I think we can spend in terms of the kind of projects we want to bring in-house. So it's really constrained more by our disciplined approach and by our return criteria than it is, I think, Scott, by any type of financial constraint.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

No, no. If opportunities came, we'd have room to even do more in that 5% to 7% without issuing any equity. So it's not the financial, it's more of the opportunities to make sure we're realistic in the expectations to achieve our returns.

Paul Ridzon -- KeyBanc -- Analyst

Thank you, that's helpful. And then just on the FERC ROEs, are you reserving at all against the 10.82%?

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

No, the 10.82%, we are not. There is one complaint period that does exist that is open yet and that is reserved at that 10.2% level. But that's the open complaint period that we're waiting to hear at the final result time.

Gale E. Klappa -- Chairman and Chief Executive Officer

And around the FERC rules, basically the 10.2% for this period, the 10.2% is basically the allowed return.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

The 10.82%.

Gale E. Klappa -- Chairman and Chief Executive Officer

I'm sorry, the 10.82%, yes, is the allowed return. So other than the one complaint period that Scott talked about, where we do have a reserve, we don't think there's any real challenge ability to basically take on the 10.82% because that is the allowed return for this period.

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Correct.

Paul Ridzon -- KeyBanc -- Analyst

Okay. Thank you.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Richard (inaudible) with Bank of America. Your line is open.

Gale E. Klappa -- Chairman and Chief Executive Officer

Good afternoon, Richard. How are you? Rich is not well.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey. It's -- I think it's Julien here, again. Can you hear me?

Gale E. Klappa -- Chairman and Chief Executive Officer

Hi, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Sorry. Sneaking on here real quickly. Can I just clarify real quickly, just in the transcript, it looks like you might have said a different earnings base than you might have meant for 2018 for the midpoint of the guidance. How -- you introduced 2018 earnings guidance earlier this year, $3.26 to $3.30. The midpoint of that is the new base, right, at $3.28, is that correct?

Gale E. Klappa -- Chairman and Chief Executive Officer

That is exactly correct.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Okay. I just wanted to clarify that for the transcript. Thank you.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome, Julien. I think you're trick or treating and masquerading as one of your analysts.

Operator

Your next question comes from Vedula Murti with Avon Capital. Your line is open.

Gale E. Klappa -- Chairman and Chief Executive Officer

Vedula, how are you today?

Vedula Murti -- Avon Capital -- Analyst

I'm doing well, Gale. Hey, good luck to your Brewers next year.

Gale E. Klappa -- Chairman and Chief Executive Officer

Yeah. Hey, my bucks are 7.0.

Vedula Murti -- Avon Capital -- Analyst

Okay. Something to look forward to. I'm more of a curious -- my question was mostly what Greg had asked about more with Foxconn, and obviously there's a lot of noise around it and lots of politics and posturing, whatever. But within all of that, what is it that we should really pay attention to to find out whether in fact there may be some lag or some give or whatever term you want to use in terms of what maybe some people thought about if it's timing or the scale of capital investment relating to what they -- what we believe we've heard about originally?

Gale E. Klappa -- Chairman and Chief Executive Officer

Well, I mean, everything we're seeing is Foxconn is full speed ahead. Now, we do have a Gubernatorial election here and there have been some discussions by the Democratic candidate for Governor and whether or not he would want to relook the incentive package for Foxconn. If that were to happen, I mean if he were to be elected and he decided to find some way to overturn legislation that's in place, that probably would be a factor that you would want to look at in terms of whether or not there would be some slowdown in the Foxconn plan. But right now, given what Foxconn is is actually doing on the campus, the construction progress they're making, the additional investments across the state that they've announced, right now, it appears that they are full speed ahead.

Vedula Murti -- Avon Capital -- Analyst

Okay. I appreciate the clarification. Thank you.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Andrew Levi with ExodusPoint. Your line is open.

Andrew Levi -- ExodusPoint -- Analyst

Hey, Gale. How are you?

Gale E. Klappa -- Chairman and Chief Executive Officer

Hey, Andy. I'm great. How are you doing?

Andrew Levi -- ExodusPoint -- Analyst

I'm doing well. Just back to Julien's last question just to make sure -- so I guess when you made your first comments, the Bloomberg Transcript picked up $3.20 at the midpoint. So -- which obviously wasn't your guidance. So you're growing off of $3.28 correct, is that correct?

Gale E. Klappa -- Chairman and Chief Executive Officer

That is correct. That is correct and we will have to sue Bloomberg for fake news.

Andrew Levi -- ExodusPoint -- Analyst

Okay. I just wanted to make sure. Okay, thank you very much.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're welcome, Andy.

Operator

Your last question comes from the line of Paul Patterson with Glenrock Associates. Your line is open.

Paul Patterson -- Glenrock Associates -- Analyst

Good afternoon, guys.

Gale E. Klappa -- Chairman and Chief Executive Officer

Hi Paul. What's shaking?

Paul Patterson -- Glenrock Associates -- Analyst

Not much. What I wanted to ask you about was just sort of back on the infrastructure projects. You mentioned that the returns might be on the high side initially in terms of how you're looking at the trajectory of the return. And I'm just wondering, if you could sort of give a little bit more flavor as to when we look at this CapEx what the earnings profile is over time. Do you follow me?

Gale E. Klappa -- Chairman and Chief Executive Officer

Sure. And again, over time, with the projects that we have in hand and the projects we've announced, we would expect over time over kind of our useful life of the project the returns to meet the kind of criteria we talked about, which is at or slightly above our retail rates of return.

Paul Patterson -- Glenrock Associates -- Analyst

Right. But I guess what I'm wondering is that you made it sound like some of that might be front-end loaded. And so what I'm wondering is, I understand that the on average over time that's what it would be, but it sounds like some of it might be front-end loaded. And so I wanted to get more of a sense as to what the -- how that might be distributed? Do you follow me? How much of a boost we might be seeing in the early years versus later years?

Gale E. Klappa -- Chairman and Chief Executive Officer

Right. Let me frame that for you and then I'll let Scott give you some detail. But the projects we're talking about really are in many cases either solar or wind or gas storage or some type of renewables. But particularly with the wind, you have a very heavy tax credit influence in the early years. Scott?

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. So specifically, the two projects we've had so far on the wind side, production tax credits are in the first 10 years, so the returns are north of that 10% by a couple percentage points in that first 10-year period, along with good cash returns because of the bonus depreciation. So it's really that first 10 years when you have the production tax credits that really make it a little higher on average.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. So really -- we're going to be -- sorry, I don't mean to interrupt you. Go ahead.

Gale E. Klappa -- Chairman and Chief Executive Officer

No problem. Also I was going to say, actually, believe it or not, because of the cash returns, it's helpful to our FFO-to-debt calculation.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Sure. So -- but -- so -- OK, so we're talking basically like the PTC kind of concept, so we're talking like a good period of time, we will be having a higher returns versus you won't be have -- there are no big upfront hits to -- benefits to EPS, this is more just a 10-year timeframe where you're going to be --

Gale E. Klappa -- Chairman and Chief Executive Officer

Right, right.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Okay. Just want to make sure about that. And then the other question I have is, so there is a decrease in electric generation in the ATC. And you mentioned something about the ROE, and I apologize if I just wasn't completely clear on this, but the ATC -- the fall-off in the CapEx, did that have to do with what you're seeing in terms of returns and what have you or could you just clarify a little bit about what's driving the change in CapEx profile at ATC? And if it has anything to do with the ROE cases that you see?

Gale E. Klappa -- Chairman and Chief Executive Officer

Nothing whatsoever to do with the ROE cases. Everything to do with the fact that ATC is just completing two very large construction projects, transmission project extensions and new transmission in our footprint and they're rolling off these two very large projects from a year. So we have a high year comparing to a slightly lower year, but it has nothing to do with the potential change in ROE.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. Okay, well, that's -- rest of my questions were answered. So thanks so much.

Gale E. Klappa -- Chairman and Chief Executive Officer

You're more than welcome. Well, I believe that concludes our conference call for today. Thanks so much for joining us. If you have any additional questions, feel free to call Beth Straka at 414-221-4639. Thanks everybody. See you on the Left Coast.

Operator

This concludes today's conference call. Thank you all for joining. You may now disconnect.

Duration: 58 minutes

Call participants:

Gale E. Klappa -- Chairman and Chief Executive Officer

Scott J. Lauber -- Executive Vice President, Chief Financial Officer and Treasurer

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Julien Dumoulin-Smith -- Analyst

Greg Gordon -- Evercore -- Analyst

Michael Weinstein -- Credit Suisse -- Analyst

Praful Mehta -- Citigroup -- Analyst

Michael Lapides -- Goldman Sachs -- Analyst

Jonathan Arnold -- Deutsche Bank -- Analyst

Paul Ridzon -- KeyBanc -- Analyst

Vedula Murti -- Avon Capital -- Analyst

Andrew Levi -- ExodusPoint -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

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