Good morning. My name is Lena, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company Analyst Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer And I would now like to turn the call over to Mr.
Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Thanks, Lena. Good morning, everyone, and thank you for joining us on such short notice. Joining me this morning are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company and Art Beatty, Chief Financial Officer. Let me remind you that we will make forward looking statements today in addition to providing historical information. There are various important factors that could cause actual results to differ materially from those indicated in the forward looking statements, including those discussed in our Form 10 ks and subsequent filings.
Today's call is audio only. However, we have posted 3 documents online for your reference: the Form 8 ks we filed yesterday, the settlement agreement referenced in the 8 ks and a slide presentation that will help you follow along during today's discussion. The files can be found under the Presentations and Webcasts section of our Investor Relations website at www.southerncompany dot com. At this time, I will turn the call over to Art Beatty to provide you with an update on the recent events involving Mississippi Power and the Kemper County project. Good morning and thank you again for joining us.
We are very pleased to be able to share the details of a settlement agreement approved by the Mississippi Public Service Commission yesterday regarding a rate recovery process for the retail portion of the Kemper County project. The settlement is the result of very constructive and thoughtful discussions with representatives of the Mississippi Public Service Commission. Both parties had common goals in mind to find a way forward that benefits customers, mitigates risks and minimizes uncertainty. Ultimately, we believe this agreement addresses the concerns raised by the commission when they chose not to implement Mississippi Power's original filing for CWIP in rates. Additionally, Mississippi Power and the commission have agreed upon a recovery framework that will mitigate rate impacts to customers.
Overall, the settlement agreement provides a timeline and much needed transparency on a path forward for Mississippi Power. Here are the key provisions of the agreement. First, the agreement authorizes Mississippi Power to file for up to $172,000,000 in rate relief within the next 30 days, on which the commission has agreed to render a decision within 50 days. Mississippi Power plans to make this filing later today. If approved, Mississippi Power would begin collecting this in the earliest possible billing cycle thereafter.
2nd, all rate collections before the commercial operation date of the project will be used to mitigate future rate impacts when the project is placed into base rate. 3rd, the commission has agreed to determine prudency for actual cost incurred through December 31, 2012 within the next 6 months and will make every effort to accomplish this over the next 2 months. They also agreed to make prudency determinations for subsequent costs within a set time frame. 4, Mississippi Power will collaborate with the public utility staff to develop and file a base rate plan for project costs to be effective for 7 years from the commercial operation date. The commission has agreed to make its final determination on the plan within 4 months of the filing.
Mississippi Power has agreed to limit the recovery under this 7 year base rate plan to the retail portion of the original $2,400,000,000 plant cost estimate plus the cost for items that the commission specifically excluded from the cost cap such as the lignite mine and the CO2 pipeline. 6th, the agreement allows the company to use alternative financing to recover prudently incurred costs for the plant above the $2,400,000,000 limitation. If adopted, legislation pending before the Mississippi legislature would mandate the TSC to implement securitization for these costs and the commission's agreed upon prudence review schedule was developed to support this path forward. Finally, Mississippi Power has agreed to seek a dismissal of its direct appeal to the Mississippi Supreme Court related to CWIP in rates. While there is much work to be done, this agreement defines a much needed process for rate recovery to be considered.
Overall, the provisions of the plan are consistent with the original spirit of the commission certification order, which contemplated the need to mitigate customer impacts and provide clarity on recovery mechanisms. We'll keep you posted as the events contemplated in this settlement agreement proceed. In the meantime, the project remains on track for a May 2014 in service date when it is scheduled to begin providing clean, safe, reliable energy to the citizens of Mississippi. At this time, we are ready to respond to your questions. Please note that we will be responding to questions regarding regulatory matters at Mississippi Power and the Kemper Project.
Any other questions, we'll need to wait until our Q4 earnings call scheduled for next Wednesday. Operator, we're now ready to take your first question.
Thank you. The first question comes from the line of Greg Gordon with SIS Group. Please go ahead.
Good morning, gentlemen. How are you?
Hey, Greg. How are you?
I'm good. So can you guys tell us what the total expected all in capital investment is going to be, so we can calculate the difference between the $2,400,000,000 in that number that needs to be securitized?
Yes, Greg. The numbers that we're looking at for the amounts that we would earn in base rates for Mississippi Power would include the $2,400,000,000 the mine cost, which currently are 240 $5,000,000 and the pipeline cost, which are $132,000,000 If you sum that up, it's about $2,800,000,000 and that is a 100% number. Basically, 85% of that will go to the retail portion.
Okay. So 85% of that will go to the retail portion and the remainder you
That's 85%. We plan on selling 15% to SMEPA and then there's a 70% retail portion of that remainder.
So you sell 70% to Smeepa and 70% of that total goes into
rates after the sale? Yes. The 2.8 multiply that times 85 percent, 15% to 75%, right. And then you multiply the remainder by about 70% to get to the retail portion.
Perfect. Understood. Thank you. So second question, just to review, based on the time line you have on page 5, it looks like you'd have a cash rate increase implemented by April and the prudence review of cost through 2012 done between March July. Is that right?
Yes, that's right.
And then the post COD rate plan will come thereafter. So that looks like it's a sum total of it. Are there any other nuances that have a significant cash flow or earnings impact that we need to be aware of?
No, I don't believe so Greg. I think you've got the basic sum of it. Yes. There was some we have had some conversations in the past about the effect of some sort of phase in plans as an alternative and a variety of things there. There has been some question as to what the ROE profile would look like under such plans.
This plan would provide for a more conventional kind of ratable normal return over time.
Okay. So whatever your authorized return is on the Mississippi utility, you'd get a consistent return on this investment?
Return on capital over time and the capital is 2.4 plus mine plus pipe plus other variety of things.
Great. Thank you, gentlemen.
And then you would recover the securitization costs as well. That's very clear. Thank you. Thank you.
And the next question comes from the line of Dan Eggers with Credit Suisse. Please go ahead.
Hey, good morning, guys. Good morning. I guess just kind of following up on Greg's question about the 7 year phase in plan. Can you just maybe give a little more clarity on the mechanics as far as how that gets carved out as a special rate rider? And will the ROE be locked for the 7 years whenever you guys agree upon that, so it's not as though it would be subject to change as with the formula ag process in Mississippi?
Yes. Let me clarify one part of your question. It's not a phasing plan. It's a rate plan. The rates that go into effect that would go into effect this year would hopefully expect to cover that entire 7 year period for the cost of the the 2.4% cost of the plant plus the mine and the pipeline.
The Plus compensation and securitization. Right. Correct. So that set in a the rates we're collecting for that would set in a regulatory liability account, okay? As rates come into play, as the plant goes into service and rates come in, those amounts in that regulatory liability would be used to offset the cost of the plant return of and return on capital of those assets.
To make sure
I understand
that The 7 year plan would include all of that and it would be the same ROE for that 7 year time frame, but it would also include O and M portions as well.
So the F2 172 would be a fixed rate for 7 years and you'd collect more now and I guess de facto less later once it gets up and running you have operating costs and that sort
of thing. Is that the right
way to think about it from a cash balancing perspective?
I think when you think about income, it would provide the income to earn the return outlined in the ROE over that 7 year timeframe. There would be no under earning period or over earning period if that's where you're going.
So from an earnings perspective, you get extra cash now because the rate steps up once?
That's correct. That's correct.
And then later, there would be comparably less just because you're going to have operating costs running the plant at some point in time that you don't have today.
That's true. So the cash goes in the regulatory account that offsets the increase on in service. And the 172 does not include the recovery of costs associated with securitization.
And then what how much of a rate increase is the $172,000,000 kind of from a baseline number it takes? Remember that the expectation was if it went all the way to the end of in service to set the rate, it was going to be fairly chunky?
It's about a 21% rate increase. Okay. Thank you, guys. Yes. Thank you.
And the next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead.
Hey, Jonathan. Good morning, guys.
My question just on Greg's question of how much is additional costs. Can I just I wasn't sure if you kind of addressed whether the recent most recent estimates for the plant itself are more than 2,400,000,000 dollars I know there's been some 2.8 numbers kicking around in certain filings? And I can you just clarify, I think the 2.4 is the originally approved number I'm not wrong. It
was the original estimate. Yes. It was the original estimate. And we had the concept in the amended order of $288,000,000 that provided for cost increases above $24,000,000 percent. And then there was the notion of beneficial capital, the notion of byproduct sales like CO2 sales above a projected amount a variety of oseg.
And recall the notion of beneficial capital was essentially increases in capital that were deemed to be beneficial to customers because they would do something like improve reliability, reduce operating costs, a variety of other things, ultimately, to benefit the customer. So that's kind of the idea. The normal, I would say conventional recovery of return on, return on capital applies to the mine pipeline and $2,400,000,000 of the plant. Ultimately and all that is subject to prudence of course. Ultimately, the final cost of the plant that we've estimated at 2.88 percent will also be subject to prudence.
And any amount above that will be subject to review based on the concept outlined like beneficial capital, extra byproduct sales, a variety of other things. Those costs above $2,400,000 would be securitized.
Perfect. So the $2.88 does compare to the $2.4 and the other piece of the mine and the pipeline just happened to add to $2.8 as well
basically? I'm sorry. We couldn't hear you very well. Say that again, Matt.
So the 2.8 8 is comparable to the $2.4 in terms of kind of actual cost versus initial estimate. And then your mine and pipeline kind of go into the base rate recovery. So you've already got this sort of the difference between $2.88 and $2.4 is going to be under the securitization.
Yes, yes, exactly.
And whatever else that ends up being.
That's right. Exactly. Okay. Thank you very much. You bet.
Thank you.
Thank you. And the next question comes from the line of Anthony Croda with Jefferies. Please go ahead.
Hi, good morning. I just want to clarify on the last question that I think the cost cap was $288,000,000 you're allowed $2,400,000 The difference there you securitize. Do you get a return on the difference or you just get to securitize and recover the cost that
spent? You get to securitize the amount. So in other words, there's an irrevocable rate essentially that will secure the payment of debt and principal, no interest and principal. We'll get the pro form a But no return on equity. Okay.
Great. Thank you, guys.
Thank you. And the next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.
You actually just answered the questions I had. Thank you. All right. Thanks for tuning in, Paul.
Thank you. And the next question comes from the line of Stephen Gambuza with Millennium. Please go ahead.
Good morning.
Hey, David. I just had
a question on the $172,000,000 of rate increase that will cover, I guess, the cash return on QIP. I believe the document said that you will defer that amount as a regulatory liability until the plant goes in service and then that amount will be used to offset future costs. Is that correct?
Exactly right.
Okay. So we'll just from an accounting standpoint, will you continue to book AFUDC until that cash, that $172,000,000 increase or whatever the actual amount is goes into effect around the April timeframe?
Yes.
Okay. And then between April, so AFUDC will cease being accrued once that cash return goes into place. And then just from an earnings standpoint, because that $172,000,000 is being deferred as a regulatory liability, will you continue to have will that be taken through the income statement? Will you so effectively, there will be some just think about the earnings of the plant, you'll be accruing AFUDC until April. And then you'll kind of have between April and when the plant goes in service in May, you'll be receiving cash but not booking any earnings?
No. It works this way. We will continue to book AFUDC and that is the only thing that will affect income. The cash will it will run through wash through revenue, but will not affect income. The only thing that will affect income will be the continuation of the AFUDC accrual until plant in service date.
Okay. So you actually will continue to book it. You continue to book AFUDC all the way up until the plant goes in service.
And then on in service, the delta will be taken up with the amount associated with what has been provided in the settlement agreement plus any amount associated with securitization.
Okay, great. That's very helpful. And then can you just kind of summarize any additional outstanding legal challenges that still face this plan? Or does this effectively address all the substantive issues?
So let's think about it. Sierra Club is still kind of contesting the amended order we got here recently. The amended certification order. Yes, the amended certification order. What else is there?
We're withdrawing our appeal. We're withdrawing our appeal. What else is there? Are there any parties that I guess are Yes. There is other thing.
I guess there's some challenges to the Baseload Act that were put in place. When was the Baseload Act put in place? Some years ago. So there's some challenges to that, but that would be it.
Okay. Thanks very much. Appreciate it.
You bet.
And the next question comes from the line of Ali Agha with SunTrust. Please go ahead.
Thank you. Good morning. Hey, how are you?
Good. Thanks. Hey, Tom, I just wanted to clarify 2 things both earnings related. I think I got it, but I want to be clear on that. So first off, in terms of the rate base that on which you will earn a return, I think Art you walked through that.
So that would be starting from the $2,800,000,000 take 85 percent of that and then take 70% off that. That's the underlying core rate base if you will on which an ROE will be booked. The securitization is essentially a pass through correct?
Well that's the retail portion of it. So you still have a wholesale portion as well that you would earn on. So there is remember the Public Service Commission is only dealing with the retail portion. So you would still have a wholesale piece as well. And your other part of the question was correct that the securitization, so principal on debt cost is secured by irrevocable rate and that is just a pass through.
Yes. And the wholesale return remind me how that gets booked?
Those are are those market based rates? Are those cost based rates in this In Mississippi they're cost based rates, yes. So it's just on referred tariff, net of firm comp.
Okay. I'll come back to that. And then also, I mean, if I looked at the settlement implications, this spread out over the 7 year period versus just bringing the plant online and raising the rates right upfront as the plant comes online. On a simplistic level, should I think about the difference in terms of how the earnings get booked that now earnings are spread out over the 7 years as opposed picking them all up right upfront? Is that a way to think about this?
Okay. Now let's first deal with the concept of the 7 year idea. What that's doing is providing customers in Mississippi a great deal of certainty about what will happen to electricity rates associated with Kemper. That's kind of thing 1. Thing 2, in terms of earnings and all, there will be a slight change in net income as we move from AFUDC to on in service, the effects of CWIP for the 2.4% associated with the plant, plus the mine, plus the pipe, plus a few other things.
And securitization for the balance of the plant above 2.4%. So this gives a great deal of certainty to customers with respect to how this is going to work for a period of time. That's kind of how you ought to think about it. And it will be it will largely look like conventional rate making, return on and return on capital at a rate.
So Tom fair to say that in return for getting that certainty and that an agreement with the commission in return for that to sort of spread out the earnings over some years as well versus just taking it all upfront?
Ali, there's no concept of spreading out earnings. It's conventional rate making is what it looks like. If you take 2.4 you take the mine, you take the pipe, that's and then you do the calculations we just said, 15% sale, 70 percent retail that sort of thing. It's conventional rate making over time. So net income looks constant over that time, essentially constant, reasonably constant.
Got it.
Got it. You got it. So there's no concept of a phase in here.
Okay. Understood. Thank you.
Thank you. And the next question comes from the line of Andy Levi with Avon Capital. Please go ahead.
Hi, good morning. Hi, Andy. Hey, how are you doing? I hope you're well. Jeremy, Just a couple of questions and I guess some will deal with IR as well.
But can you just go over how the legislation is going to work? Legislation? Well, there's actually 2 bills. 1 is a securitization bill and that's a typical requirement in any kind of securitization where they will mandate the Mississippi Public Service Commission to recognize a non bypassable charge or create a non bypassable charge to secure the issuance of bonds, which will basically have a life of, I think, 20 years at whatever rate that we're able to get for that particular rated security. The second piece of legislation is a what do we refer to that as a rate plan act.
I can't remember the exact words, Andy, but What act these bills don't have titles yet. Yes. But what it will do basically is ensure that this what we're contemplating here is not revocable. Yes. It provides for certainty over the 7 year period that it takes to implement at least partially the agreement represented by this settlement.
The process of the bill in the House of the Mississippi Legislature, the Chairman of the Public Utilities Commission is Jim Second. He is the sponsor of this bill. And in the Senate in Mississippi is the Energy Committee sponsor is Terry Burton. So those two people are submitting their bill through those committees. They will then pass out of theoretically the House and the Senate.
There will be a process for reconciliation if any differences arise. Right now, we don't believe there are any. And then it would pass through the normal process ultimately governor probably sometime hopefully before April, but sometime in that time frame. I guess the legislature reset is in April. So that's the timing of the legislation.
Okay. And I assume it's not as controversial at the legislation. Listen, there's a tremendous amount of support publicly for this plant. I was the keynote speaker at Governor Bryant's Energy Summit. And I can tell you this plant will benefit Mississippi's customers for decades to come providing cheap energy using a Mississippi resource that otherwise goes unused.
It's rate based. It's employment. It's a great economic development project and a critical part of Governor Brian's energy strategy that he's putting into place. Now certainly as with any piece of legislation or any there are always other parties that will disagree. But we believe this project is good for Mississippi, good for the customers and has widespread support.
Okay. Thank you. And then Amit, just back on the AFUDCQIP. So whatever we were assuming for AFUDC for 13, we should continue to use. But when the FIP comes into play, does AFUDC get reduced?
Or you collect equip to lessen the rate impact going forward carrying charges things like that? And the AFUDC for 2013 would remain whatever we had assumed it to be. Yes. AFUDC will remain as it's currently as you currently assume it through the in service date of the plant. And then normal rates will go into effect as Tom kind of described a moment ago for a normal recovery of capital and return on capital plus O and M.
And so that rate revenue requirement will be offset by amounts in this regulatory liability account that will be created by the $172,000,000 billing if approved. Got it. And then on the $172,000,000 quip or rate increase, however we want to characterize it or same thing I guess, right? That is really just to recover the cost of the investment, O and M, depreciation, property taxes, whatever, that will be handled in a separate proceeding. It will be incremental to the $172,000,000 Is that correct?
Or am I misunderstanding that? No. The $172,000,000 dollars we think would be adequate to provide for recovery of the 2.4 base investment in the plant plus the pipeline return of on capital for the pipeline and the mine for that 7 year timeframe. There would be an additional rate increase related to the securitization amount if approved by legislation. And the final details of how all those rates will work ultimately will be kind of in the April timeframe.
So look for the exact mechanisms. We have to work with the commission staff to agree on how all that will work. The general thrust of it, the exact details will be on the filing of April. But those two increases for securitization and for and the $170,000,000 should cover your operating costs as well. Is that correct?
Yes. I believe you got it correct. Andy, I think we can follow-up with this later with Dan and Jimmy. We've got a kind of hard stop here in a few minutes. We want to make sure we get everybody's questions.
Got some questions. I'll continue with IR. Thank you. All
right. And the next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.
Good morning, guys.
Can you hear me? Yes, sure.
Just was the $2,800,000,000 does that include this mine CO2 and pipeline before? No. Okay. So it sounds like you guys are getting recovery of pretty much everything, just some of it's going to be securitized now as compared to before. Is that how we should think about it from an earnings perspective?
Yes. Okay. And you guys answered the rest of my questions, I think. Thanks a lot.
All that is subject to prudence review by the commission. Yes, right.
Yes. And the legislation too and everything else, Brian.
You got it. Okay.
Thanks so much, guys.
You bet.
And the last question is a follow-up question from the line of Greg Gordon with ISI Group. Please go ahead.
No follow-up. You guys answered my question. Thanks.
Thanks, Greg.
At this time, there are no further questions. Sir, are there any closing remarks?
Yes. One other item. Again, we appreciate your time this morning. We are off-site from the office at this point. Dan and Jimmy will be available in their offices about 10 this morning.
So we'll look forward to your calls at that point. And thanks everybody. I know this was kind of late breaking news and I know this may have caught some of you off guard, but pretty exciting development. We appreciate your attention this morning and we look forward to a good chat Wednesday with our Q4 earnings call.
See you soon.
Thank you. Ladies and gentlemen, that does conclude today's Southern Company Analyst Call. You may now disconnect. Have a great day.