Good morning. My name is Bridget, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company first quarter 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session with instructions on how to queue up for questions. Please note that today's conference is being recorded Tuesday, May 1st, 2019. I would now like to turn the call over to Mr. Scott Gammill, Investor Relations Director. Please go ahead, sir.
Thanks, Bridget. Good morning, and welcome to The Southern Company's first quarter 2019 earnings call. Joining me this morning are Tom Fanning, chairman, president, and chief executive officer of The Southern Company, and Drew Evans, chief financial officer. Let me remind you, we will be making forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in the Form 10-K, Form 10-Q, and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call, which are both available on our investor relations website at investor.southerncompany.com. At this time, I will turn the call over to Tom Fanning.
Good morning, and thank you all for joining us. This morning, we reported earnings per share of $0.70 on an adjusted basis for the first quarter, consistent with our estimate, despite significantly warmer than normal weather across our Southeast service territory. I am extremely pleased with our performance year-to-date, and believe we are well-positioned to achieve our financial targets for 2019. In addition to solid financial performance, during the first quarter, we have executed on several strategic initiatives. Earlier this month, we announced the pending sale of the Nacogdoches Generating Facility to Austin Energy for $460 million. Additionally, we still expect to close the $650 million sale of the Mankato facility mid-year. Probably the biggest issue to report on this call is the completion of our Plant Vogtle 3 and 4 rebaselining effort. Late yesterday, Georgia Power filed the rebaseline report with the Georgia Public Service Commission.
That report confirms the regulatory approved in-service dates of November 2021 and November 2022 for Unit 3 and Unit 4, respectively. Additionally, there is no change in our total estimated cost to complete. The rebaselining process has been valuable and has increased our confidence in meeting the regulatory approved in-service dates. The resulting weekly work plan has been recalibrated and supports our strategy of working to an aggressive weekly plan on-site, which is currently expected to provide a six-month margin to the regulatory approved in-service dates. We now estimate that we would need to average about 100,000 weekly earned hours through the start of Unit 3 hot functional testing. That is essentially the completion of the construction phase of the unit to meet the regulatory approved schedule. Each week we perform above that level should provide margin to the November in-service dates.
We continue to employ a strategy that maintains an aggressive work plan on-site with an objective of providing margin to the regulatory approved schedule. We have balanced the relationship between cost and schedule, and we have resequenced parts of the construction plan. That, plus the expected gives and takes of re-estimating the remaining work and the hours required to complete it, has changed the shape of our production effort. Our revised work plan requires a productivity ramp targeting an average of 160,000 weekly earned hours for eight months between the late summer of 2019 and spring of 2020. To execute this aggressive work plan, we expect to increase craft levels and support resources in a measured fashion, similar to what we have accomplished over the last six months.
Remember, this work plan currently provides six months of margin in support of our primary objective of successful completion of units three and four on or before November of 2021 and November of 2022, respectively. Progress has continued on the site as we have accomplished all of the project's key stated objectives for the first quarter of 2019, which included setting the top head for Unit 3 containment vessel. Overall, including engineering, procurement, and initial test plan, the project is approximately 77% complete. For Unit 3, direct construction is 66% complete with a target approaching 90% complete by year-end. Since the beginning of the year, we've averaged approximately 130,000 earned hours per week. With four weeks at or above 140,000 hours, meeting our expected year-to-date total earned hours.
In our slide deck for this call, we provided the most recent Schedule Performance Index, Cost Performance Index, and % complete metrics for your reference. These are all construction-centric metrics based on the site's aggressive work plan. As we have discussed previously, perhaps now the clearest indicator of success will be our progress in meeting key milestones related to system turnover and testing within a reasonable margin to the site work plan. For 2019, the three key project milestones for Unit 3 are initial energization, the start of integrated flush, and testing of the main control room. We expect to complete initial energization on schedule in the next two weeks. The start of integrated flush is expected during the third quarter, and the main control room should be ready for testing around the end of the year, with Unit 3 hot functional testing expected just over a year away.
We will continue to optimize the schedule and work plan at the site, and we are committed to keeping our stakeholders informed. I'll turn the call now over to Drew to cover our quarterly performance in greater detail.
Thanks, Tom. Good morning, everyone. As Tom mentioned, in the first quarter of 2019, we achieved earnings per share of $0.70 on an adjusted basis, which was in line with the expectation that we provided on our last call. This compares to $0.88 on an adjusted basis for the first quarter of 2018. The primary drivers of the change were $0.11 related to earnings from divested assets and $0.07 of negative weather year-over-year. When thinking about the reduction associated with recent divestitures, keep in mind that we expect the transactions to be EPS accretive on a full year basis after taking into account avoided equity issuance related to increased equity ratios at our regulated utilities last year.
To put the weather impact into context for you, while some areas of the country saw colder than normal temperatures during the quarter, temperatures across our southeast service territory were 25% warmer than normal, representing the second warmest first quarter in the last 20 years. We were able to overcome this weather impact through diligent focus on controlling costs during the quarter. A detailed reconciliation of our reported and adjusted results is included in the morning's release and the earnings package. Taking a look at customer growth, we added 12,000 residential electric and over 7,000 residential natural gas customers across our regulated utilities, which is slightly higher than total residential customer additions for the same period in 2018. This customer growth is driven primarily by job and population growth in our southeast service territory that outpaces the national average.
Weather-adjusted electric customer usage was down approximately 1% year-over-year during the first quarter due to a combination of factors, including continued energy efficiency and technology advancements across all customer segments, a slowing pace of new commercial customer additions, and weakness in industrial sales due largely to several temporary plant outages in our territory. Looking ahead, we continue to expect combined growth in usage for retail electric sales to be flat to 1% for the year. While we see some signs of modest economic cooling across the commercial and industrial classes, economic development activity in the southeast remains strong. During the first quarter, major companies like Airbus, CarMax, and U.S. Steel announced new projects in our service territories, expected to create over 8,000 new jobs.
Taking into account our first quarter performance, economic indicators in our forecast for the remainder of the year, we still expect to achieve our adjusted full-year EPS guidance of $2.98-$3.10 per share, and our estimate for the second quarter of 2019 is $0.71 per share. As Tom mentioned earlier this month, Southern Power announced the pending sale of its 115-megawatt Nacogdoches Generating Facility to Austin Energy for $460 million. In this transaction, we are divesting of the only biomass facility in Southern Power's portfolio, yet another example of our ongoing commitment to simplify the business. The Nacogdoches sale is expected to close in mid-2019. In aggregate, our 2018 and 2019 divestitures have proven to be an efficient source of equity with a substantially lower cost of capital than issuing new common shares.
These transactions have also enabled us to significantly strengthen Southern Company's balance sheet, as evidenced by the $4 billion, or over 25% reduction in holding company debt year-over-year. We have consistently demonstrated tremendous discipline as both a buyer and seller of assets. We will maintain this disciplined approach as we continue to be thoughtful and strategic in seeking to further improve our state-regulated, utility-centric growth profile. On the financing front, I'd also like to highlight the $1.67 billion additional Department of Energy loan guarantee program that was closed in March for Vogtle Units 3 and 4. This brings our total authorized DOE financing capacity for Vogtle 3 and 4 to $5.13 billion, of which we have drawn approximately $3.5 billion to date. As always, customers are at the center of everything we do.
When compared to traditional financing methods, we estimate this program saves our Georgia customers over $500 million. We appreciate the continued partnership of the DOE as we work to bring Vogtle Units 3 and 4 online. I'd now like to call your attention to our recent dividend increase. At its last meeting, the Southern Company board of directors approved an $0.08 per share increase in our common dividend, raising our annualized rate to $2.48 per share. This is our 18th consecutive annual increase. For 71 years, dating back to 1948, Southern Company has paid a dividend that was equal to or greater than the previous year. The board's decision to increase the dividend reinforces the strength and sustainability of Southern Company's business, and supports our objective of providing superior risk-adjusted total shareholder return to investors over the long term.
Before I turn it back over to Tom, I'd like to give you a brief update on our regulatory calendar for the remainder of the year. We plan to file base rate cases with the Georgia Public Service Commission for both Atlanta Gas Light and Georgia Power mid-summer. We expect these Georgia proceedings, as well as the pending rate case for Nicor Gas in Illinois, to conclude in late 2019. Mississippi Power is scheduled to file a base rate case with the Mississippi PSC in the fourth quarter of 2019. In addition, we expect the Georgia PSC's review of the Georgia Power Integrated Resource Plan to be completed in July. Tom, I'll turn the call back over to you.
Thank you. I will now touch on some early progress on our carbon reduction initiatives. Then we'll take your questions. Last summer, we announced a goal to achieve a 50% reduction in greenhouse gas emissions by 2030, with a transition to low to no carbon by 2050. Looking at our energy supply during the first quarter, 30% of electric generation was from carbon-free resources, so nuclear, hydro, wind, and solar. Generation from coal declined from 27% in the first quarter of 2018 to 23% for the first quarter in 2019. The balance was generated by natural gas. The decline in coal generation was due mainly to low natural gas prices and higher hydro generation in the first quarter. In addition, continued low natural gas prices, coupled with higher operating costs, led to the recent announcement to retire 2,000 megawatts of older coal units across the system.
The transition of our generation fleet delivers to our customers an optimized portfolio of clean, safe, reliable, and affordable energy. In closing, I'd like to highlight that Southern Company recently ranked 14 on Forbes magazine's 2019 list of America's best employers. Of the 500 large employers ranked, Southern Company was number one among industry peers and number one in Georgia. This is the second consecutive year that Southern Company ranked in the top 20. A key to successfully building the future of energy is acquiring and developing top talent. Recognition as the Forbes ranking is a positive affirmation that we are indeed creating a culture that furthers this goal. Again, we're very pleased with our start to the year from both a financial and operational perspective.
We remain keenly focused on the progress at Vogtle 3 and 4, are committed to keeping you informed as we reach key milestones on this important project. Thank you for joining us this morning. Operator, we are now ready to take questions.
Thank you. We do welcome all questions or comments. To register, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw a registration, please press one three. Again, to register questions, please press the one followed by the four on your telephones. In order to allow everyone the opportunity to ask their questions, we would remind you to please ask one question, and if you have additional questions, please reprompt and add yourself to the queue again. One moment, please, for the first question. Our first question comes from the line of Greg Gordon of Evercore ISI. Please proceed with your question.
The amazing Greg Gordon, how are you?
I'm great. Congratulations on the update. I only have one question, but as Rodney Dangerfield said, it's in 27 parts.
Yeah. Feel free. Fire away, my friend.
Two questions. One is how often, just so we can level set expectations, do you expect to give us updates now that you've rebaselined the schedule on where you stand?
Yeah, sure.
optimization of performance at the site and where you are inside that May to November timeframe. Will we get it quarterly? Will we get it semi-annually? How are you going to keep us up to date on how things are trending?
Certainly, you'll get it via filings of the Georgia Public Service Commission. You'll get it on the earnings calls for sure. It's really whatever happens at the Georgia Public Service Commission augmented by these calls.Look, when we looked at the re-base line, we were very pleased with the result of it. It confirmed what we thought we knew and actually gave us greater certainty to the November in-service date. We talked a lot about would we do more rebaselining. I'm just guessing right now, this is not factual, this is my judgment. We won't do another rebase on 3. We'll look at 4. We feel pretty good about the results, and that's a decision we would make in a year or so. The other thing everybody should just realize is every week we re-optimize, we try to rebalance, we try to improve our current state.
This rebaselining, though, was a big, hairy effort that required a lot of manpower. My sense is, if I had to guess, probably no more rebaselining through the project, but we'll reassess that, particularly for unit 4 in a year or so.
Okay. My second question is with regard to the increase in the five-year CapEx forecast. At the same time, you've raised more capital through asset sales. What's the current assumed common equity need when you net out the success you've had with asset sales offset by the opportunity now and necessity to deploy more capital into the core utility businesses? Could that be reduced by even further paring down of the asset base?
Greg, this is Drew. The total plan is for us to invest about $38 billion over the plan period. We were purposeful in construction of that plan and meeting a number of our goals, the largest of which is make sure that we can grow earnings per share at about 4%-6% over the time period. What that plan told us in its last iteration or what we described was a need to issue about $500 million worth of equity in each year of the plan or a little more than $2.5 billion in aggregate. Mankato was certainly a transaction that we had included in the plan, and Nacogdoches, not as a placeholder, but was a little more resonant in our thinking. I wouldn't say that these two transactions will reduce that need for $2.5 billion worth of equity.
We will evaluate options over time. We will look at our liquidity and how it evolves over that five-year period to really establish when we might be able to turn principally the dividend reinvestment program off.
Okay. Thank you, guys. Have a great morning.
Thank you.
Our next question comes from the line of Angie Storozynski of Macquarie. Please proceed with your question.
Good morning, Angie.
Good morning. Two questions. One is, can you give us a sense how the pump issue at Sanmen is or might be impacting Vogtle? Secondly, the experts company that the staff of Georgia Power has hired to oversee the Vogtle site, do you have any sense of what their take will be or is on the COD of Unit 3 and four?
Yeah, sure. Yeah, absolutely. With respect to the RCP, I think we have people on site there, and the Chinese and Westinghouse have been really good in allowing our folks insight as to what's happening on the site for all issues. Of course, with respect to the RCP that was announced publicly, I guess in March, you should know that there are 16 of these pumps between the two plants. 15 of the 16 are doing fine. The one piece of equipment that failed on this one pump is really a fastener of the pump. It's not an internal to the pump. It's a very small piece of circular metal. I don't know. It looks like a ring of Saturn or something. They're doing the root cause analysis, and we'll see what happened. We don't believe there's any systemic problem. The rest of the plants are operating fine.
When you start up a plant like this, it is not surprising you have this kind of issue. How does it impact Vogtle 3 and 4? Certainly, we are keenly interested. We continue to learn from this issue and any other issue on Sanmen and Haiyang. We evaluate plans that may arise here at Vogtle 3 and 4. For example, under the leadership of Stephen Kuczynski, and Glen Chick on site, when we first heard about this RCP, we created a tiger team of engineers and construction people to go in and evaluate, "Well, what if there was a problem that did impact us? What would we do?" We actually have now contingency plans in place, to be able to manage any of the problems. Right now, we do not foresee any problems at Vogtle 3 and 4.
I can go further if you want, but right now it appears to be limited to one pump. 15-16 are fine. It does not appear to be a systemic or design issue. The other issue you raised is really kind of an interesting issue. One of the things I do know, the independent monitor, Dr. Jacobs, is a terrifically smart guy, and I know in his background, one of his particular areas of expertise is this notion of turnover from construction to startup. That testing process. Angie, that is why we have tried to draw people's attention now to the milestones and really now focus on, of course, we are focused on the rest of construction, but moving from construction to startup, I think now becomes a critical area of focus. I know Dr. Jacobs is all over that as well, so we share his interest in that.
Okay. Thank you.
You bet.
Our next question comes from the line of Steven Fleishman of Wolfe Research. Please proceed with your question.
Hello, Steven.
Yeah. Hey, good morning, Tom.
Good morning.
I guess, I kind of had the same question with just, would you, given that this is now a schedule with Bechtel, further re-baselined, et cetera, do you feel like the staff report this time will be a little more kind of aligned with your update? Whereas in the past, it's been a little bit more skeptical, and just as we kind of prep to see what they say in July?
I never want to get ahead of the staff and what they're going to say. Gee whiz. I think everybody's a little bit of a broad statement. Most people would be very pleased with our progress on construction and productive hours worked per week, and our ability to hit milestones has been really good since we've taken over the project, really since last July anyway. I think that kind of is uniform. I think now people are really focused, as I just said with Angie, this notion of milestone achievement and turnover from construction to startup is a big issue. That's why, in fact, in the materials we provided you guys, the slides, et cetera, we really did put more out there about what we expect, what the margins are for these major milestones. I think that is probably gonna be where you get a lot of conversation.
On that topic, just how well prepared is the NRC for that kind of stage?
I think really good. In fact, I could give a report. In the past, we have always, not always, but in the past, we've talked a lot about ITAACs. Remember, that's the integrated tests that once achieved, will allow us to move to fuel load. That's really critical stuff. We've really worked constructively with the NRC to get the right testing regime in place to be able for us to go hot on site. I can just tell you our progress there is good. I used to hold that out as one of the issues we were particularly worried about. I haven't talked a lot about it so much lately because I feel like we're just making a lot of good progress. Just so you know, let's see, as of year-end, we will have 200 ITAACs left for three. You remember we started at around 850.
We moved that number down cooperatively with the NRC to 450, we're moving through issues this year. By the end of this year, we'll think we'll have everything but about 200 left for Unit 3. I visited with each of the NRC commissioners personally, along with our team here. I think everybody realizes, everybody at the federal government level, whether it's the United States Cabinet, Congress, the NRC, how strategically important this is to the United States of America to succeed. We're getting all the resource and cooperation we need in order to be successful.
Okay, great. Thank you very much.
Thank you.
Our next question comes from the line of Julien Dumoulin-Smith of Bank of America. Please proceed with your question.
Hey, Julien.
Hey. Good morning, everyone.
Good morning.
Tom, maybe to just continue with the focus on Vogtle here, if I can. Can you elaborate a little bit more on that hiring ramp to get to 160,000 as you talk about it? I just want to get a little bit more of a sense of, again, where are we getting the workers? Does this include Canada? How do you see that today, given all the talk and focus on worker ramp that we've had in the last year? Maybe we'll start there.
You bet. A problem that we were intensely focused on, say, last year, seems to be getting under control. That was, we talked a lot last year about the ability for us to resource skilled electrical workers, particularly pipe fitters, secondly, on site. You may remember, we moved to top decile compensation. We've had terrific compensation from the building trades, and we have more than accomplished all of the resource requirements we need. In fact, in the last earnings call, we essentially have a waiting list, a backlog of people that want to come work to the site. That's how we achieved. If you remember, we set the target of hitting 140,000 hours per week, kind of end of March into April. Sure enough, we did it sooner. We talked about that a bit.
We feel very comfortable, we did all of that without Canada, okay? We feel very comfortable in our position right now. When we reevaluated the cost and schedule relationship and the baseline effort and this move to 160, we did so with confidence that we could hit the staffing levels. Secondly, now we're going to need to add more supervisory personnel. I know a question that would come to your mind and has been in our mind is, "Oh, you're adding people, you're going to be less efficient." You should know that most of these additions now, to move from the 140s up to 160 on the average over this smaller eight-month period, will be done largely on the second shift. If you look at work deployment so far, we've earned hours roughly 70% on the first shift, 30% on the second shift.
We're going to tilt more into the second shift. We'll go, instead of 70/30, it'll be 60/40, 55/45, of course it will vary for some weeks. This is, recall, also a ramp-up into, say, August, September timeframe. We have the ability to bring people on site in a very prudent way, train them, we'll have the right folks in place. I guess the good news is that we've gained a lot of confidence in our ability to resource personnel and to manage the work. We feel very confident about moving to the 160. That gave us the ability to think about resequencing some work and doing some other things that provided us with this new rebaseline schedule. One other thing you just should know. I think it's an important frame of reference.
We actually argued here about whether we should put this in the script or not. We gave you a baseline, bookends that said if we hit 100,000 hours per week, we can hit our November schedule, the 160 allows us to hit the aggressive schedule. If you want another number, it is a reasonably linear relationship. Working about 130,000 hours per week, that's what we've done this year so far, allows us to achieve kind of a July, maybe August schedule. We're feeling pretty good right now. Of course, there is a boatload of work to do, a ton of attention that needs to be paid, continued focus on efficiency, we're feeling pretty good.
Got it. Excellent.
November in service.
Right. The July, August is relative to November in service, right? That is what you are saying.
Yeah. Always compare everything to November. That is our target. If we beat November, there will be ticker tape parades.
Excellent. Just quick clarification on your commentary. Earlier, with respect to Greg Gordon, are there any other asset sales assumed in the plan relative to the $2.5 billion of equity? Secondly, if you can, just on electric sales, I know that you commented a little bit on weather-adjusted trends. That doesn't change anything around earnings expectations for the year, does it?
Well, yeah. I'll do a first shot and Drew Evans is going to follow up here. Look, there's nothing substantive in terms of asset sales for the rest of the year. We would only do that on an opportunistic basis. I think both of these deals have been great. Between those two deals is what, $1.1 billion?
That's right.
All of that helps with respect to where we're sourcing equity and everything else.
I think, well, you've described it exactly right. Nacogdoches in itself was not particularly in our plan. It does have a general downward bias in our equity needs. Remember that both of these transactions are effectively used to repay indebtedness in total and then ultimately reduce what we have to draw in terms of shares in the DRIP. We're always going to look for opportunities to shorten the length of the DRIP program. Nothing is within the plan today that would require additional sale of assets. The other question, Julien, that you asked was related to sales. It was a rather warm quarter down here. Second warmest in 20 years. We had good cost control over the period that allowed us to meet the estimate that we provided to you and for budgets that we provided to ourselves internally.
There are certainly limits to the ability to reduce expenses. We are certainly still sensitive to weather. We'll just have to sort of stand by to see how the summer goes. I don't think that these two things are necessarily or naturally correlated. I don't have any discomfort with our ability to meet our guidance range for the year.
Hey, Drew, wasn't it about $0.08 compared to normal on weather?
That's right.
You think about it, we hit the estimate that we gave you last time with $0.08 of headwind.
I feel pretty good about it also.
Thank you guys for the details. Cheers.
You bet. Thank you.
Our next question is coming from the line of Michael Weinstein of Credit Suisse. Please proceed with your question.
Good morning, Michael.
Hi. Hey, good morning, Tom. My question is about unit 4. I think you said that earlier that unit 4, you might be considering rebaselining at some point. I'm wondering if you're kind of indicating that you might be willing or contemplating pulling workers off unit 4 to ramp up on unit 3 if necessary.
Yeah. Thank you for that question. I didn't say I was considering it. Somebody asked me would I guess I was filling out the question, what were we thinking about going forward? Unit 3 feels pretty good. This rebaseline should be good for unit 3. We'll evaluate unit 4. Our general thrust is that unit 4 is a year behind unit 3, and that's staged on a variety of metrics and the best way to employ personnel on the site and a variety of other things. In my opinion, unit 4 should be a carbon copy of unit 3. What we have consistently found is that when we learn on unit 3, it accrues to the benefit of unit 4, so in general, I can't promise this. I am not promising this, but in general, our experience has been unit 4 performance is better than unit 3.
There might even be a chance to improve the schedule on four. I'm not promising that. I'm just telling you.
Got you.
That's a potential.
Is part of the plan to ramp up to 160, that you might pull people off of unit 4 in order to make sure that unit 3 comes in on time?
You shouldn't think about it that way. We are optimizing unit 3, and we are optimizing unit 4. It is exactly a 12-month difference between the two. We're not going to cannibalize, if that's the kind of characterization you want to make between the two units. You should know, again, as we re-optimize every week, for heaven's sakes, we always evaluate the best resource, the best allocation of personnel. If there was a short-term issue that arise, sure, we could take advantage of it. In general, both units are going fine.
I hope it's clear that the hours worked per week represents total construction at the site, and so 160 is both units three-
4
4.
That's right. Here's the thing. We are so focused on getting unit 3 to completion and getting unit 3 to fuel load. I think our metrics show that we can do that. We are working like dogs to make sure it happens.
Got you. Okay, thank you very much.
You should understand, too. Hey, wait a minute. You should understand one thing. The rebaseline effort did include both units, right?
Right. Okay.
Okay.
Thank you.
You bet.
Our next question comes from the line of Praful Mehta of Citigroup. Please proceed with your question.
Praful, great to have you with us.
Thanks so much, Tom. Thanks for doing this. I guess first question was on testing. Just wanted to understand how much testing has been done so far in terms of the equipment that's lying there, and what have been the most recent results around the testing phase that would give us any color around how we think the process is going?
Yeah. What's interesting is by year end, some testing has occurred, and I think I even suggested in prior calls that the turnover of some of the very first systems, the first two or three that we did, were not done the way we wanted them to be done. We hadn't really focused on the right processes in place and everything else. We've really turned our focus now. Of course, we're focused on schedule. This idea of moving from construction to in-service and the testing regimes in place, we've really tightened the screws on that. Lately, we've had good experience. By year-end, we expect to have 45 of the 95 total systems for unit 3 complete. Right now, when you think about both systems, both unit 3 and unit 4, we're about 12% of our testing is complete. We already have started.
What you're seeing right now is that whatever you want to call it, the waterfall curve, the ramp-up, whatever, and that's why we're giving a lot of emphasis to these milestones. This is, I think, one of the big focus areas for you and us, for 2019 and 2020 as we move to completion of construction and fuel load, is this whole turnover and testing system.
Got you. Thank you. In your mind, as you look at this testing phase, where are the areas where you think testing could show up with issues or concerns, or which other sites or which other, I think, testing spots that, I guess, are critical paths from your perspective? Any particular ones that we should be looking out for?
Yes, sir. On the slides that we have provided you, I guess that's page seven in the slides. We've given you and we've really argued a lot about how to do this most effectively. There are seven big milestones remaining. Okay? We did this just for Unit 3. If you want to go to Unit 4, take these dates and add 12 months. Okay? Interestingly, initial energization was a milestone that's really important, but it was established back in June of 2018, and sure enough, we've hit it. Now, we haven't finished it, but we're right on schedule. We feel good. That's why it has a star. As you move forward, the start of the integrated flush, we have a timeframe there, kind of summer into fall, of when we want to start that effort.
That's going to be moving water through the pipe systems and cleaning out everything so the plant is in as good a shape as it needs to be when we turn it over for testing. Once we get the main control room ready, okay, that now we've connected all the wires. That sounds like a simple thing, but if you can imagine, a lot of the electrical work that we are dealing with involves connecting A to B in the plant. When I push a button or throw a switch, that it has an effect elsewhere in the plant. Getting the main control room ready says we've done all the electrical work we need to do to basically run the plant from the control room. Big deal.
We move, and I should say for these first three milestones, of course, we've already done initial energization, but for milestones 2 and 3, we have some flexibility in how to move those through time. Let's go to the other big three. Start cold hydro testing is a big deal. The hot functional testing is essentially signifying that construction is substantially complete. You will see the hours worked from our Bechtel partners really fall off once we complete our hot functional tests. What's remaining there are essentially all of the final testing items, ITAAC completion, everything else that leads to fuel load. Once we get to fuel load, man, we have gone hot on the system. We have six months allowed between fuel load and in-service. Frankly, China did it in less than six months.
We think we could probably beat that or do it or better or whatever, but we're still allowing in the schedule six months, and then in service. Those are the seven. We think within those seven, there are, frankly, hundreds of startup tests that we will be doing. Identifying in these major milestone components, we thought, was the most effective way to communicate with you and frankly, with our regulator.
Got you. That's super helpful, Tom. Really appreciate it. Thank you.
You bet.
Our next question comes from the line of Ali Agha of SunTrust. Please proceed with your question.
Hey, Ali, how are you?
Hey, good morning, Tom. Listen, first question, I just wanted to clarify. On Vogtle, as you're looking at these milestones and going through your targeted productivities, et cetera, what's the biggest bottleneck right now that you see out there?
That's a wonderful question. Look, I would go to something that we always see. We've been good at it so far. Because we've been good at it, I don't want to say it's a walkover. Getting people on site, getting them trained, and getting them productive on the work phase. We're going to put most of these people on the second shift, as I suggested, moving from a relationship of 70/30 to 60/40, 55/45 is a big deal. When you think about rebaselining, we were very gratified with kind of actually a small reduction in hours on the electrical work. Still, I would argue the electrical work to be performed in these confined spaces is the most challenging work we do. That is kind of the issue. It remains our critical path.
I think one of the reasons why we felt more confident now finishing rebaselining about November is that our critical path actually got improved a wee bit as a result of the rebaselining, it remains critical path. One other point. Even though when you add people, we worry about so many people being crowded in the containment area and all that and the loss of productivity. Well, we're going to move them to second shift, you should lessen that problem a bit. We're going to need to bring more supervisory personnel. Those are Bechtel people. Like I say, I communicate with my friend Brendan Bechtel roughly every two weeks. Jack Futcher, one of their great leaders, has been on site so much.
Barb, Brian, all the people on that team do a hell of a job working with us in a great partnership to get this stuff done. I will say, however, executing effective supervisory oversight of more people is not a slam dunk. We should just continue to have intense focus on that. If I had to say, it's just this last thing. Wingspan. We're increasing our bandwidth. I don't know, however you want to call it. Moving from the 140s, we just did, I think, 143 last week. Moving from the 140s to 160 on the average in an eight-month timeframe, we think is doable, it will require more resources. It will require more effective supervision to stay productive. That probably is our big deal.
I got you. Very helpful. Second question, I wanted to also clarify, when you all talk about quarterly outlook, you tend to give us single point estimates like you just did for the second quarter, you gave us for the first quarter as well. For the year, you've got a range out there. When you're looking at these single point estimates, I just wanted to be clear, does that sort of target the middle point of the range or the high end? What's the relationship between those single point quarterly estimates and the full year guidance you lay out for us?
Hey, Ali. I'm going to turn this over to Drew. I'll quit talking. I did want to say, you've hit it exactly right. When we give quarterly estimates, they are in fact estimates. It's not new guidance, okay? Guidance for us is the range. When we give you an estimate, that's just the best of our ability, Drew working with the CFOs and working with the operations people, and that's all it is. Okay? We feel very confident about the range. The range is structured with the midpoint being our expected value. I can tell you, we have intense efforts here to beat our expected value.
Not a lot to add. When we set estimates for the quarter to come, we're trying to give you an indication of where we think we're going to come out based on economic conditions. Our goal is to target something that would produce a mid-range result for year-end. It's easier for us to provide first and second as we sort of move through it. Third quarter is certainly the largest quarter in contribution to our annual earnings, and so probably has the most range around it. Generally, Ali, we're trying to target what would be middle of range.
If we get to a point where we think we've been running a little bit higher in the range as we did at the beginning of last year, which had a relatively, well, significantly colder start than this year, we were able to move guidance up, I think, quite a bit earlier in the year last year.
I'll just add institutional knowledge here. The only time I think that we have commented on our range and changed it was last year, at least in my experience now, and that goes back 20 years in various roles here, even as CFO. We typically only readdress guidance at the end of the third quarter, which is our October call. Because we've gotten through our high-revenue quarter this summer. We push like crazy to get higher in the range. If you look at our track record, we typically do really well within the range. From an FD standpoint, all we have is a range right now.
Absolutely. Lastly, Tom, just remind us, when does the Georgia Commission look at the overall cost and prudency of Vogtle? Is it after unit 3 comes online, or is it after both units come online? Can you just remind us?
We have the VCM processes that undergo every six months. Then I think a process will begin on unit 4 fuel load. The date that is expected to be on the November schedule is, let me see if I can find it.
April of 2021?
2022.
Two.
April 2022 would be the kind of initiation of that.
I got you. Thank you so much.
Yeah, I just want to add for clarity, these VCMs are very helpful along the way.
Yeah, absolutely.
Okay.
Thank you.
Thanks.
Our next question comes from the line of Jonathan Arnold of Deutsche Bank. Please proceed with your question.
Hey, Jonathan.
Good morning, guys. Good morning. Just a quick question, I missed some of the call, so apologies if you answered this already, has there been any change in the contingency that you're factoring in on Vogtle as part of the rebaseline or anything to report there?
No. The contingency remains, I think for 100% dollars, around $800 million, and we have not used any of it to date.
Okay, perfect. That was it. Thank you, Tom.
You bet.
Our next question comes from the line of Michael Lapides of Goldman Sachs. Please proceed with your question.
Hey, Michael.
Hey, guys. Hey, Tom. I want to change the topic a little bit. You touched some on the two gigawatts of coal retirements. Can you talk about, A, when do those units go offline, and B, how you're looking at the fleet over the next, I don't know, 3-5 years, whether you see another round of coal retirements coming and how you might replace that capacity if you need to replace that capacity?
Well, very interesting stuff here. Gosh, even in response to the Clean Power Plan, actually before the Clean Power Plan was put forth by EPA, we started thinking about, I can remember we had a day-long meeting in D.C. about this, about what we came to call a better way. That is a way to think about rationally transitioning the generation fleet so that we preserve for the benefit of customers the best balance of clean, safe, reliable, affordable. Essentially, we've been executing on that plan, and the only change I would say is with the continued benefit of the revolution that has been directional drilling and cheap plentiful gas prices, that retirement has been accelerated. I would say that has been a factor. The other big factor has been greater penetration of renewables in our system, particularly in Georgia, to a lesser extent in Alabama.
One more factor that's very interesting. Georgia is going through its IRP, and we don't want to front-run that process. All of these decisions, there may be an overlay of a strategy that carries us through to 2050, and frankly, we have to take into account the diminishment of coal resources. If you're going to keep coal alive, it must have carbon capture technology on it. We continue to invest in the R&D for those solutions. In general, you need to think about coal going down over time, natural gas staying in its place, more renewables, nuclear being preserved. This nuclear will complete, Vogtle 3 and 4 will complete one phase of that. Probably in the 2030s to 2040s, we'll think about the so-called Gen IV reactors. I think if we're serious about carbon, we do need, as a nation, to continue to invest in nuclear technology.
For us, that won't be for my administration's call. That's going to be for two or three down the road, but it'll be in the 2030s to 2040s where I think we need to add more nukes. The other thing that's just kind of interesting here, there could be more acceleration of this transition. I think it's going to be keyed by the very things that we are working on in a rather unique way. There's so much rhetoric out there about storage technology and about carbon capture. The only people that are really investing, I won't say only, but in our industry, we by far lead in proprietary, robust research and development. We're the biggest funder of EPRI. Dr. Steven Specker is on our board. Frankly, he's the lead director. Ernie Moniz is on our board.
We are the guys that really are putting our money forward to create these solutions, we don't rely on just rhetoric to see all this stuff happen. We're trying to invent the future. One last point. There is a change in this 100-year-old business model, where we have created a very small but very important option, and that is the miniaturization, if you will, of making, moving, and selling energy away from central station approaches to so-called microgrids, where on commercial and industrial customers' locations, they may have make, move, and sell characteristics. Our subsidiary, PowerSecure, now aligning very closely with Southern Power, and perhaps another subsidiary we have that does fuel management, Sequent, are really working to advance this idea. We have deployed, The Southern Company has deployed now with PowerSecure, 85% of the nation's microgrids.
As that kind of different business model starts to take hold, that will have an effect on the transition of the generating fleet in America and may help accelerate it. Sorry for the long-winded answer, except to say, shorthand, we have a big strategy in place. We have an important option on thinking about the change in the business model. We have important investments in items that will have some effect on the speed of that transition. Ultimately, tactically, these are decisions that must be made by our states.
Got it. Hey, Tom, one quick follow-up. Do you see potential in the next couple of years, three to five years, but especially given kind of the PTC/ITC benefits that change over time, for significant renewable rollout outside of Georgia, meaning maybe Alabama, maybe Mississippi? Do you think that's more longer dated?
No. Listen, I think both in Alabama and in Mississippi, those commissions are actively considering the attractiveness of all sources of generation. If you look back at any of our commissions, they have a terrific track record of being innovative, creative, and really doing things for the benefit of customers. They don't get dogmatic on any particular issue of clean, safe, reliable, affordable. I think they do a terrific job of balancing those issues.
Oh, yeah.
Certainly, we will consider those things in the next three to five years. One other area of particular emphasis is the military. You may know that I think Anyway, I've been appointed to the Solarium Commission. My appointment was put forth by Mitch McConnell. I think I'm either the one or two only private citizens, however, that's kind of a weird description, other than, say, military personnel or congressional personnel, thinking about the next future military doctrine that DoD will go forward with. Part of that military doctrine is tied up in how do they think about operating in a digital or cyber environment, okay? Part of that will go to their resilience in their own energy operations. If there are cyber wars or kinetic wars, how do they think about their own ability to maintain their capability to listen, to learn, and to fight back?
That has a distinct bearing on the advancement of our thinking of microgrids and distributed infrastructure, certainly in the Southeast and the rest of the United States. We're participating not only in insight currently, but in creating military doctrine in the future. You may see the military as an early adopter of some of these concepts.
Got it. Thank you, guys. Much appreciated.
You bet.
Our final question comes from the line of Michael Weinstein. Please proceed with your question.
Hey, Michael.
Hey, guys. Quick follow-up. Back on Vogtle. Could you just explain how the costs aren't increasing despite the heavy ramp-up in workers over the summer and throughout the next eight months after that?
I'm sorry, give me a little more there. What are you looking for?
Yeah. How are you keeping the cost estimates for the project unchanged despite the ramp-up in-
Okay. Remember, ramp up in work levels is designed to accomplish the same amount of work in a different timeframe. In other words, if we say November 2021, 2022, we have a schedule that is also associated with, I mean, a cost schedule, a budget, this is with November 2021, 2022. Just because we're changing workflows, we're not changing the amount of hours. In fact, from the rebaselining, the amount of hours actually reduced a bit, a little over 500,000 hours total. The cost estimate is within that. Whether we ramp up from 140 to 160, I refer to the shape. That is only for an eight-month period. We've considered kind of a balance of cost and schedule in creating that shape. I think they're very consistent.
Where you might see a problem in cost is if we tried to say, "Let's go to 300,000 hours per week." Well, you would flood the people, you would flood the site with people, you would have tremendous inefficiency. The way we try to get this fuel efficiency concept is with our CPI statistic. I think the most recent CPI statistic, last week we did 143,000 hours at 1.11, I think. I think what we're showing you cumulative CPI is 1.16. What that basically says is it's 1.16 cost to deliver one hour of effective performance. We try to give you a baseline to measure that against the total budget. As long as we stay below 1.4, then we're staying within our total cost estimate.
That's kind of the way you should think about it. When you said, "How are we managing cost with an increase in hours?" We've just changed the shape of the work. The work actually went down a wee bit, and we still think we're able to hit November with some margin right now. Our cost estimates are still well below the 1.4, therefore, we're still within the total budget for cost.
I mean, essentially what you're saying is you don't expect that hiring is going to be an issue, that the cost of labor.
Yeah
Is not going to be higher to attract more workers to the site for a second shift, right?
Yes. We've already incorporated. If you recall, when we went to top decile pay, if I remember the numbers correctly, that was an $80 million kind of number, and that's a reasonable estimate. We handled that with other work that we picked up, and so we managed that without hitting contingency. We managed that cost element. Within this current estimate, of course, we'll see, but we think we're okay.
Okay.
Let me just one more point. When we re-estimated last July, we took all this into account as well.
Right. Okay. Thanks very much.
Yeah. I hope that got it. If it didn't, please call us back.
Will do.
Yep. Thank you.
That will conclude today's question and answer session. Mr. Fanning, are there any closing remarks for today?
Well, as always, you never say thank you enough in life. Thank you all for following Southern Company. This is a nationally important issue when you think about the importance of Vogtle 3 and 4. I really feel compelled with the value of Southern Company right now, when you look at PE ratios and a variety of other things. As we continue to execute on Vogtle the way we have, and of course, there's a lot of hard work to do, but my sense is the rest of the business, ex-Vogtle three and four, has been doing great. Thousands of people making thousands of great decisions. We continue to perform over and over and over. As we continue to execute on Vogtle 3 and 4, my sense is on a risk-adjusted basis, this is a terrific investment. We appreciate your interest in our company.
We'll continue to work as hard as we can to follow through on these big objectives. Thanks, everybody. See you soon.
Thank you, sir. Ladies and gentlemen, this concludes The Southern Company first quarter 2019 earnings call. You may now disconnect your line.