Ladies and gentlemen, good afternoon. My name is Frank, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company first quarter 2018 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. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded on Wednesday, May 2nd, 2018. I would now like to turn the call over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.
Thank you, Frank. Welcome to Southern Company's first quarter 2018 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Art Beattie, Chief Financial Officer. Let me remind you that we will make 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 our Form 10-K 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. The slides we will discuss during today's call may be viewed on our investor relations website at investor.southerncompany.com. At this time, I'll turn the call over to Tom Fanning.
Good afternoon, and thank you for joining us. As always, we appreciate your interest in Southern Company. Each of our major business units had a great start to the year. Our state-regulated electric and gas utilities, as well as our other businesses, are on track to deliver on their targets for 2018. As we've mentioned before, tax reform provides an enormous benefit to our customers and the economy. During the first part of this year, we've received constructive regulatory results in several of our states, including our two largest subsidiaries. Recall, as a part of our tax reform strategy, we have been engaging with each of our state regulatory jurisdictions to provide meaningful rate benefits to customers while preserving the credit quality of each of our state-regulated utilities.
Thus far, tax reform has produced over $1.7 billion of benefits to our customers, and our regulators have demonstrated their steadfast support for preserving the credit quality of our utilities by accommodating higher equity ratios. As we continue working through our remaining jurisdictions, we will keep you informed. Let's now turn to an update on Vogtle Units 3 and 4. With more than 6,000 workers on site, our focus remains on productivity and safe, efficient, high-quality construction. As of the end of March, total construction is slightly more than halfway complete. Significant progress continues in all phases of construction with the setting of modules and equipment for Unit 3, setting of the reactor vessel for Unit 4, bulk commodity installation, and major concrete placements across the project. In fact, several areas of the plant are already being transitioned from the construction team to the operations team.
As you can see in the materials provided this morning, the team at the site continues to work toward an accelerated construction schedule ahead of the November 2021 and November 2022 in-service dates that were approved by the Georgia Public Service Commission. All critical path milestones are on track, and our continued progress over the past several months is encouraging. To be clear, there is a lot of hard work ahead, particularly associated with confined areas like the reactor containment structure. There's a long way to go, but we are cautiously optimistic that our work plan will remain ahead of the commission-approved schedule. In the coming months, we are focused on securing additional skilled craft labor, particularly electricians and pipe fitters, in anticipation of the increased productivity requirements in the critical areas of the project.
As a final note on Vogtle 3 and 4, we are encouraged with the fuel load recently completed at Sanmen Unit 1 in China. Recall, Southern has had a number of personnel on site there, and we look forward to learning more during the startup activities at these units. I'll now turn the call over to Art for a financial and economic overview.
Thanks, Tom, and good afternoon, everyone. As you can see from the materials we released this morning, we had solid results for the first quarter of 2018, reporting earnings of $938 million or $0.93 per share compared with earnings of $658 million or $0.66 per share in the first quarter of last year. Excluding charges associated with the Kemper project, wholesale gas services, and other items described in our earnings materials on an adjusted basis for the first quarter of 2018, Southern Company earned $893 million or $0.88 per share compared with $652 million or $0.66 per share during the first quarter of 2017. Major earnings year-over-year drivers for the first quarter of 2018 include revenue effects, primarily driven by weather at our state-regulated electrics, and by infrastructure investments at Southern Company Gas, as well as optimization of Southern Power's state tax positions.
These positive drivers were partially offset by increased depreciation and amortization. Moving on to an economic review of the first quarter. The economy is performing well as GDP growth is expected to be 2.7% for 2018, which includes a slight lift from tax reform. In our state-regulated service areas, we are seeing this economic growth translate into employment growth on par with national growth of 1.5%. In Georgia, where we serve both gas and electric markets, 1.7% job growth continues to outpace the nation. Atlanta was ranked third in population growth in 2017 across the 12 largest Metropolitan Statistical Areas in the nation. On the industrial side, the ISM Manufacturing Index averaged 59.7 during the first quarter, signaling a continuation of strong industrial expansion across the nation.
We are seeing similar trends in our service territories, where nine out of 10 of our industrial segments showed year-over-year gains in electric sales. The ISM Index for April was at 57.3, which while still expansionary, signaled friction in the industrial supply chain that we will be monitoring. Overall, we expect the economy to continue performing well, supporting customer growth and our energy sales projections. We are keeping a watchful eye on potential policy interventions such as shifts in interest rates or developments related to international trade landscape that could affect economic growth. Before turning the call back to Tom, I want to provide an earnings estimate for the second quarter and share brief updates on our financing plans for this year in Southern Power. First, we estimate that Southern Company will earn $0.65 per share in the second quarter of 2018.
Now for an update on our financing plans. As Tom mentioned earlier, we have been constructively working with our regulators to ensure lasting benefits of tax reform for our customers while preserving credit quality. The recent outcomes in several of our state jurisdictions are supportive of our previously discussed tax reform strategy. Continued success in the execution of this strategy should result in a financial outlook with less leverage and strong credit quality, which supports the value proposition from our state-regulated utilities. Our five-year, $7 billion equity need has not changed. Recall, approximately 80% of this equity is to be invested directly into our state-regulated electric and gas utilities. The timing of fulfilling our equity needs could be influenced by the nature and the timing of regulatory outcomes and by our consolidated credit metric objectives.
As mentioned on our last call, we will seek to optimize the timing and source of equity by seeking opportunities for investor-friendly funding. The sales of Elizabethtown Gas, Elkton Gas, and our planned sale of 33% of Southern Power's solar portfolio should be seen as past examples. The sale of Pivotal Home Solutions is a more recent example that is a small part of fulfilling our current need. As an additional example of our thinking, we are also exploring third-party tax equity financing for much of our existing wind portfolio at Southern Power. Post-tax reform, the economics of this financing vehicle could be more attractive given the extension of our tax credit carry-forward position well into the next decade. Most of these projects were originally financed corporately at Southern Power.
This opportunity could offset approximately $1 billion of Southern Company's $7 billion total equity need at Southern Company, with the potential to receive the funds in the second half of this year. Additionally, we are updating our investment forecast for Southern Power. Post-tax reform, it is clear that our optimal allocation of capital is reweighted towards our state-regulated utilities. We continue to expect success with incremental renewable projects, many of which will allow us to leverage equipment purchases we've made to safe harbor the value of production tax credits. Our updated outlook for Southern Power reflects potential growth investments of up to $500 million per year, which is approximately one-third of what we outlined on our last call.
These potential growth opportunities will require little to no incremental equity from Southern, as they are expected to be funded with a combination of internally generated cash flow, debt, and third-party tax equity. Southern Power remains an important part of our business, and the long-term contracted nature of these assets serves as a great complement to our state-regulated utility business model. The continued investment in renewable generation at Southern Power and our state-regulated electric utilities is also an important part of our broader long-term low to no carbon objective. Recall that our 4%-6% EPS growth outlook is not dependent on unregulated growth. As a result, this more modest opportunity set for Southern Power represents upside within our 4%-6% range. Moreover, our less aggressive growth outlook should result in reduced costs, further supporting Southern Power's value proposition to the overall enterprise.
I will now turn the call back over to Tom for his opening remarks.
Thanks, Art. Southern Company has started 2018 with strong momentum. All of our businesses are performing at a high level. Our board of directors recently approved an $0.08 per share increase in our common dividend to an annualized rate of $2.40 per share. This is our 17th consecutive annual increase, and for 70 years, dating back to 1948, Southern Company's paid a dividend that was equal to or greater than that of the previous year. The board's decision to increase the dividend speaks to the enduring strength of our business, which is underpinned by a firm foundation of premier state-regulated electric and gas utilities. Moreover, it supports our objective of providing superior risk-adjusted total shareholder return to investors over the long term. We're also excited about the forthcoming changes to our management team.
As announced two weeks ago, effective June 1st, Art is retiring and Drew Evans, currently Chairman, President, and CEO of Southern Company Gas, will become the Chief Financial Officer of Southern Company. On a personal note, I want to thank Art, not only for his 42 years of distinguished service to Southern Company, but also for his friendship. His sound fiscal discipline, strategic thinking, and consummate professionalism have been invaluable to our company as he has helped steer us through some incredible moments in our history. He will be sorely missed. At Southern Company, we are committed to cultivating the best leadership in our industry. This announcement underscores the fact that we continue to advance the thought leadership and experience that serves to support our objective to provide clean, safe, reliable, and affordable energy with superior customer service. Operator, we'll now take the first question.
Thank you. Ladies and gentlemen, if you would like to register a question, please press the one four on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment please for the first question. Our first question comes from the line of Greg Gordon with Evercore ISI. Please proceed.
Hello, Greg.
Hey, good afternoon. Art, you're definitely gonna be missed, and congratulations. It's been a long and illustrious career.
Thanks, Greg.
A question on the $7 billion. I think you were pretty clear. You need $7 billion over five years, average $1.4 billion. Should I be to the $365 million you're raising from the Pivotal transaction, should I consider that as one of the sources of that $7 billion or is that outside of that box?
No, that's within our financial plan.
It reduces the $7 billion or it's outside of it?
No, it reduces it.
Got you. Clear. Okay. The extent that you can do this tax equity financing on the wind, that could reduce it by another $1 billion. You still have 50%
Yep
of the 1.8 gigawatts of solar, that reduces it further.
Yep.
Et cetera.
No.
As we're thinking about how you whittle this down to the actual amount of common equity you might or might not need, is that the right way to think through it?
The solar's already spoken for.
The solar's already part of the plan last year.
Yeah.
The solar's outside. You've got some really rational outcomes from the regulators here on doing what they ought to be doing to make sure the credit quality of operating companies remains sound. You have to fund that, right? You have to put that equity in to get the earnings and cash flow that they've deemed to be fair and appropriate, reasonable. Would that lead us to believe that the equity needs are sort of front-end loaded because you want to get that equity into those subs so that you can get to the appropriate credit metrics faster?
Yeah, Greg, we've already advanced to Georgia Power. I think it's $900 million of equity. We've taken that in the form of short-term debt until the time where we're at a point where we can replace that with equity.
It'd be fair to assume if we're modeling this, that you can advance the equity infusions to the subs through borrowing at the parent and then pay that off with either asset sale proceeds or equity over time.
Exactly.
Okay, perfect. I'm sure there's lots of other questions, so I'll get off. Thank you.
Thank you, bud. Thanks for joining us.
Our next question comes from the line of Michael Weinstein with Credit Suisse. Please proceed.
Hello, Michael.
Hello. Hey, just to clarify Greg's question. The $1 billion of tax equity proceeds in second half that offsets the $7 billion of equity
Expected over the next five years?
Yeah, it's part of it. We have lots of flexibility on how to think about the equity-
Yep
raise going forward, and flexibility in terms of content and time.
In terms of timing, current plans can handle about $1.5 billion a year. Has the regulatory outcomes in Georgia, Alabama, and a few other places, has the higher equity ratio require more equity up front? Like, is it front-load some of that into the current year?
Georgia is certainly, as I mentioned on Greg's answer, we've already advanced some equity to Georgia Power in the form of debt at the parent temporarily. Alabama's does not start, their process does not even start until 2019. Theirs is an achievement of an equity ratio over time.
Okay. In other words, you would expect the equity to be kind of evenly spread out throughout that five years, and you would lever as necessary at the parent in between?
Yeah. Basically, the Alabama plan provides us a pathway in which to raise equity ratios over time. There's some flexibility around that depending upon a host of variables. As we have the opportunity to raise the equity ratio, we will do that, and obviously as we do that will have a bearing on the amount and timing in any given period.
All right. One last question on the tax equity. The $1 billion, that's just to refinance existing portfolio projects, or does that include-
Yes
the potential $500 million this year?
It's just the existing portfolio. That's right.
Okay. There could be additional tax equity for new investment.
That's exactly right.
Okay. Thank you.
Yep. Thank you.
Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed.
Hey, Jonathan.
Good afternoon. Hi, guys. Just looking back to what you kind of had when you set out the plan last quarter. I think you calibrated the FFO to debt metric improvement that you were needing to go after at something like 2%-3% at the subs and 3%-4% at the consolidated level. Can you give us any sort of feel for how you feel you're doing with the mitigation achieved so far, and other pieces of the plan against what I think was the target? Look, we have to execute, and time will tell, but we're very confident we're going to be around the money and doing what we need to do. We can't kind of specify just how much improvement we've seen yet, or? Well, again, it's going to be to the degree we can earn on the equity in the subsidiaries.
The more postponed that is, we may have to take down parent debt sooner in order to achieve the targets that we've established. We will get there one way or the other. We would rather do it in the least dilutive way possible. I bet people are dying to have us lay out what the investor-friendly equity sources are. We'll certainly update you on the next earnings call, and if there's activity before then, we'll certainly bring it to everybody's attention. It really kind of deals with our execution on all those sources.
Well, could I just pick up on that, the investor-friendly comment, Tom? You obviously had a slide that showed this $1 billion for a year, and now you're sort of talking about it more as $7 billion over the five years. I mean, do you guys consider investor-friendliness to be getting it behind you or doing it or pushing it out? I mean, that's, I guess, a philosophical question in part.
It's always better to get it behind you, I think. The shape, just as we suggested on the last question from Michael, I mean, the amount and nature really depends on the execution on these regulatory plans. I must say, we've been very gratified with the response we've gotten out of our states in order to return benefits to customers and balance that with the preservation of financial integrity. We pretty much have execution in Gulf Power, in Georgia, and in Alabama. We have plans in other subsidiaries, so we're working to do that. Our bias in all of this is to preserve our metrics and really restore the financial integrity that we had prior to tax reforms. If we had a bias, I guess it would be to get it done sooner rather than just leave it out there.
Always, I think there's always this notion of overhang and equity issuance. To the extent you eliminate overhang, that's a good thing too.
Okay. Thank you, Tom. May I just on Vogtle ask, I think you in your comments, you said that you were kind of cautioning that there's a lot of heavy work in front of you, but that you're cautiously optimistic you would remain ahead of the approved schedule. You're currently quite a decent bit ahead of that schedule. Are you signaling that you think you'll narrow the gap a bit here, or do you think you'll stay as?
Those of you that have been in my one-on-ones, I do these artful audiovisual presentations.
I do this chart to demonstrate, to illustrate what hard work is. A lot of this reactor vessel containment area is tight spaces, a lot of commodity work, a lot of people. I'm just cautioning everybody. The schedule looks fabulous so far. In fact, we are ahead of our April, November 2021, 2022. We're ahead of our April schedule so far, we cannot count on that. I'm just cautioning everybody that with this very tough work, I would expect even to see some erosion in that. Our ability to perform ahead of the regulatory schedule, November 2021 and 2022, I think is pretty good. I think we feel confident about that.
That's great. Thank you. Just on the cost side, can you give us a sense of just your confidence? You're obviously tracking above at the moment, but-
Yeah
What gives you the confidence you have the line of sight that you can sort of accomplish the schedule and bring the costs into where they need to be?
Yeah. What's interesting about that cost chart is that, we make the note, performance remains well within the thresholds of the approved estimates complete. What we should note is that cost chart is really tracking the kind of personnel efficiency, labor efficiency that is associated largely with the Bechtel work. That represents about 20% of the remaining cost in front of us. Yeah, it looks like it's substantially above the cost target. We really want and are working very hard with the Bechtel people at all levels in the organization. In fact, I probably have been meeting with, via telephone or in person or whatever, Brendan Bechtel. My level, I know Paul Bowers, the CEO of Georgia Power, Steve Kuczynski, the guys on site. We are working at all levels within Bechtel to try and drive better performance on the cost index.
I think we see our way through to improving it somewhat. You got to understand, everything we see right now shows that we will be within the cost thresholds that we've had approved at the Georgia Public Service Commission. Even if we don't-
The message there is, don't take that sort of index and apply it to the whole cost, right?
That is exactly right. It's only about 20% of the cost. The rest of the costs are pretty well known.
Okay. Thank you for that.
You bet.
Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please proceed.
Hey, Stephen.
Hi, good afternoon. Hey, Art, congratulations on your upcoming retirement.
Thank you, Stephen. Appreciate it, bud.
I just wanted to go back to what you had walked through in terms of the tax equity, and I'm sorry if I missed it. I was just trying to think about just from a GAAP point of view, modeling the cost of the tax equity financing. Could you just refresh my memory on just how to think about the GAAP cost of that financing?
I'm not sure I know.
What do you mean GAAP cost?
Yeah.
Oh, the earnings drag from the financing, from the tax equity financing.
Well, when we model these kind of things, we certainly do it against our current plan. To a degree, you're giving up the tax equity, which for us is really delayed, and then look at other potential buyers who can use it sooner than we can. We think there's value there.
It's, yeah. It's simply a cost of capital compared to a time value of cash calculation. We wouldn't do it unless it was accretive.
That's right.
Okay, understood. I can follow up just to make sure. Sometimes the accounting impacts just trip me up a little bit. I'll follow up offline. Separately, just on, you've obviously had a number of questions around different approaches to financing. I think you've laid out a number of really creative and shareholder-friendly ways to approach this. Should we be thinking broadly? I know you don't want to get into too much specifics, but just conceptually more around financing options versus certain parts of the business that could be completely monetized and sold. Obviously, you have a lot of very valuable franchises and low-risk businesses that could be sold. I just wanted to make sure I'm understanding just conceptually, is it more in the sort of financing realm, or is it more in monetization, or is really everything a possibility at this point?
Yeah. We don't want to talk about specifics, but clearly, I think when you look at our track record in the past, it is a portfolio of a variety of options, and we'll consider any and all, determined by what gives the best value to shareholders.
Understood. Completely understood. Lastly, just on Sanmen, it's encouraging to see fuel loading. Do you have a sense for when they're going to go through sort of active testing of the equipment? Meaning machinery's actually going to be spinning, and they're going to go through real sort of, I guess, not being an engineer, sort of operational testing?
Yeah, we think it's imminent.
Yeah. I think they're going to do some preliminary warm-up, when they start testing with actual fuel load, I believe that's scheduled for another, be a month or so.
Yeah. If the word you're looking for is hot-
Yeah
they'll be hot in four to six weeks. There is a lot of machinery that's spinning right now. Hot in four to six weeks, if that's the question.
Yep, perfect. That's all I had. Thank you.
You bet. Thank you.
Our next question comes from the line of Agnieszka Storozynski with Macquarie. Please proceed.
Hello, Angie.
Thank you.
Thanks for joining us.
How are you and Art? 42 years. Wow. That's hard to believe, actually. Congratulations.
Thanks.
Okay, $7 billion, reduced by that $1 billion that you mentioned regarding when, reduced by the proceeds from Pivotal. The rest would be easily covered by your internal programs. Why do we even need to talk about timing? Is it just simply because the internal issuances of shares would assume some risk of the equity pricing, and hence you would prefer to potentially front-end load some of these issuances?
Yeah, there's really a kind of a what and a how, right? I think the what would be, as we demonstrated in Georgia, to the extent we have the ability to invest equity, reduce leverage at the operating companies and earn on it effectively. Certainly, that gives rise to an accelerated timing relative to the $1.4 billion per year. When you think about the knock-on effects to parent company debt and a variety of other things, I think there are a variety of accretive things we can do that are associated with accelerating equity issuances. The other idea is not so much a what but a how.
That really goes to, if we can demonstrate a shareholder-friendly approach to raising equity, then in fact, that takes this kind of overhang issue off the share price and also really speaks to the bias of us getting our metrics fixed sooner rather than later.
Yeah.
So-
I think that's where it goes. Don't forget, we've got to address the metric issue, and we can't wait forever to do that in order to maintain the ratings that we're seeking to maintain. There's a lot of balancing around all these issues.
You believe basically that these potential asset sales, if I understood correctly, would be earnings accretive?
Absolutely. We won't do anything that's not in a balanced way.
Yeah. Thanks.
Our next question comes from the line of Ali Agha with SunTrust. Please proceed.
Hello, Ali.
Hey, good afternoon, Tom, Art. Tom, just to be clear, as you look at your portfolio, and you look for investor-friendly opportunities, is it fair to say that your core electric utility businesses are core to the company not to be messed with? Or is everything potentially available as you're looking at equity-raising plans?
Ali, it's a very interesting question, and frankly, we've had a lot of debate even internally and even with the board and everything else. I frankly think almost all of what we have is core. Our business is low risk, infrastructure-driven, state-regulated, integrated utilities. That's what it is. We've been that way forever on the electric side. When we did the gas side, remember the underpinning of that strategy was safety-related pipeline replacement programs that provided a very low risk and attractive growth profile. I would argue all of that is core. Okay? Pivotal wasn't core, right? That was clear. There's a few things around the edges that aren't particularly that business. Even so, we would consider the whole portfolio of opportunity if it made sense for shareholders. The ultimate test here is what can we do to benefit you all?
We'll evaluate every opportunity we have, whether it's structural or financial.
I see. Also just to be clear on the commentary you've had, looking at these avenues, looking at acceleration, et cetera. One, can you remind us, and I haven't seen this, but through the first quarter, was there any equity issuance through the plans? If so, how much have you raised? Secondly, would you take block transactions off the table, or that's still in the menu of getting this behind you?
To my knowledge, very small amounts of maybe option exercises, but that's it. As far as equity in the first quarter. As we've said in the past, we've got a toolbox that we can access, and block is only one of the issues. We've got a lot of other options. We're not going to get specific beyond that.
Right. Nothing is off the table, is what you're saying?
When we have something to say, we will certainly say it. We've just announced Pivotal. We just announced an idea we've discovered on the PTCs. Certainly, we have our earnings call in July. If we advance something, we'll certainly let you know and do haste.
Separately, looking at more near term from the financial side. You went into the quarter budgeting or letting us know you were thinking you're going to be earning $0.84, ended up earning $0.88. What came in better than what you thought? I know it's early in the year, but could that be extrapolated as you're looking at the full year as well?
Ali, a little bit of that was better sales than what we expected on a weather normal basis. I think you've seen our numbers. Retail sales were on a weather normal basis, up 1.6%. Our industrial sales were up 2.6%. Our forecast was pretty flattish around weather normal load growth here. We picked up some there. The other side of that is O&M, O&M was really underspent throughout our business enterprises, which really goes, again, towards our modernization initiative to invest capital and replace it with lower non-fuel O&M. Certainly, there'll be some timing differences that will be part of that. Again, this is the effort upon which we've launched ourselves.
There's another interesting economic trend. The Fed has spoken about this. There was this announcement today, wasn't it AllianceBernstein, something like that? Folks moving out of high-tax state and local areas into low-tax state and local areas. Atlanta, I want to say, was the third fastest-growing population of any of the MSAs in the United States. When you think about kind of this potential mega-trend, an unintended consequence of tax reform, we think the Southeast stands to benefit.
Got it. Thank you.
Yes, sir.
Thank you.
Our next question comes from the line of Julien Dumoulin-Smith from Bank of America Merrill Lynch. Please proceed.
Hello, Julien.
Hey, afternoon, team, congratulations, Art.
Thank you. Appreciate it.
Absolutely. Thank you, rather. Just to come back to the core earnings of the company, as you talked about sort of front-end loading, at least the Georgia Power piece here, how do you think about where you are with respect to your guidance within the range and then sort of front-end loading even the earnings growth within the period that you talk about? Just want to kind of think about the timing of when these bigger factors phase in here.
We don't really comment on guidance until after the third quarter. Yeah, we've had a good quarter, again, it was better growth than what we expected. Our weather normal models aren't perfect either. I always have preached that it's more of an art, no pun intended, than science. Our range contemplates all different kinds of scenarios, and we'll just see where the rest of the year goes.
I think, Art, we give the guidance in the year-end, so it'll be the February call now. We update it once a year. We've done that for years and years and years. We'll do that in October, I guess.
Maybe to clarify here, the four to six as you guys see it, you would expect, despite front-end loading the equity contributions into the utilities, that there's still a pretty stable cadence, that four to six through your forecast period.
Absolutely.
Okay, great. That clarifies things. Let me come back just to the equity raise side of the house here, just real quickly. When you say everything's core or utilities are core, do you have a preference in evaluating, say, Southern Power versus your utilities? Secondly, let me just also be exceptionally clear about this because I think I heard you say it. With respect to needing to see something accretive, it needs to be earnings, not necessarily credit and earnings accretive.
No, we want it to be both. We take it as a whole, right? Value is a function of risk and return. If we can buy off risk, at the same time packaged together with a variety of other things, still be earnings accretive, that's a home run to us. With respect to Southern Power, recall we built that business with the idea that the long-term bilateral nature of that business as apart from merchant with low to no fuel risk, transmission risk, creditworthy counterparties, is a structure that is intended to replicate kind of the risk-return profile of our integrated regulated utility business. It is part of our core business. We've already contemplated through financial transactions, selling off, for example, a third of the solar portfolio.
We've told you that we would consider selling an economic interest in the production tax credits with the wind we already have. That is part of our portfolio of assets, that if there is a better combination for shareholders, we'll certainly consider it.
Got it. Excellent. Just real quickly, Art, if you can clarify this. You expressed a desire to sort of front-end load your ability to hit the FFO to debt targets you've delineated. Where do you stand again today, and what are the agencies saying in terms of the timeline you need to get there with?
Well, again, I think we outlined on our last call. If you exclude Vogtle, we're trying to get it back to a 16-16.5% FFO debt ratio. The timelines around that, we've communicated with the agencies about our plans. They are aware of all the things that we are looking at. We need to make progress on that at some point in time.
You asked earlier about front-loading equity in the OpCos. That's certainly true in Georgia. You'll notice that it's not upfront so much in Alabama. It starts in 2019 and stretches out over a number of years. I want to make sure and be clear that it's different in every operating company.
Appreciate it. Thank you, guys.
You bet. Thank you.
Our next question comes from the line of Paul Fremont with Mizuho. Please proceed.
Hello, Paul.
Hey, thanks. My question's been answered. Art, best wishes to you. It's been great working with you.
Same here, Paul. Thank you for the comment.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.
Hello, Michael. Thanks for joining us.
Tom, thank you for taking my question. A topic that hadn't come up today, how are you looking around the service territories, really the entire Southeast, and thinking about the opportunity to leverage your position in Sonat for incremental midstream or pipeline growth, organic growth?
You bet. Great stuff. I'm going to pull back on comments I made, I'll bet you 2 years ago now. There still is a lot of interest because the unconventional gas, particularly Marcellus, that area, is different than the traditional gas, the deep water or coastal Gulf Coast. There have been a number of projects that people are looking at. I think I spoke about several options that we were presented with from other people. We obviously are a big consumer of gas on our own. Even without Southern Company Gas, Southern Company was, I think, the third-largest consumer of natural gas in the U.S. You throw Southern Company Gas on there, I think we become the most important consumer of natural gas in the U.S. There continue to be interesting ideas of pipes north to south, as well as pipes west to east.
In fact, our constructive arrangement with Kinder Morgan resulted in the Southern Natural Gas Pipeline 50% interest. What we said then was that there may be other opportunities associated with that, and we have executed on at least one of those. Wasn't particularly big. What we told you also was that as the acquisition of 50% of Sonat gives us optionality. We still think that optionality exists. We'll just be opportunistic in terms of how we exercise it. The opportunities are still out there. We still kick the tires. We still look. We still talk. We have a guy over at Southern Company Gas, Peter Tumminello, who runs a terrific shop. Guy with him, Don Tran, are very good gas pipeline people. We continue to actively survey the landscape.
Got it. Thank you, Tom. Much appreciated.
You bet.
Our next question comes from the line of Praful Mehta with Citigroup. Please proceed.
Thanks for joining us.
Thanks, guys. Hi, thanks, and congratulations, Art.
Thank you, Praful.
I guess can't escape the equity question, I'll come back to that quickly. In terms of the equity, is there a maximum size that you would look to do in a particular year? I get the front-loading question, but obviously there is a cap that you would not want to go beyond. Is there any number that we should think of that generally you would not issue beyond that?
I'd rather not deal in that realm. What I said before is that we would be both credit and earnings accretive with any of these ideas. In terms of sizing, I think that is just area I'd rather not get into at this point. We've already suggested that the shape of our effort here will be highly influenced by, on the regulatory front, the ability to invest equity in an effective way at our regulatory jurisdictions. Let's leave it there for now.
Fair enough. It was worth a shot, though.
Praful, that's great. Celebrate good tries.
Yeah. Just following up on the regulatory question. I guess on the higher equity ratio, is this seen by the regulators as almost like a bridge to help you get to stronger metrics, but that you grow back to the lower equity ratios over time, or is this seen more as a permanent solution going forward?
No, it's really just math. If you think about it, tax reform was just a wonderful thing, right? We were able, and we worked this on our own. We worked it through EEI. Look, we pounded the pavement up in Washington. It was really important for us to maintain interest deductibility. That would have visited on our customers an almost immediate rate hike. You say, well, we did that. We got lower tax rates, which are obviously an advantage. The quid pro quo must have been that we lost cash flow associated with accelerated depreciation. The commissions, I think, we had this very constructive relationship we have for decades down here. Gee whiz. When you think about it, we were able to take the benefits by lower tax rate and use them on one hand to give customer benefits now over $1.7 billion.
At the same time, reduce leverage, increase equity ratios to fix back to a coverage ratio. That has been the plan. Our regulators in the Southeast have always understood that good, healthy utilities are good ultimately for customers. Recall the old circle of life that I started back, gosh, now it's getting a long time, but 15 years ago when I was CFO. The idea that if we are able to deliver relentless value to customers in terms of reliability and price and service, that generates a tremendous amount of value in the economy. If we generate that value and therefore we earn the ability to have constructive regulation, that gives us an environment in which to invest capital, and that gives us an environment in which to grow a good, healthy company.
I think our regulators get that model, and I think we all understand that preserving that balance is good for everybody in the long run.
Got you. Super helpful, guys. Thanks.
Thank you.
Thank you.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.
Hey, Paul.
Good afternoon. Congratulations, Art.
Thanks, Paul.
Just quickly on the tax equity market, has there been any change or any characterization of any change that's happened because of tax reform that you guys have experienced? Or has it really pretty much been a non-event in the tax equity market for you guys?
Yeah. I think there was talk during all of the passing of the bill that there was going to be a pinching of the market, that they were going to be penalized, so to speak. I think all that was fixed. To my knowledge, Paul, I believe the accessibility, and we've got the same players in the marketplace that we'll deal with if we choose to go down that road.
Yeah. I'll just give a little more nuanced answer. There has been a change, but it hasn't impacted us.
Yeah. Why hasn't it impacted you? Could you give us a little bit more of a flavor for that? Is it because of the type of-
When you look at scalable, high-quality issuers like us, we're always going to cultivate a universe of investors that is quick and easy and sophisticated. We know how to do deals. We've done deals in the past. We have a relationship. We get these things done.
Okay. On the China fuel loading, do we know what actually caused the delay for so long on that? I just was wondering if you could elaborate a little bit on that, if you found out what that was and how that may or may not translate to you guys now?
No, sir. Pure speculation. There were rumors everywhere. Nobody knows.
Okay. Finally, you were mentioning something about, I guess, the tax code sort of assisting movement to Georgia, I think. I apologize for not gathering exactly what you were saying. Could you elaborate a little bit on what you were talking about? I'm sorry.
There's been, if you look at the macro trend of population shift in the U.S., for some years, because of economic growth reasons, there has been a shift away from the Northeast and the Midwest, particularly the Rust Belt, into higher growth areas like the Southeast, the Desert Southwest, things like that. When you look at the tax code, where now you're limited on your ability to deduct state and local taxes, it's one of the things that now we're starting to see is that people are willing to migrate away from high tax areas, which have high state and local taxes, into low state and local tax areas. You know what? It was funny. 100 years ago when I was CEO of Gulf Power, I was on Jeb Bush's transition team. My assignment there were two of his planks.
One was education and one was economic development. One of the theories about at least Florida that we used with Governor Bush at the time was the idea that physical location in this digital age increasingly didn't matter. I think you're going to find people that are much more willing to go to places that are nice places to live, that have reasonable human-like commutes, that have affordable housing, that have good education, that have constructive business regulatory and legal environments. Now we have a tax code reason for people to move to those areas. Those are kind of the mega trends I was pointing out.
Okay. These would be high net worth individuals, really, right? With respect to the tax code changes we're talking about, those don't impact the vast majority. Is that what you're talking? You're talking about rich people, I guess, moving to Atlanta?
Yeah. AllianceBernstein just moved to Nashville. They just announced it.
I got you.
There's other places in the other certain-
I got you. They might be-
-kind of companies that'll be wanting to do that.
Okay. Thanks so much for the clarity.
You bet.
Our next question comes from the line of Andy Leedy with Avon Capital. Please proceed.
Hey, Andy, how are you?
Great. How are you guys doing?
Good.
Congratulations, Art. I guess you'll get your golf game going. Maybe you'll be able to beat Fanning now.
That's never been a problem. No, it's never been a problem. I heard Tom was a pretty good golfer.
No.
Congratulations.
Art is the captain of The Southern Company golf team.
Oh, okay. I miss you, Art. You've been very helpful to all of us.
Thank you, Andy.
You will be missed. Obviously, all the questions have mainly been answered. I just have a question on Georgia Power. The $900 million, I understand that. Will there be incremental equity that needs to be put down in there to get to the 55% level?
Well, we've already put it down there as equity. We will replace it at the Southern level in some form or fashion.
Just as a matter of governance and process, there's always needs for capital contributions to the subs over time, and certainly, that would include all of our subs.
That's right.
There will be other incremental equity down there in the future.
What I'm getting at is to get the equity ratio where If I remember from past comments or conversations with you guys, obviously the first goal was to try to get the regulatory approval, which obviously you got very quickly. The second goal was to try to get the equity ratio to the maximum allowed level so you could start earning on that equity as quickly as possible. I guess what I'm asking is, does that $900 million, which you put down into there, does that get you to that maximal equity level? Or do you need to put more equity down there this year to get to that maximum equity level?
Andy. It gets us to approximately the 55% level.
We're there.
I had come up with a different calculation. That's why I was confused. Let me see if there's anything else. Just on the overall equity, and you've touched on this before, on the tax equity, the $1 billion that you plan to get later in the year, that will reduce the equity needs from $7 billion, it's a hard word to say, down to $6 billion, and then another $350 million or so has been reduced by the sale to American Water Works. You're down to about $5.5 billion, give or take $100 million.
You got to be careful using gross numbers like on Pivotal, because you always want to first retire the net committed capital associated with each of these companies so that you preserve your earnings profile. To the extent the price is above, that is accretive and also gives you the notion of net equity proceeds that you can then use to reduce leverage. I know, rightfully so, we gave you the example of the tax equity associated with the wind PTCs. That's one of a portfolio of options we're looking at.
Okay. I understand. Thank you very much.
You bet. Thank you.
Sir, at this time, there are no further questions. Are there any closing remarks?
You know what? I'm going to give Art the last word here.
It has certainly been my pleasure to represent Southern Company in front of all you guys on the street. It's been a rewarding experience for me. I have to tell you, as much fun as that's been, it pales in comparison to watching my grandson play baseball. I hope you're not offended by that, but that's the truth. Thank you very much for all your courtesies and your help over these past eight years.
Thank you, Art Beattie. That's all we have, operator.
Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company first quarter 2018 earnings call. You may now all disconnect. Have a great day, everyone.
Thanks, everyone.