Good afternoon. My name is Carlos, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company First Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
As a reminder, this call is being recorded, Wednesday, May 3, 2017. I would now like to turn the conference over to Mr. Aaron Abramovid, Director of Investor Relations. Please go ahead, sir.
Thank you, Carlos. Welcome to Southern Company's Q1 2017 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company and Art Beatty, Chief Financial Officer. Let me remind you, 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 ks 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. Despite headwinds from unseasonably warm weather during the 1st 2 months of the year, our traditional electric and gas operating companies performed well and they are on track to deliver on their targets for 2017 and beyond. Southern Company Gas, including its 7 premier state regulated gas utilities performed exactly as expected.
Art will update you on our financial results in just a minute, but I'd like to first provide brief updates on the status of the Vogtle and Kemper projects. First, Plant Vogtle Units 34. As you know, Westinghouse, the primary contractor for the Vogtle expansion declared bankruptcy on March 29. Georgia Power and the co owners of Vogtle were well prepared for this event. The owners immediately entered into a 30 day interim agreement, which was as announced last week extended through May 12.
The interim assessment agreement allows work to continue and maintains momentum on the site while we develop comprehensive schedule and cost assessments for the project. Thanks to the interim assessment agreement and close coordination between Georgia Power, the co owners, Southern Nuclear, Westinghouse and Fluor, approximately 6,000 workers have remained on-site safely competing multiple concrete placements and other work within the 2 nuclear islands in the balance of the plant. In fact, we've seen meaningful improvements in productivity since our last earnings call in late February. Currently, we are working on an agreement with Westinghouse that will allow work to continue even if current EPC agreement is rejected as a part of the bankruptcy proceedings. Westinghouse has indicated its intention to reject the EPC contract.
The limitations on Westinghouse's execution of the project imposed by the bankruptcy creates uncertainties that are not good for the project, especially over an extended period of time. If Westinghouse is not committed to perform under the EPC contract, Southern Nuclear is well positioned to manage the site. The agreement we are negotiating is intended to ensure a smooth transition and continued access to Westinghouse Resources. This should put us in the best possible position whether the ultimate decision is to complete the project or not. Separately, we are seeking to add structure to Toshiba's payment obligations under the $3,680,000,000 parent company guarantee.
Ultimately, Georgia Power's objective is to be positioned with sufficient information to make a fully informed recommendation to its regulators within the next month or 2. It is possible that we will need more time to ensure that we have the best information possible and to reach consensus with the co owners regarding the best path forward for customers and all other stakeholders. More importantly, the conclusion of our assessment and development of a recommendation will merely begin a regulatory process that does not yet have a definitive timeframe. An important consideration as we move forward will be ensuring that the regulatory recovery framework for the project continues to support the financial integrity and strong credit ratings of Georgia Power. Now let's turn to an update on the Kemper County project.
Over the past 2 months, Mississippi Power has continued its efforts to improve gasification reliability as we work towards reaching sustained operations using both gasifiers in the production of electricity. As we discussed earlier this week, the ongoing challenges with various systems had led to extending the estimated in service date to the end of May. Mississippi Power expects to file its Kemper rate case with the Mississippi PSC by the June 3 deadline. In connection with this filing, Mississippi Power expects to request an accounting order to defer all costs incurred after in service that cannot be capitalized, are not subject to the cost cap and are not already included in rates. As a reminder, Mississippi Power's current strategy is to file both a traditional rate case and an alternative multi year rate mitigation plan as provided for under Mississippi law.
A negotiated settlement with interested parties that would be subject to PSC approval is an acceptable outcome. We don't want to get ahead of that process on today's call. Our goal remains to achieve an outcome that balances the interest of customers and other stakeholders. I'll turn the call now 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 Q1 of 2017 reporting earnings of $658,000,000 or $0.66 per share, compared with earnings of $489,000,000 or $0.53 per share in the Q1 of last year. 1st quarter results for 2017 include after tax charges of $67,000,000 related to increased cost estimates for work at Mississippi Power's Kemper County Integrated Gasification Combined Cycle Project. First quarter results for 2016 included after tax charges of $33,000,000 for the Kemper project.
First quarter results for 2017 also include after tax charges of $20,000,000 associated with Plant Sharer Unit 3 as a part of Gulf Power rate case settlement approved by the Florida PSC. This settlement resulted in Gulf Power's remaining $240,000,000 investment in plant sharer being placed into retail rate base. Additionally, the settlement provided for an increase in the equity ratio from 46% to 52.5% while preserving the 9.25% to 11.25% allowed ROE range. Overall, it was a very constructive result. Excluding these and adjusting for other items described in our earnings materials, Southern Company earned $652,000,000 or $0.66 per share during the Q1 of 2017 compared to $536,000,000 or $0.58 per share in the Q1 of 2016.
The major drive the major earnings drivers year over year for the Q1 of 2017 included results for Southern Company Gas and improved performance at Southern Power, offset by increased shares and interest expense. Moving now to an economic and sales review for the Q1. Collectively, the economies of Southern Companies regulated electric and gas markets continue to enjoy increased population and employment growth in the Q1 of 2017. While consumer spending is tepid, measures of consumer confidence are at record high. Similarly, leading indicators of industrial activity are improving and suggest that the U.
S. Economy should continue to expand in the first half of twenty seventeen with real GDP projected at 2.4% for the year. The ISM Manufacturers Index remains in a solid expansion mode at 54.8% in April. The increase in this index mirrors the jump in consumer confidence seen since the election last November and bodes well for improving industrial sales throughout the year. Year over year weather normal retail electric sales in the first quarter of 2017 were down 1.1%.
Customer growth remains strong in both our regulated electric and gas markets. We added 13,500 new electric customers on the residential side and 7,500 new residential gas customers in the Q1 of 2017. This strong growth was offset by expected declines in use per customer in our electric, residential and commercial classes, driven by energy efficiency and increase in multifamily housing, e commerce and the closing of brick and mortar retail stores. Overall, we continue to believe our forecast of electric retail electric sales growth in 2017 of 0% to 0.5% of 1% is achievable. Before turning the call back to Tom, I want to provide our earnings estimate for the Q2 and share a brief reminder on our financing plans for this year.
First, we estimate that Southern Company will earn $0.70 per share in the Q2 of 2017. 2nd, our various equity plans continue to operate throughout the 1st 4 months of this year and our current plans are to continue issuing new shares consistent with the outlook we provided at our Analyst Day. We remain steadfastly committed to the financial integrity of Southern Company and our major subsidiaries. I'll now turn the call back over to Tom for his closing remarks.
Thank you, Art. Following an eventful 2016, Southern Company has entered 2017 with strong momentum. Our franchise businesses performed at a high level, solidifying our position as an industry leader as our customer focused business model continues to serve us well. Finally, I'd like to highlight that our Board of Directors recently approved an $0.08 increase in our common dividend to an annualized rate of 2 point $3.2 per share. This is our 16th consecutive annual increase and for 69 years dating back to 1948, Southern companies paid a dividend that was equal to or greater than that of the previous year.
But more importantly, the Board's decision to increase the rate of growth the dividend speaks to the resilience of our long term plan, 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. In conclusion, we believe Sutter Company is well positioned for continued success in 2017 and for years to come. Now 32,000 employees strong, we remain committed to providing clean, safe, reliable and affordable energy to the customers and the communities we are privileged to serve. We're now ready to take your questions.
Operator, we'll now take the first question.
Question. You. Our first question comes from the line of Greg Gordon with Evercore. Please proceed with your question.
Hey, Greg.
Thank you. Good afternoon, guys. Good afternoon. So if I'm thinking about the timeline here, you have the next month or 2 to make up what you consider a fully informed decision, get all the stakeholders involved. And at that juncture, you'll then proceed with a dialogue with the Georgia PSC, is that right?
No. You should view our relationship with the staff. They have independent monitors, the commission. It's kind of real time. So it's continuous, not discrete.
The notion of the month and a half or 2 months or whatever it is, is really this idea of getting consensus among us, our co owners, our boards and the commission staff as to how to proceed. Based on what our assessment is at that point, we will work constructively as we have, gosh, since I don't know, 1992 or so to develop a constructive approach. The reason why we're kind of vague as to what that approach is, it may change based on what our recommendation to the commission is. So until we kind of get a better feeling within this next month or 2, we really won't have very much to say about what the continuing process with the commission will be and what time frame it will occur over.
Understood. I'm just trying to get a sense of the milestones, Tom. And so at some point, there'll be a path that you've decided to
Recommend.
Go down, which you're going to file with the commission or a menu of paths that you want to potentially go down which you're filing with the commission in a formal proceeding, correct or incorrect?
No, that's right. And I was just picking on a couple of words. You said a decision before it. This is going to be a collaborative dialogue, I think, between the co owners, us and the commission about how to proceed. Okay.
And then but you will continue and I may be presuming incorrectly, it sounds like you will continue to build the plants. Like you will continue to build the plants, continue to keep construction moving forward until you get to an end of that process.
That's exactly right.
Because you may continue to build all the units, you may continue to build 1 unit, you may continue to build no units, but until you know the path you're taking, you'll continue to construct as on the current schedule?
Because that preserves the option.
Okay.
That's exactly right.
Okay. Well, my last question, because I'm sure you got a ton. You have the $920,000,000 letters of credit that were posted. Have you requested from the banks to pull down on those letters of credit? And at this juncture, have you actually received any cash as a result of those requests for to draw down on the letters of credit?
Yes. Greg, there is a process under which you propose to draw under those letters.
You. Our first question comes from the line of Greg Gordon with Evercore. Please proceed with your question.
Hey, Greg.
Thank you. Good afternoon, guys. Good afternoon. So if I'm thinking about the timeline here, you have the next month or 2 to make up what you consider a fully informed decision, yet all the stakeholders involved. And at that juncture, you'll then proceed with a dialogue with the Georgia PSC, is that right?
No. You should view our relationship with the staff. They have independent monitors, the commission. It's kind of real time. So it's continuous, not discrete.
The notion of the month and a half or 2 months or whatever it is, is really this idea of getting consensus among us, our co owners, our boards and the commission staff as to how to proceed. Based on what our assessment is at that point, we will work constructively as we have, gosh, since I don't know, 1992 or so to develop a constructive approach. The reason why we're kind of vague as to what that approach is, it may change based on what our recommendation to the commission is. So until we kind of get a better feeling within this next month or 2, we really won't have very much to say about what the continuing process with the commission will be and what time frame it will occur over.
Understood. I'm just trying to get a sense of the milestones, Tom. And so at some point, there'll be a path that you've decided
to Recommend.
Go down, which you're going to file with the commission or a menu of paths that you want to potentially go down which you're filing with the commission in a formal proceeding, correct or incorrect?
No, that's right. And I was just picking on a couple of words. You said a decision before it. This is going to be a collaborative dialogue, I think, between the co owners, us and the commission about how to proceed.
Okay. And then but you will continue and I may be presuming incorrectly, it sounds like you will continue to build the plants, continue to keep construction moving forward until you get to an end of that process.
That's exactly right.
Because you may continue to build all the units, may continue to build one unit, you may continue to build no units, but until you know the path you're taking, you'll continue to construct as on the current schedule?
Because that preserves the option. Okay. That's exactly right.
Okay. Well, my last question, because I'm sure you got a ton. You have the $920,000,000 letters of credit that were posted. Have you requested from the banks to pull down on those letters of credit? And at this juncture, have you actually received any cash as a result of those requests for to draw down on the letters of credit?
Yes, Greg, there is a process under which you propose to draw under those letters and we're following that process to the letter. So as of today, we've not drawn on those LCs, but we're following the process.
But you've requested to draw and you have but you have not yet received, is that what you're saying?
There's a period in which you provide a notice to draw.
So you've provided that notice?
Yes.
Okay. Thanks, Tom. Sorry to be a stickler. Take care.
Yes, no problem.
Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead.
Hey, Jonathan.
Hi, guys. On the Vogtle subject, I noticed in the 10 Q, there's a number of aggregate liability under the interim assessment agreement of $470,000,000 of which your share is $215,000,000 Is that a current like through right today number? Or is because it also says that $245,000,000 was paid or accrued at the end of March. Just trying to get a sense of the pace at which that number is increasing during this period?
So that would be an assessment as to the 1st 30 day period plus any liens that have been placed on the property in order to clear the liens, so we can continue to progress the work. It really represents kind of how much we've spent.
Okay. So, but it seems to imply couple of 100,000,000 a month is sort of the spending rate. Is that about right?
It's a decent guess, yes.
Okay. And then just on the other, I mean, obviously, you made the disclosure as well this morning that your current assessment is that the cost to finish the plant would exceed the value of the parent guarantee. Can you give us any more sort of indication of by how much or is that a closed call currently or how do we think about that in the
Yes, Budd, I wouldn't view that as a conclusion at this point. Let us do our work and we'll figure out kind of what we believe the hours remaining to complete, the cost remaining to complete. And certainly along the way, we'll evaluate the $3,700,000,000 in round numbers $1,000,000,000 guarantee and what remains and whether that all looks like a good deal for our co owners and certainly for our customers. And we'll be I can assure you an ongoing dialogue with commission about that. So let us continue to progress over the next 30 to 60 days and we'll figure it out.
And we'll absolutely use the LCs to offset damages we've incurred and will occur going forward.
But you are not it is you have disclosed though that you already think it's more than the guarantee, right?
It might be. That's a possibility and we'll just assess it when we get to the end. We're not in a position to say what that amount is.
Okay. I got it. And then could I just quickly on Kemper, if the plant hasn't entered service by the June date for filing, do you still file?
Yes.
Okay. Thank you.
You bet.
And we're following that process to the letter. So as of today, we've not drawn on those LCs, but we're following the process.
But you've requested to draw and you have but you have not yet received, is that what you're saying?
There's a period in which you provide a notice to draw.
So you've provided that notice?
Yes.
Okay. Thanks, Tom. Sorry to be a stickler. Take care.
Yes, no problem.
Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead. Hey, Jonathan.
Hi, guys. On the Vogtle subject, I noticed in the 10 Q, there's a number, aggregate liability under the interim assessment agreement of $470,000,000 of which your share is $215,000,000 Is that a current like through right today number? Or is because it also says that $245,000,000 was paid or accrued at the end of March. Just trying to get a sense of the pace at which that number is increasing during this period.
So that would be an assessment as to the first 30 day period plus any liens that have been placed on the property in order to clear the liens, so we can continue to progress the work. It really represents kind of how much we've spent.
Okay. So, I mean, it seems to imply couple of 100,000,000 a month is sort of the spending rate. Is that about right?
It's a decent guess, yes.
Okay. And then just on the other, I mean, obviously, you made the disclosure as well this morning that your current assessment is that the cost to finish the plant would exceed the value of the parent guarantee. Can you give us any more sort of indication of by how much or is that a close call currently or how do we think about that in the
Yes, Budd, I wouldn't view that as a conclusion at this point. Let us do our work and we'll figure out kind of what we believe the hours remaining to complete, the cost remaining to complete. And certainly along the way, we will evaluate the $3,700,000,000 in round numbers $1,000,000,000 guarantee and what remains and whether that all looks like a good deal for our co owners and certainly for our customers. And we'll be, I can assure you an ongoing dialogue with the commission about that. So let us continue to progress over the next 30 to 60 days and we'll figure it out.
And certainly, we'll absolutely use the LCs to offset damages we've incurred and will occur going forward.
But you are you're not it is you have disclosed though that you already think it's more than the guarantee, right?
It might be. That's a possibility and we'll just assess it when we get to the end. We're not in a position to say what that amount is.
Okay. I got it. And then could I just quickly on Kemper, if the plant hasn't entered service by the June date for filing, do you still file?
Yes.
Our next question comes from the line of Anthony Carledale with Jefferies. Please go ahead.
Hey, Anthony. How are you doing, Tom?
Rupert, how are you?
Another day in sell side paradise. In the Q, it stated that, I guess, the owners of Vogtle do not believe the revised in service dates are achievable. If I guess we think of a best case option through this interim period, what do you think the new in service dates are?
We really haven't reached that conclusion. That's the whole point. So if you recall the process from back, I guess earlier this year, it was that we were going to review all the documentation and all the schedule and all the cost information associated with that schedule. And then along the way before we complete that Westinghouse files bankruptcy. Now as part of our agreement and working through the bankruptcy, Westinghouse has completely opened their books to our evaluation of time and cost remaining to complete.
That's what we're in right now. So it's almost as if we're in one track and now we're in another track of evaluation, because now we can't rely on them. We have to look at an option other than Westinghouse Finishing here.
What if we think about it, is the option of a fixed price contract the next stage of Vogtle even likely? Or should we all be thinking that the type of contract to finish this project is going to be more of a like a cost plus type contract?
It could take a variety of different forms. Certainly, we could find a third party to kind of give you a fixed price that would be most likely a FluorBectal kind of thing. We could certainly take over the project ourselves and act as general contractor. And all this really has to do with what we think is the best way to most economically complete the plant and in concert with our regulator, an equitable kind of division of risk and return as to how we intend to proceed. So all of that is part of an ongoing discussion.
And just lastly, do you get that feeling at all that Westinghouse even through this bankruptcy would like to continue on the project or that there is no sense in that?
I think they pretty well signal the reason went into bankruptcy was to insulate themselves and so we'll see. As we said, I think in the comments in the script, we believe their intent is to reject the contract. They'll do that once we conclude these interim agreements.
Great. Thanks for taking my questions.
Yes. And Anthony, let me just be very clear. What we're referring to, you and I were both referring to there were their obligations as a general contractor in the construction. They still have the obligations to play ball on things like intellectual property and whatever else they're going to do to finish the plant.
Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please go ahead.
Hey, Stephen. Hi, good afternoon.
I wanted to discuss the Department of Energy and approaches that the DOE could take in support of Focal. What sort of the range of possible options and the range of types of support that we could potentially see?
Yes. And let me just be I'm going to be a wee bit coy here, because there's lots of conversations going on. Extend the in service or the timeframe on the production tax credits. My assessment is they are absolutely willing to do that. This is an issue that is bigger, I think, at the United States government level, certainly bigger than Vogtle and Sommer.
This is a national security issue. And it follows on the heels of what by all accounts a very successful visit with Abe and Trump. And recall that as a result of those successful meetings, I guess the Prime Minister and the President instructed Deputy Prime Minister also along with Vice President Pence to set up essentially a commission and effort to evaluate lengthening and strengthening the kind of infrastructure investment opportunities that we could collaborate on between our 2 great nations. There were 3 segments of activity. 1 of those segments was energy infrastructure.
And then some weeks following that, we have a bankruptcy in Westinghouse. And so I think this is something that has taken our the attention of our elected officials. I would assess the support of the Trump administration and the relevant cabinet officers as A plus They have given us all kinds of support and we have constructive dialogues underway with them ongoing. Likewise in Congress, I think we have tremendous support. Because I said before, this is bigger than Vogtle and Sommer.
This is a national security issue. If the United States wants nuclear in its portfolio for the future, we've got to figure out a way to be successful here. I'd rather kind of leave it there, if you don't mind, Stephen, rather than go through and explore specific options.
Very much appreciate that given where we are and we'll wait for the study outcome and recommendations.
Thank you,
sir. If I could shift gears over to just philosophically thinking about how you think about the risk of further cost overruns and the regulatory treatment for that, assuming again that you do decide to continue to move forward, are there certain sort of philosophical guideposts that you would want to secure in terms of how you think about addressing and sort of allocating that to further overruns?
Well, right now, I mean, we have an agreement that was entered into in 2016 that essentially doesn't have a cost cap. So theoretically, one approach is that we could live with the prudent stipulation that addresses return levels during construction. And then following construction, presumably these amounts of capital will revert back to GPC base rate.
And even
when you think about Georgia law, it really has been very consistent over the years and this is now decades for the recovery of all reasonably and prudently incurred costs for a certified IRP resource regardless of the original certified costs. And let me also remind you of the math. When this thing was originally certified, the amount of price increase we thought we would have would be about 12%. Now we estimate it will be in the 6% to 8%. So we feel that we have at least the structure to begin a dialogue.
Certainly, as we have to make a recommendation. Once Westinghouse decides to reject the contract, which they've given us every intent of doing so, then we, Georgia Power and the co owners have to make a recommendation as to whether to proceed or to recommend not completing the plant. We have structures available for both of those. Certainly, it's a different risk posture and that will be part of the conversation with the commission. And certainly, all of this, as we have in the past and we've demonstrated it over with Mississippi and others, Southern Company has always been committed to supporting the ratings of our subsidiaries.
And I think we've shown our hand in that we are faithful in that resolution.
Understood. Thank you very much.
You bet. Thank you.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.
Hey, guys. Thanks for hey, Tom. Thank you for taking my questions.
Hey, Seth.
Turning to Mississippi. If I read the detail in your SEC filings correctly, you've got $25,000,000 per month or so of costs, including the depreciation, that are not in rates once the plant goes online. And that doesn't necessarily include a return on capital of the plant the PP and E that's not in rate base or that's not in customer rates. So $25,000,000 12 months, that's $300,000,000 a year plus the return on capital of, pick a number, but it's not a small one. On a utility this size, that's a pretty big rate increase.
Are you having conversations in the city with the legislature, the governor or others about potentially expanding the use of things like securitization, which I think you need a legal change to do to be able to mitigate some of that rate impact?
Yes. Look, I think we've said this in the past, but remember what we said in the script here is that we're going to file a traditional rate case and then we have as provided by law rate mitigation plan. The notion of the rate mitigation plan is to
Our next question comes from the line of Anthony Carledale with Jefferies. Please go ahead.
Hey, Anthony. How are you doing, Tom? Luper,
how are you?
Another day in Southside Paradise.
In the
Q, it stated that, I guess the owners of Vogtle do not believe the revised in service dates are achievable. If I guess we think of a best case option through this interim period, what do you think the new in service dates are?
We really haven't reached that conclusion. That's the whole point. So if you recall the process from back, I guess earlier this year, it was that we were going to review all the documentation and all the schedule and all the cost information associated with that schedule. And then along the way before we complete that Westinghouse filed bankruptcy. Now, as part of our agreement and working through the bankruptcy, Westinghouse has completely opened their books to our evaluation of time and cost remaining complete.
That's what we're in right now. It's almost as if we're in one track and now we're in another track of evaluation, because now we can't rely on them. We have to look at an option other than Westinghouse Finishing here.
What if we think about it, is the option of a fixed price contract the next stage of Vogtle even likely? Or should we all be thinking that the type of contract to finish this project is going to be more of a like a cost plus type contract?
It could take a variety of different forms. Certainly, we could find a third party to kind of give you a fixed price that would be most likely a floor, bechtel kind of thing. We could certainly take over the project ourselves and act as general contractor. And all this really has to do with what we think is the best way to most economically complete the plant and in concert with our regulator, an equitable kind of division of risk and return as to how we intend to proceed. So all of that is part of an ongoing discussion.
And just lastly, do you get the feeling at all that Westinghouse even through this bankruptcy would like to continue on the project or that there is no sense in that?
I think they pretty well signal the reason went into bankruptcy was to insulate themselves and so we'll see. As we said, I think in the comments in the script, we believe their intent is to reject the contract. They'll do that once we conclude these interim agreements.
Great. Thanks for taking my questions.
Yes. And Anthony, let me just be very clear. What we're referring to, you and I were both referring to their, were their obligations as a general contractor in the construction. They still have the obligations to play ball on things like intellectual property and whatever else they're going to do to finish the plant.
Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please go ahead.
Hey, Stephen. Hi, good afternoon.
I wanted to discuss the Department of Energy and approaches that the DOE could take in support?
Potentially put in place revenue requirements that are similar to the revenue requirements associated with the original order. So if we provide the plant and the plant is operational consistent with the original order and we have revenue requirements that are similar to the original order. That's kind of a way to approach. Of course, there are a host of other opportunities that we can engage in beyond those two things. And that's really what we were pointing to when we started talking in the script about the settlement conversation is an acceptable outcome.
So rest assured that we're working constructively being very mindful of the total rate impact to Mississippi's customers and the way to the best way to structure a regulatory outcome that meets everybody's needs.
Are other folks within the state outside it, meaning other legislative or folks in the governor's office involved in this process? And do you need legislation to implement some of the things that might come across the table in these talks?
In terms of need, probably not, but we don't want to again get ahead of the process that we're going to be following through here as we approach any quarter settlement or as we approach the pilot.
Okay. 1 or 2 for art and these are just kind of housekeeping types. Southern Power recognized a pretty big benefit tax benefit in the quarter, a little over $50,000,000 Just curious, what is in your guidance for the tax benefit at Southern Power this full year?
Are you referring to production tax credits and induction tax credits?
I'm looking at the whole Kit Kat and Canoodle, I'm looking Southern Power's income statement in your Q and
In the Q. Okay.
Yes, sir.
Let me address that first. There was a couple of timing things that went on in the Q1. One of them related to the manner in which we recognize PTCs. When we gave our estimate for the quarter, it was 0.57 dollars We assumed that we would recognize production tax credits under a earnings before tax perspective of Southern Power. We actually changed that methodology during the quarter and went to an as production basis.
So we recognized more income at Southern Power related to production tax credits in the Q1, but we merely accelerated them out of the second and third quarter and you'll see that flip back around during the year. So we don't expect that to occur throughout the year and won't have an impact on income for the entire year. It's all based into our guidance.
Okay. So your guidance, I'm just trying to think about how much renewable tax related items is embedded within your full year guidance?
Okay. So
$53,000,000 of one time of those PTCs, ITCs and $178,000,000 of ongoing PTC.
And I think it's interesting to point out that when you look at the one time events as compared to 2016 2017, something like, what was it, 51%, something like that were one time events. And 2016 2017, it sounded about, what 17% or something?
Yes. I think quarter over for the year between PTTs and ITCs, we'll end up with $16,000,000 less in total year over year.
Got it. And last question When
you're moving on ITCs, you're picking up on PTCs.
Right. It seems pretty flattish year over year. And one last one, also a housekeeping one. At Southern Gas, if I and I know you didn't own it in the Q1 of last year, but if I were to back out the mark to market in both periods, how significant of a change was net income at Southern Gas? And what were the biggest drivers?
Yes. Hold on just a sec. It was pretty flattish. If you look at 4 distinct segments, the gas distribution operations was pretty flat. Gas marketing services was down a little, maybe $9,000,000 in net income.
Midstream operations were bigger, mostly due to Southern Natural Gas being added. And the other there was some other mishmash, which was a couple of 1,000,000. So $13,000,000 year over year increase.
And that fell within what you expected even after you consider things like rate base growth and O and M synergies, those type of items?
Everything is in, yes.
It was amazing. It hit it exactly on the nose for the Fluor, what we expected. And that's after backing out a really big positive in Sequent, which we will regularly do. We will not include Sequent as our ongoing earnings.
Got it. Thank you, guys. Much
Our next question comes from the line of Paul Fremont with Mizuho. Please proceed with your question.
Hello, Paul.
Hey, how are you? Awesome. My first question is, if you were to go the abandonment route, is it reasonable for us to assume that it seems like through March of 2017, the total Vogtle investment is $5,400,000,000 including financing. Is that sort of a reasonable starting point in terms of a number to assume?
Yes.
Okay. And then, I think the Georgia legislation provides for recovery of your investment, plus a return in a proceeding to determine what that return would be, would that be the Georgia Public Service Commission who would decide that?
Yes. And the law provides for all prudently incurred costs.
Okay. And I guess the other question that I have is, it looks as if the banks financing Westinghouse took a collateral interest in the intellectual property or the I guess it's the EPC plans. How does that affect your situation if you decide to continue with construction?
Yes, man. So that's exactly this filing that we've made with the bankruptcy court. Potentially, the DIP financing wanted to have essentially access to everything. However, the funds used in the dip financing only applied to the so called Goodco, which is kind of the nuclear fuel processing business, their services business, O and M, decommissioning and others and don't flow to the benefit of our project. And so we don't believe they should have lien rights on the IP or anything to do with our project.
And frankly, the creditors committee agrees with our position. There will be a hearing on that on May 10, but I think we're on pretty firm ground there.
And then it would be up to the bankruptcy judge to decide how to resolve that?
That's right. It would be odd for the DIP financing to only apply to some of Westinghouse and not others. And then to give the benefit of all of the security potential to the dip financing. So it seems like an awfully logical position here.
Okay. All right. Thank you very much.
Yes. Hey, let me just make sure that we clarify some. I think it was Michael. It was Paul that raised the issue. In the scenario for abandonment, the only amount at risk for the abandonment charge is $4,100,000,000 not $5,400,000,000 The delta is the financing cost and that's already under recovery.
I just want to make sure everybody understands that. Math was right, 5.4, but the amount at risk for recovery under the abandonment scenario was 4.1. Okay?
Thank you.
Yes, sir. Thank you.
Our next question comes from the line of Praful Mehta with Citigroup. Please go ahead.
Welcome. Hi, guys. Go ahead. Yes.
So most of my questions have been answered, but just wanted to clarify on a couple of points coming back to Vogtle. If you don't find if Westinghouse steps out and you don't find anybody who's willing to accept a fixed price contract and so Southern steps in to complete the project, Is there any sense of what that how much overrun firstly that could entail given Southern's got to do it? And secondly, what does that actually mean operationally? Are you hiring all the people? Like what will that actually mean practically to kind of complete that project by Southern itself?
Sure. Okay. So let's kind of take it step by step. There's already been a tremendous amount of work that's been complete on the site. And then what you have to do is evaluate what is left, okay?
So that would be time to complete, cost to complete. It is our intention that absent any kind of smaller changes in management, that the people that we need are already present on-site. We've been able to do that with these interim agreements to keep people working And that's really important.
Focal, what sort of the range of possible options and the range of types of support that we could potentially see?
Yes. And let me just be I'm going to be a wee bit coy here, because there's lots of conversations going on. Let me first say that the most obvious thing the United States government can do is to lend support to extend the in service or the timeframe on the production tax credits. My assessment is they are absolutely willing to do that. This is an issue that is bigger, I think, at the United States government level, certainly bigger than Vogtle and Sommer.
This is a national security issue. And it follows on the heels of what by all accounts is very successful visit with Abe and Trump. And recall that as a result of those successful meetings, I guess the Prime Minister and the President instructed Deputy Prime Minister also along with Vice President Pence to set up essentially a commission and effort to evaluate lengthening and strengthening the kind of infrastructure investment opportunities that we could collaborate on between our 2 great nations. There were 3 segments of activity. 1 of those segments was energy infrastructure.
And then some weeks following that, we have a bankruptcy in Westinghouse. And so I think this is something that has taken our the attention of our elected officials. I would assess the support of the Trump administration and the relevant cabinet officers as A plus They have given us all kinds of support and we have constructive dialogues underway with them ongoing. Likewise in Congress, I think we have tremendous support. Because I said before, this is bigger than Vogtle and Summer.
This is a national security issue. If the United States wants nuclear in its portfolio for the future, we've got to figure out a way to be successful here. I'd rather kind of leave it there, if you don't mind, Stephen, rather than go through and explore specific options.
Very much appreciate that given where we are and we'll wait for the DoD study outcome and recommendations.
Thank you,
sir. If I could shift gears over to just philosophically thinking about how you think about the risk of further cost overruns and the regulatory treatment for that, assuming again that you do decide to continue to move forward, are there certain sort of philosophical guideposts that you would want to secure in terms of how you think about addressing and sort of allocating that further overruns?
Well, right now, I mean, we have an agreement that was entered into in 2016 that essentially doesn't have a cost cap. So theoretically, one approach is that we could live with the prudent stipulation that addresses return levels during construction. And then following construction, presumably these amounts of capital will revert back to a GP. So we evaluate what's been spent. We evaluate what needs to be spent.
Recall, we have the Toshiba guarantee. So that would be round numbers again, dollars 3 point $7,000,000,000 that would offset those future payments. So then we would evaluate if there was if that was sufficient or if there is anything in excess even of the 3.7 in addition to the normal budgeted costs And we'll evaluate that in terms of schedule and potential costs within the construct of whatever our co owners need and what we need via our regulatory regime in Georgia. Recall also that I think we've got a great deal of flexibility in how we think about this. You must realize that Southern is pretty well unique and being able to fulfill these kinds of obligations.
We have been involved uniquely in the supply chain efforts throughout the project. We have been involved uniquely in terms of the scope of presence on our site. I think we have roughly 400 people that have been engaged in oversight work even with Westinghouse and with Fluor. And now, we have provided for, as we started to see Westinghouse get under duress, a transition plan even before Westinghouse has filed bankruptcy. So we have a transition in place.
The people are turned on. They're on-site. We won't have to go grab bodies. It's in fact that's the course we decide to take.
Yes. I think it's important to add that we've got step in rights to all the subcontracts. So if we choose to do so, we can step in and contract with Fluor and any other subcontractor that has a primary contract with Westinghouse at this time.
Got you. That's very helpful color. And just quickly on the $3,700,000,000 parent guarantee, that there is no risk to it at this point as I understand. The only risk being if Toshiba files for bankruptcy, then you become just an unsecured creditor. But apart from that, there isn't any other risk.
Is that correct?
Well, I mean, we're trying to be very rigorous in our approach here for all these things. When we think about the guarantee, we don't want to get into position where there is an argument about the amount. We don't want to get into a position where the whether that amount is available, whether we finish or don't finish the plant if Westinghouse rejects it and we're in that position. We don't want to get into a position of arguing how the draws under the guarantee might be available and we want to have some assurance as to the security of those draws. So we're working through a lot of issues there.
Likewise with Westinghouse, I never want to get into a position, look at them, they are in bankruptcy of relying on Westinghouse's efforts. I want to have clear commercial agreements set forth for the IP that currently is under development. You know all the IP is not finished. There are some related to instrumentation and controls that is currently under development. That's not a surprise to anybody.
But we want to make sure that there is a commercial obligation for Westinghouse to finish that IP to make available the skills and resources necessary to carry it forward. Also, you should know too that there will always kind of be along the way some opportunity to change the intellectual property as design changes are manifested on the site. Further, you should know that this notion of transition is a critically important issue. It sounds like a detail, but getting all the clearances, getting the transfer of contracts, the transfer of personnel, etcetera, We want to be very clear about all that. So we're taking a very rigorous approach to all these issues.
So these two big issues, the certainty around the structure of the guarantee and certainty as to the commercial relationship we have with Westinghouse, I think are really important in order for us to even consider moving ahead should Westinghouse ultimately reject the contract.
Got you. That's really helpful color. So you do expect to continue to update us as you have further color on these discussions, I'm assuming?
Absolutely. If there is material information, we'll put it down in an 8 ks.
Great. Thank you so much, guys.
You bet. Thank you.
Our next question comes from the line of Ashar Khan with Deutsche Bank. Please go ahead.
Hello, Ashar.
Hi, Tom. How are you doing?
Fantastic. I hope you're well.
Just what I can't understand is you guys as you are spending on these projects as we are going through this analysis, right? And you mentioned you're spending at a run rate of about $200,000,000 or so a month. So I guess by the time the decision takes place, it might be 8 to 9 months into the year And that would imply another I don't know whether the $200,000,000 was for the whole and your share is $100,000,000 but it could be another $1,000,000,000 spent on the project by the time you make the decision. Doesn't that make it that the real decision is going forward and how to recover the cost? How can you I just don't get the chance of abandonment.
If there was any chance of abandonment or anything like that, you should have slowed down and not spend more on the project because in the end, the customer has to pay for it and it would be really bad for the customer to be given a bill of another $1,000,000,000 and that you make the decision. So am I missing something? To me, the chances of abandonment are really lower. If they were a little bit higher, then you should have slowed down the process and kind of like thought of it and that would kind of indicate the options are more there or am I thinking through this wrongly?
Yes. No, no, Shahriar, you're raising good points. Let's just kind of walk through it a bit though. As this next 30 days to 60 days, we're working with our co owners and course with our boards and in conjunction with the staff, the independent monitors and the commission. I think we'll reach a point where we're in a position to start making a recommendation and also as we finish the resolution of these commercial contracts I just talked about.
I think then we'll kind of be in a position to say, yes, I think it looks likely that we're going to recommend going forward. Otherwise, if it looks likely the best thing for customers is to not complete these plants. I think at that point, you may take a totally different posture on-site. So long as it is viable for us to complete the plant, it is absolutely I think important for us to not only maintain but improve productivity on the site, so that the ultimate long term cost is as attractive as it can be. Were we to start sending people home, the chances of us getting those people back on-site would be awfully difficult.
The other thing is, recall, some of these first amounts that we've been talking about, were amounts that were already owed, okay? So this is really just fulfilling the contract as it exists. And yes, I think we said this before, but if we did, let me just be very clear that 200 or so a month, it could be a wee bit less than that, but that's a decent conservative number is 100%. So Georgia share of that would be 45.7%.
Okay. That's what I thought. Okay.
Yes.
Okay. Thank you.
Thank you, sir.
Our next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.
Hey, Paul. Good morning, Tom. Good afternoon, Tom.
It's been
a long day. $3,700,000,000 is that inclusive of the $920,000,000
Yes. Yes.
The 3.7% is for 100 percent of the project, both units? That's right. And then switching gears, a big driver in the quarter was O and M. How much of that is sustainable?
Yes. Paul, some of that is certainly timing that will be spent later in the year. There were some outages pushed out of the quarter into the second. So you're going to see some of that. But a lot of that is going to be sustained as we move through the year.
As you know, the Q3 of each year is our big quarter and will determine how much O and M is spent between then and end of the year. So we still believe that we can hit our targets and in light of the under run on O and M in the Q1.
Yes. The other thing though that we're doing, Art and I have been kind of pushing at the Southern Company Management Council level is to approve the growth profile of the operating companies. And one of the things that we're looking at is, are there some things that we can do that can maybe do capital investment, technology investment, a variety of other things that will actually improve the reliability, customer service and price of our product. Associated with those investments may be some permanent reductions in O and M. So we're pushing very hard to make the grid more resilient to really understand and right size the amount of investment in our fossil hydro fleet to automate what otherwise are some administrative processes.
I think we have the opportunity to improve the organic growth profile of our operating companies and reduce O and M at the same time.
Is the permanent piece of the O and M, is that push you to one end of guidance, the top end there? Or is it just one of the gives and takes that we're seeing?
No, Paul, we don't even mess with that until the end of Q3. We just keep our guidance where it is. What I'm really doing with that initiative though is not worrying about the tactics of where we are within a range in a year, but rather make even more resilient the 5% long term growth rate that we referred you to. I said before in October, I thought October 2016, I thought it hard to knock us off the balance beam. We've been talking hard about resilience and how well founded I think our long term plan is.
And remember I said back then, if you want to really see proof of where our Board sees that and where we see it for heaven's sake, is let's watch and see what the board does on the dividend and sure enough they increase the growth rate in the dividend as we thought they may this April. I think that was a big vote of confidence in our long term ability to hit the growth rate.
Understood. Thank you very much.
You bet. Thank you.
Our next question is a follow-up from Jonathan Arnold, Deutsche Bank. Please proceed with your question.
Thank you, guys. So just could you quantify how much the change in accounting for PTCs benefit the quarter versus what you had in your guidance for the quarter?
About $0.05
Great. Thanks, Art. That was it.
Yes, sir.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead.
Hey, Steve.
Yes. Hi, Tom. Good afternoon. Just a couple technical questions on Vogtle. If it's going to take a month or 2, you think, to decide why was the interim assessment only moved to May 12 and not further and why shorter than, let's say, what SCANA did?
Yes. And I think it's very clear. We're working very hard on these agreements related to the Toshiba guarantee and related to the ability for us to effectively transition the plan away from Westinghouse, should Westinghouse reject the contract. It is, I think, clear to us that once we reach that point, making the transition as to management on the site is really important as to the effectiveness. So keeping a short leash on the relationship with Toshiba and Westinghouse and ultimately should Westinghouse reject the contract, having us take over the site if that's what we choose to do in a shorter timeframe is good for the project.
Keeping Westinghouse in this kind of limbo role under bankruptcy is not good for the project for any period of time. We want to keep that as short as we can.
Okay. That makes sense. Second question is just, I know you're kind of keeping the commission staff apprised. I guess when we ultimately get your decision in a couple a month or 2 or whatever it is, how should we think about kind of how much they are on board with it already or not?
Yes. I mean, Steve, you know us. I mean, we've been working with collaborative with the commission. I guess we had the original Vogtle decision back in 'ninety two with the last one there. And then in 'ninety five, we reached the agreement on these 3 year accounting orders.
And every 3 years, we've put in place a series of interesting accounting orders. It seems like every 3 years we had a unique set of challenges in which to handle. We just have this track record of constructive regulation here in the South. And Georgia has been a tremendous kind of example of how an integrated regulated system meets the needs of customers. We have the best reliability, price is significantly below national averages, the best customer service, it works.
And so our evaluation is we'll be able to work constructively with the commission to handle these very challenging issues. And I think that with our no surprises way of working with the commission, I think when we reach the point of beginning a filing process, I would assume we have a decent degree of Okay. And then last question, just on the nuclear
Okay. And then last question, just on the nuclear PTC. Unless something happens quickly in Congress, we're probably not going to have an extension of that prior to you making the decision. Should we just assume that your confidence level is high enough in that that you're going to assume in your analysis that that is going to get extended if needed for delayed dates?
Yes. So that's an important variable in all of this. And I can tell you that the conversations we've had, I'm just going to be broadly across government, whether it's Congress or the administration, have been very constructive and supportive. They understand that this is kind of bigger than Vogtle. This is a national security issue and that frankly the cost of extending this timeframe is almost nothing as they scored in Congress.
So we've experienced a tremendous amount of support. We could come up with a variety of ways to evidence that support, but I'm just going to assure you that as we reach the end of our deliberations and make a recommendation, this will be central to that recommendation. And if we decide to go forward, it would be because we believe and we may have evidence at that time of our belief that we'll be able to manage it. There may be ways we can demonstrate their support even without the law or the tax reform bill being passed is my point. Hello?
Steve? Operator?
This line is still open, sir.
Okay. DC based rate. And even when you think about Georgia law, it really has been very consistent over the years and this is now decades for the recovery of all reasonably and prudently incurred costs for a certified IRP resource regardless of the original certified costs. And let me also remind you of the math. When this thing was originally certified, the amount of price increase we thought we would have would be about 12%.
Now we estimate it will be in the 6% to 8%. So we feel that we have at least the structure to begin a dialogue. Certainly, as we have to make a recommendation. Once Westinghouse decides to reject the contract, which they've given us every intent of doing so, then we, Georgia Power and the co owners have to make a recommendation as to whether to proceed or to recommend not completing the plant. We have structures available for both of those.
Certainly, it's a different risk posture And that will be part of the conversation with the commission. And certainly, all of this, as we have in the past and we've demonstrated it over with Mississippi and others, Southern Company has always been committed to supporting the ratings of our subsidiaries. And I think we've shown our hand in that we are faithful in that resolution.
Understood. Thank you very much.
You bet. Thank you.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.
Hey, guys. Thanks for hey, Tom. Thank you for taking my questions.
Hey, Seth.
Turning to Mississippi. If I read the detail in your SEC filings correctly, you've got $25,000,000 per month or so of costs, including the depreciation, that are not in rates once the plant goes online. And that doesn't necessarily include a return on capital of the plant the PP and E that's not in rate base, or that's not in customer rate. So, dollars 25,000,000 12 months, that's $300,000,000 a year plus the return on capital of, pick a number, but it's not a small one. On a utility this size, that's a pretty big rate increase.
Are you having conversations in the city with the legislature, the governor or others about potentially expanding the use of things like securitization, which I think you need a legal change to do to be able to mitigate some of that rate impact?
Yes, look, I think we've said this in the past, but remember what we said in the script here is that we're going to file a traditional rate case and then we have as provided by law rate mitigation plan. The notion of the rate mitigation plan is to
Steve, you still there?
I don't know what happened. Yes, operator, you want to go to the next question? Steve, I hope that answered your question. Certainly, if it doesn't, call us back. Sorry, you got cut off.
Operator, you want to go to the next question?
Yes, sir. Our next question comes from the line of Ali Yaga with SunTrust. Please go ahead.
Hey Ali, how are you?
Good. Thanks, Tom. Good afternoon.
Good afternoon.
First question, Art, I may have missed this, but if I were to bridge the gap in the Q1 between your $0.57 original guidance and the $0.66 you reported, was that all coming from that change in accounting for the tax or what's causing that $0.09 delta?
No, I think what you're seeing is a lot of it was from the PTC recognition in Southern Power, the vast majority of that $0.05 The other $0.04 really came by better O and M management across the fronts of all operating companies to do a little better than what we had buried into our 0 point 5 $7 estimate.
I see. Got it. And then, Tom, on Kemper, do you see at all any scenario in which the plant ultimately just ends up being a CCGT?
So, I mean, the way you asked that question, sure. I mean, there's that possibility, but that's going to be taken into account in the deliberations in the state of Mississippi. Recall the 9 cell kind of red green diagram they use in order to assess the viability of the plant. Still under high gas scenarios, we still get green cells in there. And certainly, it remains a hedge.
And along the way, as we have built into the technology, the ability to operate under dual fuels, we've been able to demonstrate the ability to deliver whatever energy is the cheapest. So there is a possibility you could do that. We'll just have to see.
I see. Would that be part of sort of the rate case and prudency review or would that be outside of that scope?
Well, it's all
part of the conversation. So the conversation is kind of underway and we don't want to ever get in front of that conversation. So, Ali, whenever you ask a question, is it possible? There's a lot of stuff that's possible. Let the process run and we'll give you illumination when we get it.
Okay. Then a different topic, as you pointed out, electric sales weather normalized were negative 1% this quarter. In fact, I'm right, I think that's the 4th consecutive quarter we've seen negative by the normalized sales. I'm just wondering how you square that with the economic growth profile that you're seeing out there and should we think about that going forward?
Yes, Ali, we got a couple of things going on both commercial and industrial classes. We began to see a reduction in use per customer in the commercial class in the Q2 of last year, if you go back and look at our history. And so when you're looking at the Q1 year over year, that trend essentially put in place revenue requirements that are similar to
the revenue requirements associated with the original order. So if we provide the plant and the plant is operational consistent with the original order and we have revenue requirements that are similar to the original order. That's kind of a way to approach. Of course, there are a host of other opportunities that we can engage in beyond those two things. And that's really what we were pointing to when we started talking in the script about the settlement conversation is an acceptable outcome.
So rest assured that we're working constructively being very mindful of the total rate impact to Mississippi's customers and the way to the best way to structure a regulatory outcome that meets everybody's needs.
Are other folks within the state outside it, meaning other legislative or folks in the Governor's office involved in this process? And do you need legislation to implement some of the things that might come across the table in these talks?
In terms of need, probably not, but we don't want to again get ahead of the process that we're going to be following through here as we approach any quarter settlement or as we approach the pilot.
Okay. 1 or 2 for Art and these are just kind of housekeeping types. Southern Power recognized a pretty big benefit tax benefit in the quarter, a little over $50,000,000 Just curious, what is in your guidance for the tax benefit at Southern Power this full year?
Are you referring to production tax credits and industrial tax credits?
I'm looking at the whole Kit Kat and Kadoodle, I'm looking at Southern Power's income statement in your Q and
In the Q. Okay. Yes, sir.
Let me address that first. There was a couple of timing things that went on in the Q1. One of them related to the manner in which we recognize PTCs. When we gave our estimate for the quarter, it was 0.57 dollars We assumed that we would recognize production tax credits under a earnings before tax perspective for Southern Power. We actually changed that methodology during the quarter and went to an as production basis.
So we recognized more income at Southern Power related to production tax credits in the Q1, but we merely accelerated them out of the second and third quarter and you'll see that flip back around during the year. So we don't expect that to occur throughout the year and won't have an impact on income for the entire year. It's all based into our guidance.
Okay. So your guidance, I'm just trying to think about how much renewable tax related items is embedded within your full year guidance?
Okay. So $53,000,000 of one time of those PTCs, ITCs and $178,000,000 of ongoing PTC.
And I think it's interesting to point out that when you look at the one time events as compared to 2016 2017, something like, what was it, 51 Continues in 2017, but it wasn't in 2016. So you still have the effect of that showing up.
And in the industrial market, it was kind of the same thing. We had some industrial customers who had announced that they were shuttering portions of their process, their operating processes mid year last year that were in process for the Q1 of last year. So year over year, you're going to see some effects of that as well. More importantly, I think if you look at our sales compared on a weather normal basis compared to what we estimated they would be, we were only down 0.3%. Yes.
And let me throw
in the other stuff. You probably heard this, but leap year February of 2016 as compared to February 2017 that matters in the numbers. The other thing, and our numbers have been very
January was kind of a
bad month.
But January was kind of a bad month. February was an awful month year over year in comparison, but then holy smokes, March, especially the end of March turned around. And I always do not only a year over year comparison, but a momentum comparison. The momentum comparison from March as compared to the quarter showed that of the 10 largest industrial sectors in March, 9 of them were positive and one of them was reasonably flat. So it's fascinating to me that we saw a big turn.
The Fed saw that also for the nation. So it's very, very fascinating stuff. We're a little bit stronger than the rest of the nation in terms of our economic growth, job creation, 1.9 versus 1.5. Listen, I think there is reason for us to hang with our annual projection of between 0.5% growth this year. Let's see what happens on the sustainability of that March performance.
Okay. And last question, Tom, if I recall in your legacy regulated business, when we looked at the long term growth, the expectation was that at the back half of the decade, environmental CapEx would likely pick up and drive rate base and earnings. That probably won't materialize currently or in this scenario. What takes the place of that and what can you use to offset that growth in the future?
Sure, man. Absolutely. In fact, boy, I remember showing this to my Board almost day 1 I got on and everything else. But we went through a period there where we were kind of at the end of David Ratcliffe's timeframe. For a while there, I was CFO and then Paul Bowers took over, went over as COO where we were talking about really healthy EPS growth rate.
That's what we were spending capital like crazy as compared to a rather modest net committed capital base. And so our earnings per share growth rate was going off the charts. And then as we started winding down on a lot of environmental construction as I took over and then as we saw the riskiness of Kemper and Vogtle at one time, our long term growth rate got real flat. And I started saying that to you all and started saying that, well, it may flatten out through the last half of the decade, something like that were one time events. In 2016 2017, it sounded about, what, 17% or something?
Yes. I think quarter over for the year between PTTs and ITCs, we'll end up with $16,000,000 less in total year over year. Got it.
And last question And
you're moving on ITCs, you're picking up on PTCs.
Right. It seems pretty flattish year over year. And one last one, also a housekeeping one. At Southern Gas, if I and I know you didn't own it in the Q1 of last year, but if I were to back out the mark to market in both periods, how significant of a change was net income at Southern Gas? And what were the biggest drivers?
Yes, hold on just a sec. It was pretty flattish. If you look at 4 distinct segments, the gas distribution operations was pretty flat. Gas marketing services was down a little, maybe $9,000,000 in net income. Midstream operations were bigger, mostly due to Southern Natural Gas being added.
And the other there was some other mishmash, which was a couple of 1,000,000. So $13,000,000 year over year increase.
And that fell within what you expected even after you consider things like rate base growth and O and M synergies, those type of items?
Everything is in, yes.
It was amazing. It hit it exactly on the nose for the floor what we expected. And that's after backing out a really big positive in Sequent, which we will regularly do. We will not include Sequent as our ongoing earnings.
Got it.
Our next question comes from the line of Paul Fremont with Mizuho. Please proceed with your question.
Hello, Paul.
Hey, how are you? Awesome. My first question is, if you were to go the abandonment route, is it reasonable for us to assume that it seems like through March of 2017, the total Vogtle investment is $5,400,000,000 including financing. Is that sort of a reasonable starting point in terms of a number to assume?
Yes.
Okay. And then, I think the Georgia legislation provides for recovery of your Public Service Commission, who would decide that? Yes. Public Service Commission, who would decide that?
Yes. And the law provides for all prudently incurred costs.
Okay. And I guess the other question that I have is, it looks as if the banks financing Westinghouse took a collateral interest in the intellectual property or the I guess it's the EPC plans. How does that affect your situation if you decide to continue with construction?
Yes, man. So that's exactly this. But as you remember correctly, it should turn back up with environmental CapEx and then with new capital associated with new generation coming back in. What we were able to do in 'sixteen was execute on a growth strategy. You may remember too, I had been talking for some time about the wisdom of natural gas infrastructure and getting ahead of natural gas being a primary source of fuel for the future, a bridge, if you will, between now and 2,050.
And we recognized early on in our strategy deliberations here under my tenure that I get gas, but boy, you know what, the gas resource isn't where the load is. So there needs to be a new rethinking of natural gas infrastructure. And that's where we started pursuing ideas that ultimately became realized with Southern Company Gas, that is AGL Resources and the Kinder Morgan 50% of Southern Natural Gas Pipeline. And now we're adding to that a little bit. So the last thing is just a tiny little thing, but PowerSecure is really an option for the future.
It doesn't add meaningfully to earnings in the near term. But Ali, as you think about it, we have added to our growth rate as I suggested, we dropped down to, I forget where we were, 3% to 4%. And then when we went to AGL, it became 4% to 5%. And then when we added on the rest of SONAT plus everything else, plus Southern Power, man, we jumped all the way up to 5%. And what we've been able to demonstrate, I think, is the resilience of that 5%.
In other words, we stress tested that against a variety of scenarios and really put it through some tail risk. And we believe our through those series of transactions and through the strategy we placed, through those series of transactions and through the strategy we placed. And now for the future, what I'm suggesting is there may be a way to rethink the growth rate of the organic business in the electric companies that frankly has been a wee bit lackluster to improve that and really improve service to our customers at the same time. All of those things lead me to believe that we don't need new generation in the future until say the low 20s. We think we have a reasonable estimate as to environmental expenditures.
I think we're in terrific shape to achieve the 5%. We've done that work last year and the work we're doing continuing.
Our next question comes from the line of Mike Weinstein with Credit Suisse. Please go ahead.
Hey, Mike.
Hey, Tom. How are you doing?
Awesome. Thanks.
Thanks for taking the call.
Yes. Thank you.
Hey, in the event of abandonment for Vogtle, what's the possibility that Prudence prior to 2016 through BCM 16? What's the possibility that they could be revisited in light of the fact that the project would not be online used and useful and as anticipated?
Yes, the notion of prudence presumes we build a plant. And so, I mean, it's a fair question. We believe that the costs were prudent, but it's a fair question. But anyway, we believe they were prudently incurred. I think you go through the process thinking you're going to build a plant, who could have predicted that Westinghouse would have had the difficulty it had.
So I actually think we're in reasonably good shape. But I mean, it's a fair question. I think it's a tail risk kind of question in my opinion.
Do you think prudence includes a full return on capital though?
Yes. Prudence under the Georgia law basically puts it in a rate base.
Even though the current deal for everything above $5,440,000,000 you only get a debt return through construction. I mean, could we see something like that? Is it possible that they could go back and say you only get a debt return on an unfinished plan?
When you say is it possible, I guess anything is possible. But recall, even under abandonment, what you would do is take the Toshiba guarantee against those amounts. So kind of use that in your thing.
Yes, that's true. And also is there a possibility that you could be held, I guess, in any way responsible for not achieving the production tax credits if the plant if the plant schedule goes beyond 2021 and there is no
extension? That's conceivable also. I just we're dealing with a little hypothetics. I think it's going to happen though. I think even if you don't get tax reform this year, I feel reasonably confident given the importance of this issue, given the fact that it doesn't cost anything in the OMB scoring that I think we get support to figure out a way to get it done.
That's just my belief.
Okay. And just a follow-up on Steve's question about those credits. Is that is the $800,000,000 that you're expecting to get in value, is that included in the comparison analysis that's in the back of the VCM reports when you compare it with CCGT?
I believe that's true.
That's part of that, right?
Yes. But remember, it's 400 for each. So it's Unit 3 and Unit 4 split.
Okay. So I mean, basically everything is assuming those credits are coming in and that's
Yes. The only thing I would just add is to remember that the certificate has simply only got 50% of those credits and we think we're going to get 100 now.
Right, right. Okay. Thank you very much.
Yes, man. Thank you.
Our next question comes from the line of Ken Fallon with Citadel. Please go ahead.
Hey, guys. How are you?
Hello, Ken. How are you?
I'm good. Thanks. Could you guys provide some color on the decision making process amongst the co owners at Vogtle? And in particular, have your co owners designated Southern to act as their agent on the decision whether to go forward or not go forward? Or does each individual owner make their own discrete decision?
Well, we act as agent in the execution of the EPC contract and all that stuff. But there are also provisions for everybody to make their independent assessment as to how to proceed. And if those assessments are different what happens. But in general, the way you should think about that is, we all generally agree on how to proceed. We've have got a great working relationship with the co ops and the munis in the City of Dalton.
So I think I would just say that there are we are the agent in executing the contract. We have ongoing conversations. And generally, I think almost exclusively we reach consensus on how to approach these things. We have a really good relationship with those folks.
Okay. And the parental guarantee from Toshiba, does that stay with the project or does that travel pro rata with the co owners, if they choose differently?
Well, probably we'll choose the same, okay. I mean, there are scenarios where they could be different, but no, it would be a prorated guarantee.
The individual owners would have the right to their percentage of the guarantee individual of all the other parties?
Yes, but it would be I mean I'm trying to think of an example that would fit your hypothesis. For example, that we only finish 1 unit, we decide not to do another unit and somebody steps out and the other people stay in, the 37 would be divvied up based on the final arrangement that we enter into in this commercial agreement. We think that the draw schedule would be reasonably fixed and that they would access that guarantee on that basis, on a pro rata basis.
Okay. That's helpful. Thank you very much.
Our next question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board. Please proceed with your question. Hello, Dan.
Hi, good afternoon.
My question kind of relates to when you talk about your VOVO update, you mentioned that you have seen some meaningful improvements in productivity. And I was wondering if you could give us a little more color on what you've been able to achieve? And then also related to that, how do you incorporate assumptions around productivity into your assessment, both of the schedule length and cost? Because obviously those would be key inputs.
Absolutely, Matt. In fact, it's a great question. What we've seen since the last call is productivity improvement of around 20% from 20% to about 30%, use those as round numbers and we don't know whether they can be sustained or not. But productivity on the site the last call has improved by that amount, okay? We want to get that number up to more like 40%.
So Dan, in the evaluation of time to complete, cost to complete, we absolutely vary scenarios based on what we think we can sustain from a productivity level. It's a very good question you're asking. And so what we do is take different cuts. Okay, if it's 40%, it's this. If it's 30%, it's this.
That's exactly how we're looking at it. Filing that we've made with the bankruptcy court, potentially the dip financing wanted to have essentially access to everything. However, the funds used in the dip financing only apply to the so called good co, which is kind of the nuclear fuel processing business, their services business, O and M, decommissioning and others and don't flow to the benefit of our project. And so we don't believe they should have lien rights on the IP or anything to do with our project. And frankly, the creditors committee agrees with our position.
There will be a hearing on that on May 10, but I think we're on pretty firm ground there.
And then it would be up to the bankruptcy judge to decide how to resolve that?
That's right. It would be odd for the DIP financing to only apply to some of Westinghouse and not others. And then to give the benefit of all of the security potential to the dip financing. So it seems like an awfully logical position here.
Okay. All right. Thank you very much.
Yes. Hey, let me just make sure that we clarify something. I think it was Michael. It was Paul that raised the issue. In the scenario for abandonment, the only amount at risk for the abandonment charge is $4,100,000,000 not $5,400,000,000 The delta is the financing cost and that's already under recovery.
So I just want to make sure everybody understands that. Matt was right, 5.4, but the amount at risk for recovery under the abandonment scenario was 4.1. Okay?
Thank you.
Yes, sir. Thank you.
Our next question comes from the line of Praful Mehta with Citigroup. Please go ahead.
Welcome. Hi, guys. Go ahead. Yes.
So most of my questions have been answered, but just wanted to clarify on a couple of points. Coming back to Vogtle, if you don't find if Westinghouse steps out and you don't find anybody who's willing to accept a fixed price contract and so Southern steps in to complete the project, Is there any sense of what that how much overrun firstly that could entail given Southern's got to do it? And secondly, what does that actually mean operationally? Are you hiring all the people? Like what will that actually mean practically to kind of complete that project by Southern itself?
Sure. Okay. So let's kind of take it step by step. There's already been a tremendous amount of work that's been complete on the site. And then what you have to do is evaluate what is left, okay?
So that would be time to complete, cost to complete. It is our intention that absent any kind of smaller changes in management, that the people that we need are already present on-site. We've been able to do that with these interim agreements to keep people working And that's really important.
Okay. So could you give me a little more detail on what kind of improvements you've seen? Like is it just in the amount of time it's taken to do things or the number of people it's taken to do things or what are the kind of
The key in improving productivity on the site is to reduce dead time. In other words, transit time from check-in to workplace to have more effective management on-site, so that they do their job site briefings and then get work done. It's really that kind of thing.
Okay. And then just some on the details of the project. I just wonder, I know last time you mentioned that the steam generator installs were key half item and that for Unit 3 and then you mentioned the last CA modules for Unit 4. Are those upcoming or I noticed they're still kind of in the same location on the slide that you included. So I just wonder if you could give us some updates on the critical path?
Yes. Dan, it's Art. Those things are constantly in motion around what gets prioritized. The steam generators have been moved back a little bit, but that doesn't mean that they were on a critical path to begin with. And so the critical path itself is in the nuclear island, but just those have now been put on the horizon rather than in the near term, but doesn't mean that we're not staying on schedule and improving the productivity within that within the nuclear island itself.
How about on Unit 4?
Unit 4 is maintaining. You still have some modules yet to be placed CAO2 and CAO3, but those are
equipment on-site, what's the status of that?
Well, I think we've got 90 plus percent of the equipment on-site already.
I think all major equipment is on-site, which we're really lacking now are commodities.
Okay. How about the shield panels? Are those
pretty much the
ones that are out?
Yes. We're doing very well on the shield panels. I think on Unit 3, we're at level or course 5 or 6. And on Unit 4, I'm not sure that we've started the shield panels yet, but we have, it's going to be much lower. But that's all on schedule.
Okay. Thank you.
Thank you. Thank you, Dan.
Our next question comes from the line of Mr. Julien Dumoulin Smith with UBS. Please go ahead, sir.
[SPEAKER JULIEN DUMOULIN SMITH:] Hey, Julien, welcome. [SPEAKER JULIEN
DUMOULIN SMITH:] Hey, Julien, welcome.
[SPEAKER JULIEN DUMOULIN SMITH:] Hey, Julien, welcome.
[SPEAKER JULIEN DUMOULIN SMITH:] Hey, thank you very much, team.
I appreciate it. So let's hopefully wrap this up perhaps with a little bit of a question on the resiliency you guys have talked about in the past. I'd just be curious what are the positive drivers that you're thinking about that you'd like to flag to kind of offset any potential risks, whatever they may be across?
So we evaluate what's been spent. We evaluate what needs to be spent. Recall, we have the Toshiba guarantee. So that would be round numbers again, dollars 3,700,000,000 that would offset those future payments. So then we would evaluate if there was if that was sufficient or if there is anything in excess even of the 3.7 in addition to the normal budgeted costs And we'll evaluate that in terms of schedule and potential costs within the construct of whatever our co owners need and what we need via our regulatory regime in Georgia.
Recall also that I think we've got a great deal flexibility in how we think about this. You must realize that Southern is pretty well unique in being able to fulfill these kinds of obligations. We have been involved uniquely in the supply chain efforts throughout the project. We have been involved uniquely in terms of the scope of presence on our site. I think we have roughly 400 people that have been engaged in oversight work even with Westinghouse and with Fluor.
And now, we have provided for, as we started to see Westinghouse get under duress, a transition plan even before Westinghouse has filed bankruptcy. So we have a transition take.
Yes. I think it's important to add that we've got step in rights to all the subcontracts. So if we choose to do so, we can step in and contract with Fluor and any other subcontractor that has a primary contract with Westinghouse at this time.
Got you. That's very helpful color. And just quickly on the $3,700,000,000 parent guarantee, that there is no risk to it at this point as I understand. The only risk being if Toshiba files for bankruptcy, then you become just an unsecured creditor. But apart from that, there isn't any other risk.
Is that correct?
Well, I mean, we're trying to be very rigorous in our approach here for all these things. When we think about the guarantee, we don't want to get into a position where there's an argument about the amount. We don't want to get into a position where that amount is available, whether we finish or don't finish the plant if Wetting House rejects it and we're in that position. We don't want to get into a position of arguing how the draws under the guarantee might be available and we want to have some assurance as to the security of those draws. So we're working through a lot of issues there.
Likewise with Westinghouse, I never want to get into a position, look at them, they're in bankruptcy of relying on Westinghouse's efforts. I want to have clear commercial agreements set forth for the IP that currently is under development. You know all the IP is not finished. There are some related to instrumentation and controls that is currently under development. That's not a surprise to anybody.
But we want to make sure that there is a commercial obligation for Westinghouse to finish that IP to make available the skills and resources necessary to carry it forward.
And then a second specific question on the Kemper side of things. Obviously, the previous conversations had suggested that you would get this thing in time for a June rate case. What does it mean if you don't necessarily trigger that? Is that all that meaningful?
Well, so let's hit the resiliency thing first. I think when we started talking about the balance being and resiliency and all that early on, I know there were some questions about the ability of Southern Power to hit its numbers. Southern Power, I believe has already done about half its CapEx round numbers this year. And Southern Power already has the ability I think to hit its number this year as per our plan, which I think we flagged $300,000,000 to $330,000,000 last October, dollars 315,000,000 is a working number and they're going to hit that number unless the wheels fall off somehow. And then from 2018 to 2000, what is it, 2021, we struck the agreement with res and others.
And I think we've basically spoken for the CapEx that may show up there. So to the extent, we do more than what we've already signaled, there's upside there. Further, I think there is a plan underway to improve the growth profile of the operating companies. Further from October, there I think has the ability to improve the pace of pipeline replacement programs that are associated with safety elements in the old AGL Resources jurisdictions. We've expanded that and hopefully we've expanded the pace of investment there.
So I think we have plenty of opportunity to do a little better. The other thing that you should know, you've followed us for 100 years or so, is that we are reasonably conservative in our estimates. When we say we're going to do something good or bad, that's kind of what we believe. We don't just throw out 1,000,000,000 of dollars of CapEx filler. We really kind of know what we're going to do and we do that in concert with long term regulatory relationships.
When we put out a starting point, we do it with the notion of a no regret strategy that is we've already stress tested against downside scenarios. So what you should know is that even within our 5% long term growth rate, we have stress tested against negative outcomes. And we're still confident in saying that we believe our 5% growth rate long term is viable. So for all those reasons, we're sticking with it and I think the evidence of that is the Board's decision to increase even with Vogtle and Kemper, the rate of growth of our dividends per share. Second issue was what?
Kemper.
Oh, I'm sorry. Yes, yes, yes, yes, yes. Certainly would have been helpful, let's not kid ourselves to have Kemper up and running before the filing of the rate case. But the rate case will take some period of time. And so our experts so you should know too that there will always kind of be along the way some opportunity to change the intellectual property as design changes are manifested on the site.
Further, you should know that this notion of transition is a critically important issue. It sounds like a detail, but getting all the clearances, getting the transfer of contracts, the transfer of personnel, etcetera, we want to be very clear about all that. So we're taking a very rigorous approach to all these issues. So these two big issues, the certainty around the structure of the guarantee and certainty as to the commercial relationship we have with Westinghouse, I think are really important in order for us to even consider moving ahead should Westinghouse ultimately reject the contract.
Got you. That's really helpful color. So you do expect to continue to update us as you have further color on these discussions, I'm assuming?
Absolutely. If there is material information, we'll put it down in an 8 ks.
Great. Thank you so much, guys.
You bet.
Thank you. Our next question comes from the line of Ashar Khan with Deutsche Bank. Please go ahead.
Hello, Ashar.
Hi, Tom. How are you doing? Fantastic. Just what I can't understand is, you guys as you are spending on these projects as we are going through this analysis, right, and you mentioned you're spending at a run rate of about $200,000,000 or so a month. So I guess by the time the decision takes place, it might be 8 to 9 months into the year and that would imply another I don't know whether the $200,000,000 was for the whole and your share is $100,000,000 but it could be another $1,000,000,000 spent on the project by the time you make the decision.
Doesn't that make it that the real decision is going forward and how to recover the cost? How can you I just don't get the chance of abandonment. If there was any chance of abandonment or anything like that, you should have slowed down and not let spend more on the project because in the end, the customer has to pay for it and it would be really bad for the customer to be given a bill of another $1,000,000,000 and that you make the decision. So am I missing something? To me, the chances of abandonment are really lower.
If they were a little bit higher, then you should have slowed down the process and kind of like thought of it and that would kind of indicate the options are more there or am I thinking through this wrongly?
Yes. No, no, Shahriar, you're raising good points. Let's just of walk through it
a bit
though. As this next 30 days to 60 days, we're working with our co owners and of course with our boards and in conjunction with the staff, the independent monitors and the commission. I think we'll reach a point where we're in a position to start making a recommendation and also as we finish the resolution of these commercial contracts I just talked about. I think then we'll kind of be in a position to say, yes, I think it looks likely that we're going to recommend expectation is that we'll resolve the issues between now and then and be able to demonstrate performance. Recall though that the evaluation of performance in terms of reasonable period is 2018.
And so that's kind of the first time we have to step up to some disclosed performance. And I think we've already disclosed that in 2018, our expected availability was around 30% to 35 percent. So that's a net 2018 number, okay?
Got it. All right, excellent. So basically, bottom line, you could file a rate case nonetheless or is this more about just shifting the rate case timing irrespective?
We will file the rate case. The law in Mississippi basically says within a reasonable period of time before the asset is in service, we could certainly do that. So if the asset is in service in Jan 1, 'eighteen, I think this is easy, that June 3 is the deadline to get that done.
Okay. All right. So, yes, you'll just prove it up at some point during the dependency of the rate case?
That's it.
Excellent.
Thank you all, Jim.
Yes, actually our performance criteria really goes to the year of 2018. Right. Okay.
Right. Excellent. Thank you.
Yes, sir. Thank you very much. Appreciate you being on.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.
Good afternoon.
Hey, Paul.
How are
you doing? Awesome. Just most of my questions have been answered, but there was a comment by one of the Georgia commissioners that he was sort of looking into the idea of a Kemper type of cap for Vogtle. And I just was wondering if you could sort of address how we should think, I know you guys are very risk knowledgeable and what have you. How we should think about your ability obviously, it's early, but how you think about that kind of an idea?
That's number 1. And then number 2, I was wondering if you could just address this Reuters story that seemed to be pretty critical of Westinghouse management and whether you think sort of the issues that were addressed in that article have been resolved, so to speak? Is that old history or just how you view that rather that article which seems kind of negative if you follow me in terms of Westinghouse?
Yes, let's hit the first one. I think I've kind of gone through this at length a little bit. The relationship between Georgia and its commission in terms of putting into place effective regulation for the benefit of customers and reliability and price and service has served us all so well so long. There is nothing out there to me that indicates that that constructive relationship. I mean, they're tough regulators, don't get us wrong, but that constructive relationship will remain in place.
And certainly, any sort of regime we consider in the future will be central to our belief as to whether it is appropriate should Westinghouse reject the contract for us to proceed going forward. Otherwise, if it looks likely the best thing for customers is to not complete these plants. I think at that point, you may take a totally different posture on-site. So long as it is viable for us to complete the plant, it is absolutely I think important for us to not only maintain but improve productivity on the site so that the ultimate long term cost is as attractive as it can be. Were we to start sending people home, the chances of us getting those people back on-site would be awfully difficult.
The other thing is, recall some of these first amounts that we've been talking about were amounts that were already owed, okay? So this is really just fulfilling the contract as it exists. And yes, I think we said this before, but if we did, let just be very clear that 200 or so a month, it could be a wee bit less than that, but that's a decent conservative number is 100%. So Georgia's share of that would be 45.7%.
Okay. That's what I thought. Okay. Okay. Thank you.
Thank you, sir.
Our next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.
Hey, Paul. Good morning, Tom. Good afternoon, Tom.
It's been
a long day. $3,700,000,000 is that inclusive of the $920,000,000
Yes. Yes.
The 3.7% is for 100 percent of the project, both units? That's right. And then switching gears, a big driver in the quarter was O and M. How much of that is sustainable?
Yes. Paul, some of that is certainly timing that will be spent later in the year. There were some outages pushed out of the quarter into the second. You're going to see some of that, but a lot of that is going to be sustained as we move through the year. As you know, the Q3 of each year is our big quarter and will determine how much O and M is spent between then and the end of the year.
So we still believe that we can hit our targets and in light of the under run on O and M in the Q1.
Yes. The other thing though that we're doing, Art and I have been kind of pushing at the Southern Company Management Council level is to approve the growth profile of the operating companies. And one of the things that we're looking at is, are there some things that we can do that can maybe do capital investment, technology investment, a variety of other things that will actually improve the reliability, customer service and price of our product associated with those investments maybe some permanent reductions in O and M. So we're pushing very hard to make the grid more resilient, to really understand and right size the amount of investment in our fossil hydro fleet, to automate what otherwise are some administrative processes. I think we have the opportunity to improve the organic growth profile of our operating companies and reduce O and M at the same time.
With construction or not, all of that is integral into how we intend to proceed. So my best advice to you guys is to believe that we will continue to have a constructive relationship and certainly anything that seems to go away from that would also seem to inhibit us from going forward with a commitment to build. Best nuclear people in America today. He's come I hired him away from Exelon. Steve, I mean Steve.
Christopher Crane is just a great guy, the CEO of Exelon. I think he's likely the best nuclear in America. But he I mean, Steve Kucinski learned under his leadership. And Steve has brought a lot of those concepts to us and improved dramatically, I think, the whole performance of our nuclear fleet. I believe that even with a short period of time where we have been a lot more intrusive, we've seen some improvement.
I think our ability is rather unique in this regard in order for us to take over as general contractor as apart from Westinghouse. Commenting on Westinghouse's own shortfalls is really not productive at this point.
Well, and I'm not asking you necessarily to comment or to pile on them or anything like that. The reason why I asked the question is because you guys may end up taking over the project. And if you do, I guess it's kind of I guess the idea obviously would be what are you sort of taking over? Do you follow me? I mean
Yes. I'm
sorry, Budd. Go ahead.
No, that's basically I think you understand what I'm saying. I mean, in other words, I mean, my concern is what one's concern could be is that if you take this thing over, and it's been what exactly are you taking over? Do you follow what I'm saying?
Yes, are we taking over a bag of bones? Yes. Yes, no, thanks for the question and it's a very fair question. Look, we have had and just kind of dimension this, we've had about 400 people on active oversight here. And you can imagine there has been a lot of give and take as to our evaluation of what was going on first between Westinghouse and Shaw and then Westinghouse and CBI and then Westinghouse by themselves.
And we have always had suggestions for improvement. We didn't want to interfere with the fixed price contract that we had because that would limit our ability to collect under that contract and take away the liability of Westinghouse. So from a commercial standpoint, we had to be reasonably careful about how intrusive we were. But you should know that we have, I think, great transparency into what we think it will be required in order to finish from an hours and cost standpoint. We'll have a darn good idea what we're taking over And I think a darn good idea as to our ability to execute successfully given the different levels of productivity we may see.
I don't
think The permanent piece of the O and M, is that push you to one end of guidance, the top end there? Or is it just one of the gives and takes that we're seeing?
No, Paul, we don't even mess with that until the end of Q3. We just keep our guidance where it is. What I'm really doing with that initiative though is not worrying about the tactics of where we are within a range in a year, but rather make even more resilient the 5% long term growth rate that we referred you to. I said before in October, I thought October 2016, I thought it was hard to knock us off the balance beam. We've been talking hard about resilience and how well founded I think our long term plan is.
And remember I said back then, if you want to really see proof of where our Board sees that and where we see it for heaven's sake, is let's watch and see what the Board does on the dividend. And sure enough, they increase the growth rate in the dividend confidence in our long term ability to hit the growth rate. Okay. And then, confidence in our long term ability to hit the growth rate.
Understood. Thank you very much.
You bet. Thank you.
Our next question is a follow-up from Jonathan Arnold, Deutsche Bank. Please proceed with your question.
Thank you, guys. So just could you quantify how much the change in accounting for PTCs benefited the quarter versus what you had in your guidance for the quarter?
About $0.05
Great. Thanks, Art. That was it.
Yes, sir.
Our next question comes from the line of Steve Fleishman with Wealth Research. Please go ahead.
Hey, Steve.
Yes. Hey, Tom. Good afternoon. Just a couple technical questions on Vogtle. If it's going to take a month or 2, you think, to decide why was the interim assessment only moved to May 12 and not further and why shorter than let's say what SCANA did?
Yes. And I think it's very clear. Working very hard on these agreements related to the Toshiba guarantee and related to the ability for us to effectively transition the plan away from Westinghouse, should Westinghouse reject the contract. It is, I think, clear to us that once we reach that point, making the transition as to management on the site is really important as to the effectiveness. So keeping a short leash on the relationship with Toshiba and Westinghouse and ultimately should Westinghouse reject the contract, having us take over the site if that's what we choose to do in a shorter timeframe is good for the project.
Keeping Westinghouse in this kind of limbo role under bankruptcy is not good for the project for any period of time. We want to keep that as short as we can.
Okay. That makes sense. Second question is just, I know you're kind of keeping the commission staff apprised.
We're going to go into this blindly. Steve Kosinski is leading the effort to evaluate those issues. I think given his background, given his performance with us, I think we'll reach an effective recommendation for gono go sometime after Westinghouse rejects and within the 30 ks to 60 ks timeframe we've suggested.
Okay. Thanks a lot.
You bet. Thank you.
Next question comes from the line of Andrew Levi with Avon Capital. Please go ahead.
Hey, guys. Andrew, how are you? I'm
all right.
100 years for Julian. I think that's for me and Paul.
And you too? It seems like a 100 years. Julien is just a puppy,
smart puppy,
very smart puppy. I guess I just wanted to get back to a question that was answered, that was asked earlier.
Yes.
And I don't know if you can kind of answer it, but just kind of how we think about this because you do have 2 other partners, it's Oglethorpe and Miag. And I've kind of discussed this to some people internally, your company. And I'll be honest with you, I try always to be honest, but I guess that's like kind of my next concern is that they're much smaller companies than you, especially MEAG. And so their ability to kind of absorb these incremental costs may become an issue. So I just want to get your thoughts on that.
And then since I guess you I wasn't realizing that you are working as the agent, and I don't know if that's kind of written in the contract or the agreement partners agreement. But I guess at some point, can they come after you in a legal aspect? Kind of what happened I think that it happened years ago with Vogtle 1 and 2, not with these entities. But just kind of your thoughts on that and how you're protected in the agreement from that actually occurring beyond you guys having a good relationship?
Yes. So Andy, thanks. Don't forget about Dalton. They're in there. I forget what it is, 1.5% or something like that.
So the City of Dalton is part of this also. Look, we have a terrific relationship with these guys. We have had, remember they're part of Vogtle 12. And so we've just had an ongoing relationship. It works exceedingly well.
That's not to say we don't have discussions from time to time about issues, but we always seem to be able to work our way through them. I think their ownership shares are commensurate with their size. And so, yes, they're a different size. But I think they have the wherewithal to be able to follow through on their obligations. They're certainly different.
They're not regulated by a public utilities commission like we have, but they have their own ability to manage rates and make sure that they are viable. So I mean, here again, it's certainly a fair question. But I think you should assume as a working assumption that they're going to be fine and that will work constructively with each other.
And then just the legal aspect of it too, I mean
You know what? Yes. Go ahead. That's kind of a technical issue. Here's the thing.
If you want a briefing on kind of the legal aspects of lawsuits among or the co owners. Let's do that offline and I'll get a lawyer on the phone and we'll
Sure, sure.
Okay. That's fair. Okay. Thank you.
Yes, sir. Thank you.
And at this time, there are no further questions. Sir, are there any closing remarks?
Well, the only thing I just want to say, I probably should have said this earlier, when I was talking about the resiliency of our long term growth rate of 5%. I think what we've been able to do is demonstrate that we can operate that long term growth rate at 5% within a similar risk profile. Recall that 95% of our earnings are associated with super high quality state regulated integrated businesses. And even of the 5%, you have things in there or they're under long term contract. And even with the 5%, gosh, some of that is exceedingly consistent.
For example, the Georgia Natural Gas Marketing business, that just doesn't vary from year over year over year and they don't have much weather risk because they hedge most of it. So the beta associated with our ability to deliver on the 5% out of an ongoing manner is really good within the similar risk profile that we've demonstrated for decades. And I'm very proud of that. I know there's a lot of headline risk out there with Southern right now. If you peel the onion, what you see, especially with the action the Board took with the dividend, you find a super successful company, one of the icons in our industry and a company that has demonstrated year over year over year.
Look at a chart of our dividend of being able to deliver on behalf of its shareholders. We intend to continue to do that and we look forward to talking about it in the future. Thank you for joining us today and we'll talk to you soon.
Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company First Quarter 2017 Earnings Call. You may now disconnect.
I guess when we ultimately get your decision in a couple a month or 2 or whatever it is, how should we think about kind of how much they are on board with it already or not?
Yes. I mean, Steve, you know us. I mean, we've been working with collaborative with the commission. I guess we had the original Vogtle decision back in 1992 with the last one there. And then in 1995, we reached the agreement on these 3 year accounting orders and every 3 years we've put in place a series of interesting accounting orders.
It seems like every 3 years we had a unique set of challenges in which to handle. We just have this track record of constructive regulation here in the South. And Georgia has been a tremendous kind of example of how an integrated regulated system meets the needs of customers. We have the best reliability, price is significantly below national averages, the best customer service, it works. And so our evaluation is we'll be able to work constructively commission, I think when we reach the point of beginning a filing process, I would assume we have a decent degree of Okay.
And then last question, just on the nuclear
Okay. And then last question, just on the nuclear PTC. Unless something happens quickly in Congress, we're probably not going to have an extension of that prior to you making the decision. Should we just assume that your confidence level is high enough in that that you're going to assume in your analysis that that is going to get extended if needed for delayed dates?
Yes, so that's an important variable in all of this. And I can tell you that the conversations we've had, and I'm just going to be broadly across government, whether it's Congress or the administration, have been very constructive and supportive. They understand that this is kind of bigger than Vogtle. This is a national security issue and that frankly the cost of extending this timeframe is almost nothing as they scored in Congress. So we've experienced a tremendous amount of support.
We could come up with a variety of ways to evidence that support, but I'm just going to assure you that as we reach our the end of our deliberations and make a recommendation, this will be central to that recommendation. And if we decide to go forward, it would be because we believe and we may have evidence at that time of our belief that we'll be able to manage it. There may be ways we can demonstrate their support even without the law or the tax reform bill being passed is my point.
Hello?
Steve? Operator?
His line is still open, sir.
Okay.
Steve, you still there?
I don't know what happened. Yes, operator, you want to go to the next question? Steve, I hope that answered your question. Certainly, if it doesn't, call us back. Sorry, you got cut off.
Operator, you want to go to the next question?
Yes, sir. Our next question comes from the line of Ali Yaga with SunTrust. Please go ahead.
Hey Ali, how are you?
Good. Thanks Tom, good afternoon.
First
question, Art, I may have missed this, but if I were to bridge the gap in the Q1 between your $0.57 original guidance and the $0.66 you reported, was that all coming from that change in accounting for the tax or what's causing that $0.09 delta?
No, I think what you're seeing is a lot of it was from the PTC recognition of Southern Power, the vast majority of that $0.05 The other $0.04 really came by better O and M management across the fronts of all operating companies to do a little better than what we had buried into our $0.57 estimate.
I see. Got it. And then, Tom, on Kemper, do you see at all any scenario in which the plant ultimately just ends up being a CCGT?
So I mean the way you asked that question, sure. I mean there's that possibility, but that's going to be taken into account in the deliberations in the state of Mississippi. Recall the 9 cell kind of redgreen diagram they use in order to assess the viability of the plant. Still under high gas scenarios, we still get green cells in there. And certainly, it remains a hedge.
And along the way, as we have built into the technology, the ability to operate under dual fuels, we've been able to demonstrate the ability to deliver whatever energy is the cheapest. So there is a possibility you could do that. We'll just have to see.
I see. Would that be part of sort of the rate case and prudency review or would that be outside of that scope?
Well, it's all part of the conversation. So the conversation is kind of underway and we don't want to ever get in front of that an run and we'll give you illumination when we get it.
Okay. Then a different topic. As you pointed out, electric sales weather normalized were negative 1% this quarter. In fact, I'm right, I think that's the 4th consecutive quarter we've seen negative by the normalized sales. I'm just wondering how you square that with the economic growth profile that you're seeing out there and how should we think about that going forward?
Yes, Ali, we got a couple of things going on both commercial and industrial classes. We began to see a reduction in use per customer in the commercial class in the Q2 of last year, if you go back and look at our history. And so when you're looking at the Q1 year over year, that trend continues in 2017, but it wasn't in 2016. So you still have the effect of that showing up. And in the industrial market, it was kind of the same thing.
We had some industrial customers who had announced that they were shuttering portions of their process, their operating processes mid year last year that were in process for the Q1 of last year. So year over year, you're going to see some effects of that as well. More importantly, I think if you look at our sales compared on a weather normal basis compared to what we estimated they would be, we were only down 0.3%. Yes. And let me throw
in the other stuff, you probably heard this, but leap year February of 2016 as compared to February 2017 that matters in the numbers. The other thing and our numbers have been very consistent with what I'm seeing in my work at the Fed. And I said this on Squawk Box this morning, but January was kind of a bad month. February was an awful month year over year in comparison. But then holy smokes, March, especially the end of March turned around and I always do not only a year over year comparison, but a momentum comparison.
The momentum comparison from March as compared to the quarter showed that of the 10 largest industrial sectors in March, 9 of them were positive and one of them was reasonably flat. So it's fascinating to me that we saw a big turn. The Fed saw that also for the nation. So it's very, very fascinating stuff. We're a little bit stronger than the rest of the nation in terms of our economic growth, job creation, 1.9 versus 1.5.
Listen, I think there is reason for us to hang with our annual projection of between 0.5% growth this year. Let's see what happens on the sustainability of that March performance.
Okay. And last question, Tom, if I recall in your legacy regulated business, when we looked at the long term growth, the expectation was that at the back half of the decade environmental CapEx would likely pick up and drive rate base and earnings. That probably won't materialize currently or in this scenario. What takes the place of that and what can you use to offset that growth in the future?
Sure, man. Absolutely. In fact, boy, I remember showing this to my Board almost day 1 I got on and everything else. But we went through a period there where we were kind of at the end of David Ratcliffe's timeframe. For a while there, I was CFO and then Paul Bowers took over, went over as COO where we were talking about really healthy EPS growth rate.
That's what we were spending capital like crazy as compared to a rather modest net committed capital base. And so our earnings per share growth rate was going off the charts. And then as we started winding down on a lot of environmental construction as I took over and then as we saw the riskiness of Kemper and Vogtle at one time, our long term growth rate got real flat. And I started saying that to you all and started saying that, well, it may flatten out through the last half of the decade. But as you remember correctly, it should turn back up with environmental CapEx and then with new capital associated with new generation coming back in.
What we were able to do in 2016 was execute on a growth strategy. You may remember too, I had been talking for some time about the wisdom of natural gas infrastructure and getting ahead of natural gas being a primary source of fuel for the future, a bridge, if you will, between now and 2,050. And we recognized early on in our strategy deliberations here under my tenure that I get gas, but boy, you know what, the gas resource isn't where the load And so there needs to be a new rethinking of natural gas infrastructure. And that's where we started pursuing ideas that ultimately became realized with Southern Company Gas, that is AGL Resources and the Kinder Morgan 50 tiny little thing, but PowerSecure is really an option for the future. It doesn't add meaningfully to earnings in the near term.
But Ali, as you think about it, we have added to our growth rate, as I suggested, we dropped down to, I forget where we were, 3% to 4%. And then when we went to AGL, it became 4% to 5%. And then when we added on the rest of SONAT plus everything else, then we jumped all the way up to 5%. And what we've been able to demonstrate, I think, is the resilience of that 5 percent. In other words, we stress tested that against a variety of scenarios and really put it through some tail risk.
And we believe our 5% long term growth rate is in fact resilient against a variety of outcomes. So we're very happy with that. And I think frankly, we've accomplished through those series of transactions and through the strategy we placed. And now for the future, what I'm suggesting is there may be a way to rethink the growth rate of the organic business in the electric companies that frankly has been a wee bit lackluster to improve that and really improve service to our customers at the same time. All of those things lead me to believe that we don't need new generation in the future until say the low 20s.
We think we have a reasonable estimate as to environmental expenditures. I think we're in terrific shape to achieve the 5%. We've done that work last year and the work we're doing continuing.
Understood. Thank you.
Yes, sir.
Our next question comes from the line of Mike Weinstein with Credit Suisse. Please go ahead.
Hey, Mike.
Hey, Tom. How are you doing?
Awesome.
Thanks. Thanks for taking the call.
Yes. Thank you.
Hey, in the event of abandonment for Vogtle, what's the possibility that Prudence prior to 2016 through VCM 16? What's the possibility that they could be revisited in light of the fact that the project would not be online used and useful and as anticipated?
Yes, the notion of prudence presumes we build a plant. And so, I mean, it's a fair question. We believe that the costs were prudent, but it's a fair question. But anyway, we believe they were prudently incurred. I think you go through the process thinking you're going to build a plant, who could have predicted that Westinghouse would have had the difficulty it had.
So I actually think we're in reasonably good shape. But I mean it's a fair question. I think it's a tail risk kind of question in my opinion.
Do you think prudence includes a full return on capital though?
Yes. Prudence under the Georgia law basically puts it in a rate base.
I mean even though the current deal for everything above $5,440,000,000 you only get a debt return through construction. I mean could we see something like that? Is it possible that they could go back and say we only get a debt return on an unfinished plan?
When you say is it possible, I guess anything is possible. But recall, even under abandonment, what you would do is take the Toshiba guarantee against those amounts. So kind of use that in your thing.
Yes, that's true. And also is there a possibility that you could be held, I guess, in any way responsible for not achieving the production tax credits if the plant if the plant schedule goes beyond 2021 and there is no extension?
That's conceivable also. I just we're dealing in the world of hypothetics. I think it's going to happen though. I think even if you don't get tax reform this year, I feel reasonably confident given the importance of this issue, given the fact that it doesn't cost anything in the OMD scoring that I think we'll get support to figure out a way to get it done. That's just my belief.
Okay. And just a follow-up on Steve's question about those credits. Is that is the $800,000,000 that you're expecting to get in value, is that included in the comparison analysis that's in the back of the VCM reports when you compare it with CCGT?
I believe that's true.
That's part of that, right?
Yes. But remember, it's 400 for each. So it's Unit 3 and Unit 4 split.
Okay. So I mean basically everything is assuming those credits are coming in and that's yes.
Yes. The only thing I would just add is to remember that the certificate assumes we only got 50% of those credits and we think we're going to get 100 now.
Right, right. Okay. Thank you very much.
Yes, man. Thank you.
Our next question comes from the line of Ken Fallon with Citadel. Please go ahead.
Hey, guys. How are you?
Hello, Ken. How are you?
I'm good. Thanks. Could you guys provide some color on the decision making process amongst the co owners at Vogtle? And in particular, have your co owners designated Southern to act as their agent on the decision whether to go forward or not go forward? Or does each individual owner make their own discrete decision?
Well, we act as agent in the execution of the EPC contract and all that stuff. But there are also provisions for everybody to make their independent assessment as to how to proceed. And if those assessments are different what happens. But in general, the way you should think about that is, we all generally agree on how to proceed. We've have got a great working relationship with the co ops and the munis in the City of Dalton.
So I think I would just say that there are we are the agent in executing the contract. We have ongoing conversations. And generally, I think almost exclusively we reach consensus on how to approach these things. We have a really good relationship with those folks.
Okay. And the parental guarantee from Toshiba, does that stay with the project or does that travel pro rata with the co owners, if they choose differently?
Well, probably we'll choose the same, okay. I mean, there are scenarios where they could be different, but no, it would be a pro rated guarantee.
The individual owners would have the right to their percentage of the guarantee individual of all the other parties?
Yes, but it would be I mean, I'm trying to think of an example that would fit your hypothesis. For example, that we only finish one unit and we decide not to do another unit and somebody steps out and the other people stay in, the 37 would be divvied up based on the final arrangement that we enter into in this commercial agreement. We think that the draw schedule would be reasonably fixed and that they would access that guarantee on that basis, on a pro rata basis.
Okay. That's helpful. Thank you very much.
Yes. Our next question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board. Please proceed with your question.
Hello, Dan.
Hi, good afternoon. My question kind of relates to when you talked about your VOVO update, you mentioned that you have seen some meaningful improvements in productivity. And I was wondering if you could give us a little more color on what you've been able to achieve? And then related to that, how do you incorporate assumptions around productivity into your assessment both of the schedule length and cost because obviously those
would
be key inputs? Absolutely, Matt.
In fact, it's a great question. What we've seen since the last call is productivity improvement of around 20% from 20% to about 30%, use those as round numbers and we don't know whether they can be sustained or not. But productivity on the site since the last has improved by that amount, okay? We want to get that number up to more like 40%. So Dan, in the evaluation of time to complete, cost to complete, we absolutely vary scenarios based on what we think we can sustain from a productivity level.
It's a very good question you're asking. And so what we do is take different cuts, okay? If it's 40%, it's this. If it's 30%, it's this. That's exactly how we're looking at it.
Okay. So
could you give me a
little more detail on what kind of improvements you've seen? Like is it just in the amount of time it's taken to do things or the number of people it's taken to do things or what are the kind of?
The key in improving productivity on the site is to reduce dead time. In other words, transit time from check-in to workplace to have more effective management on-site, so that they do their job site briefings and then get work done. It's really that kind of thing.
Okay. And then just some on the details of the project. I just want to I know last time you mentioned that the steam generator installs were key path item in that for Unit 3 and then you mentioned the last CA modules for Unit 4. Are those upcoming or I noticed they're still kind of in the same location on the slide that you included. So I just wonder if you could give us some updates on the critical path?
Yes. Dan, it's Art. Those things are constantly in motion around what gets prioritized. The steam generators have been moved back a little bit, but that doesn't mean that they were on a critical path to begin with. And so the critical path itself is in the nuclear island, but just those have now been put on the horizon rather than in the near term, but doesn't mean that we're not staying on schedule and improving the productivity within that within the nuclear island itself.
How about on Unit 4?
Unit 4 is maintaining, you still have some modules yet to be placed CAO2 and CAO3, but those are smaller modules compared to say CAO1, which is already in place.
Okay. And then in terms of the equipment on-site, what's the status of that and
Well, I think we've got 90 percent of the equipment on-site already.
I think all major equipment is on-site, which you're really lacking now are commodities.
Okay. How about the shield panels? Are those pretty
much the shield? Yes.
We're doing very well on the shield panels. I think on Unit 3, we're at level or course 5 or 6. And on Unit 4, I'm not sure that we've started the shield panels yet, but if we have, it's going to be much lower. But that's all on schedule.
Okay. Thank you.
Thank you. Thank you, Dan.
Our next question comes from the line of Mr. Julien Dumoulin Smith with UBS. Please go ahead, sir. [SPEAKER JULIEN
DUMOULIN SMITH:]
Hey, Julien, welcome.
Hey, thank you very much, team. I appreciate it. So let's hopefully wrap this up perhaps with a little bit of a question on the resiliency you guys have talked about in the past. I'd just be curious what are the positive drivers that you're thinking about that you'd like to flag to kind of offset any potential risks whatever they may be across either Kemper or Vogtle? And then a second specific question on the Kemper side of things.
Obviously, the previous conversations had suggested that you would get this thing in time for a June rate case. What does it mean if you don't necessarily trigger that? Is that all that meaningful?
Well, so let's hit the resiliency thing first. I think when we started talking about the balance beam and resiliency and all that early on, I know there were some questions about the ability of Southern Power to hit its numbers. Southern Power, I believe has already done about half its CapEx round numbers this year. And Southern Power already has the ability, I think, to hit its number this year as per our plan, which I think we flagged $300,000,000 to $330,000,000 last October, dollars 315,000,000 is a working number and they're going to hit that number unless the wheels fall off somehow. And then from 2018 to 2000, what is it, 2021, we struck the agreement with res and others.
And I think we've basically spoken for the CapEx that may show up there. So to the extent, we do more than what we've already signaled, there's upside there. Further, I think there is a plan underway to improve the growth profile of the operating companies. Further from October, there I think has the ability to improve the pace of pipeline replacement programs that are associated with safety elements in the old AGL Resources jurisdictions. We've expanded that and hopefully we've expanded the pace of investment there.
So I think we have plenty of opportunity to do a little better. The other thing that you should know, you've followed us for 100 years or so, is that we are reasonably conservative in our estimates. When we say we're going to do something good or bad, that's kind of what we believe. We don't just throw out 1,000,000,000 of dollars of CapEx filler. We really kind of know what we're going to do and we do that in concert with long term regulatory relationships.
When we put out a starting point, we do it with the notion of a no regret strategy that is we've already stress tested against downside scenarios. So what you should know is that even within our 5% long term growth rate, we have stress tested against negative outcomes. And we're still confident in saying that we believe our 5% growth rate long term is viable. So for all those reasons, we are sticking with it. And I think the evidence of that is the Board's decision to increase even with Vogtle and Kemper, the rate of growth of our dividends per share.
Second issue was what?
Kemper.
Oh, I'm sorry. Yes, yes, yes, yes, yes. Certainly would have been helpful, let's not kid ourselves to have Kemper up and running before the filing of the rate case. But the rate case will take some period of time. And so our expectation is that we'll resolve the issues between now and then and be able to demonstrate performance.
Recall though that the evaluation of performance in terms of reasonable period is 2018. And so that's kind of the first time we have to step up to some disclosed performance. And I think we've already disclosed that in 2018, our expected availability was around 30% to 35%. So that's a net 2018 number, okay?
Got it. All right, excellent. So basically bottom line, you could file a rate case nonetheless or is this more about just shifting the rate case timing irrespective?
We will file the rate case. The law in Mississippi basically says within a reasonable period of time before the asset is in service, we could certainly do that. So the assets in service in Jan 1, 'eighteen, I think this is easy, that June 3 is the deadline to get that done.
Okay. All
right. So yes, you'll just prove it up at some point during the pendency of the rate case?
That's it.
Excellent. Thank you all, Jeff.
And And actually our performance criteria really goes to the year of 2018. Right. Okay.
Right. Excellent. Thank you.
Yes, sir. Thank you very much. Appreciate you being on.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.
Good afternoon.
Hey, Paul.
How are you doing? Awesome. Just most of my questions have been answered, but there was a comment by 1 of the Georgia commissioners that he was sort of looking into the idea of a Kemper type of cap for Vogtle. And I just was wondering if you could sort of address how we should think, I know you guys are very risk knowledgeable and what have you. How we should think about your ability obviously, it's early, but how you think about that kind of an idea?
Number 1. And then number 2, I was wondering if you could just address this Reuters story that seemed to be pretty critical of Westinghouse management and whether you think sort of the issues that were addressed in that article have been resolved, so to speak? Is that old history or just how you view that rather that article which seems kind of negative if you follow me in terms of Westinghouse?
Yes, let's hit the first one. I think I've kind of gone through this at length a little bit. The relationship between Georgia and its commission in terms of putting into place effective regulation for the benefit of customers and reliability and price and service has served us all so well for so long. There is nothing out there to me that indicates that that constructive relationship. I mean, they're tough regulators, don't get us wrong, but that constructive relationship will remain in place.
And certainly, any sort of regime we consider in the future will be central to our belief as to whether it is appropriate should Westinghouse reject the contract for us to proceed with construction or not. All of that is integral into how we intend to proceed. So my best advice to you guys is to believe that we will continue to have a constructive relationship. And certainly anything that seems to go away from that would also seem to inhibit us from going forward with a commitment to build. With respect to the Westinghouse thing, that's really a question for Westinghouse.
I'll just say this, Steve Kucinski is one of the best nuclear people in America today. He's come I hired him away from Exelon, Steve. I mean, Steve. Christopher Crane is just a great guy, the CEO of Exelon. I think he might be the best nuclear guy in America.
But he I mean Steve Kaczynski learned under his leadership and Steve has brought a lot of those concepts to us and improved dramatically, I think, the whole performance of our nuclear fleet. I believe that even with a short period of time where we have been a lot more intrusive, We've seen some improvement. I think our ability is rather unique in this regard in order for us take over as general contractor as apart from Westinghouse. Commenting on Westinghouse's own shortfalls is really not productive at this point.
Well, and I'm not asking you necessarily to comment or to pile on them or anything like that. The reason why I asked the question is because you guys may end up taking over the project. And if you do, I guess it's kind of I guess the idea obviously would be what are you sort of taking over? Do you follow me? I mean
Yes. I'm sorry, Budd. Go ahead.
No, that's basically I think you understand what I'm saying. I mean in other words, I mean my concern is what one's concern could be is that if you take this thing over, and it's been what exactly are you taking over? Do you follow what I'm saying?
Yes, are we taking over a bag of bones? Yes. Yes, yes. No, thanks for the question. And then it's a very fair question.
Look, we have had and just kind of dimension this, we've had about 400 people on active oversight here. And you can imagine there has been a lot of give and take as to our evaluation of what was going on first between Westinghouse and Shaw and then Westinghouse and CBI and then Westinghouse by themselves. And we have always had suggestions for improvement. We didn't want to interfere with the fixed price contract that we had because that would limit our ability to collect under that contract and take away the liability of Westinghouse. So from a commercial standpoint, we had to be reasonably careful about how intrusive we were.
But you should know that we have, I think, great transparency into what we think it will be required in order to finish from an hours and cost standpoint. We'll have a darn good idea what we're taking over and I think a darn good idea as to our ability to execute successfully given the different levels of productivity we may see. I don't think we're going to go into this blindly. Steve Kosinski is leading the effort to evaluate those issues. And I think given his background, given his performance with us, I think we'll reach an effective recommendation for gono go sometime after Westinghouse rejects and within the 30 ks to 60 ks timeframe we've suggested.
Okay. Thanks a lot.
You bet. Thank you.
Next question comes from the line of Andrew Levy with Avon Capital. Please go ahead.
Hey, guys. Andrew, how are you?
I'm all right. 100 years for Julian, I think that's for me and Paul.
And you
too. Hey, it seems like 100 years. Julian is just a puppy, smart puppy,
very smart puppy. I guess I just wanted to get back to a question that was answered that was asked earlier.
Yes. And I don't know if
you can kind of answer it, but just kind of how we should think about this because you do have 2 other partners, it's Oglethorpe and Miag. And I've kind of discussed this
to some
people internally, your company. And I'll be honest with you, I try always to be honest, but I guess that's like kind of my next concern is that they're much smaller companies than you, especially MEAG. And so their ability to kind of absorb these incremental costs may become an issue. So I just want to get your thoughts on that. And then since I guess I wasn't realizing that you are working as the agent, and I don't know if that's kind of written in the contract or the agreement, partners agreement.
But I guess at some point, can they come after you in a legal aspect? Kind of what happened, I think, that happened years ago with Vogtle 1 and 2, not with these entities. But just kind of your thoughts on that and how you're protected in the agreement from that actually occurring beyond you guys having a good relationship?
Yes. So Andy, thanks, Budd. Don't forget about Dalton. They're in there. I forget what it is, 1.5% or something like that.
So the City of Dalton is part of this also. Look, we have a terrific relationship with these guys. We have had, remember they're part of Vogtle 12. And so we've just had an ongoing relationship. It works exceedingly well.
That's not to say we don't have discussions from time to time about issues, but we always seem to be able to work our way through them. I think their ownership shares are commensurate with their size. And so, yes, they're a different size. But I think they have the wherewithal to be able to follow through on their obligations. They're certainly different.
They're not regulated by a public utilities commission like we have, but they have their own ability to manage rates and make sure that they are viable. So I mean, here again, it's certainly a fair question. But I think you should assume as a working assumption that they're going to be fine and that will work constructively with each other.
And then just the legal aspect of it too, I mean
You know what? Yes, that's kind of a technical issue. Here's the thing, if you want a briefing on the legal aspects of lawsuits among or between the co owners, let's do that offline and I'll get a lawyer on the phone. Sure.
Okay. That's fair. Okay. Thank you.
Yes, sir. Thank you.
And at this time, there are no further questions. Sir, are there any closing remarks?
Well, the only thing I just want to say, I probably should have said this earlier, when I was talking about the resiliency of our long term growth rate of 5%, I think what we've been able to do is demonstrate that we can operate that long term growth rate of 5% within a similar risk profile. Recall that 95% of our earnings are associated with super high quality state regulated integrated businesses. And even of the 5%, you have things in there or they're under long term contract. And even with the 5%, gosh, some of that is exceedingly consistent. For example, the Georgia natural gas marketing business, that just doesn't vary from year over year over year and they don't have much weather risk because they hedge most of it.
So the beta associated with our ability to deliver on the 5% out of an ongoing manner is really good within the similar risk profile that we've demonstrated for decades. And I'm very proud of that. I know there's a lot of headline risk out there with Southern right now. If you peel the onion, what you see, especially with the action the Board took with the dividend, you find a super successful company, one of the icons in our industry and a company that has demonstrated year over year over year. Look at a chart of our dividend of being able to deliver on behalf of its shareholders.
We intend to continue to do that and we look forward to talking about it in the future. Thank you for joining us today and we'll talk to you soon.
Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company First Quarter 2017 Earnings Call.
You
may now disconnect.