Good afternoon. My name is Carlos, 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 speaker's remarks, there will be a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. As a reminder, this call is being recorded Wednesday, May 3, 2017. I would now like to turn the conference over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.
Thank you, Carlos. Welcome to Southern Company's first quarter 2017 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, Art Beattie, 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-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning as well as the slides for this conference call. The slides we will discuss during today's call may be viewed on our investor relations website at investor.southerncompany.com. At this time, I'll turn the call over to Tom Fanning.
Good afternoon. 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 first two months of the year, our traditional electric and gas operating companies performed well, they are on track to deliver on their targets for 2017 and beyond. Southern Company Gas, including its seven premier state-regulated gas utilities, performed exactly as expected. Art will update you on our financial results in just a minute, I'd like to first provide brief updates on the status of the Vogtle and Kemper projects. First, Plant Vogtle Units 3 and 4. 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 maintains momentum on the site while we develop comprehensive schedule and cost assessments for the project. Thanks to the interim assessment agreement, in close coordination between Georgia Power, the co-owners, Southern Nuclear, Westinghouse, Fluor, approximately 6,000 workers have remained on site, safely completing multiple concrete placements and other work within the two 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 the 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 create 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 $3.68 billion 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 two.
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 two 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 have 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 3rd 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 interests 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 first quarter of 2017, reporting earnings of $658 million or $0.66 per share, compared with earnings of $489 million or $0.53 per share in the first quarter of last year. First quarter results for 2017 include after-tax charges of $67 million 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 million for the Kemper project. First quarter results for 2017 also include after-tax charges of $20 million associated with Plant Scherer 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 million investment in Plant Scherer being placed into retail rate base.
Additionally, the settlement provided for an increase in the equity ratio from 46%-52.5% while preserving the 9.25%-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 million or $0.66 per share during the first quarter of 2017, compared to $536 million or $0.58 per share in the first quarter of 2016. The major earnings drivers year-over-year for the first quarter of 2017 included results for Southern Company Gas, an improved performance at Southern Power, offset by increased shares and interest expense. Moving now to an economic and sales review for the first quarter. Collectively, the economies of Southern Company's regulated electric and gas markets continued to enjoy increased population and employment growth in the first quarter of 2017.
While consumer spending is tepid, measures of consumer confidence are at record highs. Similarly, leading indicators of industrial activity are improving and suggest that the U.S. economy should continue to expand in the first half of 2017, with real GDP projected at 2.4% for the year. The ISM Manufacturing 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 first quarter 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, an increase in multi-family housing, e-commerce, and the closing of brick-and-mortar retail stores. Overall, we continue to believe our forecast of retail electric sales growth in 2017 of 0%-1.5% is achievable. Before turning the call back to Tom, I want to provide our earnings estimate for the second quarter 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 second quarter of 2017. Second, our various equity plans continue to operate throughout the first four 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 $2.32 per share. This is our 16th consecutive annual increase, and for 69 years, dating back to 1948, Southern Company's paid a dividend that was equal to or greater than that of the previous year. More importantly, the board's decision to increase the rate of growth of 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 Southern 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.
Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. 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. If I'm thinking about the timeline here, you have the next month or two to make up what you consider a fully informed decision, get all the stakeholders involved, and at that juncture, you'll then proceed with the 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. It's continuous, not discreet. The notion of the month and a half or two months or whatever it 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.
Until we get a better feeling within this next month or two, 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.
Yeah.
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's it.
that you want to potentially go down, which you're filing with the commission in a formal proceeding. Correct or incorrect?
That's right. I was just picking on a couple words. You said a decision before. This is going to be a collaborative dialogue, I think, between the co-owners, us, and the commission about how to proceed.
Okay. 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.
You may continue to build all the units, you 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?
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 million Letters of Credit that were posted. Have you requested from the banks to pull down on those Letters of Credit? At this juncture, have you actually received any cash as a result of those requests to draw down on the Letters of Credit?
Yeah, Greg, there's a process under which you propose to draw under those letters.
Please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. 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. If I'm thinking about the timeline here, you have the next month or two to make up what you consider a fully informed decision, get all the stakeholders involved, and at that juncture, you'll then proceed with the 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. It's continuous, not discreet. The notion of the one and a half or two months or whatever it 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.
Until we kind of get a better feeling within this next month or two, 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.
Yeah.
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's it
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. I was just picking on a couple words. You said a decision before. This is going to be a collaborative dialogue, I think, between the co-owners, us, and the commission about how to proceed.
Okay. 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.
You may continue to build all the units, you 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?
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 million Letters of Credit that were posted. Have you requested from the banks to pull down on those Letters of Credit? At this juncture, have you actually received any cash as a result of those requests to draw down on the Letters of Credit?
Yeah, Greg, there's a process under which you propose to draw under those Letters, we're following that process to the letter. As of today, we've not drawn on those LCs. We're following the process.
You've requested to draw, you have not yet received. Is that what you're saying?
There's a period in which you provide a notice to draw.
Okay. You've provided that notice?
Yes.
Okay. Thanks, Tom. Sorry to be a stickler. Take care.
Yeah, 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 million, of which your share is $215. Is that a current, like through today number? It also says that $245 was paid or accrued at the end of March. Just trying to get a sense of the pace at which that number's increasing during this period.
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. It seems to imply a couple of hundred million a month is sort of the spending rate. Is that about right?
That's a decent guess, yeah.
Okay. Just on the other, 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-
Yeah, bud. 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. Certainly along the way, we'll evaluate the $3.7 billion guarantee and what remains, and whether that all looks like a good deal for our co-owners and certainly for our customers. We'll be, I can assure you, in ongoing dialogue with the commission about that. Let us continue to progress over the next 30 to 60 days and we'll figure it out. Certainly, we'll absolutely use the LCs to offset damages we've incurred and will occur going forward.
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. 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.
Thank you.
You bet.
Thank you.
We're following that process to the letter. As of today, we've not drawn on those LCs, we're following the process.
You've requested to draw, you have not yet received. Is that what you're saying?
There's a period in which you provide a notice to draw.
You've provided that notice?
Yes.
Okay. Thanks, Tom. Sorry to be a stickler. Take care.
Yeah, 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 million, of which your share is $215 million. Is that a current, through right today number? Because it also says that $245 million was paid or accrued at the end of March. Just trying to get a sense of the pace at which that number's increasing during this period.
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. It seems to imply a couple of hundred million a month is sort of the spending rate. Is that about right?
That's a decent guess, yeah.
Okay. Just on the other, 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?
Yeah.
Is that a close call currently? How do we think about that?
Yeah, 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. Certainly along the way, we'll evaluate the $3.7 billion, in round numbers, guarantee and what remains, and whether that all looks like a good deal for our co-owners and certainly for our customers. We'll be, I can assure you, in ongoing dialogue with the commission about that. Let us continue to progress over the next 30-60 days and we'll figure it out. Certainly, we'll absolutely use the LCs to offset damages we've incurred and will occur going forward.
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. 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.
Our next question comes from the line of Anthony Crowdell with Jefferies. Please go ahead.
Hey, Anthony.
How you doing, Tom?
Super. 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. 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. Along the way, before we complete that, Westinghouse files bankruptcy. As part of our agreement in 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. It's almost as if we were 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.
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 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 Fluor/Bechtel kind of thing. We could certainly take over the project ourselves and act as general contractor. All this really has to do with what we think is the best way to most economically complete the plant. In concert with our regulator, an equitable kind of division of risk and return as to how we intend to proceed. All of that is part of an ongoing discussion.
Just lastly, do you get the feeling at all that Westinghouse, even through this bankruptcy, would like to continue on the project? Or there's no sense in that?
I think they pretty well signaled the reason they 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 question.
Yeah. Hey, 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.
Great. Thank you.
Thank you, Bud.
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 United States Department of Energy and approaches that the DOE could take in support of Vogtle. What's sort of the range of possible options and the range of types of support that we could potentially see?
Yeah. 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 Credit. 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 Summer. This is a national security issue. It follows on the heels of what by all accounts was a very successful visit with Abe and Trump.
Recall that as a result of those successful meetings, I guess the Prime Minister and the President instructed Deputy Prime Minister Aso, along with Vice President Pence, to set up essentially a commission, an effort to evaluate lengthening and strengthening the kind of infrastructure investment opportunities that we could collaborate on between our two great nations. There were three segments of activity. One of those segments was energy infrastructure. Then some weeks following that, we have a bankruptcy in Westinghouse. So I think this is something that has taken 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 U.S. 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
Yeah. Thank you
the DOE 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 risk of further overruns?
Well, right now, we have an agreement that was entered into in 2016 that essentially doesn't have a cost cap. Theoretically, one approach is that we could live with the prudence stipulation. That addresses return levels during construction. Following construction, presumably these amounts of capital will revert back to GPC base rates. 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 cost. 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'll be in the 6%-8%.
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. 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. 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, Michael.
Hey, Tom. Thank you for taking my questions.
You bet.
Turning to Mississippi, if I read the detail in your SEC filings correctly, you've got $25 million per month or so of costs, including the depreciation, that are not in rates once the plant goes online. That doesn't necessarily include a return on capital of the plant, the PP&E that's not in rate base, or that's not in customer rates. 25 million, 12 months, that's $300 million 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 Mississippi 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?
Look, I think we've said this in the past, remember what we said in the script here is that we're going to file a traditional rate case, then we have, as provided by law, a rate mitigation plan. The notion of the rate mitigation plan is to.
Our next question comes from the line of Anthony Crowdell with Jefferies. Please go ahead.
Hey, Anthony.
How you doing, Tom?
Super. How are you?
Another day in south 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. 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. Along the way, before we complete that, Westinghouse files bankruptcy. As part of our agreement in 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. 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.
If we think about it, is the option of a fixed price contract the next stage of Vogtle even likely? Should we all be thinking that the type of contract to finish this project is going to be more of 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 Fluor/Bechtel kind of thing. We could certainly take over the project ourselves and act as general contractor. 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 division of risk and return as to how we intend to proceed. All of that is part of an ongoing discussion.
Just lastly, do you get the feeling at all that Westinghouse, even through this bankruptcy, would like to continue on the project? Or there's no sense in that?
I think they pretty well signaled the reason they went into bankruptcy was to insulate themselves. 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 question.
Yeah. Hey, 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.
Great. Thank you.
Thank you, bud.
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.
Potentially put in place revenue requirements that are similar to the revenue requirements associated with the original order. 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. That's really what we were pointing to when we started talking in the script about the settlement conversation as an acceptable outcome. Rest assured that we're working constructively, being very mindful of the total rate impact of Mississippi's customers and 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? 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. 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 filing.
Okay. One or two for Art. These are just kind of housekeeping types. Southern Power recognized a pretty big tax benefit in the quarter, a little over $50 million. 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 Investment Tax Credits?
I'm looking at the whole kit and caboodle. I'm looking at Southern Power's income statement in your queue.
In the queue. Okay. Well,
Yes, sir.
Let me address that first. There was a couple of timing things that went on in the first quarter. One of them related to the manner in which we recognized PTCs. When we gave our estimate for the quarter, it was $0.57. 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. We recognized more income at Southern Power related to Production Tax Credits in the first quarter, but we merely accelerated them out of the second and third quarter, and you'll see that flip back around during the year. 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, your guidance, I'm just trying to think about how much renewable tax related items is embedded within your full year guidance.
Okay. $53 million of one-time of those PTCs, ITCs, and $178 million of ongoing PTC.
I think it's interesting to point out that when you look at the one-time events as compared to 2016 and 2017, something like, what was it, 51%, something like that, were one-time events. In 2016 and 2017, it's down to about what, 17% or something?
Yeah, I think for the year between PTCs and ITCs, we'll end up with $16 million less in total year-over-year.
Got it. Last question.
What you're losing on ITCs, you're picking up on PTCs.
Right. It seems pretty flattish year-over-year. One last one, also a housekeeping one. At Southern Company Gas, I know you didn't own it in the first quarter 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 Company Gas, and what were the biggest drivers?
Yeah. Hold on just a sec. It was pretty flattish. You look at four distinct segments. The gas distribution operations was pretty flat.
Mm-hmm. Yep.
Gas marketing services was down a little, maybe $9 million in net income. Midstream operations were bigger, mostly due to Southern Natural Gas being added. The other, there was some other mishmash, which was a couple million. $13 million year-over-year increase.
That fell within what you expected even after you consider things like rate-based growth and O&M synergies, those type of items?
Everything's in, yeah.
It was amazing. It hit it exactly on the nose for the quarter, what we expected. 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 appreciated.
You bet. Thank you.
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 2017, the total Vogtle investment is $5.4 billion, including financing. Is that sort of a reasonable starting point in terms of a number to assume?
Yeah.
Okay. 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. The law provides for all prudently incurred costs.
Okay. 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 I guess it's the EPC plans. How does that affect your situation if you decide to continue with construction?
Yeah, man. That's exactly this filing that we've made with the bankruptcy court. Essentially, the DIP financing wanted to have essentially access to everything. However, the funds used in the DIP financing only apply to the so-called GoodCo, which is kind of the nuclear fuel processing business, their services business, O&M, decommissioning, and others, and don't flow to the benefit of our project. We don't believe they should have lien rights on the IP or anything to do with our project. Frankly, the creditors' committee agrees with our position. There will be a hearing on that on May the 10th, I think we're on pretty firm ground there.
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. It seems like an awfully logical position here.
Okay. All right. Thank you very much.
Yeah. 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 $4.1 billion, not $5.4 billion. The delta is the financing cost, and that's already under recovery. Just want to make sure everybody understands that. Math was right, $5.4, but the amount at risk for recovery under the abandonment scenario is $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, yeah.
Most of my questions have been answered, but just wanted to clarify on a couple of points. Coming back to Vogtle. 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 how much overrun, firstly, that could entail, given Southern's got to do it? Secondly, what does that actually mean operationally? Are you hiring all the people? What will that actually mean practically to complete that project by Southern itself?
Sure. Okay. Let's take it step by step. There's already been a tremendous amount of work that's been complete on the site. What you have to do is evaluate what is left. Okay. 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.
Of Vogtle, what's sort of the range of possible options and the range of types of support that we could potentially see?
Yeah. 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. It's certainly bigger than Vogtle and Summer. This is a national security issue. It follows on the heels of what, by all accounts, was a very successful visit with Abe and Trump.
Recall that, as a result of those successful meetings, I guess, the Prime Minister and the President instructed Deputy Prime Minister Aso, along with Vice President Pence, to set up essentially a commission, an effort to evaluate lengthening and strengthening the kind of infrastructure investment opportunities that we could collaborate on between our two great nations. There were three segments of activity. One of those segments was energy infrastructure. Some weeks following that, we have a bankruptcy in Westinghouse. I think this is something that has taken the attention of our elected officials. I would assess the support of the Trump administration and the relevant cabinet officers as A+. 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. We'll wait for
Yeah, thank you
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 allocating that risk of further overruns?
Right now, we have an agreement that was entered into in 2016 that essentially doesn't have a cost cap. Theoretically, one approach is that we could live with the prudence stipulation. That addresses return levels during construction. Following construction, presumably these amounts of capital will revert back to GPC O&M. 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, $3.7 billion that would offset those future payments. We would evaluate if that was sufficient or if there was anything in excess, even of the 3.7, in addition to the normal budgeted cost. We'll evaluate that in terms of schedule and potential cost within the construct of whatever our co-owners need and what we need via our regulatory regime at 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 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. Now, we have provided for, as we started to see Westinghouse get under duress, a transition plan even before Westinghouse has filed bankruptcy. We have a transition plan in place. The people are turned on, they're on-site. We won't have to go grab bodies if, in fact, that's the course we decide to take.
Yeah, I think it's important to add that we've got step-in rights to all the subcontracts. 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.
Gotcha. That's very helpful color. Just quickly on the $3.7 billion parent guarantee, there is no risk to it at this point, as I understand, the only risk being if Toshiba files for bankruptcy, you become just an unsecured creditor. Apart from that, there isn't any other risk. Is that correct?
Well, 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 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. 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 is some related to instrumentation and control that is currently under development. That's not a surprise to anybody. 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. You should know too, that there will always be along the way some opportunity to change the intellectual property as design changes are manifested on the site. You should know that this notion of transition is a critically important issue. It sounds like a detail. Getting all the clearances, getting the transfer of contracts, the transfer of personnel, et cetera, we want to be very clear about all that. We're taking a very rigorous approach to all these issues.
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.
Gotcha. That's really helpful color. You do expect to continue to update us as you have further color on these discussions, I'm assuming.
Absolutely. If there's material information, we'll put it out in an 8-K.
Great. Thank you so much, guys.
You bet. Thank you.
Our next question comes from the line of Ashar Khan with Verition. Please go ahead.
Hello, Ashar.
Hi, Tom. How are you doing?
Fantastic. I hope you're well.
Tom, what I can't understand is you guys, as you are spending on these projects as we are going through this analysis, right? You mentioned you're spending at a run rate of about $200 million or so a month. I guess by the time the decision takes place, it might be 8 or 9 months into the year, and that would imply another, I don't know whether the $200 was for the whole and your share is $100, but it could be another $1 billion 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? 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 billion that you make the decision. Am I missing something? To me, the chances of abandonment are really low. If they were a little bit higher, you should have slowed down the process and kind of thought of it, and that would kind of indicate the options are more there. Am I thinking through this wrongly?
Yeah. No, no, Ashar, you're raising good points. Let's just kind of walk through it a bit, though. As this next 30 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. Also, as we finish the resolution of these commercial contracts I just talked about. I think we'll kind of be in a position to say, "Yeah, 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 plans. I think at that point, you may take a totally different posture on site.
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.
Okay. Fair point.
Hey, the other thing is, recall some of these first amounts that we've been talking about were amounts that were already owed. Okay? This is really just fulfilling the contract as it exists. Yeah, 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. That's a decent conservative number, is 100%. Georgia's share of that would be 45.7.
Okay. That's what I thought. Okay.
Yeah.
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. Or afternoon, Tom. It's been a long day.
I got it.
The $2.7 billion, is that inclusive of the $920?
Yes.
Yes.
The $3.7 is for 100% of the project, both units?
That's right.
Right.
Okay. Switching gears, a big driver in the quarter was O&M. How much of that is sustainable?
Yeah, 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. You know, the third quarter of each year is our big quarter, and we'll determine how much O&M is spent between then and end of the year. We still believe that we can hit our targets and in light of the underrun on O&M in the first quarter.
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. 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&M. 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&M at the same time.
The permanent piece of the O&M, is that push you to one end of the 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 the third quarter. 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've heard you to. I said before in 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. 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, let's watch and see what the board does on the dividend.
Sure enough, they increased the growth rate in the dividend, as we thought they may, this April 2017. 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. 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, all. That was it.
Yes, sir.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead.
Hey, Steve.
Yeah. Hey, Tom. Good afternoon.
Good afternoon.
Just a couple technical questions on Vogtle. If it's going to take a month or two, you think, to decide, why was the interim assessment only moved to May 12th and not further? Why shorter-
Sure
than, let's say, what SCANA did?
Yeah. I think it is very clear we are 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. 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 is 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 are kind of keeping the commission staff apprised. I guess when we ultimately get your decision in a month or two, whatever it is, how should we think about how much they are on board with it already or not?
Yeah. Steve, you know us. We have been working collaboratively with the commission. I guess we had the original Vogtle decision back in 1992 with the last one there, then in 1995 we reached the agreement on these three-year accounting orders. Every three years we have put in place a series of interesting accounting orders. It seems like every three 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. Georgia has been a tremendous kind of example of how an integrated regulated system meets the needs of customers. We have the best reliability, prices significantly below national averages, the best customer service. It works. Our evaluation is we will be able to work constructively with the commission to handle these very challenging issues.
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 consensus around that approach. I would be surprised if we reach that and there were a lot of surprises on either side.
Okay. Last question, just on the nuclear PTC. Unless something happens quickly in Congress, we're probably not gonna have an extension of that prior to you making the decision. Should we just assume that your confidence level's high enough in that that you're gonna assume in your analysis that that is gonna get extended if needed for delayed dates?
Yeah. That's an important variable in all of this. I can tell you that the conversations we've had, and I'm just gonna 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 score it in Congress. We've experienced a tremendous amount of support. We could come up with a variety of ways to evidence that support. 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.
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. [D.C.] base rates. 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 cost. 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'll be in the 6%-8%. 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. 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. 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, Michael.
Hey, guys. Hey, Tom. Thank you for taking my questions.
You bet.
Turning to Mississippi. If I read the detail in your SEC filings correctly, you've got $25 million per month or so of costs, including the depreciation that are not in rates once the plant goes online. That doesn't necessarily include a return on capital of the plant, the PP&E that's not in rate base or that's not in customer rates. 25 million, 12 months, that's $300 million 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 Mississippi 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?
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, then we have, as provided by law, a rate mitigation plan. The notion of the rate mitigation plan is to Steve, you still there? I don't know what happened. 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 Agha with SunTrust. Please go ahead.
Hey, Ali, how are you?
Good. Thanks, Tom. Good afternoon.
Afternoon.
First question. I may have missed this, but if I were to bridge the gap in the first quarter 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?
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&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. Tom, on Kemper, do you see at all any scenario in which the plant ultimately just ends up being a CCGT?
I mean, the way you ask that question, sure. I mean, there's that possibility. That's going to be taken into account in the deliberations in the state of Mississippi. Recall the nine-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. Certainly, it remains a hedge. 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. 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. The conversation is kind of underway, and we don't want to ever get in front of that conversation. 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. A different topic. As you pointed out, electric sales, weather normalized, were negative 1% this quarter. In fact, if I'm right, I think that's the fourth consecutive quarter we've seen negative weather-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?
Yeah. Ali, we got a couple things going on, both commercial and industrial classes. We began to see a reduction in use per customer in the commercial class in the second quarter of last year, if you go back and look at our history. When you're looking at the first quarter year-over-year, that trend.
Essentially put in place revenue requirements that are similar to the revenue requirements associated with the original order. 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. That's really what we were pointing to when we started talking in the script about the settlement conversation as an acceptable outcome. Rest assured that we're working constructively, being very mindful of the total rate impact to Mississippi's customers and 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? 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. We don't want to, again, get ahead of the process and that we're going to be following through here as we approach any sort of settlement or as we approach the filing.
Okay. One or two for Art. These are just kind of housekeeping types. Southern Power recognized a pretty big tax benefit in the quarter, a little over-
Yeah
$50 million. 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 Investment Tax Credits, or-
I'm looking at the whole kit, cat and canoodle. 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 first quarter. One of them related to the manner in which we recognize PTCs. When we gave our estimate for the quarter, it was $0.57. 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. We recognized more income at Southern Power related to Production Tax Credits in the first quarter, but we merely accelerated them out of the second and third quarter, and you'll see that flip back around during the year. 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 baked into our guidance.
Okay. Your guidance, I'm just trying to think about how much renewable tax-related items is embedded within your full year guidance.
Okay. $53 million of one-time of those PTCs, ITCs, and $178 million of ongoing PTC.
I think it's interesting to point out that when you look at the one-time events as compared to 2016 and 2017, something like, what was it? Continues in 2017, but it wasn't in 2016. You still have the effect of that showing up. 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 first quarter of last year. 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%. Yeah, let me throw in the other stuff.
You probably heard this, Leap year, February of 2016 as compared to February 2017, that matters in the numbers. The other thing, 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, January was kind of a bad month. February was an awful month year-over-year in comparison. Holy smokes, March, especially the end of March, turned around. 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, nine of them were positive and one of them was reasonably flat. It's fascinating to me that we saw a big turn. The Fed saw that also for the nation. It's 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%. I think there is reason for us to hang with our annual projection of between 0% and 0.5% growth this year. Let's see what happens on the sustainability of that March performance.
Okay. 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?
Oh, sure, man. Absolutely. In fact, boy, I remember showing this to my board almost day one I got on and everything else. 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, then Paul Bowers took over when I went over to COO, where we were talking about really healthy EPS growth rates. That's where we were spending capital like crazy as compared to a rather modest net committed capital base. Our earnings per share growth rate was going off the charts. Then as we started winding down on a lot of environmental construction, as I took over, then as we saw the riskiness of Kemper and Vogtle at one time, our long-term growth rate got real flat.
I started saying that to you all, started saying that, well, it may flatten out through the last half of the decade.
Something like that were one-time events. 2016 and 2017, it's down to about, what, 17% or something?
Yeah, I think quarter over for the year between PTCs and ITCs, we'll end up with $16 million less in total year-over-year.
Got it. Last question.
What you're losing on ITCs, you're picking up on PTCs.
Right. It seems pretty flattish year-over-year. One last one, also a housekeeping one. At Southern Gas, if I, and I know you didn't own it in the first quarter 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?
Yeah. Hold on just a sec. It was pretty flattish. You look at four distinct segments. The gas distribution operations was pretty flat.
Mm-hmm. Yep.
Gas marketing services was down a little, maybe $9 million in net income. Midstream operations were bigger, mostly due to Southern Natural Gas being added. The other, there was some other mishmash, which was a couple of million. 13 million year-over-year increase.
That fell within what you expected even after you consider things like rate-based growth and O&M synergies, those type of items?
Everything's in. Yeah.
Got it.
It was amazing. It hit it exactly on the nose for the full year, what we expected. 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 appreciated.
You bet. Thank you.
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 $5.4 billion, including financing? Is that sort of a reasonable starting point in terms of a number to assume?
Yeah.
Okay. 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. The law provides for all prudently incurred costs.
Okay. 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?
Yeah, man. 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 2050. 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, there needs to be a new rethinking of natural gas infrastructure. 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 the Southern Natural Gas pipeline. Now we're adding to that a little bit. 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. Ali, if you think about it, we have added to our growth rate. As I suggested, we dropped down to, I forget where we were, 3%-4%. Then when we went to AGL, it became 4%-5%. Then when we added on the rest of Sonat plus everything else, plus Southern Power, man, we jumped all the way up to 5%. 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. We believe our 5% long-term growth rate is, in fact, resilient against a variety of outcomes. We're very happy with that, and I think, frankly, we've accomplished through those series of transactions and through the strategy we placed. 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 Michael Weinstein with Credit Suisse. Please go ahead.
Hey, Mike.
Hey, Tom. How you doing?
Awesome.
Thanks for taking the call.
Yeah. Thank you.
In the event of an 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 as anticipated?
Yeah. The notion of prudence presumes we build a plant. It's a fair question. We believe that the costs were prudent, it's a fair question. 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? I actually think we're in reasonably good shape. 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 $5.44 billion, you only get a debt return through construction. 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's possible. Recall, even under abandonment, what you would do is take the Toshiba guarantee against those amounts. Use that in your thinking.
Yeah. That's true. 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 schedule goes beyond 2021 and there is no extension?
That's conceivable also. We're dealing in the world of hypotheticals. 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'll get support to figure out a way to get it done. That's just my belief.
Just to follow up on Steve's question about those credits, is the $800 million 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.
It's part of that, right?
Yeah, remember, it's $400 for each, so it's
Yeah
three and unit four split.
Okay. Basically, everything is assuming that those credits are coming in.
Yeah.
Yeah.
Yeah, the only thing I would just add is that remember that the certificate assumes we only got 50% of those credits, and we think we're going to get 100 now.
Right. Okay. Thank you very much.
Yeah, man. Thank you.
Our next question comes from the line of Ken Fallin 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? 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. There are also provisions for everybody to make their independent assessment as to how to proceed, and if those assessments are different, what happens. In general, the way you should think about that is, we all generally agree on how to proceed. We've got a great working relationship. We've got a great working relationship with the co-ops and the municipalities in the city of Dalton. I think I would just say that 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. 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?
Yeah.
There are scenarios where they could be different. No, it would be a pro rata guarantee.
The individual owners would have the right to their percentage of the guarantee individually of all the other parties.
Yeah. 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 three seven 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.
Yep.
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 Vogtle update. You mentioned that you have seen some meaningful improvements in productivity. I was wondering if you could give us a little more color on what you've been able to achieve. Then also related to that, how do you incorporate assumptions around productivity into your assessment, both of the schedule length and cost?
Oh, you-
Obviously those would
Yeah, Dan
key inputs.
Oh, absolutely, man. In fact, it's a great question. What we've seen since the last call is a productivity improvement of around 20%, from 20% to about 30%. Use those as round numbers, we don't know whether they can be sustained or not. Productivity on the site since the last call has improved by that amount. Okay? We want to get that number up to more like 40%. 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. 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. A 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 GoodCo, which is kind of the nuclear fuel processing business, their services business, O&M, decommissioning, and others, and don't flow to the benefit of our project. We don't believe they should have lien rights on the IP or anything to do with our project. Frankly, the creditors' committee agrees with our position. There will be a hearing on that on May the 10th, I think we're on pretty firm ground there.
It would be up to the bankruptcy judge to decide how to resolve that?
That's right.
Okay.
It would be odd for the DIP financing to only apply to some of Westinghouse and not others, to give the benefit of all of the security potential to the DIP financing. It seems like an awfully logical position here.
Okay. All right. Thank you very much.
Yeah. Hey, let me just make sure that we clarify something.
Just.
Michael. It was Paul that raised the issue. In the scenario for abandonment, the only amount at risk for the abandonment charge is $4.1 billion, not $5.4 billion. The delta is the financing cost, and that's already under recovery. Just want to make sure everybody understands that. Math was right, $5.4, but the amount at risk for recovery under the abandonment scenario is $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.
Thank you. Hi, guys. How are you?
Go ahead, yeah.
Most of my questions have been answered, but just wanted to clarify on a couple of points. Coming back to Vogtle. If Westinghouse steps out, you don't find anybody who's willing to accept a fixed price contract, Southern steps in to complete the project? Is there any sense of how much overrun, firstly, that could entail, given Southern's got to do it? Secondly, what does that actually mean operationally? Are you hiring all the people? What does that actually mean practically to complete that project by Southern itself?
Sure. Okay. Let's take it step by step. There's already been a tremendous amount of work that's been complete on the site. What you have to do is evaluate what is left. Okay? 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. Could you give me a little more detail on what kind of improvements you've seen? Like, has it just been the amount of time it's taken to do things or the number of people it's taken to do things?
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. Then, just some on the details of the project. I know last time you mentioned that the steam generator installs were a key path item for unit 3, 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. I just wonder if you could give us some updates on the critical path.
Yeah. Dan this is Art. Those things are constantly in motion around what gets prioritized. The steam generators have been moved back a little bit, that doesn't mean that they were on the critical path to begin with. The critical path itself is in the nuclear island, just those have now been put on the horizon rather than in the near term. Doesn't mean that we're not staying on schedule and improving the productivity within the nuclear island itself.
How about on unit 4?
Unit 4 is maintaining. You still have some modules yet to be placed, CA02 and CA03. Those are smaller modules compared to, say, CA01, which is already in place.
Okay. Then in terms of equipment on site, what's the status of that?
Well, I think we've got 90+% of the equipment on site already.
I think all major equipment is on site. What you're really lacking now are commodities.
Okay. How about the shield panels? Are those pretty much on site?
Yeah. 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 gonna be much lower. 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.
Hey, Julien. Welcome.
Hey. Thank you very much, team. I appreciate it. 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-
We evaluate what's been spent. We evaluate what needs to be spent. Recall, we have the Toshiba guarantee, that would be, round numbers again, $3.7 billion that would offset those future payments. Then we would evaluate if that was sufficient or if there was anything in excess, even of the $3.7, in addition to the normal budgeted cost. And we'll evaluate that in terms of schedule and potential cost within the construct of whatever our co-owners need and what we need via our regulatory regime at 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 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. We have a transition plan in place. The people are turned on. They're on site. We won't have to go grab bodies if, in fact, that's the course we decide to take. I think it's important to add that we've got step-in rights to all the subcontracts. 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 $3.7 billion parent guarantee, 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?
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 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. 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 is some related to instrumentation and control that is currently under development. That's not a surprise to anybody. 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.
It's either Kemper or Vogtle. A second specific question on the Kemper side of things. 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?
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. Southern Power already has the ability, I think, to hit its number this year as per our plan, which I think we flagged $300-$330 last October. $315 is a working number, and they're going to hit that number unless the wheels fall off somehow. From 2018 to 2021, we've struck the agreement with RES and others. I think we've basically spoken for the CapEx that may show up there. 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 expanded the pace of investment there. 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 billions 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. What you should know is that even within our 5% long-term growth rate, we have stress-tested against negative outcomes. We're still confident in saying we believe our 5% growth rate long term is viable. 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. Yeah. Certainly would have been helpful, let's not kid ourselves, to have Kemper up and running before the filing of the rate case. You know the rate case will take some period of time, 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. Getting all the clearances, getting the transfer of contracts, the transfer of personnel, et cetera, we want to be very clear about all that. We're taking a very rigorous approach to all these issues.
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. You do expect to continue to update us as you have further color on these discussions, I'm assuming.
Oh, absolutely. If there's material information, we'll put it out in an 8-K.
Great. Thank you so much, guys.
You bet. Thank you.
Our next question comes from the line of Ashar Khan with Verition. Please go ahead.
Hello, Ashar.
Hi, Tom. How are you doing?
Fantastic. I hope you're well.
Tom, what I can't understand is, you guys, as you are spending on these projects, as we are going through this analysis, right? You mentioned you're spending at a run rate of about $200 million or so a month. I guess by the time the decision takes place, it might be eight or nine months into the year, and that would imply another, I don't know whether the $200 was for the whole and your share is $100, but it could be another $1 billion 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? 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 billion that you make the decision. Am I missing something? To me, the chances of abandonment are really low. If they were a little bit higher, then you should have slowed down the process and kind of thought of it, and that would kind of indicate the options are more there. Am I thinking through this wrongly?
Yeah. No, Ashar. You're raising good points. Let's just kind of walk through it a bit, though. As this next 30-60 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. 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, "Yeah, 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. That's kind of the first time we have to step up to some disclosed performance.
I think we've already disclosed that in 2018, our expected availability was around 30%-35%. That's a 2018 number. Okay?
Got it. All right. Excellent. Basically, bottom line, you could file the rate case nonetheless, or is this more about just shifting the rate case timing irrespective?
No.
Sorry.
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. If the asset's in service in January 1, 2018, then I think this is easy, that June 3rd is the deadline to get that done.
Okay. All right. Yeah, you'll just prove it up at some point during the pendency of the rate case.
That's it.
Excellent. Thank you all, gentlemen.
Yeah, 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.
Most of my question's 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 one. Number two, 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 article, which seemed kind of negative, if you follow me, in terms of Westinghouse.
Yeah, 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 constructive relationship, they're tough regulators, don't get us wrong, will remain in place. 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.
Okay, fair point.
Hey, the other thing is, recall some of these first amounts that we've been talking about were amounts that were already owed. Okay? This is really just fulfilling the contract as it exists. Yeah, 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%. Georgia's share of that would be $45.7.
Okay. That's what I thought. Okay.
Yep.
Okay. Thank you.
Thank you, sir.
Our next question comes from the line of Paul Richardson with KeyBank. Please go ahead.
Hey, Paul.
Good morning, Tom, or afternoon, Tom. It's been a long day.
I guess.
$3.7 billion, is that inclusive of the 920?
Yes.
Yes.
The 3.7 is for 100% of the project, both units?
That's right.
Right.
Okay, switching gears, a big driver in the quarter was O&M. How much of that is sustainable?
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 third quarter of each year is our big quarter, and we'll determine how much O&M is spent between then and end of the year. We still believe that we can hit our targets and in light of the underrun on O&M in the first quarter.
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. 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&M. 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&M at the same time.
With construction or not, all of that is integral into how we intend to proceed. 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 Kuczynski is one of the best nuclear people in America today. I hired him away from Exelon. Christopher Crane is just a great guy, the CEO of Exelon. I think he might be the best nuclear guy in America. Steve Kuczynski learned under his leadership, and Steve's 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 the 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, I'm not asking you necessarily to comment or to pile on them or anything like that. The reason why I ask the question is because you guys may end up taking over the project, and if you do, I guess the idea obviously would be what are you sort of taking over? Do you follow me?
Oh, that's the.
Yeah. I'm sorry, bud. Go ahead.
That's basically I think you understand what I'm saying. In other words, my concern is, one concern could be is that if you take this thing over, what exactly are you taking over? Do you follow what I'm saying?
Yeah. Are we taking over a bag of bones?
Yeah.
Yeah. No, thanks for the question. It's a very fair question. Look, just kind of to mention this, we've had about 400 people on active oversight here. 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. We have always had suggestions for improvement, and 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. From a commercial standpoint, we had to be reasonably careful about how intrusive we were.
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.
The permanent piece of the O&M, is that push you to one end of the 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 the third quarter. 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've heard you to. I said before in October 16, 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. 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.
Sure enough, they increased 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. 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, y'all. That was it.
Yes, sir.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead.
Hey, Steve.
Yeah, hi. Hey, Tom. Good afternoon.
Good afternoon.
Just a couple technical questions on Vogtle. If it's gonna take a month or two, you think, to decide, why was the interim assessment only moved to May 12th and not further, and why shorter-
Sure
than, let's say, what SCANA did?
Yeah. 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. 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 gonna go into this blindly. Steve Kuczynski 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 go, no go, sometime after Westinghouse rejects and within the 30-60-day 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 Julien. Nah, I think that's for me and Paul. You, Tom.
Maybe it seems like 100 years.
Julien's just a puppy. A smart puppy. Very smart puppy. I guess I just wanted to get back to a question that was asked earlier.
Yeah.
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 two other partners. It's Oglethorpe Power and MEAG Power, and I've kind of discussed this with some people internally your company. I'll be honest with you, well, 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 Power. Their ability to kind of absorb these incremental costs may become an issue. I just want to get your thoughts on that. Since 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 partners agreement, but I guess at some point Can they come after you in a legal aspect?
Kind of what happened, I think, years ago with Vogtle One and Two, not with these entities. Just your thoughts on that and how you're protected in the agreement from that actually occurring beyond you guys having a good relationship.
Yeah. Andy, thanks, bud. Don't forget about Dalton Utilities. They're in there. I forget what it is, a percent and a half or something like that. The city of Dalton Utilities is part of this also. Look, we have a terrific relationship with these guys. We have had. Remember, they're part of Vogtle One and Two. 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. Yeah, they're a different size. 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, they have their own ability to manage rates and make sure that they are viable. Here again, it's certainly a fair question. I think you should assume as a working assumption that they're going to be fine and that we'll work constructively with each other.
Just the legal aspect of it, too.
You know what?
No, go ahead.
That's kind of a technical issue. Here's the thing. If you want a briefing on the legal aspect of lawsuits among and between the co-owners, let's do that offline.
Sure.
I'll get a lawyer on the phone.
Okay. That's fair. Okay. Thank you.
Yes, sir. Thank you.
At this time, there are no further questions. Sir, are there any closing remarks?
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. Even of the 5%, you have things in there, or they're under long-term contract. 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.
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. 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, a company that's demonstrated year over year over year. Look at a chart of our dividends, of being able to deliver on behalf of its shareholders. We intend to continue to do that, 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 month or two, whatever it is, how should we think about how much they are on board with it already or not?
Yeah. Steve, you know us. We've been working collaboratively with the commission. I guess we had the original Vogtle decision back in 1992 with the last one there. Then in 1995, we reached the agreement on these three-year accounting orders. Every three years, we've put in place a series of interesting accounting orders. It seems like every 30 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. Georgia has been a tremendous example of how an integrated regulated system meets the needs of customers. We have the best reliability, prices significantly below national averages, the best customer service. It works. Our evaluation is we'll be able to work constructively with the commission to handle these very challenging issues.
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 consensus around that approach. I would be surprised if we reach that and there were a lot of surprises on either side.
Okay. 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 a decision. Should we just assume that your confidence level's high enough in that you're going to assume in your analysis that is going to get extended if needed for delayed dates?
Yes. That's an important variable in all of this, 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, frankly, the cost of extending this timeframe is almost nothing as they score it in Congress. We've experienced a tremendous amount of support. We could come up with a variety of ways to evidence that support, 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.
If we decide to go forward, it would be because we believe, 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. Steve, you still there? I don't know what happened. Yeah, 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 Agha with SunTrust. Please go ahead.
Hey, Ali. How are you?
Good. Thanks, Tom. Good afternoon.
Afternoon.
First question. Art, I may have missed this, but if I were to bridge the gap in the first quarter 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?
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 four really came by better O&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. Tom, on Kemper, do you see at all any scenario in which the plant ultimately just ends up being a CCGT?
The way you ask that question, sure, there's that possibility, but that's going to be taken into account in the deliberations in the state of Mississippi. Recall the nine-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. Certainly, it remains a hedge. 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. 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. The conversation is kind of underway, and we don't want to ever get in front of that conversation. 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. A different topic. As you pointed out, electric sales, weather normalized, were negative 1% this quarter. In fact, if I'm right, I think that's the fourth consecutive quarter we've seen negative weather 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?
Yeah. Ali, we got a couple things going on, both commercial and in industrial classes. We began to see a reduction in use per customer in the commercial class in the second quarter of last year, if you go back and look at our history. When you're looking at the first quarter year-over-year, that trend continues in 2017, but it wasn't in 2016. You still have the effect of that showing up. 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 first quarter of last year. 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%.
Yeah, 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, our numbers have been very consistent with what I'm seeing in my work at the Fed, I said this on Squawk Box this morning. January was kind of a bad month. February was an awful month year-over-year in comparison. Then holy smokes, March, especially the end of March, turned around. 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, nine of them were positive and one of them was reasonably flat. It's fascinating to me that we saw a big turn.
The Fed saw that also for the nation. It's 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% and 0.5% growth this year. Let's see what happens on the sustainability of that March performance.
Okay. Last question, Tom Fanning. 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?
Oh, sure, man. Absolutely. In fact, boy, I remember showing this to my board almost day one I got on and everything else. 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 when I went over to COO, where we were talking about really healthy EPS growth rates. That's where we were spending capital like crazy as compared to a rather modest net committed capital base. Our earnings per share growth rate was going off the charts. Then as we started winding down on a lot of environmental construction, as I took over, then as we saw the riskiness of Kemper and Vogtle at one time, our long-term growth rate got real flat.
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 2050. 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. There needs to be a new rethinking of natural gas infrastructure.
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 the Southern Natural Gas pipeline. Now we're adding to that a little bit. 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. Ali, if you think about it, we have added to our growth rate. As I suggested, we dropped down to, I forget where we were, 3%-4%. Then when we went to AGL, it became 4%-5%. Then when we added on the rest of Sonat plus everything else, plus Southern Power, man, we jumped all the way up to 5%. 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. We believe our 5% long-term growth rate is, in fact, resilient against a variety of outcomes. We're very happy with that. I think, frankly, we've accomplished through those series of transactions and through the strategy we've placed. 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 2020s. 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, senior with Credit Suisse. Please go ahead.
Hey, Mike.
Hey, Tom. How you doing?
Awesome.
Thanks for taking the call.
Yeah. Thank you.
Hey, in the event of abandonment for Vogtle, what's the possibility that prudence prior to 2016 through VCM number 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?
Yeah. The notion of prudence presumes we build a plant. It's a fair question. We believe that the costs were prudent, it's a fair question.
Yeah.
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? I actually think we're in reasonably good shape. 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 $5.44 billion, you only get a debt return through construction. 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 plant?
When you say, is it possible, I guess anything's possible. Recall, even under abandonment, what you would do is take the Toshiba guarantee against those amounts. Use that in your thinking.
Yeah. That's true. 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 schedule goes beyond 2021 and there is no extension?
That's conceivable also. 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 OMB scoring, that I think we'll get support to figure out a way to get it done. That's just my belief.
All right. Just to follow up on Steve's question about those credits. Is the $800 million 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.
It's part of that, right?
Yeah. Remember, it's 400 for each, so it's.
Yeah
unit three and unit four split.
Okay. Basically, everything is assuming that those credits are coming in and.
Yeah.
Yeah.
Yeah, the only thing I would just add is that remember that the certificate assumes we only got 50% of those credits, and we think we're going to get 100 now.
Right. Okay. Thank you very much.
Yeah, man. Thank you.
Our next question comes from the line of Ken Fallin 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? 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. There are also provisions for everybody to make their independent assessment as to how to proceed, and if those assessments are different, what happens. In general, the way you should think about that is we all generally agree on how to proceed. We've got a great working relationship. We've got a great working relationship with the co-ops and the munis in the city of Dalton. I think I would just say that 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. 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?
Yeah.
There are scenarios where they could be different. No, it would be a pro rata guarantee.
The individual owners would have the right to their percentage of the guarantee individual of all the other parties.
Yeah. 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.
That's helpful. Thank you very much.
Yep.
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 Vogtle update. You mentioned that you have seen some meaningful improvements in productivity. I was wondering if you could give us a little more color on what you've been able to achieve. Also related to that, how do you incorporate assumptions around productivity into your assessment, both of the schedule length and cost?
Oh, yeah.
Because obviously those would be-
Yeah, Dan
key inputs.
Oh, absolutely, man. In fact, it's a great question. What we've seen since the last call is a productivity improvement of around 20%, from 20% to about 30%. Use those as round numbers, we don't know whether they can be sustained or not. Productivity on the site since the last call has improved by that amount. Okay? We want to get that number up to more like 40%. 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. 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. 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 taking to do things, or the number of people it's taking to do things, or what are the kind of-
Yeah. 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. Just some on the details of the project. I just wonder, I know last time you mentioned that the steam generator installs were a 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. I just wonder if you could give us some updates on the critical path.
Yeah. Dan, it's Art. Those things are constantly in motion around what gets prioritized. The steam generators have been moved back a little bit, that doesn't mean that they were on the critical path to begin with. The critical path itself is in the nuclear island, just those have now been put on the horizon rather than in the near term, doesn't mean that we're not staying on schedule and improving the productivity within the nuclear island itself.
How about on unit 4?
Unit 4 is maintaining. You still have some modules yet to be placed, CA02 and CA03, those are smaller modules compared to, say, CA01, which is already in place.
Okay. In terms of equipment on site, what's the status of that and?
Well, I think we've got 90-plus % of the equipment on site already.
I think all major equipment is on site. What you're really lacking now are commodities.
Okay. How about the shield panels? Are those pretty much all on site?
Yeah, we're doing very well on the shield panels. I think on unit 3, we're at level or course 5 or 6. 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. 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.
Hey, Julien. Welcome.
Thank you very much, team. I appreciate it. 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? 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?
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. Southern Power already has the ability, I think, to hit its number this year as per our plan, which I think we flagged 300-330 last October. 315 is a working number, and they're going to hit that number unless the wheels fall off somehow. Then from 2018 to 2021, we've struck the agreement with RES and others, and I think we've basically spoken for the CapEx that may show up there. 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. 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 $billions 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. What you should know is that even within our 5% long-term growth rate, we have stress-tested against negative outcomes. We're still confident in saying we believe our 5% growth rate long term is viable. 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. Yeah. Certainly would've been helpful, let's not kid ourselves, to have Kemper up and running before the filing of the rate case. The rate case will take some period of time, 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, that's kind of the first time we have to step up to some disclosed performance. I think we've already disclosed that in 2018, our expected availability was around 30%-35%. That's a 2018 number. Okay?
Got it. All right, excellent. Basically, bottom line, you could file the rate case nonetheless, or is this more about just shifting the rate case timing irrespective and-
No.
Got it.
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. If the asset's in service in January 1, 2018, I think this is easy, that June 3rd is the deadline to get that done.
Okay. All right. Yeah, you'll just prove it up at some point during the pendency of the rate case.
That's it.
Excellent. Thank you, all gentlemen.
Yeah, 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 you doing?
Awesome.
Most of my question's been answered, 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 one. 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 article, which seemed kind of negative, if you follow me, in terms of Westinghouse.
Yeah. 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. That constructive relationship will remain in place. 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.
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 Kuczynski is one of the best nuclear people in America today. I hired him away from Exelon. Christopher Crane is just a great guy, the CEO of Exelon. I think he might be the best nuclear guy in America. Steve Kuczynski learned under his leadership, and Steve's 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 the 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, I'm not asking you necessarily to comment or to pile on them or anything like that. The reason why I ask the question is because you guys may end up taking over the project, and if you do, I guess the idea obviously would be, what are you sort of taking over? Do you follow me?
Oh, yeah. Yeah. I'm sorry, Bud, go ahead.
No, that's basically I think you understand what I'm saying. In other words, my concern is, what one's concern could be is that if you take this thing over, what exactly are you taking over? Do you follow what I'm saying?
Yeah. Are we taking over a bag of bones?
Yeah.
No, thanks for the question. It's a very fair question. Look, we have had, just to mention this, we've had about 400 people on active oversight here. 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, then Westinghouse and CBI, then Westinghouse by themselves. 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. From a commercial standpoint, we had to be reasonably careful about how intrusive we were.
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, 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 Kuczynski 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 go, no-go, sometime after Westinghouse rejects within the 30-60-day timeframe we've suggested.
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 Julien. Nah, I think that's for me and Paul. You, Tom.
Maybe it seems like 100 years.
Julien's just a puppy. A smart puppy. Very smart puppy. I guess I just wanted to get back to a question that was asked earlier.
Yeah.
I don't know if you can kind of answer it, but just how we should think about this, because you do have two other partners. It's Oglethorpe Power and MEAG Power. I've kind of discussed this with some people internally, your company. I'll be honest with you, well, I try always to be honest, but I guess that's my next concern is that they're much smaller companies than you, especially MEAG Power. Their ability to absorb these incremental costs may become an issue. I just want to get your thoughts on that. Then, since 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 partners' agreement, but I guess at some point, can they come after you in a legal aspect?
Kind of what happened, I think it happened years ago with Vogtle One and Two, not with these entities. Just your thoughts on that and how you're protected in the agreement from that actually occurring beyond you guys having a good relationship.
Andy, thanks, bud. Don't forget about Dalton. They're in there. I forget what it is, 1.5% or something like that. 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 One and Two. 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. Yeah, they're a different size. 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. They have their own ability to manage rates and make sure that they are viable. Here again, it's certainly a fair question. I think you should assume as a working assumption that they're going to be fine and that we'll work constructively with each other.
Just the legal aspect of it, too? I mean, I feel like.
You know what? Yeah.
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 and between the co-owners, let's do that offline.
Sure.
I'll get a lawyer on the phone.
Yeah. Okay. That's fair. Okay. Thank you.
Yes, sir. Thank you.
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. Even of the 5%, you have things in there or they're under long-term contract. 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.
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. 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 dividends, 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.