Good day. Southern Company's conference call will feature slides that are available on our investor relations website. You can access the slides at investor.southerncompany.com. Good morning. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded today, Monday, May 21st, 2018. I would now like to turn the conference call over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.
Thank you, Leila. Good morning, everyone, and thank you all for joining us on such short notice. Earlier today, Southern Company announced definitive agreements to sell several Florida assets to NextEra Energy. Joining me today to discuss the transaction are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Art Beattie, Chief Financial Officer. In just a moment, Tom and Art will provide an overview of the transaction, including our expected use of the sale proceeds. After closing remarks, we will take your questions. Before we get started, let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings, including the Form 8-K filed this morning to announce the transaction.
As a reminder, the slides we will discuss during today's call may be viewed on our investor relations website at investor.southerncompany.com. I'll now turn the call over to Tom Fanning.
Good morning, and thank you for joining us. We are pleased to announce a series of compelling transactions today. We've reached three separate agreements to sell Gulf Power Company, Florida City Gas, as well as our two Southern Power assets in Florida, Plant Oleander and our ownership interest in the Stanton Energy Center, for a combined $6.5 billion. Net of debt held at Gulf Power, this equates to an equity value of approximately $5.1 billion. These transactions are subject to customary closing conditions, including review under the Hart-Scott-Rodino Act, as well as authorization of the Federal Energy Regulatory Commission for Gulf Power Company and the two Southern Power assets. We expect the sales of Gulf Power and the two Southern Power assets to close by the first half of 2019.
The sale of Florida City Gas is expected to close in the third quarter of 2018. The sale of these assets is expected to drive substantial value for Southern Company shareholders. The valuations implied in these transactions compare very favorably with other regulated utility mergers and acquisitions and far exceed the value implied within Southern Company's current share price. The risk-adjusted value proposition of these collective sale agreements is compelling, as we have had the ability to proactively improve our credit profile while strengthening our projected EPS growth profile within our four to six long-term guidance. Additionally, reducing the execution risk of our equity financing plans, particularly in times of potentially rising interest rates, market volatility, and uncertainty, make the value created even greater. That said, these decisions were not taken lightly. Gulf Power has been part of the Southern Company family for more than 20, I mean, 90 years.
It is a terrific company with a track record of superior operations, great customer service, and a strong, dependable financial contribution. Similarly, Florida City Gas has been a valuable part of Southern Company Gas, formerly AGL Resources, since 2004 and has provided outstanding service to customers in South Florida since the mid-1940s. The value being received in these transactions is reflective of the decades-long achievements of our Florida teams, which have contributed significantly to the economies of South and Northwest Florida and improved the communities we are privileged to serve.
At the end of the day, much like our announced sales of Elizabethtown Gas in New Jersey and Elkton Gas in Maryland, these Florida businesses are being sold at a price that provides tremendous, undisputable value to our shareholders while helping ensure these exceptional franchises will be left in the hands of a high-quality utility company with a well-established presence in the state. NextEra Energy, including its Florida Power & Light subsidiary, has deep roots in Florida and is one of the very few companies with a reputation for customer service that compares to our own. I'll now turn it over to Art to provide a few more details.
Thanks, Tom, good morning, everyone. As we discussed on our past two earnings calls, we have a clear objective to improve our credit profile through debt reductions across Southern Company, primarily by increasing equity ratios at our state-regulated utilities. The constructive regulatory outcomes we have received thus far support our objective to simultaneously provide the benefits of lower tax rates to customers while preserving strong credit metrics. As a reminder, to fund the significant credit supportive debt reductions across our portfolio and fund our state-regulated utility growth capital, our forecasts include an equity need totaling $7 billion over the next five years. As a result of our federal tax net operating loss position and our tax credit carryforward position, much of the tax burden for these asset sales today will be offset, leaving only limited near-term tax obligations.
The after-tax proceeds will be used to reduce debt at both our state-regulated utilities and the parent company, including increased equity ratios at our state-regulated utilities. We expect to offset approximately $3 billion of new equity issuances originally contemplated in our plan. As mentioned on our last earnings call, we are now pursuing third-party tax equity for Southern Power's existing wind portfolio. The proceeds from this transaction, which we believe could close in the fourth quarter of 2018, would also be used to reduce debt, with $1 billion expected to offset new equity issuances contemplated in our original plan. After adjusting our financing plans for these combined proceeds, our plan now reflects a modest remaining equity need of $3 billion or an average of $600 million per year to further support our balance sheet improvement and fund growth at our state-regulated utilities.
This equity is expected to be issued over an extended period of time and is expected to come from the types of sources we have used in the past, which have included our internal equity plans and an at-the-market program. We believe our internal equity plans alone could provide approximately $500 million per year of equity funding. While our future financing activities are subject to market conditions and other factors, our current five-year financing plan does not assume any discrete equity offerings or block sales, as we expect that our internal equity plans, supplemented with other methods we have used in the past, such as an at-the-market program, could easily fund our remaining equity needs. As a result of these transactions, our financial outlook will be improved. Accelerating these sources of equity to the front end of our five-year plan more definitively improves our post-tax reform credit metrics.
As we have stated on our last two earnings calls, these investor-friendly sources of equity strengthen the profile of our EPS trajectory within our long-term 4%-6% EPS growth outlook. In fact, this collection of transactions would be $0.08-$0.10 accretive to the long-term EPS. By using these proceeds in a balanced and credit-supportive manner, we expect the EPS accretion to be closer to $0.04-$0.05 over the long term while adding cushion to our projected FFO to debt. On average, our use of proceeds should add 25 basis points to our FFO-to-debt projections. Finally, our business risk profile of primarily state-regulated utilities is preserved, as Gulf Power and Florida City Gas only represent approximately 5% of existing regulated utility earnings.
We expect the majority of these transaction proceeds, as well as future new equity issuance through our plans, to be reinvested in our other state-regulated utilities, where over 90% of our future earnings are expected to be generated. I will now turn the call back to Tom for his closing remarks.
Thanks, Art. These transactions represent an overwhelming value for Southern Company shareholders. That value is a clear testament to the outstanding track record of Gulf Power Company and Florida City Gas, as well as the total commitment and superior performance of the people who work at these great companies. As a separate update, we are in the final stages on the sale of a one-third equity interest in Southern Power's solar portfolio. Recall that the expected proceeds from this transaction were already accounted for in our financial outlook that we discussed in our 2017 fourth quarter earnings call. We currently expect this transaction to generate over $1 billion in pre-tax proceeds. We will provide further details when the transaction is complete. We firmly believe that value is a function of risk and return.
Whether it's the price we receive from the buyer of our Florida assets, the regulated utility-centric expected use of proceeds, preservation of our risk profile, and significant mitigation of equity issuance risk, or the elimination of remarketing risk for the wholesale generation assets, we believe these transactions are truly value accretive. Moreover, these transactions are representative of our ongoing commitment to continually balance our objectives of credit quality and regular, predictable, and sustainable earnings and dividend growth in an investor-friendly manner. Operator, we'll now take the first question
Thank you. Ladies and gentlemen, if you would like to register a question, please press the one 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 are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed with your question.
Hey, Jonathan.
Good morning, guys. Thanks for taking our call. On the slide, I think it's six, where you show transaction value drivers on the left and then these sort of 4 to 6 top-end assumptions. Can you give us a little more color of what you're saying there? You see a pathway to getting to the high end, and this is how you would get there. I think that's how to read that slide. Maybe just sort of some feeling of where you stand on some of those efforts.
Jonathan, this is Art. You're right. On the right side of that slide, we certainly mentioned the optimized investor-friendly sources of equity funding. The $0.04 to $0.05 is still within that 4%-6% range. Our other elements in that list you see there, we are continuing to work on business modernization initiatives throughout our core utilities. We will provide a further update as we move through this year. We continue to develop our focus on non-fuel O&M. That is all part of our modernization initiative to put new capital in place and replace it with lower non-fuel O&M. Of course, better than expected growth from our unregulated businesses. As you know, we have outlined a lower profile there of $500 million a year for Southern Power. That is all encompassed within our 4%-6% guidance range.
John, we feel really good about our prospects here right now. We could have, if we just keep the 16% FFO to debt calc as our target, we could have put $0.08 to $0.10 to earnings and obviously done even better. We felt, however, it was important to build a little bit of cushion into our credit metrics. You should think that 16% number is now more like 16.25.
Okay. What's the timing of the $0.04 to $0.05 and the debt pay down? How should we think about that relative to the receipt of proceeds?
It's certainly over time as we receive the proceeds. Certainly, some of this we project that Florida City Gas could be in 2018. Then the balance of this we expect in 2019, and that's a partial year. The full kind of hit would be in 2020.
Okay, great. Thanks. Just one other thing. Can you guys talk about when you net this all together and how this changes your go-forward tax position and when you would anticipate and at what level being a federal taxpayer?
Yeah. It used to be that before this transaction, kind of a 2027-looking number. Now we think that's more like 2024.
Okay. Any sense on what kind of rate that would be at?
It depends on a whole host of factors. Let me tell you one of them. We still have a tremendous amount of value in the remaining $500 million or so per year capital deployment at Southern Power. Those are largely associated with the residential wind deals that we've talked about before. Whether we use tax equity there or use the production tax credits ourselves, we'll see. The other issue really goes to the pace of the modernization improvements at each of our OpCos. It's just hard to say. It depends on some decisions that we'll evaluate tactically as we approach that timeframe.
Okay, great. Thanks very much, guys.
Thank you, sir.
Our next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead.
Hey, Greg.
Thanks. Good morning, guys. Good morning. Congratulations.
Thank you.
I have a couple questions. One is can you bridge us from your $6.475 billion in pre-tax proceeds here? It looks like $1.4 billion of debt's going with the assets. A little under $5.1 billion in equity value. You have a slide in the back of the deck where you talk about the taxes being paid on the totality of the asset sale proceeds that you're bringing in from Pivotal, Gulf Power, Florida City Gas, and other things. Can you just walk us through either what the tax leakage is specifically on this deal, or if you prefer to talk about it in its totality using slide eight as an anchor, how you're paying so little taxes on these assets? Do they have a high basis, or do you have sufficient NOL and AMT tax loss carryforwards to fully offset them?
If you could just humor me and walk us through in a little more detail how the tax position is shielding the proceeds, that would be helpful.
Yeah. What you're seeing there, Greg, is the $600 million. There's really a lot of that is state taxes. You're right on the federal side, we're deferring because of the ITC, PTC carryforwards a lot of the federal tax to later in the 2020s. What you're seeing there mostly is state taxes, and most of that will probably be in 2019. For the remaining.
Okay, sorry. Go ahead, guys.
No. The remaining is you add the $1 billion from the other transaction, $5.1 goes to $6.1, that's the balance that we talk about. Yep.
It's not just your existing NOL and AMT tax loss positions on the balance sheet at year-end, it's also the ongoing tax shield from the renewables business.
Yes. That's correct.
That's right.
Okay.
We weren't going to be a full taxpayer until 2027.
My second question is, then I have one more after that. It looks like you're only getting about $134, $135 per kilowatt for the two merchant contracted assets you're selling. Can you talk about how you got comfortable with that being a reasonable value for those?
Yeah, sure. You have to think about this transaction as a negotiated package. If you just look at the multiples across, we've laid out the per asset values here. Florida City Gas trades in this transaction at about a 30 times multiple, that's about a $92 per share equivalent, which is somewhere around 115% of our Friday close. Gulf Power goes off at about a 27 times multiple, which is about an $84 per share equivalent. Almost 100% premium to our Friday close, I guess it was 97. That does say that Oleander and Stanton were substantially less. It's very clear in the course of the negotiations that one of the things that mattered to us both was the nature of the uncovered capacity, particularly from the Oleander asset. We know that there was some limited coverage.
In our risk planning, you should almost think about Oleander and Stanton as risk trades as opposed to earnings trades. We felt that the best owner for those assets, given kind of the tough wholesale market in Florida, was NextEra rather than us. Having short coverage relative to our typical Southern Power asset, we were able to have our friends from NextEra take those assets rather than have us retain those assets and try and re-market them.
Got you. My last question, I think it's fairly straightforward, if you're talking about valuations that are an aggregate that big a premium to the value of the company, when you were looking at your long-term plan and getting comfortable that this kept you within the 4%-6% earnings growth trajectory, it's because that's such a lower cost of equity versus the other scenarios that you had modeled, which I presume assumed issuing common at this or lower prices, that you're basically the dilution from this sale was actually significantly less than some of the alternatives that were inside the bands of that plan, that's why you're comfortable. Is that a fair synopsis?
Yeah. If you look at the total package, you're thinking about raising this kind of capital, everything included. Southern Power at about almost $80 a share, $79 a share. That certainly is obviously better, historically better than the way we or anybody in the industry would be trading right now.
Great. Well, thank you, guys. I appreciate it.
You bet, Greg. Always good talking with you.
Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Please go ahead, sir.
Hello, Julien.
Hey, good morning. Congratulations.
Thank you.
Excellent. Hey, I just wanted to follow up on that last question a bit. Can you help us reconcile, I suppose NextEra is saying different things about the projected earnings. When you talk about that 27x projected multiple, for instance, what year's earnings are you talking about, just to be very clear? Also, can you just level with us in terms of what our earnings are in your expectations for these assets, and whether specifically that's trued up for the equity ratio? I know that that was one of the moving pieces here.
Yeah. Hey, Julien, I should have mentioned that when I gave those numbers. All those multiples are off 2019. Okay? When you look at earnings contributions, Gulf Power, let's see, 2018, we kind of expect around $156 million, $158 million. They're going to migrate up to about $164 million in 2019. Florida City Gas, somewhere in 2019 earnings around $13 million. Stanton and Oleander, it's at a high price, I mean a high earnings level now, $30 million, but as those contracts become uncovered, it goes way down. That would be kind of the early 2020s.
Got it. To be clear, the 2018, $156 million, $158 million, $164 million in 2019, that includes the uplift from the equity, right? The equity ratio?
It's $164 million in 2019. Yeah, it.
Right. Yeah, sorry. Excellent. All righty. Then just to come back to the financing piece, not to hammer this too much, just wanted to follow up on the standalone equity just to make sure we understood it. It's sort of at a high level, the point that you're making here is because you're selling assets, you're selling FFO, and that's hence the remaining equity you need here. Is there any other important moving pieces that we need to be aware of in terms of your CapEx or your targets? It sounds like you may have shifted, put it that target that you're establishing as well. I just want to tease apart that $1 billion a little more narrowly.
Julien, I think you got it.
Okay. It's basically the loss of FFO as well as a 25 basis points improvement in your FFO to debt.
Yeah. I mean, we're actually looking to create margin there. The target would be 16%, we're actually moving that even higher to 16 and a quarter. Just give us a little more financial flexibility.
Right. Hence explaining the higher equity relative, right? To that 25 basis points.
Yeah.
All right. Excellent. Thank you all. I'll leave it there.
Thank you.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead, sir.
Hey, Michael.
Hey, guys. Hey, Tom. Congrats on what looks like a great transaction at first blush.
Thank you.
I have an easy question for you, not as much related to this transaction, but related to transactions in general. How do you think about where Southern is in terms of the portfolio rationalization process? Do you think this is kind of the last step, meaning after the New Jersey asset sale, after these Florida, kind of the three buckets of the Florida asset sales? Are there other businesses that you could see being part of continued portfolio rationalization by Southern, whether that includes a sale or spin of Southern Power, given kind of where contracted assets trade in the market, whether that includes other smaller subsidiaries that you may own that may not be viewed as core within Southern? Just kind of curious how you're thinking strategically, how you and the Board are thinking strategically going forward.
Yeah. That's a really good question. There have been some people that have tried to think about Southern as core, non-core. It's pretty clear to me that, for example, Pivotal Home Solutions to us was non-core. That's really not who we are. That was a business that we got when we bought AGL Resources. That's kind of an easy way to think about it. When you think about the gas LDCs that we own and you think about the electric utilities, those are all core. I got to tell you, we did spend a lot of time thinking about the sale of Gulf Power. It's a wonderful company. In fact, if you think about it, I was CEO there. Ed Addison was CEO there. Paul Bowers at Georgia, spent a lot of time there. Stan Connally, one of our top guys, is current CEO there.
Mark Crosswhite, CEO of Alabama Power. There is a lot of DNA down at Gulf Power. So we had to really think that one through. When you look at the kind of shareholder value that we create by that transaction, again, compared to Friday's close, which may or may not be the right comparison, but a 27 times multiple on 2019 earnings, an $84 share equivalent, almost a 100% premium, you just about have to do that. That is irrespective of any equity need or any tax law change or any modernization effort. That is compelling shareholder value. We'll obviously consider anything in our portfolio that ultimately accretes to the notion of value as a function of risk and return. I think the Stanton and Oleander trades, like I said before, were a risk trade in part of that evaluation, not necessarily an earnings trade.
When you think about the rest of the stuff we have in our portfolio, we're still over 90% integrated regulated businesses. You noticed that we increased our dividends per share in April. Obviously, we have plans in place to do very well with our 4%-6% earnings range going forward. We've just made the dividend even better and our prospects for the future even brighter. Michael, we'll continue to look at opportunities. I think we've already talked about some tax-driven things. The sale of roughly a third of our solar assets. The sale, potentially, of an economic interest in our already executed wind deals, the production tax credits there. If there's anything else that makes sense, certainly we'll evaluate it, both on the buy and the sell side. I'll just go back.
I think we've demonstrated that we are as disciplined and value-seeking, whether we're buying assets, a la AGL Resources. Think about what a great deal that has been for us, way better than what we originally projected. Even selling assets. I think we all like to get bigger and stronger and all that, but boy, oh boy, I think this announcement today demonstrates the, as did Elizabethtown, demonstrates the other side of our thinking, that if we can improve shareholder prospects by value enhancing sales, we will certainly consider it.
Got it. Thank you, Tom. Much appreciated.
Thank you, my friend.
The next question comes from the line of Ali Agha with SunTrust. Please go ahead.
Hey, Ali.
Thank you. Hey, good morning, Tom.
Good morning.
I just wanted to clarify, make sure I was getting some of the points you were making earlier. One is, if I heard you right, from a timing perspective, you believe the $0.04-$0.05 accretion just from a timing of closing, et cetera, we should assume is 2020 onwards. Is that right?
Yeah. A partial year in 2019, and 2020 would be your first full year, just by the virtue of when we're going to close these deals.
Got it.
I guess the elimination of having to do blocks or anything like that.
Mm-hmm. Yeah, I got that. Florida City Gas, were you saying that you're assuming what, is it $13 million or $18 million of annual net income from that business?
About $13.
$13 million. Okay. I was just trying to reconcile the multiple. I think you said it was 30 times?
Yeah.
The pre-tax proceeds look much higher than 30 times 13. I just wanted to make sure I got that right. Then as you look forward, you talk about the 4%-6% growth rate. This obviously taking the equity out, selling for higher multiple helps you in that regards. Are you, again, because of the Vogtle math, you're really looking at, say, 2023 as kind of the benchmark outer year when you're thinking about the EPS CAGR? Is that the way to think about it?
Well, actually, we're improving the slope of our expected earnings. Now, we only think about guidance kind of twice in a year, right? Once when we initially offer it, which we did in February of this year, then we do it in October at the end of the third quarter to true up the year. I just don't want to be too cute about that. We're still in the 4%-6% range.
Got it. Lastly, I thought I heard you mention this as well, just clarifying the monetization of the one-third piece of the solar. What's the timing? I think you've mentioned, were you saying that's about $1 billion in proceeds for that as well, which is kind of baked into your original guidance? Just wanted to clarify what you had said on.
That's right. It's about $1 billion is what we expect. The reason we alluded to it is that we believe we are in a reasonably timely place in terms of completing that transaction. Normally, we don't like to allude too often to those types of things, but I would just say we're in the final stages.
Got it.
You'll hear about it when we do it.
I see. Thank you.
Yes, sir. Thank you.
The next question comes from the line of Praful Mehta with Citigroup. Please go ahead.
Thanks for joining.
Thanks so much. Hi, guys.
Hey.
Hi. Firstly, just wanted to understand, given the nature of the assets and the location, was this a competitive process from an auction perspective?
Well, it's interesting. These were essentially all Florida assets. What Southern did was look at an approach that dealt with a variety of assets. Ultimately, we concluded, and a lot of M&A work is done around who's the best owner of what asset at what price. We concluded that this package really suited a transaction with NextEra best. You must know that as part of our ongoing efforts, and those of you that have been around the block with us for years and years, it's called Project Dragon. The joke there is it's not Dragon, it's Drag On. We always look at what's the best mix of assets to support our shareholders. We had plenty of market evaluations, I'll leave it that way, in which we concluded this was by far. You look at the multiples, you look at the equivalent share prices and the premiums.
This was awfully compelling, especially when you look at history or anything in the current market today.
Gotcha. Thanks. Secondly, for the Florida power plants, I was looking in the 8-K, there was something about $110,000 per day kind of price adjustment and also some kind of revenue analysis which would require or potentially require you make an incremental payment to the buyer. Just wanted to understand a little bit about the terms of what you were describing around the power plants.
Here's what we'll do. We'll file all the documents around that one later, and certainly we'll follow up with you on those kinds of data points.
Okay. Fair enough. I guess on the Florida gas assets, it was conditional on Elizabethtown and Elkton. Why the condition?
Yeah, it's just kind of a funny little thing. When AGL originally bought those assets, they were all part of the same company, and I think this is a stock sale. Therefore, Elizabethtown and Elkton are kind of part of that, and we sell the balance of it to NextEra. We expect the Elizabethtown/Elkton deal to close prior to July 1st, I think. That's our expectation.
Got you. Thank you, guys.
Thank you.
At this time, there are no further questions. Sir, are there any closing remarks?
Yeah. Once again, thanks for your flexibility in joining us here this morning. This is a really important transaction for Southern. It eliminates, I think, the overhang on any of the equity needs we have. Everything else is really very manageable. When you think about the nature of the equity raise here, having equity associated with higher equity ratios at our operating companies is exceedingly positive for us, both from a shareholder and credit standpoint. Then the fact that I think we're being very thoughtful in how we use the contemplated $0.08-$0.10 of value we create here. I think using it to support our EPS growth as well as to give us a wee bit of cushion on our FFO to debt counts beyond even that we contemplated before really does help Southern's risk return profile.
Very big decision for us to do this, we think it was very compelling, especially given the multiples and the indicated share prices and therefore the premium. A good deal for everybody. We thank you for your attendance this morning. We'll talk to you soon.
Thank you, sir. Ladies and gentlemen, this does conclude the call. You may now disconnect.