Ladies and gentlemen, thank you for standing by. Good afternoon. My name is Savannah, and I will be your conference coordinator on today's call. At this time, I would like to welcome everyone to The Southern Company second quarter 2015 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the zero. As a reminder, this conference is being recorded Wednesday, July 29th, 2015. I would now like to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Thank you, Savannah. Welcome, everyone, to Southern Company's second quarter 2015 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Art Beattie, Chief Financial Officer. Let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, along with the slides for this conference call. The slides we will discuss on 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. Our traditional operating companies continued to operate superbly in the second quarter of 2015, making great progress towards our full-year objectives. Contributing to this performance is underlying strength in retail electricity sales. For the first time in a decade, we've experienced two consecutive quarters of growth in all 3 retail customer classes, residential, commercial, and industrial. In particular, we are encouraged by the developing strength of the residential sector, fueled in large part by healthy growth in the housing sector. Our wholesale subsidiary, Southern Power, also performed extremely well in the second quarter. Year-to-date results for Southern Power represent solid growth compared to 2014. We expect them to exceed their plan for 2015. The outlook for 2016 is promising.
As we suggested last quarter, Southern Power has now confirmed solar and wind projects to account for all of its placeholder capital in 2015. The project pipeline remains robust. We could potentially exceed our forecasted placeholders for both 2015 and 2016. We continue to leverage our full portfolio of generation resources to deliver low-cost electricity for customers. With our coal burn near record lows, our natural gas consumption is increasing. Our gas burn is expected to increase to an average of 1.8 BCF per day this year. This compares with our average gas burn of 1.5 BCF per day over the last three calendar years. We've also continued to grow renewable generation resources. Last week, the Georgia Public Service Commission approved Georgia Power's request to build a 46-megawatt solar project at the U.S. Marine Corps Logistics Base Albany.
With this approval, Georgia Power now has 166 megawatts of solar generation under development on military bases in Georgia, which speaks to a strong partnership with the United States Department of Defense. Georgia Power also launched its new solar sales and installation service on July 1st. Through a variety of solar programs, Georgia Power will add thousands of solar panels to the Georgia landscape for customers who desire that option. All of our traditional operating companies are now pursuing significant renewable generation projects, and Southern Power continues to grow its renewable portfolio. Based on the currently approved projects, The Southern Company system expects to own or purchase the output of more than 3,200 megawatts of renewable resources, including 46 solar facilities in seven states by the end of 2016.
I would now like to focus our discussion on the two major construction projects, both very important to our full portfolio of generating resources. Georgia Power's new nuclear project, Plant Vogtle Units 3 and 4, and Mississippi Power's 21st-century coal facility in Kemper County, Mississippi. First, an update on the Plant Vogtle Units 3 and 4. Construction is proceeding very well as the focus continues to be on quality and safety. We held our Southern Company Management Council meeting at the work site last week, where our senior management team was able to observe progress firsthand. For Unit 3, final preparations are underway to set the 1,000-ton CA01 module in the containment vessel, which is expected to occur in early August. Assembly of the CA03 module has begun, and concrete placements continue in preparation for the initial installations of shield building panels expected in the coming months.
The Unit 4 nuclear island continues to benefit from lessons learned on Unit 3. Three of the smaller structural modules were recently installed, and assembly of CA20 has begun in the module assembly building. Significant work has also occurred in areas outside the nuclear island, including work on the structural steel for the Unit 3 annex building. The annex building will be a critical component in the initial energization testing that is anticipated in 2016, a key milestone in preparation for the eventual testing and startup of Unit 3. Groundwork for the Unit 3 switch yard is also finished. There has been significant progress on other transmission infrastructure. The Unit 3 cooling tower is complete, and the Unit 4 cooling tower is now more than 100 feet tall.
Overall, we remain on target for the anticipated completion of Unit 3 in the second quarter of 2019, and Unit 4 in the second quarter of 2020. On the regulatory front, the Georgia Public Service Commission staff has recommended approval of costs submitted in the 12th Vogtle construction monitoring report, and we expect the commission to render a decision on August 18th. Let's turn to an update on the Kemper County IGCC project. Kemper startup is also progressing with first syngas production expected later this year. Operator training is well underway, and portions of the plant have been turned over to the operations team. Control system validation, an area of significant initial focus, is also on schedule to support these future milestones. Mississippi Power is continuing startup and checkout activity, and as expected with any project, is identifying and remediating issues along the way.
In some cases, equipment is being repaired by the original equipment manufacturer. While in other cases, the engineering and construction team is implementing solutions on-site. To a large extent, contingencies for cost and schedule have been sufficient to absorb these activities, and the focus remains on the expected in-service date in the first half of 2016. I'll move now to a discussion of regulatory matters. Based on the Mississippi Public Service Commission July 7th order, Mississippi Power has ceased billing customers for Kemper. As a result, Mississippi Power filed a rate proposal on July 10th for an 18% increase, primarily to recover costs associated with the project's combined cycle and transition investments, as well as Kemper-related regulatory assets. The combined cycle has been running since August of 2014 and performing exceptionally well.
In fact, over the last 11 months, Kemper's combined cycle operations have delivered more than 3 billion kilowatt hours of electricity and saved Mississippi Power customers more than $15 million, having displaced other higher-cost methods of generation. Year to date, this unit has experienced an equivalent forced outage rate, or EFOR, of approximately 1.25%, compared with an industry average EFOR of over 6% for natural gas combined cycles. As the commission is not expected to rule on any permanent rates for Kemper prior to November, Mississippi also petitioned the PSC to implement the 18% increase on an interim basis subject to refund. A hearing on the interim rates is scheduled for August 6th. At the same time, the PSC may also rule on Mississippi Power's proposed mirror CWIP refund plan, which was filed in response to the July 7 order.
I'll turn the call over now to Art for a financial and economic overview.
Thanks, Tom. As you can see from the materials we released this morning, we had solid results for the second quarter of 2015, reporting earnings of $629 million or $0.69 a share, compared with earnings of $611 million or $0.68 a share in the second quarter of 2014. For the six months ended June 30, 2015, earnings were $1.14 billion or $1.25 a share, compared with earnings of $962 million or $1.08 a share for the same period in 2014. Earnings for the three and six months ended June 30, 2015 include after-tax charges of $14 million and $20 million respectively, related to increased construction estimates for Mississippi Power's Kemper County Integrated Gasification Combined Cycle project. Earnings for the six month ended June 30, 2014 include after-tax charges of $235 million or $0.26 a share related to the Kemper County IGCC project.
Earnings for the three and six months ended June 30, 2015 also include a $4 million after-tax charge related to discontinued operations of Mirant and the March 2009 settlement agreement with MC Asset Recovery. Excluding these charges, Southern Company earned $647 million or $0.71 a share during the second quarter of 2015, compared with $611 million or $0.68 per share during the second quarter of 2014, an increase of $0.03 per share. For the first six months of 2015, excluding these charges, Southern Company earned $1.16 billion or $1.28 per share, compared with earnings of $1.20 billion or $1.34 a share for the same period in 2014, a decrease of $0.06 a share. Earnings for the second quarter of 2015 were positively influenced by retail revenue effects at Southern Company's traditional operating companies, warmer weather, and a stronger than expected performance from our Southern Power subsidiary.
Earnings were negatively influenced by increased non-fuel O&M expenses. Moving on to an economic and sales review for the second quarter. As Tom just mentioned, we experienced weather normal growth in all three customer classes, residential, commercial, and industrial, in consecutive quarters for the first time since 2004. We are particularly encouraged by growth in the residential class, which saw weather normal sales increase 1.2% in the second quarter, largely a result of customer growth. We've added nearly 22,000 new residential customers through June of this year, which compares to just over 13,000 customers added during the same period in 2014. An increase of nearly 60% over last year and our 2015 forecast. Residential growth is shifting from absorption of vacant properties to new construction, as 85% of our customer gains are from new connects.
While not yet back to pre-recession levels, new connects are 14% ahead of 2014, which further indicates a strengthening housing market and healthy migration into our service region. Between 2013 and 2014, Atlanta was ranked number 4 among U.S. cities with the highest net migration. Our commercial markets are continuing to show strength as well, with a second quarterly increase in weather-adjusted sales of 0.7%. This growth is supported by strong non-manufacturing employment growth. Atlanta experienced the second fastest rate of job growth of the 12 largest metro areas in the U.S., and its office vacancy rate is at the lowest level since 2008. Earlier this month, we reengaged with our economic roundtable, a group consisting of regional economists and executives from several of our largest customers that meets twice a year. The panelists expect GDP growth of approximately 2.5% for 2015.
They also noted an improvement in the national housing market, which further supports what we are experiencing with migration to our region as homeowners are better able to sell their existing homes and relocate to higher growth job markets. Finally, our earnings estimate for the third quarter is $1.16 per share. I'll turn the call back over to Tom for his closing remarks.
Thank you, Art. Here at the midpoint of 2015, we continue to see a franchise business that is operating at a high level, and we see important progress on major capital projects. We also see a strengthening economy and a region poised for continued growth. Finally, Southern Power is on track to exceed its original financial targets. In short, we believe Southern Company is well-positioned for continued success in 2015 and beyond, behind the strength of our 26,000 employees and their commitment to our customer-focused business model. We're now ready to take your questions. Operator, we'll now take the first question.
Thank you. Ladies and gentlemen, if you'd 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 Greg Gordon with Evercore ISI. Please proceed with your question.
Hello, Greg. How are you?
Good. Good afternoon, fellas.
Hey.
I know you guys usually only update guidance once a year at the beginning of the year. You made a comment that you're feeling pretty good about where the financial performance stands year to date. Are you prepared to comment about how we look inside the guidance range for 2015?
Yeah, no. Greg, we're going to keep doing what we've been doing for, gosh, I know this was ever since I was CFO. This is over 10 years ago now. We provide initial guidance in January, then we always update kind of in October. Once we get past the summer months, we'll just keep with that practice.
Fair enough. My second question was looking at the financing plan on page 12 of the slide deck. It actually looks like your total debt financing needs are slightly lower over the 2015 to 2017 time period. You still are not projecting the need any equity. Is that plan sort of formally updated for the SMEPA refund and what you hope to get in terms of a decision in Mississippi with regard to the refunds there?
Greg, this is Art. Yes, it does. We have adjusted some of the operating company's needs out of 2015 and reduced those. Then Southern Power has been a small bit of adjustment as well, offset by some increases in the holding company level. All in all.
Yes. When you say you've reduced the needs of the operating companies, does that mean that there's more cash flow than you expected there, or you've cut back on expected capital expenditures at the regulated businesses or does that mean there's just you're modulating down sort of the pace at Southern Power?
Yeah, it's a combination of all that plus if you look into 2016, we pushed some out of 2015 into 2016, but if you net them all, it's a slight bit of an increase. Not great.
Okay. Can you guys just explain again specifically what it is that you're hoping to get from the Mississippi Commission on August 6th?
Sure.
18% rate increase for one, and then what is the preferred plan for the customer refund?
The simple answer is that we have a plan in place that amounts to about an 18% increase permanently for assets and service, including some amortizations of some regulatory assets. That amounts to 18%. We won't be able to have those rates put into place by the commission until the process is complete, which we think now might be, who knows, November, something like that. The interim rates we would expect to be put into place on or around August 6th. That would permit us to basically keep the rate structures in place that have been in place minus the refunds. That's really the process. Number one, the interim rates equal to what we believe is the right kind of rates associated with assets and service. We think that'll be complete at the end of this year, November.
We will have the rest of the assets either ruled on by the end of the year, we don't know the answer to this, or conceivably pushed into 2016. That's associated with what we believe will be about a 10% looking number, 6% associated with the securitization bonds, 4% associated with the other assets. In terms of the refund plan, our preference is to have a default that would be a bill credit. The customers could elect to take a check. All that would be complete within 90 days.
Great. Thanks, guys.
You bet. Thank you.
Our next question comes from the line of Anthony Crowdell with Jefferies. Please proceed with your question.
Anthony, how are you?
Wonderful. Never been better.
Awesome.
Just two quick questions. Unfortunately, they're with the smallest part of your business on Mississippi. One is, I think previously you were thinking you'd get syngas entered into unit in July, and maybe that's been pushed back. If you could give some color on that. Second question is related to, I guess, the staff recommendations in Mississippi that were released last Friday. The staff had recommended some conditions, two of them of interest. One was that an equity infusion of like $200 million rather quickly, and also, the parent Southern Company guarantee investment grade credit at Mississippi Power through the duration of the project. I just wonder if you could maybe talk about those. Is that something the company's willing to entertain until they get full clarity on the entirety of the project?
Let me take the first one on syngas. Basically, there's three or four big pieces that we need to do. One is that we're working on the syngas cooler superheater, the ash silo, and the fluidization lines pressure testing. We're doing all those right now. Once we get those done, then we'll go through in-service pressure tests. We expect to complete all of that kind of by mid-August. That's the very near-term stuff. As well, there's something called a particulate control device that basically takes the foreign matter, the particulate matter, out of the flue gas. We will move into the fluidization process. The first thing we will do is actually run the gasifier. This is kind of a new step we've put in place. We just think it's prudent, though. We will use sand to emulate the lignite particle end shape.
We're going to run sand through the gasifier. Essentially the fluidization will be able to be demonstrated without the production of syngas. Putting that step in place pushes actual syngas production out of lignite into the fourth quarter. That's roughly the schedule. Four or five big things we're doing right now. We expect to be complete by mid-August. We start this simulated process with sand. Once we get that in place, then we'll do the lignite. These are all intentional, and we think it will serve us well as we continue to go through an orderly startup. Anthony, with respect to the second question, it really goes to the staff's recommendation. The Southern Company has stood behind everything we said we would do with respect to getting the plant built and started up, and that's what we're doing.
Right now, there has been a staff recommendation. It's better, I think, for us not to comment, particularly to any staff recommendation. Certainly, as any recommendation could relate to Southern Company. I think we believe that when you look at the issue at hand, that is rates for assets and service, and those service have produced great value to Mississippi's customers, and they have been performing exceedingly well compared to any measure, we think we'll be treated fairly. We expect constructive treatment out of the commission, not only for interim rates, but also for permanent rates related to those sets of assets. Okay? Is there anything else that you wanted me to cover about that?
I guess, do you expect the interim rates? I know there's a window when the commission has to, I guess, approve interim rates and also maybe permanent rates. Does that all get decided with the current commission, or does that get decided maybe in 2016 when you have two new faces on the commission?
We think that the 18% that we're seeking, both in interim and permanent, would be with this commission. There are two paths that could happen on the remaining 10% or so. Remember, 6% of those 10 relate to securitization bonds, which does not involve any ROE to Mississippi Power. The only remaining return elements to Mississippi Power is 4%. That could either happen this year based on a current filing or a new filing we might make, or it could be pushed into 2016. We'll just see where that goes. We believe that so far the plant, knock on wood, has been going great. Start has been going great. We've had some normal bumps in the road, but we've been able to handle them with the contingencies that we've had in place. We're very happy with the performance of the team on-site.
They're doing a heck of a job.
Great. Thanks for taking my question, Tom.
Thanks, Anthony. Good talking with you.
Our next question comes from the line of Steven Fleishman with Wolfe Research. Please proceed with your question.
Hey, Steve.
Hey, Tom. Thank you. Just one other thing. I know you just went through an extensive schedule on Kemper. I think when you commented on it, you said something to the effect of, you're to a large extent within the contingency for it. I just wanted to make sure I understood what messaging you were trying to say there.
Yeah, sure. Thanks for the clarification. What I meant by that was, remember when we took this reserve, whenever we last changed the schedule into the first half of 2016. We basically provided for, I want to say, about $30 million a month, and that included some contingency. As I said in the prepared remarks, that contingency is working, and it speaks to whatever kind of unforeseen changes we've had to make, any work, rework, those kinds of things. When I said largely, the only thing I'm referring to really isn't schedule. It goes to these little small things that we've been showing, like for example, a net increase this time of $14 million for the quarter. That's all we're referring to.
Okay. Then maybe just also in your comments at the end on happy with financial results and maybe, I think you said maybe meet or exceed expectations.
I said that on Southern Power.
That's on Southern Power?
Right.
Okay. Is that due to the higher investments in renewables?
Yeah. Just to review the bidding there, if you think about it, in 2014, remember, we had, I forget, placeholders for three years as we kind of typically do. In 2014, we started seeing so much success, we accelerated those placeholders into 2014. That produced better than expected results. Then remember when we set our financials this year, we said we are going to replicate 2014 and 2015. In other words, 2014 results for 2015, and we are going to add some stretch. I am telling you right now, I think we are going to beat our stretch targets for 2015 for Southern Power. We said this on the last call, but it just continues to be true and perhaps further, that the placeholders are getting filled up for 2016.
I am feeling very confident about our ability for the placeholders in 2016, and in fact, potentially cannot guarantee it, but potentially there could be upside to even our expectations for 2016. By October, we may be able to shed even a little more light on both of those 2015 and 2016 issues. Let us wait till the next earnings call where we will have a little more transparency. We are feeling very good about our progress in executing.
Okay. I guess my only question then on that is, what happens then in 2017 if we do not have an ITC anymore, or it gets smaller?
Sure.
Does that become a big headwind?
Not a headwind. It was the shape of earnings. I think this would largely be true for most folks, and that is, absent solar investment tax credits, which go from 30 to 10, you would generally expect to see a flattening out of earnings. We're telling you, we're seeing a really good picture. The franchise is doing great. Southern Power's doing great. You're going to see a trajectory in 2015 and 2016. All things being equal, if the solar credits go away, or at least go to 10, you'd see some flattening of progress, especially if people try to push stuff into 2016 to get it done. 2016 to 2017 could flatten out a little bit.
One of the things, though, that we're working on is ways to fill in what we're calling that divot, and that divot could be filled in with some wind projects. We announced earlier Kay Wind. There's some other things we're looking at. As you know, they have a different earnings profile associated with their production tax credit. It's a 10-year kind of deal. We're working on ways right now to improve what 2017 may look like, assuming you don't get an extension on the solar credits.
Okay. I'll leave it at that. Thank you very much.
Thank you.
Thank you.
Our next question comes from the line of Daniel Eggers with Credit Suisse. Please proceed with your question.
Hey. Good afternoon.
Hi, Dan.
Hey, Tom, can we just talk a little bit about EPA and the CPP, and I guess, A, whether you think the stories are right that it's going to come next week, and then what adjustments you guys think are going to make it into the final rule?
Yeah. Dan, it's anybody's guess at this point. When EPA pushed forward the preliminary rule and they got, gosh, over 4 million comments, I think they themselves realized that the proposed rule has some significant flaws. I think we've been working constructively with EPA to try and fix those flaws. There've been a number of important areas that we look forward to EPA addressing. For example, one that's been just widely discussed is the so-called cliff date of 2020. We would look for EPA to provide some flexibility. My sense is they're likely going to keep teeth in the 2030 requirement. We could see some flexibility on 2020. Who knows? EEI certainly has put forth a recommendation for that. Other issues could be related to current non-carbon emitting resources. It could be life extensions of nukes. It could be increases of capacity of nukes.
It could be our own Vogtle 3 and 4, which originally we didn't get credit for, that somehow EPA would recognize that that absolutely meets the intention of reducing carbon. Really, it goes to Kemper County and actually other things. There's a host of other issues, Dan, that could be considered. You hear about energy efficiency requirements. You hear about the original methodology that EPA took to determine the renewable capacity of certain states. For me to say where they're going to come out on those issues, again, would be pure conjecture.
Okay, got it. I guess next question, Tom, is just Toshiba is the economic backstop to CBI and Westinghouse on Vogtle. Given all their troubles they've incurred so far, A, is that having any effect on how Westinghouse is behaving on the project itself? B, what is your source of recourse if Toshiba has problems or if they sell down their interest in Westinghouse to make sure your protections stay in place?
Well, we have an awfully strong contract, number 1. Remember, our contract is very different in its makeup than what you see at the Summer project for SCANA. Our contract is typically viewed as a turnkey fixed price deal. Actually, we've improved it over the construction cycle that we've experienced so far. That's number 1. Number 2 is when you think about just the commercial incentives for CBI, for Westinghouse, and even Toshiba, the best thing they can do to improve their own financial integrity is to perform under the contract. That's important. Number 3, I know there's been some trade press about Toshiba's ability to execute, given that they've had some negative publicity. In 2013, Westinghouse took appropriate charges for many of these issues. Those issues are behind Westinghouse.
To the extent there is a double, a 2-notch downgrade at Toshiba's level, they would post an LOC. We think they have the ability to do that. The contract provides us protection. Incentives, even in the event of tremendous turmoil, would always direct them to perform under the contract. Finally, to the extent there are downgrades, the contract provides for Toshiba to post a letter of credit. We think they have the ability to do that.
Great. I guess one last question. Can you remind how you guys think about M&A from a corporate strategy perspective, how you prioritize that relative to other uses of capital?
Absolutely. Yeah. We've talked about this a lot. Nothing's changed. Essentially, we've talked about it in the past in terms of thinking about this kind of long-term trajectory we're on. As our CapEx program starts to wind down, I think this year we're $6.8 billion in CapEx, next year $5.5 billion, the year after that, $4 billion, $3 billion. I think those are the numbers, round numbers. When you think about that, the consequence is that EPS starts to slow, we've talked about that. We said there's a shape to that. In other words, EPS growth should resume once you get into the next decade. You reach capacity equilibrium in the region as well. There could be new CapEx associated with environmental law. As well, there could be new CapEx associated with 111D.
Kind of on its own, we think the curve resumes. In the interim, as we see CapEx winding down, we see cash flow growing immensely. What we said is, during this period of immense cash flow, certainly compared to our recent history, Southern actually looked a little over-equitized. We've said that on several earnings calls. What do we do about that? We've often talked about three options. The first simplest option is to buy back your own shares. The second option is kind of at the other end of the spectrum, is to buy somebody else's shares. We always said that would require a premium, and you would have to demonstrate a likelihood of recovery of the premium through increased value to shareholders. In the middle has been just buying assets. Frankly, we've been doing that.
If you look at kind of Southern Power's performance, we certainly have exceeded our own expectations on our ability to execute asset purchases, particularly in solar and wind. We've done that very successfully. Those are really the options I would cover.
Okay. Thank you.
Yep. Thank you.
Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please proceed with your question.
Stephen, how are you?
Hi, good afternoon. Very well, thank you. Thanks for your time.
You bet.
Most of my topics have been covered. I just wanted to hit on new nuclear briefly and check in on the Chinese project at Sanmen. Anything notable in terms of development there since the last quarter?
Not really. With respect of new nuclear at Georgia, what I said was we were going to call a timeout on pushing that one forward until we got this dispute resolved from a commercial standpoint. Recall what we've said in the past is the dispute isn't so much with us anymore, it's kind of among and between the contractors. We look forward for them to kind of constructively resolve their own issues, and then I think we can deal with them in a constructive way. Let's see how that goes. With respect to Sanmen, I think the most important thing there is there's been a lot of conversation about this reactor coolant pump issue. That's not a critical path issue for us, and it looks as if they have made a successful resolution on some of the design issues. That will accrete to our benefit.
It's going fine.
Great. Thank you very much. That's all I have.
Thank you, sir.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.
How are you doing, Michael?
I'm all right, Tom. Congrats on a good first half of the year.
Thank you, sir.
When you think about Southern Power, how do you think about the maximum? Meaning, how big would you want Southern Power to be relative to the overall, and whether that impacts how you think about whether under different umbrellas, Southern Power might have even greater growth opportunities if there is such a cap?
Yeah. Hey, that's a great question. That's something we actually talk about. Yeah. Right now, they're about 8% of Southern. You probably remember from prior discussions, but just to review for everybody's benefit, the way we structure Southern Power is to essentially replicate the kind of credit profile, risk profile that we have at Southern. That is, as apart from any merchant investment, long-term bilateral contract, durations of 14 years or so, creditworthy counterparties. We don't take fuel risk. We don't take transmission risk. It kind of has the feel from a portfolio risk standpoint, as does the rest of our franchise business. Now, the question you raise is a very interesting one, and that is how high is too high? Or is our appetite?
I think you could easily kind of double Southern Power relative to the rest of Southern Company, and still, I think, stay within our appetite, that would be pushing it. Somewhere in the 15% of net income range. There again, we'd have to see what the nature of those investments are, our tax appetites, all that stuff. We'd have to review that. That's what I would roughly say. Relative to where we are now, we could still double it and remain within our appetite.
Somebody asked a question earlier about the EPA, wanted to ask you, obviously there's a lot of wood to chop when it comes to the upcoming carbon rules, state implementation plan designs, et cetera. How are you thinking about what the impact of other potential rules that haven't been finalized are, say maybe ozone?
Yeah.
What that means both for the CapEx profile and for the cost to customers and the timeline for implementation, and whether it's ozone or some other rule that I'm not thinking of.
Listen, it's an excellent thought because one of the problems that let me start out with, I've been very public on this one. The body that has the same kind of lens we do, that is to balance the important objectives for our customers of clean, safe, reliable, and affordable energy, is Congress. I think with all the best of intentions, EPA doesn't have the ability to assess. I think they get clean, but they don't have the ability to assess in a balanced way, safe, reliable, and affordable. It's not what they do. When we think about long-term implications of a regulator like EPA putting out piecemeal pieces of regulation, it is an important fact to note that the so-called pancaking of these various regulations are not particularly well-coordinated in balancing the overall energy portfolio of the United States.
That's why I've always said we need a consistent national energy policy. I think we've got great leadership there. Fred Upton in the House, Lisa Murkowski in the Senate. These are terrific leaders of the United States, and I think they've got all of our best interests at heart in balancing these important issues. The other issue that's just interesting to think about along these lines, I would've gone to the HAPS/MACT, now MATS issue. The remand to the D.C. Circuit Court, and depending on what they do, they could send it back to EPA for clarification on how did they take cost into account. The practical matter is, as this industry complied in good faith to that kind of far-reaching regulation, we've already spent billions of dollars. We've started closing plants. We've eliminated jobs and tax base. We've done all sorts of things.
The regulation remains in place, even though it's being revisited. It's important, I think, to learn as a lesson that whenever you evaluate the far-reaching implications of some of these regulations, we need to get all this right out of the gate as opposed to after the fact. That would be my big lessons learned. One is thinking about the pancake effect. We got to think about it in an integrated way. Number two, we've got to get all those clean, safe, reliable, affordable factors considered before we implement. Three, I'd love to see national energy policy enacted by Congress.
Got it. Thank you, Tom. Much appreciated.
Thank you, sir.
Our next question comes from the line of Carrie Saint Louis with Fidelity. Please proceed with your question.
Hey, Carrie.
Hi. How are you?
Super. How are you?
I'm doing fine. I just wanted to touch base a little bit more on the capital raising and Mississippi Power. Looking at the slides, it looks like you guys have put some bank debt in at Mississippi Power?
Yeah, that was true, Carrie. This is Art. Back in the spring.
About $900 million. Yeah.
What was the decision behind that?
Well, again, it was renewing some bank loans that were already outstanding, and we added a little bit to it at the same time.
Okay.
Again, these are to serve as a bridge until we get some clarity on regulatory issues or to the point where we can issue securitization bonds and take that debt out.
Okay. Is it like a general term loans? Are you deciding that you're not going to issue in the public market at Mississippi Power until there's a little bit more regulatory clarity? Just what was the decision to use that type of funding versus public market issuance?
Yeah. That's absolutely true.
Okay.
With so much on the clarity side.
Right
That's a problem.
Okay.
We're trying to do it as best we can. Again, the banks are worried about security as well. It's not just the public markets. I think just from a structural standpoint too, if we believe that securitization bonds are in the near-term future, bank debt to bridge to that is an efficient way to finance. Yeah.
Okay. Just two other quick questions. On the Southern Company, the $1 billion of issuance this year. Why are you issuing so much up at the parent this year versus prior years? It seems like a lot of issuance. I think it's $1.6 billion overall.
Yeah. These are remaining amounts and a lot of that is to cover the cash needs at all of our Southern subs for the capital that we might be providing to them. It also covers some of the Mississippi Power needs related to refund, and it will be provided in the form of a intercompany loan.
Okay. Turning to equity. There still looks like there's no contemplation of increased equity issuance at the company?
That is our current plan. We continue to manage our portfolio over the long term. Things change.
Southern Power, if they keep executing on their plan to the upper limit, there could be additional needs in that regard. It depends on where we are with cash and where we see the future CapEx going for the entire business.
Yeah. Carrie, let me just jump in on this one. If you look at our CapEx plan going into 2017, you see this drop from $6.8 to $4.3. We're throwing off cash. It would be kind of silly for us to issue equity and then in turn repurchase it 2 years later.
Yeah. I guess just the concern I have is that S&P put the whole complex, Southern and all opcos, on review for downgrade. I guess that was done during this last quarter. I guess, and I don't want to read anything into it, but I would've thought that maybe you would like to maintain your ratings there. I guess your comment is that you're not looking to issue equity to defend current credit rating. Is that a fair comment, or how should I think about that? I would've thought maybe you'd use a little bit more discretion about future equity, but it seems like you're saying not necessary.
Well, we got to run this business for the long term, and I think the S&P move was all about Mississippi, to be honest with you.
I'm assuming that we're going to get fair treatment with the interim rates and then the permanent rates.
Right.
I think we just need clarity around that process.
If somehow in Mississippi things don't go as expected with the outcome for interim rate relief, is there a view that you would be open to considering issuing equity? Or are you saying that that's just not in the plans regardless?
Well, look, we're open to anything, to be honest with you. We expect fair treatment, and I think we have a compelling case for fair treatment. I don't expect anything other than that.
Okay.
So.
Well, I appreciate that. I think an openness to equity is always constructive. Thank you.
You bet. Thank you.
Our next question comes from the line of Paul Ridzon with KeyBank. Please proceed with your question.
Hey, Paul.
Hey, Tom. How are you?
Awesome. How are you?
I'm okay. Quick question. You said you thought that at this point the Vogtle dispute was among the consortium. What residual risk do you see Georgia Power still wearing here?
I think Georgia Power has demonstrated that they are very well protected via their contract. Residual risk to me, I suppose there's some theoretical risk there. As a practical matter, when you think about even with the schedule changes, even with the increases in cost associated with those schedule changes, we believe that the majority of the cost, the big majority of the cost associated with that is being borne by the contractors. That's being demonstrated over and over again. In fact, when you think about the fact that when Georgia had this plant certified, everyone thought that the cost was going to be a 12% price increase to Georgia Power's customers. Because the benefits have overwhelmed the increases in cost, we think now that estimate, frankly, Paul, has actually improved this quarter, as you see in the VCM 12 filing.
Now we think we're in the bottom of the 6%-8% range. Largely, this recent improvement is because we're financing at a much better rate than what even we thought when we got the federal loan guarantees. Remaining kind of risk, I think we've disclosed in prior quarters, one of the features of the contract is called a financial integrity payment. It basically provides that as the contractors perform their obligations, if they use up all of their profit, then they spend another $250 million above their profit, I guess it's above their cost, then we would share a $250 million segment, of which our share of that would be about $114 million. Everything above that would be for the account of the contractors guaranteed by Toshiba. That's been a part of the contract since day one.
That's probably it, in my view, other than certain owners' costs and everything else. That's about it. I think we're in terrific shape on the contract.
Thanks for that. Then, just back to Southern Power and how big it could be. Do you think that Southern Power should be valued any differently than the utility?
Man, haven't we thought about that over the years? I know you've, over the years, thought about it. I've thought about it too. Remember at one time, all the infrastructure guys were buying up all these bilateral contracted entities, and they had tremendous value. We actually thought about that. Please understand from my background as a CFO, I know Art feels this way. We're always after shareholder interest. So, theoretically, you're always a buyer and a seller at a certain price. We're always there to do what's best for shareholders. If there's a better owner, we'll take advantage of it. The other thing, though, it's not just a dollars and cents business. There's real blood and guts and relationships in this stuff.
When you think about the relationship that Southern Power has been able to strike in the marketplace I think this is really important because it goes to the center of our business model. Customers are in the middle of everything we do, reliability, price, and service. One of the most loyal customer groups that Southern Power has are co-ops and municipals. They absolutely have a long-term view on these kinds of assets and what service may be provided for their customers. I'm not sure, we'd have to think very hard about ever selling those kinds of relationships away from the franchise. That's other considerations we'd have to take into account.
Thank you. Sorry to switch subjects. Over in Mississippi, you said you expect a fair outcome. I assume that you would not consider the staff rec to be a fair outcome?
Yeah, I just don't even want to comment on the staff rec.
Okay. Understood. Thank you very much.
Thank you. Appreciate you being on. Are there any other questions?
Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed with your question.
Hey, Julien.
Thank you. Hey, good afternoon.
Afternoon to you.
I wanted to go back a little bit to some of these balance sheet questions first. In terms of talking about future equitization, you talked pretty bullishly about your balance sheet, but obviously you've got the pressures from the credit rating agencies kind of in a more immediate sense. How do you think about that contingency level that you guys obviously baked in earlier, especially relative to some of the pressures that you alluded to before with Carrie? If you can quantify it perhaps, is really what I'm getting at.
It's kind of difficult to do that when you've got issues like Southern Power trying to execute on plans and you don't really have a good idea. What we're thinking about from a rating agency perspective is basically getting to a point where we can reduce the business risk. Excuse me, increase financial risk because business risk will be reduced as we move out of these construction programs.
Let me say it a different way. Value is a function of risk and return. I think the heart of your question gets into a bunch of kind of current unknowables. What's going to happen with bonus depreciation and therefore cash flow? What's going to be the success rate of Southern Power? What's going to be our appetite to do things like gas infrastructure? There's a host of things that we just can't get our arms around. What I can tell you is, as internal risk starts to wind down, that is, we get more resolution on Kemper. That is, we get more wind down of construction programs and therefore financing pressure. It's clear to me that as internal risk subsides, cash flow improves, that we can probably think differently about our capital structure.
That's why we've said for some time now that in fact we may believe in the future we may be over-equitized a bit. I can't put a number on it, but these are things that we talk about daily.
Right. Perhaps just to come back to it a little bit, you've alluded to scaling up the relative size of Southern Power within the Southern family here. How do you think about potentially monetizing these assets? Obviously, given the ITC recognition and the subsequent earnings in future years, and obviously your co-ownership with certain yieldcos. Do you think about potentially sort of recycling the capital rather than necessarily scaling up the business per se? Particularly if you're going to hit limits that max, you say 15% or what have you. In the context of Southern Power.
Think about the kind of CapEx that would be associated with doubling Southern Power right now. That is a big number. Okay? I think the chances, and if you think about how big Southern is, and you think that Southern continues to grow, if you think about what's going to be required to double Southern Power, that is a big number. Number one, boy, that's an outside bet. Number two, I've been pretty consistent in saying if there's a better owner, we'd certainly take advantage of it. We'd always do that. Taking into account historical relationships, long-term partnerships, all those sorts of things.
It's a great option to have.
Yeah. Heck yeah.
All right. Maybe let me just ask it more bluntly. To what extent would you pursue that as a first option rather than issuing equity in any kind of near-term sense to address balance sheet concerns?
If I'm a better owner of the asset and I have investment opportunities to issue equity, I would certainly issue the equity and make the investments that I need to make. I don't think about issuing equity in and of itself as being a bad thing. Number 1, I'm over-equitized, so I've got some margin there. Number 2, if I'm above my kind of EVA threshold, then I issue equity and create value. I don't look at issuing equity as a bad thing. If I'm issuing equity, it must mean that all other things being equal, I've got darn good value-enhancing investments to make.
That's very fair. Let me come back to something you alluded to in your comments previously here on gas infrastructure. Where do you stand on those opportunities? You've kind of suggested there could be updates coming, but where do we stand today?
Yeah. A lot of activity. I'm not prepared to give you an update today only because I got a lot of irons in the fire, and I got to see how those things resolve themselves.
All right. Well, with that, best of luck with those irons.
Thank you, sir. We appreciate it.
Our next question comes from the line of Ali Agha with SunTrust. Please proceed with your question.
Ali, how are you?
Tom, doing well. Good afternoon.
Good afternoon to you.
First question, Tom. As you mentioned, your weather-normalized sales through the first half are up 0.8%. As I recall, your full-year target was 1.3%. Is that still the target, given where we've been through the first half?
Yeah, Ali. This is Art. It still is. We don't adjust our targets that we put into our initial plans. Again, the momentum that we're seeing is beginning to approach what we've set out. We're certainly not there, but it was kind of forecast that way as well.
The signals we're seeing are really bullish. If you look at the national statistics, I'm sure the things the Fed is dealing with right now, we're seeing the same stuff they are. This residential move we've seen has been really bullish for us. We're not far away from where we were pre-recession on migration into our area and increase in customers. We're probably, I don't know, we think are about 70%-80% of the way there.
More like 60%.
Well, what are we expecting for the year? 44,000 customers?
Yeah.
In those days, we were 55,000 to 60,000.
Right.
Okay. whatever percentage that is.
Okay. secondly, perhaps to you, Art, again. As you look at your O&M ramp, again, through the first half, I know you had talked about having some catch up to do. Are we where you thought we should be on the O&M front? Can you just remind us how we should think about that O&M this year and then going forward?
Yeah. We're exactly what you said. We're right on target. Even though year-over-year it looks like we're spending more money, and it is, a lot of that is driven by a couple of things. We've had more outages at our larger operating companies this year, last year as comparison.
Planned outages.
Planned outages to the tune of maybe $0.03 year-over-year. There is some regulatory deferrals in Alabama in 2014 that you don't have in 2015, and that's about another $0.03. For other changes that we're seeing, it's about another $0.06. We're right in target. That deferral I mentioned at Alabama will reverse itself at year-end. When you get to year-end, we should be right on target with what we talked about, a 3%-3.5% growth in non-fuel O&M.
That's the run rate we'll think about going forward as well?
That's correct.
Yeah. Lastly, Tom, just clarifying the Vogtle dispute with the contractors from your perspective. I know in the past you've alluded to the fact that, if the other side is willing, there may be a settlement to be had where you give up some, they give up some, and you move forward. Is that still an option, or am I hearing that things are now going in a different direction, that they themselves are not sure where to go or is that still something we should keep an eye on?
I think it's something to keep an eye on. Look, we're always looking for a successful resolution. Failing a settlement, we're going to end up in court in Augusta, Georgia, to litigate around the commercial dispute. I think once the contractors resolve their own differences, we'll be in a position to address in a constructive way how to settle this thing. I'm an optimist, but I think it's reasonable optimism. I think we have a basis to go forward. They got to resolve their own differences first.
Got it. Thank you.
You bet. Thank you.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.
Good afternoon, guys.
Hey, Paul.
I have a really sort of quick question, I guess. Now that you guys are further along in the project and what have you, what do you guys estimate the cost of turning the lignite into gases on just an operational basis?
Okay. When I answer that one, Paul, I generally think about it as a net energy price equivalent to gas to Mississippi's customers.
Okay. MMBtu, you mean?
Yeah. Let me give it to you on what it used to be, and we'll project, we'll give an estimate on what it is now. Recall that our ability to stand behind our construction overruns has preserved largely the capital cost economics to Mississippi's customers. When I think about the relative lack of volatility of lignite fuel supply into the plant, we control all that fuel, there's almost no volatility relative to natural gas. Now, remember, the net cost is really net of also sales of byproducts, which includes sulfuric acid, ammonia, and CO2. The biggest issue there is CO2. At $100 a barrel, this obviously isn't the case today. At $100 a barrel, remember, the CO2 revenues are indexed to oil. The net energy price was equivalent to about $1.25 per million BTU, somewhere in that range.
Now, with oil prices being down, the net energy price would be up. Let's say it's, I don't know, call it $2.50. If $100 and call oil $50, and I'm being kind of broad brush here, but say it's $2.50 per million BTU, somewhere in there. My sense is gas today is what? $2.82, somewhere in there is the last I saw. You're still going to compete favorably with natural gas with this plant. It'll be, by all reasonable estimates, a base load facility. For those economics, recall it has almost no volatility.
Okay. Let me just understand this. What you're saying is with the CO2 being used to extract oil, is that what you mean?
That's right.
Okay.
Remember, we sell it under contract to Tellus and Denbury.
Okay.
We get paid revenue for what would otherwise be a waste stream.
Okay. Because it's indexed to oil.
Correct.
As a result, obviously, those numbers have changed. Even with them changing, on an operational basis, you guys see all in, all the reagents, all the energy you have to put into it, et cetera, the extraction is basically approximately 250, give or take. Is that right?
That was a broad estimate. Okay?
Okay.
I don't have in the top of my head what ammonia is worth, what sulfuric acid is worth. It assumes a heat rate, it assumes a variety of things. That would be, as I sit here right now, that would be a reasonable estimate.
You see this as dispatching pretty much.
Yes
once it's up and running. We're not going to have a situation where you're just going to be running natural gas through the CCGT because it's more economic.
I wouldn't think so, no.
Okay. That's it. You've answered all my other questions.
Thank you, sir.
Thanks a lot. Have a good one.
Thank you. You too. Appreciate you being on.
Our final question comes from the line of Dan Jenkins with State of Wisconsin Investment Board. Please proceed with your question.
Hey, Dan.
Hi, good afternoon.
How you doing, bud?
Pretty good. I have a couple related to the economy. You mentioned how you're seeing a rebound or a pickup in the residential and commercial areas, but I noticed that the industrial seemed it was a little slower than what we've seen the last few months. I'm wondering if you have any more color on that.
Yeah, sure. Look, it's been consistent with kind of what the Fed has been saying. It's what everybody's been kind of speculating, me included. Gosh. As the dollar has gained in strength relative to the euro, when you think about what's going on in China and everything else, the United States economy, like it or not, may be the best place for people to invest, including treasuries. The strength of the dollar has really increased, and one of the dilemmas that the Fed is trying to deal with is if they start on a path to lift off, if you will. Then depending on what trajectory they select, you could see further strengthening of the dollar relative to other international currencies. Obviously, that could have an impact on exports. Okay? We've seen already some of that happen.
When you think about the Brexit, whether it happens or not, Japan, China, like I said, event risk in the Soviet Union or in the Middle East, the dollar still looks pretty darn good. We've seen some slowdown in exports. Likewise, we've seen an increase in imports. The other thing that's kind of weighed on the industrial activity a little bit is oil prices. Oil prices being so low, we've seen kind of a reduction a bit in pipelines, some manufacturing, things like that. Primary metals are down a little bit. Chemicals are down a little bit also in this whole mix. That's what you're seeing. That's what's responsible for some of that.
Okay, good. I also had another question kind of related to the changes you've made to the financing plan. Overall, the three-year total didn't change much, but it looks like the 2015's about $445 million lower, whereas 2016's $475 higher. You're still talking about the same CapEx numbers. Is that more related to maybe some CapEx getting delayed into 2016 that was in 2015, or how should we think about that year-over-year change related to the CapEx forecast?
Dan, it really is a function of cash flows within the operating companies, how they change, what their needs might be, whether they can push an issuance out of one year into the next. Again, we try to balance from a Southern Company perspective, who's going to market, when they go to market, that we don't all go at the same time. We're just trying to balance out as we move through time how we tap the markets in the most efficient way.
Okay. Lastly on Vogtle. You didn't really break out the unit three and unit four like you have in the past. I was just curious, just looking into this current quarter, the third quarter, it sounds like setting the unit three CA01 as one of the critical items. I was wondering if you could identify any of the other critical items at unit three and unit four in this upcoming quarter.
Well, the near term, you hit it, would be to set the CA01 in unit 3. There's some other things going on there. The transmission work that we mentioned, I believe in the script. That aux building, as Tom mentioned as well, is very important to us. The one other thing that's really not mentioned here is really down in the on the horizon part of unit 3. It's the installation of the turbine generator.
Yeah.
Which I believe is late this year or early next. I believe.
That's right.
Which is a big deal. That turbine building has probably another 60 feet of steel to go on top once that turbine deck's built. If you look at the pictures we put in the slide deck, it's beginning to look like what it's going to look like at the end of the day. That's exciting for us.
You know what, I just make the invitation. I know certain of you guys have taken investors onto the site to be able to see this stuff. The scale of this work is just immense. In order to kind of get an appreciation for it, if you guys ever want to come see it, we'll be glad to arrange any kind of visit you want.
Okay. How about unit four? Are there any critical items in the upcoming quarter there?
Dan, I think they've set some smaller modules in, but the real big work there is going to be modular related. The CA20 assembly has begun in the module assembly building, and they've begun making panels for the CA01 module at unit four as well. Those are big deals. We've learned a lot of lessons from unit three, and we're hopefully going to put those lessons to use and build them quicker on unit four.
The other thing that I guess I come away with when I go out there and kick the tires on the site and listen to the people building it, we're actually feeling pretty good about the schedule on unit two. I'm sorry, unit four. There's a lot of elements on unit four that relative to unit three are accelerated. That's good for the project.
Okay. Thank you.
Thank you, sir.
Operator, are there any more questions?
At this time, there are no further questions. Sir, are there any closing remarks?
Sure. Just want to say thank you to everybody. We had a heck of a first half of the year. Boy, the franchise is doing fabulous. We're coming off a year where we were the highest level of customer satisfaction. That's our ultimate barometer. Financially, we're great. Operationally, we're great. Southern Power is doing fine, making big progress on these big projects. I'm very happy to report a really good first six months and look forward to the next six months. Thank you all for being on the call. Thank you for following us, and look forward to talking with you soon. Have a great afternoon.
Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company second quarter 2015 earnings call. We thank you for participating in today's call, and you may now disconnect your lines.