Good afternoon. My name is Jose, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company First Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I would now like to turn the conference over to Mr.
Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Thank you, Jose. Welcome, everyone, to Southern Company's Q1 2015 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company and Art Beatty, Chief Financial Officer. Let me remind you that we will make forward looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially those indicated in the forward looking statements, including those discussed in our Form 10 ks and subsequent filings.
In addition, we will present non GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning as well as the slides for this conference call. The slides we will discuss during today's call can be viewed on our Investor Relations southerncompany.com. At this time, I'll turn the call over to Tom Fanning.
Good afternoon and thank you for joining us. Many of you have heard me speak before about the full portfolio and its significance to Southern Company and to our industry as a whole. Simply put, we are inventing the future of clean, safe, reliable and affordable energy for the benefit of the customers and communities we serve. Our full portfolio strategy, which includes new nuclear and innovative new technologies for 21st century coal as well as natural gas, renewables and energy efficiency is a fundamental component of that mission. I'd like to take a few moments to highlight how this all the above approach continues to be beneficial to customers and to discuss several projects helping to shape the full portfolio for the future.
To begin with, our diverse generation fleet enables us to quickly adapt to particular point in time. When natural gas prices are low for example, we are able to take advantage by burning more natural gas and less coal. Such was the case in the Q1 of this year. Gas energy climbed to 48% of our energy production. Our use of coal for the quarter was the lowest in several decades falling to 32% of our energy mix.
And as a hallmark of our integrated business model, we passed those savings along to customers. Natural gas, of course, will continue to be a dominant solution. Recently, our gas consumption was about 1.5 Bcf per day. This year, it could approach 1.9 Bcf per day. And by 2020, the amount could be as much as 2.3 Bcf per day.
But natural gas is not a panacea as we cannot assume that current prices will endure indefinitely. We must therefore continue to pursue the development of a truly diverse generation portfolio, one that provides the necessary optionality and flexibility to adjust to changing market conditions. In addition to natural gas, 21st century coal and new nuclear, we are rapidly building out our energy portfolio with renewables, including solar and wind. With that in mind, I would like to take a more detailed look at how we've expanded our renewable resources in recent months. 4 Southern Company Subsidiaries recently marked major milestones in the strategic expansion of 1 of the nation's largest renewable energy portfolios through the announced development or acquisition of large scale solar projects.
Gulf Power and Mississippi Power recently announced power purchase agreements with solar facilities totaling 173 megawatts that are currently being developed on military basis in their respective states. Georgia Power broke ground at Fort Benning, the first of 4 30 Megawatt retail rate based solar projects in development with the U. S. Department of Defense. And there's more likely to come.
In February, our Southern Power subsidiary announced the Parkway Solar Project and the 19 Megawatt Decatur County Solar Project. And most recently, Southern Power announced the acquisition of a controlling interest in the 32 Megawatt Loth Hills Blackwell solar facility in California from First Solar. Also in March, Southern Power announced an agreement to acquire the 299 Megawatt Kay Wind facility currently under construction in Oklahoma. This acquisition is expected to close in late 2015 upon successful completion of the project. K Wind will be the largest renewable electric generation plant in the Southern Company system and the 1st wind facility we will own.
Upon completion of these projects, the Southern Company System expects to own or purchase the output of more than 3,100 Megawatts of Renewable Resources System wide, including 44 solar facilities in 7 states. Let's now discuss our 2 large construction projects, which are equally important to our full portfolio of generation resources. Our new nuclear project, Plant Vogtle Units 34 and our 21st Century coal facility in Kemper County, Mississippi, featuring coal gasification technology developed by our researchers in partnership with KBR and the Department of Energy. Both of these projects stem from state specific resource planning processes that value generation diversity, including the hedge that these new resources represent against potential carbon dioxide regulations in the future. First, an update on Plant Vogtle Units 34.
The primary focus of the project continues to be quality and safety. Georgia Power has maintained an exceptional safety record for a construction project of this size, which currently has over 5,000 people on-site. During the Q1, our outstanding safety culture manifested itself as we performed over 1,000,000 safe work hours without a recordable injury. The quality oversight from our nuclear team team processes and controls are holding up to the inspection of both the NRC inspectors and Georgia Power's regulator. More importantly, our own rigorous oversight is being manifested in the quality of the facility.
The new Vogtle units are being built to serve Georgia customers for 60 plus years and the oversight in place today should help ensure that these units will function at a high level for decades to come. Construction activities are tracking closely with the revised schedule provided by the contractors in January. The greatest risk to the schedule for both units continues to be in the timely delivery of structural sub modules. I'm pleased to report that the quality at the Lake Charles facility has improved and we no longer expect submodules from that facility to require remediation on-site before being released for assembly. We anticipate continued delivery of panels throughout the year from Lake Charles and we've been informed that the scope of work may panels for the Shield building.
These panels are fabricated by Newport News Industrial and quality has been good. Acceleration of work at NNI along with improving the panel installation process represents one of our best opportunities to improve on the schedule provided the contractors. Critical path runs somewhat parallel with activities inside the containment vessel. The CA-one module is one of the major next steps inside this area of the nuclear island. The final concrete pours necessary to install CA-one were completed late last week.
CA-one is now projected to be lifted into place early in Q3 of this year. A number of you have visited the site in person and the progress is obvious. While the entire project is proceeding well, the Unit 3 Annex Building energization of the control systems for Unit 3, an important early step in the start up process. The concrete foundations and structural steel for this facility are well underway. And late February, the first of 34 wall submodules for the Unit 4 CA-twenty module was upended, marking the start of the assembly process.
On the regulatory front, dollars 198,000,000 in expenditures submitted in the 11th Vogtle Construction Monitoring Report were unanimously approved on February 19, with a cumulative amount approved to date of $2,800,000,000 Additionally, the procedural and scheduling long standing Georgia law, the order reaffirmed that neither the project certified costs nor the VCM-eight stipulation in 20 13 constitute a cost recovery cap. Georgia Power will be allowed recovery of all reasonable and prudent start up costs up to and above the certified amount. And we believe the semiannual VCM process, including the testimony of the independent monitor, continues to build a record that has thoroughly documents Georgia Power's prudent management of the project. The order also establishes a schedule for filings and hearings on our request of the commission verify and approve $169,000,000 in expenditures for the second half of twenty fourteen. Georgia Power expects to file direct testimony on Friday.
Hearings are scheduled to begin on June 2nd and we anticipate a decision in mid August. A full schedule is included in our slide deck. Now let's turn to an update on the Kepper County IGCC project. The Kepper project also bodes a terrific safety record In early March, we completed the first firing with natural gas of the facility's gasifier burners, a significant milestone. We continue to make tremendous progress on our other startup activities as we look ahead to the 1st synthesis gas production planned now for the Q3.
In the meantime, the combined cycle at Kemper continues to perform exceptionally well with a 1st quarter equivalent forced outage rate of less than 1 percent and a capacity factor in line with the rest of our combined cycle fleet. Turning to the legal and regulatory fronts, the Mississippi Supreme Court's order, which deemed that the 2013 settlement unenforceable and reversed the subsequent rate order has been met with vocal opposition from state wide industry groups, business organizations, the State Economic Council and members of the public utility staff and commission as well as other public entities through amicus briefs filed with the Mississippi Supreme Court. Most of the briefs emphasize that the rate plan agreed to in 2013 was of great benefit to the customers of Mississippi Power and that a traditional rate case could mean rate impact approaching 40% for some customers. This compares to the 25% rate increase contemplated in the original settlement, 18% of which is already in place. While we await the court's decision on rehearing, we will continue to work towards a reasonable comprehensive settlement with the public staff.
However, as a possible alternative to a settlement, we are also preparing to file a rate case by mid May. With the completion of the project in sight, we want to ensure that the rate recovery is adequately addressed in a timely manner. I'll now turn
the call over 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 Q1 of 20 15, reporting earnings of $508,000,000 or $51,000,000 or $0.39 per share in the Q1 of last year. The Q1 results for 2015 include a $6,000,000 after tax charge related to an increased construction estimate for Mississippi Power's Kemper Integrated Gas Vacation Combined Cycle Project. The Q1 results for 2014 included a $235,000,000 after tax charge for the for the 0
$6
or $0.66 per share in the Q1 of 2014. Earnings for the Q1 of 20 15 were in line with our expectations and were positively influenced by retail revenue effects at Southern Company's traditional operating companies offset by milder winter weather than in 2014 and increased operating and maintenance expenses. Moving now to an economic and sales review for the Q1. Economic growth in the Q1 of 2015 was modest, but our retail sales across all customer classes are encouraging. Total weather adjusted retail sales grew 1% in the 1st quarter, led by industrial sales, which were up 2%.
We have now enjoyed 8 consecutive quarters of positive year over year industrial sales growth in our region. Industrial sales growth remains broad based across 8 of our largest 10 industrial segments. The strongest industrial segments include petroleum up 10% stoneplay and glass up 6% due to improvements in the housing market. Transportation improved 5% as automotive manufacturers expanded output. Weather adjusted residential sales were slightly positive for the Q1 of 20 15, primarily due to strong customer growth of nearly 16,000, a 55% over the approximate 10,000 new customers gained in the Q1 of 2014.
Weather adjusted commercial sales were up 0.7% for the quarter. Office vacancy rates continue to show signs improvement and more office retail projects are being announced. Currently, more than 1,900,000 square feet of office space is under construction in Metro Atlanta. In addition, a number of new Atlanta projects are expected to begin construction soon, including the Mercedes Benz headquarters. According to the U.
S. Bureau of Labor Statistics, non farm employment increased in all the states of our retail service territory between February of 2014 and February of 2015. Nationally, Georgia ranked number 5 among all states for job growth and Atlanta was ranked among the top 5 metro areas. Meanwhile, our economic development pipeline remains robust with more than 300 potential projects representing 37 business and investment remains strong in our service region. Alabama and Georgia were recently ranked number 1 and number 4 respectively among states in which to do business by Site Selection Magazine.
Turning briefly back to Southern Power. As Tom mentioned in his opening remarks, Southern Power continues to find new projects that meet its investment criteria. In our Q4 call in early February, we outlined 2 categories for Southern Power's CapEx projections: base CapEx and placeholder CapEx for growth. Base CapEx includes projects we have identified as likely even though we may not have reached final terms or received all regulatory approvals. In February, our base CapEx included among others the Kay Wind and Decatur projects Tom mentioned earlier.
Since then, Southern Power has identified a number of additional projects for 201520 16. As a result, we are shifting dollars out of the placeholder category and into base CapEx for Southern Power. The result is that we have accounted for all of our original 2015 placeholders and have moved $100,000,000 from the placeholder to base in 2016. With our 2015 success thus far and the long runway between now and the end of 2016, we are confident about our ability to find solid projects to account for our remaining 2016 placeholders. Before turning the call back to Tom, let me cover 2 final items.
First, our earnings estimate for the Q2, which is $0.69 per share. Secondly, I'd like to highlight our dividend announcement last week. Our Board of Directors approved a $0.07 increase in our common dividend to an annualized rate of 2 point $1.7 per share. This is our 14th consecutive annual increase and marks 270 consecutive quarters dating back to 1948 that Southern Company will have paid a dividend equal to or greater than the previous quarter to its shareholders. Over the past 2 decades, our dividend has accounted for nearly 70% of our total shareholder return.
It is the cornerstone of our value proposition and the Board's decision last week reinforces its confidence in the strength of our long term financial plan. I will now turn the call back over to Tom for his
new year with strong momentum. We see a franchise business that is operating better than ever, solidifying its position as an industry leader in all phases of the business. We see important progress on major capital projects and we continue to excel with our customer focused business model. We also see a strengthening economy and a region poised to grow in the months years ahead. In short, we believe Southern Company is well positioned to succeed in 2015 and in the years ahead behind the strength of our 26,000 employees and their commitment to provide clean, safe, reliable and affordable energy to the customers and communities we serve.
Southern Company is keenly focused on remaining an industry leader for the long term and forward thinking decisions with regard to our generating portfolio are a key aspect of that effort. But the evolution of our business does not stop there. We recently announced the launch of a new energy innovation center to be located in Atlanta's Technology Square. While we remain steadfast in our commitment to excel at the fundamentals of making, moving and selling and consuming electricity, we also understand that the way in which customers use energy may change over time. The Energy Innovation Center is just one way in which we are working to anticipate the future and lead the way with the development of new energy innovations.
Going forward, we will continue to build on our long history of inventing the future by relying on the thinking of our entire workforce and with potential partners such as Nest and other major established and new entrants to the energy industry. Initial possibilities involve expanding the notion of energy infrastructure to assets beyond the meter, unmanned aerial vehicles, hydrogen production from underutilized generating facilities and desalination plants. As Art indicated earlier, the strength of our underlying franchise as well as our continued focus on remaining an industry leader through innovation underpinned the Board's decision last week to increase our dividend, which supports our objective of providing superior risk adjusted total shareholder return to investors over the long term. We are now ready to take your questions. Operator, we'll now take the first question.
Thank And our first question comes from the line of Greg Gordon from Evercore ISI. Please proceed with your question.
Hello, Greg. Greg?
I'm here. Can you hear me?
Yes, we can now.
Sorry, I was on mute. It's been a long day already. You're like our 5th call. So what is the legal path in Mississippi today that either gets you back to a settled rate deal or put you in a formal rate case filing? Like what are the different paths that get us back into a settled low rate hike or put us into a rate filing in May?
Yes. That's right. Just as we described, there's 2 paths. One is we've been having as we as you all know, a prolonged series of discussions with the staff. We continue to think they are constructive.
I think the result of a settlement could in essence preserve and form the rate structure that we put in place in 2013. Failing to reach a settlement, we will file a rate increase in a conventional rate case. It is conceivable you could file the rate case and file the settlement at the same time. But those are the 2 paths.
Okay. But the Supreme Court's decision has essentially closed off the creative approach you used to prefunding the capital project? Or is that not
the case? No, we've not.
That's not the case. The settlement would essentially preserve the structure, which would mimic what was approved in 2013.
That would be great. Second question is on your continued expansion of the renewables platform. When we look at essentially the announcement of this wind project acquisition is fills in some of the sort of the notional space in your Southern Power CapEx budget?
That's right.
It's not incremental to the budget that you've already articulated
to us.
It's part of the yes, it was in the base already. It was
in the base.
And what we've done is I think the change here is on the graph showed is that we essentially have spoken for all the placeholders in 2015. So we're very confident of hitting our numbers for Southern Power in
2015. Great. And how much of your total CapEx in 2016 at Southern Power is currently sort of money projects that are definitely going forward versus placeholders? Oh, that's here on page 12.
Sorry. Yes. There you go.
It's about 400,000,000
dollars Right. And can you articulate
sorry, go ahead. No. We feel really good about hitting our placeholders in 2016 also, but we're not at the stage we're ready to declare those as part of base. We've improved it by $100,000,000
Got you. And then is there a way you can articulate what you think the earnings contribution is going to be from the KWAN facility when it
in? Well, the KWAN facility, the benefits are not investment tax credits. They're production tax credits. So I don't recall the 2016 benefit, but it should not benefit 15 at all. It will be a 16 addition.
It will be a little over $0.01 a year something like that for whatever.
Okay. Great. And when is the next milestone, if we have a firm milestone? This is my last question. Your conversations with your EP and C contractor at Vogtle with regard to the delay they announced in the in service date?
Yes. So we continue to have constructive discussions there. And one of the things I think we tried to highlight in the initial remarks is that we can see our way through to some ways to improve the schedule that the contractors have delivered to us. We've been pretty clear about that in our disclosures. So we continue to work with them and we're trying to find ways to reach an amicable kind of resolution to that.
And is there a sort of definitive milestone to look for there in terms of a drop dead date or?
Not really. The ultimate conclusion would be litigation in the Not really. The ultimate conclusion would be litigation in the city of
Augusta, Georgia. All right. Thank you, guys.
Yes, sir. Thank you.
And our next question comes from the line of Jim Von Reisman from Mizuho. Please proceed your question.
Hey, Jim. Hey, John. How are you? Super. Hope you're well.
Thank you. I am. Hey, I have two questions for you. So first question is, can you guys provide a little bit more color on this continuing disconnect between the 3% GDP growth in the service territory and yet 0.2% residential growth?
Yes, Jim. Our expectation was for the year about 3% GDP growth. That was underlying our forecast of low growth this year of the 1 outlined in the script, that's driven by the industrial sales growth. As we outlined in the script that's driven by the industrial sales growth. But we're beginning to see movement on the residential and the commercial end as well.
This is the Q1 in about 4 years where we've had positive growth in all three customer classes. So we think it's broad based. And if we look at employment growth both in the manufacturing sector and in other sectors, it's beating the national numbers. So the economy in the Southeast has been a bit stronger in our view than what we're seeing on the 0.2%.
Yes. If I could at the risk of falling into Fed's speak too, there's fascinating developments. And some of the things we're seeing are better than, but in some ways mimic what we're seeing nationally. Better than clearly than the industrial growth sector, even surprising to us how strong it is. And even probably better than what we're showing, we think that chemicals, for example, was slightly negative, but those were outages.
So we expect to chemicals rebound. And recall a continuing theme has been segments which are dependent upon natural gas. Well, those are going to be really strong we think for the rest of the year. The only kind of cloud on the horizon there, primary metals and we think that's kind of strong dollar, strong imports, low oil prices and therefore metal associated with pipelines and probably slowing down a bit. But one of the things that I think is really interesting that Art alluded to on the residential sector, we're starting to see a pickup in household well well formation.
It's pretty modest, but still a pickup. Interestingly, the Fed guys are concerned by that in that it looks like they are not consuming this pickup in either the top line revenue or a reduction in cost like lower gas are less exposed. They're more resilient to future economic dislocations. So it's not all bad. Value is a function of risk and return and GDP growth is return.
Increased savings rates is improvement in risk. So it's not all bad. And when you consider that the United States GDP was 0.2% growth in the Q1, you look at our numbers, clearly better. We feel pretty good about our prospects going forward.
So the answer thank you. The answer to your question on the growth and the improvement leads me into my next question. So if I look at your trailing 12 months on a weather normalized basis, you're at 276. But if I remember correctly at the end of the conjunction with the Q4 call, you had 276 to 288 with your expectations for the year. How do you get to the upper end of that band or even the middle end of that band given that you're trailing 12% at the very bottom?
Improvement at Southern Power is an easy way.
Good weather better than expected economic outcomes.
Okay. Okay. And I'm just on there's nothing else that I'm missing, am I?
I don't think so.
No. And if you remember too, one the things I think we said this before Art was the lower end of our range was down by Southern Power not filling in its complement of CapEx. It for 2015 and potentially could even improve.
Okay. Thanks guys. Appreciate it.
You bet. Thank you, Jim.
And our next question comes from the line of Brian Chin from Merrill Lynch. Please proceed with your question.
Hi. How are you? Very good. Just a quick one. The long term EPS CAGR slide isn't in the deck.
Are we just to assume that it's still 3% to 4% longer term? Yes. We only adjust that kind of once a year, right? We come out every January. We give guidance for the year and our long term growth estimate.
And then we only update that in our October call once we've gotten through the big earnings month in the summer. That's right. Great. Thanks a lot. That's it.
All right. Thank you, Brian. See
you, Brian. And our next question comes from the line of Mark Burnett from Morningstar Equity Research. Please proceed with your question.
Hey, Mark. How are
you? Good afternoon, guys.
Hey, good.
Very well. Thanks. A couple of questions here. One is for the bigger picture. You gave a little bit of detail around what you're seeing in the commercial sector.
And obviously, it's from a usage perspective has lagged a little bit, but we have a nice pickup here in the quarter. I'm wondering is this about the level of improvement that you've baked or expectations in your guidance here?
Actually we're looking for a little more improvement. That's correct. The
expectations for the year in terms of segments like 1.4 on commercial, about 1% on residential and 1.7% on industrial. So we're a bit ahead of our industrial numbers. We still got a little ways to go
on commercial. Yes. 1.3% for the year total. Right. Percent for the year total.
Right. Sorry, that number it slipped the 1.4% on commercial.
At commercial. That's the
level that's in your guidance. Okay. And then year over year, obviously, base business growth driving a lot of that OpEx I'm sure. Is this level of kind of the year over year increase sort of a guide for the remainder of the year? Or do you have a lot
of flexibility there? I'm sorry.
Flexibility on CapEx is going to go to Operating expenses.
Yes, yes, yes. The Q1 was a bit of anomaly. You may remember Mark that Q1 of last year, we deferred a lot of expenses at Alabama Power. There were non nuclear outage costs under an accounting order that they were operating under last year. And then also if you look at year over year, there were more megawatts out this year across the system than there were last year.
So there were more outage costs this year. And then you just got normal growth for the rest. That's a big piece of it as well. So if we look at what we expect for the year, I still think my guidance from last call about a 3% to 3.5% growth in non fuel O and M for the year still applies. And the Q1 is just kind of an outlier that will correct itself through the year.
And when we came up with the $0.55 estimate for the Q1, it almost exactly expected this level of O and M. Got it.
Okay. Thanks for the reminder. It has been a long day as somebody mentioned earlier. Last question and can you just remind me if Governor Dean has signed the new solar bill, the HB 37? And generally what you expect to see as a result in terms of maybe your own programs or offerings in the state?
He has not signed it to our knowledge. But I can tell you all this is very consistent with our plan. I have always tried to position the company as given whatever business circumstances exist for us to find ways to play offense. And to the extent, distributed generation becomes important to the customers of this state, it is the clear mission of our businesses to provide that service and those assets to our customers. So we fully support any development with respect to distributed generation, whether that's rooftop solar or some idea associated with storage or community solar or financing or anything else.
Now whether we do that ourselves or do it through 3rd parties, our job is to find ways to succeed in this changing business environment. And I think we're demonstrating that in a superb way.
All right. Thanks guys.
Thanks. Yes, sir.
And our next question comes from the line of Anthony Crodell from Jefferies. Please proceed with your question.
Anthony, how are you? Hi, Anthony.
Not bad. I just wanted to follow-up on Mr. Gordon Goes to Washington's question in Mississippi.
Just it seems that there's
a disconnect there. When you look at the 2 roadmaps you have of a conventional rate case for the 30% to 40% rate increase or I'm not sure if you use this term, but maybe a glide path or some type of nice trajectory of rate increases. It would seem like a no brainer if you were a regulator or you were only thing I can tell you, I don't want to in Mississippi?
Anthony, the only thing I can tell you, I don't want to characterize the decision that's kind of in front of these folks. But if you look at the broad based support that the company has enjoyed to ask the Supreme Court to reconsider their decision in the amicus briefs, including the staff. To me, it is an obvious decision that benefits the citizens of Mississippi to pursue the settlement or at least restore what the Supreme Court invalidated in its recent order. Either one of those is, I think in a broad sense the obvious way to go in the state.
Great. Thanks for taking my question guys.
You bet. Hope you're well. Operator, can we take the next call?
And our next question comes from line of Michael Winton from UBS. Please proceed with your question.
Good afternoon.
Hello. How are you doing? First question is about pipelines and midstream opportunities. Wondering if you're still considering going forward with that and how serious is that contribution?
Yes. Here's some fascinating supporting data. We're actually looking at several opportunities and active discussions. We'll see how that goes. When you think about it, before I came into this role, we were consuming coal, 70% of our energy came from coal and then 16% from natural gas.
When you look at recent history, 1.5 Bcf per day, now this year maybe as high as 1.9 and depending on what happens with 111D and a variety of other things that per day gas consumption can average somewhere around 2.3 Bcf per day. So when you think about the attractiveness of Southern Company being one of the nation's largest consumers of natural gas, our value as a kind of a key tenant to any of the infrastructure that needs to be built out to meet that kind of demand investments. And we're all over that stuff. So we'll see what happens.
How about gas reserves and rate base? I think you're
This goes way back even when I was, gee whiz, I think I was CFO and COO. So we're talking now 10 years ago, we've been kind of kicking that around. And back then, we weren't consuming that much natural gas and it wasn't as important. But certainly, it's an idea that has merit. And as natural gas becomes more important to us, especially given its volatility relative to other fuel stocks, we'll certainly keep that on the front burner of ideas.
In any case, we would not want to take price risk on molecules in the ground. This would all be a fuel clause related issue. Right.
One other question about nuclear. We've heard recently from Commissioner Echols that he is he sees the need for another 2 units beyond the current and that it depends on how well the project goes and whether 111T goes. So I'm just wondering if you have actually been in conversations about that. Is that something that's actually being planned out at this point? Or is it just being is it just talk for now?
And also is this something that you can hold over the consortium's head sort of so to speak that it guarantees some kind of good performance going forward also in the litigation?
So many of you on the call may remember in 2014, I want to say it was the summer in a Q and A session at Bipartisan Policy Center, I think, after a hawk I made, that I did allude to the fact that we would be, I forget, delighted to consider new nuclear. The steps that would be taken first would be to essentially begin essence, it's fairly modest dollars in order to secure the option. And we moved along and then we were hit in December with the change in schedule put forth by our contractor group. We were very clear that we don't believe that the contractors are doing everything they can do in order to fully mitigate their schedule per the requirements of the contract. And so what I said at that time was that I thought it was sensible for us to set aside a lot of talk about new projects until we came to more resolution as to the commercial dispute.
It is clear to me that if the contractors want to succeed in the United States with AP1000, then they need to perform well on Vogtle 34. It is in fact the benchmark plan for all AP1000s going forward. So you can draw your own conclusions as to their motives. All right.
Thanks a
lot Tom. You bet.
And our next question comes from the line of Daniel Edgar from Credit Suisse. Please proceed with your question.
Hey,
Daniel. Hey, good afternoon. Hey, how are you?
Tom, just on the nuclear conversation. Can you maybe just share some of the things that you guys saw in schedule in schedule, are there things you're going to be able to do to mitigate that from happening kind of going forward, so we didn't run into this 12 or 18 months from now them saying, well, we have the
same sort
of delay problems? Yes, yes, yes. So we tried to kind of suggest that in the prepared remarks at the outset. I think there's a clear opportunity to advance some schedule mitigation with Newport News. That's our opinion.
And it's not only production of their facilities, but also the installation of the panels. We need to make sure that all of that is done well. Also you must know that especially those of you that have visited the site, we encourage everybody on the phone if you can figure out a way to get to the site, we love showing it off. I think the people that were there were, I think, really struck with the kind of progress and quality of the work there. We have an enormous quality assurance program.
And as licensee of the plant, we ultimately are responsible for having the right kind of plant built there. Our QA program has been focused not only on-site, but also at places like Lake Charles. And I think our working with the contractor has helped put them in the position where now we essentially have been able to accept production out of that facility and go ahead and put it in a production process. As we move to more work inside the nuclear island, that kind of process improvement, quality assurance and ultimately production on-site is going to move the needle in the right direction. So we remain relentlessly focused on ways to work with them to do that.
And I would argue in the past quarter or so, I think we've made some progress in our thinking.
I know Mike just asked a question, but just on the gas reserves and rate base issue. The legislation in Mississippi seemed to open that as a little bit more of a window than previously discussed. Is that something you guys are going to look to pursue? Or how do you read that legislative action?
Well, it's a law largely focused on EMC's recovery of economic development projects. It does authorize the PSC to deem that natural gas reserves are used and useful as utility plant or whatever. So a similar concept so it is something we would consider as there is natural gas kind of generation in Mississippi. I think once you're post Kemper, plant Radcliffe, it's a third, a third, a third coal gas and Kemper. A similar concept that we have at Kemper is in fact the lignite mine.
It's a similar idea where essentially we own the lignite and it's in rate base and it serves to hedge kind of any future price swings. Remember that is almost no volatility going forward. So it's certainly a valid idea, something we consider and makes sense.
Okay. And I guess just on the renewable side of the business, you guys are able to put renewables in rate base in Georgia, you've been doing PPAs in the other states. Is there going to be an opportunity when you guys can start putting or feel more comfortable putting some of those assets into your rate base than contracting out where the cost of capital is higher?
Yes, sure. And I think to the extent those assets ever get flipped sold what have you, I think we're a natural buyer. One of the things that we always kind of think about is for any of our assets and although we tend to acquire some, you know we sold some or swapped some, who is the best owner? And we always seek to achieve that position. So I think there will opportunities for us should those assets ever come to the market for us to be a strong player in acquiring them.
That may be at Southern Power. It could be at the OpCo.
But you don't necessarily see the utilities doing more to develop renewables in territory in a rate based asset?
No. Absolutely, we could. And in fact, I tried to suggest that in that little funny sentence where I said, there's probably more to come, if you remember that sentence. We've done a lot of business in Georgia. We've done 4 times 30 with DoD facilities.
And I said and there's more to come. So I'm very bullish on that. We've had a terrific relationship with the DoD. You know that the DoD has a renewable mandate goal what have you. And I think we were probably the first ones in the United States to work with them constructively to fulfill that mandate.
Very good. Thank you guys.
Yes, sir. Thank you.
And our next question comes from the line of Ali Agha from SunTrust. Please proceed with your question.
Ali, how are you?
Hey, Tom. Good afternoon.
Good afternoon.
First question, Tom, just wanted to clarify your scenarios on getting closure on the Mississippi issue. I recall one of the options previously was for the Supreme Court to overturn their ruling, which I guess was 5.4. Is that still an option? Or are you really thinking if global settlement could address all the issues they raised the original ruling and take care of it from that perspective?
Ali, it's both of those. The commission I mean, the Supreme Court could certainly reconsider their decision that obviously and think about the broad support in the state just about everybody in the state that we had huge participation in the Amicus brief. But failing that, we could reach a global settlement, which would in effect mimic many of the characteristics of the 2013. We think we could get that as well. We think any of those are better than filing for a 40% increase in a rate case, but we'll see how it goes.
Those are the paths we will follow.
And also to be clear, I think you mentioned thinking about filing that rate case by mid May just a couple of weeks from here. So in your mind the other two parts whether a global settlement or a Supreme Court reversal realistically could happen within the next couple of weeks?
Sure. And then I suggested on the call earlier today that another alternative is for us to file the settlement proposal 4th
show cause notice that they put out there, 4th show cause notice that they put out there to you guys on market power issues, how big of a deal is that? And how do you see that playing out?
We don't think it's a big deal right now. Look, there I don't think there's any evidence. In my opinion, there's very little evidence, no evidence that Southern Power has any market power in the Southeast. I think this was a reaction by the FERC staff that basically pointed out that there was not much activity in our auction mechanism that we had put in place really up until 2014. In 2015, we introduced kind of a tweak on that auction process, which increased the activity of the auction manyfold.
But you got to understand, through this period, we've been a net the the Southeast has been traditionally a bilateral market and people are very happy. There's been no contention at FERC that suggests that there's something wrong with the auction process we have in place. This in fact was a rule by the FERC that basically is raising a question where I'm not sure there's any problem at all. So we have a chance to respond and we'll provide our evidence and have a good constructive dialogue with FERC and we'll see how it goes. In the near term, you should think about that in the next 3 to 5 years.
At least in the thinking we've done so far, there's almost no potential adverse financial impacts from this.
I see. Okay. And then in your financial planning, you still have assumed no equity issuance through 2017. I was just curious, much cushion do you have right now so that that scenario different scenarios keep you in that no equity issuance mode? Or are you fairly close if you get more Southern Power activity etcetera that equity comes back into the equation?
Yes, Ali. Just recall last year we issued $800,000,000 versus the $600,000,000 we planned. So we're a bit ahead of where we thought we'd be. We don't really have any scenarios in which in the foreseeable future even with the Southern Power of the amounts that we forecasted. And you can see we filled up our bucket in 2015 on placeholder projects and we still have a ways to go in 2016.
So I think we're good to give you a feel for. I don't have a number to give you about where we are in the limit, but I think we're in pretty good shape.
And I think we've suggested in the past that kind of as we start to down our CapEx and if you look at our CapEx slides kind of what was it 6.8 to 5.5 or so to 4.3 or something like that, we're probably over equitized to some degree. So there's not pressure to sell more equity.
Got it. Thank you.
You bet. Thank you, Ali.
And our next question comes from the line of Michael Lapides from Goldman Sachs. Please proceed with your question.
Hey, Michael.
Hey, Tom. Congrats on a good start to the year and especially on the renewable side. One quick Mississippi question and then one natural gas question for you. In Mississippi, had the court decision referenced pretty clearly the need for a prudency review before the commission can grant any kind of rate increases. And given that this stems from a rate payer or customers acting as litigant here.
Do you need to have a prudency hearing of some kind as part of any settlement docket?
We've already filed a prudency record last year. So we think all the evidence is there necessary for the commission to act right now.
Got it. So the commission could issue a prudency determination based on what's in the record right now and that should satisfy effectively what the Supreme Court said had not been satisfied when the Supreme Court made its ruling?
That is our belief.
Okay. On the natural gas side, when you look at the infrastructure of the natural gas system throughout your service territory and maybe even slight neighboring areas, where do you all see as the biggest bottlenecks? Meaning where is there a lack of midstream infrastructure that is needed to be able over the next, I want to say 5 to 10 years because it's kind of hard to look much more beyond that to help alleviate some natural gas or other midstream related bottlenecks in your area?
Yes. So that's a fascinating question. And I wish I had my map and my pointer. And it really depends on what you believe out of 111D and what we do with other kind of displaced coal assets should they arise. Recall, under half MAC or MAX, we went from kind of 20,000 megawatts down to 13,000 with 4 of the 1,000 coal units being retired being converted to gas, 3,000 retired completely.
You know by EPA's own math, and I'm not going to stand by their math because I frankly don't believe it's achievable in the time frames they do, But they would have us retire enough coal down to about 4,000 megawatts. So what do you do? Do you convert that to gas? Do you build greenfield gas? Where do you build it?
If you want to think about the way the pipes work in the Southeast, there's 2 big themes. The normal dimensional historical theme would have come from the West. And you got a lot of pipelines that kind of run from the Gulf of Mexico up through the northwestern part of Georgia, if you want to think about it that way, where you don't have a whole lot of distance to cover. You have some embedded costs that are attractive. And we could certainly link into systems to the West.
And there's even it's not just Gulf of Mexico stuff, right? There's Fayetteville and some areas out there that are shale gas related. The other theme would come out of kind of the north. And so you would think about pipes that may come down north to south and kind of approach our territory more from the east. And so we'll see how that goes.
You're talking about probably more expensive pipe. So can you get a basis difference in the gas between the North and say a Henry Hub looking proxy. So that's really the 2 big themes in gas infrastructure that we seem to see.
Got it. And my apologies real quick back on Mississippi and this may be an Art question. Art given the court case and where it stands now, what happened in the Q1 from a GAAP accounting perspective in revenues in Mississippi versus what had been basically going on through all of 2013 2014? And I'm just trying to kind of match up our GAAP revenue numbers to the Mississippi rate increases? Are they reflected in GAAP revenue?
I know the cash was collected previously. I'm just trying to think through the puts and takes here.
Michael, we didn't record any Mirrorquip revenue in the Q1, but there were some impacts for equity return on some other pieces that actually went back into the last Q4 of last year where we unbooked some of that, but it was very it was all really deferred. I don't have a number to give you, but I can give you something after the call.
Yes. I mean just trying to think big picture. You're basically no longer booking the revenue related to Kimber that $156,000,000 number?
Well, all of that was never going to income per se. It was all being booked on the balance sheet as a regulatory liability and it was going to be used to offset rate increases as the plant went into service over time. That was the whole design of Mirror Cliff. Right.
Okay.
I can follow-up offline. Sorry to get down get too far down the weeds on this one on the call. Much appreciated guys.
Yes. We love that stuff. No problem.
And our next question comes from the line of Shahriar Pourreza from Guggenheim Partners. Please proceed with your question.
Good afternoon.
How are you, Tom? Hi, Art. How are you? Hey, Jacques.
Just a real question, quick question on Mississippi. I know you're kind of working on potentially striking the global settlement. Can you remind us if the asset has sort of a capacity factor hurdle it has to meet once it's live? It's good to see that it's running like a CCGT, but I'm kind of curious
on what the hurdles are once it's live.
Well, recall that the combined cycle that's running right now is running on natural gas. Ultimately, we have been working with the commission on an arrangement in which when you think about it, when we had the project certified, there was a capital cost component and then there was an energy cost component. And what we've been able to kind of think about in the settlement is a way for us to essentially assure that Mississippi customers are held harmless from any cost overruns. We've done that painfully for all of us. And then otherwise to assure that the energy benefits are there for Mississippi's customers.
And I think we can get that done. Now you all must recognize that when Plant Radcliffe was originally approved, this is a process that occurred in 2,009 2010. And remember, we only had 10% of the engineering done. There have been a host of changes in a variety of fronts, including natural gas prices, commodity prices, all host of things. I think what we would undertake to do is make sure that we could deliver the energy benefits that the commission thought they were getting when the project was approved.
We've already spoken for the capital cost. I think we can get that done.
Got it. Got it. And then just one question on renewables Tom is we're starting to see some more contracts being signed post ITC step down. Curious on if you're seeing that within the Southeast and then kind of what that placeholder could look like for Southern Power between wind and solar say post-twenty 16?
Yes. So what's interesting, Shar, is that right now there's an enormous rush to get stuff done particularly in solar before the end of 2016. And certainly that has filled up our wheelbarrow of capital placeholders for 2015 and we feel really good about where we are for 2016. The wind deal was a way to straddle. In fact, it was interesting.
One of our own directors used the phrase a divot in kind of the development activity of renewables and therefore earnings associated with renewables. The other thing that's fascinating is as we start to consider kind of beyond renewables to 111D, we'll probably have a final rule there in the summer, say August. The states will now have start providing for the reality of complying with that rule. And therefore, we got to start thinking about gas. And remember, as I suggested earlier on the call, if we're going to do new gas generation, we need new gas infrastructure.
Those things can go hand in hand in filling in that flat
spot. Got it. Got it. And then just on any of the Southeast states, is anybody close to submitting a state implementation plan? Are we like really far off?
You don't have a final rule to react to. Hey, Sharf, Art just pointed something out. Why don't you stay with it on the solar?
Yes. If you look at our CapEx budget in terms of growth CapEx in 2017, it's like $200,000,000 but A solar project. Solar project. So it's very, very small compared to 2015 to 2016.
Yes. So there is 200 dollars anyway. It's way less than what we're seeing right now. Yes.
Got it.
Thanks a couple of questions.
Excellent. Thanks so much.
Okay. Thank you.
And our next question comes from the line of Paul Ridzon from KeyBanc. Please proceed with your question.
Hello, Paul. Tom, how are you? Awesome. How are you? Well, thank you.
It seems incrementally with each call you're embracing more and more renewables. I mean if this trend continues, what are your current thoughts about when a might come into serious consideration? So we're really following through on what we said we would do. It's funny. It's kind of what you say and how you say it, I guess.
The what's of what we've been saying here have been pretty consistent for a while now that we thought that renewables would be important, certainly solar renewables through 2015 2016, while you had the 30% investment tax credit environment. And that kind of beyond 2016 into 2017 2018 where 30% goes to 10%, all of a sudden wind starts looking like a way to address that gap. Also you should know the strategic synergy. We started procuring wind energy via contract. And so for us to take an equity position in wind puts us in a different posture than we had been before.
With respect to a yield we'll consider anything. But I think on balance we felt that Southern Company in and of itself was a yield co anyway. We have really efficient ways to raise capital. I think it introduces complexity into your balance sheet. And long term, I'm not sure that it inures to the benefit of shareholders.
It certainly has short term appeal, but I would never want to impair the long term viability of this company by doing financial engineering or tricks. The other thing you should just know and let's just point out again, we haven't really talked about on this call, but we have in other calls. We have terrific tax appetite. And given our scale, given our tax appetite, you know that we've always been conservative. Our tax appetite remains a competitive advantage for us to play in these fields.
We'll link in that with our experience with the major vendors, our low cost of capital, access to capital markets, gee whiz, I think the developers that want to do something significant look to Southern as the premier partner right now. That's why we've been able to fill up our dance card. Okay. Thank you. And then it was refreshing to see the Kemper charge kind of immaterial this quarter.
How's the future look there? Tell me about it. Hey, look, we're in startup right now. There's a smidgen of construction left, but we're essentially in startup. And the team there is working wonderfully.
We brought in a guy that has had a tremendous amount of experience in start up of these types of processes, trip I mean, chip trucks Claire. He and his team have really done a dynamite job of staying to schedule and working around the issues. It's refreshing to us as well. They're doing a great job. Thank you.
You bet.
And our next question comes from the line of Dan Jenkins from State of Wisconsin Investment Board. Please proceed with your question.
Hey, Dan, how are you?
Very good. Good afternoon. First question is on Slide 18, your financing plan. I noticed there are a couple of revisions from the slide from last quarter, the big ones being Alabama in 2015 went from 700 to 1375 and then in Mississippi Bank debt in 2016 went from $0 to $900,000 I was wondering if you could talk about what's driving those changes?
Yes. I believe the Alabama took advantage and issued some additional debt this year and actually did some refunding that probably wasn't reflected in the schedule we showed you on the last call. The Mississippi bank debt was really a renewal of bank notes that were maturing this year. There was about $775,000,000 maturing this year and we actually renewed those plus a couple of $100,000,000 or $175,000,000 or so of additional money. And really that's serving as bridge financing for until we get into a position where we can either go to the capital markets or do our securitization financing.
Okay. And I wanted to go back a little bit on your retail sales growth. You talked about the change in the weather normalized sales. I was wondering if you could give us a little color on the customer growth. How is that going consistent with your expectation?
Or how is that playing out?
Yes. Well, we talked a little bit about customer growth in the residential side. We had 16,000 new. I think last year we added 10 in the Q1. So pretty good jump in growth.
I think if you do a year over year look, it's about a 37,000 increase. If you look at year what we have added since the Q1 of last year, 37,000. You may recall that prior to the recession, we were adding almost 60,000 or more a year. So it's not back to where it was, but it's showing stronger growth.
Okay. And then last I was looking at the Vogtle construction update on Slide 5, I think it is. And I noticed you didn't really change any of the information related to Unit 4. And I was wondering if that was according still according to plan or if there's been some slippage
seeing I don't have last quarter slide in front of me, but I believe that what you're seeing there is still kind of consistent with where we are. The biggest new module that CA-four module is not a very big one neither are CB-sixty 5 or 66. So the next biggest module for Unit 4 will be CA-twenty and we mentioned that in the script. That is just now beginning assembly in the MAB, the module assembly building.
So the schedule hasn't really changed for Unit 4 then from what you reported last time?
Not that I'm aware.
Okay. Thank you. That's all I had.
Yes, sir.
And at this time, there's no further question. Mr. Fanning, are there any closing remarks?
Yes. Thank you. Listen, everybody, we appreciate you being on the call. I think the company is off to a great start. As we've said, the franchise for some time now has been in as good a shape as it's ever been.
We continue to execute like champions and we're going to do our best to make sure that as shareholders you're handsomely rewarded. Thanks very much. Talk to you