美國南方電力 (SO) 2013 Q4 法說會逐字稿

Good afternoon. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company fourth-quarter 2013 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded today, Wednesday, January 29th, 2014. 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, Tamika. Welcome to Southern Company's fourth-quarter 2013 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, as well as the slides for this conference call.

To follow along during the call, you can access these slides on our Investor Relations website at www.southerncompany.com.

We have a full agenda for today's call. We will begin with a brief recap of 2013 operational highlights, followed by an update on the Vogtle and Kemper projects.

We will then discuss fourth-quarter and full-year 2013 financial and sales results. Finally, we will update our forecast of sales, capital spending and financing which support our earnings and dividend forecast for the next two years.

At this time, I'll turn the call over to Tom Fanning.

Good afternoon and thank you for joining us.

2013 was a year of operational, regulatory, and financial challenges for Southern Company. And apart from our difficulties with Plant Ratcliffe in Kemper County, Mississippi, we achieved tremendous success in meeting these challenges. In what was arguably our busiest year ever, from a regulatory standpoint, we saw an unprecedented level of activity across all four states.

The results in each of our jurisdictions demonstrate that our continued focus on the customer helped support constructive regulatory engagement. In Alabama, minor adjustments were made to the RSE mechanism that will serve customer interests well.

In Georgia, the PSC approved another constructive three-year agreement for Georgia Power. Georgia Power also completed another successful integrated resource plan.

And in the third regulatory proceeding in Georgia, the VCM8 report was approved unanimously, bringing the aggregate total of costs approved for Plant Vogtle Units 3 and 4 to $2.2 billion, with no disallowances.

In Florida, the PSC approved a settlement agreement reached between Gulf Power and all of the interveners in its rate case. And in Mississippi, we reached a settlement in January 2013 that paved the way for Kemper-related rate increases in 2013 and 2014, and a subsequent rate increase in 2015 for the securitization of certain project costs. Combined, these steps are projected to stabilize the impact on customers for at least seven years.

Even with the backdrop of the regulatory proceedings in all four of our retail jurisdictions, Southern Company and its four traditional operating companies occupied the top five spots in the 2013 customer value benchmark survey, which compares our customer satisfaction ratings with those of peer utilities.

We experienced the best year in our Company's history in terms of transmission and distribution reliability, continuing a trend of improvement over the past decade.

And most important, we completed our safest year ever. For the third consecutive year, Southern Company achieved a new all-time record low in recordable incident rates and also saw reductions in lost work day cases and preventable vehicle accidents. This continuing commitment to protecting the health and safety of our workers is a key component of Southern Company's workplace culture, and I'm extremely proud of our most recent results in this area.

Let's now discuss our two large construction projects. Progress at the Vogtle 3 and 4 construction site is remarkable. We've included photos in our slide deck that indicate how much the site has changed over the course of 2013.

Also included is a recent photo of CA20, the auxiliary building module for the Unit 3 nuclear island. The photo, which was taken inside the on-site module assembly building, shows all of its structural walls assembled. Prep work continues to ready this module for placement in the nuclear island next month.

We overcame early issues with the sub module fabrication and documentation in Lake Charles, Louisiana. Our demonstrated ability to work through challenges is indicative of the strong, collaborative relationship we have with Chicago Bridge and Iron and Westinghouse, as well as a testament to the rigorous oversight we have in place for this project.

As we look ahead to 2014, the site will continue to change shape in dramatic ways. Progress on the turbine island and cooling tower for Unit 3 will continue, and the nuclear island for Unit 3 will really start to come out of the ground.

After the placement of CA20, we are scheduled to see two of the containment vessel rings stacked on the bottom head, the large CA01 module placed inside the containment vessel, and the six-foot-thick walls of the nuclear island will come all the way to ground level. Progress on Unit 4 will also continue; and a year from now, we expect many of the unit's components to be further along than Unit 3 is today.

We're also pleased to announce that after extensive negotiations on loan guarantees, Georgia Power has delivered its documents to DOE. Now, there remain a series of steps that must be taken prior to closing. And while we can't disclose final terms, we do believe that our earlier estimate of approximately $200 million of present-value benefits is still representative of the loan's value to customers.

Combined with other customer benefits, including production tax credits for which we qualified after the completion of the concrete base mat pours in both nuclear islands, we project approximately $2 billion worth of additional benefits to customers relative to the amounts originally certified by the PSC. We will continue to provide more color on these savings and other aspects of the project in the next Vogtle construction monitoring report, which is scheduled to be filed in late February.

The Kemper IGCC project also continues to make progress, and we are still working towards a fourth quarter in-service date. During 2013, the transmission infrastructure was completed, the pipelines were all completed, and the lignite mine was placed into service. At this stage, more than 75% of the piping has been installed; and testing of the combined cycle is underway.

In fact, we produced electricity using natural gas throughout most of January, generating approximately $1 million to offset project costs. We will move towards testing of the gasifier in the second quarter, which will mark the first heat-up of a gasifier at the facility. The key milestone expected prior to commercial operation is a reliable supply of syngas to the combined cycle.

Recognizing that there are risks associated with start-up activities, we have recorded an additional charge for the project of $40 million pretax, $25 million after tax, in the fourth quarter of 2013 to increase the contingency for those risks. Overall, we continue to anticipate that Vogtle Units 3 and 4 and Plant Ratcliffe in Kemper County will benefit customers with clean, safe, reliable and affordable energy for decades to come.

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 strong results for the fourth quarter of 2013, which positively influenced our results for the full year. For the fourth quarter of 2013, we earned $0.47 per share, compared to $0.44 per share in the fourth quarter of 2012.

For the full year 2013, we earned $1.88 per share, compared with $2.70 per share in 2012.

Our results for the fourth quarter 2013 include after tax charges of $25 million, or $0.03 per share, and earnings for the full year 2013 include after tax charges totaling $729 million, or $0.83 per share, related to increased cost estimates for construction of the Kemper project. As a reminder, Mississippi Power will not seek recovery of estimated cost to complete the facility above the $2.88 billion cost cap, net of Department of Energy grants and exceptions to the cost cap.

Results for the full year 2013 also include an after-tax charge of $16 million, or $0.02 per share, for the restructuring of a leveraged lease investment recorded in the first quarter of 2013.

Earnings for the fourth quarter and full-year 2013 include $12 million, or $0.02 per share. And earnings for the full year 2012 include $21 million, $0.02 per share, of an insurance recovery related to the March 2009 litigation settlement agreement with MC Asset Recovery LLC.

Excluding these items, earnings for the fourth quarter and full-year 2013 were $0.48 and $2.71 per share, respectively, compared with $0.44 and $2.68 per share, respectively, for the same periods in 2012.

Year-over-year results were positively influenced by revenue effects associated with new generating capacity at our traditional operating companies, as well as reductions in interest expense and AFUDC. These positive effects were offset by significantly milder-than-expected weather, increased depreciation and amortization and non-fuel O&M expenses, and an increase in the number of shares outstanding. A full listing of earnings drivers for both the full year and the fourth quarter is included in the slide deck.

Our full-year 2013 results are perhaps best understood, however, by examining the response of our traditional operating companies to unexpected headwinds in revenue. Weather in our territory was especially unseasonable in 2013, resulting in one of the mildest summers of the past 20 years; and rainfall during the third quarter of 2013 was the heaviest in nearly 100 years.

The impact on our base revenues equated to negative $0.14. At the same time, retail sales growth in 2013 was slightly less than anticipated.

2013, therefore, marks yet another year in which our flexible spending plans have proven effective in offsetting unforeseen shortfalls in revenue. Each year, as part of the development of our financial plan, we build flexibility into our operations and costs to serve as a mitigation for revenue variances.

Since 2010, with the economy struggling to recover and with two very mild weather years back to back, our O&M spending has been down $500 million compared against our plan, helping us to deliver on our short-term financial commitments, while adding more than $7 billion in capital assets. All the while, our operating companies have been keenly focused on safety, reliability, and customer satisfaction, with a view towards maintaining the long-term sustainability of our business model.

Moving now to an economic and sales review of 2013. As expected, economic growth in 2013 was slow during the first half of the year but picked up considerably during the second half of the year. This trend is reflected in our retail sales results, which showed improved growth in the second half of the year in all customer classes.

For example, industrial sales, which decreased 0.7% in the first six months, increased 3.6% during the second six months and 4.8% during the fourth quarter, bringing us to seven consecutive months year over year of industrial sales growth.

The strongest segments included paper, up 11%; primary metals, up 11%; and pipelines, up 6%. Housing-related industries improved as well, with stone, clay and glass up 9% and lumber up 5%. Commercial and residential sales were essentially flat for the year, although we did see a noticeable increase for residential in the fourth quarter.

Meanwhile, our economic development pipeline remains robust, growing nearly 20% in 2013, compared with 2012. Our traditional operating companies are currently supporting some 350 potential projects, representing 35,000 jobs and $15 billion in capital investment.

Earlier this month, we re-engaged our economic round table participants. As a reminder, this group consists of several regional economists and executives from a handful of our largest customers. The viewpoints of our round table participants are well-aligned with Southern Company's economic forecast.

The momentum experienced during the second half of 2013 is expected to carry over into 2014, with anticipated GDP growth of between 2.5% and 3%. Industrial activity and exports are expected to be the key drivers, with growth expected in chemicals, steel, auto manufacturing, and transportation.

The housing market is improving, but likely has a long way to go before returning to pre-2007 levels. Multifamily customer growth is 10% higher -- is a 10% higher share of our growth than during the pre-recession period, consistent with many anecdotes about robust growth in multifamily housing.

Building permits were up more than 25% over 2012, but are about 50% below normal levels. The dynamics of supply and demand in this sector are returning to historical levels, which should translate into an increase in single-family home starts.

This continued recovery of the housing sector will support stronger residential customer growth and further support the rise in activity we saw in housing-related sectors in 2013, with expectations of continued growth in 2014.

Much of the feedback we have heard from our economic roundtable participants is consistent with the factors that drive our electric sales outlook for 2014. Overall, our forecast reflects 0.7% growth from our 2013 weather-normalized results.

As one looks at how the forecast breaks down by customer class, the expected trend is similar to that of the past several years in that industrial growth leads the way. Specifically, our forecast of 0.7% overall growth assumes a 1.1% growth for industrial sales and about half that rate for both residential and commercial.

Now let's focus on the other elements of our new forecast, including our three-year projection of capital expenditures and the associated financing plan.

Based on our CapEx forecast for 2014 to 2016, it totals $14.5 billion. More notably the forecast reflects a slowing trend in the rate of capital investments by our regulated subsidiaries.

The main drivers of this trend are expected completion of Plant Ratcliffe in Kemper County, Mississippi; the transition to start-up activities for Vogtle Units 3 and 4; and the expected completion of compliance investments for EPA's MATS rule.

In addition, we have outlined potential Southern power investments for the three year period which total $1.4 billion. These placeholders represent potential acquisitions or new-build capacity projects consistent with Southern Power's long-standing capacity contract-oriented business model, as well as potential opportunities to invest in additional PV solar projects over this time frame. As always, we will provide the details of any specific opportunities as they arise to an appropriate level of certainty.

Overall, our three-year CapEx total is expected to be $15.9 billion. As we turn to the financing plan for the next three years, there are several things to note.

First, the only equity issuances we are forecasting over the three-year period are the same $600 million in 2014 that we highlighted late last year. This is primarily driven by our desire to preserve our target equity ratios in light of the estimated Kemper losses recorded in 2013.

Our current forecast anticipates that all this equity will be issued through our various internal plans. We currently project zero equity needs in 2015 and 2016.

Secondly, we have highlighted the appropriate size and timing for Georgia Power's draws under the DOE loan guarantee program, and an estimated total for securitized bonds to be issued by Mississippi Power to fund a portion of the Kemper project. As our cash flow profile continues to improve over the next several years, our three-year financing plan reflects very little new capital market issuances, which may increase with potential new investments by Southern Power.

However, it is important to note that our forecast would still reflect zero equity needs for 2015 and 2016, even if we spend the entire amount reflected in our CapEx forecast for potential Southern Power growth projects. We have provided a more detailed financing schedule in the appendix of our slide deck, which breaks these out by subsidiary.

All of the forecast elements we've discussed -- sales, CapEx, equity and cash flow -- factor into our earnings guidance, which I would like to share with you now. First, let's focus on 2014.

As noted earlier, our 2013 earnings per share result of $2.71 excluded charges -- excluding charges came in a year of extremely mild weather, heavy rainfall, and a still-sluggish economy. However, we largely overcame the financial impact of those external factors by demonstrating an ability to mitigate revenue shortfalls with lower spending.

As a result, it's fair to consider $2.71 a normalized earnings per share result. Using $2.71 as the starting point, we then adjust for the additional share dilution resulting from the estimated Kemper losses, which total $0.07.

As we have shared previously, this step change is simply a function of the new shares we're issuing to preserve our target equity ratios at both Mississippi Power and Southern Company. Growing 4% to 5% from this adjusted starting point establishes a midpoint for our new 2014 guidance range.

To establish a reasonable range for the year, we then add plus or minus $0.04, a very modest 1.5%, to this midpoint to set a range at $2.72 to $2.80 per share.

Now let's transition to expectations for 2015 and 2016. In our last earnings call, we shared a very distinctive trend, which we are beginning to see in our long-term forecast. More specifically, we highlighted a slowing of EPS growth in the middle of the decade.

This slowing is largely a function of a slowing level of capital spending, especially relative to a capital base that has grown significantly in the recent years with new generation and environmental investments.

Combined with the increased operating cash flow associated with these same projects, the rate of growth in total invested capital slows over the next several years. Consistent with these trends, our estimates for earnings-per-share growth for 2015 is 3% to 4% from our 2014 guidance range. And our estimate for 2016 is another 3% to 4% above our estimate for 2015.

As we look beyond 2016, we continue to see potential for the growth rate to reaccelerate. For instance, we are likely to see new generation investment opportunities later this decade for both Southern Power and our traditional operating companies, as well as new environmental spending.

Additionally, beginning several years ago, we raised our equity ratio by several hundred basis points to preserve our financial integrity during a period of increased construction risk. As our major projects are completed, there may be an opportunity to unwind some of that equity ratio cushion and maintain our credit quality at the same time. This would also have a positive impact on earnings-per-share growth.

In assessing our earnings estimates for 2014 through 2016, we have also reconfirmed our belief that continuing with dividend increases of $0.07 per year is sustainable. While dividend increases are subject to Board approval, the implied payout ratios associated with a $0.07 per year increase are reasonable within the context of our strong cash flow, business model, and constructive regulatory jurisdictions.

So to summarize, we estimate EPS growth of approximately 4% to 5% in 2014, off of an adjusted 2013 base. Our growth estimate for 2015 and 2016 is 3% to 4%.

Beyond 2016, we see potential to reaccelerate that growth. Based on our level of confidence, we expect to continue our current dividend growth strategy. As a side note, our earnings estimate for the first quarter of 2014 is $0.56 per share.

I'll now turn the call back over to Tom for his closing remarks.

Thanks, Art.

Earlier, Art highlighted something that I want to take a minute to reinforce; namely, our track record of delivering regular, predictable and sustainable earnings. Along with that, a consistent dividend growth trajectory.

We are extremely disciplined in how we approach earnings guidance and dividends at Southern Company. We provide guidance once a year during our fourth-quarter conference call in January, like this one; and we have never changed our guidance range during the remainder of the year.

Additionally, our ranges tend to be small relative to those of other utilities. On the average, over the past decade, our guidance range has been the smallest relative to the other 19 companies in the Philadelphia Utility Index.

And, as an affirmation Art's earlier point on the effectiveness of our spending flexibility, we have been inside or slightly above these narrow EPS ranges every single year over the past decade. And we were inside those ranges other than including items.

Combined with the fact that we have had sustainable dividend growth every year for more than a decade, even through the toughest of economic times, we believe the risk return profile of Southern Company remains an unmatched value.

We are now ready to take your questions. Operator, we'll now take the first question.

Thank you.

(Operator Instructions).

Our first question comes from the line of Steve Fleischman with Wolfe Research. Please proceed with your question.

Hey, Steve.

Hi, Tom, how are you? I don't think I'm ever first on a call. I'm surprised.

Just, when you look at the growth in 2015 and 2016, in terms of earnings growth, it doesn't totally match the growth in the capital that you show 2015, 2016, so 2015 has higher capital growth, then it slows in 2016, but the earnings growth is kind of consistent. Can you maybe explain just those differences?

Yes. Steve, are you saying that earnings growth is slower than the CapEx growth? Is that where you're going?

Well, it is -- CapEx growth in 2015 is about 5% the invested capital growth and 2016's 3.5%. But then the earnings growth for both years are kind of consistent. So the 2015 growth in theory should have been higher if it matched the capital growth and then slow down in 2016.

I've got a lot of things going on there, but you've got invested capital, actually expected to grow but it's being offset with some cash as well, and Southern Power is also an element of that as well. The growth rate we include there assumes some expansion at Southern Power and some of that could be in the form of new solar projects which would be more productive to income in those time frames.

And let me add a little bit of that. So we've often talked about kind of how we put a risk premium on tax advantaged investing. It is clear that if we invest in solar projects you get a big pop to ITC. You know, those pops are not sustainable and so in order to provide a growth trajectory, you've got to continue to add to add to add and it also adds to your risk of being able to recognize the economic value of those tax benefits.

For example, if you had a hurricane, you expense all the hurricane expenses in the current period and it pushes out the economic consequence of the tax credits. What we see in 2016, for example, is kind of the aggregate effect of not so much tax-oriented investing but a return to kind of base-load investing at Southern Power, which in the very near term looks a little dilutive.

In other words, you don't earn big returns. It's kind of AFUDC. The returns tend to be more of the sustainable nature that we like. So I think that shaping, the kinds of investments we're assuming for Southern Power is a big deal.

And then I guess the last kind of point would be that earned ROE is based on average invested capital not year-end. So you've got to account for the deltas in going from one year at 4.9% and another year at 3.6%. You need to average the consequences. So it won't have that kind of year-to-year discrete impact.

Okay. And then just a commentary that you made on the right side about the long-term growth drivers.

Yes.

Is that to kind of highlight that -- my sense from the last call was that growth was potentially going to slow in 2016 and 2017 and then maybe get better long, long term. Are you trying to say -- are these trying to say that, look, it is status quo it's set this low, but there's these other things that could pop up that could kind of get us back up again, more to the 3% to 4%.

Yes, Steve, I think that's worthy of a little bit of commentary here. Let me kind of illustrate some of the thinking.

It is kind of a business-as-usual case that would say, look, 2014 is 4% to 5%, 2015, 2016 is 3% to 4% and you always use that three-year period. And then we said, based on these assumptions, which we believe will come true, new generation requirement, and in fact the latest thinking is those generation projects could potentially accelerate. Remember, we're retiring a bunch of capacity in 2015 and 2016. So we're looking at the adequacy of that.

Environmental expenditures, Southern Power, this whole notion of are we over-capitalized during this period where we have very little construction risk and one of the charts we showed was a debt chart that shows our debt requirements for new money is very minimal. So we're in this cash flow position we talked about before.

So the base case is just what we foreshadowed, which was unusual for us the last call and we're showing you now in a lot more detail of a shaping of the earnings per share growth. That is, 4% to 5%, 3% to 4%, 3% to 4% and then beyond 2016, we expect it to reaccelerate, based on a host of unknowns.

There are other things we could do along the way that would improve the earnings per share growth rate. But recall, as long as I've been around here, we've been a big EVA shop. And by that I mean, we think we create value by the joint function of risk and return. And we are exceedingly disciplined in how we evaluate risk. So for us to accelerate the growth in earnings per share beyond this kind of business as usual case, we would be very careful in looking at what happens to our risk profile along the way.

So there's a host of issues out there. Business-as-usual depending on how the unknowns actually occur; 2017, 2018 is when the reacceleration will occur. There are things along the way, we have ongoing discussions with the Board, we talk about it and argue with each other all the time as to other alternatives that are available to us during this period. But what we're showing you right now is our best guess as to a business-as-usual evaluation.

Okay, great. Thanks very much.

You bet. Thank you.

Thank you. Our next question is from the line of Greg Gordon with ISI Group. Please proceed with your question.

Hey, Greg.

Good afternoon, guys. Couple questions. Just as a follow-up to Steve's question, is one of the factors perhaps affecting the growth rate being slower than the rate of capital growth contracts or hedges that you have at Southern power that are rolling off, that are headwinds or that sort of are net against what would otherwise be normal growth in rate base earnings in the core businesses? Or is that not something that's a factor.

It's not much of a factor. Southern Power doesn't swing us that much. You need to look at just kind of this averaging effect that we talked about. If you take average ROE and therefore the generation of earnings per share, it tends to moderate the discrete year-to-year differences in CapEx. That's where I thought Steve was going.

So what you see is just kind of a moderation effect. I wouldn't attach -- and then when you add on what's going on with cash, what's going on with Southern Power and a variety of other factors, that's what's causing kind of the delta. Don't expect in any single year a change in invested capital. You've got to average it across a couple of years anyway.

Understood.

Don't expect 4.9% to equal 4.9% and 3.6%, to equal 3.6%.

Got it. Two more questions. One is, the amount of Southern Power CapEx that you've assumed you're going to spend over the next three years is significantly lower than the place holder you had for the sort of last three year rolling period?

That's right.

What's caused you to down-size that? You talked about solar and you talked about base load. Can you extrapolate a little bit more on what you see as opportunities there? And what are the milestones we should look for to get comfortable that, that capital can be deployed at a good IRR.

Yes. Okay, so Greg, great stuff. And actually I've got to give you kudos. You actually -- I bet it was two years ago, you called this circumstance of slowing invested capital growth and therefore what happens to earnings per share, like I said, about two years ago you raised this issue.

What we said is, we're working on it. On one hand, if you think about a normal kind of investment indifference portfolio horizon, all we've done is move down the growth curve, down the risk curve. Our value creation, we think, is pretty consistent.

Now, what we have in there for Southern Power is based on a reasonable look and certainly part of that look involves the Southeast United States being in an equity -- I'm sorry, a capacity oversupply situation through the rest of this decade. As you get into the 2020s, you need to have -- start building into the late part of this decade in order to make sure you have capacity in place.

What we're watching right now is kind of a couple of factors, and these polar vortex issues are pretty instructive. If you look around the United States, the United States did fine during these periods of significant load increases, but I think it illustrates the fact that along with the effect of (inaudible) and the retirement of a lot of capacity, it may mean that the value of capacity is higher than what we think it is now. I.e., the equilibrium point may be closer than otherwise we suggest. So that's kind of thing one.

Thing two -- we have also said that Southern Power has turned down business outside the Southeast and so, therefore, we had been looking closer at other opportunities -- Texas, MISO, maybe certain other parts of the United States. We're continuing that. In terms of creating place holders for those opportunities, my sense is we've been reasonably conservative.

So you should just know that Southern Power has a great deal of interest from us and every meeting that we're in there with those folks we remind them that if they can hit our tough IRR requirement, that they have all the capital they need to grow. Capital is not a constraint here. And so we're pushing them as hard as we should in our external kind of presentation. I think we're being reasonable y conservative.

Said another way, there may be upside, I just don't want to count on it.

Thanks, Tom. Taking up a lot of time. I'll circle back into the queue. Take care.

Thank you.

Thank you. Our next question is from the line of Jim Von Riesemann with CRT Cap. Please proceed with the question.

Hi, Tom; hey, Art. How are you? Stay warm.

Piece of cake.

Piece of cake? Lot of snow down there. Couple questions. I'm confused on the bridge between 2014 and 2013. Was weather, like, $0.14 below normal for 2013 on a weather-normalized basis? So what am I missing there?

Yes, 2013 was down $0.14 below normal, and most of that's that was in the summer.

Okay.

Versus, what, 2012? I didn't follow your question.

The question is, if you were $2.64 on your adjusted base and you're adding back the $0.14, that would take you closer to the $2.78 range. Why am I looking at a $2.72 to $2.80 range for 2014.

What we've done is normalize the result for our O&M spending.

Okay.

Which really drove it back, and when you do year-over-year versus against our plan, you get different numbers. But that's -- when we look at our plan, we were down $0.14 on weather. We were probably down about $0.06 on economic growth, and offset that, basically, with our cost control.

One of the things just thinking about on a second question is deferred taxes in the absence of bonus depreciation. Can you give us some guidance as to how you think that line item on the cash flow statement's going to look going forward?

Well, we still have some bonus in 2013, probably in the $400 million range. Is it higher? $680 million. I was talking about 2013. 2013 was probably in the $400 million -- close to $500 million, $550 million. 2014 is expected to be $680 million. And then beyond that, there's not any more. We go back to a more normalized basis.

And then I guess the last question, maybe this is for you, Tom, is, you've got a little bit of dividend payout ratio creep going on. When you get to that 2019, 2020 range, what kind of payout ratio are you thinking about.

It depends on a host of unknowns, but we think it's south of 75% would be my guess. You'd be in that neighborhood. Depends on kind of what you do. What we've indicated here is that with the ranges we're showing you, based on how the next three-year period goes, I think you're in the 73% to 77% range. That's the way the math works.

Right.

To the extent -- and remember, you add $0.07 a year, your growth rate is actually dwindling a bit, maybe from 3.5% to 3%. So as earnings per share grows again, and we think we reaccelerate beyond the 3% to 4% to beyond 4%, our payout ratio goes down, just depends on what year you want to pick. But I would feel reasonably comfortable saying -- of course, host of assumptions, we're south of 75%.

Okay. So then that would include all the benefit from Kemper coming online and then Vogtle coming online, which should be a big rate base add, right? In the latter part of the decade?

We're adding the rate base with CWIP, remember. It's a big cash flow impact.

I understand the math. Thank you.

Yes.

Sure.

Thank you. Our next question is from the line of Ali Agha with SunTrust Robinson Humphrey. Please proceed with your question.

Ali, good afternoon.

Good afternoon. Couple of clarifications, Tom, just going to a little bit more insight into your outlook for 2016. For 2014 you had mentioned you guys are budgeting 0.7% load growth. Are you keeping that constant for 2015 and 2016 as well, or what's embedded as far as load growth is concerned in those years?

So we're doing GP -- GDP growth, gee whiz, of 2.5% to 3% kind of over that time frame and you should use your 50% kind of ratio in round numbers. (Multiple speakers) Some pick-up.

There will be some pick-up in 2015. We think just north of the 1% level, and then maybe a little stronger than that in 2016.

And let me just add one more thing. If you look at the momentum in the second half, which we called, and then you see what happened what happened in the fourth quarter, the numbers don't actually jive. In other words, the momentum looks stronger than what we're projecting. Here again we try to be conservative in our estimates. We're off to a good start.

The other thing you look forward to is kind of headlights that are provided by our economic development. We think that kind of look at our backlog on a number of different factors. We think we're kind of up 20% on our backlog. In other words, we're seeing lots of good things coming into the Southeast.

One interesting thing you may find is on-shoring. We're seeing more foreign companies consolidating or adding new facilities in the Southeast. We think that's good labor force, it's gains in efficiency of modern production facilities and frankly cheap energy relative to other places around the world. I've been saying for some time around the United States that if we continue on the right kind of national energy policy, we can provide America with its unassailable advantage in manufacturing, growing jobs, growing personal incomes. I think we're starting to see some of that.

Yes, Ali, let me add to that a little bit. We talked about weather-normal sales growth for last year being 0.4%. But we really believe that with all the rainfall, we don't normalize for rainfall. It certainly had an effect on residential sales because the number of days above 100 degrees, above 90 degrees last year was about one day in the third quarter. We normally have more than 100. So you've got this weather-normalization effect.

We think we've understated real growth here. When I look at residence class we added 27,000 new customers last year, about 3,000 more than we thought. On the commercial side of the house we added 3,000 new commercial customers. We're beginning to see the growth in those sectors as well, which is the connecting point between industrial growth, residential growth, and then following that, commercial growth.

Got it. Got it. Art, second question to you. You alluded to that a bit. But off the O&M base that you reported this year, how should we, again, be thinking about O&M growth. I know there's normalization to be done as well. Can you just remind us how we should think about O&M growth off this 2013 base?

It's a good question, Ali. In 2014, we estimate that O&M will grow roughly 9%, or maybe $300 million or so. About a third of that O&M is for environmental. The rest will be a return to what we call normal operating levels that are supported by recent rate cases, both in Gulf and in Georgia.

Growth for 2015 and 2016, we think averages about 3.5% a year, 2.5% of that would be kind of normal O&M growth, and then in 2015 you'll have to add about another 1% for operations of Kemper County. So that kind of paints the picture for you.

Absolutely. Last question, just to clarify. In your financing plans you've assumed the DOE loan guarantee comes through and you're drawing down on that, et cetera. I'm assuming you're obviously extremely confident you're getting it. But for whatever reason, if that doesn't come through, and maybe that's 1% or 2%,and if that doesn't happen, does that get replaced by additional debt or would more equity come into the picture in that scenario.

It would be pure debt. We would go to the capital markets for the debt.

I got it. Thank you.

Yes, sir.

You know what, I just feel compelled to throw one more statistic out, because it's along the lines of these questions about growth and everything else. We talk about this a lot at the Fed right now. One of the triggers in the kind of tapering decision that's going on today is what's going on with the long-term unemployment rate.

Let's recall that, that rate is influenced -- probably too rosie, if you will -- by the fact that more and more people are leaving the workforce and it includes people that are moving from full-time to part-time. I think a real instructive kind of statistic that we should be watching now is personal income growth.

Recall also, there's been this theory that energy efficiency is driving down electricity sales. We haven't seen that as much of a factor. What we do see as a factor are things like the cost of electricity and personal income growth. And if personal income growth is flat, that will have more of a dampening effect on sales. Remember to keep all this into account as we come up with our forward forecast. Thank you. Operator, let's take the next question.

Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs Asset Management. Please proceed with your question.

Hey, Michael.

Hey, Tom, hey, Art, thank you for taking my questions. When you -- embedded within your guidance, how should we think about which of your businesses, which of your regulated operating companies, are earning their authorized levels, and which ones might either be under-earning, or given what's in your state-by-state demand forecast, potentially doing better than what the authorized is?

We pretty much put the challenge on each of our companies to earn at the upper levels of their range. Remember, what we got to do is, if you compare us against almost anybody in the United States, we do a darn good job of earning our authorized returns, company by company. That's kind of what you see. Now, there's always a host of factors there in terms of your ability to kind of think about weather, economic growth, O&M levels, et cetera. But if you go back and look at history, we challenge folks to get right at the top.

Got it. And I hate to do this and I want to stay in more the near term, meaning 2014 or 2015, because I don't know, the world will change 572 times especially now and 2020, so forecasting out that hard -- really hard. Your demand forecast, one interesting thing is you had really strong industrial demand this year. I mean, up 1.5%, a real positive kind of tailwind. And yet in your 2014 guidance you're basically saying that's going to slow a decent chunk. What's the driver of the slowing there?

So, Michael, this is so much fun. We beat each other to death on coming up with these estimates, and I tried to elude to this earlier. When you look at the momentum on the second half, 3.6% in the second half, 4.8% in the fourth quarter, it looks as if we're light.

All I can tell you is, we have challenged each other in very significant ways in coming up with this. We do bottoms up, we do tops down. We bounce it against other economists. Our estimates are a little bit lower than what the Fed would say right now. Let's just say it is reasonable and conservative and we hope there's upside.

One other thing I'll add to that Michael, is we get a lot of input from our customers. Some of our very largest customers rotate production around the country at various facilities. Some of it driven by price, some of it driven by just location of the need of whatever material they're producing. So we're trying to make judgments around those kind of issues as well as we prepare forecasts in a reasonable band of expectation.

And finally, just real quick on Vogtle, can you -- I know it's embedded within the new generation forecast, within your capital spending views or outlook. Can you just give us some guidance in terms of -- or reiterate kind of what the CapEx on Vogtle for this three-year cycle is likely to be?

Well, hey, Michael, if I could just ask your patience there. We're going to file VCM I guess 9 and 10 in February and we're going to give a great deal of illumination around those statistics when we do that. If you want more general stuff, we can give you that I'm sure. But we're getting ready to give a lot of detail on that.

Got it. I can follow up with Dan offline. Happy to do that.

Sure.

Thanks, guys. Much appreciated.

You bet. Thank you.

Thank you. Our next question is from the line of Andy Levi with Avon Capital Advisors. Please proceed with your question.

Hey, Andy.

Hey, guys. How are you?

Dynamite. Hope you're well.

I'm all right. Where did you guys sleep last night?

Georgia Power has a condo. That's where me and Art slept. We had people in offices. We had people across the street here at a hotel. Art did fall and bust his buns going over to the studio this morning. It was hilarious.

Sorry to hear that, Art.

Well, thank you, Tom.

Actually, all my questions were asked. I have one housekeeping thing. The guidance that you gave 2014, 2015, 2016, is that basic or diluted?

Basic.

Okay. And that was what, about a $0.03 difference? Is that right?

Less than $0.01.

Less than $0.01. Okay. Thank you.

All right. Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of Kit Konolige with BGC. Please proceed with your question.

Good afternoon, guys.

Hey.

Hi, Kit.

Hey. So this is a little bit of a follow-up to Andy's question as well. Again, sort of housekeeping. But Art, can you just walk through how the dilution adjustment works? So for taking the axel of ongoing earnings from 2014, then we subtract $0.07 for future equity issuances, is that what we're doing there?

Well, that's what we have in our guidance, is adjusting to that. And we certainly have already reflected that in our forward-looking stuff. But the math around fully-diluted assumes certain stock option exercises and the shares that would be issued in association with that. And that number could likely move in the future as you move forward. So it's kind of hard to give you -- I think what we've got right now is less than a penny, but that could change, depending on the number of options that are outstanding.

Let's make sure. The way we read the question before, the way we answered the question was, dilution associated with the stock options and other kind of contingent equity that sits out there. There is the other question about the $0.07, right, and that is associated with equity underlying commitment to maintain financial integrity with Kemper.

Right.

I thought that was clear, but I just want to make sure.

I guess what I'm asking is, so if when we're looking at what you actually report, say in 2014, is it going to be -- the guidance is that it will be in the range of $2.72 to $2.80, less some part of the $0.07? Or --?

No, no, that's it the $0.07 is completely separate. That's what I was trying to illustrate. $0.07 is separate.

Okay.

The other dilution we were talking about really is just associated with the exercise of options.

Right, so that's not a big deal. What we're looking for is $2.72 to $2.80, and then these other numbers for 2015 and 2016 that you give out here.

You got it.

Okay. One last item on Kemper. What's the schedule for upcoming testing and milestones that we should be keeping an eye on?

Yes, Kit, the next -- I think we mentioned it in the script a little bit. The first fire to the combustion turbine, I'm sorry, misspoke. It's really the first gasifier heat-up which we expect to be sometime in the second quarter. And then beyond that, it will be the delivery of reliable syn gas to each of the combined cycles. And those should be achieved sometime late summer, early fall.

Okay.

The other thing I just want to point out too here, just to remind everybody, if we had perfect foresight the cost increases we've had on Kemper were really kind of entered into the day we entered into a fixed price agreement with only 10% of the engineering done. That was kind of 2009 and 2010. The construction of the plant had actually gone pretty darn well and in fact in this latest reporting period we think we're on budget, on schedule on construction.

And with respect of the additional $40 million, that really is, with our best judgment, gee, whiz, we could have done nothing and wait until a later period with more certainty but in all of our collective wisdom, and we argued about this a lot, we decided that it was prudent to add $40 million to the contingency around cost expected around start-up. So construction's going great. We'll know more about start-up as you get into the June and beyond time frame.

Okay. Thank you very much.

Thank you. Appreciate it.

Thank you. Our next question is from the line of Dan Eggers with Credit Suisse. Please proceed with your question.

Hey, Dan.

Hey, just with power demand looking pretty enormously high so far this quarter, I was kind of wondering what the fleet dispatch has been, how the plant's been performing and with the run in gas do you guys see a lot more coal burn coming this year just as you try and recalibrate the fleet a little bit?

Fascinating stuff. So let me give you the first good answer, is the system's running great. We're very happy with our reliability. In fact, I think we noted our wire's reliability's the best in history, so that's great.

The thing that's interesting is, is there a change in equilibrium point? We've been saying that, that may have pushed off at least in the Southeast early 2020. With all these spikes associated with the polar vortex, we actually were loaded up pretty well. All of our units that could run were running. So the suggestion is perhaps there is an acceleration of the value of capacity, at least in the Southeast.

The other thing that's fascinating about this, I commented on it a bit in both CNBC and Bloomberg this morning, there's this whole notion of the dash to gas in the United States. Frankly, it's been a big story at Southern Company. We now are the second or third largest gas consumer in the United States. We made a big shift away from coal to gas.

You all have heard, and I've written and spoken about five points to be cautious about in natural gas. The polar vortex has told us that at least point number two is absolutely true and that is the need for infrastructure. The new gas is in a place that is different than the old gas. And all of a sudden we find the need to build more pipes, make sure the critical service providers have FT, firm transportation in those pipes, and we've got to make sure that we have adequate storage.

Now, we have secured all the FT we need for our business. And we have seen prices $4.50 per million BTU and I guess they spiked up a little bit. In fact, I just saw something before we gone on the call, that maybe they were in the high $4s to $5s, and it's been since 2010 since we hit numbers like that. In fact, some people were saying that we wouldn't hit $5 again for the rest of our lifetimes.

Okay. If you live at the end of the pipes, particularly you folks in the Northeast, if you don't have sufficient infrastructure, if you don't have FT, if you don't have sufficient storage, we've seen a blow-out in some of those prices up to $130 per million BTU. One of the suggestions is that the beta of the energy supply of the United States is increasing as a result of the push to gas. We've been saying that. It's true.

So one of the things you got to think about is what is the infrastructure, what is the availability of FT to assets all over the US, and how do we think about storage in this new environment? How do we think about industrial capacity in this new environment? Big deal.

Overall, the system is performing great. At least for Southern, reliability looks good for the years to come. The only question with us is, what happens to the equilibrium point.

The dispatch on the non-PRB coal plants has been pretty low for a while now. At that $4.50, $5 gas number do you see those plants running a bit more this summer? (Inaudible)

If you see gas in the -- I'm sorry, if you see, yes, if you see gas in the $5 to $6 range, you're going to start running probably your Illinois Basin plants first, and then your Central App plants after that. But that's kind of the range. PRB, gas in the $3 to $4, Central App and then Illinois Basin, $5 to $6, with Illinois Basin being ahead of that.

The other factor -- I just kept coal prices constant. We've seen coal prices come down a bit. The other impact that hit us last year was abundance of hydro. So interesting stuff. All this is a little bit in flux.

Recall again, Southern is uniquely positioned in that we have huge optionality, among and between gas and coal. We can swing gas from I think it's 35% of energy to 55% of energy and we can swing coal 25% to 45%. So we'll be able to deliver the best package, we think, of energy to our customers based on our diverse portfolio.

I guess the other question, I went back looked at the fourth quarter presentation from last year. The CapEx numbers you guys have for 2014 and 2015 this year are higher than what you guys had a year ago and the growth rate was kind of 4% to 6% range instead of the new numbers now. Is there some deterioration in earned ROEs or what bridges that gap? Because I don't know that I saw all that step-down if I put all those numbers into the model.

Yes, Dan, this is Art. This is probably Kemper. We've written off estimated probable losses but we're still having to invest that capital. So that's showing up in the CapEx numbers in 2014.

So that's not captured in the $0.07 recalibration? Baseline was and the growth would be from there.

It is in the $0.07 recalibration but it's also in the CapEx.

Yes.

Okay. I'll follow up with Dan afterward. Thank you guys.

Thank you. Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed with your question.

Good afternoon, Jonathan. Jonathan?

Sorry. Mute button. Can you hear me now?

Turn down your radio, Jonathan.

CA20, I think you've now said you're hoping to get it in place in February, before you'd been saying Q4. Is there enough wiggle in the schedule to mean that, that doesn't matter very much or --?

Hey, Jonathan, we try to be -- let me take exception with that just a little. We try to be very careful in that we want to get assembly by year end. We missed it by like five days or whatever it was. So we assembled by year end in our view. That was much more important. Us moving it into the hole, we've got plenty of slack time around that. You should not consider moving that as critical path.

Okay. So what are sort of the next critical part items we should be watching that you're going to point us to?

Jonathan, if you look at the slides, there is that diagram we showed you, there's a CAO1 module that goes inside the containment vessel. That would probably the next item on the critical path list. But remember that these things, as we move in and out of these things kind of change places in critical path. That is the next item, big item on critical path.

And that's kind of a third-quarter event.

So most of the sort of progress to this picture on the slide is more back end of the year?

Well, progress throughout the year but CAO1 is in the -- you said third quarter.

Yes. In terms of placement in there. So if you kind of look at that picture, you see CO1's a great big thing and it's got lots of panels and it's kind of complex walls and all that. That will be going on in the module assembly building. There will be all sorts of progress throughout the year just as there was on CA20. We believe we'll be able to hit it. The placing of it is almost less important than the assembly of it.

Okay. That's great. Thank you for the update. Tom, with this kind of period of, I guess, either more conservative outlook, or lack of growth, whichever, does it change your calculus and interest level in M&A at all? Can you just talk to your latest thoughts there?

Yes, sure. Remember, again, we're very kind of analytical in terms of how we think about value creation. Value's a function of risk and return. And I can remember -- I grew up in a period where we decided that growth was the end all to end all and we chased growth and really I don't think did an effective job of evaluating risk. If you grow risk faster than you grow growth, then you destroy value.

What you've seen with Southern Company and especially, we talked last year about getting all this regulatory wood chopping behind us, we've done that I think in an exemplary manner in 2013. So here's the deal. As that financial pressure associated with the big CapEx plans start to go away, our risk starts to go down. All we're doing is moving along the risk return curve. We think our value creations aspects are terrific through this period.

Now, we always want to test a business-as-usual case and that's where I kind of got a long-winded earlier in the call. We can look at more opportunities at Southern Power. We can evaluate other opportunities we might have to build new generation, to build out our environmental program requirements. We can look at other opportunities as we are essentially bound to do as a fiduciary, including M&A.

But remember what we say about M&A. In my opinion, the whole work around mergers and acquisitions is a how, not a what. The what is what it results for us in terms of the portfolio outcomes on risk and return. The how could be buying assets, building assets, or buying corporate entities. So I don't view M&A as a what. I view it as a how. It is a means to achieve something else.

We're going to be very disciplined as we always have been about looking at what happens with the total value creation profile of Southern. The base case -- and in fact we're showing you a lot more clarity in this call than any time in my memory. The reason for that is, we have a great deal of confidence in it. Can we improve it? We're going to work like crazy to see if we can. But we will not chase growth at the expense of increasing risk so that it destroys value ultimately.

Okay. Thank you, Tom. Can I -- one other quick thing.

Sure, absolutely. Yes.

I think this is a little dated now but the last thing I remember you giving a range of like $1.75 to $1.90 for earnings out of Southern power for 2014.

That's right.

Is that still a good number for this year?

Gone down a little bit for a variety of reasons. We would say kind of over this time frame, $1.45 to $1.75. You say, well, what happened there? Well, a couple of moving pieces.

One is that the energy margins have essentially gone down with the rising gas prices. Interestingly, for us anyway, gas prices have almost tripled. Remember everybody said it wasn't volatile. Well, it's gone from, I don't know, $1.85 per million BTU at one time to now this kind of $4.50 to $5 per million BTU. I don't know where it sustains after the polar vortex withdraws.

Gas prices have gone up. Largely our business at Southern Power is largely gas fired. And so, therefore, as gas prices go up, coal prices come down. The pull interchange rate changes and our margins decrease a bit, number one.

Number two, the pace of the economy has slowed based on prior projections. Now, you look at the evidence in fourth quarter of 2013 and you say, boy, that looks awfully bullish. You look at our economic development stuff, that looks awfully bullish. The numbers we're showing you I think are reasonably conservative and prudent. So what's the potential for economic growth beyond what we see? I don't know.

The third, I guess, would be just kind of, what's the opportunity for Southern Power to deploy more assets, and will they be tax-oriented assets, like solar, to given you the big -- non-sustainable, though -- pops in investment tax credit and net income? Or will they be of a nature that give you more the sustainable earnings picture of kind of base-load generation normally associated with natural gas. It's all those factors.

Is it fair to say that the outlook, the earnings projections you've given us for 2014 through 2016 assume something flattish within that lower range you just spoke to?

$1.45 to $1.75's a decent range.

Through the whole period?

Yes.

Things are kind of potential upside.

Yes. And lots of uncertainty around that.

All right. Thank you.

Yes, sir. Thank you.

Thank you. Our next question is from the line of Anthony Crowdell at Jeffries. Please proceed with your question.

Good afternoon, Tom. Just hopefully two quick ones. One is just housekeeping really. The dilution from Kemper you have minus $0.07. Just how do you calculate that and is there potential for any more equity in 2014 I guess maybe dependent upon write-offs of Kemper?

Well, we certainly are very confident in the cost estimates that we put out but there are risks as we move through start-up and as we finish construction and we have outlined those pretty clearly. When we think about the $0.07, we're issuing about $1.3 billion in total equity. That's really a little bit more than what we need for Kemper, and what we're really targeting here is a common equity ratio somewhere in the neighborhood of 43.5%, 44%. So we've got a little bit of cushion there. But again, this is the commitment we made to patch the holes around the write-offs, so we do have a little cushion as we move forward in time and that's what the $0.07 reflects.

There's this other discussion we're kind of in now that, to my memory, we haven't been in, in, gosh, decades, I don't know. But when you think about it, we did thicken up our equity ratio in anticipation of a really ambitious construction program that now appears to be kind of finishing up. When you look at our new debt requirements, they're really modest.

So you have all these kind of interesting questions about, how do you think about new equity over time? On prior calls I've talked about cash flow posture during some years that could cause us to repurchase equity. It seems to us it would make more sense not to issue and then not to have to repurchase, than issuing and repurchasing over time.

So there's all kinds of shaping about what we're going to do about new sales of equity. Are we over-capitalized for this exceedingly low business risk environment we appear to be moving into, and then you have the wild card of Southern Power and what else may be there in terms of any scale of purchases. And let me remind you all, if we have the opportunities to invest in value-creating ways with Southern Power, we will do it. We will do it even beyond the place holders if those opportunities arise.

Just, if I could jump in lastly. When you talk about maybe post-2016 and you want to -- I think the term you're using is reaccelerate growth, is the target what you set out maybe two, three years ago of 5% to 7%, or is it target 4% to 6%? What is management shooting for this reacceleration?

We've really argued about what to say about this one, and you know that you're dealing with a conservative company. So I hope you'll accept this one. All we want to say is reaccelerate beyond 4%. Don't know what the number's going to be. Let's see when we get there. There's a host of variables involved. We think it will be better than what we see in 2015 and 2016.

Great. Thank you very much for your time.

Thank you.

Thank you. Our next question is from the line of Paul Ridzon with KeyBanc. Please proceed with your question.

Hello, Paul.

Good afternoon. How are you, Tom?

Good.

Just, I guess just one housekeeping question. Can you share with us what your expected share count for 2014 is?

Yes. I got somebody looking at that. How are you doing? We heard you had an accident.

I'll be on crutches for a while longer, but --

Oh, man.

It's day by day.

Sorry to hear that. Hope you're well. Hope you get well soon.

It's really fun on the ice.

Yes, I bet. Well, Art did one today. He looked like he was trying out for Sochi to be honest with you. What we're looking for is the amount of shares?

Yes.

Hang on just a second. In August of -- oh, I'm sorry. The average number of shares for 2014 is 800 -- almost 900 million shares. The average number of shares in 2014 is about 900 million.

And you said no new equity at all in 2015 and 2016, including drips and employee type programs, is that correct?

That's correct. Based on all these assumptions and Southern Power and everything else. That's right.

Is that kind of linked with your view that you're going to be over-capitalized for a while? Or in a while?

The over-capitalized statement -- remember, what we always want to do with that is to preserve our financial integrity and bond rating. Really goes to kind of how new investment opportunities develop and kind of the post 2016 time frame.

You know, when we finished Vogtle, certainly as we get to the end of Vogtle, this whole profile changes completely. Our view is this layering up of equity heading into the big construction program really -- recall, in 2008, these guys reminded me, we were about 40.5% equity ratio. In 2013 we're 44%. That was heading into -- as we built up the equity ratio during this construction period. Now we're getting down of it.

We have not reflected in any earnings per share estimates we're giving you, we're giving you business as usual. We have not reflected any delayering of the equity ratio in any of our estimates. So that would represent upside. But recall we want to make sure that we're able to preserve our financial integrity position during this time frame.

Understood. Thank you.

Yes, sir. Thank you.

Thank you. Our next question's from the line of Michael Weinstein with UBS. Please proceed with your question.

Hey, Michael.

Hey, Tom, how you doing?

Good.

Apologize if this was already asked before, but just wanted confirm about it. For the place holder CapEx you guys have for Southern Power, 0.4%. How much of that is solar? Can you break it out a little bit more like how much was thermal, quantify it? Is it all in Georgia?

No, listen, we don't -- we're not that fine about it. We don't have a breakout for you. Listen, we've been chasing lots of different projects. I can tell you that we've been chasing some that are thermal and we've been looking at some that are solar. And it seems like you can do as much as you want to all over the place. The real challenge for us is what makes sense in the portfolio and what is, at the end of the day, the best value-accreting strategy for shareholders. We can't give you a breakout in our place holders.

Have you guys talked at all about the prudencey review at Kemper? Is that something you can maybe comment on?

No, we haven't. We expect that to occur, what, in June, later this spring?

In May, or --

May, June.

May of 2014, based on spending through March of 2013. And Mississippi Power has filed a number of documents related to that, I believe in December of last year.

And we certainly don't want to front run that process. We don't want to front run the regulator. I mean, I can just tell you my opinion, when I look at kind of you how the construction has unfolded. I think these guys have done a terrific job.

And you said before that the delay of CA20 is really no big deal, right, the movement of it on-site.

What we were really -- what you got to understand is, one of the ways that we've mitigated some of the problems in the facility at CBI has in Louisiana, was to get product out of there, put it on-site and essentially you have a CBI facility on-site now that holds those pieces of equipment, pieces of metal. And then what we do is we have an army of people on-site, both Southern and CBI, Westinghouse, whatever we need, in order to complete the nuclear quality documentation before we put those panels up on the CA20 facility.

So the real timing factor was to get it assembled. Now that we've got it assembled, there's lots of work-arounds and things we can do that take, frankly, the setting of CA20 in the nuclear island away from the critical path. That activity is not critical path. So we're focused now on assembly of CA1.

In fact, on that subject, critical path means clearing out Lake Charles, the assembly facility, right? Are you guys happy with the way things have improved there or --?

We've said this a million times. Look, in any project of this magnitude there are always challenges. Your measure of success is not that you have challenges, it's how you work around them. And I think especially since Philip Asherman and his CBI cohorts have come into play here, since they took over Shaw, the performance, the responsiveness, the constructive attitude has just really gotten better.

So we're not depending now solely on the Louisiana facility. We're moving the fabrication to different points in the United States. Navy shipyards, Oregon, even couple of the facilities, couple of the CA20 modules in IHI in Japan. So what we're doing is, we look for what is practical, what is reasonable from an economic and timing standpoint, and we find the best solutions. And that's what we've done.

And just one last question. You said there were disagreements when you were talking on the economic round table and trying to figure out what the economic growth rate should be, and what you should be assuming. You came out with conservative numbers. I'm just wondering, what kind of disagreements did you have, what were the biggest disagreements over.

The economic round table really didn't have any disagreements there. There were different numbers. I think the lowest number that was out of the group was like 2.25%. The tallest number was around 3%. So we're right in the heart of that range.

I think he's referring to the disagreements we had. Southern Company had.

You made it -- Tom made it sound like it was a very tough and arduous process.

The it always is. You wouldn't believe how much we prepare for these calls to get the right stuff. Ultimately, when we give you stuff, when we give you an estimate it is everybody's collective wisdom, their best judgment and it's after a good food fight. I'll just tell you, I look at the numbers sometimes and I go, wait, you grew 3. 6% in the second half, 4.8% in the fourth quarter and you're projecting, what, 1.1% for the year. Why is that?

We go through a giant fight. We just do. What we're providing you is our best judgment, I think. We are conservative. We don't try and push the numbers in order to achieve a result.

Thank you very much.

You bet.

Thank you. Our next question is from the line of Mark Barnett with Morningstar. Please proceed with your question.

Hello, Mark.

Hey, good afternoon, guys.

Good afternoon.

Lot of questions on some of the specifics and from the long-term plan. But just curious, maybe to shift the end of the call towards some of the policy issues that we're maybe facing over the next couple of years. There's been a lot of -- I wouldn't want to say controversy, but just kind of discussion around the numbers that the EPA's used to justify the cost analysis that they present with the new source, with the carbon, the proposed stuff that went in, in January.

I'm wondering, one of your projects obviously at Kemper is one of the benchmarks that they use. But obviously with the new engineering and some of the changes in the project since you initiated, I'm just wondering, how do you think that those estimates that they use, and the justification based on those, does that really turn into a strongly defensible rule? Because of course this is going to get challenged. Just some thoughts around that, I guess.

Rather than give you a legal opinion at this point I'll just talk about the suitability of using plant Ratcliffe and Kemper County. I met with Gina McCarthy and her whole staff along with some other CEOs in the industry and I told this to her. I've said it on TV.

The characteristics of Kemper County are such that they are reasonably unique to that site. In other words, it's mine-mouth lignites. It's our specific technology. It is the ability in an economic way to do enhanced oil recovery.

When you set a standard, you should use a set of circumstances that are applicable to a broad range of the United States. We don't believe that, that is those conditions and as unique as they may be there are applicable in a broad sense. So it's that argument first.

The second one would go to just kind of is it commercial? Is it adequately demonstrated? And I would argue it's hard to find out why you would believe that it is commercial and demonstrable in a broad sense.

Southern Company's probably the leader right now in the United States in looking at carbon capture technology. Not only are we doing it on a pre-combustion basis at Kemper County, we are doing it, have done a successful test post-combustion at plant Berry. We've had a very good outcome there. I tend to believe the pre-combustion, when you have a very concentrated set of gases moving along a process, is a more efficient way to do it than on a post-combustion where all the gases are diffused.

But still, are we going to be able to deploy that technology broadly and in a commercial way across the United States? I think those are the hearts of the question.

Great. Appreciate it.

You bet.

Thank you. Our next question is from the line of Vedula Murti with CDP Cap. Please proceed with your question.

How are you?

I'm doing well. Thank you. When you think about the reacceleration possibilities post 2016, you reference very specifically the fact that the balance sheet could be over [appetized] following the, mostly the completion of Vogtle. Is the whole reacceleration simply tied to letting the equity ratio move back down to like the 2008 level that you mentioned, or is there something beyond just the retweaking of the capital structure that would allow for higher growth rate at that point.

Oh, heaven's no. I would argue that's almost last in the list of potential. We know, Vedula, that we're going to have new generation. We know that there are going to be requirements associated with environmental CapEx.

We're watching very closely, as with the data we provided to you today, what's going to happen with the economy, and recall there's a set of generation that's retiring as a result of the (inaudible) rule or what's now called MATS. The confluence of those factors may have some sense as to what happens to equilibrium point of supply and demand in the next few years.

All of those factors are the primary factors. In other words, you'll see this reacceleration of CapEx. That's the primary factor. Frankly, this thinking about our capitalization, really I think has kind of followed behind the primary facts. We'll just see how all that goes.

Those are kind of interdependent, right? In other words, as you accelerate CapEx you may need more equity. So the capitalization discussion is a temporal issue.

Okay. Thank you very much.

You bet.

Thank you. Our next question is from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Good afternoon, guys.

Good afternoon, Paul.

How you doing?

Dynamite. Hope you're well.

I'm managing. Just want to check a few quick things. 2.5% to 3%, that's a national GDP figure, right? Not some regional number; is that correct?

That's correct. Okay. When we look at the 0.7% growth in 2014, I think Ali was asking about this. I just want to make sure I understand it. That seems a lot less than 0.5% of GDP. What's going on there? I think you guys then see it going back up. If you could refresh -- just sort of help me out there with what that is.

I think it goes kind of what Tom mentioned a few moments ago, is we try to put out a credible forecast that we can rely on. The sticking to a specific ratio to GDP is influenced by a lot of factors, a lot of the industrial side. I said before we get a lot of input from our customers, our large customers, as to what their outlooks are for the coming year, and so we have to factor those things in. These are more known quantities than just drawing a line on a curve and trying to make an estimate.

We have not seen great growth in residential and commercial over the last four years. So we are very cognizant of the fact that, that's true and then we're trying to make a measured approach towards getting the economy back to full measure, and we think that once that occurs, then you're going to have more s cylinders working around that ratio of 50% to GDP.

And we are covering some territory that we covered before but maybe in a more concise way. I agree with you. The industrial numbers look weird. You're going from this big period of growth to something that's more moderate. But that's what we're projecting.

The other one to keep your eye on is just this whole residential sector. I think the effects you're seeing now are, personal income growth has been relatively flat. The growth in jobs has not been necessarily in manufacturing. Good news for manufacturing is they're more efficient, i.e., less people have input to the output they produce, therefore they're going to be more sustainable in the long run, but the manufacturing jobs are the ones that are higher paying. Therefore the increase in the jobs in the Southeast have been more service industry.

There is a shift as the result of a lot of external factors, including the Affordable Care Act to move people, or at least to inhibit companies from adding full-time employees, shifting rather to part-time employees. So even though they're kind of in the workforce, they're earning less. And then there are people leaving the workforce. You get all that kind of thing going on.

The other thing is perhaps a consequence of the housing bubble. At one time 70% of our residential sales came out of single-family housing. Now it looks like, perhaps it's a function of personal income growth, perhaps it's a function of banks tightening lending requirements, that 70% may be more like 62% with the delta showing an increase in multifamily. It's all those factors.

Okay. If for some reason we don't see sales growth -- or could you give us a flavor for what the sensitivity is around sales growth? So if we don't get -- I guess you guys were saying 1% to 1.5% or something I think you guys were talking about? If you get, let's say -- a rule of thumb, for every 50 basis points of sales growth, how should we think about that in terms of earnings? Or can you guys do other things? How dependent are you on sales growth, I guess, in terms of meeting your longer-term EPS forecast that you have?

I'm going to let Art give you the heuristic. I'll give you the other answer. Look, over the past two years we've lost $500 million in revenue as associated with weather or slower-than-expected economic growth and we've made it all up with O&M. In 2013 those numbers were just under $300 million lost revenue, reduced expense. And at the same time we had reduced expense we had some of the best reliability and customer satisfaction we've ever had. Art?

Paul, the heuristic on, say, a 1% change in retail sales, equal across all classes, is about $82 million pretax, and we talk about cost control or cost flexibility and that would represent less than 2% of non-fuel O&M. So that goes towards some of the mitigations we have around the sensitivity on sales.

And I can't stress it enough. I've got to thank the thousands of employees that make thousands of good decisions every day. The folks at Southern Company know how to run the utility business in an optimal l way and have reliability and serve customers and be safe and they do a heck of a job of it. We were able to demonstrate, year-in and year-out, that we can meet the needs of shareholders and deliver earnings targets, part of that litany I gave you in the script, and do it exceedingly well and run the business well.

Okay. So if I hear you correctly, if I understand correctly, if the sales growth doesn't -- if it doesn't work out as well, you guys still have other levers that you can use?

Yes.

That you believe in terms of making these numbers. Just in general, as you know, we're seeing a falloff in a lot of areas around the country.

Yes.

We're just trying to figure it out. Okay.

We see the same thing. I sit on the Fed board. I see all this stuff too. But you know what? The results in the Southeast were awfully gratifying in the fourth quarter.

I appreciate the help. Thanks a lot and have a good one.

Yes, sir. Thank you.

Thank you. And our final question is from the line of Greg Gordon with ISI Group, a follow-up question. Please proceed with your question.

They've answered all the questions. I'm good. Thanks.

Thanks, Greg.

Thanks, Greg.

Thank you. Sir, that was our final question. Are there any closing remarks?

Yes, just very briefly. Number one, let me thank you all for staying with us on this rather lengthy call. But it's an important one, you know. This is a little bit of an inflection point in our growth rates, in our risk profile and a variety of other things.

Interestingly, when you look at the regulatory work that we had to accomplish last year, when you look at the major projects that were in front of us, my sense is, absent what happened at Plant Ratcliffe, Kemper County, this company deserves an A plus. I think they've come l through those regulatory processes terrific. The progress on Vogtle is terrific. And I think we're positioned well for years to come. It will be fascinating to see how we continue to deliver value to shareholders. Please rest assured that is our primary focus.

Thank you very much for your attendance on this call. And we'll talk with you soon.

Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company fourth-quarter 2013 earnings call. You may now disconnect. Thank you.