Southern Co (SOMN) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Southern Company first-quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today, Wednesday April 30, 2014. I would now like to turn the conference over to Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Thank you, Nelson.

Welcome, everyone to Southern Company's first-quarter 2014 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Co, 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. You can follow along by accessing the slides posted on our Investor Relations website at www.southerncompany.com. At this time I'll turn the call over to Tom Fanning.

Thank you, Dan. Good afternoon and thank you for joining us.

Art will go through the details in a few minutes, but first I would like to highlight two of the key drivers of our first-quarter earnings growth: cold-weather and continued economic growth.

First, the weather story. Around the industry much has been reported lately on the polar vortex. The Southeast experienced the second-coldest first quarter in the last 20 years, and we set a new all-time winter peak on our system of 39,130 megawatts.

While the colder than normal weather had an obvious impact on revenues, that's not the only important story. Operationally, the Southern Co system delivered on our commitment to provide clean, safe, reliable, and affordable energy to the customers and communities we serve as demonstrated by our crew's tireless work under the most challenging of circumstances to restore power to nearly 800,000 customers affected by the severe ice storm in mid-February.

The winter weather also underscored the importance of developing the full portfolio of energy resources. As weather-related demand and delivery challenges proved once again how volatile natural gas prices can be, Southern Co dispatched one of the industry's most diverse and reliable generation fleets, delivering more than $100 million in fuel cost savings by taking advantage of our fuel optionality.

Second, the economy continues to improve. 9 of our 10 largest industrial sectors, which account for approximately 80% of industrial sales, reflected positive year-over-year growth for the first quarter, and all 10 of them were positive in March. Combined with solid customer growth and usage growth in our residential class, we are increasingly confident in the sustained momentum of the Southeast economy.

Let's turn now to our major projects. Construction progress continues at plant Vogtle Units 3 and 4 in Georgia, and at the Kemper County energy facility in Mississippi. First, tremendous progress continues in the construction of the Vogtle project, which remains on schedule for the fourth quarter of 2017 and fourth quarter of 2018 for Units 3 and 4 respectively.

Nearly two months ago, as planned, we successfully executed the heaviest lift to date, placing the 2.2 million-pound CA20 module into the Units 3 nuclear island. Our critical path focus remains on the major elements of the Unit 3 nuclear island with the CA05 module scheduled to be installed in the second quarter.

Other signs of our continued construction progress include the walls and concrete under the containment vessel which will support the installation of the shield building panels later this year. Outside of the nuclear island we continue to progress on the major other elements, including the cooling tower and turbine building.

We are also very pleased with the progress on Vogtle Unit 4. The CR10 module, commonly known as the cradle, was placed in the nuclear island during the first quarter and the containment vessel bottom head is scheduled to be set in May.

In February, US Department of Energy Secretary, Dr. Earnie Moniz joined us at the Vogtle site to commemorate America's first loan guarantees for nuclear construction. The DOE loan provides a committed source of funds that reduces financial risk while delivering an estimated $250 million in present value benefits to Georgia Power customers. These savings should translate to lower base rates for customers over the life of the loan.

Including the DOE loan benefits, Georgia Power highlighted $2.3 billion of customer benefits in the combined 9th and 10th VCM report filed at the end of February. This came on the heels of the 5-0 vote by the Georgia PSC to verify and improve the actual capital costs reflected in the 8th VCM. The current VCM report, which reflects $389 million of actual 2013 spending, is expected to be voted on by the commission in August.

Turning now to the Kemper project, where we are winding down construction and ramping up our start-up activities, we continue to work toward our next major milestone, the heat up of the first gasifier, which is now scheduled for mid to late summer. Additionally, we expect to place the combined cycle portion of the plant into commercial operations this summer. As we mentioned last quarter the start-up activities for the combined cycle are largely complete, and it is expected to be able to serve customers' energy needs during the upcoming peak season.

As we shared in our most recent disclosures, we have experienced decreases in construction labor productivity due to a combination of adverse weather, labor turnover, and inefficiencies. Having assessed the impact of these issues and the risk that additional unanticipated factors could have on the construction and startup of the project, we recorded an additional pretax charge of $380 million. This estimate includes the previously disclosed $184 million in increased labor and weather-related expenses, an additional $135 million due to the extension of the expected in-service date, and $61 million of incremental construction costs as an adjustment for the earlier number.

Our confidence remains high in the value of the TRIG technology and the entire Kemper project to Mississippi Power's customers. Our ongoing commitment to safety and quality is of primary importance as we focus on completing construction of this first-of-a-kind plant, and working through instrumentation and controls integration that is critical for the project's success.

Meanwhile, Southern Power continues to expand its generation portfolio. Recently, Southern Power closed on the 20-megawatt Adobe Solar Facility, our second solar plant in California. This brings Southern Power's solar portfolio to approximately 222 megawatts, all with quality long-term contracts. We continue to work diligently on additional projects and hope to announce another solar acquisition very soon. Looking ahead, we remain confident in Southern Power's ability to execute its business plan for the remainder of the year.

I'll now turn the call over to Art for a financial and economic review.

Thanks, Tom.

For the first quarter of 2014 we earned $0.39 per share, compared to $0.09 per share in the first quarter of 2013, an increase of $0.30 per share. Included in these results for the first quarter of 2014 is an after-tax charge against earnings of $235 million, or $0.27 per share related to the current cost estimate for Kemper as detailed in the 8-K we filed yesterday.

Included in the 2013 results are after-tax charges of $333 million, or $0.38 per share for increased cost of the Kemper project, and $16 million, or $0.02 per share for the restructuring of a leveraged lease investment. Excluding these items, we earned $0.66 per share in the first quarter of 2014, compared to $0.49 per share in the first quarter of 2013, an increase of $0.17 per share. The major factors which influenced our year-over-year adjusted earnings were weather, economic growth, and retail revenue effects at our traditional operating companies. A detailed summary of the earnings drivers can be found in our slide deck for this call.

Weather in the first quarter of 2014 compared with the first quarter of 2013 added $0.08 per share to our earnings. Weather was $0.07 above normal for the first quarter of 2014, compared with $0.01 below normal for the first quarter of 2013. Average temperatures were almost five degrees below normal, and as a result, we saw the second highest number of heating degree days in 20 years.

Total weather-normal retail sales for the first quarter of 2014 increased 1.3%, compared with the first quarter of 2013. Our original forecast was based on a GDP growth estimate of between 2.5% and 2.7%. While it's still early in the year, it appears as though GDP growth estimates could actually be between 2.7% and 3%.

Weather-normal residential sales increased 1.2% over the first quarter of 2013. Residential sales were positively affected in almost equal parts by an increase in usage, reflecting demand growth beyond the amount avoided through energy efficiency, and the addition of 10,000 new customers in the first quarter of 2014.

The first-quarter industrial sales increased 2.8% compared with the first quarter of 2013, continuing the strong performance and momentum seen for 10 straight months. Manufacturing employment growth in our service territories exceeded the national pace in a first quarter that featured growth that was very broad-based. Some specific examples of segments that performed particularly well were primary metals and transportation, which grew at 6.4% and 6% respectively.

In addition, housing-related segments including stone, clay and glass, textiles, and lumber as a group grew approximately 6% year-over-year. This positive momentum was also evident at the Port of Savannah, where container exports increased 8.1% over the first quarter of 2013.

Finally, one of the best leading indicators is economic development activity. The pipeline remains robust with 340 potential projects that could deliver 30,000 more jobs and generate more than $11 billion in additional capital investment. This reflects a 58% increase in projects, a 46% increase in potential jobs, and a 107% increase in potential capital investment compared to the same period last year. This potential is on top of a very strong quarter of announcements, which are expected to create an additional 3,000 additional jobs and represents $4.5 billion in new capital investment.

Before turning the call back over to Tom, I'd like to share two additional items. First, as we have shared many times over the years, Southern Co is committed to maintaining a high degree of financial integrity, including our A credit rating. This commitment has served our customers and shareholders well by providing low-cost financing and beneficial access to the capital markets.

Our plan to issue equity, which included a total of $1.3 billion of new equity over the 2013 and 2014 time frame, contemplated additional risks for the Kemper project. As a result and based on all of our current assumptions, we do not anticipate the need to increase our equity issuances due to the new charges reflected in our earnings results.

We continuously monitor our capital structure and relevant credit metrics. As conditions change, whether it is unexpected costs or better than expected success in acquiring new projects at Southern Power, we will reforecast our equity needs as necessary. Finally, I'd like to share with you our earnings-per-share estimate for the second quarter of 2014, which is $0.66 per share.

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

Thank you, Art.

Earlier this month our Board of Directors voted to increase Southern Company's common dividend to an annualized rate of $2.10 per share, an increase of approximately 3.5%. This marks the 13th consecutive year that our dividend has increased. In fact, since 2002, our dividend has increased a total of 57%.

This track record is a direct reflection of the strength of our business model and the region our Company serves. We have the privilege of serving 4.4 million customers in a region with an improving economy and a stable constructive regulatory environment.

Our value proposition is bolstered by our ability to deliver industry-leading customer satisfaction, low electricity prices, and the highest level of reliability. In fact, the success of our customer-focused strategy and how well it has positioned the Company to earn top quartile returns and generate strong operating cash flow over the long-term is the underpinning of our Board's dividend actions.

Despite our challenges with the Kemper project, our performance during the first quarter is a direct result of the sustaining successes we produced elsewhere in our business during 2013. We will continue our focus on providing clean, safe, reliable, and affordable energy to customers and the communities we serve, which supports our value proposition objectives for investors.

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

Thank you.

(Operator Instructions)

Greg Gordon, ISI Group.

In reading through your 8-K on Kemper, there was also a section where you discussed, because of the decision to delay the start up till May of 2015, a reduction in bonus depreciation. So in order for you guys to not have to pin that on the shareholder, what now has to happen on the regulatory front?

Greg, this is Art.

There are a number of things that could happen. That is not part of any of the write-off amount that we have included in the numbers to date.

We are in the process of working with regulators in Mississippi to reach what we think will be a global settlement of prudence and issues related to our seven-year rate plan.

Now, with the loss of bonus depreciation, we'll certainly have to rework the seven-year rate plan assuming that bonus depreciation is lost -- and we'll come back and address that in a minute -- in order to make sure that we don't violate tax normalization rules. So that's an absolute requirement.

Now, when we think about bonus depreciation, there are a couple of avenues here. One could be that we get an extender bill coming out of Congress that extends bonus depreciation into 2015. So that would take care of it on its own.

Secondly, there could be issues in our global settlement whereby we mitigate the impact on customers.

So all of these things are in kind of a settlement stage with the commission as we address how we'll help that through the regulatory process.

One other point.

You know that we produced electricity during, I think it was January; made about $1 million in revenue off the combined cycle. We expect that to go in to dispatch this summer and go into service. As that goes into service, that eliminates a slug of the bonus depreciation at risk.

Combined cycles are running off a natural gas line that's going straight into the plants now?

Right. Right.

Got you. One more question on the negative side and then a positive one.

So on Vogtle, we haven't heard much on the trend -- what's gone on in court in Augusta with regard to your case against CBI. Nor have we heard any progress publicly on a potential settlement.

Can you give us an update on where that stands and whether or not the costs, all things equal, notwithstanding the overrun that you're dealing with there, have been staying pretty steady and on track?

Greg, I'm not sure there's going to be much of a substantive update. It will be roughly the same we've been telling you.

Essentially, we have venue in Augusta. We have, I think, askings by both the consortium and us with respect to the dispute.

I think the issue resides more clearly within the consortium right now. They have issues to work out among and between themselves -- that's Toshiba, Westinghouse, and Shaw. But we have constructive conversation with those folks all the time.

In fact, I want to say next week, Philip Asherman, the CEO of Chicago Bridge and Iron, I think the head of Westinghouse, representatives from Toshiba, Georgia Power Management, Southern Company Management, were all meeting at Plant Vogtle. We do that regularly just to cut through any of the issues in order to continue to advance a project as well as it has been.

So I guess the point is we continue to have a very good relationship. And I think we've said before, it's much better now since Shaw is out and Chicago Bridge and Iron is in. We'll see. It could happen quickly or it could happen late.

Great.

My final question is, I'm noticing -- and it's not just you, we're on the front end of earnings -- but there's been a handful of companies where their weather-normal sales growth numbers in the first quarter tracked ahead of the baseline expectation for the full year. Are we seeing just a little bit more of a bounce in the economy than you had modeled because you wanted to be conservative?

Or is there some friction in your weather normalization model when you have really extreme moves in weather? That was the explanation one of the other managements gave, is that they're not sure that they're getting an accurate weather-normal reading because it was such a strong weather quarter?

So is it we are definitively trending better? Or is it that we won't really know till we get a few more quarters ahead?

Greg, this is Art.

I've always said that weather normalization is more of an art than a science. But when we look at industrial sales, industrial sales are largely not weather normalized. So when we have a 2.8% increase in industrial sales, that's a very good, strong indicator.

And as we've talked about in our remarks earlier, that's the tenth month in a row where we've had year-over-year growth in our industrial sales. So that is not impacted by what you brought up.

Now, on the residential side, we could be seeing a little bit of that; but it is only one quarter of growth. We did have a 0.5% growth in the fourth quarter.

So if it's not 1.3%, I don't think it's a whole lot less than that due to the fact that we've had extreme cold temperatures.

And you know my position with the Fed. The Fed was more bullish than we were as we developed our annual guidance.

And just as of the first quarter -- here again, one quarter does not a year tell -- but it does indicate that the macroeconomic effects are more closely 2.7% to 3% in terms of GDP than they were our 2.5% to 2.7%. So we'll see, but it's a good start.

Great. Thank you.

Jim von Riesemann, CRT Capital.

I'm confused. And don't comment on that.

(Laughter)

So your second quarter last year was $0.66, and you're guiding to $0.66 for the second quarter in this year. What might be some of the big mechanics that would -- at least under that condition -- would put you at the high end of your $2.72 to $2.80 guidance range for 2014?

Yes. Good question, Jim.

When you look at non-fuel O&M -- and I think we outlined this on our last call -- we estimated we were going to spend roughly $300 million more, at least in our regulated core business, than we did in 2013.

If you look at our spending in the first quarter, it was only up year over year about 1.3%. So we've got some heavier lift to do on the expense side for the remainder of the year. And when you look at our outage schedule, it is somewhat back end loaded as well.

There are a few other elements, at least in the quarter-over-quarter numbers, that you need to remember.

Alabama Power had entered into an accounting order that allowed them to defer some non-nuclear outage costs this year, which will make their non-fuel O&M look lower year over year. And that's a big influence on the first quarter, non-fuel O&M numbers.

But when you look at the O&M that we're going to at this year, at least in the second quarter, along with new rates and you take normal weather, you're seeing about a flattish kind of equation there.

Jim, Art and I talk about this stuff all the time. It's not -- don't be ashamed of being confused. We had the same questions here.

But I think it really does go to Art's pattern of O&M and being roughly flat for the first quarter. That presumes you're going to spend a lot more on the rest of the year. So I think that really kind of does go there.

Okay. But in that same vein, I'm still confused on the Kemper County now -- if you don't mind me changing topics. My memory needs to be refreshed.

If the gasifier goes into service, let's just call it September 1, how do the mechanics work under all that if you're a customer of Mississippi Power? Who benefits?

The economics of Mississippi's customers are relatively fixed. In other words, there's $2.4 billion that accrues at a full mix of capital up to $288 million. The tax-exempt bonds-

Jim, you said gasifier. Did you mean the combustion turbines?

I'm sorry. Yes, I did say gasifier. I apologize. I did mean --

Okay. Sorry.

Combustion turbines, I'm sorry. That's my mistake.

No problem. Well, a lot of how that might work is tied up in this global settlement as well. There are a host of issues.

In fact, there was some language in the recent continuance of discussions, which indicated that there was some conversation going on between the Company and the staff. So I would look for all of that to be kind of handled as much as it could in that settlement.

Any idea on the timing of when that might happen?

Not really. But look forward in the months ahead here.

Okay. Thank you.

(Operator Instructions)

Dan Eggers, Credit Suisse.

When you talked about the growth rate update last quarter, and you pointed to the back end of this decade, the reacceleration environmental CapEx, part of that being coal ash and some other things. We've seen some other folks in the region have some issues around coal ash.

Wondering if you could walk through maybe in a little more detail the spending needs you guys have there and how that paces out with more scrutiny? Does that change the timeline for when you guys might start spending that money?

I'm going to turn this over to Art in a second. But I think if you kind of globally look at it here, we kind of have $6 billion of future environmental compliance investments that will manifest themselves at the end of the decade. Certainly coal ash is part of that, certainly effluent guidelines, certainly 316(b).

There are a lot of moving parts there. And the number can move pretty dramatically, both in terms of the quantum, again our estimate is $6 billion, as well as the timing. And it would not surprise us, but that these other issues could have some bearing as to the ultimate resolution for companies like us.

We're following it very closely and we'll see.

Okay.

On the Casper decision, where it is right now, is that going to have any effect on near-term spending? Or is the MATS obligation pretty well covered for you guys?

Dan, the MATS contemplates most of that. I think when the original Casper was passed, it was prior to the development or finalization of the MATS rules.

So since they're both directed at SO2 and NOx, most of that will be addressed through SCRs, through scrubbers, or through whatever other compliance equipment we may have added to the units.

There may be some small change in the dispatch of some of the smaller coal units that are further back in the stack that won't operate a lot. And so the only real impact may be fuel cost on an extreme day.

Yes. It is much more a dispatch energy issue than a capital issue for us. The MATS already spoke to the capital.

Okay. One more on coal.

We've heard a few people a little more concerned about coal inventories for the summer after the cold winter and having to run the coal fleet hard. Where do you guys sit on your coal inventories? And how is that going to get captured if you have to start buying more actively in the open market to the fuel mechanisms?

It's fascinating. We made a big play in the past. We talk a lot about 70% coal six years ago, 16% gas now. What we've said before was 45% gas, 35% coal. Fascinating.

Average gas prices during the first quarter of 2014 were $5 in round numbers. First quarter of 2013 they were $3.50. So you're up almost 50% in gas prices, with coal prices being relatively constant.

So what that's done is we've been able to shift our dispatch around to save our customers about $100 million. So we're marginally more on coal than gas is what we saw in the first quarter -- 42% coal, 38% gas.

It's fascinating to think about how that may rollout for the rest of the year.

Dan, when you think about our inventories, we are very close to the targets we've set for ourselves this year. We are building up coal supply to meet the summer peak demands. And that basically runs our average target up from 35, say, to 45 days.

So we're just in the process right now of rebuilding after we increased our burn quite a bit in the first quarter above what we thought it would be.

And that moves around a lot from plant to plant. Obviously, if we have plants like the Branch Units that we're planning to close a little bit later, you'll treat those a little bit differently than you will a Bowen or a Scherer or a Miller.

Yes.

Got it. Thank you.

Steve Fleishman, Wolfe Research.

Hi Tom, just to follow-up on that last question.

Is it fair to characterize that you're running gas more maybe in these shoulder months so that you can rebuild the coal piles? Or is it just you're running dispatch as you normally would and you're just bringing more coal in?

We're in great shape. We're running normal.

Okay.

Just maybe if you could spend a little more time, Art. You mentioned that you're starting to work on a settlement in Mississippi of various issues.

Could you remind us what the issues are? Is it both the prudency case and that seven-year deal that you got that you're trying to wrap altogether? And timelines and how much are people onboard together? Is there going to be a lot of opposition? Likelihood that you'll be able to get a settlement?

Well, we think there is an opportunity for both the regulators and the Company to come out with some kind of agreement here.

The seven-year rate plan was designed to recover costs and keep rates at the set level that we agreed to in January of 2013. And that was a 15% increase in rates last year followed on by a 3% rate increase this year, both of which are in place.

So as these numbers move around, as our in-service date moves around, we're going to have to amend that to make sure that we comply with tax normalization rules, as I mentioned. So that's one element.

And there are some other pieces of the pie that we might be able to include in the grand settlement that will keep customers harmless in this agreement. But it's mostly focused around those two very issues, the seven-year rate plan and the prudency issue. We would like to get those solved on a simultaneous basis.

And I guess roll into that the in-service of the combined cycles. We fully expect those to run. They are actually attractive, and we've actually had some interest in the wholesale markets for those things.

All this could be wound up together, we think, in a beneficial discussion.

And just timing of this and --

It's always hard to predict those things. We got the continuance order. Let's let that play out and let events take their course.

Okay.

And then just separately on Vogtle, I might have missed this in your presentation. But is there any update on the schedule for the Vogtle units? And if not, when will we get the next schedule update?

As we filed in our VCM-9 and 10, we reiterated our plan to leave the schedule in place. COD dates for Unit 3, fourth quarter of 2017; Unit 4, fourth quarter of 2018.

And we did not change the amount that we are contemplating in terms of overnight costs at the same time.

And if you just go back, Steve, to the VCM 8 filing, that is our most recent schedule. Now, of course, we always continue to move things around within; but that's it. And I would argue that probably Unit 4 is actually probably a little bit ahead. So we feel very good about our schedule right now.

Okay.

And just tying in commentary from Scanner, which are obviously different Units, but they talk about having a new schedule from the E&C guys in the fall to lay out. Is that a timeline that's relevant for you at all, or you're just on a separate track?

It's interesting. We try to work together to coordinate best practices and share information and a variety of other things. But it is very clear that we have a different contract.

And without commenting on their situation, I can tell you that our contract, as we've suggested in the past, is essentially fixed with performance schedules that are also fixed. So I wouldn't spend a lot of time comparing say, for example CA20 for us and CA20 for them.

They're operating under a different regime than we are.

Okay. That's helpful. Thanks, Tom.

Michael Lapides, Goldman Sachs.

Couple of questions.

If I looked at your fourth-quarter 2013 slide deck, and went back to the appendix just at the CapEx by subsidiary, can you walk us through -- and a lot of this is Kemper-driven, but a little of it may also be Southern Power-driven.

Just what's different from the CapEx you laid out for 2014 through 2016 back on Slide 25 of your fourth-quarter deck versus what it is today when you look forward for the next couple years?

Well, Kemper will change a bit as we push more dollars into 2015 now. And when I think about all the other companies, nothing has really changed that I'm aware of.

Our plan for Southern Power remains. Some of that is capital for maintenance and other capital for our expansion plan.

So when I think broadly about that, Michael, I just can't see a lot of change that's occurred since that date.

Okay.

And so I just want to make sure I'm getting Kemper right. What's the remaining amount of CapEx in Kemper for 2014, meaning second quarter through the end of year?

And then is the amount, is that $25 million a month number for 2015 still a good number, so four or five months into 2015?

Yes. If you look at it, we've got about $925 million remaining.

About $800 million of that in 2014 and the remainder, the $125 million, would be five months into 2015.

That's the $25 million a month.

Yes. And maintenance CapEx is a little bit -- $100 million, $150 million -- so that would get total Mississippi Power?

That's correct.

Okay.

A nuclear construction question. Just curious, is there any insight or any update you can provide from the folks in China who are a couple years ahead of us in the process in terms of building new nuclear plants?

Just any updates on the construction timeline for either Sanmen or the other units that are coming online there that are using AP1000s?

Sanmen and Haiyang -- you know that we have people that live there. And other various members of our team go there from time to time.

It's interesting to think about how that's helped us. I would argue the very first benefit that we've seen out of them going first and our people onsite have been supply chain related.

I would argue also the way that some of the material was handled onsite, once it is fabricated, has been helpful for us. We've had better performance than they have.

There are some significant differences, particularly in the late-end construction where when you think about, for example modules, or you think about how these things are erected, they tend to be much more people intensive than we are. Our processes tend to be much more automated.

The other thing that we find is where they have a specific problem, can we learn from it?

Well, I'll tell you one. The way some of the panels were erected, they erected them horizontally. When they were picked up, they deformed a little bit; and they had to worry about correcting that. What we learned was to erect to them vertically so we didn't have that kind of deformation.

The other thing is just kind of issues that relate to the engineering around some pieces of equipment. I know one issue has been reactor coolant pumps. I know that's been surfaced in China. We have that equipment. It will be resolved to our satisfaction well in advance of any critical path.

Got it. Okay, thank you very much and appreciate the update.

Paul Ridzon, KeyBanc.

You mentioned some wiggle room in your equity forecast. If there were continued pressures at Kemper, is there still contingency built in there?

We are probably on the cusp. If we have additional costs, then we may need. It depends on any other offsetting issues, either in CapEx or that might affect our equity needs.

But we'll keep an eye on that over time. And certainly advise you of any needs we may have.

Again our target, Paul, is 44% equity ratio. And right now we're solid in that range.

And either I missed it or you didn't address annual guidance on the call.

We almost never do that.

What we do is we do annual guidance twice a year. We do it once in January; that sums up where we believe we'll be for the year. And then, as has been our practice really since I was CFO -- so we're dialing back eight years or so now -- we only do a revision to annual guidance once we get through the third quarter. So that's typically our October phone call.

What we provide are just quarterly estimates beyond that.

Okay. Thank you.

Anthony Crowdell, Jefferies.

Just following up on Paul's question, I think the guidance for equity in 2013 and 2014 was roughly about $1.3 billion. How much of that has been issued already?

In the first quarter, we issued right at $140 million. So we're on track for our $600 million number this year.

And I guess lastly, when you think of Kemper -- and you have quantified maybe into 2015 roughly $25 million a month over budget or incremental charges -- what do you think is the biggest risk on cost overruns there?

It seems like there's been a labor issue. Last quarter you spoke about it and also this quarter. What's the biggest issue or sensitivity with the higher cost at Kemper?

We've been very confident on this. When you transition away from construction to start up, that's kind of the lion's share of risk ahead of us now.

The integration of the different systems of Kemper, it's a very complex animal. In a combined cycle unit, you may have three systems that need integration.

Recall this one is coal gasification. It is gas handling equipment and all those related things. It's about 13 different systems.

I like to think of it like fine tuning a 6-cylinder car versus a 12-cylinder car. So just getting the integration of the various systems through startup is the biggest issue.

Beyond that, it is, I think, the unknown unknowns. There's always something that could happen that nobody can contemplate.

We, I think, are allowing for normal disruptions through startup. You have those anyway. It's something that nobody has foreseen. We'll see.

When we've rethought this schedule, I can tell you we did a lot of soul searching about it. You know from following us that we're a conservative Company. We always try and take the long view.

And I think it is absolutely the right thing to do, in our judgment, to adjust this schedule. Because even though it produces some near-term pain, this is absolutely the long-term trajectory that represents the best interest of our customers.

And it's so important that we get it right at the outset. So that's what you see us doing here.

Just lastly, like a really weird question -- more like to your point unknown unknowns. It seems like the conventional part of the Kemper unit, or Kemper Plant CCGT or whatever, is working fine; you've produced electric first quarter.

Are there any changes to that seven-year rate plan you entered into back in January of 2013 if the gasifier, just for some reason, just doesn't really reach commercial operation as intended?

There's nothing in the seven-year rate plan that is contemplated around that. But I will remind you, Anthony, that we have a lot of experience with our pilot project, whereby we have over time perfected the operation of the gasifier.

So our confidence in the gasifier and having problems with it is not high on the list. But as Tom mentioned, we have the gas cleanup island.

So we've got to be able to continually integrate the gasifier, the cleanup island, collection of the byproduct, and delivery of reliable syngas in order to make sure that this plant operates as intended.

And I know we've talked about this in the past. Where we made mistakes, I think, on this project was entering into a fixed-price commitment back in like 2009 or so with only 10% of the engineering.

And I think for where we did the feed studies and all, we were very good in terms of what the combined cycle island is going to cost and how the gasifier -- where we got bit was in the gas handling system. Remember as we ramped up our carbon capture profile -- the quantity of the pipe, the quality of the pipe, the hangers and all the related equipment -- it's going to be that. That is, we had a lack of experience.

The good news is we do have experience with the gasifier. We have the combined cycles already working. We know that the gas management system exists elsewhere.

So my sense is, all of these components will work. That's my judgment. Integrating them and optimizing them and fine-tuning them is going to be the challenge.

Great. Thanks for that color. I really appreciate it.

Mark Barnett, MorningStar Equity Research.

You talked a lot about Kemper and Vogtle. Can I just ask a couple quick questions around Southern Power to round it out?

You mentioned you might have something coming down the pipe pretty soon here in terms of another solar project. Assuming that that is the case, would that largely speak for the placeholder that you have in your CapEx guidance for the optional Southern Power projects for the year?

Yes. We had outlined, Mark, about -- I think it was 100 megawatts of expansion in 2014. And roughly what we're talking about is somewhere near half of that.

But we've got other projects that we've got on our list as well. So we feel very good about our expansion plan for this year and for next.

Yes. Every Board meeting, Art updates the Finance Committee with essentially a red/yellow/green list of potential projects. Looking at the health of those development activities, we have a lot of confidence on Southern Power's ability to execute this year.

Great.

And just one nit-picky detail on the quarterly results for Southern Power. Despite the topline growth, you had some lower profitability on the operating line.

I'm just curious, is that sort of a one-time thing? Or was there anything in particular that was driving that?

We had some solar contracts or some energy margins from the contracts with solar plants that were in service, say, midyear last year, mid to late last year that quarter over quarter increased revenues.

But we also had a one-time tax issue that occurred that was really a big help too. And had we not had the one-time tax issue, we may have been at or just below our target for the quarter.

Okay. Makes a lot of sense. Thanks for that.

Ali Agha, SunTrust.

Tom, when do you think you're in a position on Kemper to really lock down these costs? And tell us -- This is it, and I think we don't expect any more overruns.

Ali, I wish I could have done that a year ago. Every time that we have given you an estimate, it has been our best judgment.

When things happen that we can't foresee, we have to make adjustments. I hate that, but that is in fact the case.

Every time we've given an estimate, it has been our best judgment at the time.

But is there anything in these remaining months to a year for completion where once you cross that line, you can say, okay, it's pretty much done? Or will it go all the way to the end?

Well, except for the unknown unknowns. So what happens if, heaven forbid, there's a tornado that comes across the site? Or what happens if there's a major hurricane? Or what happens if as we integrate the system, it's just more complex; and we are not able to track it effectively or something?

Everything I know right now, I have great confidence in our ability to execute. We really fought a lot with each other over this latest adjustment.

We would still effort our best to get this done in 2014. But I think given the bow wave of uncertainty that we were creating by the delay in productivity on the construction as a result of polar vortex one, two, and some of the other issues, it just seemed to us to be a conservative, prudent judgment to push the schedule out to May 31.

I wish I could give you certainty. That's not the nature of the beast when you build something like this.

Right. Also --

Ali, this is Art.

A couple additional elements there. And I think we mentioned them already, but you've got milestones out there. The first gasifier heat up. We get by that, we are producing syngas.

And then beyond that is making sure that the gas cleanup island is doing its job, and that we get reliable syngas that we can burn in our combined cycle.

So as we move through those elements, those are elements of milestones that we have set for ourselves. That will tell the tale about where we identify issues.

Separately, Tom, I think in the past you have told us for planning purposes for the next three years or so we should assume relatively flat earnings profile for Southern Power, if I recall correctly. Anything change on that front as you're looking at opportunities today versus a few months ago?

Not significant change, but we continue to kick over every stone we can.

We've mentioned before that we're looking in some other regions of the United States in order to identify opportunities. It will be fun to see how the nation's so-called organized markets develop this year and next.

My sense is when you look around at different regions of the United States, particularly in the so-called organized markets where you see coal plant shutdowns, there may be needs for more capital investment.

I think our model of long-term bilaterals, credit-worthy counterparties, no fuel risk, no transmission risk is the kind of economic commercial model that will support the kind of CapEx that needs to be brought to bear to those markets.

My sense is, particularly with our focus on co-ops and municipal utilities, we have some potential to do more than we think we can do. And I can assure you that -- I guess we had our Southern Power meeting two weeks ago -- I can assure you that we give them a high goal every time we can.

The other thing that could have some play in that, you may be aware that Georgia Power is in it's second phase of their advanced solar initiative. They had one in I think it was 2010, it was called ASI. And this next one was called ASI Prime or something.

But it accounts for 525 megawatts of new solar in Georgia, 425 of which is central station and 100 megawatts of which is distributed generation.

We have challenged both of our Companies, Southern Power and Georgia Power Wholesale, separate from Southern Power, to compete in those businesses. Especially with distributed degeneration around the United States, a lot of people have taken the posture of fighting it.

Our view is let's do it right; let's create the right pricing mechanism for the energy and capacity; let's create the right pricing mechanism, one that is fair to all customers, for connections to the network; and let's create the right mechanism for backup generation.

Having done that, if customers want it, my view is we should provide it. And so I've directed folks inside Southern, and in fact we're competing with ourselves to play offense in that environment. Looking forward to seeing how those bids turn out. That's another potential source of growth for us.

Got it.

Last question. Tom, you've also indicated to us in the past as you looked at your earnings profile being more backend loaded in terms of growth, you would be looking at opportunities to fill that gap if you found them out there. I'm just wondering today, are you seeing those opportunities?

We saw this "opportunistic transaction" that was announced this morning. Are you seeing opportunities out there for yourselves?

Was that an M&A question?

I think the way you posed it to us, yes, I'm presuming it's M&A.

Okay. Because with us, we do asset acquisitions all the time. That's one of our ways.

If you're talking about corporate M&A, it was interesting, we were listening to the different shows this morning, CNBC and Bloomberg and all that. A bullish signal in the economy is how much M&A is going on. And in fact there seems to be a pretty good bit of it. Exelon and Pepco, the latest example in our industry.

I've been on record for this, and I bet you guys on the call could give this speech as well as I can. But this is something that we have a fiduciary obligation always to evaluate. We have a group of people, our competitive intelligence group here focusing on those deals.

My sense is now, as it has been forever, that those deals are extraordinarily difficult to do, particularly in a regulated environment where for the amount of the premium that you will spend in order to acquire the target, you're going to have to earn a return on and return of capital that from an EVA standpoint is positive for shareholders.

Add to that regulatory complexity and a variety of other things, those are just hard to do. We work hard to try and make sense of them. But I can tell you, it's just really hard, and I wouldn't particularly count on them right now.

Understood. Thank you.

Kit Konolige, BGC.

Just to revisit the Mississippi settlement talks one last time, can I ask who initiated the talks? And what were the circumstances of there being settlement talks in the first place?

Kit, I believe the Commission, in and around the prudency hearing, had pushed the dates of the hearing, along with the staff, were able to push those hearings out until August. And in some of their public remarks, they mentioned the fact that they were looking for discussions towards some kind of agreement, both on the prudency issue and on the seven-year rate plan.

So that's kind of where it all started from, and we're certainly a party to those as well.

Simply put, the Commission directed the staff to engage the Company with potential settlement talks. So we'll see how it goes.

Right. Okay. Got that.

And obviously we don't know until there is or is not a settlement. But it sounds like you would hope that this could be a pretty comprehensive deal if you got there.

Would you envision it accounting for any future possible further overruns or delays in the timetable of Kemper?

I think it's just too early to tell, Kit.

The prudency issue is important; the seven-year rate plan is pretty important. But there could be other elements to the agreement as well.

The in-service treatment of the combined cycle units are important. There are a host of things. How you would weave together with PET is important.

So we'll try and get as comprehensive as we can.

Okay.

One last thing. So I understand this -- obviously, given your prior agreement, there can't be any further rate increases for customers as a result of this. Are we looking at potentially some change in the pattern of future rate increases?

In other words, from a financial point of view for shareholders, what could change as a result of a settlement here?

Kit, I'm a little reluctant to dive into profiles and what-ifs. Let the talks happen, and let's get a good result for everybody here.

Okay. Sounds fair to me. Thank you.

Julien Dumoulin-Smith, UBS.

Quick question here.

Just following up a little bit on the same vein of thought, can you walk through how you think about the in-service criteria for Kemper by chance? And how that process works in Mississippi?

I know you're talking about a settlement here. But I suppose that's technically a separate process that we're going to be going through down the line.

And then also perhaps a little bit of the key dates as far as that goes? Particularly I'm thinking of contrast to some of the performance issues we've seen elsewhere?

In-service has some connotations both for tax and for regulatory purposes. For tax purposes, it's essentially that you're integrated into the grid and you can demonstrate.

We've already demonstrated we can run Kemper to help during peak periods. We did that during polar vortex.

And it's fun. I actually have a live shot of the construction sites of both Vogtle and Kemper in my office, and it's fun to see the cooling towers at Kemper blowing off steam, showing that they're generating electricity. We expect them to be fully integrated this summer.

By the same token, when we think about the gasifier island and everything else, I think the standards will go to a reliable supply of syngas to the combined cycle units. Those will be kind of the standards we'll be looking for.

And so basically that's down the line here after May 15?

Yes. Again, the combined cycles we expect to be in service this summer, declared in service, both for tax and books. And for the gasifier and the gas cleanup system it will come probably later.

Okay. Excellent.

And then going back to the equity question, sorry to hit this one more time.

If you don't end up getting either of those two options with regard to making up the bonus D&A benefits, does that push you through the contingency you put in there? Or did your comment before contemplate that as well?

It contemplated that as well.

Got you. And could you quantify how much contingency, unless you didn't want to do that.

We're pretty close to the edge. Again, it's a function of more than just Kemper. There's lots of other CapEx that we spend. And so it would also impact how we're doing on that regard as well.

I know you guys have spoken about -- just the last subject here on coal ash. Obviously, some adjacent states are picking up the speed of reform on that.

What are you seeing right now on your front as far as the need to spend and address, both from a capital and expense perspective?

We've had a very constructive relationship with all of our environmental regulators in all of our states. We meet or exceed all of the environmental regulations that are currently in place. We are watching with interest what happens elsewhere and what impact that may have.

It was notable back around the Kingston event. I remember I was COO at the time, and I can recall walking myself virtually every ash pond we had.

And we have this long track record of exceedingly safe, reliable operation of those facilities. The personnel there were just surprised to see anybody was interested in how those were being run.

I think with the events at Duke, there will be more evaluation of our practice and closure practices and all sorts of things. I think this is something that is probably inevitable. The question to me is, to what degree and over what time frame?

Great. Excellent. Thank you all very much.

Appreciate you joining us.

Ashar Khan, Visium.

Tom, I was trying to understand, just trying to look through -- and I don't know if Art can help me on this. One thing which took people by surprise was when you came up with guidance in the January presentation, you started off with $2.71; and then you subtracted $0.07, which was from dilution from the Kemper write-off 2014 and beyond.

And you reset the base to $2.64. And then from there of course the growth came in for this year's EPS impact.

With these additional write-offs which have come in since the beginning of the year, should we then be modeling a similar kind -- of course, they are not to the extent that they happened last year.

But should I be modeling something like for when you come out next year and all that, a slight decrement again in the base EPS if you were to go ahead and redo your EPS for next year, from this dilution impact from the write-offs and things like that?

Just wanted to get a little bit better understanding.

Yes, Ashar.

There's a pretty simple answer here. And we think it's, no, because we don't think we'll require any new equity. And therefore there's not a dilutive impact. We'll be able to manage this, we think.

Okay. Thank you so much.

And I'm showing no further questions.

Thank you all for joining us today. I know it's a busy day for everybody. A lot of exciting things going on. I'm really gratified.

I don't like the fact that we had the write-off on Kemper again and changed the schedule. But I am gratified with the sustaining excellence of the Company.

When you think about all the good work we had -- and I know we talked about that a lot last year -- we really accomplished a whole lot in 2013. And I think that our first quarter in 2014 is a demonstration of that benefit.

We thank you for joining us today. We thank you for following Southern Company. And we look forward to chatting with you further. Take care.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.