Southern Co (SOMN) 2015 Q2 法說會逐字稿

Good afternoon. My name is Solvana and I will be your conference coordinator on today's call. At this time, I would like to welcome everyone to the Southern Company's second-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, July 29, 2015. I would now like to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, Sir.

Thank you, Solvana. Welcome, everyone, to Southern Company's second-quarter 2015 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company; and Art Beattie, Chief Financial Officer.

Let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed on our Form 10-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning along with the slides for this conference call. The slides we will discuss on today's call may be viewed on our investor relations website at investor.southerncompany.com.

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

Good afternoon and thank you very much for joining us. As always, we appreciate your interest in Southern Company. Our traditional operating Company continued to operate superbly in the second quarter of 2015, making great progress towards our full-year objectives. Contributing to this performance is underlying strength in retail electricity sales. For the first time in a decade we have experienced two consecutive quarters of growth in all three retail customer classes, residential, commercial, and industrial. In particular, we are encouraged by the developing strength of the residential sector, fueled in large part by a healthy growth in the housing sector. Our wholesale subsidiary Southern Power also performed extremely well in the second quarter, year to date results for Southern Power represents solid growth compared to 2014 and we expect them to exceed their plan for 2015, and the outlook for 2016 is promising. As we suggested last quarter, Southern Power has now confirmed solar and wind projects to account for all of its placeholder capital in 2015. The project pipeline remains robust and we can potentially exceed our forecasted place holders for both 2015 and 2016.

We continue to leverage our full portfolio of generation resources to deliver low cost electricity for customers. With other coal burn near record lows, our natural gas consumption is increasing and our gas burn is expected to increase to an average of 1.8 bcf per day this year. This compares with our average gas burn of 1.5 bcf per day over the last three calendar years. We have also continued to grow renewable generation resources. Last week, the Georgia Public Service Commission approved Georgia Power's request to build a 46 megawatt solar project at the US Marine Corps logistics base in Albany, Georgia. With this approval, Georgia Power now has 166 megawatts of solar generation under development on military bases in Georgia which speaks to a strong partnership with the United States Department of Defense. Georgia Power also launched its new solar sales and installation service on July 1. Through a variety of solar programs, Georgia Power will add thousands of solar panels to the Georgia landscape for customers who desire that option. All of our traditional operating companies are now pursuing significant renewable generation projects and Southern Power continues to grow its renewable portfolio. So, based on the currently approved projects, the Southern Company system expects to own or purchase the output of more than 3200 megawatts of renewable resources, including 46 solar facilities in seven states by the end of 2016.

I would now like to focus our discussion on the two major construction projects, both very important to our full portfolio of generating resources. Georgia Power's new nuclear project Plant Vogtle units 3 and 4 and Mississippi Power's 21st century coal facility in Kemper County, Mississippi. First, an update on the Plant Vogtle units 3 and 4. Construction is proceeding very well as the focus continues to be on quality and safety. We held our Southern Company management council meeting at the work site last week where our senior management team was able to observe progress first hand. For unit 3, final preparations are underway to set the 1000 ton CA01 module in the containment vessel which is expected to occur in early August. Assembly of the CA03 module has begun and concrete placements continue in preparation for the initial installations of shield building panels expected in the coming months. The unit 4 nuclear island continues to benefit from lessons learned on unit 3. Through the smaller structural modules were recently installed an assembly of CA20 has begun in the module assembly building.

Significant work has also occurred in areas outside the nuclear island, including work on the structural steel for the unit 3 annex building. The annex building will be a critical component in the initial energization testing that is anticipated in 2016, a key milestone in preparation for the eventual testing and start-up of unit 3. In groundwork for the unit 3 switch yard is also finished and there's been significant progress on other transmission infrastructure. The unit 3 cooling tower is complete and the unit 4 cooling tower is now more than 100 feet tall. Overall, we remain on target for the anticipated completion of unit 3 in the second quarter of 2019 and unit 4 in the second quarter of 2020. On the regulatory front, the Georgia Public Service Commission staff has recommended approval of costs submitted in the 12th Vogtle construction monitoring report, and we expect the commission to render a decision on August 18.

Now let's turn to an update on the Kemper County IGCC project. Kemper start-up is also progressing with first syngas production expected later this year. Operator training is well underway and portions of the plant have been turned over to the operations team. Control system validation an area of significant initial focus is also on schedule to support the future milestones. Mississippi Power's continuing to start-up and check-out activity and as expected with any project, it's identifying and remediating issues along the way. In some cases equipment is being repaired by the original equipment manufacturer while in other cases the engineering and construction team is implementing solutions on site. To a large extent, contingencies for cost and schedule have been sufficient to absorb these activities and the focus remains on the expected end-service date in the first half of 2016.

I'll move now to a discussion of regulatory matters. Based on the Mississippi Public Service Commission July 7 order, Mississippi Power has ceased billing customers for Kemper. As a result, Mississippi Power filed a rate proposal on July 10 for an 18% increase, primarily to recover costs associated with the project's combined cycle and transmission investments as well as Kemper-related regulatory assets. The combined cycle has been running since August of 2014 and performing exceptionally well. In fact, over the last 11 months Kemper's combined cycle operations have delivered more than 3 billion kilowatt hours of electricity and saved Mississippi Power customers more than $15 million, having displaced other higher cost methods of generation. Year to date, this unit has experienced an equivalent-forced outage rate, or E4, of approximately 1.25% compared with an industry average E4 of over 6% for natural gas combined cycles. As the commission is not expected to rule on any permanent rates for Kemper prior to November, Mississippi also petitioned the PSE to implement the 18% increase on an interim basis subject to refund. A hearing on the interim rates is scheduled for August 6. At the same time, the PSE may also rule on Mississippi Power's proposed mirror C-whip refund plan which was filed in response of the July 7 order.

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

Thanks, Tom. As you can see from the materials we released this morning, we had solid results for the second quarter of 2015 reporting earnings of $629 million or $0.69 a share compared with earnings of $611 million or $0.68 a share in the second quarter of 2014. For the six months ended June 30, 2015, earnings were $1.14 billion or $1.25 a share compared with earnings of $962 million or $1.08 a share for the same period in 2014. Earnings for the three and six months ended June 30, 2015, include after-tax charges of $14 million and $20 and him respectively related to increased construction estimates for Mississippi Power's Kemper County integrated gasification combined cycle project. Earnings for the six months ended June 30, 2014, include after-tax charges of $235 million or $0.26 a share related to the Kemper County IGCC project. Earnings for the three and six months ended June 30, 2015, also included a $4 million after-tax charge related to discontinued operations of Mirant and the March 2009 settlement agreement with MC Asset Recovery. Excluding these charges, Southern Company earned $647 million or $0.71 a share during the second quarter of 2015 compared with $611 million or $0.68 per share during the second quarter of 2014, an increase of $0.03 per share. For the first six months of 2015, excluding these charges, Southern Company earned $1.16 billion or $1.28 per share compared with earnings of $1.2 billion or $1.34 a share for the same period in 2014, a decrease of $0.06 a share. Earnings for the second quarter of 2015 were positively influenced by retail revenue effects that Southern Company's traditional operating companies, warmer weather, and a stronger than expected performance from our Southern Power subsidiary. Earnings were negatively influenced by increased non-fuel O&M expenses.

Moving on to an economic and sales review for the second quarter. As Tom just mentioned, we experienced weather normal growth in all three customer classes, residential, commercial, and industrial, in consecutive quarters for the first time since 2004. We are particularly encouraged by growth in the residential class which saw weather normal sales increase 1.2% in the second quarter, largely a result of customer growth. We've added nearly 22,000 new residential customers through June of this year which compares to just over 13,000 customers added during the same period in 2014, an increase of nearly 60% over last year and our 2015 forecast. Residential growth is shifting from absorption of vacant properties to new construction as 85% of our customer gains are from new connects. While not yet back to pre-recession levels, new connects are 14% ahead of 2014 which further indicates a strengthening housing market and healthy migration into our service region. Between 2013 and 2014, Atlanta was ranked number four among US cities with the highest net migration.

Our commercial markets are continuing to show strength as well with a second quarterly increase in weather-adjusted sales of 0.7%. This growth is supported by strong non-manufacturing employment growth. Atlanta experienced the second fastest rate of job growth of the 12 largest metro areas in the US, and its office vacancy rate is at the lowest level since 2008. Earlier this month we re-engaged with our economic round table, a group consisting of regional economists and executives from several of our largest customers that meets twice a year. The panelists expect [GGT] growth of approximately 2.5% for 2015. They also noted an improvement in the national housing market which further supports what we are experiencing with migration to our region as homeowners are better able to sell their existing homes and relocate to higher growth job markets. Finally, our earnings estimate for the third quarter is $1.16 per share.

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

Thank you, Art. Here at the mid point of 2015 we continue to see a franchise business at its operating at a high level and we see important progress on major capital projects. We also see a strengthening economy and a region poised for continued growth. Finally, Southern Power is on track to exceed its originally financial target. In short, we believe Southern Company is well-positioned for continue success in 2015 and beyond behind the strength of our 26,000 employees and their commitment to our customer-focused business model.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Greg Gordon with Evercore ISI. Please proceed with your question.

Hello, Greg. How are you?

Good. Good afternoon, fellows. I know you usually only update guidance once a year at the beginning of the year, but you made a comment that you are feeling pretty good about where the financial performance stands year to date. How do we look -- are you prepared to comment about how we look inside the guidance range for 2015?

No. Greg, we're going to keep doing what we have been doing for, gosh, I know this was ever since I was CFO, over 10 years ago now, so we provide initial guidance in January and then we always update in October, once we get past the summer months. We'll just keep it that practice.

Fair enough. My second question, looking at the financing plan on page 12 of the slide deck, it actually looks like your total debt financing needs are slightly lower over the 2015 to 2017 time period and you still are not projecting to need any equity. Is that plan formally updated for the SMEPA refund and what you hope to get in terms of a decision in Mississippi with regard to the refunds there?

Greg, this is Art. Yes, it does. We have adjusted some of the operating company's needs out of 2015 and reduced those, and then Southern Power has been a small bit of adjustment, as well offset by increases in the holding company level.

When you say you have reduced the needs of the operating company, does that mean there's more cash flow than you expected there or you have cut back on expected capital expenditures at the regulated businesses, or does that mean there's just -- you are modulating down sort of --?

Yes, it's a combination of all that plus as you look into 2016 we pushed some out of 2015 into 2016, but if you net them all, it's a slight bit of an increase, not great.

Okay. Can you just explain again specifically what it is that you are hoping to get from the Mississippi commission on August 6, the 18% rate increase for one, and then what is the preferred plan for the customer refund?

Yes, sure. So the simple answer is that we have a plan in place that amounts to about an 18% increase permanently for assets in service, including some amortizations of some regulatory assets, so that amounts to 18%. We won't be able to have those rates put into place by the commission until the process is complete, which we think now might be, who knows, November, something like that. So, the interim rates we would expect to be put into place on or around August 6 that would permit us to basically keep the rate structures in place that have been in place, minus the refunds. So that's really the process.

Number one, the interim rates equal to what we believe is the right kind of rates associated with assets and service, and we think that will be complete at the end of this year, November, and then we will have the rest of the assets either ruled on by the end of year. We don't know the answer to this, or conceivably pushed into 2016. That's associated with what we believe will be about a 10% looking number, 6% with securitization bonds, 4% associated with the other assets.

In terms of the refund plan, our preference is to have a default that would be a bill credit. The customers could elect to take a check. All that would be complete within 90 days.

Great. Thanks.

You bet. Thank you.

Our next question is from Anthony Crowdell with Jefferies. Please proceed with your question.

Anthony, how are you?

Wonderful. Never been better.

Awesome.

Just two quick questions. Unfortunately with the smallest part of your business on Mississippi, one is I think previously I think you were thinking you could get syngas entered into the unit in July and maybe that's been pushed back. If you could give some color on that.

The second question is related to the staff recommendations in Mississippi that were released last Friday. The staff had recommended some conditions, two of them of interest. One was that an equity infusion of like $200 million rather quickly and also the parent Southern Company guarantee investment grade credit at Mississippi Power through the duration of the project. I just wanted to know if you could maybe talk about those. Is that something the Company is willing to entertain until they get full clarity on the entirety of the project?

Let me take the first one on syngas. Basically there's three or four big pieces that we need to do. One is that we're working on the syngas cooler super heater, the ash silo, and the fluidization lines pressure testing. We're doing all those right now. Once we get those done, then we'll go through in-service pressure tests. We expect to complete all of that by mid August. That's the very near-term stuff.

As well, there's something called a particulate control device that basically takes the foreign matter, particulate matter, out of the flue gas, then we will move into the fluidization process. The first thing we will do is actually run the gasifier. This is kind of a new step we have put in place, we just think it's prudent, though. We will use sand to emulate the lignite particle and shape.

So, we're going to run sand through the gasifier, so essentially the fluidization will be able to be demonstrated without the production of syngas. Putting that step in place pushes actual syngas production out of lignite into the fourth quarter. So that's roughly the schedule, four or fivebig things we're doing right now we expect to be complete by mid August. Then we start this simulated process with sand. Once we get that in place, then we'll do the lignite. These are all intentional and we think it will serve us well as we go through an orderly start-up.

Anthony, with respect to the second question really goes to the staff's recommendation. Southern Company has stood behind everything we said we would do with respect to getting the plant built and started up and that's what we're doing. And right now there has been a staff recommendation. It's better, I think, for us not to comment particularly to any staff recommendation, certainly as any recommendation could relate to Southern Company.

I think we believe that when you look at the issue at hand, that is rates for assets in service, and those services have produced great value to Mississippi's customer and they have been performing exceedingly well compared to any measure, we think we'll be treated fairly and we expect constructive treatment out of the commission not only for interim rates but also for permanent rates related to those sets of assets, okay. Is there anything else that you wanted me to cover about that?

Do you expect the interim rates, and I know there's a window when the commission has to approve interim rates and also maybe permanent rates. Does that all get decided with the current commission or does that get decided maybe in 2016 when you have two new faces on the commission?

We think the 18% that we're seeking both in interim and permanent would be with this commission. There are two paths that could happen on the remaining 10% or so. Remember, 6% of those 10 relate to securitization bonds, which does not involve any ROE to Mississippi Power. The only remaining return elements to Mississippi Power is 4%. That could happen this year based on a current filing or a new filing we might make, or it could be pushed into 2016.

We'll just see where that goes. But we believe that so far the plant, knock on wood, has been going great. The start-up has been going great. We had some normal bumps in the road, but we've been able to handle them with the contingencies we've had in place, and we're very happy with the performance of the team on site. They are doing a heck of a job.

Great. Thanks for taking my question, Tom.

Thanks, Anthony. Good talking with you.

Our next question is from Steven Fleishman with Wolfe Research. Please proceed with your question.

Hey, Steve.

Hey, Tom. Thank you. Just one other thing. I know you went through an extensive schedule on Kemper. When you commented on it you said something to the effect you are to a large extent within the contingency for it? I just wanted to make sure I understood what messaging you were trying to say there.

Sure and thanks for the clarification. What I meant by that was remember when we took this reserve, whenever we last changed the schedule into the first half of 2016 we basically provided for, I want to say about $30 million a month, and that included some contingency, and so as I said in the kind of prepared remarks that that contingency is working and it speaks to whatever unforeseen changes we've had to make, any work, re-work, those kinds of things. The only, when I said largely, the only thing I'm referring to isn't schedule. It goes to the little small things that we've been showing like, for example, a net increase this time of $14 million for the quarter. That's all we're referring to.

Okay. And then maybe just also in your comment at the end on happy with financial results and you said meet or exceed expectations.

I said that about Southern Power.

So that's on Southern Power?

Right.

Okay. And is that due to the higher investments in renewables?

Yes. And just to review the bidding there, if you think about it in 2014, remember, we had, I forget, placeholders for three years as we typically do, and in 2014 we started seeing so much success we accelerated those placeholders into 2014. And that produced better than expected results, and then remember when we set our financials this year we said we're going to replicate 2014 and 2015, in other words 2014 results for 2015 and we're going to add some stretch. I'm telling you right now, I think we're going to beat our stretch targets for 2015 for Southern Power.

And we said this on the last call, but it just continues to be true and perhaps further, that the placeholders are getting filled up for 2016. So I'm feeling very confident about our ability for the placeholders in 2016 and in fact potentially, can't guarantee it, but potentially there could be upside to even our expectations for 2016. By October we may be able to shed even a little more light on both of those 2015 and 2016 issues, but let's wait until the next earnings call where we'll have a little more transparency. But we're feeling very good about our progress executing.

Okay. My only question then on that is, if that becomes -- what happens then in 2017 if we don't have an ITC anymore, or I guess it's smaller, does that become a big headwind?

Not a headwind. We've talked about this before and it was the shape of kind of earnings, so I think this would largely be true for most folks and that is absent solar investment tax credits which go from 30 to 10, you would generally expect to see a flattening out of earnings from -- you would love to see -- we're telling you we're seeing a really good picture of the franchise that's doing great. The power is doing great. You're going to see a trajectory in 2015 and 2016. All things being equal, the solar credits go away or at least go to 10, you'd see some flattening of progress, especially if people trying to push stuff into 2016 to get it done, 2016 to 2017 can flatten out a little bit.

One of the things though we're working on is ways to fill in what we're calling the divot and that divot could be filled in with some wind projects. We announced earlier [K-wind]. There's some other things we're looking at. As you know, they have a different earnings profile associated with their production tax credit, a 10-year kind of deal, and so we're working on ways right now to improve what 2017 may look like assuming you don't get an extension on the solar credits.

Okay. I'll leave it at that. Thank you very much.

Thank you.

Our next question is from Daniel Eggers with Credit Suisse.

How you doing, Dan?

Tom, can we just talk a little bit about EPA and the CPP and I guess, A, whether you think the stories are right that it's going to come next week and then what adjustments do you think are going to make it into the final rule?

Yes. Dan, it's anybody's guess at this point. When the EPA pushed forward the preliminary rule and they got, gosh, over four million comments, I think they themselves realized that the proposed rule has some significant flaws and I think we've been working constructively with EPA to try and fix those flaws.

There's been a number of kind of important areas that we look forward to EPA addressing. For example, one that's been widely discussed is the so-called cliff date of 2020. So we'd look for the EPA to provide some flexibility. My sense is they are likely going to keep teeth in the 2030 requirement, but we could see some flexibility on 2020, who knows. EEI certainly put forth a recommendation for that.

Other issues could be related to current non-carbon emitting resources. It could be life extensions of nukes, it could be increases of capacity of nukes, it could be our own Vogtle 3 and 4 which originally we didn't get credit for that somehow EPA would recognize that that absolutely meets the intention of reducing carbon. And really it goes to Kemper County and actually other things.

There's a host of other issues, Dan, that could be considered. You hear about energy efficiency requirements. You hear about the original methodology that the EPA took to determine the renewable capacity of certain states, but for me to say whether they are going to come out on those issues would be pure conjecture.

Okay, got it. The next question, Tom, is just the economic backstop to CVI and Westinghouse on Vogtle and given all their troubles they've incurred so far. A, does that have any affect on how Westinghouse is behaving on the project itself? B, what is your source of recourse if Toshiba has problems, or if they sell down their interest in Westinghouse to make sure your protections stay in place?

Well, we have an awfully strong contract, number one. Remember, our contract is very different in its makeup than what you see at the summer project for Scana, so we -- our contract is typically viewed as a turnkey six-price deal and actually we have improved it over the construction cycle that we experienced so far. So that's kind of number one.

Number two is when you think about just the commercial incentives for CBI, for Westinghouse, and even Toshiba, the best thing they can do to improve their own financial integrity is to perform under the contract, so that's important. Number three, I know there's been some trade press about Toshiba's ability to execute given that they have had some negative publicity. In 2013, Westinghouse took appropriate charges for many of these issues. Those issues are behind Westinghouse.

To the extent there is a double, a two-notch downgrade at Toshiba's level, then they would post an LOC. We think they have the ability to do that. So, the contract provides us protection. Incentives, even in the event of tremendous turmoil, would always direct them to perform under the contract and then finally to the extent there are downgrades, the contract provides for Toshiba to post a letter of credit, we think they have the ability to do that.

Great. One last question.

Can you remind how you guys think about M&A from a corporate strategy perspective and how you prioritize that relative to other uses of capital?

Absolutely. Yes. We've talked about this a lot and nothing's changed. Essentially -- and we've talked about it in the past in terms of thinking about this kind of long-term trajectory we're on as our CapEx program starts to wind down. I think this year we're $6.8 billion in CapEx and next year $5.5 billion and the year after that $4.3 billion, I think those are the numbers, round numbers.

When you think about that, the consequences that EPS starts to slow, and we've talked about that and we said there's a shape to that, in other words, EPS growth should resume once you get into the next decade, you reach capacity equilibrium in the region as well. There could be new CapEx associated with environmental law as well, there could be new CapEx associated with 111D, so on its own we think the curve resumes.

In the interim, as we see CapEx winding down we see cash flow growing immensely. And what we said is during this period of immense cash flow certainly compared to our recent history, Southern actually looked a little over equitized, so we said that on several earnings calls.

So what do we do about that? We often talked about three options. The first simplest buy back your own shares. The second option is kind of at the other end of spectrum is to buy somebody else's shares, and we always said that would require a premium and you would have to demonstrate likelihood of recovery of the premium through increased value to shareholders.

And in the middle has been just buying assets, and frankly we've been doing that. If you look at Southern Power's performance we certainly have exceeded our own expectations on our ability to execute asset purchases, particularly in solar and wind. So, we have done that very successfully. So those are really the options I would cover.

Okay. Thank you very much.

Yes. Thank you.

Our next question is from Stephen Byrd with Morgan Stanley.

Stephen, how are you?

Very well. Thank you. Thanks for your time. Most of my topics have been covered. I just wanted to hit on new nuclear briefly and check in on the Chinese project at Sanmen. Anything notable in terms of development there since the last quarter?

Not really. With respect of new nuclear at Georgia, what I said was we were going to call a time-out and pushing that one forward until we got this dispute resolved from a commercial standpoint. Recall what we said in the past is that the dispute isn't so much with us anymore, it's kind of among and between the contractors. So we look forward to them to kind of constructively resolve their own issues and then I think we can deal with them in a constructive way. So let's see how that goes.

With respect to Sanmen, I think the most important thing there is there's been a lot of conversation about this reactor coolant pump issue. That's not critical path issue for us and it looks as if they have made a successful resolution on some of the design issues, so that will accrete to our benefit. So it's going fine.

Great. Thank you very much. That's all I had.

Thank you, Sir.

Our next question is from Michael Lapides with Goldman Sachs. Please proceed with your question.

How are you doing, Michael?

I'm all right, Tom. Congratulations on a good first half of the year.

Thank you, Sir.

When you think about Southern Power, how do you think about the maximum? Meaning how big would you want Southern Power to be relative to the overall, and whether that impacts how you think about whether under different umbrellas Southern Power might have even greater growth opportunities if there is such a cap?

Hey, that's a great question. That's something we actually talk about.

Yes, right now there are about 8% of Southern and you probably remember from prior discussions, but just to review for everybody's benefit, the way we structure Southern Power is to essentially replicate the kind of credit profile, risk profile that we have at Southern. That is, as a apart from any merchant investment, long-term bilateral contracts, durations of 14 years or so, credit-worthy counter parties. We don't take fuel risk, we don't take transmission risks, so it has the feel from a portfolio risk standpoint as does the rest of our franchise business.

Now, the question you raise is a very interesting one and that is how high is too high, or is our appetite? I think you could easily kind of double Southern Power relative to the rest of Southern Company and still, I think, stay within our appetite, but that would be pushing it. Somewhere in the 15% of net income range. But there again we would have to see what the nature of those investments are, tax appetites, all that stuff. We'd have to review that. That's what I would roughly say relative to where we are now. We could still double it and remain within our franchise -- remain within our appetite.

Somebody asked a question earlier about the EPA, and I wanted to ask you, obviously there's a lot of wood to chop when it comes to the upcoming carbon rules, state implementation plan designs, et cetera. How are you thinking 'what the impact of other potential rules that have not been finalized are, say maybe ozone, and what that means both for the CapEx profile and for the cost to customers and the timeline for implementation and whether it's ozone or some other rule that I'm not thinking of?

Listen, it's an excellent thought. One of the problems -- let me start out with, I've been very public on this one. The body that has the same kind of lens we do, that is to balance the important objectives for our customers, a clean, safer, reliable and affordable energy, is Congress. I think with all of the best of intentions, EPA doesn't have the ability to assess. I think they get clean, but they don't have the ability to assess in a balanced way safe, reliable, and affordable. It's not what they do.

And so when we think about long-term implications of a regulator, like EPA, putting out piecemeal regulation, it is an important fact to note that the so-called pancaking of these various regulations are not particularly well coordinated in balancing the overall energy portfolio of the United States. That's why I've always said we need kind of a consistent national energy policy, and we've got great leadership there. Fred Upton in the House, and Lisa Markowski in the senate, these are terrific leaders of the United States and I think they've got all of our best interests at heart in balancing these important issues.

The other issue that is interesting to think about along these lines, I would have gone to the Hatch/Max, now Matts issue, the remand to the DC District Court and depending on what they do, they could send it back to EPA for clarification on how did they take costs into account. Well, the practical matter is as this industry complied in good faith to that far-reaching regulation, we have already spent billions of dollars. We've started closing plants. We've eliminated jobs and tax base and we've done all sorts of things. The regulation remains in place even though it's being revisited.

It's important, I think, to learn as a lesson that whenever you evaluate the far-reaching implications of some of these regulations, we need to get all of this right out of the gate as opposed to after the fact, so that would be kind of my big lessons learned. One is thinking about the pancake effect. We've got to think about it in an integrated way. Number two, we've got to get all of those clean, safe, reliable and affordable factors considered before we implement. And, three, I would love to see National Energy Policy enacted by Congress.

Got it. Thank you very much, Tom. Much appreciated.

Thank you, Sir.

Our next question is from Carrie St. Louis with Fidelity. Please proceed with your question.

I just wanted to touch base a little bit more on the capital raising and Mississippi Power. So, looking at the slides it looks like you have put some bank debt in at Mississippi Power?

Yes. That was true, Carrie. This is Art. Back in the spring about $900 million, yes.

What was the decision behind that?

Well, again, it was renewing some bank loans that were already outstanding and we added a little bit to it at the same time. These are to serve as a bridge until we get some clarity on regulatory issues or to the point where we can issue securitization bonds and take that debt out. Okay, but is it like a general term loan? Are you deciding that you're not going to issue in the public market and Mississippi Power until there's regulatory clarity? What was the decision to use that type of funding versus public markets? That's absolutely true. With so much on the clarity side.

Right.

That's a problem.

Okay.

So we're trying to do it as best we can. Again, the banks are worried about security as well, so it's not just the public markets.

I think just from a structural standpoint, too, if we believe that securitization bonds are in the near future, bank debt to bridge to that is an efficient way to finance.

Two other quick questions. On the Southern Company, the $1 billion of issuance this year. Why are you issuing so much of this up at the parent this year versus prior years? It seems like a lot of issuance. I think it's $1.6 billion overall.

Yes. These are remaining amounts and a lot of that is to cover the cash needs at all of our southern subs for the capital that we might be providing to them and it also covers some of the Mississippi Power needs related to the refund and it will be provided in the form of a inter-company loan.

Okay. And then turning to equity, so there still looks like there's no contemplation of increased equity issuance of the company?

That is our current plan. We taken to manage our portfolio over the long term. Things change, but Southern Power, if they keep executing on their plan to the upper limit, there could be addition needs in that regard. But it depends on where we are with cash and where we see the future of CapEx going for the entire business.

Yes. Carrie, let me jump in on this one. If you look at our CapEx plan going into 2017, you see the drop from $6.8 billion to $4.3 billion. We're throwing off cash, so it would be silly for us to issue equity and then in turn repurchase it two years later.

The concern I have is that your S&P put the whole complex, Southern and all OpCos on review for downgrade, and that was done during the last quarter. And I don't want to read anything into it, but I would have thought that maybe you would like to maintain your ratings there, so your comment is that you're not looking to issue equity to defend current credit rating.

Is that a fair comment? How should I think about that? I would have thought you would use a little more discretion about future equity, but it seems like you are saying not necessary.

Well, we've got to run this business in the long term, and I think the S&P move was all about Mississippi to be honest with you. I'm assuming that we're going to get fair treatment with the interim rates and then the permanent rates.

Right.

I think we just need clarity around that process.

So if somehow in Mississippi things don't go as expected with the outcome for interim rate relief, is there a view that you would be open to considering issuing equity or are you saying that that's just not in the plans regardless?

Well, look, we're open to anything, to be honest with you, but we expect fair treatment. I think we have a compelling case for fair treatment. I don't expect anything other than that.

Okay. Well, I appreciate that. I think an openness to equity is always constructive.

Our next question is from Paul Ridzon with KeyBanc.

Hey, Tom, how are you?

Awesome, how are you?

I'm okay. Quick question. You said you thought that at this point the Vogtle disputes was among the consortium. What residual risk do you see Georgia Power still wearing here?

I think Georgia Power has demonstrated that they are very well protected via their contract. The residual risk to me, I suppose there's some theoretical risk, but as a practical matter even with the schedule changes, even with the increases in cost associated with those schedule changes, we believe that the majority of the costs, the big majority of the costs associated with that is being borne by the contractors and that's demonstrated over and over again.

In fact, when you think about the fact that when Georgia had this plant certified, everybody thought that the cost was going to be a 12% price increase to Georgia Power's customers because the benefit had overwhelmed the increases in costs. We think now that estimate frankly, Paul, has actually improved this quarter, as you see in the VCM12 filing. So now we think we're in the bottom of 6% to 8% range. Largely, this recent improvement is because we're financing at a much better rate than what even we thought when we got the federal loan guarantees.

Remaining risks, I think we have disclosed in prior quarters one of the features of the contract is called financial integrity payment. It basically provides that as the contractors perform their obligations if they use up all of their profit and then they spend another $250 million above their profit, I guess it's above their costs, then we would share a $250 million segment of which our share of that would be about $114 million, and then everything above that would be for the account of the contractors guaranteed by Toshiba.

That's been a part of the contract since day one. That's probably it, in my view, other than certain owners costs and everything else, but that's about it. I think we're in terrific shape on the contract.

Thanks for that. Do you, just back to Southern Power and how big it could be, do you think that Southern Power could be valued any differently than the utility?

Man, haven't we thought about that over the years. I know you over the years thought about and I thought about it, too. Remember at one time all the infrastructure were buying up the bilateral contracted entities and they had tremendous value. We actually thought about that and please understand from my background as a CFO, I know Art feels this way, we're always after shareholder interests, and so theoretically you are always a buyer and a seller at a certain price. We're always there to do what's best for shareholders. If there's a better owner, we'll take advantage of it.

The other thing though, it's not just a dollars and cents business, there's blood and guts and relationships in this stuff. When you think about the relationships that Southern Power has been able to strike in the marketplace, it is really important because it goes to the center of our business model. Customers in the middle of everything we do, reliability, price and service, one of the most loyal customer groups that Southern Power has are co-ops and municipals.

They have a long-term view absolutely on these kind of assets and what service may be provided for their customers. So I'm not sure, we'd have to think very hard about ever selling those relationships away from the franchise, and that's other considerations we'd have to take into account.

Thank you. Switching subjects over to Mississippi. You said you expect a fair outcome. I assume that you would not consider the staff rack to be a fair outcome?

I don't want to comment on the staff rack.

Understood. Thank you very much.

Thank you. Appreciate you being on. Are there any other questions?

Our next question is from Julien Dumoulin-Smith with UBS. Please proceed with your question.

Afternoon. Excellent, so I wanted to go back to some of the balance sheet questions first. In terms of talking about future equitization you talked pretty bullishly about your balance sheet, but obviously you got the pressures from the credit rating agencies kind of in a more immediate sense. How do you think about the contingency level that you obviously baked in earlier, especially relative to some of the pressures that you alluded to before with Carrie? If you can quantify it, perhaps, is really what I'm getting at.

It's difficult to do that when you have issues like Southern Power trying to execute on plans and you don't really have a good idea, so -- but what we're thinking about from a rating agency perspective is basically getting to a point where we can use -- we can reduce the business risk -- excuse me, increased financial risk because business risk will be reduced as we move out of these construction projects.

Let me say it a different are way. Value is a function of risk and return and I think the heart of your question gets into a bunch of current unknowables: what is going to happen with depreciation and therefore cash flow, what's going to be the success rate of Southern Power, what's going to be our appetite to do things like gas infrastructure? So, there's a host of things that we just can't get our arms around.

What I can tell you as internal risks start to wind down, that is we get more resolution on Kemper, that is we get more wind-down of construction programs and therefore financing pressure, it's clear to me that as internal risk subsides, cash flows improves that we can probably think differently about our capital structure. That's why we said for some time now that in fact we may believe in the future we may by over equitized a bit. So, I can't put a number on it but these are things we talk about daily.

Right. Perhaps just to come back to it a little bit. You've alluded to scaling up the relative size of Southern Power within the Southern family here, but how do you think about potentially monetizing these assets, obviously given the ITC recognition and the subsequent earnings in future years and obviously your co-ownership with certain FuelCos? Do you think about potentially recycling the capital rather than necessarily scaling up the business per se, and particularly if you are going to hit limit the max, you say 15% or what have you, in the context of Southern Power?

Think about the kind of CapEx that would be associated with doubling Southern Power right now. That is a big number, okay. So, I think the chances -- and you think about how big Southern is and you think that Southern continues to grow, if you think about what is going to be required to double Southern Power, that is a big number. Number one, boy, that's an outside bet.

Number two, I've been pretty consistent in saying if there's a better owner, we'd certainly take advantage of it. We'd always would do that, but taking into account historical relationships, long-term partnerships, all those sorts of things.

It's a great option to have.

Heck, yes.

Right. Maybe let me just ask it more bluntly. To what extent would you pursue that as a first option rather than issuing equity in any near-term sense to address balance sheet concerns?

If I'm a better owner of the asset and I have investment opportunities to issue equity, I would certainly issue the equity and make the investments that I need to take. I don't think about issuing equity in and of itself as being a bad thing. Number one, I'm over equitized, so I have got some margin there.

Number two, if I'm above my kind of EVA threshold then I issue equity and create value. So, I don't look at issuing equity as a bad thing. If I'm issuing equity, it must mean that all other things being equal I've got darn good value-enhancing investments to make.

That's very fair. Let me come back to something you alluded to in your comments previously here on gas infrastructure. Where do you stand on those opportunities? You have suggested there could be updates coming. Where do we stand today?

A lot, a lot, a lot of activity. I'm not prepared to give you an update today only because I have a lot of irons in the fire and I've got to see how other things resolve themselves.

All right. With that, best of luck with those irons.

Thank you, Sir. We appreciate it.

Our next question is from Ali Agha with SunTrust. Please proceed with your question.

Ali, how are you?

I'm doing well. Good afternoon. First question, Tom. As you mentioned, your weather normalized sales through the first half are up 0.8%. As I recall, your full-year target was 1.3%. Is that still the target given where you have been through in the first half?

Yes, Ali. This is art. It still is. We don't adjust our targets that we put into our initial plans, but again the momentum that we're seeing is beginning to approach what we've set out. We're certainly not there, but it was kind of forecast that way, as well.

The signals we are seeing are really bullish, and if you look at kind of the national statistics, I'm sure the things the fed is dealing with right now, we're seeing the same stuff they are. This residential move we has been is really bullish for us. We're not far away from where we were pre-recession on migration into our area and increasing customers. We're probably, I don't know, what do you think, Art, about 70% or 80% of the way there?

More like 60%.

Well, what are we expecting for the year? 44,000 customers?

Yes.

In those days, 55 to 60? So whatever percentage that is.

And then secondly, perhaps to you, Art, again. As you look at your O&M ramps through the first half, I know had talked about having some catch-up to do. Are we where you thought we should be on the O&M front? Again just remind us how we should think about O&M going forward.

We're exactly what you said. We're right on target. Even though year over year it looks like we're spending more money, and it is, a lot of that is driven by a couple of things. We've had more outages at our larger operating companies this year, last year as a comparison.

And planned outages.

And planned outages to the tune of maybe $0.03 year over year, and there's some regulatory deferrals in Alabama in 2014 that you don't have in 2015, and that's about another $0.03. And then for other changes that we're seeing, it's about another $0.06, so we're right in target. That deferral I mentioned that Alabama will reverse itself at year end, so when you get to year end we should be right on target with what we talked about, 3% to 3.5% growth in non-fuel O&M.

And that's the run rate to think about going forward as well?

That's correct.

Lastly, Tom, just clarifying the Vogtle dispute with the contractors from your perspective, I know in the past you have alluded to the fact that if the other side is willing, there may be a settlement to be had where you give up some, they give up some and you moved forward. Is that still an option or am I hearing that things are now going in a different direction, that they themselves are not sure where to go, or is that still something we should keep an eye on?

I think it's something to keep an eye on. We're always looking for a successful resolution. Failing a settlement we're going to end up in court in Augusta, Georgia, to litigate around the commercial dispute. So I think once the contractors resolve their own differences, we'll be in a position to address in a constructive way how to settle this thing. I'm an optimist, but I think it's reasonable optimism. I think we have a basis to go forward, but they have to resolve their own differences first.

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

Good afternoon. I have a sort of really quick question. Now that you guys are further along in the project and what have you, what do you guys estimate the cost of turning the lignite into gases on just an operational basis?

Okay. So when I answer that one, Paul, I generally think about it as a net energy price equivalent to gas to Mississippi's customer.

Like [MMBC] you mean?

Yes, so let me give it to you on what it used to be and we'll project and will give an estimate on what it is now. Recall that our ability to stand behind our construction overruns has preserved largely the capital cost economics to Mississippi's customers. When I think about the relative lack of volatility of lignite fuel supply into the plant so we control all that fuel, there's almost no volatility relative to natural gas.

Now, remember the net cost is really net of also sales of byproducts, which includes sulfuric acid, ammonia, and CO2. The biggest issue there is CO2. At $100 a barrel, and so this obviously isn't the case today, at $100 a barrel, remember the CO2 revenues are indexed to oil, the net energy price was equivalent to about $1.25 per million BTUs, somewhere in that range.

Now with oil prices being down, the net energy price would be up, so let's say, I don't know, call it $2.50, if 100 and call oil $50, and I'm being kind of broad-brushed here. But say it's $2.50 per million BTUs somewhere in there, so my sense is gas today is $2.82, somewhere in there last I saw, you are still going to compete favorably with natural gas with this plant. It with be by all reasonable estimates a base load facility and for those economics recall it has almost no volatility.

Okay. So let me just understand this. So what you are saying is with the CO2 being used to extract oil, is that what you mean?

That's right. Remember, we sell it under contract at Tellus and Denbury and we get paid revenue for what otherwise would be a waste stream.

Because it's indexed to oil and, as a result, obviously those numbers have changed, but even with them changing on an operational basis you see all in the -- all the reagents, all the energy you have to put into it, et cetera, the extraction, is basically approximately $2.50 give or take.

That is a broad estimate. I don't have in the top of my head what ammonia is worth, what sulfur acid is worth. I assumes a heat rate, it assumes a variety of things. But that would be, as I sit here right now, it would be a reasonable estimate.

You see this as dispatching.

Yes.

Pretty much up once it's up and running. We're not going to have a situation where you're just going to be running natural gas through the CCGT because it's more economic?

I wouldn't think so, no.

That's it. You have answered all my other questions.

Thank you, Sir.

Thanks a lot. Have a good one.

Our final question comes from the line of Dan Jenkins with State of Wisconsin Investment Board.

Hi. Good afternoon.

How are you doing?

Pretty good. I have a couple related to the economy. You mentioned how you are seeing a rebound or a pick-up in the residential and commercial areas, but I noticed that on the industrial it seemed it was a little slower than what we have seen in the last few months. I'm wondering if you have any more color on that?

Yes. Sure. Look, it's been consistent with what the Fed has been seeing, it's what everybody has been kind of speculating, me included. Gosh, as the dollar has gained in strength relative to the euro, when you think about what's going on in China and everything are else, the United States economy, like it or not, may be the best place for people to invest, including treasuries; therefore, the strength of the dollar has really increased and one of the dilemmas that the fed is trying to deal with is if they start on a path to lift off, if you will, and then depending on what trajectory they select you could see further strengthening of the dollar relative to other international currencies and obviously that could have an impact on exports, okay.

We have seen already some of that happen, so when you think about the Greck set, whether it happens or not, Japan, China like I said, event risk in the Soviet Union or in the Middle East, the dollar still looks pretty darn good. So we have seen some slowdown in exports. Likewise, we have seen an increase in imports. The other thing that's kind of weighed on the industrial activity a little bit is oil prices. Oil prices being so low, we have seen kind of a reduction of bid in pipelines, some manufacturing, things like that. Primary metals are down a little bit, chemicals are down a little bit also in this whole mix. So that's what you are seeing, that what's responsible for some of that.

Okay. Good. I also had a question, another question, kind of related to the changes you have made to the financing plan. Overall, has the -- the three-year total didn't change much, but it looks like the 2015 is about, $445 million lower where as 2016 is $475 million higher. You are still talking about the same CapEx numbers. Should we maybe -- is that more related to maybe some CapEx getting delayed into 2016 that was in 2015? How should we think about that year over year change related to the CapEx forecast?

Dan, it really is a function of cash flows within the operating companies, how they change, what their needs might be, whether they can push an issuance out of one year into the next. Again, we try to balance from a Southern Company perspective who is going to market, when they go to market so that we don't all go at the same time, so we're just trying to balance out as we move through time how we tap the markets in the most efficient way.

Okay. Then the last question on Vogtle, you didn't really break out the unit 3 and 4 like you have in the past. So I was just curious, just looking into this current quarter, the third quarter, it sounds like setting the unit 3 say one is one of the critical items. I was wondering if you could you identify any of the other critical items at unit 3 and 4 in this upcoming quarter?

The near term, you hit it, would be to set the CA01 in unit 3. There's some other things going on there, the transmission work that we mentioned I believe in the script, that ops building, as Tom mentioned, as well, is very, very important to us. But one other thing that is really not mentioned here is really down on the horizon part of unit 3, it's the installation of the turbine generator, which I believe is late this year or early next, I believe.

That's right.

Which is a big deal. And that turbine building has probably another 60 feet of steel to go on top, once that turbine deck is built. So if you look at the pictures we put in the slide deck, it's beginning to look like with what it's going to look like at the end of the day, and that's exciting for us.

You know what? I'll just make the invitation, I know certain of you have taken investors onto the site to be able to see this stuff. The scale of this work is just immense and in order to get an appreciation for it, if you ever want to come see it, we'll be glad to arrange any kind of visit you want.

How about unit 4. Are there any critical items in the upcoming quarter there?

Yes, Dan. I think they set some smaller modules in, but the real big work there is going to be modular-related, the CA20 has begun in the module assembly building and they began making panels for the CAO1 module at unit 4, as well. Those are big deals. We have learned a lot of lessons from unit 3 and we're hopefully going to put those lessons to use and build them quicker on unit 4.

The other thing that I come away with when I go out there and kick the tires on the site and listen to the people building it, we're actually feeling pretty good about the schedule on unit 4. There's a lot of elements on unit 4 that relative to unit 3 are accelerated. So that's good for the project.

Okay. Thank you, Sir.

Operator, are there any more questions?

At this time there are no further questions. Sir, are there any closing remarks?

Sure. I just want to say thank you to everybody. We had a heck of a first half of the year. The franchise is doing fabulous. We're coming off a year where we were the highest level of customer satisfaction, that's our ultimate barometer.

Financially we're great. Operationally we're great. Southern Power is doing fine. Making big progress on these big projects. I'm very happy to report a really good first six months and look forward to the next six months. Thank you all for being on the call. Thank you for following us and look forward to talking with you soon. Have a great afternoon.

Thank you, Sir. Ladies and gentlemen, this does conclude the Southern Company's second-quarter 2015 earnings call. We thank you for participating in today's call. You may now disconnect your lines.