The Southern Company (SO) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, my name is José and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company's First Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background notice. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Thank you, José. Welcome everyone to Southern Company's first quarter 2015 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company; and Art Beattie, Chief Financial Officer. Let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we've released this morning, as well as the slides for this conference call. The slides we will discuss during today's call can be viewed on our Investor Relations Web site at investor.southerncompany.com. At this time, I'll turn the call over to Tom Fanning.

Good afternoon and thank you for joining us. Many of you've heard me speak before about the full portfolio and its significance to Southern Company and to our industry as a whole, simply put, we are inventing the future of clean, safe, reliable and affordable energy for the benefit of the customers and communities we serve. Our full portfolio strategy which includes new nuclear and innovative new technologies for 21st century coal, as well as natural gas, renewable and energy efficiency is a fundamental component of that mission. I would like to take a few moments to highlight how this all of the above approach continues to be beneficial to customers and to discuss several projects helping to shape the full portfolio for the future. To begin with, our diverse generation fleet enables us to quickly adapt to constantly changing market conditions with the ability to utilize the most cost efficient generation resources at any particular point in time. When natural gas prices are low, for example we are able to take advantage by burning more natural gas and less coal. Such was the case in the first quarter of this year, gas energy climbed to 48% of our energy production. Our use of coal for the quarter was the lowest in several decades falling to 32% of our energy mix. And as a hallmark of our integrated business model we passed those savings along to our customers. Natural gas of course will continue to be a dominant solution. Recently our gas consumption was about 1.5 Bcf per day. This year it could approach 1.9 Bcf per day and by 2020 the amount could be as much as 2.3 Bcf per day. But natural gas is not a panacea as we cannot assume that current prices will endure indefinitely. We must therefore, continue to pursue the development of a truly diverse generation portfolio, one that provides the necessary optionality and flexibility to adjust to changing market conditions. In addition to natural gas 21st century coal and new nuclear, we are rapidly building out our energy portfolio with renewables including solar and wind. With that in mind, I would like to take a more detailed look at how we’ve expanded our renewable resources in recent months. Four Southern Company subsidiaries recently marked major milestones in the strategic expansion of one of the nation's largest renewable energy portfolios through the announced development or acquisition of large scale solar projects. Gulf Power and Mississippi Power recently announced power purchase agreements with solar facilities totaling 173 megawatts that are currently being developed on military bases in their respective states. Georgia Power broke ground at Fort Benning, the first of four 30 megawatt retail rate based solar project in development with the U.S. Department of Defense. And there is more likely to come. In February our Southern Power subsidiary announced the acquisition of two solar projects totaling 99 megawatts in Georgia, the 80 megawatt Decatur Parkway solar project and the 19 megawatt Decatur County solar project, and most recently Southern Power announced the acquisition of a controlling interest in the 32 megawatt Lost Hills-Blackwell Solar facility in California from First Solar. Also in March Southern Power announced an agreement to acquire the 299 megawatt Kay Wind Facility currently under construction in Oklahoma. This acquisition is expected to close in late 2015 upon successful completion of the project. Kay Wind will be the largest renewable electric generation plant in the Southern Company system and the first wind facility we will own. Upon completion of these projects that Southern Company system expects own or purchase the output of more than 3,100 megawatts of renewable resources system wide including 44 solar facilities in seven states. Let's now discuss our two large construction projects which are equally important to our full portfolio of generation resources. Our new nuclear project plant Vogtle units 3 and 4 and our 21st century coal facility in Kemper County, Mississippi featuring coal gasification technology developed by our researchers in partnership with KBR and the Department Of Energy. Both of these projects stem from state specific resource planning processes that value generation diversity including the hedge that these new resources represent again potential Carbon Dioxide regulations in the future. First, an update on plant Vogtle units 3 and 4. The primary focus of the project continues to be on quality and safety. Georgia Power has maintained an exceptional safety record for a construction project of this size which currently has over 5,000 people on site. During the first quarter our outstanding safety culture manifested itself as we performed over 1 million safe work hours without a recordable injury. The quality oversight from our nuclear team continues to be invaluable. This is a complex project with numerous challenges. We are proud of how well our processes and controls are holding up to the inspections of both the NRC inspectors and Georgia Power’s regulator. More importantly our own rigorous oversight is being manifested in the quality of the facility. The new Vogtle units are being built to serve Georgia customers for 60 plus years and the oversight in place today should help ensure that these units will function at a high level for decades to come. Construction activities are tracking closely with the revised schedule provided by the contractors in January. The greatest risk to the schedule for both units continues to be in the timely delivery of structural sub modules. I’m pleased to report that the quality at the Lake Charles facility has improved and we no longer expect sub modules from that facility to require remediation on site before being released for assembly. We anticipate continued delivery of panels throughout the year from Lake Charles and we’ve been informed that the scope of work may be expanding there. Critical path remains closely aligned with delivery and installation of panels for the shield building. These panels are fabricated by Newport News Industrial and quality has been good. Acceleration of work at NNI along with improving the panel installation process represents one of our best opportunities to improve on the schedule provided by the contractors. Critical path runs somewhat parallel with activities inside the containment vessel. The CA01 module is one of the major next step inside this area of nuclear island. The final concrete pours necessary to install CA01 were completed late last week. CA01 is now projected to be lifted into place early in the third quarter of this year. A number of you have visited the site in person and the progress is obvious. While the entire project is proceeding well, the Unit 3 Annex Building is an area of noteworthy progress. The Annex Building is necessary for the initial energization of the control systems for Unit 3 an important early step in the startup process. The concrete foundations and structural steel for this facility are well underway. And in late February the first of 34 wall sub modules for the Unit 4 CA20 module was [up ended] [ph] marking the start of the assembly process. On the regulatory front $198 million in expenditures submitted in the 11th Vogtle construction monitoring report were unanimously approved on February 19th with a cumulative amount approved to date of $2.8 billion. Additionally the procedural and scheduling order for the 12th Vogtle construction monitoring report was approved on April 7th, consistent with the long standing Georgia Law the order reaffirmed that neither the project certified cost nor the VCM 8 stipulation in 2013 constitute a cost recovery cap. Georgia Power will be allowed recovery of all reasonable and prudent start up costs up to and above the certified amount and we believe the semi-annual VCM process including the testimony of the independent monitor continues to build a record that has thoroughly documented Georgia Power’s prudent management of the project. The order also establishes a schedule for filings and hearings on our request of the commission to verify and improve $169 million in expenditures for the second half of 2014. Georgia Power expects to file direct testimony on Friday, hearings are scheduled to begin on June 2nd and we anticipate a decision in mid-August. A full schedule is included in our slide deck. Now let’s turn to an update on the Kemper County IGCC project. The Kemper project also boasts a terrific safety record. With now over 2,500 workers on site no safety incidents occurred during the first quarter. In early March we completed the first firing with natural gas of the facility’s gasifier burners, a significant milestone. We continue to make tremendous progress on our other start up activities as we look ahead to the first synthesis gas production plan now for third quarter. In the mean time the combined cycle at Kemper continues to perform exceptionally well with the first quarter equivalent force outage rate of less than 1%, and a capacity factor in line with the rest of our combined cycle fleet. Turning to the legal and regulatory fronts the Mississippi Supreme Court's order which deemed that the 2013 Kemper settlement unenforceable and reversed the subsequent rate order has been met with vocal composition from state wide industry groups, business organizations, the state economic council and members of the public utility staff and commission as well as other public entities through amicus briefs filed with the Mississippi Supreme Court. Most of the briefs emphasize that the rate plan agreed to in 2013 was of great benefit to the customers of Mississippi power and then a traditional rate case could mean rate impacts approaching 40% for some customers. This compared to the 25% rate increase contemplated in the original settlement 18% of which is already in place. While we wait the Court's decision on rehearing we will continue to work towards a reasonable comprehensive settlement with the public utility staff. However as a possible alternative to a settlement we are also preparing to file a rate case by mid May. With the completion of the project and site we want to ensure that the rate recovery is adequately addressed in a timely manner. I'll now turn the call over to Art for a financial and economic overview.

Thanks, Tom. As you can see from the materials we released this morning, we had solid results for the first quarter of 2015 reporting earnings of 508 million or 0.56 per share compared with earnings of 351 million or 0.39 per share in the first quarter of last year. First quarter results for 2015 include a $6 million after tax charge related to an increased construction estimate for Mississippi Power's Kemper integrated gasification combined cycle project. The first quarter results for 2014 included a $235 million after-tax charge for the Kemper IGCC project or $0.27 per share. Excluding these items, Southern Company earned $514 million or 0.56 per share during the first quarter of 2015 compared to $586 million or $0.66 per share in the first quarter of 2014. Earnings for the first quarter of 2015 were in line with our expectations and were positively influenced by retail revenue effects at Southern Company’s traditional operating companies, offset by milder winter weather than in 2014 and increased operating and maintenance expenses. Moving now to an economic and sales review for the first quarter. Economic growth in the first quarter of 2015 was modest but our retail sales across all customer classes are encouraging. Total weather adjusted retail sales grew 1% in the first quarter lead by industrial sales which were up 2%. We have now enjoyed eight consecutive quarters of positive year-over-year industrial sales growth in our region. Industrial sales growth remained broad based across eight of our largest 10 industrial segments. The strongest industrial segments include petroleum up 10%, stone, clay and glass up 6% due to improvements in the housing market. Transportation improved 5% as automotive manufacturers expanded output. Weather adjusted residential sales were slightly positive for the first quarter of 2015 primarily due to strong customer growth of nearly 16,000, a 55% increase over the approximate 10,000 new customers gained in the first quarter of 2014. Weather adjusted commercial sales were up 0.7% for the quarter, office vacancy rates continue to show signs of improvement and more office retail projects are being announced. Currently more than 1.9 million square feet of office space is under construction in Metro Atlanta, in addition a number of new Atlanta projects are expected to begin construction soon, including the Mercedes Benz headquarters. According to U.S. Bureau of Labor statistics non-farm employment increased in all of the states of our retail service territory between February of 2014 and February of 2015. Nationally Georgia ranked number five among all states for job growth and Atlanta was ranked among the top five metro areas. Meanwhile our economic development pipeline remains robust with more than 300 potential projects representing 37,000 potential new jobs and over $34 billion in potential capital investment. The climate for business and investment remains strong in our service region. Alabama and Georgia were recently ranked number one and number four respectively amongst states in which to do business by Site Selection magazine. Turning briefly back to Southern Power as Tom mentioned in his opening remarks Southern Power continues to find new projects that meet its investment criteria. In our fourth quarter call in early February we outlined two categories for Southern Power’s CapEx projections, base CapEx and placeholder CapEx for growth. Base CapEx includes projects we have identified as likely even though we may not have reached final terms or received all regulatory approvals. In February our base CapEx included among others the Kay Wind and Decatur projects Tom mentioned earlier. Since then Southern Power has identified a number of additional projects for 2015 and 2016. As a result we are shifting dollars out of the placeholder category and into base CapEx for Southern Power. The result is that we have accounted for all of our original 2015 placeholders and have moved 100 million from the placeholder to base in 2016. With our 2015 success thus far and the long runway between now and the end of 2016 we are confident about our ability to find plan solid projects to account for our remaining 2016 placeholders. Before turning the call back to Tom let me cover two final items. First our earnings estimate for the second quarter which is 0.69 per share. Secondly I'd like to highlight dividend announcements last week. Our Board of Directors approved a $0.7 increase in our common dividend to an annualized rate of $2.17 per share. This is our 14th consecutive annual increase and marks 270 consecutive quarters dating back to 1948 that Southern Company will have paid a dividend equal to or greater than the previous quarter to its shareholders. Over the past decades our dividend has accounted for nearly 70% of our total shareholder return. It is the corner stone of our value proposition and the board's decision of last week reinforces its confidence in the strength of our long-term financial plan. I will now turn the call back over to Tom for his closing remarks.

Thanks, Art. After a successful year in 2014, Southern Company has entered the New Year with strong momentum. We see a franchise business that is operating better than ever, solidifying its position as an industry-leader in all phases of the business. We see important progress on major capital projects and we continue excel with our customer focused business model. We also see a strengthening economy and a region poised to grow in the months and years ahead. In short, we believe Southern Company is well-positioned to succeed in 2015 and in the years ahead, behind the strength of our 26,000 employees and their commitment to provide clean, safe, reliable and affordable energy to the customers and communities we serve. Southern Company is keenly focused on remaining an industry leader for the long-term and forward thinking decisions with regard to our generating portfolio a key aspect of that effort. But the evolution of our business does not stop there, we recently announced the launch of a energy innovation center to be located in Atlanta's Technology Square, while we remain stead fast in our commitment to excel the fundamentals of making, moving and selling and consuming electricity. We also understand that the way in which customers use energy may change over time. The energy innovation centers is just one way in which we are working to anticipate the future and lead the way with the development of new energy innovation. Going forward we will continue to build on our long history of inventing the future by relying on the thinking of our entire work force and with potential such as [Meth] and other major established and new entrants to the energy industry. Initial possibilities involve expanding the motion of energy infrastructure to assets beyond the meter un-manned aerial vehicles, hydrogen production from underutilized generating facilities and desalination plants. As Art indicated earlier the strength of our underlying franchise as well as our continued focus on remaining an industry leader through innovation underpin the Board's decision last week to increase our dividend which supports our objective of providing superior risk adjusted total shareholder return to investors over the long-term. We are now ready to take your questions. Operator we will now take the first question.

Thank you, sir. [Operator Instructions]. And our first question comes from the line of Greg Gordon from Evercore ISI. Please proceed with your question.

So what is the legal path in Mississippi today that either gets you back to a settled rate deal or puts you in a formal rate case filing? What are the different paths that get us back into a settled low rate hike or just into a rate filing in May?

Just as we described there is two paths, one is we’ve been having as you all know prolong series of discussion with the staff, we continue to think they’re constructive. I think the result of a settlement could in essence preserve and form the rate structure that we put in place in 2013. Failing to reach a settlement, we will file a rate increase in a conventional rate case. It is conceivable you could file the rate case and file the settlement at the same time. But those are the two paths.

But the Supreme Court’s decision has essentially closed off the creative approach you used to prefunding the capital prospects or is that not the case?

No, that’s not the case. The settlement would essentially preserve the structure which would mimic what was approved in 2013.

Second question is on your continued expansion of renewables platform, when we look at - so essentially the announcement of this wind project acquisition it fills in some of the sort of notional space in your Southern Power CapEx budget?

That’s right.

It’s not incremental to the budget that you’ve already articulated to us?

It’s part of the – yes, it was in the base already. And what we’ve done is I think the change here, it’s on the graph we showed, is that we essentially have spoken for all the placeholders in '15, so we’re very confident of hitting our numbers for Southern Power in '15.

And then how much of your total CapEx in '16 at Southern Power is currently sort of money projects that are definitely going forward versus placeholders or that’s on page 12.

I think it's 400 million.

And could you articulate -- sorry go ahead.

We feel really good about hitting our placeholders in '16 also but we’re not as the stage we're ready to declare those as part of base. We’ve improved it by 100 million.

And then is there what you can articulate what you think the earnings contribution is going to be from the Kay Wind facility when it comes in?

The Kay Wind facility the benefits are not investment tax credits, they’re production tax credits. So I don’t recall the '16 benefit but it should not benefit '15 at all, it will be a '16 addition.

It will be a little over $0.01 a year, something like that for whatever…

And when is the next milestone if we have a firm milestone? This is my last question. Your conversations with your EP&C contractors Vogtle with regard to the delay they announced in service date.

So we continue to have constructive discussions there. One of the things I think we tried to highlight in the initial remarks it that we can see our way through to some ways to improve the schedule that the contractors have delivered to us. We’ve been pretty clear about that in our disclosures. So we continue to work with them and we’re trying to find ways to reach an amicable kind of resolution to that.

And is there a sort of definitive milestone to look forward there in terms of drop dead date or…?

Not really. The ultimate conclusion would be litigation in the City of Augusta, Georgia.

And our next question comes from the line of James von Riesemann from Mizuho. Please proceed with your question.

I have two questions for you, so the first question is can you guys provide a little bit more color on this continuing disconnect between the 3% GDP growth in the service territory and yet 0.2% residential growth?

Jim, our expectation was for the year about 3% GDP growth that was underlying our forecast of low growth this year of the 1.3%. We’ve had a very strong economy here in the Southeast, I think our numbers and results reflect that as we outlined in the scripts that’s driven by the industrial sales growth. But we’re beginning to see movement on the residential and the commercial land as well, this is the first quarter in about four years where we’ve had positive growth in all three customer classes. So we think it’s broad based and if we look at employment growth both in the manufacturing sector and in other sectors, it’s beating the national numbers. So the economy in the southeast has been a bit stronger in our view than what we’re seeing on the 0.2%.

Yes, at a risk of falling into fed speak too, there is fascinating development and some of the things we’re seeing are better than but in some ways mimic what we’re seeing nationally. Better than clearly in the industrial growth sector, even surprising to us how strong it is. And even probably better than what we’re showing we think that chemicals for example was slightly negative but those were outages. So we expect to see chemicals rebound and recall a continuing theme has been segments which are dependent upon natural gas, well those are going to be really strong we think for the rest of the year. The only kind of cloud on the horizon there primary metals and we think that’s kind of strong dollar, strong imports low oil prices and therefore metal associated with the pipeline is probably slowing down a bit. But one the things that I think is really interesting that Art alluded to on the residential sector we are starting to see a pickup in household wealth formation, it’s pretty modest but still a pickup. Interestingly the fed guys are concerned by that, in that it looks like they are not consuming this pick up in either the top line revenue or a reduction in cost like lower gasoline prices, they are saving it. We are within kind of an historical range of savings rates so it’s not particularly troubling to me. And frankly if households are reducing debt or investing or even just putting money in a checking account for now at least they are less exposed, they are more resilient to future economic dislocations. So it’s not all bad, value is a function of risk and return, and GDP growth is return, increased savings rates is improvement in risk. So it’s not all bad and when you consider that the United States GDP was 0.2% growth in the first quarter you look at our numbers clearly better. We feel pretty good about our prospects going forward.

So the answer to the question on the growth and the improvement leads me into my next question. So if I look at your trailing 12 months on a weather normalized basis you are 276, but if I remember correctly at the end of the – in conjunction with the fourth quarter call you had 276 to 288 which are your expectations for the year? How do you get to the upper end of that band or even the middle end of that band given that trailing 12 is at the very bottom?

Improvement at Southern Power is an easy way.

Good weather, better than expected economic outcomes.

Okay. And then just on - there is nothing else that I am missing, am I?

I don’t think so.

No, if you remember too, one of things I think we said this before Art was the lower end of our range was down by Southern Power not filling in its complement of CapEx, it kind of lived with the base scenario. We think we’re there for 2015 and potentially could even improve.

And our next question comes from the line of Brian Chin from Merrill Lynch. Please proceed with your question.

Just a quick one, the long-term EPS CAGR slide isn’t in the deck, are we just to assume that it’s still 3% to 4% longer term?

Yes. We only adjust that kind of once a year, right. We come out every January and we give guidance for the year on our long-term growth estimate and then we only update that in our October call once we’ve gotten through the big earnings month in the summer.

And our next question comes from the line of Mark Barnett from Morningstar Equity Research. Please proceed with your question.

A couple of questions here one sort of bigger picture, you gave a little bit of detail around what you’re seeing in the commercial sector and obviously from a usage perspective it’s lag a little bit but we have a nice pick up here in the quarter. I’m wondering is this about the level of improvement that you’ve taken for expectations in your guidance here.

Actually, we’re looking for a little more improvement. The expectations for the year in terms of segments.

Like 1.4 on commercial about one on residential and 1.7 on industrial, so we’re bit ahead of our industrial numbers. We're still about a little way to go on commercial.

Yes, 1.3 for the year total.

Right, sorry that number is 1.4% on commercial that’s the level that's been in your guidance. And then year-over-year obviously base business growth driving a lot of that OpEx I’m sure, is this level kind of the year-over-year increase sort of a guide for the remainder of the year and you have lot of flexibility there.

Flexibility on CapEx is going to go to Southern Power….

The first quarter was a bit of an anomaly, you may remember Mark that first quarter of last year we deferred a lot of the expenses at Alabama Power they were non-nuclear outage costs under an accounting order that they were operating under last year. And then also if you look at year-over-year there were more megawatts out this year across the system than it were last year. So there are more outage costs this year. And then you just got normal growth for the rest that's a big piece of it is well. So if we look at what we expect for the year I still think my guidance from the last call was about 3% to 3.5% growth in non-fuel O&M for the year still applies and the first quarter is just kind of an outlier that will correct itself through the year.

And when we came up with the $0.55 estimate for the first quarter, almost exactly expected this levels O&M.

Thanks for the reminder it has been a long day if somebody mentioned earlier. Last question can you just remind me if Governor Dean has signed the new solar bill, HP37. And generally what you expect to see as a result in terms of maybe your own programs or offerings in the state?

He has not signed it to our knowledge, but I can tell you all this is very consistent with our plan I have always tried to position the company as given whatever business circumstances exist for us to find ways to play often. And to the extent distributor generations becomes important to the customers to this state it is the clear mission of our businesses to provide that service and those assets to our customers. So we fully support any development with respect to distributed generation whether that's rooftop solar or some ideas that they were storage or community solar or financing or anything else. Now whether we do that ourselves or do it through third parties our job is to find ways to succeed in this changing business environment. And I think we're demonstrating that in a superb way.

And our next question comes from the line of Anthony Crowdell from Jefferies. Please proceed with your question.

I just want to follow up on Mr. Gordon goes to Washington's question and Mississippi. Just it seem that there is a disconnect there when you look at that the two road maps you have over conventional rate case for the 30% to 40% rate increase or I'm not sure if you use this term but maybe a glide path or some type of nice trajectory of rate increases. It would seem like a no brainer if you were a regulator or you are running the intervene parties. Could you maybe highlight what that disconnect is and maybe handicap what you think to chances are of a potential settlement in Mississippi?

Anthony the only thing I can tell you I don't want to characterize the decision that's kind of in front of these folks, but if you look at the broad based support that the company has enjoyed to ask the Supreme Court to reconsider their decision in the amicus briefs, including the task to me it is an obvious decision that benefits the citizens of Mississippi to pursue the settlement or at least restore what the Supreme Court validated in its recent order, either one of those is I think in a broad sense the obvious way to go in the state.

And our next question comes from the line of Michael Weinstein from UBS. Please proceed with your question.

First question is about pipeline to midstream opportunities wondering if you are still considering going forward with that and how serious is that consideration?

Yes, here's some fascinating supporting data. We're actually looking at several opportunities and active discussions, will see how that goes. When you think about it before I came into this role we were consuming coal 70% of our energy came from coal and then 15% from natural gas. When you look at recent history 1.5 bcf per day, now this year may be as high as 1.9 and depending on what happens with 111 (d) and a variety of other things that per day gas consumption can average somewhere around 2.3 bcf per day. So, when you think about the attractiveness of Southern Company being one of the nation's largest consumers of natural gas, our value as a kind of key tenant to any of the infrastructure that needs to be build out to meet that kind of demand really gives us some opportunities to pursue a variety of investments and we're all over with that stuff, so we'll see what happens.

How about gas reserves and rate base?

This goes way back even when I was CFO and COO, so we’re talking now 10 years ago we’ve been kind of kicking that around. And back then we weren't consuming that much natural gas and it wasn’t as important. But certainly it’s an idea that has merits and as natural gas becomes more important to us especially given its volatility relative to other fuel stocks we we'll certainly keep that on the front burner of ideas. In any case we would not want to take price risk on molecules in the ground this would all fuel clause related issue.

One other question about nuclear. We’ve heard recently from Commissioner Echols that he sees the need for another two units beyond the current and that it depends on how well the project goes and whether 111 (d) goes, so I am just wondering if you have actually been in conversations about that, is that something that’s actually been planned out at this point or is it just talk for now? And also is this something that you can hold over the consortium's head so-to-speak, that guarantees some kind of good performance going forward also in the litigation?

So many of you on the call may remember in 2014, I want to say it was the summer and a Q&A session that’s by far some policy center I think after a talk I made that I did alluded the fact that we would be I forget delighted to consider new nuclear. The steps that would be taken first would be to essentially begin the permitting process to undertake a new plant, not necessarily to commit to build a new plant. So in essence it’s fairly modest dollars in order to secure the option. And we moved along and then we were hit in December with the change in schedule put forth by our contractor group. We were very clear that we don’t believe that the contractors are doing everything they can do in order to fully mitigate their schedule per the requirements of the contracts. And so what I said at that time was that I thought it was sensible for us to set aside a lot of talk about new projects until we came to more resolution as to the commercial dispute. It is clear to me that if the contractors want to succeed in the United States with AP1000 then they need to perform well on Votgle 3 and 4. It is in fact the benchmark plant for all AP1000s going forward. So, you can draw your own conclusions as to their motives.

And our next question comes from the line of Daniel Eggers from Credit Suisse. Please proceed with your question.

Tom just on the nuclear conversation can you maybe just share some of the things that you guys saw to expedite or to catch up on the delays of the EPC folks, number one. And then number two if you look at kind of how they got their delays and schedule, are there things you’re going to be able to do to mitigate that from happening kind of going forward so we don't run into this 12 or 18 months from now them saying while we have the same sort of delay problems?

So we try to kind of suggest that in the prepared remarks at the outset. I think there is a clear opportunity to advance some scheduled mitigation with new Newport News, that’s our opinion. And it’s not only production of their facilities but also the installation of the panels. We need to make sure that all of that is done well. Also you must know that, especially those of you that have visited the site we encourage everybody on the phone if you can figure out a way to get to the site, we love showing it off. I think the people that were there were I think really struck with the kind of progress and quality of the work there. We have an enormous quality assurance program and as licensee of the plant we ultimately are responsible for having the right kind of plant built there. Our QA program has been focused not only on site but also at places like Lake Charles, and I think our working with the contractors itself put them in the position where now we essentially have been able to accept production out of that facility and go ahead and put it in the production process. As we move to more work inside the nuclear island that kind of process improvement, quality assurance and ultimately production on site is going to move the needle in the right direction. So we remained relentlessly focused on ways to work with them to do that. And I would argue in the past quarter or so I think we've made some progress in our thinking.

And then just to ask a question, but just on the gas reserves and rate base issue. The legislation in Mississippi seemed to open that as a little bit more of a window than previously discussed. Is that something you guys are going to look for sure how do you read that legislative action?

Well it’s largely focused on E&Ps recovery of economic development projects. It does authorize the PSE to deem the natural gas reserves are used and useful as utility plan or whatever. So a similar concept -- so it is something we would consider as there is natural gas kind of generation in Mississippi I think once you're post Kemper rank with 3rd coal gas and Kemper. A similar concept that we have at Kemper is in fact that the Lignite mine. It’s a similar idea where essentially we own the Lignite and it’s in rate days and it serves to hedge kind of any future price swings. Remember that is almost no volatility going forward. So it’s certainly a valid idea something we consider and make sense.

And I guess just on the renewable side of the business, I guess we’re able to put renewables in right place in Georgia in PPAs in the other states, is there going to be an opportunity when you guys start putting or feel more comfortable putting some of those assets into your rate base rather than contracting out where the cost of capitals are.

Sure. I think to the extent those assets ever get flipped, so what have you. I think we’re a natural buyer. One of the things that we always kind of think about is for any of our assets and although we tend to acquire some you know we sold some and swapped some, who is the best owner. And we always seek to achieve that position. So I think there will be opportunities for us, should those assets ever come to the market for us to be a strong player in acquiring that, that maybe a Southern Power or could be at the OpCo.

But you don’t necessarily see the utilities doing more to develop renewables in territory in rate base asset.

No, absolutely we could and in fact I try to suggest that in that little funny sense right there and there is probably more to come if you remember that sense. We’ve done a lot of business in Georgia, we’ve done four times 30 with DOD facility and there is more to come. So I’m very bullish on that. We’ve had a terrific relationship with the DOD. You know, that the DOD has a renewable mandate goal what have you and I think we were probably the first ones in the United States to work with them constructively to fulfill that mandate.

Our next question is come from the line of Ali Agha from SunTrust. Please proceed with your question.

First question Tom, just wanted to clarify your scenarios on getting closure on the Mississippi issue. I think one of the options previously was for the Supreme Court to overturn their ruling which I guess was 5.4. Is that still an option or are you really thinking if global settlement could address all the issues they raised in the original ruling and take care of it from that perspective.

Ali, it’s both of those I mean the Supreme Courte could certainly reconsider their decision that obviously and think about the broad supporting the state just about everybody in the state that we had huge participation in the amicus briefs. But tailing that we could reach a global settlement which would in effect mimic many of the characteristics of the original rate order that was entered into in 2013, we could get that as well. We think any those are better than filling for 40% increase in the rate case but we’ll see how it goes, those are the path we will follow.

And also be clear I think you mentioned thinking about filing that rate case about mid May just couple of weeks from here. So in your mind the other two parts whether a global settlement or a Supreme Court reversal realistically could happen within the next couple of weeks?

Sure. And then I suggested on the call earlier today that another alternative for us to file the settlement proposal, at the same time would temper us with the conventional rate case.

And then secondly this show cause notice that they put out there to you guys on market bought issues, how big of a deal is that or do you see that playing out?

We don’t think it’s a big deal right now. Look, I don’t think there is any evidence in my opinion there is very little evidence, no evidence Southern Power has any market power in the Southeast. I think it was a reaction by the first half that basically pointed out that there was not much activity in our auction mechanism that we had put in place, really up until 2014. In 2015 we introduced kind of a tweak on that auction process which increased the activity of the auction many folds. But you got to understand through this period we’ve been a net purchaser not seller. So heaven sake I don’t know how we exercise market power as a net purchaser of energy. Number two, the southeast has been traditionally a bilateral market and people are very happy. There has been no contention at FERC that suggest that there is something wrong with the auction process we have in place. This in fact was flow by the FERC that basically is raising a question where I am not sure there is any problem at all. So we have a chance to respond and we we'll provide our evidence and have a good constructed dialogue with FERC and we'll see how it goes. In the near-term you should think about that in the next three to five years. At least the thinking we've done so far there is almost no potential adverse financial impact from this.

And then in your financial planning you still have assumed no equity issuance through '17. I was just curious how much cushion do you have right now so that that scenario different scenarios keep you in that no equity issuance mode or are you fairly close if you get more Southern Power activity et cetera that equity comes back into the equation.

Yes, Ali just recall last year we issued 800 million versus the 600 week plan. So we're a bit ahead of where we thought we'd be. We don't really have any scenarios in which in the foreseeable future even with the Southern Power investments that we have outlined in our CapEx program where we would need more equity. It would have to be in access of the amounts that we forecast and you can see we filled up our bucket in 2015 on placeholder projects and we strive away to go 2016. So I think we're good to give you a feel for I don't have a number to give you about where we are in the limit, but I think we're in pretty good shape.

And I think we've suggested in the past that kind of as we start to wind down our CapEx and if you look at our CapEx slide kind of, what was it to 6.8 to 5.5 or to 4.3 or something like that. We're probably over-equitized to some degree. So there is not pressure to sell more equity.

And our next question is coming from the line of Michael Lapides from Goldman Sachs. Please proceed with your question.

Congrats on a good start to the year and especially on the renewable side. One quick Mississippi question and then one natural gas question for you. In Mississippi the court decision referenced pretty clearly the need for a prudency review before the commission can grant any kind of rate increases. And given that the stems from a rate pair or customers acting as litigant here, do you need to have a prudency hearing of some kind as part of any settlement docket?

We've already filed a prudency record last year. So we think all the evidences there necessary for the commission to act right now.

So the commission could issue a prudency determination based on what's in the record right now and that should satisfy effectively what the Supreme Court said had not been satisfied when the Supreme Court made its ruling?

That is our belief.

On the natural gas side when you look at the infrastructure of the natural gas system throughout your service territory and maybe even slight neighboring areas. Where do you all see is the biggest bottle mix meaning where is there lack of midstream infrastructure that is needed to be able to over the next. I want say five to ten years because it's kind of hard to look much more beyond that to help alleviate some natural gas or other midstream related bottle mix in your area?

Yes. That's a fascinating question and I wish I had my map and my pointer and it really depends on what you believe at 111 (d) and what we do with other kind of the display co-assets should they arise, recall under their half [mac or math] we went from kind of 20,000 megawatt down the 13,000 with 4,000 total unit being retired -- being converted to gas 3,000 retired completely. By EPAs own math and I'm not going to stand by their math because I frankly don't believe it's a achievable in the timeframe as they do. But they would have us retire enough coal down about 4,000 megawatt, so what do you do, do you convert that to gas? Do you build Greenfield gas where do you build it? If you want to think about the way the pipes work in the southeast there is kind of tow big themes. The normal conventional historical theme would has come from the west and you got a lot of pipelines that kind of run from the gulf of Mexico up through the North Western part of Georgia if you want to think about it that way. Where you don't have a whole lot of distance to cover, you have some embedded costs that are attractive. And we could certainly link in to systems to the west. And there is even if not just Gulf of Mexico stuff right, there is Fayetteville and some other areas out there that are shale gas related. The other theme would come out of kind of the north and so you would think about pipes that may come down north to south and kind of approach our territory more from the east. And so we'll see how that goes, you are talking about probably more expensive pipes so can you get a basis difference than the gas between the north and say Henry hub looking and kind of proxy. So that's really the two big themes in gas infrastructure that we seem to see.

My apologies real quick back on Mississippi and this maybe our Art question. Art given the court case and where it stands now. What happened in the first quarter from a GAAP accounting perspective in revenues in Mississippi versus what had been basically going on to all of '13 and '14? And I am just trying to kind of match up our GAAP revenue numbers to the Mississippi rate increases, are they reflected in GAAP revenue I know the cash was collected previously. I am just trying to think through the puts and takes here.

Michael we didn’t record any mere equipped revenue in the first quarter but there were some impacts for equity return on some other pieces that actually went back into fourth quarter of last year where we un-book some of that but it was very -- it was all really deferred. I don’t have a number to give you but I can give you some math to recall.

Just trying to think big picture you're basically no longer booking the revenue related to Kemper, that $156 million number.

Well, all of that was never going to the income per se it was all being booked on the balance sheet as a regulatory liability and it was going to be used to offset rate increases as the plant went into service over time that was the whole design of mere [equipped].

And our next question comes from the line of Shar Pourreza from Guggenheim Partners. Please proceed with your question.

Just real question quick question on Mississippi, I know you’re kind of working on potentially striking a global settlement. So can you remind us if the asset has sort of a capacity factor hurdle it has to meet once it is live? It’s good to see that it’s running like a CCGT I am kind of curious on what the hurdles are once it’s live?

Recall that the combined cycle that’s running right now is running on natural gas. Ultimately we have been working with the commission on an arrangement in which when you think about it when we had the project certified there was a capital cost component and then there was an energy cost component. And what we’ve been able to kind of think about in the settlement is a way for us to essentially assure that Mississippi customers are held harmless from any comp over runs we’ve done that painfully for all of us. And then otherwise to assure that the energy benefits are there for Mississippi's customers and I think we can get that done. Now you all must recognize that when plant Radcliffe was originally approved this is a process that occurred in 2009 and 2010 and remember we only had 10% of the engineering done, there's been a host of changes in a variety of fronts including natural gas prices, commodity prices, all host of things. I think what we would undertake to do is make sure that we could deliver the energy benefit that the commission thought they were getting when the project was approved. We’ve already spoken for the capital cost. I think we can get that done.

And then, just one question on renewables Tom as we’re starting to see some more contracts being designed post ITC step down. Curious on if you’re seeing that within the Southeast? And then kind of what that placeholder could look like for Southern Power between wind and solar say post 2016?

So, what’s interesting Shar is that right now there is an enormous rush to get stuff done particularly in solar before the end of '16. And certainly that has filled up our wheelbarrow of capital placeholders for '15 and we feel really good about where we are for '16. The wind deal was a way to startle in fact it was interesting one of our own directors used the phrase that did it and kind of the development activity of renewables and therefore earnings associated with the renewable. The other thing that’s fascinating is as we start to consider kind of beyond renewable to 111 (d) we’ll probably have a final rule there in summer, say August. The States will now have to start providing for the reality of compliance with that rule and therefore we got to start thinking about gas. And remember as I suggested earlier on the call if we’re going to do new gas generation we need new gas infrastructure. Those things can go hand in hand and filling in that kind of flat spot.

And then just on any of the Southeast states, is anybody close to submitting the state implementation plan or we’re like very far off?

You don’t have a final rule to react to. Shar Art just pointed something out. Why don’t you stay with it on the solar?

If you look at our CapEx budget in terms of growth CapEx in 2017 it’s like $200 million but solar projects so it’s very, very small compared to '15, '16.

So there is 200 million anyway, it’s way less than what we’re seeing right now.

And our next question is coming from the line of Paul Ridzon from KeyBanc. Please proceed with your question.

It seems incrementally with each call you’re embracing more and more renewables. I mean if this trend continues what are your current thoughts about when yield come into serious consideration?

So we’re really following through on what we said we would do. It’s funny. It’s kind of what you say and how you say it, I guess. What we’ve been saying here been pretty consistent for a while now that we thought that renewables will be important certainly solar renewables through '15 and '16 while you have the 30% investment tax credit environment, and that kind of beyond ‘16 into '17 and '18 where 30% goes to 10 all of a sudden wind starts looking like a way to address that gap. Also you should know the strategic synergy we started procuring wind energy via contract. So for us to take an equity position and win puts us in a different posture than we have been before. With respect to the YieldCo you know that we’ll consider anything but I think on balance we felt that Southern Company itself was a YieldCo anyway we have really efficient ways to raise capital. I think it introduces complexity into your balance sheet and long-term I’m not sure that north of the benefit of shareholders it certainly has short-term appeal but I would never want to impair the long-term viability of this company by doing financial engineering or tricks. The other thing you should just know and let’s just point out again we haven't really talked about on this call but we have another call. We have terrific tax appetite and given our scale, given our tax appetite you know that we’ve always been conservative; our tax appetite remains the competitive advantage for us to play in these fields. Linking that with our experience with the major vendors our low cost of capital, access the capital markets, I think the developers they want to do something significant look to Southern as the premier partner right now. That’s why we have been able to fill up our [advance] card.

And then it was refreshing to see in the Kemper charge kind of immaterial this quarter, how you look there?

Tell me about it. Look, we’re in start up right now. There is a submission of construction left but we’re essentially in start up, and the team there is working wonderfully. We brought in a guy that has had a tremendous amount of experience in start up of these types of processes Chip Troxclair, he and his team have really done a dynamite job of stay on the schedule and working around the issues. It’s refreshing to us as well. They’re doing a great job.

Our next question is come from the line of Dan Jenkins from State of Wisconsin Investment Board. Please proceed with your question.

First questions on Slide 18, your financing plan I notice there are couple of revisions from slide from last quarter the big ones being Alabama in '13 went from 713 to 75 and then Mississippi bank debt in '16 went from to 0 to 900. I was wondering if you could talk about what’s driving those change?

I believe the Alabama took advantage and issues from vision of that this year. It actually did some refunding that probably wasn’t reflected in the schedule we showed you on the last call. Mississippi bank debt was really a renewal of bank notes that were maturing this year that was about 775 million maturing this year and we actually renewed those plus a couple of hundred million or 175 million or so of additional money and really that's serving as bridge financing for until we get into position where we can either go to capital markets or do our securitization financing.

And I want to go back little bit on your retail sales growth. You talked about change in the weather normalized sales. So I was wondering if you could give us a little color on the customer growth how -- is consistent with your expectation or how is that playing out?

Yes, well we talked a little about customer growth in the residential side. We added 16,000 new I think last year we added 10 in the first quarter. So pretty good jump in growth. I think if you do a year-over-year look it's about 37,000 increase if you look at year what we have added since the first quarter of last year 37,000 you may recall that prior to the recession we were adding almost 60,000 or more a year, so it's not back to where it was but it' showing stronger growth.

Then last I was looking at the global construction update on Slide 5, I think it is then I noticed you didn't really change any of the information related to Unit 4, and I was wondering if that was according -- still according to plan or if there has been some slippage in the near-term and on the horizon are essentially the same as what you reported last quarter.

I don't have last quarter's slide in front of me but I believe that what you're seeing there is still kid of consistent with where we are the biggest new module, CA04 module is not a very big one neither are CD-65 or CD-66. So the next biggest module for the Unit 4 will be CA20 and we mentioned that in the script that is just now beginning assembling in the MAB the module assembling building.

So the schedule hasn't really changed for Unit 4 and then to what you reported last time?

Not that I'm aware.

And at this time there is no further question. Mr. Fanning, are there any closing remarks?

Yes. Thank you. Listen everybody we appreciate you been on the call. I think the company's is off to a great start as we've said to franchise for some time now has been in a good as shape as it's ever been. We continue to execute like champions and we're going to do our best to make sure that our shareholders here are handsomely rewarded. Thanks very much. Talk to you soon.

Ladies and gentlemen, this does conclude the Southern Company's first quarter 2015 earnings call. You may now disconnect.