Q3 2019 Earnings Call
Good morning, My name is Maryann I will be your conference operator today at this time I would like to welcome everyone to the Southern company third quarter 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session at that time and give us.
<unk>. Please press star one fell about a four and your telephone as reminder, this conference is being recorded Wednesday October Thirtyth 2019, I would now let's turn the conference over to Mr., Scott Gamma Investor Relations Director. Please go ahead Sir.
Thank you Mary Good morning, and welcome to Southern Company third quarter 2019 earnings call. Joining me. This morning are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company and drew Adams, Chief Financial Officer, Let me remind you that we'll be making 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 Form 10-Q 's and subsequent filings. In addition, we'll present non-GAAP financial information on this call reconciliations to the applicable GAAP measure are included in the financial information, we released the sport.
<unk> as well the slots for this conference call, which are both available in our Investor Relations website at Investor about Southern company Dot Com.
At this time I'll turn the call over to Tom thing.
Good morning, and thank you all for joining us this.
This morning, we reported strong earnings per share substantially above our estimate year to date earnings through September have also exceeded our expectations and the fourth quarter is off to a strong start for our electric utilities with unseasonably warm temperatures in early October .
Through will further discuss our earnings result, and expectations in a few minutes.
Before providing you with an update on our progress at the Vogel site I want to highlight our outstanding operational performance. This quarter, we experienced record heat in the southeast. This summer recording all time September peak load days four times during the month, our electric system demonstrated.
Vilia with record peak season generation and transmission performance, resulting in the exceptional reliability for our customers.
Importantly.
Even amid these conditions a diverse fuel mix enabled southern company system to reduce our carbon emissions by approximately 35% compared to the strongest demand of 2007, our benchmark year for carbon emissions.
Let's now turn to an update on plant Vogel units three and four.
The site continues to make progress as demonstrated by the achievement of several milestones during the quarter, including the start of integrated Flushing activities. We remain focused on meeting the November 2021 in November 2022 regulatory approved in service date.
And we continue to maintain and aggressive work plan onsite.
Tool to help position us to meet those dates.
There is no change in our total estimated cost to complete the project.
Last quarter, we discussed at length. The contingency we established for the project in the second quarter of 2018.
Recall the total amount we established is $800 million for the entire project of which Georgia powers share is $366 million.
For the quarter.
Georgia power has allocated $30 million of its project contingency into the base project capital cost forecast.
There are a host of factors, both positive and negative that go into that analysis.
But the biggest factor in allocating contingency was probably increased cost forecasts related to craft attraction and retention.
To give you context contingency as a proportion of the estimate to complete is larger today then when it was established 15 months ago.
We continue to believe that we have sufficient contingency to meet the budget associated with the November regulatory approved in service dates.
Overall, including engineering procurement and additional tests planned activities. The entire project is approximately 81% complete with unit three direct construction.
Currently 77% complete.
The project major milestones for 2019 have been achieved or are expected to begin as planned later this year.
We continue to successfully attract and retain craft labor and currently we believe we have the resources necessary onsite to support our aggressive work plan.
Over the past several quarters, we have experienced periods, a fluctuation in productivity around significant startup and construction activities.
This variability has resulted in a solid too.
S curve shape and our performance charts and effect, we discussed on our last earnings call in August as we started our integrated Flushing activities. We saw a similar effect on unit threes productivity.
Production levels have improved in recent weeks and we're seeing the positive impact of a mature workforce with an increased ability to balance the needs of both construction and testing onsite.
Aside is averaged nearly 150000 earned hours over the past four weeks with two recent weeks at about 160000 hours a record on the site.
Simulative CP I remain near last quarter's levels, reflecting the construction and testing balance I just mentioned.
On previous calls we have focused on both units three and four in the aggregate.
At this point in the project unit four is progressing slightly ahead of its aggressive site plan.
As you can see on slide seven units reconstruction is currently lagging its aggressive slight plan.
The primary driver is a backlog and the installation of electrical commodities and increased system turnover activity trends, we discussed last quarter.
Southern nuclear and backfill or implementing a productivity improvement plan to address the electrical backlog.
Additionally project leadership is utilizing specialized teams to focus on commodities installation.
As further enhanced night shift efficiency and has streamlined preparation for system turnovers.
These initiatives have demonstrated initial success as I have already noted and further improvement as expected.
With these actions we believe there is sufficient flexibility in margin in future testing and startup activities to maintain unit threes aggressive site plan milestone targets.
To that end, we began the start of integrated flush activities for unit three in August consistent with the aggressive site plan.
Integrated flush is proceeding as we expected at over 60% complete and continues to support the start of open vessel testing later this year. Our next major milestone expected for 2019.
Open vessel testing will continue through the first quarter of 2020, as we prepare for cold hydro testing.
Additionally, we expect to have the ability to test plants systems from the main control room before the end of the year.
Each of these major milestones is important to the successful startup and operation of the plant and will lay the foundation for commercial operations.
We continue to believe that working to an aggressive site plan is the right strategy in support of our primary goal upbringing Vogel units three and four online by the regulatory approved November 2021, and 2022 in service dates.
This is a very exciting time for the Vogel project within a year, we expect construction to be largely complete for unit three and we expect to be preparing unit three for fuel load.
Consistent with past practice, we will continue to provide updates on our earnings calls and through the regulatory process as we move towards these major milestones.
I'll now turn the call over to drew to cover our quarterly performance in greater detail.
Thanks, Tom and good morning, everyone.
In the third quarter of 2019, we achieved earnings per share of $1.34 cents on an adjusted basis, that's 24 cents higher than the estimate we provided on our last call and 20 cents higher than the earnings per share on an adjusted basis reported in the third quarter of 2018, a detailed reconciliation.
One of our reported an adjusted results is included in this mornings release and earnings package.
A key driver, but not the only driver of our quarterly results compared to last year was warmer than normal weather at our regulated electric utilities temperatures across our southeast service territory, we're significantly warmer than normal during the third quarter of 2019, including the warmest September in the last 50.
There's resulting in nine cents, a benefit compared to last year, and 15 cents of benefit versus normal.
Empathizing Tom's earlier remarks, our operational performance over this period of prolonged high temperatures was nothing short of extraordinary.
Excluding the impact of weather, our 11 cents increase over the prior year was primarily driven by higher revenues at our regulated utilities.
The revenue increase reflects the impacts of tax reform and related changes in capital structure.
You will recall that the majority of tax benefits accrued to customers and we retained a portion at our regulated utilities to maintain credit metrics within those entities.
The increase in revenue also reflects other pricing effects and customer growth net of changes in customer usage.
All of these factors more than offset the impact of divested entities.
We've also been successful in mitigating inflation related to own them expense as we operate more efficiently.
Taking a look at customer growth through September we have added over 30000, new residential electric customers and over 21000 residential natural gas customers across the regulated utilities. These additions put us on track to meet our full year expectations for residential customer gains across our electric and.
Yes franchises and our comparable to the growth we experienced in the same period last year.
Customer growth continues to be driven primarily by strong job and population growth in our southeast service territory.
For the third quarter weather adjusted retail electric sales were down about 2% year over year versus last year due to a combination of factors, including continued energy efficiency technological advancements across all customer segments and continue to weaker industrial sales.
Industrial sales, particularly primary metals petroleum paper and textiles were down due to go global trade concerns as well as changes in production levels and demand response programs.
These trends have persisted throughout 2019 with year to date electric sales down 1.7%.
While the overall overall usage trend is negative year over year. It is consistent with our expectations.
Weather normalization is also less precise and these extreme circumstances, and we do not foresee a significant change either positive or negative in our service territories in the near term.
With adjusted earnings per share through September of $2.84, we expect to achieve full year earnings at or slightly above the top end of our guidance range of $3.10.
Remember fourth quarter earnings can vary materially year to year due to sharing mechanisms that are regulated electric franchises that helped mitigate the customer bill impacts related to extreme weather situation. We have certainly seen to date this year.
Turning now to some updates on our capital requirements in early August Southern company completed a 1.7 to 5 billion dollar equity units offering.
When combined with our year to date equity issuance from internal plans were approximately $625 million and projected internal equity plan issuances through the end of 2019. This offering is expected to completely satisfied southern company's total equity need through our five year plan period.
We do not plan to utilize our at the money equity or ATM program to issue shares and in 2020, we expect to begin open market purchases to satisfy the dividend reinvestment plan.
Financial stability and credit strong credit metrics remain top priorities for us as they provide significant benefit to our customers and investors.
Before I turn the call back over to Tom I'd like to give you a brief update on our regulatory calendar.
We started the year with a full slate of regulatory proceedings, some of which we recently concluded.
Earlier this month, the Illinois Commerce Commission approved a 168 million dollar annual base rate increase for Nicor cast, including $65 million related to night course, multiyear pipeline infrastructure replacement program already in rates under the investing and mill in Illinois program.
New rates also include a revenue decoupling mechanism for residential customers.
This outcome is representative of a credit supportive, Illinois regulatory environment and was in line with our expectations.
Also Virginia natural gas received approval to extend and expand it saved infrastructure replacement program with an estimated investment totaling 30 $370 million through 2024.
In Georgia, we are in the midst of a base rate case proceeding for both Atlanta, Gaslight and Georgia power. We expect these proceedings to conclude in the fourth quarter of this year.
Further Mississippi power expects to file a base rate case with the Mississippi PFC before the ended the year and we'll keep you posted as that schedule evolves.
In addition to these proceedings in September Alabama power filed with the Alabama Public Service Commission a comprehensive proposal that addresses how the company is strategically planning to meet customer demand during the winter peak.
Alabama's powers proposals include 2400 megawatts of new generation capacity comprised of long term power purchase agreements acquisitions, and new constructions with with an expected capital investment totaling approximately $1.1 billion. The proposed generation mix is diverse calling.
For 1800 megawatts of new gas fired capacity 400 megawatts of solar projects with paired energy storage systems, and 200 megawatts of distributed energy and demand side management, we expect all regulatory approvals to be paying by the end of the third quarter 2020 to 2020, Tom I'll now turn.
On the call back over to you.
Thanks drew as drew outlined we are very busy on the regulatory front.
We've demonstrated over the course of many decades that we're able to effectively manage our business to bring clean safe reliable and affordable energy to our customers who are at the center of everything we do.
A regulator share the same broad goals and we are confident that the ongoing proceedings will result in outcomes that support these objectives.
Now before we move to your questions I'd like to highlight a few accomplishments that earned recognition for the company during the quarter.
Both Alabama power and Georgia power were named a top us utility for economic development by site selection magazine.
Economic development has always been a priority for our regulated utilities and we successfully partner with state and community organizations to bring companies jobs and investment to the states, where we operate each year.
In addition, southern company has been acknowledged for our leadership on transparency and disclosure.
Other companies 2019 proxy statement was named the number one proxy statement in the country in the inaugural US Transparency awards sponsored by Labrador, a global communications firm specializing in regulated disclosure documents.
We were also ranked third in the us for overall disclosure by the same organization.
These are all outstanding accomplishments and I'm proud of our team.
As you move towards the end of the year, we're very pleased with our performance on both a financial and operational perspective, and believe we are well positioned to deliver adjusted earnings per share for the full year at or above the top of our guide range. We've also completed our expected equity needs through 2023.
In the fourth quarter, we should have clarity on some of our remaining regulatory proceedings and we'll be in communication with you as these cases conclude.
We have achieved several key milestones at Vogel and remain focused on bringing units three and four online by their regulatory approved dates of November 2021, and November 2022.
Thank you for joining us. This morning, operator, we are now ready to take questions.
Thank you if you'd like to register your question. Please press Star one followed by the floor on your telephone you will hear three Tom prompting onto your request.
A question has been answered any we'd like to drive registration. Please press star one followed by the screen.
The first question comes from the line of Greg Gordon from Evercore ISI. Please go ahead.
Hey, good morning, Congrats on a great quarter.
Thanks, but.
Couple of questions.
I know you gave us a lot of information with regard to Vogel and we're Raul I was pleased to hear that it's going well, but can you just clarify what's your what do you mean, when you say that.
For all intents and purposes now the contingency is larger piece of the overall budget is that because.
You are doing better on sort of the the expected base cost of Jeff building the plant before contingency.
Yes, sure Greg I think Theres drew has got some great details here I'll, let him fill in the blank some real details, but as a pretty easy concept. When you put contingency in place as we talked about last quarter. It's because it's an unknown costs that you expect to spend it part of the official budget of the plant.
As you go through really we do this thing all the time, but just imagine every month, we add up all the positives and negatives around cost and all the different components of the plan and we net those out.
Until this quarter, we have never had the negatives kind of outweigh the positives in evaluating the contingency balance.
This minor amount the $30 million that we just pulled out now represent costs that really relate to compensation.
That we put in place to attract and retain especially electrical workers on the site.
When you take into account how much contingency as a percent of remaining cost was in place when we set up the budget.
Even accounting for the draw a 30 million to get the contingency account.
Percentage left for remaining construction is higher now than it was when we established contingency in the first place drew has some even better data there well certainly difficult to add to that I'll, just say, but.
Estimates to complete us the denominator and the contingency is the numerator and so that ratio is now larger than when we started I think the only other feature that's worth noting is that if you think about time.
Our contingency in time were.
25 months out from.
Hi, functional testing, so we're pretty close to construction completion, both yet.
On the for that.
Delivery of unit three.
Im sorry, 13 months, if you look at our delivery expectation, which is November of 2021 that's.
25 months, if you look at the amount of timing contingency that we maintain today, it's greater than two nearly 25%. So six months over those denominators since I think both the cost factor and the time factor give us some comfort that we can deliver within the regulatory expectations drew bigger the bread box.
20, 425% now what was that when we established contingency round numbers little less than 20.
So you can see as a percent of total cost contingency now it's higher as a percent.
Even accounting for the $30 million than it was when we established and that really as a function of time.
Thanks, I've got two more questions one is.
It's also a little bit remarkable.
That despite.
The record demand you had this summer, but you were able to keep on them flat in the quarter.
So I mean.
That's that's actually.
To me like a pretty positive.
Mark or can you can you talk to how you were able to keep when I'm under under under control, even though you had such high levels of demand.
Let me, let me give some kudos.
Drew used to be CEO of.
Hey, Geo resources.
And before that it with the CFO and when we looked in the diagnostic to that company when as we were making the acquisition.
He and his team they are had a great track record of thinking about effective ways to deploy technology et cetera. So he's come over Bethree says come over was a key player.
And they're applying a lot of those concepts here.
Got it some cost control is.
Needs to be a long term discipline I would say that the vast majority of what's occurring here is not.
Smart people move moving over but really hard work of folks that operate underlying utilities and as folks move into rate cases, they have to be very focused on cost control. We have to remember that a one dollar of cost saved allows $8 worth of capital investment and improvement in modernization of our systems and so rather than.
Looking for.
Large belt tightening exercise I think the right discipline for us is to be prudent about managing inflations within our business and Thats what were trying to demonstrate this year and then there's just been the big technology substitution as you may recall that I think.
We led the world and local offices for so many years.
And that was really important to us, but with the advent of technology, I think Georgia Power's demonstrated that.
Without the local offices, they can still increase.
Customer touch through technology by over 400%.
So we can remove some physical costs improved technology and improved customer service all the same time.
And Patrick My final question is milestones on the Georgia power rate case, if we're going to get to a point, where we can settle it what's the usual cadence of that and.
How do you get to finance or that.
Hopefully retains the integrity of the auto E band that you are currently put at risk slash opportunity for.
Achieving in light of.
The initial staff position being such a low or are we number.
Yes, and Greg you've been following us for 100 years I think in so many of you on the phone and of as well.
Yes look we've had this.
Three year rate process, the accounting order process in place in Georgia.
Since 1995, and I think every three years since 1995, we've gone through this process.
The staff does with the staff doesn't they know it's funny, we kind of went back and looked at Pryor iterations of these rate cases, what they've done in terms of their recommendation is not all that different than what they've done in the past.
Well, let the process the continue.
Typically in the past I think.
Weve reached an agreement right before the Christmas holidays, I expect that will be the case this time.
Thanks, guys great quarter Congrats thank you.
The next question comes from the line of Michael Weinstein from Credit Suisse. Please go ahead.
Hi, good morning.
On.
Terrific.
Glad to hear it.
Can you talk a little bit more about the low or the negative weather normalized sales growth.
I mean electric territories.
Whether that you think thats kind of something that's maybe shifting up for the future as well or is something that's only affecting this year maybe next year.
Yes, I'll turn this over to drew in a second when offer my comment if you look across the board I always like to take kind of a mega look at this when we saw these numbers. We said part of this or that is.
And adjustment for weather normal with the extreme weather, we had those adjustments are always subject to second guessing. The other one if you remember and Mike you around go back to 2018.
We had surprisingly high increases in retail sales and in fact.
If I just have the numbers in front of money for the same period for 18, we were 1.7 up this year, we were negative two seven in terms of residential we were one nine up. This time, we were one nine down essentially flat over two years commercial we were one one up here a little bit down industrially were too.
Three up now were three three down my view is if you take a longer view.
These sales are kind of within the range of expectations Theres a whole lot going on right. Now also in terms of the industrial economy, one of things always love to talk about is industrial.
Development economic development always kind of consider that the headlights.
As as we talk about a lot.
Capital investment long term investment loves calm waters, they love nice stable environments in which to invest.
While our economic development projects are about let's say more maybe 5% less year over year, but still a good number.
The amount of long term capital associated with our economic development backlog is down a lot around a half and the jobs associated with that are down a lot about a half.
When you get into these arguments well is this a function of the fed is that trade policy is that I really think that long term investment on the part of our customers is taking a breather, it's kind of plateaued out a bit.
Really as a function of the trade.
Issue going on the skirmish whatever you want to call it.
So when we passed new tax law, when we had the advent of smarter regulation.
There was an enormous breadth of oxygen in the economy and we took off my sense is pending the resolution of the trade skirmishes.
And maybe even the election year in 2020, I think we have the ability to sustain the economy going forward or not we'll see.
It's probably the only thing I'd add is the way we planned long term or have been planning in more recent term per sales growth has been around an expectation that our customer counts, particularly residential would grow by about 1% a year, we offset that with the expectation that efficiencies will be.
Assistant and that will lose used for customer at about the same rate, maybe something a little bit less.
This quarter are actually this year to date, we're down about 1.7% in total sales across all three customer classes and I don't know if we've detailed them for you in the slides, but it's effectively nine tenths and residential 1.7% in commercial about two and a half in industrial.
This weather normalization is something that we have to construct internally. It is based on linear regression.
Be completely nerdy about it and we've moved into non linear portions of.
Whether experience, which just means that we've hit some extremes and so I'm pretty certain that what we're seeing is maybe just a little bit at this association from our curves and not so much. A result, if you look at last year, we saw about a 1.4% increasing retail sales through the third quarter.
That probably.
At the same sort of feature in that maybe averaging these two years gives us a better indication of what's happening in our economy.
Residential and commercial in particular, I think we're probably just seeing.
Normal or expected declines in these areas in the industrial segment.
Since the fourth quarter of last year, we have seen industrial production, which doesn't have sort of a weather feature.
Migrate a bit down over the past, maybe four or five quarters as Tom said, probably due to a little bit of uncertainty and some trade headwinds, but we also remember that these are off a pretty significant highs in terms of levels of production at the end of 2018 and so these are just trends that we're monitoring I would suggest.
That we look maybe more toward full year.
Whether usage as far as normalization will become a bit more normalized and that'll help us get a better understanding of.
How we're budgeting for next year, Hey, one last comment following Andrews nerdy comments.
As I was with the fed for so many years one of things I love to look at as essentially the first derivative of change and the momentum statistics in other words evaluating.
How the numbers were changing over time also indicate is kind of plateau and I don't know when this will resolve itself trading.
The trade wars or whether it's the election, but up the top 10 industrial sectors year over year, you've seen about five of them.
Go negative so they are negative momentum.
About three of them are flat.
Two of them are positive in the two that are positive are just less negative year over year.
So I think all that data serves to underscore. The fact that we are in a bit of a pause and I think the pause can be resolved. So we'll see.
Okay.
Last question.
Could you just go over maybe what your future plans are at southern power or they're going to be more asset sales coming or kind of settled at this point.
Well, we've always been in the posture of recycling capitalized I think if you look at our track record.
Broadly from an M&A standpoint, we bought well and we've sold well and we always look for opportunistic ways to improve shareholder value.
What is a true we allocate about 500 million a year that way off of where land where are we had we had been about a 1 billion in a half allocation of year. We've cut that now by two thirds down to 500 million, but you want it was something a lot of that as a function of the market.
We really see a tremendous amount of competition in the market with shorter terms on you know we love long term bilateral contracts those are getting shorter and the margins are getting narrower.
So when we look at the balance of capital allocation.
Going forward for the next I don't know three to five years were 93 plus.
Percent allocating to our core franchise businesses, we think.
Risk adjusted basis, Thats more attractive than the so called.
Certainly the organized markets or even the renewables markets right now, we'll keep our eye on it but thats our foster Michael It's fair to say.
A lot of the work that we did last year was simplification of that business structure and so we've tried to get rid of assets that werent gas assets that were not within our core service territory. Some of the things that we did around wind and solar were optimization of capital deployment, but not outright sale of assets I think more importantly, we've just recently announced.
Purchase of school, Chuck, which is Oh wind generating asset we're still very interested in investment in renewables.
But as Tom said, we're going to be focused on the risk adjusted returns on those investments and be very careful up about what meets our threshold and has just narrower than it was.
Thanks for all the great detail.
Good day.
Thank you.
As a reminder, Q4 question. Please press star one followed by the for the next question comes from the line of Julien Dumoulin Smith from Bank of America. Please go ahead, hey, good morning to area great. Thank you Hey, So just wanted to follow up on a couple little details here first off as you think.
We are tracking in terms of days here just wanted to be extra clear heard your commentary about unit for.
How that's going fairly well how do you think about the may date for.
Unit three year, just want to clarify here given all your more constructive commentary.
Yes, the site continue to work towards the aggressive plan. We have always characterized the may schedules both for unit three and four as aggressive. Okay. We think that is the right way to run the site.
Steve Kaczynski, the CEO of our nuclear business Glenn check the Guy that really runs the project day to day.
Believed that still achievable.
It is aggressive and.
We remain committed to that kind of work plan on site.
I always want to remind people.
Our regulatory approved dates our November and I think I've been saying this for saying this in the past if we hit those dates we hit anything before that ticker tape parade time.
But we think this approach of keeping an aggressive posture on site avails those margin to achieve ultimately our regulatory approved dates.
And I want to understand a little bit more on the contingency. So it sounds like this 30 million here the small utilizations more for construction and some of the higher cost related to keep the qualified individuals route but when I think about contingency conceptually here as we pivot a little bit should we thinking about that principally being allocated towards some of these in service Craig.
Curian, achieving those on time and on budget and then even within that can you clarify how how are you thinking about these in service criteria, which of these processes are I tax should we be following are asking you are for paying attention to most closely as best you see it.
Well, let me hit Itex first.
I can remember juice, three or four years ago.
As Weve talked through this thing we had itex out there is one of the big risks.
Now, let me underscore the tax must be done before we feel okay. So it must be done.
But I would say the work of the team in conjunction with the NRC over the years has brought that into.
A less risky posture in other words I believe we have a sound plan working with our regulator.
To achieve those milestones.
So when I think about say the top.
10 risks on the project I don't think Aipac's are there right now.
I think we see our way through we're making great progress.
You May remember, we started a concept called view is for the essentially.
Exit or complete except for the result of a test.
That has been very effective and reducing the bow wave of testing that must be done.
So.
I guess the other comment I would just make it I guess as goes to the contingency question.
You know.
When we set that estimate in place I guess it was July of 18.
That included for the whole project 800 million contingency theyre actually buckets of contingency elsewhere like.
That still has the ROE we have our.
This is the one that we've called out specifically.
And this is where the 30 million applies Georgia power dollars alone.
And recall also that when we made this draw this $30 million. This is an evaluation not a current period, but expected future period costs. So it is all the cost that we know about right now through the completion of the project that result in a $30 million draw.
So.
I think we're in good shape if that answered your question.
Or maybe clarify that you're using this for construction and labor costs, but with respect to somebody's in service.
Criteria and just achieving those milestones you feel pretty good you haven't use any contingency, but should we expect thing updates on the contingency to be principally focused on the in service for the construction side of this if one can buy any and all I mean, there's bucket everywhere and so the when we did.
800 million plus everything else I mentioned that.
That domain. However, we may have in our hip pocket somewhere.
That includes a schedule that concludes in November .
And includes all known future cost through November .
Okay.
The only a couple of components I would add or that when we do essent re estimate of costs. It is a mark to completion of both facilities and so we're estimating what we think it will take to complete both units three and four and so this is not.
Just a feature for the.
A unit in the near the unit three in the near term.
In the end, though Julien.
Money time is money and so a lot of contingency as we progress will be related to the amount of time it will take to complete the project that's.
I don't know that there are any expectations that there are system components that will end up being more expensive than estimated the only I would reinforce though is when we set that budget that budget was set for November .
So to the extent you finished sooner than November you get pickups.
That saves money.
Greed already thank you alluded there.
You bet thank God.
The next question comes from the line of Tesla.
A full mehta from Citigroup. Please go ahead.
Right. Thank you for joining US yeah, great great call and great quarter. So congratulations just had a couple of quick questions, maybe just touching on Vogel again.
As you decide on trying to hit the November deadline, and you have additional money to spend maybe to his dad earlier deadline versus allowing it to slip to November or I guess hit the November deadline.
How do you choose on the cost side like are you looking to invest more to hit do you and your deadline. The may deadline or are you willing to allow the November deadline or target to kind of get to that and congestion on the cost side.
Well it to any and all right.
Drew said at a second ago time as money when you think about the hotel costs of personnel on the site and the work that must be done.
To the extent you're able to improve schedule.
It it takes a lot of cost to exceed the cost of time.
So.
It's pretty much a dominant solution if we can advance the calendar. If we can that's why we keep an aggressive site plan for may.
That overwhelms generally speaking the cost that we incurred to do that.
We always make an evaluation of that point however in other words.
We're not going to do anything stupid in terms of cost just to achieve schedule, we always balance that but I'll just tell you the math as pretty compelling. If you can achieve schedule performance that does a lot for cost performance and we believe that is prudent behavior.
Gotcha makes sense that.
That's helpful and then maybe on the weather normalized sales again, just touching on that given you have all the Capex plans and Alabama power as you know investment as well.
Do you think there's any implication on that.
No growth concern on in terms of what that could do to Bill's given investment cycle. Then what you have going on with Alabama ball.
Well I think Thats why Weve got a focused on our cost structure I think we I mentioned it earlier, but a dollar of cost savings permits $8 worth of capital investment.
Alabama in particular, I think is proposing a resource mix that's important for meeting their winter, peaking and makes pretty progressive strides in terms of the environmental content of what they're generating with and so.
And ultimately I think we'll reduce total costs. If you look at the OEM cost structure around.
Coal fired generation. So what we're really trying to do is minimized in total the impact on customer bills overtime, but still have good investment in modernization I. Suppose your question was well that will lack of customer growth spiteful. It certainly makes it easier if you're if the underlying is growing but I don't think it probably reduce.
It was from our expectation, yes as me Andrew sit here and we sit in the manager Council meetings at Southern the objective is no rate change as a result of capital investment in other words as we increase revenue requirements, we must take commensurate revenue requirements out in our own m. cost structure.
The idea keeping rates flat as we transition the generating fleet or invest to improve reliability and resilience.
Gotcha Super helpful and just to clean up question the income taxes in the third quarter was the effective tax rate lower than previous and any particular driver on that tax rate.
No I think more of that third quarter of last year was a little bit anomalous we had to.
Make the assumption that we work in to utilize.
All of the film tax credits that we purchased one of the subsidiaries and so the the difference really is a little bit unnatural in that regard.
Hey, probably no more thanks somebody just warn me, yes, thats, probably right, Georgia power recall in its rate case deferred any rate action three years ago.
And so if you think about were Georgia Holy Smokes. This rate case really covers essentially nine years.
Of investment.
So that's a whole lot.
The formulation I gave you have no rate change in the future as a design criteria as you are referencing.
In terms of the Capex going forward transitioning the fleet in building resilience. The design criteria is to make go nm adjustments that compensate.
And produced no rate increased to customers that's the design.
Gotcha very helpful. As always thanks, guys.
Thank you Sir.
The next question comes from the line of sharp correct.
Hi, Good partners. Please go ahead.
Ashar how ARIA good good morning, guys, how you doing great.
So most of the questions were answered it's very comprehensive just one follow up around the retail sales in sort of the comments around more of the industry activity. We seen similar weakness reported by some of your other peers right but.
What turns out is the rate structure of the customers or I guess more fixed versus volume metrics show the EPS impact for a deceleration in volumes is diminished.
Do you do you have a sense on sort of the industrial customers and how we should think about their rate structure volumetric versus fixed and I guess, what I'm trying to get a sense on is if you see a prolonged weakness and you don't see recovering industrial activity and sort of the global macro concerns are more prolonged is there do you see an impact.
Two fundamentals over a longer term right. So like obviously short term it's within your plan, but I'm just trying to get a sense on.
What the sensitivity is to industrial weakness.
Well from a corporate perspective, a 1% change industrial sales us about $16 million pretax and so pretty small impact the southeast generally uses industry industrial customer rate design as a way to promote economic development and bring jobs to the region and so were significantly less sensitive to it.
I've, probably created too much of a sensitivity to this factor in this quarter because.
We did have some demand side management programs that that worked productively in the period to make sure that we didnt have to curtail any.
Needed delivery to customers and that we had so we had good reliability to commercial and residential customers and so that will impact some of the sales figures as well when we look at full year, though I think we'll find that were.
We're probably near our expectation, which is around one and a half maybe 2% reduction in industrial demand and total yes, just to add to that I think Georgia power was the first and big right probably remains the biggest in terms of RTP real time pricing.
That recall sends a price signal to customers and customers on their own.
Can react to it or not in other words, if they're making more money by driving through a peak period well good for them if they want to shutdown during a high cost period. They can take that as well. So these are customer.
Driven demand side management kind of issues is nothing we do demand.
We have the biggest program I bet you in the United States something like.
I think 40% to 50% of our industrial and commercial load is subject to real time pricing over the year provides terrific value to our customer right.
Right. Okay. So just to just to summarize if there is a if there is weakness and industrial activity.
Worse than sort of what you were internal plan assumes we should not assume that there's there's did would be a deceleration in your growth trajectory or or fundamentals just given that it's not that sense. Okay that was terrific. Congrats guys on the results.
Thank you Shirley.
The next question comes from the line and Stephen Byrd from Morgan Stanley . Please go ahead.
Hello, David morning, Congrats on a go quarter.
Thank you.
What questions have been addressed.
Just wanted to touch on equipment testing at vocal that's all from the latest CCM just the status of overall testing, but just any further color on.
Where you stand with equipment testing any lessons learned along the way or just any further color on.
Testing the equipment that's at the site.
Yes. Thanks for that question you know what was it maybe a collar go or two calls ago.
There was a lot of conversation.
About the wisdom of early testing.
So does it.
Cost a lot does it reduce productivity create that S curve et cetera.
I think our posture has been to test as early as we could even for partial systems.
And we think that we have found issues early and had been able to.
Handle them in a very successful way also as we test early we can bring lessons learned to other.
Parts of the plant and to unit four we think Thats really really helpful.
It reduces risk it assistant our eyetech completions.
Just to tell you.
For unit three we think our civil testing.
Now.
For construction is well over 90% mechanical over 77% and electrical testing on unit three that 50%. So this testing process, we're going through right now is exactly what we want to have happened and here. The other thing that really also goes to the sawtooth or the S curve of.
When we enter into the an integrated flush we start testing.
And.
We want to find problems part of testing is to identify where you are weak spots may be as soon as you can so that you can address.
And have a successful completion of a milestone ultimately.
And we think that is really going well.
As our testing organization has started out we have found now over time that their efforts have matured and they're more effective at testing the procedures the deployment the coordination with construction.
It has all been getting better over time, I think our recent hours work kind of indicate that as well. This whole program. While it has been the subject of some conversation has served us very well.
That's really great color then my next question, it's very very broad.
Just thinking about your generation mix overall, and the evolution of solar economics.
Looking at your plant Daniel in Georgia, maybe just think about it and do you think about your generation mix and just the evolution of renewables economics do you see any potential changes you'd want to make to your generation mix over time or you sort of generally happy with your current resource planning on that.
Well, so we do a that we started this actually went out with COO, we do a probability weighted kind of integrated resource plan, where we take different shots of different assumptions and probability weight them in other words, we look at the cost of carbon we already do that inside our math.
For our integrated resource plan. So we say there is no carbon price and then there's $10 $20, where now evaluating carbon costs prices.
As high as $50.
We look at high medium low gas prices coal prices all kinds of things.
And within all that scenario analysis, we come up with what we think our dominant solution.
Those dominant solution.
Manifest themselves in evolution of.
Where the best generation resources, our end because we're not in a so called organize market in an integrated market you can iterative around generation solutions and transmission solutions. Okay.
The other big thing and I'm kind of nursing out now also but I'll be I'll cut this quick.
He is our reserve margin assumptions really change based on the penetration of renewables. The most important renewable resource for us in the southeast is solar.
We have pretty good resources, it's very cloudy here, but solar makes sense. We just don't have the kind of wind flows that support widespread wind generation. Our win is imported through long haul transmission systems, mostly from.
Right now, Kansas and Oklahoma Okay.
We go through this analysis.
And we develop optimal solutions over the next 20 to 30 years, that's both transmission and generation and we do this in conjunction with each of our state.
So that this is a well known process.
As politics change say for example.
Someone in a new administration wants to start a carbon tax or there are different environmental costs associated with coal that we've seen over time.
We certainly take those things into account and so what we have is essentially a series of options based solutions, where we can move the fleet.
In general what you find right now its other.
Is between now and 2050.
Much bigger share as you get towards the end date of renewables that will mostly be solar.
We will see a continued importance of gas at some point very high carbon prices, you would see gas with carbon capture.
Overtime because of these costs, we see coal diminishing.
And we see a constant share of nuclear.
The big swing and how these resources may follow depends upon technology investment, particularly in the realm of storage and the cost of carbon capture.
You know that the objective function here is to provide low cost reliable electricity for the benefit of customers and we have said low to no carbon by 2050.
That low to no delta.
He is really going to be spoken for by the advancement of technology carbon capture and storage. So we'll see but thats the broad brush answer.
That's helpful. Thank you very much you bet.
The next question comes from the line of Sophie Karp from Keybanc. Please go ahead.
Hello JP.
Hey, guys and good morning, congrats on the quarter. Thanks.
Couple of questions. If I may 1st I wanted to clarify and going back to evolve I guess the S. T. I did you keep saying it needs to each 1.5 from the next nine month free in order to be.
In line with the regulatory deadline, and I guess looking at the VCM filing testimony last week and just stem its inbuilt tracking below that so far I'm just looking to average at 1.5 for it doesn't need to reach that number what does it mean it to you kinda eaten into that six months buffer you have they can you clarify that.
Little bit.
Oh sure. Yeah look you were just reading at opposite in other words, we like a low SP I'd number okay.
What we would say by that 1.5 would be.
We would have to average that going forward.
In order to hit November to the extent were below that number as we are right now I guess cumulative one O. Three unit 311 unit four 0.96 remember, we said Uniforce tracking slightly ahead of the aggressive aggressive plan.
Thats indicated by a number less than one one would essentially say you're on the aggressive plan.
Okay got it so the fact that were below is good news, that's where you want to be.
Got it.
So you would want to be an average no more than that basically.
Yes, you want to be less than something over 1.5.
Got it and then maybe a little bit of color on Mississippi, as we see a little more visibility on who the monies are for the commission. So how do you expect the regulatory climate there to shape up after the election and is that effect in your.
I mean decision they get some rate case filing do you plan to go after they have the election.
No we don't try to time elections or try to guess is going to win.
We think this company, yes again you go back to my history do is I'm in my 39th year for Heaven's sake.
We go through political.
Swings all the time.
Our regulatory plans our service to customers are notion of reliability is something that transcends politics and must be long term.
We always start with long term answers first and we work like dogs to make the short term results.
The beneficial to to investors so.
We're going to file the rate case independent of any assessment of politics.
And.
I think really since Kemper, we've been treated really well in Mississippi. We think we've been treated fairly we expect that to continue no matter, who then office.
Got it thank you.
You bet.
Our next question comes from Andrew Weisel from Scotia, Howard Weil. Please go ahead.
Hey, Andrew.
Hey, good morning, everybody. Good morning first a question first question on financing can you talk a little bit about the decision to issue equity units in August as opposed to prior plan of using internal programs or even up locked or more.
Equity forward.
Just to clarify would you say that the equity you to satisfy your needs through the five year period does that assume you will not use to full contingencies for nuclear construction.
Well I guess take him in two pieces I'll start with the second one first it does assume that we use contingency that's embedded in the way we accounted for the cost re estimation last summer and our expectations for construction, although I would say that the delta.
Somewhat immaterial to the corporation in total.
We'll do eight to 9 billion dollars' worth of Capex every year for the next number of years or 38 or $39 billion over the plan period, and Bogo represents only three or 4 billion of that in aggregate.
Your first question was related to the equity units offering which was a mandatory convertible preferred security that we issued in August .
You know it had a number of features I think drew us there.
Not the least of which is that we are.
Quite bullish are comfortable that we'll complete the nuclear construction within the regulatory window and we thought the issuing units that.
Convert after the first unit goes into service is probably to our benefit we think the share price has a bit of room to regain ground to historical trading levels and.
That instrument allowed us to share in any upside and so we will literally share an upside through the high Sixtys, maybe low seventys in terms of its conversion price when it does convert in August of 2022, and let me just offer my own commercial here I can tell you. This this instrument with debated a lot in turn.
Really.
We think it was absolutely the right decision, but the math to me is pretty compelling for the future and there's no promises here I can't say, whatever but when you think about southern company and people are already make any pets I think in our stock price.
About Southern Company X Vogel.
Theres No question in my mind. This company has been trading kind of on par recently, we should trade at a premium so think about what a couple more turns me to the stock price in our PE ratio and recall, we're in a period in Georgia regulatory framework, where essentially our Aro, we coming of Georgia.
Look flattish that's part of the rate design, we had when we had that thing approved recently.
As we clear these asset to end service the trajectory of earnings increases significantly I think evolved on your own modeling when you think about a healthier PE ratio and you think about a much faster trajectory of the stock prices because.
The significant above this we thought though taking risks off the table at these attractive levels made a whole lot of SAS for us and just took another issue of overhang office stop.
The only thing I'd add just to be clear, we do not plan to utilize the ATM program at all throughout our plan period, and we thought it was an important signal to equity investors that we were complete in our equity issuance and the instrument that you're describing allowed us to do that.
Great. Thanks.
Well, there and just to clarify the slightest say that you will be issuing new shares for incentive compensation, what ballpark would be the annual lease for that.
Let me I don't want to give you a halfway answer so let us handle that maybe in a call. After we can we can give you an absolute number will keep the.
We'll issue shares under the drift for balance of year. There are still some options that are open to be exercise, where we don't control the timing and there'll be some modest issuance relative to the total shareholder base related to executive compensation, but I can't I cant off hand give you a number with much accuracy.
No problem will follow up offline just one last one if I may regarding the Alabama, our IR or other issues certification I am I right at the 1.1 billion. So the new gas plants not a capacity is incremental to the five year Capex plan previously laid out and if so would be extent.
Upside when you roll the planned for the fourth quarter results or would be would you de prioritized spending either in that state or other states for things like the affordability or the balance sheet or whatever else.
No we do think it's incremental to our.
Five year plan and we're comfortable that we can handle it within our expected cash generation capitalization.
Goals.
Great. Thank you so much.
Thank you.
Our next question comes from the line and I understand that collects Yeltsin missile Sac Securities. Please go ahead.
I guess sina thanks for joining us.
Thank you.
Just wanted to clarify one thing so around the time when they finally be was filed.
Basically I think that were identified like a total of 1.4 billion contingency.
Which basically consisted of 800 million cost contingency and 600 million upscale contingent fee. So just wanted to understand if those 600 million our skill and arcaded.
Well there are allocated to schedule, assuming we hit November .
Okay. Thank you finish sooner than November you would need into that exactly yes, okay. Perfect and then one other thing. If you just have you could just stuck with it a bit about what would be the top we at least.
Well going forward.
Well, that's a good ones. So we think about that a lot you know to limited to three is always fun.
Here's what I would say.
Top three rigs are gonna be.
Probably hitting our milestones you know I know, we put out hours, but milestones are the big deal and it's not just when we began its when we finish and did we run into the testing program, where we had some equipment failure, where we had some issue.
So we just don't expect.
Pat could prolong the successful test of any particular milestone.
We know of nothing right now that would suggest that but I would say that as a risk.
Another risk will be just kind of maintaining the kind of recent productivity that we have had now we are building margin the wisdom on site.
Of keeping an aggressive site plan gives us margin to November and we want to preserve that as much as we can.
We went through a very tough summer, where it was very hot hard working conditions. The sawtooth effects of new work fronts being opened new people coming in can we maintain the kind of productivity improvements that we have seen recently the last couple of weeks 160000 last four weeks about 150000 thats.
Really good performance can we maintain it.
Hi, Jeff that's the last thing and then.
And then I think just before fuel load that's going to be awfully important do we wrap up everything that even beyond hot functional test is non critical path.
I would say those three people will argue about that but I think thats. It I think thats a fair summation.
Hi, Thanks, Let me just say most of that translate to schedule.
Our cost element to that.
Probably it.
Perfect great. Thank you so much.
Thank you ma'am.
Your next question comes from the line Ali Uh-huh from Suntrust. Please go ahead.
I always great ahead.
Thanks, John Good morning, good on Andrew Good morning up Justin.
Couple of things will clarify one I wanted to go back you ended up.
Shifting lending 24 cents above what you had budgeted for the quarter and I know you mentioned, the whether as a factor, but can you flush that out literally what else came in better than expected and.
2019.
Issue or some of them actually we're into the future years, we should think about just alternatives as looking at.
Earnings in 2000 and beyond.
So whether we're certainly the single largest factor sort of nine cents of the positive variance. The two things that were different than our expectation were levels of operations and maintenance expense and so we were able to control to a greater degree than where we had budgeted and then revenue related to.
Real time pricing the system Lambda or the system average cost was actually quite low through the time period, but there was some congestion that led to slightly higher rate signaling to some industrial customers.
And so is that at least the non whether it be should we think that that could continue the oil and then ill and even maybe pricing as we looking at 20 going beyond.
Certainly things that we're working on RTT real time pricing is more a function of the condition in the period and so it's not something we view as being persistent.
And let me just.
Correct weather is 15 cents greater than expectation, although it's only nine cents higher than where we were up year to year.
Got it and then secondly on woven Tom if there was to be a change in either costs or schedule, where she is the way youre budgeting. It right now is the VCM. The full then where you will give us an update or would it be in some other session on forum.
Oh, gosh I mean there.
If it was significant we do an 8-K I.
I mean, it really just depends on the magnitude.
I see okay.
And then lastly can you just remind us as you're looking forward no 19, obviously is coming in well above what you were expecting at the beginning of the yet but can you just retailer bid for us the longer term.
Good expedition leap, yes, both expeditions that you're looking at and what's the base from which you are looking at that growth.
Yes, it was 4% to 6% off of 287, which was our 2018 gotten yeah.
And even with this kind of base that we're in right now with Georgia.
We are well within that cone and when you start to clear these units into rate base. The trajectory really takes off so with four to six.
And of course, the next year.
We will update all that but were well within what we said.
And I think on you said you could hit four to six every year or is it like a cumulative growth rate.
It's kind of the cumulative growth rate off of.
Two 2000, whatever it is 18, but we do expect the hit within that 4% to 6% range in each year yeah.
I'll tell you 87 base, if you think about that as a cone of growth emanating from 287 will be within that band through the plan period is the expectation.
I got you. Thank you.
Our last question comes from Mike on the penis from Goldman Sachs at Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking my call and congrats.
Guys want a good quarter.
I've a question there was something in the Georgia power rate case testimony that stood out a little bit which was one or two of the interveners I forget, which one made commentary about instead of having coal ash spend to run through rate base, albeit on a expedited amortization schedule actually seeing if they could get securitized at that.
It would be better for the rate payer for the customer in terms of the bill impact just curious for your thoughts on that whether it's even a viable and under Georgia statute.
And if so if not is there a mechanism or a method that would make sense to do SAP.
Yeah, well, let me give a couple comments number one that idea.
Whether it's a good idea or not will require legislation and Georgia, we don't have such a thing.
Good thing was I would also go back to the I RP discussion, where this issue was considered an approved on.
In the IR Pete.
But let the process workout and let the commission and.
And the company and all the Interveners.
Come to a successful conclusion, we think will be treated well there.
Got it okay. Thanks, Tom I'm, just a housekeeping question the 2018 numbers for in the release for things like go Nm et cetera.
That includes or excludes the businesses sold in the last 12 to 18 months.
Meaning last year's data I'm, just looking at OEM and actually shows it down more than $100 million I wanted to make sure that was apples to apples.
The 18 figure includes the own them for the businesses that were owned in those years.
Okay can you see I forget you may have done it and if I missed it my apologies can you quantify what deal we name change would have been without those business so like for like.
About flat I guess is the right way to think about it but we can give you some detail. So instead of a decrease it would be flat yep.
And that kind of how we characterize the.
I think the.
All of them for the call here, yes.
Drew is kind of big Big plan is to eat inflation every year.
Got it okay. Thank you guys much appreciated.
Thank you Sir.
And I will conclude today's question and answer session. Sir are there any closing remarks.
Well just want to thank everybody for joining us.
This is an awfully exciting time for us all.
And you know I know, we all get focused on Vogel, three and four but the thing I want to reinforces the thousands of people. Its other that are making this business hum that.
Even despite these really extreme loads, we had really through the summer and even into October there was one day very early October where we do assistant weighted temperature. That's just a way to temperature in October was 91 degrees. This is a time, where you're normally hitting outage season, you're taking a lot of resources out of.
Play the system responded beautifully transmission people the generation people.
And we proved our flexibility and resilience in this kind of extreme conditions.
We continue to serve customers well by all fronts. This company is hitting all cylinders right now so I know, we all get excited and focused on Vogel no I am.
But I want you to know that the rest of the business is doing great.
Thank you for your Followership and look forward to talk and we just take care.
Thank you, Sir ladies and gentlemen, just this concludes the southern company third quarter 2019 earnings call you may now disconnect.