Q4 2019 Earnings Call
Please standby the conference will be getting woman Charlie we thank you for your patience and actually please remain on line. Once again. Please standby these conference will begin momentarily.
[music].
<unk> starts are all as reminders carpets is being recorded Thursday February 22020.
I'd like to turn the call sort of caught <unk> director of Investor Relations. Please go ahead.
Thank you had a good afternoon and walk in the southern company's year end 2019 earnings call joining me today or Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company, and drew Adams Chief Financial Officer.
Let me remind you will 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 at our form 10-K and subsequent filings.
In addition, we will present non-GAAP financial information on this call reconciliations to the applicable GAAP measure are included in the financial information. We released this morning as both the slots for this conference call, which are both available on our Investor Relations website at Investor about Southern company Dotcom.
At this time I'll turn the call over to Tom Fanning.
Good afternoon, and thank you all for joining us.
As you can see from the materials that we released this morning, we reported strong adjusted results for the full year that exceeded our original guidance expectation and were in line with the updated yearend Ethernet, we disclose on the third quarter call.
By all accounts 2019 was an outstanding year for our company.
We performed well across a broad range of metric.
We reached all 2019 major milestones that bogo units three and four.
Operational performance at our state regulated utilities, whats apart with record generation and transmission performance.
We concluded several key regulatory proceedings, including constructive base rate cases for Nicor gas, Georgia power and Atlanta got like.
We took steps to further strengthen our balance sheet.
We continue to economically de carbon eyes are generating fleet decreasing our coal generating capacity by 2000 megawatts and we expanded our portfolio of renewable energy sources, which is now over 12%.
Our generation mix.
Our company's ranked in the top cortile nationally for customer satisfaction.
And we were named Best company to work for in our industry and 14th overall in the United States.
So overall terrific performance.
Let's turn now to an update on plant Bogo units three and four in April 2019, we laid out an aggressive site work plan as a tool to achieve margin to meet the November 2021, and 2022 regulatory approved in service date.
Executing this strategy resulted in substantial progress at the site.
We reach all major milestones in 2019.
The aggressive site work plan tablets last April set a goal of approaching.
90% completion of unit three direct construction by year end today unit three direct construction is 85% complete.
As we have discussed in the past southern nuclear evaluate projected cost and schedule for cat on a regular basis.
As part of this process, we completed a schedule refinement for units three and four earlier this month, which.
In summary produced three major conclusion.
First.
We confirmed our ability to our expected ability to achieve the November 21, and November 2022 in service date second we supported the site strategy to continue to utilize and aggressive site work plan with no change to the May 2020.
The one target in service date for unit three.
And a two month advancement of the target in service date for unit four to March 2022.
And third.
We confirmed no change in the projected overall capital cost forecast.
Now I'll walk you through the details.
Let's begin with some additional background on the schedule refine it.
Over the past year, we continued to gain a greater understanding of the site capabilities for construction and testing.
Specifically for construction in 2019, the site achieved sustained periods of 140240 5000 earned a hours per week, but built a backlog to the April 2019 aggressive site work plan.
The schedule refine that process took into account our 2019 performance.
And also our progress on work packages testing and turned out.
The resulting refined aggressive site work plan for 2020 relied on sustaining our current construction production levels and required a reasonable increase in electrical commodity installation.
On the refined aggressive site work plan, we have extended by about six weeks.
Two of our near term milestones for unit three.
Starting cold hydro testing on our functional testing.
Like the ending these milestones refining testing sequences between our functional testing and fuel load and planning to complete noncritical electrical work later in the schedule.
We now have more time to complete construction and worked down the current backlog of construction hours.
With these changes the aggressive site work plan continues to target a unit three fuel load by the end of this year supporting it may 2021 in service date.
The aggressive site work plan reflects a continuation of our strategy to drive construction productivity.
Complete testing activities and ultimately meet the regulatory approved in service date.
Next to complement the aggressive site work plan for unit three we have established a November benchmark that forecast construction production levels and future milestone day necessary to support the regulatory approved in service date of November 2021.
This benchmark provides a clear comparison to the refined aggressive site work plan.
On the November benchmark fuel load could occur as of late.
This summer of 2021 in support of a November 2021 in service date.
The November benchmark also supports our expectation that the aggressive site work plan is an appropriate strategy and provide sufficient flexibility to achieve the November 2021 regulatory approved in service date.
The result of the schedule refinements and the November benchmark as illustrated on the key milestones chart for unit three.
The Blue line represents the aggressive site work plan and the Orange represents the November benchmark with a milestone start date shown in the circles and the direct construction for 6% complete detailed on the line near the top.
As you can see on the Green bars recently, we have been averaging about 2% completion per month for direct construction for unit three.
If we maintain construction completion of approximately 2% of direct construction from each month from now until I've functional testing, we would expect to be close to the blue line or the aggressive site work plan.
To achieve the November benchmark, we estimate this metric would need to be approximately 1.3% each month.
Now, let's focus on estimated costs.
In conjunction with the refined schedule in the fourth quarter, Georgia power allocated an additional $110 million of its project contingency.
Primary drivers for this allocation include a continuation of current cost and schedule productivity trends, which had been lower than planned.
Through the fourth quarter of 2019, Georgia power has allocated a total of $140 million. So approximately 60% of our initial total cost contingency remain.
Looking at it another way.
Schedule cost margin and the remaining cost contingency combined represented approximately 20% of the remaining estimated cost to complete.
Recall the estimated cost at the time between the aggressive site work plan and the regulatory approved November in service dates or there are schedule margin is embedded in Georgia Power's base capital forecast.
As we've said we expect to utilize the entirety of these bonds as we progress towards completion of the project.
In summary.
As I mentioned earlier, there is no change to the total estimated cost to complete the project.
Finally from a regulatory perspective, Georgia power continues its vogel construction monitoring or VCM process with the Georgia Public Service Commission.
VCM 2021 recall, that's 12 month was unanimously approved by the PSC on Tuesday.
Georgia Power filed VCM 22, accounting for six months yesterday.
In summary.
We continue to expect that we will meet the November regulatory approved in service dates and there is no change to our estimated cost to complete it is important to recognize the substantial progress made on Vogel units brand for both in 2019 and really since the southern nuclear team.
Assumed leadership at the site nearly three years ago it.
It is equally important to recognize that there is much work ahead, particularly in 2020.
Our primary objective remains achievement of the regulatory approved November 22021, and 2022 in service date for Vogel units, three and four and we look forward to communicating progress on our major milestones in the month ahead.
Drew I'll turn it over to you now for an update on the financials and our outlook.
Thanks, Tom and good afternoon, everyone first I'd like to Echo the.
Tom's comments on an incredible year in 2019, we achieved earnings per share of $3, an 11 cents on an adjusted basis above the guidance range that we established at the beginning of the year.
We delivered this outstanding financial performance, while also returning to customers the benefits of tax reform and regulatory sharing programs, including additional onetime refunds to customers as a result of the Georgia power rate case settlement.
Detailed reconciliation of our reported an adjusted results is included in the mornings release and in the earnings package.
2019 bps was four cents higher compare to the prior year on an adjusted basis, primarily driven by higher earnings that are state regulated utilities.
Just to be clear our performance is relative to a year in 2008 2018 that significantly exceeded the midpoint of our original guidance expectations impart due to strong whether at our state regulated utilities.
And in 2019, we more than offset 31 cents of EPS.
From entities, we divested in the prior year.
With that backdrop, the four cents year over year increase reflects the impacts of tax reform and related to changes in capital structure and continued investment at state regulated utilities in support of infrastructure modernization, along with some customer growth.
Recognizing the industry trend that customer uses declining we have also been successful in mitigating international really related to own m. expense as we always look to operate more efficiently.
Turning to some operational highlights for 2019, our energy supply mix was comprised of 50% natural gas, 22% coal, 16% nuclear and 12% renewables, notably generation from coal to decrease by almost 20% from 2018. This is can.
Consistent with our carbon reduction reduction objectives, and our commitment to deliver affordable energy to customers.
We continue to experienced strong population and job growth in our southeast service territory, particularly in Georgia, which is the fastest growing state and U.S. last year, we added over 41000, new residential electric customers and nearly 30000 residential natural gas customers across the state regulated utilities.
Feeding our full year expectation.
Over the past five years on average we have seen weather adjusted retail electric sales remained essentially flat, we've seen annual customer growth of roughly 1% offset by a decrease in customer usage of about the same percentage, reflecting continued energy efficiency and technology investments for.
2019, specifically, we saw a trend of weaker industrial sales. This resulted largely from global trade uncertainty as well as changes in production levels and customer responses to real time pricing. However, we do see some modest improvements are merging and we believe the southeast is well positioned that customers as the industry.
Real sector picks up.
Overall usage remains consistent with our expectation and we expect retail sales growth to be flat to 1% for the foreseeable future.
Turning now to our expectation for 2020, our guidance range for the full years $3.10 $3.22. The three dollar and 16 set midpoint represents a compound annual growth rate of 5% from the midpoint of our 2018 guidance range for.
For 2020, we estimate that we'll learn 72 cents per year per share.
Our expected long term EPS growth rate remains 4% to 6% using the same base that we established in 2018 of $2.87 per share.
With over 90% of total projected earnings over the five year planning horizon coming from our state regulated utilities, our EPS trajectory has a solid foundation.
Likewise, our balance sheet improvements recent constructive regulatory results and ongoing focus on cost control served to strengthen our outlook over the next several years.
The lower ROI, we use related to Vogel three and four construction phase in phase out.
Our long term outlook also continues to be driven by capital investment in our state regulated businesses, our investment plan a $40 billion for the 2020 through 2024 timeframe includes projected rate base growth our state regulated utilities are approximately 6%.
This updated plan reflects a 2 billion dollar increase over last years five year forecast.
The main driver of the increases incremental investment related to new electric generation and additional safety related gas pipeline replacement programs.
The total 95% and is expected to be invested in our state regulated utilities with a continued emphasis on transmission and distribution modernization.
For southern power the cumulative five your investment plan is comprised entirely of previously announced projects and maintenance capital for the existing generation fleet, which supported by recent re contracting successes is over 90% contracted for the next 10 years.
Any incremental growth opportunities southern power expected to enhance the long term financial plan and be largely self fund.
We currently forecast no equity need over our five year plan horizon as a result of strategic value accretive transactions that we have executed over the past two years and our August 2019 equity units offering financial integrity and strong credit ratings provide significant benefit both customers and investors and has always been.
A very top priority for us we've taken significant steps over the past two years to de leverage our balance sheet decreasing our total company debt Dakota to two capitalization by almost eight percentage points and believe we're well positioned to further strengthen our balance sheet improve our credit metrics.
As part of this focus we've engaged in an effort over the past year to simplify our business. This effort has included a identifying and divesting assets that are not sufficient not have sufficient scale to be meaningful to southerners overall value proposition.
The amount sale of our ownership interest in the Atlantic Coast pipeline and the pivotal LNG business to Dominion energy is the most rigs. Recent example of this business simplification effort.
Additionally on January 17th we closed on the sale of Southern Power's Man plant Mankato to excel and last year, we executed on the sale of led lighting and utility infrastructure businesses that were originally acquired acquired as part of US Powersecure transaction.
Lastly, in an effort to continue to improve our risk profile, we made a $1.1 billion voluntary contribution to our pension plan in the fourth quarter of 2019. This increased our funded status at year end to 100%.
Further we did not expect any additional required pension contributions over the next five years.
Before I turn it over to Tom turn it back to Tom I'd like to give you a brief update on our regulatory calendar. After a very full regulatory calendar agenda. In 2019, we will return to a more normal pace in 2020.
Proceedings related to Alabama power certificate of need for new generation are ongoing and resolution of Mississippi Power's base rate case is expected in the coming months. In addition, the second quarter in the second quarter, Virginia natural gas expects to file a general rate case, well keep people.
All of these proceedings as they involve.
Thanks for your interest in southern and with that I'll turn it back over to Tom. Thanks Drew.
Adding to your regulatory commentary, we started 2019 with a full slate of regulatory proceedings. The outcomes. In these proceedings are once again representative of the constructive regulatory environments across our system.
That support future investments in infrastructure to strengthen the reliability and resiliency of the state electric and gas systems, while maintaining competitive rates for our customers.
Drew briefly mentioned in his remarks that generation from coal fired facilities decreased to 22% in 2019 and as a result today coal energy only represents about 14% of southern company's total revenue.
Importantly, carbon emissions I've also declined by 44% since 2007, our high watermark for carbon emissions, which demonstrates that we are making good progress towards our 50% carbon reduction goal by 2030.
I actually believe we'll meet that goal with years despair.
We also continue to increase our renewables footprint and expect to have over 15000 megawatts of renewable resources by 2022 across our state regulated utilities and southern power.
These are meaningful shifts in a shortly in a relatively short timeframe.
As we assess pathways to further decarbonize, our footprint and diversify our generating fleet, we remain mindful of potential economic community and environmental impact to society. This effort will be a multi decade transformation for our industry and we look forward to engaging with our.
Many stakeholders.
Now before we moved to your questions I want to mention a recent charitable committed and they buy the charitable foundations of southern company and its state regulated utility company, one of the largest commitments and our company's history.
In January we announced a 50 million dollar multi year initiative for students at historically black colleges and universities. The initiative aims to provide scholarships internships entrepreneurship training and leadership and career development to qualifying HPC use.
Students.
This investment is consistent with southern company's commitment to diversify and all forms.
In making this commitment we also hope to ignite, giving from additional corporate partners to increase HPC you funding.
2019 wasn't excellent year by all accounts and we believe we are well positioned to carry our strong momentum into 2020, we have a solid financial outlook for 2020 and beyond driven by continued investment in our state regulated utility franchises that continued to be among the industry leaders.
For operational performance and customer satisfaction.
I have said 2020 will be a pivotal year for the for the Vogel project. We're committed to keep you informed of major milestones in key productivity measures as we progress through the year and we remain focused on placing units three and four in service by their regulatory approved dates.
Remember 2021 in November 2020 to.
This is certainly an exciting time to be in our industry.
At Southern company, we have much to look forward to.
Thank you for joining us. This afternoon, operator, we are now ready to take questions.
Thank you expect to register a question. Please press Star one fall baby for on your telephone if you will hear threeq on problem to acknowledge your request. If your question has been answered you make your try registration.
One follow up to three what's going to register a question is one for on your telephone keypad. The first question comes online as Michael Weinstein with Credit Suisse. Please proceed sir.
Hey, Michael.
Hey, guys.
Thanks for taking the cost.
Hey.
So the financing plan.
But any additional significant divestitures going forward or is that pretty much done at this point is there anything else that you might be considering.
Going forward and with that if so would that be incremental to no equity needed.
Results, maybe some kind of additional action.
Let drew doubles of it double team. This one I'll lead off with it I think we've demonstrated.
As well as anybody in the industry that were good buyers and sellers.
We always look opportunistically strategically.
To improve our our returned to shareholders on a risk adjusted basis.
I think we've demonstrated that so we're always kind of in the market does the plan soon.
Any major activity in that regard my answer is no absolutely right nothing assumed in the plan.
Nothing assumed about our growth and our investment requires additional divesture and I would say that.
Principally around the the.
Transactions that we've just discussed HCP in particular, our primary goal really has been or secondary gold behind credit quality has been business simplification I think that that's a major component of it. We just really wanted to select two assets that we thought would have a meaningful impact on southerns prospective growth and at 5%.
Thats simply didn't do it and we think that was really just a good thing to execute around those same.
Two principles will guide us through everything that we evaluate in the corporation in total, but there is simply isn't any need for additional equity to fund. The 40 billion dollar investment one of the things we'd like to say to ourselves we remind ourselves all the time don't do things that don't matter.
And that asset Didnt really matter to us.
Right and.
Another question would be the difference or they get to the compression in the schedule between units for.
That's.
Are there any is there anything significant about that did you can talk about that might lead to French maybe some acceleration three at some point.
Well sure. It's it's all about lessons learned from unit three when we think about.
And even think of just some examples we did initial energization of units three and we were very excited about that to achieve that milestone.
You know in looking back however.
We think that delaying initial energization will allow us.
Kind of more productivity improvement on unit for we've always felt that as we adjust the schedule, which really moved us from the April 2019 to the February 2020 refinements.
We always find that as we refine the schedule and move things forward and move things back we can improve our ultimate performance in delivering and that's what you see in the scheduled compression between three and four we picked up we think two months and Matt good on a risk adjusted basis.
That's great to hear.
One last question the $2 billion you, having a long term plan for southern power infrastructure contracted infrastructure business.
Is that.
What does that say about what does your philosophy going forward about investment in the unregulated part of the company going forward and particularly maybe solar in renewables going forward.
Well, we want to say exposed to fill our renewable.
So thats important the second is really that at the recognition of a tougher marketplace.
We have lots of opportunity to invest in our franchise businesses I think drew pointed out 95% is kind of focus in that direction.
We have seen the market on a risk adjusted basis, just really tough and getting tougher.
So we don't try to expand our market share rather we have a rather disciplined kind of investment thesis where over the long term, we try to gain about 150 basis points relative to a franchise investment in that long term contracted business.
Those projects are getting fewer and far between we still want to have exposure, we have 500 million allocated per year.
Over the next five years.
But it's a tougher market to do business I think if you look at the base sort of our base expectation of around $40 billion invested.
Almost ability to that as in southern power over the time period in the vast majority of those things are already committed we've got some very nice wind projects.
Google Chuck running wild horse that rely on some.
Wind turbines that we set aside prior to tax reform and we're really pleased to complete those projects, we would love to do more it really is going to be dependent upon the return and attracting capital relative to that that we can invest in state regulated franchise.
You know one other outcome is just kind of interesting who knows how it will turn out but certainly theres been more solar approved in the state of Georgia, I will remind you.
Those of you would have followed us for years couple two three years ago, Georgia power was named by the solar industry as the Investor owned utility of year, you know that we don't have any.
Renewable requirement in order to hit it just makes a good business that.
When you consider alabamas.
Integrated resource plan.
There is new solar in there there may be opportunities.
In the southeast as well, but whether those are third parties or not we'll see.
Okay, great. Thank you very much.
You bet. Thank you.
The next question comes line of Sophie Karp with Keybanc. Please proceed.
Hey, Sophie How're you.
I'm doing great how are you guys.
Fantastic Thanks for joining us.
Thank you for taking my questions and congrats on the Internet Kieran.
Investments.
Yeah, it's exciting.
No. That's that's a couple of questions or they have so the divestiture of.
You can HCP to the extent earnings that you a booking a natural contemplated in the original guidance remains unchanged. What are the offsets that you have seen it would make up for that.
I think invested in our franchise business, Yeah, I think Thats right are you know our investment was pretty small to date construction is not progressed as rapidly as our original expectations there and so our capital deployment was not heavy the 150 $875 million in aggregate.
And proceeds from the two businesses really is allows us to sort of offset whatever we had expected and plan for EPS, our trajectory on capital investment and would drive Dps growth in our gas businesses has exceeded our expectations and recall that is really associated with safety related pipeline replacement.
Program, and we got through regulatory processes, both in Illinois in in Georgia and of course, Georgia power went through in IR PT last year and then the results of that I RP was largely a accounted for in a three year accounting order that was received at the end of the year. So I think we filled in with franchise investment.
Look forward to more in the future when we look to Mississippi, We looked Alabama and Virginia.
Got it this is super helpful. Thank you and then just broader bigger picture question I guess.
So you are investing very heavily obviously in the zero carbon generation being planned Volvo.
So looking beyond that is there is there a sense.
Needed to be more.
He is G friendly fine Okay, alright worried but this is an increase in fourq increasingly focus in this space right and wish you. The names who are making is do you friendly investments.
Before I get the premium donations and performing better so.
Is there internally a discussion of.
Is there any your strategy.
Hi ends with this broader trend in the March patient, yeah, and Sophie Thanks for that Interestingly, we talk about that a lot at our board.
And we're having a special focus a just kind of global what's going on in the LSG World in April and our next board meeting. So this is a particular focus of ours. We view this as an and not an award. This this is something that I think we've had a lot of a depth in in the past and.
It's really just kind of coming to fruition now you know before I became CEO of southern we were 70% coal zero renewables and you see the numbers now the we gave you a new data point in our script today and that was 14%.
Of our revenue total revenue associated with coal generation that was a data point that came from one of our E.S.G. investors. They wanted to see that kind of data. So we provided it.
It's absolutely and impact that I think any responsible company will take and I think in the Bronto sense Southern company has been doing this for 100 years.
We've talked about being citizens wherever we serve making sure that communities are better off because were there when we think about a SG. It isn't just what's going on with carbon or the environment. It really goes to the broader sense of making sure that the communities are better off because were there and I think we demonstrate that as well as any.
Buddy This is not a company run by a spreadsheet, we've always taken into account all of our stakeholders and I think thats the right way to drive long run performance.
Great. Thank you so much for comments.
You bet.
The next question comes to line up probably aren't as good as CRH. Please proceed.
Hello Alley, how are you yeah good afternoon.
First question on on local Tom what drew can you just remind us.
The net income contribution from will go in 2009 gain.
And at bought all of that same question.
And does the the mean sort of difference.
I mean that view of the progress and the stuff and the independent monitors view.
Clearly diametrically opposite in terms of their conclusions to where you want.
Well, yes contribution.
Oh, it's a little bit of a complicated answer we know that Vogel in service will produce something like $800 million worth of additional cash flow Corporation and about.
40 cents a share in aggregate, we have about half of that embedded in rates today as we collect as we construct a bit.
There are some offsets like the are are we.
Penalties that we incur as as construction progresses and those impacts could be 15 to 25 cents over the next couple of years since they are bit of an offset.
You want to give us a call later on we can walk you through each of the individual years and how vocal contributes to income within within Georgia, but I do want to hit the softest here actually as we emerge from Vogel net income goes up.
An additional 20 cents a share it's $40 million.
40 cents worth of Con and I think I've said this before when you think about kind of in and I'm, not giving guidance down I'm just doing dumb math when you emerge from this kind of penalty rate period, we're kind of in the 2023 time frame somewhere in the 375, even the four Bucks range just from Ed just transitioning from.
This kind of return environment to a full return environment.
On the other thing is it's a very interesting question Ali Hi, you know I really don't think were diametrically opposed and just yesterday drew and I were down at the site and we sit there with all the co owners independent monitors everybody's there and members of the staff for their the NRC is there deal we is there.
So we're all hearing the same stuff.
In some cases, it's a difference in philosophy, and we tried to take a risk adjusted approach to this very large and complex project for example.
We believe that.
Accomplishing as much as we can as fast as we can is an enormous risk mitigator you've heard I've used the expression before fail fast we like to get our hands on major equipment and major system and test them as early as we can.
Two big benefit.
And when we do that we lessen the opportunity for these systems when problems invariably occur that they don't impact our critical path. One two that we can minimize cost as a result of those things and three that we gain lessons learned that we can apply to other.
System throughout the plant and we have proven that over and over and over again, we think that is absolutely. The right thing to do you will have seen testimony.
Some of the staff et cetera that would say a we think you're testing too early we absolutely disagree with that I wouldn't say were diametrically opposed the difference in philosophy.
The other one would go to the.
Why are we driving so hard on achieving an aggressive site plan well I think it's too in that.
The thousands of people that are there on the site.
To achieve to be the best they can be.
Where are we to relax our demands on the system at the site. We think we would just be giving up margin and by giving up margin, we increased risk and our ability to handle unforeseen changes and to achieve ultimately the November 21 in November 22.
Milestones.
In other words.
It may sound Crazy, but I think it's true.
If we were just to adopt a November pathway, we think that would be a much riskier approach in and building the plant.
What we're doing right now.
The other thing it's fun to look at it go to the chart. We've given you I guess that's on page seven and what you can see is kind of our performance in and how we see.
I hate to take my foot off the accelerator on the plant we've been achieving 2% on the average.
Over the past and you can see December January our wee bit last but that's holidays and kind of ramp up after the holidays, otherwise we're pretty confident we can hit 2% the new aggressive site plan. This refined schedule assumes 2%.
We could drop all the way down to 1.3%.
By Hot functional test and still.
Achieved the November schedule, and I love looking at the Green line relative to the Red and Blue lines. I think you can see the trajectory.
Why slow down now, let's do as much as we can as efficiently as we can and I think overall, that's an enormous risk mitigator as a strategy to prosecute the construction of these plants.
Okay got it makes sense.
Second question.
When you look at that 40 billion Capex plan over the next several years.
Any of that Capex. So then you know the functionality of that Capex, where do you think you may get bigger pushback from regulators or is your sense.
As flu by adding on to all of that you did it capex that you're planning over that time period.
You know I think time will tell in these I rps, especially that's where the big chunk of it as you you've just been through you've just been through a rate case in Illinois, <unk> rate case in Georgia with respect to.
Atlanta Gaslight from the gas standpoint, that's the lions share of it from the electric standpoint, the lions share of it as a Georgia. We just finished the ERP and then we just finished the rate case ahead of US this year and we never get ahead of regulatory processes is the IR PC.
Conclusion in Alabama.
The thing to only I think I would look at it.
Yes, we're talking about 40 billion dollars' worth of investment our depreciation over that time period is something in the range of 20, so our net additions to rate base, we think is.
Appropriate and prudent at about 5% a year and electrics, maybe closer well more than 10% of your in in the natural gas business. The vast majority of expenditure in both of those categories is for modernization of transmission and distribution systems, which brings higher reliability for customers, we will get to a more aggressive moderately.
One of the generating fleet over time, but in the near term I think these are very consistent with the priorities. The states have laid out individually for how capital should be deployed there.
Okay.
Hey, one more thing and this new concept of resilience really matters, you know I'm, helping lead the industry on all this cyber and National Security work. It is a national security interest for this industry to invest in resilient, which is how your system operates under abnormal condition as opposed to the old traditional engineering economics concept.
Of reliability resilient does matter and we should put forth the effort to make sure that our electric grid is it safe if they can be.
Okay got it I'd just say one just one clarity on that equal the capex with them then without.
Closures can you just remind us why usual it without closures as well.
Are you okay.
Oh, I'm, sorry, PON closures I think long.
Jerry but certainly we were yeah, okay, sorry about.
Those are plans that were working through today with commissioners I think we wanted to just demonstrate what they could be with or without that particular category for their relative contribution.
Hi, This is I see okay. Thank you so much you bet.
The next question comes the line of Michael Appease with Goldman Sachs. Please proceed.
Thank you Hey.
Fine. Thank you for taking my question.
Actually it's two questions first of all how are you thinking about when you look across the electric utility subsidiaries.
And as opposed to bold goal, which ones are right for incremental fleet transformation. You obviously have to plan laid out in Alabama right now for the next couple of years. How are you thinking about what happens next in Georgia, and what happens next in Mississippi.
So we do a.
We do assistant plan.
And then every individual operating company has an integrated resource plan or whatever flavor they have in their state.
That essentially operationalize is in that state. The overall system plan and of course every state Commission has their own a ability to modify the plan. However, they see fit although I think we've been generally successful showing the benefit of.
Kind of the the benefit of scale that we have in the benefit of everybody playing within that scale.
In one of the things that is an obvious kind of.
Determining factor.
Is that the southern company power pool, where everybody participates provide.
Excellent outstanding economic value to all of our participants.
So we get the benefit of a state by state solution, but we also get the benefit of an integrated.
Long term plan or generation and transmission, which is a benefit we have as an integrated system relative to the so called.
Organized markets.
So we have scale.
We have the benefit of state by state input.
And we had the benefit of the kind of a recognition that it's not just generation, it's generation and transmission and we iterative around that.
Got it Okay. One other question Tom I.
I know you're selling your stake in the Atlantic Coast pipeline, but the reality is it was a pretty small stake in what's been a pretty big project getting bigger how are you thinking about the opportunity set for incremental gas pipeline investments, but kind of stuff that's more in your service territory or touching your service territory.
Well you know we did the southern natural gas pipeline with Kinder Morgan.
Thought we got to a really good outcome there.
You know we've done a few things around the margin drew can speak to that probably better than me.
We look at this stuff you know my sense is.
Theres two big factors that that's just making pipeline investment tough. These days one is kind of the environmental pushback.
It really shows up as regulatory or permits or what have you that's tough that's a tough environment.
The second one is the long term question of natural gas in the system look we absolutely believe I used to say when we bought a geo resources that natural gas was a bridge to 2050 I really believe natural gas will go beyond 2050, I think in order to achieve low to no or net zero concepts by 2050.
Given how plentiful and cheap natural gas is we're just going to have to find a way to keep it in play but deal with the carbon Adam you know that we by far lead the industry.
And investments in that regard.
With the Wilsonville facility is our big research and development.
Effort, where we run the national carbon capture research Center.
We run the international carbon capture research Center, and I think the next kind of generation or the first part of that was kind of focused at coal we're gonna start doing it on gas as well.
Got it. Thank you appreciate it.
Sorry.
[laughter].
Michael I think the only thing I'd, probably add is that we have been successful in.
Smaller additions to our.
Our current infrastructure, we're really pleased with the investment in so that we think that's a very important piece of infrastructure for the southeast for reliability in particular for generation. We have added things like the Mcdonnell lateral we've talked to FERC and filed Nick.
So not expansion to some degree, but I think longer term. This is just a piece of infrastructure given the difficulty for building new infrastructure that will rely on and be very proud that will we've owned for a long period of time, Yes said another way looking back boy that was a great acquisition because it exists and we work than it serves a a little over half our.
System now one of the thing is just an exciting thing I'm actually front running and breaking a little knows.
But in the R&D realm, we are doing some direct air extraction of carbon we're starting to plan that anyway.
I'll be announcing that around the annual meeting, but I guess I already did.
But it's some exciting work that will get us to net zero, we hope by 2015.
Got it. Thank you Tom Hey, one last one what's embedded in your and your growth rate for O'neil.
Just in terms of how should we think about kind of a winning growth.
Consolidated entity over the next couple of years.
Our goal is to generally blade inflation throughout the plan period.
Okay.
Great. Thank you guys much appreciate it as always yes, there. Thank you.
The next question comes line of Julien Dumoulin Smith with Bank of America. Please proceed.
Hey, Julian how are you.
Hey, good afternoon team. Thanks for the time I appreciate it.
Good afternoon, any quick question guys coming back to the the Vogel timeline here can you talk a little bit about the sandeman experienced on the cold and hot functional testing just thinking about how long was their experience in each of those phases and maybe any of the learning that came how does that we should be.
Following and you guys starts moves through that for unit three here.
Well.
Let's think about this for a minute.
There were a lot of noise.
Going on as they moved these plants into service. If you remember there was a big celebration around premieres G.
Where a lot of activity, just really slowed or came to a halt.
We have people on the site there there was nothing at this site.
Cause any discernible reason to slow down or stop what they were doing now their experience from fuel load.
Two in service.
It is really pretty encouraging for us. So you may remember we've talked about these management windows, our flexibility period or what have you.
In the February refined to aggressive site plan.
We have consumed about two months of our four month of total.
Flex time, if you will so that allows us to move the start dates of some of our milestone six weeks and still maintain our schedule on fuel load and in service.
If you look at fuel load and service, we still had six month, yeah, China averaged.
Essentially 138 days not 180 days.
So we think we can beat the 180 days China's death was 112.
We frankly think and we've got plans in place to beat that now maybe its beat it by some margin.
But in all I think we've got kind of two months of flexibility from fuel load in service.
As demonstrated from China.
The other thing that I, just want to point out that I forget which unit. It was the some of these units when they started up they ran like a Swiss watch.
They went the post to pose breaker to breaker.
So they performed beautifully so we should have confidence that you know failing any equipment problems or anything else, which is why we do all the testing we do we're going to get a good result.
The only other thing I would just say the regulation in the United States is way different than the regulation in China.
So that may account for some differences.
From regime to regime.
Got it and then can you just talk about the timeline to every two months on cold functional differences are there any specific data points that you would point access to and perhaps more critically outlets.
<unk>.
Hey, Julie Hey.
Hey, Bud you broke out you're breaking up could you be could you say that again.
Sorry, hopefully is better.
I'm thinking about the timelines here for the hot and cold functional testing.
Right what are the public data point, so we all should be looking for in the next say cumulatively eight months here as you work your way through them, especially given how tight they are off for instance, the coal as a couple of months to the cold functional testing.
As a follow both solid.
Yeah, let's think about that so we just filed all this stuff in the VCM. So you could go into the Georgia.
Process and get that materials, all public one of the things that we have heard some questions I just want to clear that up.
Tom.
What we're showing here so cold hydro testing.
Has the ability to began you know in June and conclude or actually as of November schedule.
You could start as late as kind of in the fall.
We really don't mean to suggest that that is the duration of the test.
The cold Hydro test.
That is referring to the start of the cold Hydro test itself.
As a duration.
Of 19 or 20 days in total.
That includes mobilization and take down.
The test itself is only seven days long.
Okay.
The other thing I'll, let me just do hot functional test too.
So the hot functional test from beginning to end total duration mobilization to take down.
I'd like to month.
The hot functional test itself is only a month.
Now we show you just major milestones I don't mean to suggest that when we finish high potential tests. We go right to fuel up there's a few other things we're gonna have to do.
We have between cold hydro and functional there's some leak test in a variety of other things we will be doing.
If you want a more complete picture the VCM.
I think it's on page 24 of the filing has a detailed list of of all those matters.
Julian will give you a couple of interim data points as well you'll see at the end of the first quarter our release on percent complete which will help us better define what the start of cold Hydra will be the loss will be testimony, both from our selves and from staff related to VCM before these events occur.
There are a couple of interim data points that will give you a little bit better handle on it as we proceed yeah.
You know it let me add just a couple things you Didnt ask this but I'm going to go ahead and offered up in line in the spirit of this question and it really goes to you guys. It often asked before what do we worry about and I think we've been pretty consistent on productivity, particularly electrical.
We said reasonable I think in the script here a reasonable increase in productivity.
We've been averaging kind of in the 28000 hours per week.
We expect to be able to achieve around 32000 remember.
And that for units three and remember we I think I've drawn for a lot of you all in one on one this graph and I think we've included a similar graph somewhere in the appendix to the handouts.
Kind of how big the capital cost curve is right now I guess, it's on page 35.
Where we show that once we hit hot functional test the exposure to cost variant logically should decrease pretty rapidly. If you go to page 35, you'll see a reasonably quick slope and I've really dramatic slow per unit for that because this graph shows both.
Three and four alright.
So we would expect to see any major cost variances occur right now what do we worry about what are the kind of big variances. One is hitting this all electrical productivity again the increase for the next six months or so for unit three from 20000 hours a week to 32.
We believe it is reasonable because as we said a lot and you look at this curve again, we are in the toughest period right now for electrical work. We are in that reactor vessel. It can find areas. It's a lot of material and it's a lot of people.
And so you would expect the productivity to be the worst it should be right now.
As we move out of the containment vessel into other areas of the plant we opened up scope, we open up area, we should see productivity improve.
That's kind of thing one.
Thanks to that it's on our mind right now it's kind of you know next man up.
That all has a broad responsible and they've been doing a great job on this project I work with branded back to his top guide Jack Buege or in the far, but Brian and the people decide a really good folks.
One of their other areas of responsibility is system sub contracts and we talked about that two years ago, but now is the time, where subcontractors under the management of back, though and some with us.
I have to perform.
And it's stuff that you.
No, it's not electrical and containment, it's things like coding.
It's the Hvdc systems in the plant, it's insulation around the pipes.
Where are you have penetrations in walls, it's the ceiling of those penetration.
And then fire protection and others, there's actually a big laundry list of stuff, but this is the next thing that we have to perform on.
So.
I know you Didnt ask that its my executive caveat to answer a question that I asked but I think it's important for everybody to understand it's just a new phase in the project.
Thanks.
Good luck.
You bet. Thank you appreciate it.
The next question comes line of Andrew Weisel with Scotia Bank. Please proceed.
Hi, Andrew.
Hey, everyone.
So you've already addressed or you just in the last just wonder just my first question. My second one is about the.
The outlook for demand you were pretty clear that you've seen flat weather normalized sales over the last five years.
What gives you the optimism that it's going to be more like flat to up 1% going forward.
So I think the issue I was actually I wanted to be specific in addressing was we did see a decline in a use per customer this year that seemed a bit exaggerated in my mind and I think it mirrors exaggerate positive exaggeration 2018, and so when you put those two.
Things together.
A lot closer to smooth in terms of total net growth in total than any one of those two years would indicate there are number of folks in our sector that are expressing the same issue, which is that we're doing linear regression of weather normalization and we've seen two very extreme weather years that tend to kind of bend around that.
Curves not to get too.
Statistical about it but I think our precision with which we can measure in these these two instances is not great. So your question was more around long term as we do more long term view of growth. We think it's quite strong in the southeast we've seen a lot of in migration into our area, particularly in Georgia.
But we are seeing efficiency and we're measuring the capacity for efficiency, particularly in our commercial segments.
And so we do take some comfort that use per customer, although we'll be growing customer count would be declining, but not with a full off so that's a bit of a long winded answer we're also seeing.
Industrial rebound. This is the third cycle within the last 12 years of growth cycle, and we really do think that momentum as positive in the industrial segment, yeah. The standard that I like to Geek out on all at the first derivative of all this is momentum and in fact, we're seeing that I've I've told you before I think that momentum showed us.
Bottoming out a little bit that the momentum that signals were flat to negative they've just turned a wee bit positive six positive three negative one flat and I think what you're seeing in English is tax law change good.
Reduce regulation good.
Are you know a.
Currency Wars country trade Wars bad.
And now all of a sudden we see some green shoots out of some agreements a with US and Mexico for example, North America.
Also with China, and there's still more to go.
Now countervailing that in a little bit a headwind is the corona virus, but as we have seen and we've actually talked about this at the fed before with the kind of pandemic that we're seeing assuming that we get control of it those are reasonably shallow downturns and the recovery is pretty good.
We'll see where this one takes us but long term we think the fundamentals are still good certainly relative sense for the southeast as compared to other places.
I. Appreciate you are putting that into words I can understand very simple [laughter] next question and this is very very minor, but you do have to comment that you'll have new shares for long term equity options incentive comp.
What's the outlook for that either in dollars or shares per year.
We only have about $350 million worth of options outstanding.
Comes into came it's actually a little bit lower than that probably closer to 200, and we don't control the exercise of those but I know, we know that the duration is no longer than I think 2024, and so we can't gauge the timing, but we know that will happen sometime in that timeframe.
Okay very minor. Thank you 200 about $200 million is but the dollar denominated.
Great.
Thank you.
The next question comes one node Andy you find with Exodus point. Please proceed.
Hey, Andy Bud.
Good how are you.
Awesome just a question on on cash flows you've talked about earnings as you get further out.
75, or dollar range again, that's not guidance.
[music].
Taking about it but just what will cashed floaters look what I will they changed from like where they are today.
[music].
The 20 324 time frame out.
Right now.
Uh huh.
Yes. So there are a bunch of different ways to think about this in general, though vogel adds about $850 million of cash flow once it's fully embedded in rate.
You know all the other business units are driving a general increasing cash flow that's consistent but if I look at this with respect to.
Couple of things payout ratio or FFO to debt.
We're very credit conscious here in total and I would say that both of those measures in indicate improvement over the five year plan period, that's measurable in substantial but that's the way we plan.
Here again, and we Didnt assets I, just feel compelled to say this too when we show our Capex plan and all that it is what we think we know we don't have a bunch of placeholders in there it's not pie in the Sky numbers, there's an asset underlying everything that we're projecting here our experience has been.
That we tend to spend more in outer years.
But we're just showing you exactly what we know right no placeholders.
So you're going to have $850 million of incremental.
Net income and cash.
I'm, sorry, cash and then I.
Heading or what the Capex is maybe a little before.
Let's call it $1 billion.
What do you do with that cash.
You pay down debt.
Start growing dividend faster.
I don't know what what's selling yeah, it's all that is coming back.
Back stock.
What do you do without doing a dollars and could you talk about longer term get it's up to the board, but as far as once we get out of this building cycle.
Where would you envision dividend growth rate should be once you get that popping hurting so does the shareholder almost as a sense get a catch up on the dividend.
You know first Andy as always I. Appreciate your long term perspective, it's very refreshing to think about 20 to 2020 420 fives and 26.
I would say that deed, we will talk with our board about the bookends of opportunity around around free cash flow and in general we have been keeping the dividend growth slightly behind the expected growth of income in an effort to move our payout ratio down a little bit closer to the industry.
We'll achieve that within this plan period and at that point, well have a conversation about whether or not we grow dividends a paced with earnings or are we on the other hand pay down debt to improve the credit quality of the corporation. My I think that the reality lights someplace in between that we will emphasize.
Both of those activities when we have the ability at the end of Vogel construction, yeah, and the other thing I would you say, we said all the time values, a function or risk and return improving your credit metrics as a lot of value to the value accretion as does increasing earnings and so we'll keep our eye on both of those things.
The wonderful news is you're looking at a company that's going to be spinning off a boatload more cash.
Have much greater earnings potential and have little to no event risk.
Great. Thank you very much.
Thank you.
Okay.
The next question comes Atlanta, Ashar Khan with version. Please proceed.
Hello, Ashar good afternoon.
Hi, good afternoon to congratulations.
Well I'm, hoping a with a would do you have I guess this new fees.
We can also returned to the old fears when you want to see a four and when you gave guidance you exceeded the old visit to the thought <unk> and in the.
2000 years wouldn't you as the CFO, Dan I assume that under this new it's two years of board that back in bed cycle, what where does that.
Followed you did two couldn't be Bakken Dutch cycle up as you project that you and leading towards the upper end of guidance a every year going forward.
Yeah. Those are all southern people up there you know a yeah look.
We always have a conservative bearing.
To our earnings that's the way we like it we think run to a great trajectory.
And.
We'll be able to address you know we put this 4% to 6% thing in play some time ago, and we think it's good to fit to be faithful to that.
A lot of people of ask us or you're going to increase it and certainly if you look at a point estimate one year going forward, yes, sure I mean, the math would show you that it would increase long term we'll see.
I think once we get out of the Big project business, which you know I assumed when I got this job.
We will be in a position where as I, just said cash flow positive in a big way.
Earnings accretive in a big way.
Low event risk, we should be in a posture to continue to improve our recent performance you know a ashar first time I think even when I was CFO, we never said on a third quarter earnings call that we were going to exceed the range. We would always say something like well, we expect to be at the very top of.
Right, we did exceed and we would have exceeded more but for part of a settlement in the Georgia rate proceeding remember we gave away some of the earnings above 12% as part of an overall really attractive global settlement.
That was probably worth what four cents or so this year.
So I think you know look we're going to do the best we can to under promise over deliver.
Right now are focused on getting Vogel done.
I'd love to get back to those days.
I would only reiterate that we do we are ashar under pressure this year because of penalty are always related to the construction of Vogel, which is a single minded focus for us and then the only thing other thing I would do is absolutely up from the fact that Tom was the CFO 2000 years ago [laughter].
Thank you a shot yeah anything else, but.
No. Thanks, Thank you.
Yeah.
And there are no further questions I'll turn the call back over to you.
Hey, Thank you Ed. Thanks, everybody. This is such an exciting time and boy you know, we said 2019 with such a heavy lift you look back over that year, we had to scale up remember we were all worried about getting people to the site getting site productive and we did hit numbers like a 160000 hours in a month than we did all that stuff.
I think we have refine the schedule going forward at somewhere between aren't 4000 45000, maybe we can do that we are calling for a a modest increase in electrical we think we can do that we've got to get subcontractors under bechtold management to perform we think we will do that there's a long way to go here, but boy, we're starting to see.
The end of the tunnel.
And I'm, so proud of the folks that work at Vogtle, three and four and our partners backed alone the site good folks.
So we look forward if we're going to continue to work on that like crazy, but the other thing I don't want you to forget is that this company has been performing like champions outside of the major projects.
This notion that now we're the best company to work for the industry 14th in the United States that we do so many good works in the community like the help historically black colleges.
Like the work we're doing on the SG front like the folks that don't do rhetoric, we do solutions on the environmental and technology front, we're really trying to invent our future beyond just performing on the major project. We have in front of US. This is I think what makes this company great. It's not a company run by us.
Spreadsheet, rather it is a company run by a relentless focus on value is a function or risk and return and we try to balance both those issues in doing the best we can for shareholders going forward.
Now man 2020 could be just a great year, and we're going to true everything we can to make it that way.
Thank you so much for being with Us and we'll talk to you soon.
That's great that's called Phase we thank you for your participation mass that you. Please disconnect your lines.
[music].