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Edited Transcript of SO earnings conference call or presentation 22-Feb-17 6:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Southern Co Earnings Call

Atlanta Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Southern Co earnings conference call or presentation Wednesday, February 22, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Abramovitz

Southern Company - Director of IR

* Tom Fanning

Southern Company - Chairman, President and CEO

* Art Beattie

Southern Company - CFO

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Conference Call Participants

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* Jonathan Arnold

Deutsche Bank - Analyst

* Julien Dumoulin-Smith

UBS - Analyst

* Michael Weinstein

Credit Suisse - Analyst

* Anthony Crowdell

Jefferies LLC - Analyst

* Angie Storozynski

Macquarie Research Equities - Analyst

* Michael Lapides

Goldman Sachs - Analyst

* Ali Agha

SunTrust Robinson Humphrey - Analyst

* Paul Patterson

Glenrock Associates - Analyst

* Praful Mehta

Citigroup - Analyst

* Andy Levi

Avon Capital/Millennium Partners - Analyst

* Paul Ridzon

KeyBanc Capital Markets - Analyst

* Dan Jenkins

State of Wisconsin Investment Board - Analyst

* Ashar Khan

Visium Asset Management - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Suzy and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company fourth-quarter 2016 earnings.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, February 22, 2017. I'd now like to turn the call over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.

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Aaron Abramovitz, Southern Company - Director of IR [2]

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Thank you, Suzy. Welcome to Southern Company's fourth-quarter 2016 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Art Beattie, Chief Financial Officer.

Let me remind you that we will make forward-looking statements today, in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings.

In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information and slides we released this morning and are available at investor.SouthernCompany.com. At this time, I'll turn the call over to Tom Fanning.

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Tom Fanning, Southern Company - Chairman, President and CEO [3]

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Good afternoon, and thank you for joining us. As always, we appreciate your interest in Southern Company. We have a long list of outstanding accomplishments for 2016, and we are well-positioned for continued success in 2017 and beyond.

We shared many of our 2016 successes at our analyst day, but I'd like to recap just a few. Our longest standing strength is the operation of premier state-regulated utilities. The addition of Southern Company Gas broadens our opportunities to leverage our customer-focused business model, which has long supported constructive regulatory relationships; world-class customer satisfaction; and regular, predictable and sustainable returns on investment.

As evidenced by the efficient merger approval processes that were completed in the first half of 2016, all of these newly-added LDCs have constructive regulatory frameworks, and well established regulatory relationships. Recall that one of the key rationales for our acquisition of Southern Company Gas was to create a platform for future gas and infrastructure.

On the heels of completing the AGL Resources merger, we acquired 50% of Southern Natural Gas, which serves the vast majority of our state-regulated utilities in the Southeast and is arguably the crown jewel of the interstate natural gas pipelines in the southeastern United States. Not only does our ownership provide for long-term earnings and cash flows, it is also expected to provide growth opportunities in the future.

At Southern Power, we invested nearly $5 billion in 2016, and began a shift toward wind. At the very end of the year, Southern Power signed an agreement with RES to jointly develop 3,000 megawatts of wind projects with an in-service date of 2018 through 2020.

Southern Power will co-originate the PPAs for this pipeline of projects, and will procure turbines through two supply agreements with Vestas and Siemens. Our initial turbine purchases in 2016 provide a safe harbor for 100% of the 2016 production tax credit value for the full development pipeline. We plan to invest approximately $1.5 billion per year to grow Southern Power over the next five years, and the pipeline of projects under our joint development agreement accounts for most of the expected investments in 2018 through 2020 timeframe.

The addition of PowerSecure early last year provides Southern Company with another important option for the future. PowerSecure is well aligned with our customer-focused business model, providing customers with the energy infrastructure solutions they increasingly demand. With the slowing of electricity usage, we have positioned Southern Company to serve a nationwide base of customers on both sides of the meter.

This strategy includes opportunities under the alliance we announced with Bloom in late 2016. Much like Southern Power and our interstate natural gas pipeline investments, PowerSecure is positioned to build and own distributed energy infrastructure under long-term contracts in a manner that should provide for regular, predictable and sustainable results.

At Vogtle 3 and 4, we continue to make progress on construction. In addition, in December, as another example of constructive regulatory environments, that are key to our overall success, the Georgia PSC approved the prudence agreement we announced in October. As a reminder, the Georgia PSC approved our 2015 litigation settlement with Westinghouse.

In addition, the PSC either deemed or presumed prudent costs aggregating $5.68 billion, while providing contingencies for both cost and schedule. The schedule contingencies provided in the prudence agreement consolidate the project timeline, to allow for completion of both Units 3 and 4 by December 31, 2020. This PSC action provided more certainty concerning the prudence and collection of project costs for both the company and investors.

At Southern Power, we've already announced the acquisition of the Bethel Wind Energy Center. This 276 megawatt facility is now in service, and places Southern Power's ownership in renewable generation resources north of 3,200 megawatts.

In addition to wind projects, natural gas generation under long-term contract remains a priority for Southern Power. As you recall, we acquired the Mankato combined cycle facility last year. The Bethel Wind Project and the expansion of Mankato represent approximately $600 million of Southern Power's $1.5 billion growth capital for 2017.

At Southern Company Gas, yesterday's approval of Atlanta Gas and Light's gram rate structure by the Georgia PSC is yet another example of a constructive regulatory framework for our premier state-regulated utilities. This forward-looking mechanism will provide timely recovery of important infrastructure and growth investments in Georgia over the long term.

In addition, Southern Natural Gas recently filed a proposal with FERC for expansion of the natural gas lateral that serves Plant McDonough-Atkinson in Georgia, with an estimated investment of $240 million. Our 50% share of this investment, $120 million, is part of the $300 million placeholder CapEx we included for pipelines in our Analyst Day materials.

In 2016, by expanding our premier state-regulated utility portfolio, continuing to invest in energy infrastructure projects under long-term contracts, and financing our 2016 growth on very favorable terms, we were able to extend our EPS outlook to five years, with an EPS growth rate of approximately 5%. Our EPS outlook is resilient to a variety of different outcomes, and supports our regular, predictable and sustainable objectives.

And subject to Board approval, that should enable us to follow through on the dividend policy we outlined in our Analyst Day in October. I'll turn the call over now to Art, for a financial and economic review.

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Art Beattie, Southern Company - CFO [4]

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Thanks, Tom, and good afternoon, everyone. As you can see from the materials released this morning, the adjusted results for the fourth quarter met our estimates, and we exceeded our guidance on an adjusted basis for the full year of 2016.

For the fourth quarter of 2016, we had reported earnings of $197 million or $0.20 per share, compared with $271 million or $0.30 per share in the fourth quarter of 2015. For the full year of 2016, reported earnings were $2.45 billion or $2.57 per share, compared with $2.37 billion or $2.60 per share in 2015. On an adjusted basis, for the fourth quarter of 2016, consistent with our estimate provided at our Analyst Day, Southern Company earned $235 million or $0.24 a share during the fourth quarter of 2016, compared with earnings of $403 million or $0.44 per share during the fourth quarter of 2015.

For the full year of 2016 on an adjusted basis, Southern Company earned $2.73 billion or $2.89 a share, compared with earnings of $2.63 billion or $2.89 a share for the same period in 2015. A reconciliation of our as-reported and as-adjusted results is included in the materials we released this morning.

Our adjusted annual result of $2.89 per share was just above the top of the 2016 guidance range we established a year ago. The major earnings drivers, when compared to our $2.89 per share adjusted results for 2015, were retail revenue effects at our regulated electric utilities, weather, and continued growth at Southern Power.

These positive drivers were offset by the issuance of additional shares, higher non-fuel O&M expense, higher depreciation and lower weather-adjusted retail electric usage. A more comprehensive list of drivers is included in the materials we released this morning.

We continue to see retail electricity customers using less. This trend is true for all classes, especially commercial.

Industrial sales are lower due to persistent strength in the dollar, weaker demand for domestic manufactured products, and lower oil prices. Hitting three of our largest industrial segments in 2016, chemicals, paper, and primary metals. However, the outlook is somewhat brighter in 2017, with prospects of potential infrastructure spending, lower tax rates, and higher levels of confidence as reflected by the ISM Manufacturing Index, which rose to 56 in January, a two-year high.

Residential sales are flat, influenced by increased levels of efficiency, and a continued trend from single-family homes to multi-family housing. Commercial sales trends are reflective of similar moves to more efficient lighting and HVAC systems, as well as an increase in e-commerce putting pressure on the growth of bricks and mortar retail stores.

Our expectation for retail electric sales growth over the next several years, as we outlined in our Analyst Day, are between 0% and 1%. In the near term, we expect 2017 electric sales growth to be towards the lower end of that range. Somewhat offsetting declining retail electric sales is strong customer growth, especially in Georgia and Florida.

As we look across our state regulated footprint, which now covers nine states, we are seeing employment and population growth consistent with national trends, with slightly stronger growth in Georgia, where we serve both gas and electric markets. Southern Company Gas has experienced strong customer growth in its gas distribution territories, especially in Georgia, Florida, and Tennessee. This reflects an increase in migration to these states, and strong employment growth.

In our gas and electric markets, our economic development pipeline remains robust, as most of our states are well-positioned to create jobs over the next several years, and we expect to support continued customer growth and infrastructure investment. Before I turn the call back over to Tom, I'd like to cover a few final items:

First, our earnings estimate for the first quarter. We estimate that Southern Company will earn $0.57 per share in the first quarter of 2017. We are also reiterating our adjusted EPS guidance from our Analyst Day of $2.90 to $3.02 per share for the full year of 2017, and an EPS growth rate of approximately 5% for the next five years.

Secondly, I'd like to touch on potential tax reform legislation. No doubt, we will all be keeping a close eye on this issue, but we also know predicting the outcome is impossible.

There are two very public proposals garnering attention, one from the Trump Administration, and one from House Republicans. Both proposals focus on three primary elements: Reducing the corporate tax rate, expensing of capital expenditures, and eliminating the interest deduction.

Each of these elements impacts customers and shareholders in different ways, and it is far too early to know exactly how these proposals might be implemented, or exactly what, if any, transition rules would be established. Having acknowledged that uncertainty, let me share some potential impacts of the major tax reform proposals under a few different scenarios.

We estimate that the administration's proposal would be slightly accretive to EPS through 2021. When considering the three major elements of the House Republican proposal, the impacts could range from slightly accretive to approximately 5% dilutive through 2021, depending on the underlying assumptions.

In all of our House Republican planned scenarios, we have assumed a 20% tax rate. However, there are a wide range of assumptions related to capital and interest deductibility.

Our worst case scenario assumes no interest is deductible, and there are no incremental investments to offset potential rate base reductions relating to deducting 100% of capital. Our best case assumes interest on existing debt is grandfathered, and that incremental capital projects offset reductions in rate base.

We're engaged with policy makers regarding tax reform on several fronts. Our priorities are preserving both the interest deduction and current tax treatment on CapEx, as well as ensuring fair and comprehensive transition rules. I will now turn the call back over to Tom for his closing remarks.

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Tom Fanning, Southern Company - Chairman, President and CEO [5]

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Thanks, Art. Before we open the call up for questions, I'd like to briefly address our two major generation projects. Progress at Vogtle's 3 and 4 construction site continues, and the actions of our contractor are indicative of a focused commitment to improve productivity in critical path areas of construction, and to complete projects in a timely manner.

We are closely monitoring the status of Toshiba and Westinghouse. Our fixed price contract continues to protect customers and shareholders alike. Westinghouse has provided us with an updated schedule that reflects commercial operations dates of December 2019 for Unit 3 and September 2020 for Unit 4.

The Company is currently reviewing this schedule, in an effort to confirm that these projected dates align with our expectation. The prudence settlement approved by the Georgia PSC in December provides flexibility to accommodate these schedule changes. You will recall that the PSC order prescribes the completion of both Units by year-end 2020. And we are seeing improvements in productivity, and believe this momentum will be sustained, given the recent announcements by Toshiba and WEC.

At the Kemper project, we achieved integrated operations at both gasifier trains and combustion turbines in late January. Following a short outage in early February to make modifications and improvements to clean the gas clean-up systems, the plant returned to integrated operations of both trains, including the capture of CO2 and the production of sulfuric acid and ammonia, all at acceptable quality under the related off-take agreements.

On Monday, however, Mississippi Power determined that an outage to removed ash deposits from gasifier B's ash removal system was necessary. Gasifier B been producing syngas 60% of the time since November of last year. During the outage, gasifier A and combustion turbine A are expected to remain in operation, producing electricity from syngas, as well as producing chemical byproducts.

As a result of this latest outage work, we are currently expected to reach sustained operation and place the full IGCC facility into service by the middle of March. Mississippi Power expects to file for an accounting order from the Mississippi PSC, that will allow a deferral of depreciation and operations and maintenance expenses of approximately $25 million per month pre-tax for the assets placed in service, until rates are in place. Our 2017 EPS guidance assumes receipt of this accounting order.

In the coming months, Mississippi Power expects to file for cost recovery with the Mississippi PSC. We plan to file both a traditional rate case, and an alternative multi-year rate mitigation plan, as provided for under Mississippi legislation passed in 2013. Our goal is to achieve an outcome that balances the interests of customers and investors alike, an objective which often presents challenges.

Our commitment to the financial integrity of Mississippi Power and Southern Company has not changed. As we have done to date, Southern Company expects to maintain a capital structure and credit metrics from Mississippi Power supportive of investment grade ratings. Likewise, we plan to continue targeting a minimum 16% FFO to debt metric over the long term at the Southern Company level.

Moreover, our overall objectives as a Company remain constant. We continue to believe that focusing on the customer, operating premier state-regulated utilities, and investing in energy infrastructure projects under long-term contracts will continue to support regular, predictable, and sustainable long-term earnings and dividend growth for our investors.

Our tremendous successes in 2016 provide us a foundation for a resilient financial outlook, including approximately 5% growth in earnings per share. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first line, coming from the line of Jonathan Arnold with Deutsche Bank.

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Jonathan Arnold, Deutsche Bank - Analyst [2]

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I had a question on Kemper. In your last 8-K, you referenced the economic viability analysis that you were going to update. I believe the K says that this has been negatively affected by cost and the lower gas price forecast. Can you give us any more specifics on what negatively affected means?

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Tom Fanning, Southern Company - Chairman, President and CEO [3]

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Sure. Let me first give the context. I guess we've been filing these economic viability announcements since about 2009. Somewhere around there. Did it annually as a requirement through 2014.

In 2015 the commissioner or the staff asked us to file another, and we did. Then the idea was to update that whenever we saw a major change. We didn't see a major change in 2015, so we didn't file one there.

Then in 2016, the predominant change that we saw, really related to a lower long-term gas price forecast. That was by far the major effect, and it resulted in reduction of gas price forecast of 25% to 30%.

Now, when you look at the outcome of the so-called three by three matrix, so there's nine boxes, essentially what you're able to see is throughout time, this project has been somewhere between six to nine boxes that are green. That means as currently formulated, the plan is economic relative to variances and high, low, and medium gas prices, and some spread of what carbon cost or price may be.

The latest specialty result of the new price forecast reduced the number of green boxes to three. If you had not had the reduction of long term gas price forecast in this current edition, we would have been back to around six green boxes.

So Jonathan, I guess my advice to people looking at that is this: The real result is due to the reduction in the long-term gas price forecast. That's the overwhelming change, the big change. Obviously, there are others.

It is a point in time. When we had this plant certificated, we all thought that gas prices were going to be double-digits, and there were some spreads that were way higher now.

And recall again, and it was interesting, I actually went back in conjunction with this last Board meeting we just had, as we started to think about the whole regulatory situation and recovery. Going back to 2008, when this plant was first filed for in Mississippi, it was really structured as a gas price hedge. In other words, we saw volatile and high gas prices, and nobody figured that gas prices will fall this low.

But at the time, Mississippi was looking at being exposed to 70% gas generation and 30% of coal, adding Plant Ratcliffe-Kemper County to the mix gave us a third exposure to gas prices, a third Kemper, and a third coal prices. Interestingly, Mississippi's customers have been able to benefit from the dropping gas prices along the way, because as you know, our combined cycle gas turbine has been in service and has been having an operations profile much better than what you typically find in the United States.

So all that to say is, it's an input. The big change is really related to gas prices. Obviously operating costs did go up since 2015, about $40 million a year. It will just be part of the input that goes in to the evaluation of recovery. I'm very happy to say that once we achieve in service, we will be able to give the regulators and customers of Mississippi essentially what was certificated back in 2010.

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Jonathan Arnold, Deutsche Bank - Analyst [4]

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Tom, to follow up, is there a scenario where the lack of green boxes causes someone -- the determination to be made that it would be better for customers just to run this as a gas plant?

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Tom Fanning, Southern Company - Chairman, President and CEO [5]

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Jonathan, I suppose there's a million different scenarios we could evaluate. The good news is, and you folks know as well as we do, and it's been a painful process, getting to this point, we certainly have taken our lumps, but we have delivered what was certificated back in 2010. I think we will, and we'll see how that goes.

Based on the order, we're going to give them what was required for us to build. We'll see how that discussion goes. Certainly, there's a lot of different ways the regulatory process could unfold from there, but that's our starting point.

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Jonathan Arnold, Deutsche Bank - Analyst [6]

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Okay, Tom. Thank you for the full answer. I appreciate it.

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Operator [7]

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Thank you. Our next question coming from the line of Julien Dumoulin-Smith with UBS.

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Julien Dumoulin-Smith, UBS - Analyst [8]

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Perhaps just to kick it off where Jonathan left it, can you elaborate a little bit more on this filing in Mississippi around the $25 million a month? What's the timeframe for that to kick into effect, what you'll be tracking there? And more importantly, is that a good leading indicator on thinking about ultimate recovery of Kemper in a future rate case?

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Tom Fanning, Southern Company - Chairman, President and CEO [9]

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I really don't think it is, to be honest with you. It's interesting, once we go in service, we think on a pre-tax basis, the run rate is about $25 million a month. What it will be -- when we file for tax and accounting in service, is essentially prescribed by accounting and tax rules. When we hit that level, we think that four or five days of continuous integrated operation, we'll make that determination.

We're having some conversations with the Mississippi staff about what the threshold for operation will be, in order to get the accounting order. But everybody should understand that whether these costs fall inside an accounting order or outside, until we get an accounting order, they will all be subject to review and recovery under the rate filings, so it really has to do with the accounting presentation in the meantime.

I think the general thrust of the staff is that they want to see more sustained operation, as yet undefined, beyond what's required, in order to call this thing in service for accounting and tax purposes. We're having those discussions now.

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Julien Dumoulin-Smith, UBS - Analyst [10]

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Awesome. And then moving back to the other side of the major project, you discuss productivity trends going well thus far. Where are we in that hiring process ramping up?

Are we almost done with that? Just to be clear about what you said earlier, I assume between any liquidated damages from the consortium and the fixed price guarantee, that ultimately there's fairly limited changes to your or customer-incurred cost as a result?

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Tom Fanning, Southern Company - Chairman, President and CEO [11]

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Yes, I think there's almost no changes to incurred cost. It's pretty clear, we've been meeting with management, in fact Steve Kuczynski, our CEO of Nuclear and I, met with Westinghouse's Chairman, Toshiba's Chairman, I think the President of Westinghouse in DC in December, Paul Bowers, and the team there, he's our CEO of Georgia Power, have been meeting with management all along the way.

You should view us as having a reasonably continuous contact with management. It's very clear to us, I think it's clear to the contractor, that all these issues, especially issues related to productivity at the site, are for their account. And all the media releases that you have seen, there's never been a dispute raised to that effect.

The predicate of your question was just a wee bit off, though. One of your predicates of the question was that staffing wasn't where it needs to be. Really, staffing is, Julien.

I think the bigger issue there is productivity of the staffing that exists. Interestingly, and I think we have a slide in the deck, do we have a slide in the deck? It's page 23, and it's in the appendix.

It shows the productivity, if you will, it's a productivity looking slide anyway, of various activities that were accomplished in Unit 3, and the duration of those activities later for Unit 4. And what you can see by that chart is effectively true, that broadly, productivity at Unit 4 is a lot better, and we're learning a lot from having undertaken activities at Unit 3. That's why you see the difference in the change in schedule from six months to three months.

It really has nothing to do with the amount of staffing onsite. The amount of people we need are onsite. Further we believe Westinghouse is pulling in the best nuclear construction people and project management talent from all over the country to augment their efforts onsite, particularly in the nuclear island. So they are all about trying to improve their productivity and improve their own financial results.

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Julien Dumoulin-Smith, UBS - Analyst [12]

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Got it. That's fair. Just confirming there is no change for consumers, right? And yourself, more importantly?

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Tom Fanning, Southern Company - Chairman, President and CEO [13]

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No. In fact, the way I think about LDs, is they really offset owners' costs for any delay.

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Julien Dumoulin-Smith, UBS - Analyst [14]

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Right. Thank you very much.

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Operator [15]

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Thank you. Our next question coming from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

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Michael Weinstein, Credit Suisse - Analyst [16]

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I wanted to confirm that VC summer is going to be, looks like a few months behind you. You're ahead of them by about three to four months, is that right?

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Tom Fanning, Southern Company - Chairman, President and CEO [17]

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You'll want to ask them that.

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Michael Weinstein, Credit Suisse - Analyst [18]

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Do you think that -- so you don't have any opinion as to why you might be a few months ahead of them?

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Tom Fanning, Southern Company - Chairman, President and CEO [19]

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We really try to stay away from those things. We're much better served paying attention to our own project, at this point.

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Michael Weinstein, Credit Suisse - Analyst [20]

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And there's no change to the cost of the project as far as you can see?

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Tom Fanning, Southern Company - Chairman, President and CEO [21]

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Not to us, not cost to our customers, no.

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Michael Weinstein, Credit Suisse - Analyst [22]

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Okay.

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Tom Fanning, Southern Company - Chairman, President and CEO [23]

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And the schedule remains within the prescription that we settled, that was agreed to by the Public Service Commission, and the settlement in the prudence hearings.

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Michael Weinstein, Credit Suisse - Analyst [24]

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Right. Has there been any movement on the IRS review of tax credits or anything like that at this point?

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Art Beattie, Southern Company - CFO [25]

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We're waiting on the Congressional Tax Committee, Joint Committee of Congress. And we believe that sometime in the first half of this year, that we should hear something from them.

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Tom Fanning, Southern Company - Chairman, President and CEO [26]

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You're referring to the 174 deduction?

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Art Beattie, Southern Company - CFO [27]

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I assume, Michael, that's what you're asking about.

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Michael Weinstein, Credit Suisse - Analyst [28]

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Right.

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Art Beattie, Southern Company - CFO [29]

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For Kemper? Not for Vogtle, right? Kemper?

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Michael Weinstein, Credit Suisse - Analyst [30]

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Yes. That's about it for now. Thanks.

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Operator [31]

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Thank you. Our next question coming from the line of Anthony Crowdell with Jefferies.

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Anthony Crowdell, Jefferies LLC - Analyst [32]

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Just obviously, everyone is hoping for a great outcome at Kemper, the Company has been making progress. But is there a scenario that happens at Kemper where Southern the parent no longer supports the operating company?

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Tom Fanning, Southern Company - Chairman, President and CEO [33]

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We've been over that a lot. We try to evaluate every potential card that could get turned up on the table here. It's our belief that we will maintain our support for Mississippi Power in the manner that we have described. It's just not in anybody's interest to consider in any serious way something other than that.

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Angie Storozynski, Macquarie Research Equities - Analyst [34]

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Great. Thanks for taking my question, guys.

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Operator [35]

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Thank you. Our next question coming from the line of Michael Lapides with Goldman Sachs.

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Michael Lapides, Goldman Sachs - Analyst [36]

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Congrats on a good end of 2016 and nice start to 2017. Real quick on Vogtle, and then I want to turn to Southern Natural Gas for a second. On Vogtle, the projects are getting closer, meaning Unit 4's in service date is I think you said September 2020.

What happens if this pushed out another couple months into 2021? How should we think about the risk to things like production tax credits, meaning the ability to qualify for them, or for things like bonus depreciation treatment for Vogtle 3 and 4, if they come online after 2020?

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Tom Fanning, Southern Company - Chairman, President and CEO [37]

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I'll hit production tax credits and let you do bonus. Our team in Washington is working really hard to get an extension for the two projects that are under construction, and so we're working that angle. And we think actually there's a good vehicle, good circumstances in which to make that happen.

The second thing that I would say to you is this six-month and three-month extension to the schedule is something we're reviewing. When you look at that slide that I showed you, that I talked about before, page 23, Vogtle Unit 3 versus Unit 4 duration, our position has been that we ought to be able to hit Unit 4 really pretty well, without any kind of three-month schedule extension.

I think the schedule extension there may do well more with staging work among and between the different Units, rather than the productivity we're seeing at Unit 4. So I think Unit 4's schedule remains absolutely under discussion, and we'll see where that goes. Over the next month or so, we're tying the proposed schedule change to what the lower level schedules would indicate right now.

We have to make sure those things all [gee ha] if you will. That will be the topic of a lot of review over the next four to six weeks. Art, did you want to talk about bonus? Oh, I'm sorry, go ahead.

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Michael Lapides, Goldman Sachs - Analyst [38]

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Just on the PTC, is the goal to try to get an extension of the PTC date as part and parcel or an amendment to some broader tax package? Or is this, are you going to try to get this done in some separate legislation?

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Tom Fanning, Southern Company - Chairman, President and CEO [39]

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We've actually had a lot of different ways to do this. We'll see. Let me just tell you, there's a lot of support in Congress for this. This is not an adversarial or any controversial thing. Getting stuff done in Congress, as we all know, is hard, but it's got a lot of support.

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Michael Weinstein, Credit Suisse - Analyst [40]

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Got it. Thank you, Tom.

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Art Beattie, Southern Company - CFO [41]

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Mike, what did you want to know about bonus? I was looking at something.

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Michael Lapides, Goldman Sachs - Analyst [42]

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What happens if the plants come online post 2020, what's the treatment for bonus D&A, if they don't meet an end of year 2020 in service?

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Art Beattie, Southern Company - CFO [43]

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I believe it's zero. All that is subject to change under what's being proposed. We'll see what happens.

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Michael Lapides, Goldman Sachs - Analyst [44]

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Understood. Then finally, Southern Natural Gas, you introduced the new lateral off the pipeline, where you're 50% owner with a large midstream company. Do you see a lot of other opportunities like that, and do you see those coming to fruition over the next three to five years? Meaning bolt-on projects, bolt on laterals or even storage? Or is the growth the bigger growth off that pipeline, off of that position, more longer term than that?

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Tom Fanning, Southern Company - Chairman, President and CEO [45]

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We think we did it at our Analyst Day. We outlined $300 million of opportunity. This is a piece of that $300 million. We're looking at other opportunities jointly with Kinder Morgan on opportunities just like this.

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Art Beattie, Southern Company - CFO [46]

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Beyond the $300 million placeholder, if you go back to Rich Kinder's analyst call, after we announced the acquisition of SoNat he referred to a lot more opportunities. We support those things. We're aware of them. We're working with him where it makes sense. None of those additional growth opportunities are in our financial plan.

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Michael Lapides, Goldman Sachs - Analyst [47]

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Got it. Thank you, Tom. Thanks, Art.

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Operator [48]

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Thank you. Our next question coming from the line of Ali Agha with SunTrust.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [49]

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First question, just wanted to clarify your earlier comments, this economic viability test at Kemper. So just to understand, is this one of the tools that the Commission is going to use to determine what investment gets recovered as part of the rate case filing? And this last test where you had the three green boxes, is that really what goes in front of them, when they're doing the analysis or will there be any update?

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Tom Fanning, Southern Company - Chairman, President and CEO [50]

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It's just another piece of input that goes in to the process. It's nothing more than that. We know gas forecasts have changed a lot over time.

With respect to whether we should recover it or not, I don't think -- as a matter of fairness, I cannot imagine that thee Company is going to be held accountable for changing gas price forecast. We all entered in to this certificate, this order from the Commission in 2010, with the understanding this was a gas hedge. And in fact, it remains a gas hedge.

There are still green boxes on the economic viability analysis, which would indicate that under certain scenarios, this is a very economic thing to do. And let me remind you, if you had 2015's gas forecast instead of 2016-2017 gas forecast, you would have six green boxes. So just because you have this more recent snapshot of what we believe about the future, which we all know has changed dramatically over time, that does not mean anything about the imprudency of costs incurred.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [51]

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Okay. Then switching to Vogtle, as you said, you've been obviously closely in contact with Toshiba, Westinghouse. Just remind us in the scenario that for whatever reason Toshiba's financial health implodes further, or they're no longer committed, what are the backstops, and what would be the scenario if they cannot complete the rest of their obligations?

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Art Beattie, Southern Company - CFO [52]

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Ali, some of that is public, but we have every reason to believe that Toshiba is going to remain viable. They have recognized the fact that they do have an obligation as a parental guarantee under these contracts. We believe it's in their best interest from an economic perspective to complete these projects, and our expectation is that they will. That's what we've been communicated to by them.

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Tom Fanning, Southern Company - Chairman, President and CEO [53]

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When you think about it, when you look at the credit banks that support Toshiba and the government, they own about 20% of the stock. Further, there's about 170,000 employees in Japan and elsewhere that are impacted by the viability of Toshiba. Further, the nuclear renaissance in Japan, such as it may be, the cleanup from Fukushima and then restarting other nuclear reactors, Toshiba has a central part of that role for Japan. They're just an important player in the economy, and we continue to get feedback that Abe's administration supports Toshiba.

Two other financial facts. One financial fact. We have, and we've disclosed this I think a lot, almost $1 billion, $920 million of letters of credit. Further, we have a multi-billion dollar guarantee to Toshiba, the parent.

There's a lot of reasons why we believe, including Toshiba's own statements, and moves that are now in the press, that I should just let you look at in the press, rather than me comment them, that Toshiba has taken hard steps necessary to improve their financial viability, and that they remain committed to these two projects. Ultimately, success on Vogtle will inure to the success of Toshiba long-term.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [54]

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Fair enough. Last question, we've been seeing consistently, Tom, the weather-normalized sales have remained negative, in fact, got a little worse in the fourth quarter, negative 1.5%. I know you alluded to some of this perhaps in your commentary, but what is causing this consistent negativity, and what's the optimism that we see at least flat, if not slightly better, as we look at 2017 and beyond?

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Tom Fanning, Southern Company - Chairman, President and CEO [55]

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We're seeing it at the Fed too. The strength of the dollar has slowed exports, number one. Number two, low oil prices have slowed things like expansion of pipelines, and a variety of other things. So we've seen already those effects weigh on industrial sales.

In the commercial sector, we've seen real improvement in terms of office occupancy, and a variety of other measures. But there is a secular change we think going on in the commercial sector, really related to e-commerce that is changing the nature of big box department stores, particularly. Further, we are seeing things like energy efficiency take a lot bigger share, primarily lighting and HVAC from the commercial sector.

On the residential sector, we're seeing we think, at least for now, of course that sounds weird, for now a secular change, but a secular change away from primary housing in the 70/30 to multifamily, more to primary 60, multi-family 40. We think those things may be generational. In other words, the younger generation not wanting to get tied down under a mortgage and homeownership, and actually prefer the flexibility of apartments.

It could be still people under recovery. It could be people not wanting to extend their credit risk from a household standpoint. And we have seen at the federal level larger savings rates in the household income level.

All those things would suggest that the residential buying power isn't what people had hoped it would be in the past, say, three years. The good news is that we still see an influx of customers in to the southeast. When you think about it, not just the southeast. If you add together Southern Company Gas and the traditional electric operating companies at Southern Company, you're talking about 70,000 new customers.

We went from 4.5 million customers to 9 million customers, and one of the things we're definitely looking at is how can we increase the margin? How can we increase more sales and more value associated with having a customer? Whether we sell either therms or electrons in front of the meter, or whether we put energy infrastructure on the other side of the meter.

Fortunately, this thrust on the other side of the meter is happening outside our territory. High price, low reliability, low customer satisfaction areas. The southeast remains a bastion of strength in that regard.

Low prices, great service, great customer satisfaction. Look, what we're trying to do is take advantage of all our natural resources to improve our own organic growth, but where we're losing organic growth to things like beyond the meter sales, or energy efficiency, we're playing offense where we can, to improve our posture and gaining value from customers there, whether they're inside our territory or not.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [56]

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One last clarification. The 5% growth over the next five years, that's pretty straight line, it's not front end or back end loaded?

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Art Beattie, Southern Company - CFO [57]

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Pretty straight line.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [58]

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Thank you.

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Tom Fanning, Southern Company - Chairman, President and CEO [59]

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Take the bottom of the range and the top of the range and grow them by 5. That's what we showed you in October, and we stand behind that. That permits, assuming the Board continues to agree, our dividend policy that we outlined in October as well. I think that should show everybody in the investment community great strength and belief in our future. And remember, this is not just lengthen, it's strengthen.

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Ali Agha, SunTrust Robinson Humphrey - Analyst [60]

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Thank you.

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Operator [61]

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Thank you. Our next question coming from the line of Paul Patterson with Glenrock.

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Paul Patterson, Glenrock Associates - Analyst [62]

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I wanted to touch base on Vogtle. I hear you on the confidence and all the good points you're bringing up on Toshiba and its economic needs, but your partner to the north, SCANA, not your partner but whatever, the guys who got the nuclear plants as well, they seem to be taking some potential contingency planning with respect to whether or not Westinghouse can complete the project, from seeing potentially other contractors or even themselves taking a role. I was wondering, are you looking at anything like that?

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Tom Fanning, Southern Company - Chairman, President and CEO [63]

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Look, and again, I don't want to compare to SCANA. I will not do that. I will just tell you about what we're doing, and that is I hope I get these numbers right. We have about 400 people on site involved in oversight, and have had that. And recall that we've had people all over the world in the supply chain.

I would argue that Southern Company, unlike anybody else in the United States, has the technical depth to be able to step in, if we need to, and finish the product. Further, we have all the contractual rights with respect to getting IP, to make sure we can run the project successfully, et cetera. We've been through every one of those contingencies. I think those are way more tail risk than they are substantive, but if they ever become substantive, we are primed and ready to go.

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Paul Patterson, Glenrock Associates - Analyst [64]

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Okay, great. With respect to Kemper, looking through the 2017 economic viability analysis, for some reason, I'm not sure if it's redacted, it just doesn't appear to be there, the actual gas price assumptions. And I was wondering if you could tell us on the high end what those gas price assumptions are, the ones with the green boxes?

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Tom Fanning, Southern Company - Chairman, President and CEO [65]

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Yes, just give you a point estimate. At 2020 the high gas forecast is a wee bit over $5 per million BTU. So think about volatility in gas prices. Could you be at $5 by 2020? Conceivably. Then beyond 2020, there's obviously a trend that continues to grow in that manner.

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Paul Patterson, Glenrock Associates - Analyst [66]

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Okay. You guys are clearly into the testing phase and what have you, so you want the gasifiers and everything to work. But in the current environment, it sounds like it would be more economic to run the plant simply on natural gas and not run the gasifier. Is that correct? How long would this testing phase go through -- would you expect the phase in which you'd have to run the gasifiers, just to show it's working okay?

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Tom Fanning, Southern Company - Chairman, President and CEO [67]

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Paul, I got you. Here we go. When we've had the gasifiers ready to go, they've actually been performing pretty well.

Like I say, we've been able to demonstrate once they're able to go, they're in the 50% to 60% availability. Remember, all we talk about during this first year is something like 35% availability. So who knows what it will be over a year. I don't want to guarantee anything, but we're actually happy once we get the things up and running, and look at the way A is running right now.

The other issue that I think is important inherent in your question is this notion of what is the energy value of the plant to Mississippi's customer? And I talked about this a lot in the past. Actually, I've been reasonably conservative in how I've postured that.

I've used, I think, the range of numbers with you while on a gas price equivalent, at about, I don't know, $2. 75 to $3 per million BTU equivalent. That didn't include all of the value of the byproduct sales, and it really probably hived off more O&M than what our people would traditionally use in a dispatch assessment. We have run this thing back through our system planning people. If you do the traditional dispatch assessment and you include the value of all the byproduct sales, we believe this thing will dispatch out at about $1.75 per million BTU.

From a useful standpoint, this plant has tremendous energy value. Now, would you rather run the plant, keep it going, it has a rather large fixed O&M component, and get the benefit of the energy, or would you rather convert and just run on natural gas? It's the question you get to, and that underlies, I think, your point. But these are things that we will discuss with the Commission as we file the rate case.

The other thing that announcement still ignores is what's the value of the plant as a gas hedge? So there is absolute value there. It will be interesting to see how all that assessment goes forward.

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Paul Patterson, Glenrock Associates - Analyst [68]

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Okay. Thanks so much.

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Operator [69]

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Thank you. Our next question coming from the line of Praful Mehta with Citigroup.

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Praful Mehta, Citigroup - Analyst [70]

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First question on the tax reform side, the slide you provided was helpful, but wanted to get a little bit more context, more specifically at the holding company level. Could you give us some color on the earnings impact at the holding company level, if the interest reduction went away?

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Art Beattie, Southern Company - CFO [71]

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That's included in our worst case scenario. Obviously, the holding company would be a heavy weight on the downside for tax deductibility, and so it's incorporated in to that scenario. All we've really tried to do, Praful, is just to outline the top and bottom scenarios. But there roughly is about a $0.5 billion a year of interest expense that's exposed. So what we've done is project that out to 2021.

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Praful Mehta, Citigroup - Analyst [72]

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Got you. That's helpful. As you think about the commercial segment, and the additional CapEx at the commercial segment, clearly that is funded with CapEx at the holding company. Wanted to understand with the tax reform, not just the interest deductibility but broadly tax reform, how does the commercial segment grow, you get exposed, both from the economics associated with holding company leverage and other tax reform that might impact economics at the project level for the commercial?

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Art Beattie, Southern Company - CFO [73]

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Praful, when we talk about commercial, we're talking about the commercial class in our regulated business. We're not talking about the unregulated businesses, which I think that you're referring to.

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Praful Mehta, Citigroup - Analyst [74]

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My question is more about the unregulated.

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Tom Fanning, Southern Company - Chairman, President and CEO [75]

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If you're not Southern Power, they finance off their own balance sheet.

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Art Beattie, Southern Company - CFO [76]

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That's correct.

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Tom Fanning, Southern Company - Chairman, President and CEO [77]

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Not at the parent level.

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Art Beattie, Southern Company - CFO [78]

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That's right.

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Praful Mehta, Citigroup - Analyst [79]

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Right, but interest deductibility will still impact the economics, so will other tax reforms. What I'm trying to get at is how do those projects and the growth of those projects get impacted by the tax reform?

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Tom Fanning, Southern Company - Chairman, President and CEO [80]

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Well, listen, I've been walking around the hill on this. I Chair at EEI and I have a finance background and we go through all these things with all the people that we should, both in the White House Administration and Congress, both in the house And Senate.

I can just tell you, there's interesting nomenclature up there. This notion of eliminating interest deductibility is a grand experiment and has the ability in a very near term to radically change. Of course it depends how this thing is factored in over time, transitional, but radically change how America finances long-term capital. If we're trying to stimulate long-term capital, I'm not sure that's the right way to go.

On the flip side, well, how can we help on the national income statement? There's this idea about expensing capital. I understand some people like that, but given the long term nature of the capital that this industry commits to, whether you give bonus depreciation or not has very little influence on our spending habits.

We really do, for example, Vogtle, Kemper, transmission lines, these are long term trending capital commitments. And varying tax treatment over time has very little influence on our behavior. We always do what's right for customers. So when you think about it, it makes much more sense, and these things in scoring, are really pretty close.

Keeping interest deductibility is about equal to keeping the current tax depreciation, and not expensing CapEx. The government is purporting to give us a benefit that really has very little value. So that's where we are on all that.

With respect of Southern Power and what the incremental effect may be, I think we've been awfully famous over the years, and enormously successful. We've done this for the Board. Our ex post review of the performance of the portfolio at Southern Power, and it's even exceeded, ex post, our review of what was required by our own disciplined IRR approach.

The other thing that you just have to understand is there's a lot of people around those deals right now, particularly tax equity, projects without tax credits, there's all sorts of uncertainty going forward. Just rest assured we'll use the same discipline, and my sense is that the market will react to that as well.

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Praful Mehta, Citigroup - Analyst [81]

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That's very helpful context. Just to understand, the Southern Power CapEx, the $8 billion you have from 2017 to 2021, do you see any risk with that spend, depending on what happens on tax reform?

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Tom Fanning, Southern Company - Chairman, President and CEO [82]

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There's uncertainty with respect to tax reform, but you should know that by virtue of the agreement we signed with RES and then ultimately with the turbine suppliers, that we have Safe Harbored our PTCs in the 100%. You show me, but I'm not aware of any tax law change in which they unwound commercial decisions, once entered into. So my sense is, from the value of the PTC that we just entered into with that arrangement last December, we think that will persist under any tax reform.

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Praful Mehta, Citigroup - Analyst [83]

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Got you. That's really helpful. Thank you.

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Operator [84]

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Thank you. Our next question coming from the line of Andy Levi with Avon Capital.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [85]

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Just a couple of questions. I just have some questions on Kemper and on Vogtle. On Kemper, the only thing I think I have left is, in your 10-K you talk about $105 million of increased O&M annually, possibly on the disclosure here. Can you just describe that, and who would pay for that?

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Art Beattie, Southern Company - CFO [86]

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We have already -- are you talking about the first year O&M? Is that what you're referring to?

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Andy Levi, Avon Capital/Millennium Partners - Analyst [87]

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It says operations and maintenance expenses have increased an average of $105 million annually, and maintenance capital has increased by $44 million for the first full five years.

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Art Beattie, Southern Company - CFO [88]

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We talked about at the Analyst Day I think the fact that we have an additional $68 million in the first year, and that we were going to expense those in the first year of operations. That's included. As we go through, and I think Tom talked about it already, and look at the fixed O&M cost associated with the asset, that's part of the negotiation that will go through the regulator, around what's best option for customers. So it is part of the equation that we're going to.

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Tom Fanning, Southern Company - Chairman, President and CEO [89]

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Andy, you may be referring to O&M that was in place, estimated way back in 2000, and actually probably first got filed around 2008 was subject to review in 2009, part of the order in early 2010. That dealt with the level of O&M that was estimated at that time. That since has been updated in 2015.

It was updated to $100 million. And most recently in October, again revised in November of last year, was updated to around $140 million. So the increase over, say, 2015 till now is about $40 million a year. I think what you're reading is probably from the certificate level.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [90]

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Right. Okay. The bottom line is it's to be negotiated.

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Tom Fanning, Southern Company - Chairman, President and CEO [91]

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You can't get the benefit of the plant, all those energy savings I mentioned, without that O&M. You can't separate the two. And recall also in 2012, the commission specified the operational parameters that we're going to have to stand up to.

We believe we can hit those parameters. O&M is not part of those parameters. Those things deal with the availability heat rate, and byproduct sales and something else.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [92]

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I guess this issue about removing ash deposits has plagued, maybe I'm inaccurate, but plagued both gasifiers. Can you maybe describe what that issue is, not in a long way?

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Tom Fanning, Southern Company - Chairman, President and CEO [93]

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I'll do it in a short way.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [94]

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How does that get resolved?

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Tom Fanning, Southern Company - Chairman, President and CEO [95]

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Sure. There were really two different kinds of issues. One of the things we've always said about this was, if you remember, one of the big technical risks was lignite in, ash out. That was one.

The other one, you may remember from years past, and you've been around us for a few years, is this notion of the instrumentation and getting all the digital control synchronized. Remember, this is a pretty complex plant. I'm happy to say all the instrumentation, even though it's complex, has really performed terrific, so we haven't had hardly any problems with that.

With respect to lignite in and ash out, I think part of regular startup practice is to iron out all the bumps in the road, and I think you may remember from all the conversation in the past about lignite driers and all this other stuff, we've solved lignite in. Ash out, we've had two different kinds of problems.

This one recently is a really different one. Okay. The outages that we took in the fall were related to clinkers, and what they dealt with was ash that was melted due to some temperature excursions, as we brought the plants into and out of service. We think we've solved all of those problems. This latest problem really dealt with the notion that on Train B, we've started and stopped it about seven or eight times.

This is -- they use the word agglomeration, but if you can imagine, there are vertical and horizontal pipes in this plant. What we have seen is when you turn the pipe on and off, the fluidization inside -- they're circulating fluid, that boiler stops. And whatever ash is in there will sit on a horizontal pipe. What they think happened in this latest run was that some of the ash started sticking to each other.

When the plant is running and the velocity of the ash is going through the plant, it doesn't stick, and it performs exactly the way you want it to. They think it just stuck together. So they're going to take the plant out of service, get it out, start it up, and they think it will run fine.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [96]

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So is that more of a -- I guess obviously it's an engineering issue, but it's trying to predict the right heat to use?

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Tom Fanning, Southern Company - Chairman, President and CEO [97]

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Yes, but we've done that. That's the early problem and they've solved it. One of the advantages, just to remind you, this thing runs at a lower temperature, therefore less O&M. You don't have clinking and scaling, and its operational performance should be better than a conventional boiler.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [98]

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I think I understand it. We can talk more about it next week up in Boston.

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Tom Fanning, Southern Company - Chairman, President and CEO [99]

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Great. Though we don't want to go to Boston.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [100]

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It's all right, I wish the Giants got that far. And then on the Vogtle side, just to understand, you have this letter of credit and I have gone over it with IR, but I want to make sure I'm clear on it. This letter of credit which is $920 million or $930 million and your portion of that is 45% of that, that expires every July, is that right? And needs to be renewed? Is that correct? Or is that incorrect?

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Art Beattie, Southern Company - CFO [101]

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I believe that the banks are in the position to renew it automatically every year. If they fail to renew it, there's a 60-day notice on the bank's part to let them know they're not going to renew. We have an option if they do that, and that Toshiba can't replace the LLC, to draw on a 30-day notice. So we think we're in good shape around all it.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [102]

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So there doesn't have to be a default, which is right now when you would draw on it, if it were this condition.

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Art Beattie, Southern Company - CFO [103]

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That's one of the conditions. I wouldn't call that a default.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [104]

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No, that wouldn't be a default. But if they failed to -- obviously forget them pulling it. The bottom line is, if there's a default or something like that, obviously you can draw on it.

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Art Beattie, Southern Company - CFO [105]

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As you'll recall, the reason they had to post these letters of credit is because their financial condition fell below a certain level. As long as their financial condition is at that level, they have to provide LCs.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [106]

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But if the banks decide to pull it, you within that 30 to 60-day window when you're informed, you can withdraw on that letter of credit, is that correct?

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Art Beattie, Southern Company - CFO [107]

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That's it.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [108]

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Whose money is it? Is it Toshiba's money or the bank's money that, is that $900 million?

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Tom Fanning, Southern Company - Chairman, President and CEO [109]

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It's our money at that point, pal.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [110]

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I get that point, I'm saying, but right now it's a bank guarantee, right? The banks go after Toshiba. You get the money.

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Tom Fanning, Southern Company - Chairman, President and CEO [111]

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It's the bank's money, and Toshiba is a creditor to the banks.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [112]

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Right. And is there a scenario where the banks decide not to pay you, or is that out there far fetched?

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Tom Fanning, Southern Company - Chairman, President and CEO [113]

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That's pretty far fetched, my friend.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [114]

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Okay. I think that's it. In a bankruptcy situation for Toshiba, how does your fixed cost contract work, and I guess the letter of credit stands, so that's fine. Do you just become a creditor, or is there any type of backstop in that scenario?

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Tom Fanning, Southern Company - Chairman, President and CEO [115]

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We have the LC. Other than that we're an unsecured creditor. We just think, that's really unlikely.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [116]

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The bankruptcy or the unsecured creditor part?

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Tom Fanning, Southern Company - Chairman, President and CEO [117]

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The bankruptcy part.

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Andy Levi, Avon Capital/Millennium Partners - Analyst [118]

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Okay. Got it. Thank you very much.

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Operator [119]

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Thank you. Our next question coming from Paul Ridzon with KeyBanc.

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Paul Ridzon, KeyBanc Capital Markets - Analyst [120]

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One of the 8-Ks a few months back talked about sustainability of nitrogen with Train A and Train B simultaneously. I assume that's been fixed, or you wouldn't be this far?

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Tom Fanning, Southern Company - Chairman, President and CEO [121]

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Yes. Here's the deal. We need supplemental nitrogen in order to basically start up both trains, but we have the technical performance profile that once we're in operation, we don't need to supplement nitrogen, that we're able to run the process and the nitrogen onsite is sufficient.

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Paul Ridzon, KeyBanc Capital Markets - Analyst [122]

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And back to energy efficiency, you keep seeing usage per customer decline. Does that plateau or does technology keep moving the bar on you enough that this can go on for several more years?

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Art Beattie, Southern Company - CFO [123]

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That's an interesting question. I think you'd have to talk about different markets, the commercial market we think it may have a little ways to go, and the residential market, it's just a matter of change-out of appliances and how many new multi-family Units are in place versus single-family homes.

That ebbs and flows over time. I think we're seeing a slowdown in construction of apartments at this point. And whether that morphs in to more single-family homes, we'll just have to wait and see.

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Tom Fanning, Southern Company - Chairman, President and CEO [124]

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But there is a natural slowing down of this effect, as you replace out HVAC and lighting, particularly in the commercial sector. So my sense is the rate of decline would slow to zero eventually, it will approach a limit, as inefficient equipment is replaced with efficient equipment. Then your profile of growth really goes to two things.

One is adding more customers, and the other really goes to things that relate to electrification. Whether that's electric transportation, or whether it's feeding the digital economy. I think there's lots of reasons why we should expect organic growth of electricity to be reasonably resilient going forward, once we account for energy efficiency.

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Art Beattie, Southern Company - CFO [125]

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I think another driver, Paul, would be the fact that 50% bonus was passed at the end of 2015, and companies are seeing low interest rates. They're using bonus. The payback on these improvements gets to be pretty quick. So that may be driving some of it in the near term.

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Paul Ridzon, KeyBanc Capital Markets - Analyst [126]

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So bonus has acted to accelerate the swap out?

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Art Beattie, Southern Company - CFO [127]

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That's a theory. Whether they're actually doing that or not, I just say it certainly would be a piece of low-hanging fruit.

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Tom Fanning, Southern Company - Chairman, President and CEO [128]

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Just to contrast with my earlier comments about tax benefits like that impacting capital decisions, Art is right. Bonus and those kinds of things typically impact short term flexible decisions, discretionary capital, as opposed to long term committed capital we'd incur with a plant or transmission line.

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Paul Ridzon, KeyBanc Capital Markets - Analyst [129]

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Got it. Makes sense. Thank you very much.

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Operator [130]

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Thank you. Our next question coming from the line of Dan Jenkins with State of Wisconsin Investment Board.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [131]

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A couple questions, first around Vogtle. The CapEx schedule that you lay out on slide 17 for new generation there, does that reflect the updated schedule you got from Westinghouse? Or did you not have time to reflect that yet?

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Tom Fanning, Southern Company - Chairman, President and CEO [132]

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No, no change for that yet. Remember, we're still reviewing what they're doing, and it's going to be a month and a half or so before we get to the bottom of what they're suggesting right now. There's a lot of uncertainty with respect to their schedule right now, in terms of our agreement to it.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [133]

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Okay. I assumed that, but I just wanted to verify that was the case. In terms of Units 3 and 4, I was wondering if you could let us know what the current critical path items are for each of those Units?

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Art Beattie, Southern Company - CFO [134]

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Still the critical path goes through the nuclear islands. On Unit 3, we're now morphing beyond just concrete and rebar, we're moving into installation of equipment, we installed the reactor vessel.

In the near term on Unit 3, we're looking at steam generator installation, at least the first of two. We will begin the reactant cooling piping, and then a little later this year, we'll get the second steam generator in, and then the initial energization of the Unit 3 site is a big deal, and that should be on the horizon as well.

Unit 4, we're still putting module walls into the reactor vessel of Unit 4. They're still pouring concrete in certain areas and setting those last modules inside the containment buildings, so that's just part of the process of where they are. I think Tom showed you the productivity of that Unit, compared to Unit 3. So we're well along our way in Unit 4.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [135]

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Do you have -- can you let us know what -- are there any of those key components that have yet to be delivered onsite, or do you still have some that are being fabricated offsite?

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Art Beattie, Southern Company - CFO [136]

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No, no, no. Everything is onsite is well as I'm aware, and I believe just getting concrete to a certain level and making sure that you're doing things in an orderly manner to support the new placements.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [137]

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Okay. One other issue I was wondering about is, I know SCANA, in one of their filings, mentioned the concern they had with the ITAAC submittal process and amount of support they were getting from Westinghouse related to the timeliness of that.

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Tom Fanning, Southern Company - Chairman, President and CEO [138]

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We love our brothers and sisters at SCANA. I would argue that our perspective on that is a wee bit different. We have led the charge in working cooperatively with the NRC to put in place something called UIN, uncompleted ITAAC notices.

If you can imagine what an ITAAC is, it's a check-out of a system in a plant, and what we've done is essentially, when you finish a system like in your house, the HVAC, you'd submit it, the test and the test results. So there's the process of the test, and the result of the test, and it would be checked off as completed.

We saw, this is some years ago, in ICU, this is one of our big risk factors. We saw a bow wave, if you will, of these ITAACs going forward.

So what we did was work with the NRC to develop this UIN, uncompleted ITAAC notice procedure, where we will essentially outline and get the NRC to agree to the process, leaving a blank for the ultimate result of the test. What that does is take an enormous amount of review off the forward calendar and puts it right here, so that when we get the test, fill in the blank, boom, check the box and move forward.

The other thing we've been working on lately is consolidating some of the ITAACs. What's the number, 892, or 75 per Unit. We think we have a way forward to knock off 200 of those per Unit, just by consolidating some things that otherwise look duplicative.

I think we've made a lot of headway there. If you go back and listen to what I've said now in these past few earnings calls, if ITAAC is one risk factor and productivity is the other, I would put the productivity risk factor at this point as much more important than the ITAAC risk factor.

It's still bears watching. We're still all over it. I would just pay more attention to productivity than ITAAC at this point.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [139]

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Okay. Good. Then the last thing I wondered is if you could give us a feel for on your financing for 2017, you have on --

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Art Beattie, Southern Company - CFO [140]

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I believe there's a slide in the appendix, Dan, that outlines our 2017 financing plan.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [141]

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I was just wondering though, for those numbers, are those pretty much spread throughout the year for the various Units, or are some more front loaded or back loaded?

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Art Beattie, Southern Company - CFO [142]

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I don't have the schedule in front of me, but we can get that information to you.

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Dan Jenkins, State of Wisconsin Investment Board - Analyst [143]

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Okay. That's all I had. Thank you.

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Operator [144]

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Thank you. Our next question is a followup question coming from the line of Michael Weinstein with Credit Suisse.

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Michael Weinstein, Credit Suisse - Analyst [145]

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Just one last question. With the liquidated damages being triggered by nuclear fueling at the end of year for 2018 for Unit 3, 2019 for Unit 4, has the proposed delay from Westinghouse, do they exceed that? Is this something that's going to be negotiated as you review whether to accept or reject the changes that they've proposed?

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Tom Fanning, Southern Company - Chairman, President and CEO [146]

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I suppose you could negotiate anything, but right now, that schedule would trigger liquidated damages.

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Michael Weinstein, Credit Suisse - Analyst [147]

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It would.

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Tom Fanning, Southern Company - Chairman, President and CEO [148]

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If you believe that gives a share. We've made no contract amendment at all.

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Michael Weinstein, Credit Suisse - Analyst [149]

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Got you. Liquidated damages specifically apply to the owner's cost, right? The $6 million a month plus $30 million in financing?

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Tom Fanning, Southern Company - Chairman, President and CEO [150]

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No, it's just one way to think about it. It's not applied to anything. It's just cash to us.

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Michael Weinstein, Credit Suisse - Analyst [151]

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Just in general. Okay. Thanks.

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Operator [152]

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Thank you. Our final question coming from the line of Ashar Khan with Visium Asset Management.

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Ashar Khan, Visium Asset Management - Analyst [153]

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I was wondering one thing that was written in the 10-K, if I can read it out, and if you can help me a little bit on the definition on one of the words. Mississippi Power has evaluated various scenarios in connection with its process to prepare the 2017 rate case, and Southern Company and Mississippi Power have recognized an additional $80 million charge to income which is estimated minimal probable amount of the $3.31 billion of Kemper IDC costs not currently in rates. That will be recovered under the probable rate mitigation plan to be filed on June 3, 2017.

Tom, can you tell me, can you guide us a little bit, what is this minimum? Is it 10% or 15%? I was trying to get a better sense of this minimum language that you used, which corresponds to this $80 million write-off.

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Tom Fanning, Southern Company - Chairman, President and CEO [154]

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Let me tag team it. The first thing is, let me make sure you get the context right. The traditional rate plan is something that we will file.

The rate mitigation plan is designed for us to hit as precisely as we can the revenue requirements that were contemplated under the original certificate. I've said it all to you before, not only does the rate mitigation plan give us the economics that the Commission thought they were getting when they certificated the plant, they will have a plant that operates under this original certificate.

So that's the big picture. Part of that rate mitigation plan assumed essentially not asking for recovery of depreciation and amortization on the 15% uncovered portion of the plant.

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Art Beattie, Southern Company - CFO [155]

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That's correct. Ashar, as you'll remember, the plant was certified at 100% level. We entered into an agreement to sell 15% of it. That was undone since, but the rate mitigation plan that we will file basically does what Tom outlined.

It recognizes that we won't charge Mississippi for the depreciation and amortization of the 15% of the asset for five years. That's what the $80 million represent.

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Ashar Khan, Visium Asset Management - Analyst [156]

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Thank you so much. That clarifies it. Thank you so much.

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Operator [157]

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

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Tom Fanning, Southern Company - Chairman, President and CEO [158]

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Just want to say this. I know we have Vogtle and we have Kemper, but if you look past these headline items, we're at a really important point, and that's what we tried to stress in our October presentation. You think about our earnings that we're forecasting forward, as we said in October, $2.90 to $3.02 with the midpoint of $2.96.

When you look at the operating companies that are state regulated, something like $2.78 of earnings of the $2.96 are coming from those entities, and that does not account for the long term contracted bilateral contract that has served us so well for so long, and have a risk profile similar to those state-regulated entities. I think from a risk-return standpoint, and therefore a value accretion standpoint, Southern Company has lengthened, strengthened, and improved its value position going forward.

We'll get Kemper started up. We'll go through the regulatory process. We'll continue to make progress on Vogtle.

I think from an investor standpoint, we're as good as we've been in many, many years. We appreciate your attention today, and we look forward to talking with you soon. Take care. Operator, that's all I have.

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Operator [159]

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Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company fourth-quarter 2016 earnings call. You may now disconnect. Have a great day.