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ALLETE’s (ALE) CEO Alan Hodnik on Q1 2016 Results – Earnings Call Transcript

ALLETE, Inc. (NYSE: ALE ) Q1 2016 Earnings Conference Call May 3, 2016 10:00 AM ET Executives Alan Hodnik – Chairman, President and Chief Executive Officer Steven DeVinck – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Capital Markets Brian Russo – Ladenburg Thalmann & Company Inc. Christopher Ellinghaus – The Williams Capital Group, L.P. Sarah Akers – Wells Fargo Securities, LLC Joe Zhou – Avon Capital Advisors Operator Good day, ladies and gentlemen, and welcome to the ALLETE Conference Call announcing the First Quarter 2016 Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Al Hodnik, Chief Executive Officer. Sir, you may begin. Alan Hodnik Well, thank you for joining us this morning. With me is ALLETE’s Chief Financial Officer, Steve DeVinck. This morning we reported our first quarter financial results that delivered earnings per share of $0.93 on revenue that was up almost 6% over last year. I am pleased with our financial performance for the quarter and believe ALLETE is well-positioned to deliver sustainable value to our shareholders. These financial results demonstrate the synergies of ALLETE’s businesses in challenging times and the strength of our strategic direction. We started this year facing headwinds similar to those in 2015 the most notable coming from a decline in power demand for Minnesota Power’s taconite customers. Our regulated businesses continue to manage costs as they have always done getting through these down cycles without compromising customer service or reliability. Additionally, our emerging and complementary Energy Infrastructure and Related Services companies posted financial results in line with our expectations and we expect further growth as they execute against their strategies. ALLETE Clean Energy and U.S. Water Services strategies are designed to capitalize on the countries desire for cleaner energy sources and conservation. This to meet changing societal expectation, regulation, and resource scarcity, additions of new wind generation facilities in Southern Minnesota and Pennsylvania last year significantly contributed to strong financial performance at ALLETE Clean Energy. ACE currently owns and operates about 537 megawatts of fully contracted wind generating capability and is well-positioned to meet the nation’s call for more renewable energy. We remain excited about the prospects for U.S. Water Services our newest member to the ALLETE family of businesses. U.S. Water experienced impressive revenue growth in the first quarter. Earnings for the Company reflect results from selling certain products, which are seasonal in nature with higher demand typically realize in warmer months. Attention to the water and energy nexus continues to increase and we believe changing regulation and societal expectations will drive growth and improved profitability for this business. Similar to ALLETE Clean Energy, U.S. Water will further balance and complement our core regulated businesses while providing long-term earnings growth. We are seeing encouraging signs relative to the steel dumping that is negatively impacted taconite production on Minnesota’s iron range. The United States Department of Commerce has made preliminary affirmative determinations in its duty and antidumping investigation; final determinations are expected in 2016. According to the U.S. Census Bureau, February 2016 year-to-date imports for consumption of steel products are down approximately 40% compared to February of 2015. Consequently, we are pleased that the import share of the domestic market has fallen from a peak of 34% in March of last year to roughly 24% of this year. Auto production in the United States remains very strong, all of this reminder that there is no lack of domestic steel demand. In addition, Cliffs Natural Resources recently reported stronger than anticipated Q1 financial results and affirmed that it will be restarting its previously idled Northshore mine in May of this year. Cliffs’ CEO, Lourenco Goncalves announced on a recent earnings call that they fully expect United Taconite to restart later this year. While NorthShore mining is not a large power customer of Minnesota Power, we are nonetheless pleased with these developments. Given nominations as we know them however in the near-term, we believe our full-year earnings will likely be in the lower half of our earnings guidance range of $3.10 to $3.40 per share. Again this expectation reflects our current view of industrial sales at Minnesota Power. The midpoint of our original earnings guidance reflected production levels in Minnesota Power’s taconite customers of approximately 35 million tons in 2016. We now estimate 2016 taconite production to be between 30 million and 32 million tons. We are preparing for our next general rate case at Minnesota Power and will be able to file later this year. Some factors affecting rate case timing decisions includes current depreciation dockets and approval of our integrated resource plan currently be for regulators and the outlook for industrial sales. We expect to have more specific information when we release the second quarter financial results. We remain committed to maintaining reasonable and competitive rates for our customers while providing a fair rate of return to our investors. I am pleased with ALLETE’s financial results for the quarter and I am confident in our ability to deliver sustainable shareholder value. I will make some additional comments after Steve takes you through the quarterly financial results. Steve? Steven DeVinck Thanks, Al and good morning everyone. Before I begin, I encourage you to refer to the 10-Q we filed earlier today for more details on the quarter. For the first quarter of 2016, ALLETE reported earnings of $0.93 per share on net income of $45.9 million and operating revenue of $333.8 million. This compares with $0.85 per share on net income of $39.9 million and operating revenue of $320 million in 2015. Earnings in 2015 included $3 million or $0.06 per share of acquisition costs related to our acquisition of U.S. Water Services in February of last year. Earnings from ALLETE’s regulated operations segment, which includes Minnesota Power, Superior Water Light and Power and our investment in the American Transmission Company were $42.4 million compared with $41 million in 2015. This year’s results reflect higher cost recovery rider revenue and lower operating and maintenance expenses mostly offset by a decrease in kilowatt hour sales and higher depreciation and property tax expenses. Our equity earnings in ATC increased $600,000 after-tax due to period-over-period changes in ATC’s estimate of a refund liability related to MISO return on equity compliance. Operating revenue from the Regulated Operation segment decreased $10.5 million or 4% from 2015, primarily due to lower kilowatt-hour sales, field adjustment cost recoveries and gas sales, partially offset by higher cost recovery rider revenue and FERC formula based rates. Revenue decreased $8.1 million due to a 5% decrease in kilowatt-hour sales. Sales to our residential, commercial, and municipal customers were lower due to warmer average temperatures this year. Heating degree days were approximately 8% lower in 2016. Sales to our industrial customers decreased 18% primarily due to reduced taconite production in 2016. Sales to other power suppliers increased 27% mostly due to more energy available for sale resulting primarily from the reduced demand from our taconite customers. Fuel cost recoveries decreased $5.5 million due to lower fuel and purchase power cost attributable to our retail and municipal customers. Revenue from gas sales at Superior Water Light and Power decreased $1.8 million as a result of warmer temperatures in 2016. Cost recovery rider revenue increased $4.7 million primarily due to the completion of our Boswell Unit 4 environmental upgrade. Revenue from our wholesale FERC regulated customers increased $1.7 million primarily due to additional environmental upgrades and other investments. On the expense side, fuel and purchase power expense decreased $9.1 million or 11% from 2015 primarily due to lower purchase power prices in kilowatt-hour sales this year compared to last year. Transmission services expense increased $1.9 million for the quarter or 13% primarily due to higher MISO related expenses. Cost of sales decreased $1.5 million or 33% from last year due to the previously mentioned lower gas sales at Superior Water, Light and Power. Operating and maintenance expense decreased $8.1 million or 14% primarily due to a sales tax refund received this year and lower salary and benefit expenses. In addition, conservation improvement program expenditures were less than the first quarter of 2015. Conservation improvement program expenses are recovered from certain retail customers resulting in a corresponding reduction in revenue. We remain committed to cost containment at Minnesota Power to reduce rate increases per customers, improve our return on equity over time, and mitigate some of the impacts of cyclicality facing our customers in taconite mining. Our 2016 earnings guidance reflected lower operating and maintenance expense due to cost control initiatives with the expectation that 2016 amounts would be 5% to 10% lower than 2014 actual amounts. We are on track to meet those expectations. Depreciation and amortization expense increased $6.2 million or 19% from 2015 primarily due to additional property, plant and equipment and service. Equity earnings in ATC increased $900,000 or 23% from last year due mostly to period-over-period changes in ATC’s estimate of a refund liability related to MISO return on equity compliance. Net income at ALLETE Clean Energy increased $3.6 million and revenue increased $11.2 million over the last year primarily due to Wind Energy facilities required in April and July of last year. U.S. Water acquired in February of last year is a leader in integrated water management to a growing number of industrial and commercial customers throughout the United States. Revenue at U.S. Water Services increased $16.9 million compared to the period from February 10, 2015 to March 31, 2015. The net loss at U.S. Water was in line with expectations and was $400,000 higher than the first quarter of 2015 which did not reflect the full quarter. The Company sells certain products which are seasonal in nature with higher demand typically realized after the first quarter. The first quarter net loss also included $300,000 of after tax expense related to purchase accounting for inventories and sales backlog. As we have discussed in previous quarters this purchase accounting adjustment has now been fully recognized. The corporate and other segment, which includes result from BNI Energy, ALLETE Properties, and other miscellaneous corporate income and expenses, reported a $2.1 million net loss this quarter compared to a net loss of $3.5 million for the same quarter in 2015. Earnings in 2015 included the $3 million or $0.06 per share of acquisition costs related to the acquisition of U.S. Water Services. ALLETE’s effective tax rate in the first quarter of this year was approximately 17% compared to about 13% in 2015. We anticipate the effective tax rate for 2016 will be approximately 17%; this could vary slightly if earnings expectations change. ALLETE’s financial position continues to be solid. Cash from operating activities increased $21.4 million for the quarter driven primarily by higher net income and non-cash expense. Our debt-to-capital ratio at quarter end was 46%. Al. Alan Hodnik Thank you for the financial update, Steve. I have a few more comments to make before Steve and I take your questions. Regarding Minnesota Power’s Energy forward initiatives we recently shared good news on Minnesota Power’s proposed great Northern transmission line. This proposed 220 mile, 500 kV line will deliver hydro generated electricity from Manitoba to Minnesota Power. In an order dated April 11, 2016 the Minnesota Public Utilities Commission approved the route permit which largely follows Minnesota Power’s preferred route including the international border crossing. The project has garnered considerable support and a final decision on the Presidential permit by the United States Department of Energy is expected in the second quarter of 2016. Minnesota Power expects to begin construction on the transmission line in 2017 and this project will provide investment and growth opportunities to the end of the decade. With respect to a natural gas generation addition Minnesota Power continues to advance the need within its resource plan currently before regulators and with other strategic partners who share a similar interest. I would like to remind everyone that these initiatives are the latest step and how Minnesota Power is advancing its energy forward strategy and the balancing of its energy supply towards one-third renewable, one-third natural gas and one-third coal by the early 2020. Regarding new industrial load in our region, I have constructive news for PolyMet’s proposed copper, nickel, and precious metal mining operation in Northeast Minnesota. The Minnesota Department of Natural Resources issued its record of decision on March 3 of this year finding the final EIS adequate. The time to appeal that adequate EIS adequacy determination has expired and on April 19 the Department of Natural Resources initiated their required free application, public information hearing near the mine site. With this required step complete formal submission of permit applications by PolyMet can now occur. Once records of decisions by the federal and state agencies on the necessary permits are received PolyMet could move forward with its plans to construct and operate the mine. Minnesota Power could begin to supply between 45 and 50 megawatts of new load to a 10-year power supply contract that would begin upon start up of the mining operations. Essar is again in the midst of seeking financing to complete their Minnesota project. As you will recall the Essar facility will result in approximately 110 megawatts of new load in Minnesota Power’s fulfill municipal segment once it reaches full production levels and by taking service from the City of Nashwauk. Given the quality of the ore body and the billion plus dollars investment made to date we maintain a view that it is not a matter of if but when the Essar project moves to commercial operations. Further just last week Cliffs Natural Resources publicly shared a view that the Essar site is favorable for a direct reduced iron facility, which is an enhanced product suitable for use in electric arc furnaces. Regarding our complementary Energy Infrastructure and Related Services businesses, ALLETE Clean Energy is positioned for earnings growth in 2016 as a result of the wind energy facilities it acquired during 2015. Opportunities within the renewable space remain very strong and ACE will continue to target acquisitions of existing facilities which have long-term power sales agreements in place. U.S. Water Services will further complement our core regulated operations, balance our exposure to business cycle and changing demand and provide earnings growth over the long-term. The Company will continue to look for strategic tuck-in acquisitions which expand its geographic reach, add new technology or deepen its capabilities to service expanding customer base. All of us at ALLETE are excited about our prospects and the opportunities to create shareholder value. Thank you for your continued confidence and your investment with us. At this time, I’ll ask the operator to open up the line for your questions. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from the line of Paul Ridzon with KeyBanc. Your line is now open. Paul Ridzon Good morning. Alan Hodnik Good morning, Paul. Paul Ridzon What’s the status of – you had talked about special rates for energy intensive customers. Is that still a viable option? Alan Hodnik It still is. The Minnesota Public Utilities Commission took up the docket initially here in the first quarter of the year and ultimately determined that they did not have enough information and Utility Kilowatt rejected it without sort of discrimination against it in that sense. And so we’re positioned right now and working with our customers to resubmit the EITE where that’s known here in Minnesota to our regulators and would hope to get that to the regulators again sometime in the early spring or mid spring here as we go off into the summer. Paul Ridzon And Al, I think I heard you say you will be filing a rate cases here, is that correct? Alan Hodnik We will be able to file a rate case later this year, yep. Paul Ridzon And how does that targeting with the energy intensive customers, there just be two separate processes? Alan Hodnik While the EITE was a piece of special legislation that was passed by the Minnesota Legislature of course and signed by Governor Dayton into law to help paper customers and taconite customers with their competitiveness challenges that they’re facing. And so that has its own docket if you will or its own pathway with the regulators. It could ultimately get a part of the conversation inside of a rate case because after all it is a rate design question, but the EITE is on its pathway and it’s collateral to or connected to any rate case that we might file later this year. Paul Ridzon So you’re still not committing to file a rate case, you are still prepared to file one if need to be? Alan Hodnik We are going to be able and ready to file a rate case and as we said timing around that really is stemming from sort of more clarity on filings that we have before our regulators in the moment. We have depreciation filings before our regulators right now that are very important to the Company, of course we have our integrated resource plan before the commission at this point in time. We expect to hear on that shortly. And then as I say, we have this industrial loan growth and demand situation here in the region that we continue to manage, but also we’re going to be able and ready to file a rate case in the fall if we need to. We’ll have more clarity on that after our second quarter earnings call. Paul Ridzon Understood. Thanks for clearing that up. What was your previous expectation for tonnage of taconite? Steven DeVinck Our original guidance – Paul this is Steve, good morning. Our original guidance, the midpoint had approximately 35 million tons. Paul Ridzon Okay. Thank you very much. Alan Hodnik Thanks, Paul. Operator Thank you. And our next question comes from the line of Brian Russo with Ladenburg Thalmann. Your line is now open. Brian Russo Hi, good morning. Alan Hodnik Good morning, Brian. Brian Russo How does the 30 million to 35 million tons of taconite production assumption – how does that correlate with the present nominations which I believe are set at 80% for the next few months? Steven DeVinck So our updated information this morning were we expect taconite production to be in the 30 million to 32 million ton range would generally correlate with that 80% of total production number that you’ve seen from us here in the last quarter or two. Brian Russo So then what’s changed because I believe the last time you reaffirm to guidance we were at 80% as well? Is it just fine tuning the sensitivity? Steven DeVinck Well, the last time we talked that 80% was for the first four months of the year. We have a better insight into the remaining eight months of the year or an insight or expectation as to what that maybe, so with that insight into the later – in the left eight months of the year we now think taconite production will be reduced from 35 million tons at original expectations to 30 million to 32 million. Brian Russo Okay, got it. And just is there any update on the Boswell depreciation study when might we expect an outcome? Steven DeVinck Yes, as you know in conjunction with Minnesota Power’s Energy forward plan and the related extensive environmental upgrades completed at our Boswell generating facility, we filed for depreciation use of life extensions earlier this year. The requested useful life extension would decrease annual depreciation expense by approximately $20 million and have a rate increase mitigating effects for our customers both immediate and longer-term. We are proposed to provide immediate customer benefit for approximately one-third of the annual expense reduction through our environmental cost recovery rider. The remainder will help mitigate future rate increase needs. The Minnesota Department of Commerce requested and was granted a postponement of the proceeding until August. Brian Russo And did they give a reason why? Steven DeVinck No, we are not certain, but we think it just might be the status of other workload initiatives in front of them. Brian Russo Okay, great. And has there been any change to the property net book value relative to your 10-K? Steven DeVinck No. Brian Russo Okay. And then lastly could you elaborate a little bit more on the ALLETE Clean Energy project pipeline? Alan Hodnik Well, this is Al. Brian, the pipeline remains strong both on the wind and solar side existing assets are positioned for sale or original developers want to move on. So I’m not going to get specific this morning about projects that we are looking at or locations that we are looking at, but I would say again that the pipeline remains very, very strong both on the solar and on the wind side. The ACE has plenty of opportunities before it and right now the team over there is parsing the opportunities that they have in the past and fully expect to have more opportunities later this year for us to assess at the ALLETE corporate level and potentially make investment in. Brian Russo Okay, great. Thank you. Alan Hodnik Thank you. Operator Thank you. And our next question comes from the line of Chris Ellinghaus with Williams Capital. Your line is now open. Christopher Ellinghaus Hey, guys. How are you? Steven DeVinck Hi, Chris. Alan Hodnik Good morning. Christopher Ellinghaus Couple of questions, have you got any updates on activity with the ALLETE properties? Steven DeVinck No, nothing really new to report. We continue to see about the same level of activity that we saw in 2015, so we’ll see how the year progresses. Christopher Ellinghaus Okay. And given the acquisition costs that were incorporated another in the first quarter last year; it looks like there was a material decline in adjusted earnings. Can you give us some color on that? Steven DeVinck So the acquisition costs were about $0.06 per share, our earnings per share this year were $0.93 versus $0.85 last year. So if we adjusted for that $0.06 I guess it would be $0.93 versus $0.91 last year. Christopher Ellinghaus No, I meant just in the corporate and another segment, if you take out the $3 million from last year’s first quarter it would’ve been a loss of more like $0.5 million. So there was some significant decline there versus last year adjusted so maybe 2.1 versus minus 0.5 last year. So what was the delta there? Steven DeVinck Yes, I see. So you’re correct, the acquisitions cost of $3 million were in there last year, this year we have just more general corporate interests and taxes, so we have higher interest expense of rate around $0.5 million. We also I’m going to get into ALLETE’s here a little bit but if you look at some of our disclosures we have a contingent purchase obligation for U.S. Water that is discounted and then accreted over time through 2019 when that buyout happens. So there’s accretion expense of about 600,000 related to that that is more than last year. And we have some period to period income tax allocations of probably another $0.5 million or so. So it’s miscellaneous things like that. Christopher Ellinghaus Okay great. And as far as the guidance on taconite production can we infer that a significant portion of your decline in expectations is just related to the timing of United Tac coming back? Steven DeVinck Yes. Christopher Ellinghaus Okay. Great. Thanks for the color. Alan Hodnik Thanks Chris. Operator Thank you. And our next question comes from the line of Sarah Akers with Wells Fargo. Your line is now open. Sarah Akers Hey, good morning. Alan Hodnik Good morning, Sarah. Sarah Akers With the latest news on PolyMet and Essar can you update us on the current expectation for the in-service dates there? Alan Hodnik Well, it’s a little difficult with both these to do that I guess Sarah the PolyMet process we’re very encouraged about at the moment. The fact that the EIS adequacy determination and decision by the agencies was not litigated in any way is very good news for PolyMet and somewhat unprecedented to in terms of mining in Minnesota at least with regards to that. On the permit processes themselves have a bit more of a defined timeline both from the Federal Government side and also the state, so unlike the EIS which had a much more sort of expansive process if you will in an undefined timeline, the permit processes are tighter of course it was financing that the Company needs to obtain as well. And so I don’t know that I can give you anything more than what PolyMet expressed already that you know they would hope to be moving forward of permitting in the later part of 2016 here and into 2017 and then hopefully with construction and the timing of finance and all the rest would be operating sometime in 2018 would be kind of I’d think there are commentary or what I’d see basically on their webpage with respect to their latest observations. Essar, of course is about 1 billion plus ton and Essar continues to try to work on it’s financing if you will to put the rest of the project together. We are certainly not expecting any production from Essar in the kind of early 2017 timeframe as they put their financing togetherness construction is played out up there. So that’s the best I can offer with respect to PolyMet and Essar. Sarah Akers Got it. Thank you. And then on the upcoming rate filing should we expect a multi-year rate plan with step-ups in years two and three or will this just be a one-year filing? Steven DeVinck So we are working through that rate now. I have nothing really to announce on the specifics here today. As Al mentioned, when we announce second quarter results, we will have more specifics on the timing amount and some of the other factors in a rate case. So we’re still working through that. Sarah Akers Got it. And then one more, can you just remind us of ALLETE’s deferred tax position and whether you are a cash taxpayer now and if not how many years you expect to be a non-cash taxpayer with bonus and renewable credits? Steven DeVinck Yes, so we are not a cash taxpayer right now because of all the factors you just indicated. I believe our current projections are that we will run through those net operating loss carry-forwards in 2018 or 2019. Sarah Akers Great. Thank you. Steven DeVinck Thank you. Alan Hodnik Thanks, Sarah. Operator Thank you. [Operator Instructions] And our next question comes from the line of Joe Zhou with Avon Capital. Your line is now open. Joe Zhou Hi, how are you? Good morning. Alan Hodnik Hi, Joe. Steven DeVinck Good morning. Joe Zhou Good morning. So I just want to make sure my model is correct. Is that – so now the taconite production is reduced to 30 million to 32 million tons for the year? So is that still a rule of thumb that reduced $0.03 per million tons for taconite production on your [earnings per] share? Alan Hodnik Yes, that rule of thumb generally still holds. Joe Zhou Okay. So your original guidance was like $3.10 to $3.40 and with – and the original taconite production was 35 million and now reduced to a midpoint of 31, so there is 3 million tons. So that should reduce your regional guidance by roughly $0.12 for the rate should be roughly $2.98 to $3.28 so that’s my calculation. And now you say that the earning will be in the bottom half of the guidance, so there is $3.10 to $3.25 so I assume that the lower end lift by $0.10 is that because of the rate case? Steven DeVinck No I don’t think your math is quite accurate. So our original guidance contemplated, the midpoint contemplated taconite production of approximately 35 million tons, so the midpoint would’ve been $3.25. Joe Zhou Okay. Steven DeVinck So that was the midpoint, so now we are expecting taconite production to be $0.30 to $0.32 so you got to subtract that delta from that midpoint. Joe Zhou Okay, okay. Steven DeVinck That’s how we get in the lower… Joe Zhou It’s not the linier relationship that can now do that back-of-the-envelope calculation I guess. Okay, so and on the timing for the rate case can you remind us that you said you would be able to file later this year. Are you talking about the second half of this year or like towards the end the year? Steven DeVinck We don’t have the specific month yet that we’re ready to disclose at this time, some of the factors affecting rate case timing include decisions on our open depreciation docket, approval of our integrated resource plan which is expected in June and really the outlook for industrial sales, but we do expect to have more specific information when we release second quarter financial results. Joe Zhou Okay, great. Thank you very much. Steven DeVinck Thank you. Alan Hodnik Thank you. Operator Thank you. And our next question comes from the line of Brian Russo with Ladenburg Thalmann. Your line is now open. Brian Russo Yes, just curious are you able to file for interim rates in the Minnesota rate cases? Steven DeVinck Hi, Brian, yes. So the way it works in Minnesota is once the filing is being complete 60 days later interim rates would go into effect of course subject to refund. Brian Russo Okay, so they automatically going to effect is not like you have to request interim rates? Steven DeVinck Well, we will certainly request and they will automatically going to effect. Brian Russo Okay, got it. And then just within the guidance range might be at the lower end of the range, is there any assumption made on the outcome of the Boswell extension wise study? Steven DeVinck No, we are assuming nothing for that. Brian Russo Okay, great. Thank you very much. Steven DeVinck Thank you. Alan Hodnik Thanks Brian. End of Q&A Operator Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Mr. Al Hodnik for closing remarks. Alan Hodnik Well, Steve and I thank you again for being with us this morning and we certainly thank you for your investment and interest in ALLETE. We hope to see some or all of you on our travel throughout the summer. Thank you very much. Steven DeVinck Thank you. Operator Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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Public Service Enterprise’s (PEG) CEO Ralph Izzo on Q1 2016 Results – Earnings Call Transcript

Public Service Enterprise Group Inc. (NYSE: PEG ) Q1 2016 Earnings Conference Call April 29, 2016 11:00 AM ET Executives Kathleen Lally – Investor Relations Ralph Izzo – Chairman, President and Chief Executive Officer Dan Cregg – Executive Vice President and Chief Financial Officer Analysts Neel Mitra – Tudor, Pickering Paul Patterson – Glenrock Associates Michael Weinstein – UBS Travis Miller – Morningstar Greg Gordon – Evercore ISI Jonathan Arnold – Deutsche Bank Gregg Orrill – Barclays Michael Lapides – Goldman Sachs Praful Mehta – Citigroup Ashar Khan – Visium Asset Management Shahr Pourreza – Guggenheim Partners Michael Goldenberg – Luminous Ben Budish – Jefferies Operator Ladies and gentlemen, thank you for standing by. My name is Brent, and I’m your event operator today. I would like to welcome everyone to today’s conference, Public Service Enterprise Group’s First Quarter 2016 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session for members of the financial community. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, April 29, 2016, and will be available for telephone replay beginning at 2 O’clock PM Eastern today until 11:30 PM Eastern on May 6, 2016. It will also be available as an audio webcast on PSEG’s corporate website at www.pseg.com. I would now like to turn the conference over to Kathleen Lally. Please go ahead. Kathleen Lally Thank you, Brent. Good morning, everyone. Thank you for participating in PSEG’s call this morning. As you are aware, we released our first quarter 2016 earnings statements earlier today. The release and attachment are posted on our website at www.pseg.com, under the Investors section. We also posted a series of slides that detail operating results by company for the quarter. Our 10-K for the period ended March 31, 2016, is expected to be filed shortly. Please read the full disclaimer statement and the comments we have on the difference between operating earnings and GAAP results. As you know the earnings release and other matters that we will discuss in today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties, and although we may elect to update forward-looking statements from time-to-time, we specifically disclaim any obligation to do so, even if our estimates change, unless of course we’re required do so. Our release also contains adjusted non-GAAP operating earnings as well as adjusted EBITDA for PSEG Power. Please refer to today’s 8-K for our other filings for a discussion of the factors that may cause results to differ from management’s projections, forecast and expectations and for a reconciliation of operating earnings and adjusted EBITDA to GAAP results. I would now like to turn the call over to Ralph Izzo, Chairman, President and Chief Executive Officer of Public Service Enterprise Group and joining Ralph on the call is Dan Cregg, Executive Vice President and Chief Financial Officer. At the conclusion of their remarks, there will be time for your questions. Thank you. Ralph Izzo Thank you, Kathleen, and good morning everyone and thank you for joining us today. PSEG delivered solid results for the first quarter in the face of rather mild winter temperatures and low prices for natural gas and energy. Earlier this morning, we’ve reported operating earnings for the first quarter of 2016 of $0.91 per share versus operating earnings of $1.04 per share in last year’s first quarter. Extreme temperature differences between the first quarter of this year and the first quarter of last year provides the backdrop for this quarter’s operating results. The first quarter of 2016 was 10% warmer than normal and the fifth warmest on record. The month of March in particular was extremely mild with heating degree days 25% lower than normal. Weather for the first quarter was also 27% warmer than the first quarter of 2015, but last year was the coldest on record. Our results were strong in the face of this headwind. PSE&G’s execution on its expanded capital investment program continues to provide a growing source of earnings. PSE&G is expected to invest $3 billion in 2016 as part of its five-year $12 billion capital program. Transmission is the largest part of PSE&G’s effort, representing 60% of planned spending. PSE&G’s investment program and a continued focus on controlling costs will help drive our forecast for double-digit growth in PSE&G’s 2016 operating earnings. PSE&G’s execution of our capital program is expected to yield best-in-class growth rate in rate base of 8% per year for the five-year period ending 2020. PSEG’s continues to develop a pipeline of investment opportunities that also meet New Jersey’s policy objectives and have customer support. Now as for PSEG Power, it has been focused on operating in an environment of low gas prices for years. The availability and low price of gas and the need to meet more stringent reliability requirements has added new urgency to the company’s efforts to improve its cost structure and efficiency. Power’s capital program also represents an important response to today’s market. Power’s $2 billion of investment in three new combined cycle gas turbine will add approximately 1,800 megawatts of clean, reliable and efficient capacity to its fleet. Construction of the KEC plant in Maryland and the Sewaren Unit in New Jersey are on schedule to meet their 2018 operating date. Bridgeport Harbor is expected to be available for 2019 commercial operation date. The addition of this new capacity will transform Power’s fleet. Power’s base load nuclear capacity will be complemented by a flexible low cost fleet of combined cycle gas units capable of responding to the market. The fleet’s carbon footprint is also expected to decline with the addition of the new clean gas fired capacity as nuclear generation continues to represent approximately 50% of the fleet’s output. As I said, we remain focused on operating efficiently and safely. PSEG Power has made judicious reductions in its nuclear workforce and is working closely with the industry to identify additional means of reducing its cost structure to assure the availability of this clean nuclear resource well into the future. Our goal is to capture these savings for the year to help offset the impact of low gas prices on earnings. Separately from operations, we were very pleased with some recent actions in defense of competitive markets. In particular, we were delighted with the U.S. Supreme Court’s unanimous decision affirming the Fourth Circuit decision in Hughes versus Maryland. Since that decision the U.S. Supreme Court also dismissed the New Jersey case allowing to stand the lower court ruling that the so called LCAP contracts are unconstitutional. A recent action at FERC is also constructive. I am referring to the orders issues by FERC earlier this week, granting the complaints filed by EPSA and others, which called into question some approvals, granted by the Public Utility Commission of Ohio. A separate complaint brought by a number of generating companies regarding the scope of the minimum offer price rule under RPM is till pending at FERC. While owners of existing assets without of market contracts will not be directly restricted in the upcoming base residual auction regarding how they can bid the affected units. The lack of certainty regarding FERC approval of such contracts should at least neutralize some if not all of the incentives under the contracts to bid without regard to the unit’s actual cost of operations. We believe that a competitive market is the best approach for ensuring that there is a supply of electric capacity to meet customer demand at the lowest cost. Our companywide efforts are focused on building an infrastructure that improves system reliability, reduces emissions and supports the needs of customers. Our strategy is working and it is made possible by the contribution from our dedicated employees, who support our efforts in countless ways. Their focus on the mission of providing safe and reliable energy has allowed us to meet the needs of customers and shareholders. We are maintaining our operating earnings guidance for the full year of $2.80 to $3 per share. Our guidance assumes normal weather for the remainder of the year. As we move forward, the weather and market conditions during the third quarter will be important for both PSEG Power and PSE&G. Current market conditions and the complete absence of a winter require that we maintain our relentless focus on identifying cost efficiencies and maintaining strong operating performance. With that I’ll turn the call over to Dan, who will discuss our financials in greater detail. Dan Cregg Thanks you, Ralph, and good morning everyone. As Ralph said, PSEG reported operating earnings for the first quarter of 2016 of $0.91 per share versus operating earnings of $1.04 per share in last year’s first quarter. On Side 4 we’ve provided you with a reconciliation of operating earnings to net income for the quarter and we’ve provided you with information on Slide 8 regarding the contribution to operating earnings by business for the quarter. Additionally, Slide 9 contains a waterfall chart that takes you through the net changes quarter-over-quarter and operating earnings by major business. And I’ll now walk through each company in more detail. For PSE&G, shown on slide 11, we reported operating earnings for the first quarter of 2016 of $0.52 per share compared with $0.47 per share for the first quarter of 2015. PSE&G’s first quarter results reflect the impact of revenue growth associated with an expansion of its capital investment program, which will more than offset the effect of unfavorable weather conditions on electric and gas demand. Returns on PSE&G’s expanded investment in transmission added $0.04 per share to earnings in the quarter and the first quarter also benefited from the recovery of revenue on PSE&G’s distribution investment under its Energy Strong program. This increase in revenue improved quarter-over-quarter earnings comparisons by a $0.01 a share As Ralph mentioned, weather in the first quarter was warmer than normal and significantly warmer than conditions experienced last year. The negative impact of the extreme differences in weather on gas demand in revenue quarter-over-quarter was largely offset by the gas weather normalization cost. A decline in our electric sales in revenue however as a result of the extreme differences in weather reduced quarterly earnings comparisons by $0.02 per share. Lower taxes more than offset an increase in O&M expense due to the absence of insurance recovery of storm costs received in the year ago quarter. These items together added $0.02 per share to quarter-over-quarter earnings. Economic indicators continue to improve. Employment in New Jersey has increased for 28 consecutive months as the unemployment rate has declined to 4.3% and the housing market has also experienced an improvement. However, this improvement in economic growth was outweighed during the quarter by a mild weather. The variability in quarterly data for weather normalized electric and gas sales has been high given the extreme weather conditions making it difficult to discern a trend in demand when analyzing just the quarterly data but data for the trailing 12 months indicates weather normalized electric sales were flat for the period ended March of 2016. And in terms of weather normalized gas demand a 0.3% decline in sales in the first quarter was led by 1.5% decline in heating demand from the residential sector which also is influenced by the large weather adjustment quarter-over-quarter. But on a trailing 12-month basis gas sales increased by 1.8% year-over-year. PSE&G capital program remains on schedule and PSE&G invested approximately $725 million in the first quarter as part of its planned $3 billion capital investment for 2016. Also as you may recall PSE&G implemented $146 million increase in annual transmission revenue under the company’s transmission formula rate filing which took effect this past January. This increase in revenue adjusted to reflect the impact of bonus depreciation and updates of spending in prior years will be reflected in PSE&G’s earnings throughout the year. We’re maintaining our forecast of PSE&G’s operating earnings for 2016 of $875 million to $925 million. Moving to Power, as shown on slide 18, PSEG Power reported operating earnings for the first quarter of $0.36 per share and adjusted EBITDA of $416 million compared with $0.55 per share and adjusted EBITDA of $626 million for the first quarter of 2015. Adjusted EBITDA excludes the same items as our operating earnings measure as well as income tax expense, interest expense, depreciation and amortization and major maintenance expense at Towers Fossil generating facilities. The earnings release and slide 19, provides you with a detailed analysis of the impact on Power’s operating earnings quarter-over-quarter. We’ve also provided you with more detail on generation for the quarter on slide 21. PSEG Power’s first quarter results were impacted by the extremely mild weather conditions experienced this year in comparison to the year ago period. A decline in capacity revenue associated with the June 2015 retirement of the HEDD or High Electric Demand Date peaking units in PJM reduced quarter-over-quarter earnings by $0.04 per share. Lower output due to the mild weather conditions coupled with lower average prices on energy hedges reduced quarter-over-quarter earnings by $0.09 per share. And a weather related decline in total gas send out to commercial and industrial customers and lower prices combined to reduce quarter-over-quarter earnings on gas sales by $0.12 per share. Lower O&M expense improved quarter-over-quarter earnings by $0.05 per share and a reduction in interest expense added $0.01 to earnings per share. Now let’s turn to Power’s operations. Output from Power’s fleet declined 9% in the quarter as a result of the reduced demand and lower wholesale market prices. Output from the coal fleet reduced during the first quarter a decline of 1 terawatt hour from 2.5 terawatt hours in the year ago quarter as low gas prices affected the dispatch of coal. Output from the combined cycle fleet declined 0.2 terawatt hours to 3.7 terawatt hours with the decline in demand. The nuclear fleet however experienced a 0.6 terawatt hour improvement in output to 8.4 terawatt hours for the quarter. The fleet operated at an average capacity factor of 99.7% in the quarter and the nuclear fleets performance benefited from an improvement in availability at Salem as well as an increasing capacity at Peach Bottom. You may recall that the extended power upgrade work was completed at Peach Bottom last year and this work added 130 megawatts to our share of the station’s capacity. Power’s gas fired combined cycle fleet has access to low cost gas which continues to provide it with an advantage relative to market prices. However, the lack of demand and a lack of volatility in the market given the mild weather in an excess supply of gas pressured spot spreads which were significantly lower compared to last year’s levels. Overall Power’s gross margin declined to $43.80 per megawatt hour from $47.32 in the year ago quarter. Power is revising its forecast of output for 2016 to 52 terawatt hours to 54 terawatt hours from its prior forecast of 54 to 56 terawatt hour. The updated range for output incorporates the impact of the abnormally warm weather in the first quarter. This range also incorporates an anticipated expansion of the Salem 1 refuelling outage. A visual inspection during the current refuelling at Salem 1 which began on April 14 revealed damage to a series of bulbs located inside the reactor vessel. The need to conduct further testing to repair and replace the bulbs is expected to expand the refuelling outage. To provide some context as a rule of thumb, a delay in Salem’s refuelling outage of 30 days would reduce generation by approximately 0.5 terawatt hour. And under this scenario nuclear fleets’ capacity factor for the year would be reduced by about 1.5% to 91% from the current forecasted capacity factor of 92.5% for the year and the actual outage duration will be determined after ongoing inspection work is completed. As shown on slide 24 approximately 70% to 75% of anticipated production for the April to December period of 40 terawatt hours is hedged at an average price of $49 per megawatt hour. Our open position for the reminder of 2016 is more than adequate to cover the potential for a decline in output at Salem from our original forecast. For 2017, Power’s hedged 50% to 55% of its forecast generation of 54 terawatt hours to 56 terawatt hours at an average price of $49 per megawatt hour. And for 2018, approximately 20% to 25% for the forecast generation of 59 terawatt hours to 61 terawatt hours is hedged at an average price of $49 per megawatt hour. The forecast increase in generation in 2018 reflects the commercial operation of the Keys and Sewaren combined cycle units. The hedge data for 2016 continues to assume PSEG’ hedges representing 11 terawatt hours to 12 terawatt hours. As we mentioned to your last quarter, there are items included in our average hedged price which influence Power’s revenue but not support Power’s gross margin. Our average hedge price for the remainder of 2016 reflects an increase in cost elements such as transmission and renewables associated with serving our full requirement hedge obligations. The increase year-over-year in these non-margin revenue items is approximately 1 megawatt hours to 2 megawatt hours. We continue to forecast operating earnings for Power in 2016, of $490 million to $540 million and the forecast for operating earnings represents adjusted EBITDA of $1.320 billion to $1.4 billion for the full year which compares to $1.563 billion of adjusted EBITDA in 2015. I’ll briefly address as well enterprise and others’ operating results and for the first quarter we reported operating earnings of $0.03 per share compared with operating earnings of $0.02 per share recorded last year in the first quarter. The increase in operating earnings quarter-over-quarter reflects contractual payments associated with the operation of PSEG Long Island and certain tax items that PSEG Energy Holdings and we continue to forecast full year operating earnings for 2016 from PSEG, Enterprise and Other of $60 million. And finally with respect to financings and other, PSEG closed the quarter with $592 million of cash on the balance sheet with debt at the end of March representing 44% of our consolidated capital. During the quarter, PSE&G issued $850 million of securities consisting of $300 million of five-year notes at 1.9% and $550 million of 30-year notes at 3.8% while redeeming a $171 million of long-term debt. And we remain in a position to finance our current capital program without the need for the issuance of equity. We continue to forecast operating earnings for the full year of $2.80 to $3 per share. That concludes my comments and I will now turn the call back over to the operator for your questions. Question-and-Answer Session Operator Ladies and gentlemen, we will now begin the question-and-answer session for the members of the financial community [Operator Instructions] Your first question comes from the line of Neel Mitra with Tudor, Pickering. Please go ahead. Neel Mitra Hi, good morning. Ralph Izzo Good morning, Neel. Neel Mitra I just had a quick question on the lower generation in the first quarter from the milder weather, is that actually a net negative or a positive because you could not wanted to lead and then procure the power at a lower cost to fulfill the financial hedges? Ralph Izzo So the hedges are supplied at a lower cost even though we’ve locked in the price, so that’s good news. But as you know, we’re naturally long, so whenever demand is down that creates a drag for Power, is a more modest drag on the utility, it has a whether normalization on the gas business, but no such thing on the electric business. So reduced demanded due to mild whether would create a slight drag there. Neel Mitra So the opened position on Power is hurt just because it’s not running as much is that the way to look at that? Ralph Izzo Yes. That’s right. So you have lower dispatch prices, we have lower, lesser amount of run time. Neel Mitra Okay. And second question, I know you have a small stake in the PennEast Pipeline. Can you remind us when you have that going into service and then there have been recent reports on possible delay, what your thoughts are on that? Ralph Izzo So we have 10% position and we are now forecasting late 2018. Neel Mitra And what were you forecasting earlier? Ralph Izzo Late 2017. Neel Mitra Okay, great. Thank you. Ralph Izzo You’re welcome, Neel. Operator Your next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead. Paul Patterson Good morning. Ralph Izzo Good morning, Paul. Paul Patterson On the Salem implant and I apologize I heard you talk about, but I just want to make sure I understood it. How long is the extended outage that you guys are now expecting? Ralph Izzo So we don’t know yet Paul. The outage started I think it was April 14 and that would have been a fairly standard refuelling outage. We normally don’t give dates on that for obvious reasons due to market sensitivity. But we are in the middle right now of doing some testing to see how many of the bolts are damaged. And so until we finish that we won’t know exact how long the outage is, but I should point out even when we know we typically don’t announce that to the marketplace. Paul Patterson Okay. And then with – and you are still looking at how many bolts or what percentage of bolts have problems. Ralph Izzo That’s right. Paul Patterson And is there any read through to any other units do you think or any other sort of sense for about this? Ralph Izzo Yes, I mean so clearly Salem 2, but we did inspect Salem 2 in 2015, because I mean this is an industry, problem it’s been around since I think 1998, so this is not something that is unique to us or unheard of before. But if Salem 2 pass visual inspection in 2015 and Salem 1 was scheduled to have the more intrusive inspection in 2019, but we’re couple of years ahead of schedule there. I just remind you Salem 2 is six years younger than Salem 1 to the extent that this is a degradation over time that should have an influence. Paul Patterson Okay, thanks so much. Ralph Izzo No problem, Paul. Operator Your next question comes from the line of Michael Weinstein with UBS. Please go ahead. Michael Weinstein Hi, Ralph, how are you doing? Ralph Izzo Good. Michael Weinstein Hey, recently we saw ConEd enter agreement to purchase gas storage and pipeline assets in Pennsylvania and New York and we’ve also seen other large utilities making large acquisitions of gas assets and utilities. And given the PennEast interest that you have already what is your view on the current market for gas related acquisitions and what’s your own interest in expanding further? Ralph Izzo Yes, I would say that our interest in expanding further is low to zero. In terms of our position in PennEast, high candidly every gas LDC in New Jersey has a position in that and we just thought that it was important to help participate and bringing those consumer benefits to our gas customers as you know PSE&G has almost two million gas customers. It’s a really different business, Michael. I serve on a board of the company that’s involved in the pipeline business and I just think we’re really good at the netting that we do and I would like to stick to that. So, I’m not second guessing others, please don’t misinterpret. I mean they have their own unique reasons for moving in that direction. But typically the corporate structure is different there, mostly MLPs, they have a fairly different financial proposition and they are not without their challenges nowadays as well. So that may be a great time to go in to buy in. There is a graph of those citing challenges associated with this, we are experiencing that in PennEast. That was a major pipeline. And I am sure you are aware of in New York state obviously had an unpleasant surprise. So it’s a very challenging business with fairly different DNA than what we have in our company and I like the DNA and the match that our company has with the operations that we are responsible for. Michael Weinstein Does the current PE’s and the gas utility space on the LDC space, does that also put you off in terms of future opportunities? Ralph Izzo Yes. So that’s a different subject, but the short answer to that is yes. I mean, I understand that debt is fairly inexpensive. Dan, hopefully impressed you with the numbers he reported for our utility. And you can make acquisitions accretive at very, very attractive premiums to the target. But the question really is that obvious just because money is relatively inexpensive what are the alternative uses for that and simply paying a very, very rich premium and still having accretion may not be your best choice and we’ve been very clear. Our priorities are number one organic growth and number two supporting the dividend and then number three will be share repurchase. As I have said to many people paying a 20 plus PE to someone seems to me to be a bad idea when I know a great company that’s treating at a 14 or 15 PE that has the ticker symbol PEG. So again hopefully [indiscernible] because it’s the second guessing critical above the decisions, but those are the ones I am comfortable for us. Michael Weinstein Okay. One last question, in terms of the partnership with Vectren for competitive transmission in MISO, do you see any other opportunities to part with other local utilities for similar type of partnerships? Ralph Izzo Yes. So I can’t disclose any of that we haven’t public disclosed. But there is an approach that we are eager to pursue. I think that there is lot of value to be had by combining forces with someone who understands the local transmission grid and system with our expertise now having put over $2 billion to work on annual basis for good number of years in terms of cost and schedule management on transmission construction. I am very proud of our team and the work that they have done, but we don’t know the system everywhere in the country, such to the extent that we combine our project management as skills in our construction management know how with people systems knowledge that’s a win-win for everyone. Operator Your next question comes from the line of Travis Miller with Morningstar. Please go ahead. Travis Miller Hi, thanks. Ralph Izzo Hi, Travis. Travis Miller I wanted to think a little bit more about the $0.12 on the lower gas send out and fixed cost recovery business. How much is that just pure volume and how much is there something else there, either margin contractions there or some other factor there that might not be directly weather related? Ralph Izzo I ask Dan if he knows the split between the two. I mean, my short answer is it’s a combination of both. Dan Creeg And that’s right. I mean, Travis, I guess the way that may be the best way to try to think about where we are from that $0.12 impact that we saw this quarter is if you were to look at each of the last couple of quarters, you would have seen last year and the year before, there was a $0.05 and a $0.04 benefit that we picked up additively over the last two quarters. So, it’s very much the absence of a winter which has impact both on pricing and on volumes. I think the volumes were down about a third and when you have that impact as well as a margin compression. We really also didn’t see much volatility which doesn’t help in that market. So they all were contributions to the delta that you saw for this quarter. Travis Miller Okay, great, that’s helpful. And then Ralph without too much a dissertation here, you guys have put a lot of eggs in the transmission baskets certainly, previously and for the next three to five years. What are your thoughts on storage and how that might disrupt the transmission plans or alternatively offer you guys investment opportunities that wouldn’t be in transmission but could be in storage? Ralph Izzo Sure, I am a still sort of smarting from your suggestions that I am a bit long way [indiscernible]. Travis Miller I am interested in the dissertation, just not this morning. Ralph Izzo [Indiscernible] There is a lot we’re having. I literally just came for a presentation two weeks ago by a director of Lawrence Berkeley Labs on storage. And his claim, don’t ask me his name because I don’t remember but he is easy to look up, is that at least factor of too away from grid connected storage that makes the economic sense and what he has found is that that translates into anywhere from a 10-year to 20-year timeframe. Of course when you are talking about material science research event it’s difficult to put up with precision but we are agnostic Travis about what hardware one puts in place to serve customers. So I don’t care if its copper wires, super conducting ceramic wire, lead acid batteries, lithium batteries, slow batteries, I am running out of technologies to stop lathering and I am starting to tread on dissertation time frames but we were more than happy to pursue things that have economic merits that provides the reliability our customers are demanding. Travis Miller Okay, good question our this [ph] version. Ralph Izzo Thanks. Travis Miller Thank you very much. Operator Your next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead. Greg Gordon Thanks, my questions have been asked and answered, thank you. Ralph Izzo Thanks Greg. Operator Your next question comes from the line of Jonathan Arnold with Deutsche Bank. Please go ahead. Jonathan Arnold Thanks same here. Thank you. Operator Your next comes from the line of Gregg Orrill with Barclays. Please go ahead. Gregg Orrill Yes thank you. Just around the hedges at Power, you increased some of the hedges over the last quarter and just wondering where you stand with where you would normally be at this point. How you are thinking about that? Ralph Izzo So Gregg as you know we try not to outguess the forward market. We do, however, we’ve said in the past there was a tendency of the market to take a data point from 48 hours ago and a data point from 24 hours go and extrapolate it for the next three years and sometimes that emotional responses not as formed by fundamentals as we would like but we always stay with some certain guidelines. We allow our team to drift up little bit if we think the market is begin a bit bullish and we allow them to drift down if we think the market is begin overly bearish and you will recall in April 14 was the former where you said we can go ahead and hedge a little bit towards the upside since the market is being somewhat bullish and it’s pretty safe to conclude that right now we are drifting towards the bottom of our guide post just given the anomalously one winter we had and the bearish that crept into the market. Now having said that that bearing this is not, totally unjustified given the guess those levels are. And then just the other thing to think about too Gregg is that for the BGS auction to the extent that that’s a contribution across our hedge horizon. That auction usually takes place every year in February. So, you see a little bit of a pickup in that regard in the first quarter’s change. Gregg Orrill Fair point, okay, thanks. Ralph Izzo Thank you. Operator Your next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead. Michael Lapides Hey, Ralph thanks for taking my question and congrats on a good start to the year. Can you on the Salem issue, can you talk a little bit about other plants over the years kind of seen similar issues and whether any of those turned into any more major related items or is having issues with kind of baffle bolts are very standard, very common occurrence. I have to be very honest as a non-nuclear engineer that where baffle bolts is a little baffling to me? Ralph Izzo Thanks Michael for the question. I’m glad you asked this. So, to my knowledge DC Cook had an issue in 2010, Indian Point had an issue starting a month or so ago. There have been a handful, I think like six or eight European plants. These are not to my knowledge, these are not life threatening issues, they’re literally 800 bolts typically that secure these metal plates we call them baffles to the reactor vessel and they’re under pressure. There is a pressure grade in because of the hot high temperatures steam that flows through the holes of these baffles and you just get a mechanical stress, in our case I think we have 832 bolts. They are typical of pressurized water reactors, so that’s why I mentioned earlier it’s a false question that we would have to look at Salem 2 again it is extra refueling outage although it passed visual inspection in 2015. It would be an issue for Hope Creek because that’s a boiling water reactor. So, I don’t want to suggest anything other than we have to complete the inspection but none of the prior instances has this been an issue that has threatened the plants going forward integrity or anything of that nature. Michael Lapides Got it, and coming to your regulated side of the ENG, you know as you guys do most years at your Analyst Day, you lay out a CapEx forecast that obviously shows you know in year three through five somewhat of a decline from years one through two, can you talk about the things, your goals in 2016 in terms of actually, I don’t want to call it back filling but the types of projects that you could see showing up in the 2018 to 2020 timeframe that might keep CapEx at a more similar level to 16 and 17 or even at a higher level, what are the types of projects what you have to do from the regulatory construct process to get those approved? Ralph Izzo Sure, so there is a whole host to that Michael; there is ongoing renewable portfolio standard commitments that could result in some additional solar work. There are couple of special projects that we haven’t named publically on the distribution system that involve major customers that would benefit the entire customer base that we will be pursuing. There is always new and additional work that comes out of it PJM, RTEP [ph] and that’s the kind of stuff you will see us looking at and potentially announcing in 2016. However, the major backfill in the out years of the plan won’t be announced in 2016 because they are pretty new and that will be continuation of our gas system monetization plan and a continuation of Energy Strong. And reason why we won’t announce those in 2016 is because we are only a year and half since Energy Strong and we are only six months into GSMP and those were both three-year programs give or take a few months on some unique aspects. So you’re right to say that we have historically backfilled the years four and five. I think there is a very high probability we’ll do the same this time. But I think that’s in terms of the goals for 2016, it will be more some significant distribution projects that we have and potentially some solar work that to keep the state on its RPS targets, you’ll see as a percent in the near-term. Michael Lapides Got it. Thank you Ralph. Much appreciated. Ralph Izzo Sure. Operator Your next question comes from the line of Praful Mehta with Citigroup. Please go ahead. Praful Mehta Thanks you. Hi, guys. Ralph Izzo Hi, Praful. Praful Mehta So quickly on the storage point, I know it was an interesting debate and you’ve made a bunch of relevant points, so that was very thoughtful. I’m just wanted to understand you were mentioning storage more from a transmission perspective. But just take it back to storage more from a generation perspective. If you did have the 10 to 20 year window horizon as you talked about, how would you think of the implications for your gas lead and just generally for the markets in general? If you did think storage was coming, whenever, 10 years or 20 years down the road, how do you see the implications for the power generation for your fleet and just generally in the U.S.? Ralph Izzo Yes. I think there are three uses for storage. One is to the extent that one has some localized distribution reinforcement that can be more economically achieved for the storage rather than fluctuation enhancement. Second would be your classic arbitrage between peak and off-peak, however which has become less of an economic driver now days just given the abundance of natural gas. Third could be sort of a similarity that which is to offset the intermittency associated with renewables, but in terms of using batteries as speakers I mean I think that you just have to take a look again it’s a dollar per KW and my goodness yes I’m – keeping getting more and more efficient and storage seems to be losing in that race so its to keep up with them. So I think there are multiple applications I didn’t mean to suggest that we would only consider one what I was trying to point out is whether the application is a supply side or whether it’s a customer reliability side, whether its providing peaking services, other ancillary services. We don’t have a religious fervor around one technology or another we look at them all the time. Praful Mehta Fair enough that’s really helpful. And then secondly from a M&A perspective there is number of generation assets clearly in the market and potentially more coming and you’ve talked about at some point of separation as well. So how do you fit all that in are you looking to get to critical mark is there opportunity here to apply some asset critical mark there you think you can at some point separate how are you thinking about that opportunity right now? Ralph Izzo Yes I mean that’s pretty much what we’ve told the world right that we see three very changeable tactical reasons for remaining integrated its the financial synergies between powers, our cash generation and utilities cash needs. It’s the customer build synergies between the customer Power serves and the customers that PSEG’s serve and power prices were down PSEG’s distribution rates go up quite candidly. And the last but not least is the benefit of scale associated with the corporate support functions and as Power continues to pursue growth opportunities outside PJMEs the first two issues become less important right. You have more customers that are not PSE&G customers that we will be serving in the New England and the New York State. You have more need for Power’s funds from operations going to Power as opposed to going over to the utility and as both companies get bigger then the corporate supports synergies become less on a percentage basis. As the reason why I say outside of PJMEs is because we’re pretty much preemptive from making any acquisitions within PJMEs and given the slow growth in demand, we’re not big fans of Greenfield development in PJMEs it’s just you quickly run into an oversupply situation. Having said all of that, we have demonstrated that we’re pretty bad at acquiring assets. By that I mean we seem to have a more conservative view of where the market is going and are consistently outbid, Keys being the one exception to that which I believe was largely because of our confidence in our ability to manage construction risk that perhaps others did not posses and also some of the portfolio benefit going to us in terms of PJM West. So, we all the time at generation assets, we have an, I was not saying anti coal bias, that sounds very political and I didn’t mean it that way. But just given the direction of environmental regulation, you wouldn’t see us taking a look at any co expansions in terms of new assets. But we do look in our target markets which would be the rest of PJM, New England and New York State. We just have to get it at the right price and we’re going to remain disciplined in what that means for us. Praful Mehta Got it. That’s very helpful, Ralph, thank you so much. Operator Your next question comes from the line of Ashar Khan with Visium Asset Management. Please go ahead. Ashar Khan Good morning and good results. Can you just ask you one thing which [indiscernible] mentioned why their outage is lasting a little bit longer, is that they didn’t have the equipment on site and I didn’t know what that meant exactly, but I just wanted to ask you Ralph, are you guys do you have this stuff on site to replace everything so it won’t cause a longer outage? Ralph Izzo No it was so – hi Ashar. So the equipment is not routinely onsite, but we are in the process right now of securing that equipment while we do the ultrasonic testing. This is a highly radiated area. It’s inside the reactor vessel, but we are in conversations with at least two vendors who claim to be able to help us do the work and we’re confident we will be able to bring them on site. I mean this is – as I said there is at least 10 other reactors that had this issue in the past and. Ashar Khan No, I understand. And I was just trying to understand whether they were saying the delay was caused by equipment not begin on site? Ralph Izzo I think there is a robotic device that needs to go in and change out the bolts and replace those that fail the ultrasonic test. It’s not something you could send a person into the vessel. Ashar Khan Okay. Ralph Izzo From a clinical path perspective to the inspections that are ongoing now need to take place first so we have sometime of a critical task to be able to secure that kind of equipment. Ashar Khan Equipment, okay I appreciate it. Thank you. Operator Your next question comes from the line of Shahr Pourreza with Guggenheim Partners. Please go ahead. Shahr Pourreza Hi, questions were answered thanks. Ralph Izzo Thanks sure. Operator Your next question comes from the line of Michael Goldenberg with Luminous. Please go ahead. Ralph Izzo Hi, Mike. Michael Goldenberg Good morning. Ralph Izzo Good morning. Michael Goldenberg Hi just wanted to ask a question about your 2018 hedging. I wasn’t clear. If I just look at previous quarters and this quarter it seems like you hedge very little about 5% of your output, but if I did the math I get about $30 or $31 incremental hedging price. I’m not understanding if that’s the price or I’m doing something wrong there. Ralph Izzo And your comparison is what Michael. Michael Goldenberg Versus Q4, so in Q4 you were same percentage at $54 now you’re same percentage $49 so if I just do the simple math I get incremental hedging down at $31? Ralph Izzo We will have to go through the individual math which maybe we could follow up with you on but you also got a range of output where you’re within a higher low band. So, its going to vary, I know that some of that 2018 output is going to come from BGS which tends to have a higher price and then we run lower price environment as well, so it’s going to be some mix of that. Michael Goldenberg Got it. Thank you. Operator [Operator Instructions] . Your next question comes from the line of Ben Budish with Jefferies. Please go ahead. Ben Budish Hey, everybody good morning. Just I wondering if I’m maybe reading into your comments you made at the beginning of the call too much about kind of the importance of Q3, it seems like maybe you’re sort of guiding us to the low end of the range and I’m curious like strong Q3 might get us back to the midpoint or maybe we’re looking at sort of below the bottom end and a strong Q3 gets us back within, is there anymore color you can kind of give on that? Dan Creeg Yes so Ben, the range is the range and historically what we do is after Q1 we really don’t modify our numbers or push people up or down and just live with range. After Q2 sometimes we may move a nickel one way or another if we think that there is a definitive bias one way or another in terms of verbally guiding and then typically after Q3 is when we – if there is a need tighten the range one way or another. So we’re $2.80 to $3 it was a tough winter and we’ve got a lot of focus on our operations and cost efficiencies and the range always assumes that the rest of year is normal weather. We never assume that the weather is going to suddenly do something different than what the weather service predicts as anomaly. Ben Budish Okay great thank you. Operator Mr. Izzo and Mr. Cregg there no further questions at this time. Please continue with your presentation or any closing remarks. Ralph Izzo Sure thank you Brent. So thanks everyone for being on the call and the main message I hope you took away is my favorite message which is steady she goes. We have utility capital program that’s proceeding as planned, Power construction program with three combined cycle units is on schedule and on budget, our operations are strong throughout the enterprise and the balance sheet is as solid as ever. I know Kathleen and Dan have some travels coming in the next couple weeks and then the three of us have some travels coming up in the next couple of months. So hopefully we will get to you see you most if not all of you during those travels. Thanks a lot and we will talk soon. Operator Ladies and gentlemen, that does conclude your conference call for today. You may now disconnect. Thank you for participating. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. 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The Southern (SO) Thomas A. Fanning on Q1 2016 Results – Earnings Call Transcript

The Southern Co. (NYSE: SO ) Q1 2016 Earnings Call April 27, 2016 1:00 pm ET Executives Aaron Abramovitz – Director – Investor Relations Thomas A. Fanning – Chairman, President & Chief Executive Officer Arthur P. Beattie – Chief Financial Officer & Executive Vice President Analysts Greg Gordon – Evercore ISI Julien Dumoulin-Smith – UBS Securities LLC James von Riesemann – Mizuho Securities USA, Inc. Ali Agha – SunTrust Robinson Humphrey, Inc. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Mark Barnett – Morningstar Research Paul Patterson – Glenrock Associates LLC Daniel F. Jenkins – State of Wisconsin Investment Board Operator Good afternoon. My name is Benjamin, and I will be your conference operator today. At this time, I would like to welcome everyone to Southern Co.’s First Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir. Aaron Abramovitz – Director – Investor Relations Thank you, Benjamin. Welcome to Southern Co.’s First Quarter 2016 Earnings Call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Co.; and Art Beattie, Chief Financial Officer. Let me remind you that we will make forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call. The slides we will discuss during today’s call may be viewed on our Investor Relations website at investors.southerncompany.com. At this time, I will turn the call over to Tom Fanning. Thomas A. Fanning – Chairman, President & Chief Executive Officer Good afternoon, and thank you for joining us. We appreciate your interest in Southern Company. We had another good quarter to begin 2016, a great start to the year, and we are making excellent progress on many fronts. Art will provide an overview of our financial results in just a minute. But first, I’d like to provide you with a brief update of our regulatory calendar in Georgia, and updates on the Vogtle and Kemper projects. As many of you are aware, 2016 is a busy year for regulatory filings in Georgia; an IRP filing, two VCM filings, a merger approval application, a potential rate increase and the Vogtle contractor settlement filing, which has been extended by the Georgia Public Service Commission to review all costs of the project incurred to-date. To summarize, first, Georgia Power filed its triennial integrated resource plan, or IRP, in January. The PSC is expected to vote on the company’s plan this July. Second, the PSC unanimously approved Georgia Power’s 13th Vogtle Construction Monitoring Report in February. And later that same month, Georgia Power filed the 14th VCM Report to be voted on in August. Third, Southern Co. and AGL Resources received unanimous regulatory approval of our companies’ proposed merger from the Georgia PSC earlier this month, with all intervening parties in support of the settlement agreement. Fourth, Georgia Power has agreed to extend its current rate plan until 2019, and to keep base rates flat for the next few years. Fifth and finally, as you may recall in January, Georgia Power filed an application with the Georgia PSC for review of the $350 million settlement with the Vogtle 3 and Vogtle 4 EPC contractors. The Commission voted to move forward with an expanded process which will examine the full project cost and schedule. Consistent with that February order, Georgia Power filed a Supplemental Information Report, which provides compelling support that all project costs incurred to date for Vogtle Units 3 and 4 have been prudent, and that the current cost and schedule forecast is reasonable. The filing includes reports from several subject matter experts, which support that conclusion. Over the next six months, Commission staff and Georgia Power will review this information, which may result in an agreement this fall for the Commission to consider. Let’s move to an update on the construction status of Plant Vogtle Units 3 and 4. The Vogtle 3 and 4 nuclear expansion project continues to progress with multiple milestones achieved in the first quarter. The transition to Westinghouse and its affiliate as the single contractor is complete. Fluor is fully engaged in providing on-site leadership to the construction efforts. We’ve seen increased productivity at the work site, including 24-hour coverage in critical path areas of the project. Expected near-term milestones include the placement of the final large construction modules in the Unit 3 nuclear island, CA02 and the 400-ton stainless steel CA03 module. For Unit 4 four, we anticipate setting the CA05 module and getting the five-story, 1,100-ton CA20 module ready for hook later this summer. Now let’s turn to an update on the Kemper County project. We’re making good progress on modifications and improvements to the refractory lining of both gasifiers, and addressing issues identified during the initial fluidization and refractory cure-out on Gasifier A. We are also in the process of remediating issues with the lignite feed and drying systems as we approach testing of the gasifier using lignite. In March, we completed the refractory cure-out of Gasifier B, reaching full operating temperatures while successfully operating the gasifier in pre-lignite feed mode. Over the next couple of months, utilizing Gasifier B, we expect to achieve first syngas production, and later this summer, initial power production using syngas. We continue to estimate an in-service date for the entire facility in the third quarter of this year. Reflected in the financial results we released today, we have recorded additional dollars to account for the projected schedule cost through September largely to accommodate the revised schedule for Gasifier A. I will now turn the call over to Art for a financial and economic overview. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Thanks, Tom. As you can see from the materials we released this morning, we had solid results for the first quarter of 2016, reporting earnings of $485 million, or $0.53 per share, compared with earnings of $508 million or $0.56 per share in the first quarter of last year. First quarter results for 2016 include after-tax charges of $33 million related to increased cost estimates for the construction of Mississippi Power’s Kemper County project. First quarter results for 2015 included after-tax charges of $6 million for the Kemper project. Earnings for the first quarter of 2016 also include after-tax charges of $14 million related to the proposed acquisition of AGL Resources and PowerSecure International. Excluding these items, Southern Company earned $532 million, or $0.58 per share, during the first quarter of 2016, compared to $514 million, or $0.56 per-share, in the first quarter of 2015. The major earnings drivers year-over-year for the first quarter of 2016 included retail revenue effects across all our regulated operating companies, and lower nonfuel operating and maintenance costs, offset by mild weather and higher depreciation expense. Southern Power also contributed positively year-over-year as a result of anticipated benefits from renewables projects expected to be in service in 2016 and increased revenues from renewable projects placed in service in 2015. Moving now to an economic and sales review for the first quarter. Economic growth in the first quarter of 2016 was modest and our retail sales results are encouraging. Total weather adjusted retail sales grew 0.4% in the first quarter, led by strong residential sales, which were up 1.4% for the quarter. Growth in our residential class continues to be driven by strong customer growth as a result of faster population growth compared with the rest of the nation. Regional market fundamentals are strong, and we expect our regional economy to outpace the national economy. The housing sector appears poised for a modest uptick, and the economy continues to add jobs at a decent pace. Residential construction spending continues to grow, driven by the integration of millennials into the workforce. Atlanta added the most new apartments in the nation in 2015, and even more units are expected to come online in 2016. Nationwide, Atlanta’s multi-family forecast is second only to that of Brooklyn, New York. Weather adjusted commercial sales were up 0.8% for the first quarter. This marks five consecutive quarters of positive growth in commercial sales, and we expect to continue this momentum into the second quarter. Atlanta’s office market vacancy rate was 16.2% at the end of 2015, the lowest rate since 2008. This marks a move from absorption in existing properties to accelerated new office construction. Industrial sales were down 1% in the first quarter. Our regional manufacturing sector continues to adapt to weak demand, and U.S. dollar remains a challenge for export-oriented businesses. I think it’s significant to note that some of our largest industrial segments experienced maintenance outages during the first quarter. We expect them to return to operations soon, supporting our positive outlook for stronger industrial sales for the remainder of the year. We are also encouraged by certain economic indicators that suggest an improving industrial production outlook. The ISM Manufacturing Index increased to 51.8% in March, signaling a prospective expansion in industrial production for the first time in six months. New orders in production improved for a second consecutive month, with new orders posting the largest monthly gain since 2009. Manufacturing employment in the U.S. declined in March, but our service territory has experienced a strong rebound with manufacturing employment up 1.8% year-over-year. All four of our states posted manufacturing job gains. Four of our 10 largest industrial segments saw increases in sales year-over-year. Paper and transportation, along with lumber, stone, clay and glass, led the way, largely attributed to a continued recovery in the housing sector. Our economic development pipeline continues to be strong. There has been a 69% increase in year-to-date jobs announced compared to the same period in 2015. We have also seen a 19% increase in the year-to-date capital investment announced compared to that same period in 2015. The geographic region we serve continues to attract businesses that are seeking well-established transportation networks, lower cost of living, a capable workforce, attractive climate and low-cost energy. Before turning the call back over to Tom, I will briefly cover three final items. First, our earnings estimate for the second quarter. We estimate that Southern Co. will earn $0.70 per share in the second quarter of 2016. Secondly, I’d like to highlight our dividend announcement last week. Our Board of Directors approved a $0.07 increase in our common dividend to an annualized rate of $2.24. This is our 15th consecutive annual increase and marks 68 years, dating back to 1948, that Southern Co. has paid a dividend to its shareholders that was equal to or greater than that of the previous year. But the decision to increase the dividend isn’t about the past, it’s all about the future. It’s the strength of our underlying franchise, together with our continued focus on remaining an industry leader through innovation that underpin the board’s decision to support our objective of providing superior risk-adjusted total shareholder return to investors over the long run. I would like to note that with the five-year extension of bonus depreciation, our expected cash coverage of dividends is approximately 10% higher than before the extension and 20% higher than our recent historical average. Finally, I want to provide an update on our financing plan. The year is off to a great start. We completed a $1.2 billion syndicated term loan for Mississippi Power in the first quarter. This term loan provides much needed liquidity to Mississippi Power. Also in the first quarter, Georgia Power became the first retail regulated utility in the U.S. to issue green bonds. In doing so, they follow Southern Power, which became the first investment-grade power producer in the U.S. to issue green bonds last November. Demand for both of these green bond offerings exceeded our expectations. As we look ahead, executing our holding company financing plan is a key priority. This plan includes issuing approximately $8 billion of debt and a minimum of $1.2 billion of – in equity in 2016. Our internal plans, which were deployed last fall, have generated approximately $270 million so far this year. We will look to supplement those plans with additional common equity, and we are taking steps to preserve several options for achieving this. We expect to issue the debt in most, if not all, of the equity in advance of closing the AGL Resources transaction. While these issuances are intended to accommodate all of our holding company needs for 2016, our financing needs could increase to the extent that incremental investment opportunities present themselves, including Southern Power growth projects. Southern Co. is committed to maintaining a high degree of financial integrity, and our financing plans are intended to support our current credit ratings. I will now turn the call back over to Tom for his closing remarks. Thomas A. Fanning – Chairman, President & Chief Executive Officer Thanks, Art. Following a successful and eventful 2015, Southern Co. has entered 2016 with strong momentum. Our franchise business continues to perform at a high level, solidifying our position as an industry leader in all phases of the business. We are seeing continued progress on major capital projects, and our customer focused business model continues to serve us well. Our pending merger with AGL Resources is progressing through the approval process. The proposed merger has been approved by AGL Resources’ stockholders and the Federal Trade Commission. And we’re making good progress with relevant state approvals, and we continue to expect the transaction to close in the second half of this year. We are also excited about our pending acquisition of our PowerSecure International. Subject to the PowerSecure shareholder vote on May 5, we expect to close in the second quarter. PowerSecure is a premier provider of distributed infrastructure, offering primarily commercial and industrial customers, innovative solutions to meet their individual reliability, energy efficiency or green objectives. Our business model has traditionally focused on making, moving and selling energy, predominantly in front of the customer meter. PowerSecure accelerates our opportunity to extend our make, move, and sell business model to the other side of the utility meter as innovative new technologies emerge and customers’ need evolve. In conclusion, we believe Southern Co. is well positioned for continued success in 2016 and for years to come. Bolstered by the strength of our 26,000 employees and their commitment to provide clean, safe, reliable and affordable energy to customers and communities we serve, we are enthusiastic about the future. We are now ready to take your questions. Operator, we’ll now take the first question. Question-and-Answer Session Operator Thank you. One moment please for our first question. Our first question comes from the line of Greg Gordon with Evercore ISI Team. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hello, Greg. Greg Gordon – Evercore ISI Hey, guys. Good afternoon. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Good afternoon. Greg Gordon – Evercore ISI So the financing plan with the $1.2 billion of equity, $930 million remaining this year, should we presume that’s the totality of the equity that you envision needing to fund the AGL deal? Because when I look at the 2017, 2018 projected financings, you have no equity there. Arthur P. Beattie – Chief Financial Officer & Executive Vice President That’s the plan, Greg. I did say in the script that should there be additional opportunities either from Southern Power or other accretive investments, that we would finance those plans or any of those additional investments with a balanced – with an eye towards maintaining our credit support. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, and, Greg, the other thing that Art alluded to a wee bit, but I think we talked about it on prior calls, that we had a – I forget. For Southern Power, I guess we have $1 billion of CapEx in 2017. We’re seeing probably more – a larger opportunity set to increase that number in 2017. So as Art said, to the extent we do see further investment opportunities, we will be supportive of our credit ratings in that. Greg Gordon – Evercore ISI Okay. Because you have Southern Power at $1.2 billion this year, and then you have that drop into $500 million in 2017 and 2018 on slide nine. You’re saying that you could theoretically be double that? Arthur P. Beattie – Chief Financial Officer & Executive Vice President Well, it’s hard to say what multiple it would be. We just have, as Tom said, opportunities for success. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, Greg, I’ll go to the CapEx. In CapEx, I think we’re showing that we were $2.4 billion this year in CapEx for Southern Power, and $1 billion next year and $1.5 billion in 2018. I’ll bet you, we’ll be bigger than that in 2017 and 2018. That would just be my guess right now. Greg Gordon – Evercore ISI Got you. And is this mostly in utility scale solar or is it a mix of solar, wind, and other sort of – type of generation? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, it’s going to be more of a tilt towards wind if you were going to make a projection on that. But we’ll have solar in there, for sure. As you remember, we had a lot of success in 2015, way beyond what we thought. Some of those are CapEx numbers that will show up in 2016. Some – and remember, now that we’ve had the extension on the tax preference item, some of that could push over into 2017. So you’ll still see solar, you will see more wind than we’ve traditionally done in the past, would be my guess. Greg Gordon – Evercore ISI Got you. Got you. I was looking at the wrong slide. I should’ve been on slide 16, sorry. So the – and you guys talked about a sort of a $300 million earnings contribution from – on the last earnings call from… Thomas A. Fanning – Chairman, President & Chief Executive Officer Southern Power. Greg Gordon – Evercore ISI …Southern Power this year. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah. Greg Gordon – Evercore ISI And you sort of weren’t certain whether that was a sustainable level of spending, but you seem much more confident now than you were on that last call relative to this – am I implying too much there in terms of the sustainability of the earnings contribution with Southern Power given this CapEx outlook? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes. So remember, it’s hard to track because you’ll spend money and then net income will show in a current year. I wouldn’t go overboard on CapEx contribution and one – mean net income contribution in one year equaling net income in the next year. What I will say is I am reasonably confident that we’re going to spend more CapEx, and therefore, you should see net income contributions be a little bit better, and recall, than what we’ve had in our kind of base case. And what you recall is to the extent there is more of a tilt towards wind, those are kind of 10-year production tax credits as opposed to the single shot you get from solar. So the net income profile following that CapEx investment will look a little different. Greg Gordon – Evercore ISI Okay. Thomas A. Fanning – Chairman, President & Chief Executive Officer Overall, we’re seeing a very bullish market for Southern Power. Greg Gordon – Evercore ISI Awesome. One more question, then I’ll cede the phone. Can you talk about the earnings ramifications of the deal, the AGL settlement in Georgia for Georgia Power? Thomas A. Fanning – Chairman, President & Chief Executive Officer We expect Georgia Power to perform consistently with the past. It’s going to be a lot of hard work, but Art got some data, but I think, look, when we see Georgia, probably among all the states in the Southeast, seven, eight dynamite kind of relative economic performance, and I think Georgia has traditionally shown that they’ve been able to hit their targets in all levels of performance; operations, customer satisfaction, safety, including earnings. And I think Paul Bowers that runs that business and his team has shown their ability to hit their target very well. We think it is manageable. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Yeah, Greg, I think it’s important to note that the Vogtle NCCR tariff will remain in place. So that will – that’s not part of the rate extension plan. With the economy being very strong in Georgia, with no major capital additions such as new environmental needing recovery, they think that the rate plan extension is manageable during that timeframe. Greg Gordon – Evercore ISI Fantastic, guys. Have a great day. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah. You, too. Thanks. Operator Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed. Thomas A. Fanning – Chairman, President & Chief Executive Officer Julien, how are you? Julien Dumoulin-Smith – UBS Securities LLC Good. They got my name right there. Thomas A. Fanning – Chairman, President & Chief Executive Officer (24:48) I don’t know. At least I got it right. Thanks for joining us today. Julien Dumoulin-Smith – UBS Securities LLC Hey. Thank you, rather. So perhaps a follow-up on Greg’s last question, just to hit you with this quickly. Why a little bit more wind in the mix rather than solar? Just to pick on that before going to another thing. Thomas A. Fanning – Chairman, President & Chief Executive Officer Just opportunity set is bigger. I think with the extension of the PTCs, we’re seeing a lot of interest there. I think you also see certain state kind of policy level encouragements. You’re seeing companies getting ahead of the Clean Power Plan. We’re just seeing a good market for it. And remember, as we have shown in our solar business so far, the fact that we can strike good, strategic relationships with developers, you recall the one that we’ve done the most, this is within solar, is First Solar… Arthur P. Beattie – Chief Financial Officer & Executive Vice President And Recurrent. Thomas A. Fanning – Chairman, President & Chief Executive Officer And Recurrent has been a great partnership. We’re starting to strike those same relationships in the wind business. And so we kind of have a favored position to be able to strike large-scale deals. We are seeing that develop. Julien Dumoulin-Smith – UBS Securities LLC Got it. Excellent. And then turning over to the Vogtle side of things just quickly. You talk about, I suppose, a potential for a deal this – agreement this fall. Could you elaborate on what you need to see to get there? Just what are kind of the key milepost, more importantly? Perhaps some of the sticking points or moving pieces? Thomas A. Fanning – Chairman, President & Chief Executive Officer No, this process is set up, and most discussions of this nature are best held in a quiet form. Let the company and the staff evaluate all the evidence in front of them, and come up with what we believe will be a constructive result. That will then get presented to the Commission, the Commission will undertake whatever is necessary to approve it. Julien Dumoulin-Smith – UBS Securities LLC Got it. And then just turning to the PowerSecure deal. Congratulations, moving in a new direction. Just curious, how do you think about that in the context of the earnings of Southern Power and where you want to scale that business? I mean, how should we think about that, call it tomorrow after you close, but then years down the line as part of the growth trajectory? Thomas A. Fanning – Chairman, President & Chief Executive Officer It certainly contributes to our growth trajectory, but it’s a really small deal. Despite its small size, we think it is important for us to learn. See, I don’t really view this as a new business. What I’ve been saying pretty consistently is that this notion of evolving the make, move, and sell, then pass electricity through a meter into where, because of technology enabling, because of customer requirements, think data centers or other customers in the industrial or commercial space which have enormous reliability requirements, which is necessary in this kind of new kind of digital community we find ourselves in, look, I think this is just a natural evolution of – particularly in areas where they are challenged with reliability or price or service, for customers to want us to provide them solutions. So this is – we may do some business in our territory, be glad to do it, we’ll probably do it under the brand of the operating companies, and we had done some of this already. But I think the ability to grow this business, to learn in markets other than our own, will be positive for us all. It will add to our earnings trajectory, I don’t think it will be enormous because of the small size of this thing initially, but I think it certainly enhances our ability to compete in the future. And we’re very excited about it. Julien Dumoulin-Smith – UBS Securities LLC Right. Excellent. I’ll leave it there. Thank you, gentleman. Thomas A. Fanning – Chairman, President & Chief Executive Officer Thank you, my friend. Operator Our next question comes from the line of Jim von Riesemann with Mizuho. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hey, Jim. How are you? James von Riesemann – Mizuho Securities USA, Inc. How are you? Thomas A. Fanning – Chairman, President & Chief Executive Officer Awesome. James von Riesemann – Mizuho Securities USA, Inc. Perfect. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Hey, Jim, buddy. James von Riesemann – Mizuho Securities USA, Inc. Hey. Hey, Art. Can you just talk a little bit about how your thinking is evolving with the equity needs? I know the $1.2 billion, how much of that is broken down between internal plans versus the external dribble? Could you refresh my memory? And at valuations at these levels, why don’t you just go out and issue the rest of the equity right now? Arthur P. Beattie – Chief Financial Officer & Executive Vice President Jim, and I think we’ve said this pretty consistently since the announcement of AGL last August, was that we’ll consider all of our options as we move through. We began with internal programs, but we always have the option in front of us to raise the equity in different ways. James von Riesemann – Mizuho Securities USA, Inc. Okay. Okay. And switching over to the dividend, congratulations on that, but when is it time to actually start bumping up the growth rate instead of just the absolute dollar amount of the dividend? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, we talked about that. I want to say when we announced the AGL deal, given our belief in the growth contribution from AGL, recall, we increased our corporate expectation, our long-term growth rate from 3% to 4% to 4% to 5%. And what we said back then was, of course, this is the purview of the board and it is ultimately their decision, but we saw a pathway to increase the rate of growth from $0.07 in a year to $0.08 in a year. And recall, as Art mentioned in his comments, even since then, because of bonus depreciation and everything else, we are substantially better from a cash flow coverage standpoint than we were. So, the financial integrity underlying that decision even to increase the rate of growth of our dividends has improved since we spoke to you by 10%. It’s over kind of recent historical averages by 20%. So if anything, our ability to do that as measured purely by financial integrity is even higher than what we suggested. So I think we’ll keep it right there for now… James von Riesemann – Mizuho Securities USA, Inc. Okay. Thomas A. Fanning – Chairman, President & Chief Executive Officer …and look forward to the rest of the year. James von Riesemann – Mizuho Securities USA, Inc. Hey, and then one last thing on Vogtle. I know we’re getting a little out of our skis here, but when do you think it’s time to decide whether or not you take bonus depreciation on those two new units? Arthur P. Beattie – Chief Financial Officer & Executive Vice President We are. That’s in the plan. James von Riesemann – Mizuho Securities USA, Inc. Okay. Just making sure. Thank you. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Yeah. Okay. Thomas A. Fanning – Chairman, President & Chief Executive Officer Thank you, sir. Operator Our next question comes from the line of Ali Agha with SunTrust. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Ali, good afternoon. Ali Agha – SunTrust Robinson Humphrey, Inc. Good afternoon, Tom and Art. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Hey. Ali Agha – SunTrust Robinson Humphrey, Inc. First question, going into the quarter, you guys have budgeted $0.53 for Q1. You ended up at $0.58. Where would you say things that came out better than your original expectations? Arthur P. Beattie – Chief Financial Officer & Executive Vice President Yes, Ali, it’s pretty simple. You break it down, most – about half of it came out of the operating companies and half of it came out of Southern Power. We announced a couple of new projects on Southern Power that weren’t in the plan at least in terms of the first quarter. And then with the OPCOs, there are a lot of moving parts there. We had, obviously, a headwind on weather. It was $0.02 below normal from an expected perspective, but we offset that with non-fuel O&M and some other moving parts that gave us the other piece of the $0.05 of outperformance. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. And on that non-fuel O&M, you’ve been fairly consistent talking about that growing, call it, 3% or so on an annual basis. But it was actually down in the first quarter. So how should we be thinking about that from a full-year perspective? Arthur P. Beattie – Chief Financial Officer & Executive Vice President Yeah, I think on the full year, you’re going to see the whole measure of it. In the first quarter of last year, we had a lot of outages going on versus not so many this year. So that’s a big driver. But as you do your plan, I think we’re still in that range of 3% to 3.5% growth. But remember that there’s never such a thing as a normal year of – for non-fuel O&Ms. Thomas A. Fanning – Chairman, President & Chief Executive Officer Right. And just remember, our historic – I mean, ever since, I guess – well, certainly since I’ve been CFO here, so that spans quite a bit of time and even before that a little bit, we’ve always had this ability to – we have a flexible budgeting system here that takes out the volatility of weather. So, we’ve been able – I think we’re one of two companies in history, anyway – there’s no promise for the future – where we have always hit our earnings. Now, again, I can’t promise that or the lawyers will throw me in jail, but we have been able to demonstrate our ability to manage our spending, and at the same time, show industry-leading reliability and customer service kind of statistics. The other challenge, Ali, which is kind of interesting, is as we now have committed to hold Georgia Power’s rates flat through 2019, there is likely to be some impact on O&M. But remember, it’s not going to be done just with O&M. It’s the economic growth. And we believe this all to be manageable. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. And then, as you pointed out, on a weather-normalized basis, first quarter was up 0.4%. You guys have been budgeting 1.1% for the year. Is that still a good target for the year? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, call it a percent, and we beat our PhDs in Economy here. They’re really good guys here – we have a great staff – beat them up unmercifully getting ready for the call. They absolutely believed that from a bottoms-up analysis, when we look at some of our major customers, particularly in the chemical sector and then some other large sectors, with the outages that were undertaken, as those outages now go away, we’ll see industrial production and sales return to where we thought they would be. Ali Agha – SunTrust Robinson Humphrey, Inc. Okay. And last question, Tom. Can you remind me, the year guidance you have out there, $2.76 to $2.88, had that assumed that AGL would close sometime this year and contribute? And if not… Thomas A. Fanning – Chairman, President & Chief Executive Officer No. Ali Agha – SunTrust Robinson Humphrey, Inc. …does that give you some extra cushion within this year if you close AGL before year end? Thomas A. Fanning – Chairman, President & Chief Executive Officer No, we – yeah, we have evaluated that without AGL. And remember, we said that AGL is kind of an interesting animal for this year. They get most of their earnings in the first half of the year. We’re going to close probably in the second half of the year. So their earnings to Southern won’t be much at all. When we gave you that guidance, that was ex-AGL. So you’ll see AGL start to contribute in 2017 and beyond. Ali Agha – SunTrust Robinson Humphrey, Inc. I see. So coming in perhaps even earlier than expected wouldn’t really move the needle for the bottom line this year. Thomas A. Fanning – Chairman, President & Chief Executive Officer No, I would focus on Southern standalone for this year. And then, we’ll certainly give you new numbers for next year. And we’ve already kind of indicated what the contribution on the margin will be from AGL 2017, 2018, 2019. Ali Agha – SunTrust Robinson Humphrey, Inc. Right. Thank you. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes, sir. Thank you. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Thank you. Operator Our next question comes from the line of Paul Ridzon with KeyBanc. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hello, Paul. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Good afternoon. Tom, how are you? Thomas A. Fanning – Chairman, President & Chief Executive Officer Super. Hope you’re well. Paul T. Ridzon – KeyBanc Capital Markets, Inc. I am, thank you. It seems as though you’re getting a bigger opportunity set around Southern Power with the renewable. And you’ve kind of talked about this in the past, but what’s the right size from a percentage standpoint of earnings for Southern Power to be? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, so if I remember this right, they are currently around 6%, somewhere around there. We think very easily, we could take Southern Power to about a 10% number. And recall, 10% would include AGL. So the net income contribution could really grow pretty high if you’re just talking about an appetite kind of number. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Okay. So you’ve got some runway there. Thomas A. Fanning – Chairman, President & Chief Executive Officer A lot of runway. Paul T. Ridzon – KeyBanc Capital Markets, Inc. And you said you think Southern Power will do about $300 million of net income this year? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes. Paul T. Ridzon – KeyBanc Capital Markets, Inc. And then just a little… Thomas A. Fanning – Chairman, President & Chief Executive Officer And the other thing – hey, excuse me, Paul, just real quick. Everybody should just remember that this isn’t a merchant business, this isn’t something that lives and dies in the so-called organized markets. We do long-term bilateral contracts, credit-worthy counterparties, no fuel risk, no transmission risk. This is a credit quality kind of profile similar to our own. Paul T. Ridzon – KeyBanc Capital Markets, Inc. And then just what’s happening in the A-trains and B-trains? What’s the current state, just review that? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah, so – yeah, yeah, yeah. So, we’re actually reasonably happy with our progress. The refractory repair on A actually has taken longer, and there’s been a few more things we found with refractory. They’re called – I forget what they call them, rat holes or something like that. But we’ve gone in and evaluated. So it’s really, it – and this is not a high tech kind of operation. It’s just in a fairly closed space, hour-intensive thing. And really, the schedule of A is really what had pushed out kind of from August to September. The schedule of B has been delayed some weeks, but we still believe that we will have syngas and ultimately, electricity this summer. We’re very happy with the way that’s going. Paul T. Ridzon – KeyBanc Capital Markets, Inc. So B has been brought up to temperature and any hotspots have been addressed? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes. Paul T. Ridzon – KeyBanc Capital Markets, Inc. And then on your prepared remarks, you said something about the syngas, some issues that you found. What’s happening there? Thomas A. Fanning – Chairman, President & Chief Executive Officer I’m not aware of that. I don’t think we’ve – we haven’t made syngas yet. The other stuff that you may be remembering, let me kind of – I’m trying to remember what you’re referring to. Lignite dryers had been one. But that’s been something we’ve talked about for some time, and again, you’ve got to remember the lignite is essentially 40% moisture. So as we move the lignite from the field into the plant, it goes through a process where we essentially remove the moisture. In fact, one of the cool environmental aspects of this plant is that it actually produces water. We capture the evaporation and use it in the plant. One of the feeders for the lignite dryer had blades, if you can imagine, like an old-timey – I always use these metaphors, but it’s like an old-timey, non-power lawnmower where you would push behind it and it would actually feed the lignite into the plant. What we’ve done is expanded the distance of the blades of that feeder that would allow us not to experience clumping and some other thing. So it’s just stuff like that we continue to work through and in a rather pedantic manner. And that’s really what startup is all about. You operate certain areas of the plant and we make improvements where we see capable. Paul T. Ridzon – KeyBanc Capital Markets, Inc. Thank you very much. Thomas A. Fanning – Chairman, President & Chief Executive Officer You bet. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Thank you. Operator Our next question comes from the line of Mark Barnett with Morningstar. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hey, Mark. Mark Barnett – Morningstar Research Hey. Good afternoon, everybody. Thomas A. Fanning – Chairman, President & Chief Executive Officer Good afternoon. Mark Barnett – Morningstar Research I know you can’t talk to specifically about any figures, and you kind of touched on the subject of managing around a settlement at Georgia Power a little bit already. But I am curious, given the size of the annual investment that you’re making there, and again, some of the investments that you’re making for growth. Outside of the nuclear recovery and kind of the other ongoing cost recovery mechanisms, what are your principal levers on the O&M front, on the capital front, for managing under that? Thomas A. Fanning – Chairman, President & Chief Executive Officer So outside of capital, you’re asking what levers would we pull to manage O&M, essentially? Mark Barnett – Morningstar Research Well, O&M, yeah, and outside of capital that you kind of get the more concurrent recovery on. Thomas A. Fanning – Chairman, President & Chief Executive Officer Okay, that’s outside a clause. Mark Barnett – Morningstar Research Right. Thomas A. Fanning – Chairman, President & Chief Executive Officer Okay. Well, so, obviously, I think one of the things anybody would look at in terms of looking at O&M first, as you have seen demonstrated with us in the past, we put an enormous priority on giving for our customers, the best reliability in the United States, and we’ve demonstrated that for years. So one of the areas that we look at is attacking from an O&M standpoint, non-reliability related areas. So that would go to overhead. Any sort of thing in terms of corporate governance or those kinds of things. We think we have some capability to effectively manage reducing overhead inside our financial plan. And that’s both at the parent and at the operating company. Arthur P. Beattie – Chief Financial Officer & Executive Vice President Mark, I think you also need to think about it from a capital perspective, and bonus depreciation will certainly give a little headroom to that opportunity. But as you look forward to 2019, that should be concurrent with the time when Unit 3 of Vogtle comes online, so it all fits pretty nicely into a plan as we move out in time. Mark Barnett – Morningstar Research And could you remind me, with the settlement with Georgia, is there anything in there that you’d have to go back and re-examine, if you had like a timing delay from another approval, or is it pretty much Georgia is kind of set and tied up at this point? Thomas A. Fanning – Chairman, President & Chief Executive Officer If you look at the regulatory calendar and those five items I enumerated earlier, I think we’re pretty well committed to the three-year deferral. And I think that given everything we’ve talked about, we can perform as we have in the past within that construct. I think we’re in good shape in terms of evaluating everything else. The – I think AGL is behind us and Georgia. I think we’re in good shape. Mark Barnett – Morningstar Research Okay. Appreciate that, guys. Thanks. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes, sir. Operator Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hey, Paul. Paul Patterson – Glenrock Associates LLC Good afternoon, guys. Hey, how are you doing? Thomas A. Fanning – Chairman, President & Chief Executive Officer Super, I hope you’re well. Paul Patterson – Glenrock Associates LLC I’m okay. So… Thomas A. Fanning – Chairman, President & Chief Executive Officer Come on, you got to do better than that. Paul Patterson – Glenrock Associates LLC Oh, okay. The sales on slide seven, do those – were those adjusted for leap year or not? Arthur P. Beattie – Chief Financial Officer & Executive Vice President No. Paul Patterson – Glenrock Associates LLC Okay. And then with respect to the changes and everything that’s going on at Kemper, how do you guys – I mean, do you guys still feel comfortable about the 2012 CPCN and operationally being able to bring the plant on – I mean, is there anything that – I mean, I know there are obviously delays and what have you, but in terms of what you’ve seen so far, and I know there’s testing to be completed and what have you. But so far, do you see anything that gives you any pause in terms of being able to have the plant operationally active (45:59) as you guys had planned on? Thomas A. Fanning – Chairman, President & Chief Executive Officer No. Yeah, no. And I think one of the things that I think is distinguished by our operation at Mississippi in Kemper County plant (46:09), sometimes painfully, is that getting it done right the first time is really important to us. We’re not going to rush and try and slam this thing in. And what we will do is essentially demonstrate a reasonable history of reliable commercial operations and then file the rate case. We think that’s the right way to go. And we continue to do everything along the way. So this hasn’t just been, oh, something broke and let’s fix it. We are making improvements along the way. For example, one of the things that we demonstrated beautifully during 2015 is our ability to run that plant on natural gas. It provided, I don’t know, 40% of the energy to the citizens of Mississippi Power – or the customers of Mississippi Power, and did so in an extremely economic way. So as you think about the ability for that plant to provide not only electricity from syngas, but in a dual fuel sort of way to provide a really high level of reliability by supplementing any outages or whatever with natural gas-fired electricity, it’s exceedingly attractive, and in my opinion, more than meets the obligations we’re setting forth when this plant was originally ordered. Paul Patterson – Glenrock Associates LLC Okay. Great. The rat holes and the corrosion… Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes. Paul Patterson – Glenrock Associates LLC …was there – I mean, we’ve heard about this with other similar operations. Is there any issue there that’s changed at all? Thomas A. Fanning – Chairman, President & Chief Executive Officer I mean, we fixed it. But – so remember, there were some gaps from these nozzles. If you can imagine the riser – remember this thing – I always view it as a letter D, is what it looks like. And the riser is essentially where the lignite comes in and then gets blown up into the air in this kind of beautiful helix design. So you have both fuel stock moving into the riser, as well as a very intricate set of air-fired nozzles. What we found in the original fluidization test – even though the fluidization test went beautifully, the nozzles worked well, the material circulated amazingly, and remember, I was there the day it happened. We found that because there was a lack of seals among and between the refractory and these nozzles, some of the material got behind the refractory and the hard face (48:45) and caused what we call these rat holes. But these are really small, really small kind of tunnels, if you will, that were filled up with material. As we had – and the way you fix it is you tear the refractory back off and put it back on. It’s not a high-tech operation. What has taken a lot of time is it’s a confined space and has just been time intensive. And the more we’ve looked around the refractory, we found more of these rat holes, we had to tear more of it off and put more back on. We have not seen, to any sense, that degree of rat holing with B. And recall, I think B finished its fluidization test like in one day. So we learned a lot going from A to B. Paul Patterson – Glenrock Associates LLC Okay. Great. I really appreciate it. Thomas A. Fanning – Chairman, President & Chief Executive Officer Yes, sir. Thank you. Operator Our next question comes from the line of Dan Jenkins with State of Wisconsin Investment Board. Please proceed with your question. Thomas A. Fanning – Chairman, President & Chief Executive Officer Hey, Dan. How are you? Daniel F. Jenkins – State of Wisconsin Investment Board Pretty good. How about you? Thomas A. Fanning – Chairman, President & Chief Executive Officer Terrific. Thank you. Daniel F. Jenkins – State of Wisconsin Investment Board So, just a couple here on the earnings for the quarter. You had the $0.08 positive from the revenue – retail revenue impact. I was wondering if you could break that down a little bit in terms of jurisdiction, or were there specific rate actions and will they lap coming up, or how should we think about that going forward? Arthur P. Beattie – Chief Financial Officer & Executive Vice President If you look at Mississippi, start there, we got a couple cents from the Kemper in-service assets. Alabama had some CNP adjustments of – that I think were related to environmental assets. It’s around $0.03, and then Georgia had a number of adjustments that in total was between $0.02 and $0.03. Daniel F. Jenkins – State of Wisconsin Investment Board Okay. And then on the $0.04 from the non-fuel O&M, I know in the past, you’ve adjusted your discretionary maintenance when – to kind of match when sales are impacted by weather. Is that kind of what’s going on here or is that there’s something else involved? Arthur P. Beattie – Chief Financial Officer & Executive Vice President On a year-over-year basis, there’s lots of moving parts there. But as I mentioned earlier, there was lower other production expenses, there were more outages in the first quarter of 2015 and the first quarter of 2016. There were other expense reductions in, say, our distribution area and then administrative in general, generally relate to reductions and pension expense and some other cost in that particular category. Daniel F. Jenkins – State of Wisconsin Investment Board Okay. And then I had a question on the decline in your fuel costs and revenue. I know – realize that doesn’t have any impact on the bottom line, but just kind of thinking about that, is it – that driven more by volume or price or mix or… Arthur P. Beattie – Chief Financial Officer & Executive Vice President It’s – actually, loads were down quarter-over-quarter from a year ago, but gas prices are down 31% year-over-year as well. So it’s been about… Daniel F. Jenkins – State of Wisconsin Investment Board How about coal? Any impact from coal pricing or transportation or not so much? Arthur P. Beattie – Chief Financial Officer & Executive Vice President I would say it’s negligible. It’s most of the load is being driven by gas at this point, at least in the first quarter. Daniel F. Jenkins – State of Wisconsin Investment Board Okay. And then just a couple questions on Vogtle. I know last year – or last quarter on your near term, you had for Unit 3, the setting the containment vessel ring 2 (52:48), and I was just wondering what the status of that was. Is that upcoming or where are we… Arthur P. Beattie – Chief Financial Officer & Executive Vice President Yeah. I think when you think about Unit 3, the next big things would be CA03 and CA02, which are the kind of the two big remaining modules into the nuclear island for Unit 3. And then I believe the other ring will be added beyond that timeframe. That’s my understanding of the schedule. Daniel F. Jenkins – State of Wisconsin Investment Board And then just on your slide, this time you have for Unit 4, setting the CA05, but I assume that has to – that can’t occur until the CA01 is completed, correct? Arthur P. Beattie – Chief Financial Officer & Executive Vice President No. Don’t get any idea that these are in the order of insertion. CA05 goes in well before CA01. Daniel F. Jenkins – State of Wisconsin Investment Board Okay. And I think that’s all I have. Thank you. Arthur P. Beattie – Chief Financial Officer & Executive Vice President All right, Dan. Thank you. Thomas A. Fanning – Chairman, President & Chief Executive Officer Thank you, sir. Appreciate it. Operator And at this time, there are no further questions. Sir, are there any closing remarks? Thomas A. Fanning – Chairman, President & Chief Executive Officer Yeah. Thank you so much for your time here this afternoon while (54:05) I will wrap this up inside an hour. How about that? That’s historic for a Southern Co. earnings call. Delighted to do it. Off to great start. Earnings are good. Our operations are good, and a lot of work in progress that we look to have some significant announcements on coming up our next earnings call in July. So we look forward to seeing you then. Take care. Operator Thank you, sir. Ladies and gentlemen, this does conclude The Southern Co. First Quarter 2016 Earnings Call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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