The Southern Company (SO) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Dimitria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company Fourth Quarter 2015 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. [Operator Instructions] As a reminder this conference is being recorded, Wednesday, February 3, 2016. I would now like to turn the call over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.

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

Good afternoon and thank you for joining us. As always, we appreciate your interest in Southern Company. 2015 was a tremendous year for Southern company as we continue to see outstanding performance in our franchise operations. We saw a strong financial performance from both our wholesale subsidiary Southern Power and our traditional operating companies. Our state regulated utility delivered these 2015 results despite the warmest December in the last 120 years. We continued our longstanding tradition of operational excellence. Once again ranking among the best in our industry for customer satisfaction and solidifying our reputation as one of the most trusted energy providers in America. We experienced great success with strategic initiatives as both Southern Power and our traditional operating companies continue to build the energy portfolio of the future with significant expansions of their renewable energy resources. And then our ongoing quest to deliver superior risk-adjusted long-term growth. We entered into an agreement to acquire AGL Resources and create a platform from which we expect to compete for growth more broadly across the energy value chain. Now regarding AGL Resources, I will just briefly add that activities related to the proposed merger are progressing in a timely fashion. The waiting period under the HSR Antitrust Improvement Act expired in late 2015 unnecessary milestone for closing the transaction. In addition AGL Resources shareholders voted in November to approve the merger. The merger remained subject to certain other customary closing conditions, including state regulatory approvals, and we are currently engaged in regulatory proceedings for the various state commissions. The transaction is expected to close in the second half of 2016. In a few moments Art will discuss the drivers of our financial performance in more detail and provide guidance for 2016. Before that however, I will address the progress we’ve experienced with our major construction projects at Plant Vogtle and in Kemper County Mississippi. First, an update on the Plant Vogtle Unit 3 and 4. As reported in our last quarterly call, we agreed to a settlement with our contractors for the two new units at Plant Vogtle. We have now finalized that settlement and the related litigated has been dismissed. As a reminder this $350 million settlement resolved all outstanding commercial issues for the project and amends our EPC agreement to provide even greater protections for customers. The settlement affirms and provides incentives for anticipated fuel load dates in December 2018 and 2019 as well as our expected in service dates in June 2019 and 2020. In a related transaction Westinghouse acquired the nuclear construction arm of Chicago Bridge & Iron. This move positions Westinghouse and its affiliates as the primary contractor under our EPC agreement and they have engaged with floor to provide day-to-day construction leadership. We’ve worked very closely with the contractors through this transition and I am pleased to say that thus far we are very encouraged by the improved communication and efficiencies we’ve observed on site. On January 21st, Georgia Power filed an application for review of the settlement with the Georgia PSC. Yesterday, the PSC made and approved a motion, asking Georgia Power to file further information within the next 60 days pertaining to the prudent of the project to-date as well as the current schedule and cost forecast. Other interested parties will have an opportunity to make filings of their own in response. This will allow the PSC to consider the settlement agreement in the contact of a more comprehensive review of the full project cost and schedule. The commission staff which will not make any separate filings will have six months to analyze these filings. If the staff identifies any issues of imprudence or unreasonableness they are directed to work with Georgia Power toward a possible settlement of any such issues within that same six months period. During this six months period there will be no hearing. If there is a settlement between the company and the staff, Georgia Power and the commission staff will file that for the commission to consider in the fall. If the parties do not come to a settlement the commission will decide how to proceed. Let’s turn now to an update on the Kemper County Facility. The combined cycle performed exceptionally well in 2015, providing over one third of the electricity consumed by Mississippi Power customers last year. Major startup activities are ongoing and we continue to transition to operational testing. Fluidization trials on the first of two gasifiers are complete and we were able to begin the cure out process for the gasifier refractory. The fluidization process was an important validation of the scale up of the technology as the operators were able to use the control system. We circulate sand and air at design flow rate through the gasifiers a good rehearsal for the eventual introduction of lignite to the operation. The team is currently working to repair a portion of the refractory on the first gasifiers and making improvements to all of the nozzles in the refractory lining of both gasifiers to address hotspots identified during the initial cure-out process for the first gasifier. The type of work to repair and improve the refractory lining is similar to the refractory replacement there will be a common part of the plant long-term maintenance. However these activities are time intensive and they are the primary driver for our schedule extension into the third quarter of 2016. As always quality and safety are our top priorities as we are taking steps to help ensure that Mississippi Power’s customers will enjoy the benefits of our reliable source of low cost energy for decades to come. We expect to introduce lignite to gasifier in the spring this critical step is the beginning of the important process of integrating all of the various systems of the facility. In December the Mississippi Public Service Commission unanimously approved rates for the combined cycle assets already in service. Mississippi Power plants to seek recovery of the remaining assets after they are placed into service. Art will now provide a financial update including an outlook for 2016 and beyond.

Thanks, Tom. Good afternoon, everyone. As you can see from the materials released this morning we had solid results for the fourth quarter as well as for the full year 2015. For the fourth quarter of 2015, we earned $0.30 per share, compared to $0.31 per share in the fourth quarter of 2014. For the full year of 2015 we earned $2.60 per share, compared to $2.19 per share in 2014, an increase of $0.41 per share. Excluding certain adjustments listed in the earnings materials, earnings for the fourth quarter and full year 2015 were $0.44, $2.89 per share respectively, compared with $0.38 and $2.80 per share respectively for the same periods in 2014. As Tom mentioned earlier our adjusted annual result of $2.89 was just above the top of our 2015 guidance range we established a year ago. The major earnings drivers when compared to our $2.80 adjusted result for 2014 where residential and commercial sales growth, retail revenue effects and tremendous success with renewable projects at Southern Power. These positive drivers were partially offset by increased shares, higher depreciation, operation and maintenance costs and weather. A more comprehensive list of drivers is included in the materials we released this morning. Moving now to an economic and sales review of 2015. The economy within our region continues to experience modest growth, favorable domestic market fundamentals include strong employment growth that have served to underpin consumer confidence in spending. At the same time the effects of the strong dollar, low commodity prices and economic weakness abroad have combined to constrain manufacturing growth in our region. Total weather-adjusted retail sales grew by 0.3% in 2015 led by commercial sales, which were up almost 1% for the year. We experienced positive growth for the commercial sales in every quarter in 2015, which we have not seen since before the recession. Weather-adjusted residential sales grew by 0.4% during 2015, growth in the residential sector has been fueled largely by customer growth as the Southeast continues to see positive in migration. More than 37,000 new residential customers were added in 2015, an increase from 2014 when we added some 31,500 new customers. Industrial sales fell by 0.3% in 2015. We experienced a modest deceleration in industrial growth in our region as a result of the strong dollar, low oil price and natural gas prices and significant economic slowdown in China and other emerging markets. We have seen the impact of these factors on three of our largest industrial segments, primary metals, chemicals and paper. However transportation and housing related industries have supported growth and we expect those segments to continue to Growth and we expect those segments to do well in 2016. Economic development activity remains robust and consistent with previous quarter’s activities. Job creation and capital investment for 2015 exceeded 2014 levels and the pipeline of potential projects grew significantly compared to recent years. Corporate announcements and potential projects represent a broad cross section of industries including automotive, primary and fabricated metals, aerospace and chemical segments. Also within our region Alabama was named the top state of economic development by Business Facilities Magazine and Georgia has been ranked first for business climate by Site Selection Magazine for the third consecutive year despite economic headwinds from overseas, our regional economy remains in a positive growth mode. During our most recent economic roundtable consensus of the participants was that the economy will grow in 2016 supported by robust employment and spending growth, modest income gains and a steady housing recovery all pointing to further growth in energy demand. Our sales growth guidance for 2016 is 1.1% for retail sales, 1.2% for residential sales and 1% for both commercial and industrial sales. Before we cover the detail of our capital expenditure forecast, financing plan and earnings per share guidance, I would like to speak to the impact of the recent extension of tax benefits on our financial outlook. We currently project that a five year extension of bonus depreciation will improve cash flows by approximately $ billion through 2020 and potentially more assuming Southern Power is able to execute on its growth plan. This translates to a significant uplift in the value of the enterprise. Over the next few years some of the biggest tax benefits are expected to be generated by plant Ratcliffe, plant Vogtle Units 3 and 4 along with a variety of renewable energy projects and environmental compliance investments. Considering our customer focused business model, this is very good news. All else being equal, our customers should benefit from lower retail rates over time. In addition to the implied reduction in regulatory risk, we expect to enjoy reduced exposure to both debt and equity capital markets over the next several years. Perhaps the greatest benefit of all these tax benefits is the level of cash flow support we project for our common dividend. Of course dividend policy is ultimately subject to the approval of our Board of Directors, but our expected cash coverage of dividends is greatly improved compared to how we characterize our dividend growth at the time of the AGL Resources merger announcement. We fundamentally believe that value is a function is risk and return. Given the magnitude of the dollars and the high degree of certainty inherent in these deductions, Southern Company’s value proposition should be greatly improved. We provided an updated forecast of capital expenditures for 2016 through 2018 in our slide presentation. This standalone projection does not include AGL Resources. Anticipating continued success at Southern Power, we are excited about the possibilities that exist with the extension of tax benefits for both wind and solar projects. We have enjoyed a higher than anticipated growth from Southern Power in recent years, in fact a year ago our 2015 through 2017 CapEx forecast was approximately $3 billion. Today, based on our recent success, we estimate the same period to be about $5 billion of investment for Southern Power. Going forward, we expect to sustain that same level of activity and success, in fact our Southern Power forecast for 2016 through 2018 includes CapEx of $5 billion for wind, solar and traditional natural gas generation project. Our CapEx forecast for our traditional operating companies does not include projects specific to the clean power plant. If our ultimate compliance plants require investment prior to 2019 our current CapEx projection could or would increase. Our forecasted $1.8 billion investment in environmental compliance over the next three years is largely associated with EPAs, effluent guidelines and final coal combustion residuals rule. Included in the appendix of our slide deck are our projected financing plan, credit ratings and a schedule of maturities and a liquidity summary. Within our financing plan, you will note the anticipated debt issuances to fund the AGL Resources merger. We expect these notes to be issued shortly before the closing of the acquisition and to include a blend of maturities. Additionally, we are planning on a $1.2 billion in equity issuances in the calendar year 2016. As discussed earlier the extension of bonus depreciation is expected to reduce our exposure to the capital markets and that has resulted in a favorable impact to the remainder of our financing plan. Considering the incremental cash flow along with our Department of Energy Loan facility for Plant Vogtle construction and an assumption that we will utilize securitized financing for a significant portion of Kemper, which is subject to approval by the Mississippi Public Service Commission our exposure to the debt markets for our traditional operating companies over the next three years should be limited. Southern Power’s debt financing needs will be driven largely by their success in finding suitable projects to fill the placeholders in the CapEx forecast. An additional benefit of the incremental cash flow from bonus depreciation is the effect on our need to issue new equity. We currently project no additional equity issuances beyond the $1.2 billion in 2016. Financial integrity and strong credit ratings have always been priorities for us and that emphasis remains unchanged. Our financial outlook including our expected credit metrics in 2016 through 2018 has improved and we continue to believe our credit profile is fully supportive of our credit ratings. Moving now to our earnings per share outlook, you will recall that we began issuing new shares in the fourth quarter of 2015 under our internal equity programs largely to fund the AGL transaction and to reinforce our commitment to financial integrity. The cumulative effect of the shares issued in 2015 and projected for 2016 equates to a $0.06 diluted impact on our standalone 2016 earnings per share. In addition the estimated impact of bonus depreciation is $0.04. But for the cumulative impact of these shares and bonus depreciation we would have been in the top half of our 3% to 4% standalone trajectory for 2016. Considering these drivers, our standalone 2016 earnings per share guidance excluding any cost to achieve the AGL Resources merger is $2.76 to $2.88 per share. Assuming the AGL merger closes later this year, our long-term earnings per share growth outlook remains a range of 4% to 5%. In addition our earnings estimate for the first quarter of 2016 is $0.53 per share. I’ll now turn the call back over to Tom for his closing remarks.

Thanks, Art. As evidenced by our discussion today, 2015 was indeed a remarkable year for Southern Company, and we enter 2016 with strong momentum. The franchise business is performing at a high level solidifying its industry leadership. We see great progress on major capital projects with the completion of the Kemper County facility on a near-term horizon and Plant Vogtle unit 3 and 4 over 60% complete. We anticipate the addition of AGL Resources later this year and we see a stable economy in a region poised for continued growth. Our cash flow and credit profiles are significantly improved and we continue to project 4% to 5% long-term growth in our business. With the strength of our 26,000 employees and their commitment to provide clean, safe, reliable and affordable energy to the customers and communities we are privileged to serve. We believe Southern company is well position to succeed in the month and years ahead. We are now ready to take your questions. Operator, we’ll now take the first question.

Thank you. [Operator Instructions] Our first question comes from the line of Dan Eggers with Credit Suisse. Please go ahead.

Hey, Dan. How are you?

Doing good. Thank you. First question for you just on the load growth outlook, kind of your 2015 maybe a little more tougher than hoped and you looked at the kind of the rally in 2016. Can you just maybe share a little bit more what you’re seeing particularly on the residential side are you seeing some usage gains or what do you see kind of sprucing that up, and then kind of on the industrial front doesn't seem like the world's getting a whole lot better that the idea that that’s going to bounce this year also?

So residential we are seeing a continued in migration of customers. That’s the big deal and we think that our projection of 1% is going to be driven largely by that. Interestingly through the work I see in the Fed we see similarly here in terms of consumption. Consumption is kind of flattish and you are seeing that also in the federal reserve data as well. That’s not all bad. There is this long-term dividend by cheap oil, therefore cheap gasoline prices, cheap natural gas prices all is accruing to increase essentially the disposal income of households throughout the Southeast. Interestingly they are attending to increase their savings rate rather than their consumption rate at that point. Not all bad because that typically serves as an insulator against future economic shocks. So that would be kind of my first comment.

Yeah, Dan, you asked about industrial, we commented about three largest segments primary metals and chemicals and paper were down last year. We expect them to kind of be flattish this year. There are still elements of strength in the primary metals group. I think if you look at automotive steel there is still a good demand for that, architectural steel is actually going pretty well to boot. And then in the automotive sector, automotive is or transportation is expected to expand. We’ve got expansions going on, it’s some of the customers in our jurisdiction Mercedes being one of those. There is model expansions as well. So we expect those numbers to actually do well next year and then the housing related industries primarily in Georgia are expected to continue to grow, which is kind of a reflection of the continued growth on the residential and commercial end.

And I commented earlier this morning on squat box about this throughout 2015 as I appeared in that forum culminating in a December meeting I had with Dennis Lockhart there on set. It was interesting, our leading indicators started showing softening, our lagging indicators commercial were really good and I have been kind of bearish particularly in the December telecast. Our guys do a bottom up forecast and we’ve done as business round table discussion here in the Southeast with all the economist of the major entities here and based on a bonds up analysis plus we are seeing from the round table here in the Southeast we do expect these major industrial participants to start adjusting to this new reality and improve their performance into the end of the year.

Okay, got it. And I guess the bonus appreciation cash is pretty huge amount of money, coming back to you guys was there any way for some of that cash to offset the equity raise you guys needed at AGL and...

Yeah.

Is that... so is there a way to mitigate down the numbers you guys gave when you announced the deal so maybe the equity ratio is going to be less the $1.1 billion or whatever the number was originally.

Let me take you through dump math and then we’ll talk about how we attributed it here. Dump math the number is going to be somewhere between $4 million and maybe over $5 billion. The $4 billion of cash that we talked about is really through 2020 and doesn’t really assume that Southern Power execute its growth plan, which we think they will. So the number could be higher maybe over a longer time frame. When we look at - so that’s kind of a source of cash, when we look at the uses of cash over time we got into an argument here internally about how to attribute the benefits of that cash. So let’s go through it and let’s just use the $4 billion number although the number could be higher. We had always assumed in our former financial plan assumingly we buy by AGL a $3 billion equity issuance over the time frame. We are going to do $4 billion in cash if you just use a 40% equity ratio, 40% times $4 billion so it’s the cash retires a mix of capital requirement the equity portion that would be 1.6. If the total amount of equity was 3 and you don’t have to issue 1.6 now that leaves you 1.4 to issue. When you look at the usage of cash, we could go through a variety of ways to attribute these shares, but since the biggest issue of cash is a near-term use and that is to acquire AGL. So we decided to allocate the new equity essentially to that project. And so if you think about it $200 million issued in 2015 plus another $1.2 billion represents the balance of $3 billion less $1.6 billion equals $1.4 million. So that’s really the simple math. Look Dan we could have allocated the equity to Southern Power, we could have taken pro-rata approach, this is just the way we decided to do it, to keep the plans in place through 2016.

Okay. And I guess one last question just that cash reduction in the rate based growth because of bonus depreciation, there was enough room in the 4% to 5% earnings growth band that reduced rate base deployment is not going to work you guys down in the growth rate you provided in the hall?

Well, there is a give and take there, right? Essentially the take is yeah, sure reduces growth but the other side is, there is the benefit of excess cash and therefore less shares as I just outlined with you, $1.6 billion less equity raise over the same time frame and remember part of this appropriation still was not just bonus depreciation it was ITC and PTC. So you will see a sustained Southern Power growth plan through this period and we think we are within that range, we’re able to maintain it.

Okay, got it. Thank you guys.

Thank you.

Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead with your question.

Hello, Steve.

Yeah hi, hey Tom and Art how are you?

Good.

Just wanted to kind of clarify something here so, when you announced the AGL deal, I think you said it was 4% to 5% growth off of your standalone 2015 base, is that correct?

That’s right.

And the midpoint of that was 282. Now you’re saying 4% to 5% growth off of your 2016 guidance, which is also still a midpoint of 282. So, if I go out and look at the future like I looked out to 2018, if you just take the 4% to 5% to find that way, what was going to be 322/18 would essentially be 308? So could you just be specific on what is the $0.14 difference between what you had said before and what you are saying now?

It’s simply the shares associated with the preliminary issuance to support AGL plus the estimated impact of bonus depreciation. Look, PE times EPS is a shorthand for value when you think about the intrinsic value of Southern we got bumped from the passage of this bill an additional $4 billion to $5 billion and perhaps more of cash. So, when you look at the delta, the number is $0.04 here that’s how you get to 282 and we grow off of that 4% to 5%. It is inescapable in fact I would argue that the adjustment from a book standpoint is in earnings per share, but the value adjustment is probably in the PE ratio, if you do a dcf on Southern we just increased $4 billion to $5 billion just on cash from where we were before. So take 288 at 5%, 276 at 4% and that will be our growth trajectory going forward.

Okay, and then -

Hey, Steve one more thing, real quick. Recall also, we talked about of course this is all subject to the board approval, all of our credit metrics are improved now, we got a lot more cash, so all of our credit metrics are better. And when you look at the dividend thing if you want to do a Gordon model approach evaluation we’re better off than we were. In other words we said, given the earnings profiles and the growth rates and everything else according to the Board approval we’ll pay an additional $0.07 in 2016 and then we would grow that to $0.08 okay. We’re on the same trajectory, assuming the Board approves and our cash flow metrics covering that dividend are somewhere between 20% better to historical performance around 10% better than what we thought it was when we announced the AGL deal. In other words, our ability to pay the dividend because of this cash is enhanced relative to where we are consistent with the value proposition.

Okay. Should I read that as this just supports better the higher dividend growth that you talked about in the deal or are you suggesting that there might be a chance to grow it even faster than you said?

Let’s say at a minimum it supports the growth that we said before. We’ll always evaluate it year-to-year based on the Board. But my point to you is we are significantly better from a cash flow coverage or dividend standpoint than we were before this point. And so we’re able according to board approves, we’re able to maintain what we said before and we’re even better are from a credit standpoint. And that include it’s going from $0.07 to $0.08 in the increase.

Okay. So I get that just okay. One other question just on the Georgia review, do you view this I mean the commentary about the commissioner seem to be constructive. So do you view this an opportunity to kind a go back to kind of getting a bit of a pre-prudence decision because I know that was initially the law than it kind you settle that away and so there is an opportunity to do that or is just do you think this is kind of a risk or how should we interpret this review?

Steve we think this is bullish. This is all associated with the settlement of the litigation and recall if you dial the numbers back around BCMA we decided not to pursue these courses because we were in front of litigation and we didn’t want to do all of that. So the commission sell - and we’ve seen a lot of public discourse about this that the settlement was good for everybody. The commission is taking the lead in evaluating now is this the right time to pursue prudence. So we’re following their lead, we’ll prepared these exhibits in the next 60 days and we’ll pursue this process as outlined by the commission. But overall, we think this is very constructive.

Okay. I’m sorry I just want to go back one more time, so the difference in the future earnings that we discussed that is really all do longer term to the bonus depreciation not having as much rate base because of that obviously that’s offset by financing, but net-net that is the reason for the difference.

That’s right and we’re going to maintain the - you go through your Gordon model stuff. We’re going to maintain the trajectory of the dividend so payout ratio is up. The cash flow coverage to dividend is significantly higher. And as our growth rate goes from 4% to 5% payout ratio comes down pretty quickly in the years ahead. So what we’re doing is maintaining with better credit posture what we said before.

Okay thank you.

Yes sir. Thank you.

Our next question comes from the line of Anthony Crowdell from Jefferies.

Good afternoon, guys.

Hey, how are you?

Never been better. How about yourself?

Awesome.

Just two real soft ball questions I guess. One is on Kemper, you had some like I don’t know you called it hotspot so you had a, I guess two other refractory. I mean is there a period where you get to when you’re comfortable with now the gasifier and I don’t say out of the woods but maybe the high cost or whatever trying to get this online is passed you.

Yeah and let me very clear. What we’re doing with the refractory is not high-tech. it really involved finding some hotspots looking at that making and not only fixing what was there but making an improvement to both gasifiers. So we’re taking the opportunity to once we get this thing up and running it will run in a safe reliable manner for years to come. So we took the opportunity to make improvements. These are not high-tech nor they reasonably expensive. However they are time intensive. Taking these steps right now, we think will benefit us long-term unfortunately they do add about two months to schedule. So that’s what we’ve done. So the startup process otherwise as we were so excited I guess the last time we spoke the fluidization test and the more technical test have gone beautifully. So we’re very kind of energized by the steady rate of progress in start-up. Didn’t like the delay but we think that will service right in the long run.

And just lastly if I move to Southern Power it seems like I don’t want to say perfect storm, but you have the, maybe yield closer to other companies that were investing in a lot of their projects at Southern Power was also investing in, I mean is there a lot more potential you guys have a lot of cash, great cost of capital that Southern Power really just takes tremendous advantage of this downturn in the market and sees a lot more projects open to them?

We’re very excited about the opportunity for Southern Power in the next few years. We’ve demonstrated our ability to execute like champions, we’ve developed terrific relationships with the people in the field and I think the first comment I want to make is recall this $2 billion outperformance in capital deployment from 2015 through 2017 we think it’s the same from 2016 into 2018. Now I think I feel very confident we’re going to be able to execute there, there are some wild cards out there it will be fun to see when gas starts reemerging, okay. And so that could even accelerate beyond what we’re showing right now, but right now I think we’ve got a good plan. We continue to execute in a very discipline way and we’ll see where it goes. I have very kind of positive views about our ability to execute for Southern Power in the years ahead. And one other things we just moved Buzz Miller over there he is a very talented guy and I think we’ll do great.

Great thanks for taking my question guys.

Thank you.

Our next question comes from the line of Paul Ridzon with KeyBanc. Please go ahead.

Hello, Paul.

Tom, how are you?

Awesome, how are you?

Well thank you. Just want to make sure I understand you’ve got in your guidance the shares to fund the acquisition, but no revenues from the acquisition?

That’s way basically they are excluded from kind of ongoing EPS, exactly right.

So when you assume the deal closes, or you just assume it doesn’t close this year?

Well now remember the earnings profile of AGL is such that its frontend loaded. The other earnings are in the first half of the year. They don’t really earn very much in the second half of the year. And so what I’ve been telling everybody is you shouldn’t expect any contribution in 2016 out of AGL. And on a standalone basis, as we suggested in the script if you remove these kind of one-off items, we were in the high end of the 3% to 4% range. Now when you bring AGL on beginning in 2017 and beyond we change our growth rate to 4% to 5%. We feel very comfortable about that.

And that includes AGL.

Yes, and that includes everything.

2016 doesn’t include anything for AGL.

So remember AGL plus fewer shares plus the growth rate of Southern Power gets us back to the 4% to 5% that we told you we would do before. And we think even with the higher payout ratio as the book EPS would suggest the cash flow coverages allow us to pay that with even greater safety. We’re in a better position on the dividend than we were before when we announced AGL.

So bonus.

Yeah.

And then just back to your comments on Southern Power should we look for you to kind of what’s the right scale in your tax appetite to do more renewables?

So I’ll let Art kind of fill in on that we find ourselves because of this excess cash and tax benefits in a carry forward position. We’ve adjusted we are adjusting our IRR requirements, we only have this very disciplined process we go through, particularly for the solar deals and I’ll let Art go through that unchanged probably is our wind deal.

I think you just wrapped it up it’s just you said Paul we’re going to not be able to monetize some of the investment tax credits quite as quickly as we had expected for solar however it’s a little bit different for wind because production tax credits are spread over a 10 year period. So we’ll still look at incremental solar, we’ll look at incremental wind and we’ll still apply very disciplined processes Tom talked about to our approach to every project.

And we talked to you before in October about we had a great backlog already in 2016 winning all those projects fit underneath our curves even as they are adjusted.

And then Tom I kind of heard in the background this morning on TV. But you didn’t my undivided attention had a couple of things going on.

Come on Paul.

And I’ve been looking forward to a replay on it. Can you just kind of you view your comments you had about kind of a new age because of e-commerce or electronic?

Yeah. It’s fascinating stuff. We really do have a great team of economist here and we are just seeing this now in a broader sense. Here is the issue, we had talked historically about leading and lagging indicators and in fact I would argue our stuff is as good as anybody in predicting the direction of the market and what we had been seeing historically is that industrial sales are the leading indicator, even better than that is economic development. But let’s just stay with industrial sales. They create jobs, they grow personal incomes that are above normal for the Southeast, as we create jobs people move in, they get those jobs, they get the higher income, they start consuming more that’s residential. And then as more people move in, the commercial sector comes in, they do dry cleaners and grocery stores and hospitals and schools. Now there is an emerging segment in the commercial class. So the commercial class is the lagging indicator and it matured really well during 2015 and so you say is that a bearish signal. There is an emerging important segment in commercial sales that really relate to the electrification of the economy. As the whole economy becomes more digital in its composition we are seeing especially in the Southeast the advent of data farms - server farms, of IT professional and these jobs are two to three times higher than typically what would you see in a normal commercial job like a restaurant or a school. These are really high paying job and they don’t have the kind of correlation to industrial activity that you see typically from commercial to industrial. And just as a supporting statistic Georgia was just named the seventh fastest growing state in the United States for technology employment. This is a sustainable growth rate and doesn’t have that correlation. So even if industrial starts to take off and all that again these guys are going to sustain and we are very excited about that, the buying power, the economic quality of this segment is really good.

And then your 1% forecast for industrial sales growth that’s just based on economic development activity you expect to start taking move?

Yeah. Plus I think even the people that had been damaged a bit by the downturn and the malaise in international economies and cheap oil and the strong dollar and all that, even there we are seeing these people adjust to this new market reality. Let me give you a fun statistic there, nationally we are seeing United States exporting down around 7%, in the Southeast it was down only 2% and that really picked up at the end of the year. The Savanna Port had a record year in terms of its activity. So I think what we are seeing is some of these industries that had been hurt pretty bad and maybe they are coming off a low base chemicals, primary metals et cetera now adjusting to this new reality.

Thank you very much.

Yes sir, thank you.

Our next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead.

Hey, Greg.

I don't think that it's possible to patent the dividend discount model; I think that was already done by someone else. But thanks. So a little bit more on the question of the visibility on the solar and wind stuff. I understand you said you are going to - because you theoretically you are going to be able to monetize ITCs now over longer time frame, your IRI are higher, every other utility holding company is in the same boat. So your marginal competitor for an incremental solar project is just Conad [ph] or Dominion or Duke then you are all on the same boat and that doesn’t really change the competitive landscape. But if your marginal competitor is someone who is at a similar credit rating and is still has tax appetite. Doesn’t that put you at a theoretical disadvantage going forward in order to achieve your targets?

Yeah sure. As you positive at your question now, but and what we’ve already seeing for the projects that we’ve already circled for 2016 and I remember in October I gave you great confidence about our ability to execute 2016 in a similar manner. I think we’re going to be able to do that. We already know that those projects meet our hurdle rates even with the adjustments. And don’t forget about the importance of relationships, our ability to close, the fact that we’ve worked in joined development if you will for people to get power cells agreement better suitable to our risk return profiles. And so I think all of this will work to our benefit. We don’t see really any significant slowdown. I just wanted to let you know that we were looking at the time value of the cash, but it doesn’t make a substantial difference to be honest with you. I feel very bullish about our ability to execute the growth program.

Okay, great. And I know that Steve asked this question in a million different ways and I come up with a slightly less lower number in 2018 but semantics. But is it solely the impact of bonus deprecation all things equal or are we also sort of seeing the compounding effect of slightly lower than expected sales growth in terms of earned returns on across the business as well.

It’s all bonus.

It's all bonus.

Yeah lowers your growth rate. Improving your growth rate is going to be less shares improving your growth rate is going to be the growth plan at Southern Power and we’re going to keep rolling. Hey remember, we talked about $4 billion I mean, I know we’re conservative on all these things, but Southern Power execute these growth program it’s going to be more than $4 billion it could be in fact a little higher than $5 billion.

Got it. Last question Georgia, things look like they’re going in a positive direction in terms of them reviewing the settlement them doing prudence. You also have a rate plan that you’ll either again the counting order for again this year or go through a normal rate case process as you usually do when you roll these things. Is that work load sort of theoretically like achievable by the Georgia commission this is the lot of stuff for them to get done this year or should we expect some of the stuff to sort of roll into 2017 just by the sure magnitude of what they’re trying to accomplish with three major approvals pending here the settlement, the prudence review and the rate case.

Yeah man I mean add to that. I think we’re doing integrated resource plan, we have DCM 14 filed on February to be done and whatever it is July and August. And then we have 15 in the middle of the year. So if you think about it we've got a lot of activity. And I know when they had suggesting to go through this process the staff rates and issues about work load. Look we all get that we have a history since really 1995 of working very constructively with the staff and the commission. And we’ll find a way to balance the work load and achieve good results for everybody. So it’s a great point let’s let the commission to figure that out and we’ll work with them to get good results.

Okay, thank you guys. Bye-bye.

Yes sir, thank you.

Our next question comes from the line of Michael Weinstein with UBS. Please go ahead.

Hey, it’s Julien here?

Hey Julien.

Yeah there you go. Just for the record I just want to say we’re both on the call. I will let Julien do the talking.

You do all the work he does the talking, right?

Well a quick question if you will. Just to elaborate on the last series of questions around the growth rate. Can you be specific around the ITC benefits recognized in 2016, 2017 and 2018 as well sort of, what do we see in this year and what are you thinking going forward. Dominion's laid it out the other day they’re seeing obviously with the lower CapEx a rolling off. So what are we expecting - what are we baking in there is there an offset to the bonus depreciation potentially with more solar ITCs.

Well the problem is the bonus depreciation pushes out, stands in front of the monetization of the ITCs. So the more solar you do the more bonus you book kind of pushes out the equation of it. But if you look at 2016 and 2017 look we’ll be back into utilizing tax credits I believe sometime in 2018.

Okay. And how much I’m just kind of curious, how much is baked into the 2018 number and then just be very clear about it or are you…

So if I had to read I mean, I am looking at some [indiscernible], I mean it looks like yeah you’re in there you’re kind of done in 2017 you’re into consuming it in 2018 and you’re done by 2020, 2021 it gathers itself up pretty quickly it consumes it pretty quickly. We can give you breakdown year-by-year I guess later but…

And is there any incentive to delaying projects just to kind of think about it allowed if you’re not getting the tax benefits now why not push them off if you can renegotiate the deals get a little bit better, little better uplift?

You’re talking about solar deals?

Yeah there is talk out there in the industry I suppose you guys could potentially be a leading indicator on it?

No you know what I mean, it’s an interesting question, here is something that we have talked about, but so far we haven’t seen much of it. Remember when we thought there was going to be a cliff from 2016 to 2017 and we all said boy there’s a freight train running to get deals done in 2016 and we kind of said well you know what if we get this expansion which we did with all the activity show up in 2016 or would it start to spill over into 2017. We’re seeing some of that okay, but we still feel that for the projects that were circled by us back in 2015 for 2016 that they’re still going to happen pretty much in 2016. There could be a minor spillage if you will into 2017 but here’s what I think you’re going to find more likely and that is more projects now come to light. When you think about people starting to anticipate proactive responses to the clean power plant, other states’ activities with respect to renewable portfolio standards, look I think there is a tremendous appetite to grow both solar and wind in the years ahead. So my sense is with the added ITC and PTC extensions the market is going to well exceed, I’m just going to guess what we all think is out there. And the price for those projects will reflect the fact that the general participants in the United States are going to have bonus depreciation sitting on top of them. In other words I think this will all resolve itself and we will see additional growth that would be my guess.

Got it. Can I just go back real quickly clarify regarding some questions here, when we’re talking about the ITCs I was specifically inquiring around the earnings impact not necessarily the cash. Is there any solar ITC earnings impact reflected in the 2016 guidance in 2017 or are you also delaying this earnings recognition?

No for both purposes you will still recognize the benefit of ITC. The recognition for cash that will be delayed until you got room to take them.

So the cash benefit gets delayed a bit and you’re in the kind of I don’t know if I did an average to that it’s kind of an average I don’t know 2.5 with a four year total kind of thing. That’s kind of the time value magnitude you’re talking about.

But just to be clear how much like EPS are we talking about in 2016 guidance?

In total for Southern Power?

Yeah or for the ITC just I’m thinking about like that being something of quasi one-time that you want to think about…

I am going to say it’s about $150 million.

Of ITC benefit in 2016?

Yeah right.

All right, great. And 2017 and 2018 I suppose it’s proportionally lower based on the CapEx you’re projecting that probably a fair statement.

It depends on the mix, remember the mix of wind and solar. So we’ve just given you a number, we’ve not defined it anyway between what’s solar, what’s wind and what’s gas.

Got it, all right great thank you.

Thank you.

Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please go ahead.

Hey, Stephen how are you?

Great how are you doing?

Awesome.

Awesome. Most of my questions have been addressed, so just wanted to touch on new nuclear and checking on the Sanmen project in China what’s your sense in terms of the progress at Sanmen?

That’s good there were the - I guess there are big hold ups related to the reactor cooling pump, resolved those technical issues, those have been resolved. I think they’re moving forward. I forget which ones is which, but one's going to go in service this year and I think Sanmen this year and early next year will be Hian [ph], they are going well. With respect to new nuclear certainly as the clean power plant starts to mature and states responses. We’ve said it before there is really a big three maybe a big four in responding to that. I think new nuclear makes a lot of sense big scale, base load, no carbon emissions. Clearly renewables will be a big player will be for us have been for us. And then when you see kind of intermittent resources like wind and solar come to play, you’re going to need two types of gas come in. One piece of gas which will be the ability for generation to follow the intermittency will be CTs. So we think you’ll start to see CTs in a big way. And then it looks tough for coal certainly new coal. So if you want to look at base load looking gas that looks like CCs. So those are going to be the trends that I think you’ll see going forward. Right now Georgia has filed its integrated resource plan, but that really is not particular responsive to the clean power plant it is way too far early to get a kind of cogent response by the state. So you should view the IRP in Georgia as being pre-cleaned power plant in its composition.

Understood. So that could add as you think about the clean power plant that can add addition opportunities but probably a bit later on just given that the time frame of that regulation.

Yeah and that's right, but you’re going to get this conundrum of whenever you decide whenever its accepted by EPA and everything else if gas is going to be a big deal and if you got four years to start building combined cycles and you got to have a response in place by 2022 for example. You got to start right away. And that’s why I guess Art made the comment that you’re going to start seeing potential changes in the CapEx budgets. If CC starts to show up in the backend of this three year budget we’ve lead out for you.

Yeah, okay thank you. Just had one last question just on Toshiba and Westinghouse. We’re very pleased obviously with the settlement and improvement of the risk position. There is a little bit of press reports about the position of Toshiba and potentially looking at their investment in Westinghouse, but that looks more like a financial test rather than anything operational. I assume it’s the case that the people that you want in terms of the team involve from Westinghouse et cetera. There if Toshiba were to take a right off of Westinghouse that’s not necessarily really it translates into anything different in terms of team composition or commitments to the business or anything of that sort.

No not at all Steve.

In fact we would argue look, we’re in such a better spot than we were. Thing about the relative positions of the partners we have a single point of contact now they’re not having to fight with each other. In fact we’re already seeing improvements on the site we’re going to 24 hour coverage which we didn’t have before. We’re seeing an acceleration in the subcontractors for things like panels, new port news, organ iron works. A much more focused workforce on site. Now this thing has been terrific. And with respect to any and I’ll let Art to comment on this. But with respect to any credit issues at Toshiba with respect to their ability to undertake their financial obligations under the contract. They provided us LCs to meet their obligation.

When they were downgraded below investment grade. In terms of the contract required them to commit letters of credit, which we received about a month ago.

And they’re written by strong banks we’re completely happy with.

That’s very helpful. Thank you very much.

You bet, thank you.

Our next question comes from the line of Shar Pourezza with Guggenheim Partners. Please go ahead

Hey, Shar.

Hey, Art and Tom how are you?

Super.

So just looking at slide 10, the dip in CapEx that you’re showing for Southern Power I am still trying to just figure out is this the pull forward of demand under the old tax regime or is that sort of Southern Power shifting out their CapEx profile given the higher hurdle rates or the less tax appetite?

Are you talking in 2017 Shar?

Yeah right in 2017 exactly.

Yeah I think it’s a bit of the lack of supply at this point is that’s going to have to adjust to the new market reality that you now have extended the ITCs beyond down to 2021 that you don’t have as many projects that were in the mill so to speak.

Yeah and you know what I mean that I think Art is right on the money there, I wouldn’t be surprised that the market for that number grow and I feel good about our ability to execute within that growing market. Look at what we’ve done and that’s why we want to make a point in the script about kind of the last three year forecast we gave you was $3 billion and we did $5 billion for heaven sake. Right now we are saying it’s going to be $5 billion for the next three year and we are going to do $2.4 billion in 2016. So I would say as while there is only $2.6 billion in the last three years. I wouldn’t be surprised that number growth. When you see the availability of these tax credits and you think about people getting ready for the clean power plant, the market is going to grow. That’s what we are showing right now, that’s where we’re going to stick within our plan. But I think there is room to grow.

If you look at the RPS standards expansions that will certainly drive some of the growth naturally anywhere.

Absolutely.

And then just sticking with the growth, large scale acquisitions on the renewable side I have to imagine there is willing sellers and maybe you could just touch on if you can, the recent media reports that Southern Power was potentially looking at Sun Edison’s portfolio?

I haven’t seen that and I’m not going to comment on it. We are active, we have terrific relationship, have had terrific relationships with major developer. First Solar has been one, Recurrence another and so we work lock step with those guys and that’s why we are so confident about kind of our forward supply. Certainly there are projects that are in existence and if we are a logical buyer we will participate really hard. I’ll give you examples where we’ve done that. In Georgia after the solicitation process that went through a lot of developers when we did deals there we became a very attractive participant because we could execute with a great deal of financial resources and just work it really well, that’s going to be an existence. But with respect to any particular name we would never comment on that. There is going to be stuff available though.

Got it. Thanks so much.

You bet, thank you.

Our next question comes from the line of Ali Agha from SunTrust. Please go ahead.

Ali, how are you?

Good, Tom, good afternoon.

Good afternoon.

Just to clarify a couple of points you had made earlier just to make sure I’m getting them right. So first off on bonus depreciation, is it fair to assume that the $0.04 hit if you assume 2016 is that a good annual number to think about for 2017, 2018 as well?

No, it will go up as we move out in time, Ali. The facts are that we were actually a cash tax payer in 2015 and we did before the extension of bonus we’ll probably have been more in 2016. So it’s the smaller effect in 2016, but it will be grow over the time.

But just remember consistent with the guidance we’ve given you we are going to overcome and a continuing burden by less shares, growth plan, addition of AGL.

Right.

Yeah, I get that. And then secondly so given this ITC and PTC extension and Tom you alluded to the fact that previously you were looking at a bit of a cliff in 2017. So off that 2015 earnings base for Southern power, how should we be looking at the next three years? Relatively flat or growing given that these have extended how should we think about that change now from your perspective?

These guys hate me talking about this, but [indiscernible] we have continued to beat Southern Power’s goals every year. When I think about, I want to go back to 2014 we estimated around 150 or so and we got 170 or so. When we estimated 2015 we estimated 180 and we are going to get to 215. Now here is what’s interesting, I’m going to give you a number in 2016, it’s going to knock your socks off I think. But remember we added to the CapEx so our CapEx went from, I forget what we estimated 1-2 to 2-4 round numbers in 2015 and then we said we are going to execute similarly in 2016. So imagine the CapEx that we’ve been expanding on projects and while we jumped up to 215 the effect of this acceleration of CapEx at the end of 2015, we were spending CapEx. We didn’t have projects and service. Once we go into services in 2016 you’re going to see a great big jump and that jump could be as high as high $200 million to $300 million in net income. So, it’s going to be a big bump. Now, consistent with the CapEx that we’re showing you here, that number is not sustained and in fact the less CapEx and the idea of the cliff and all that would show that our net income will come down in Southern Power to some level in 2017, I’m not prepared to talk about what that level is, but I want you to know don’t expect 300 to stay the same every year thereafter. I will just say, 2016 we expect a great year in net income contribution from Southern Power.

Yeah, absolutely.

And just remember in 2017 and 2018 going forward AGL pops in and we estimate it way back when I think about $0.10 a year on the average, that’s really picks up for Southern in 2017, 2018 and beyond.

And also can you remind us Arthur again of the 2015 O&M number expense that you posted, what kind of growth rate should we be looking at annually going forward?

Okay, Ali. Going forward, we’re going to stick with our 3% to 3.5% number, but understand that there is no such thing as a normal year in non-fuel O&M. Looking back to 2014, I mean it’s for the operating companies alone year-over-year, it’s only up 1.2%. If you look at total Southern, it was up 2.3. So, lots of things influenced those numbers, but as a planning guide, I think 3% to 3.5% is a good number.

And you guys know for years, really, I mean going back when I was in the CFO rank, we've developed this dynamic budgeting process. Actually we approve a lower level of budget and then above that we developed some flexibilities that essentially creates optionality in our spending plan to match for different economic conditions and different weather such that that’s why we always hit our numbers. We're able to adjust spending, when we have warm weather during the summer. We’re able to do more outages and more work. And what underpins all that, the result is we have the best reliability for the wires and our generating system in the industry. So, it works exceedingly well, but Art is right, I mean I guess you should use a 3.5% looking number, but just be cautious, we'll match that with revenue overtime.

Yeah, and there is other exogenous factor that it will bring Kemper online that will certainly make a difference in non-fuel O&M and as we bring other environmental piece of equipment on that will impact O&M as well. So, I’m really talking about base kind of stuff.

Yeah, understood. Last question, Tom, now with all these moving parts and these extensions and bonus et cetera, if you look at your company on a standalone basis and pre the AGL acquisition announcement and the financing that goes with that obviously, if none of that had happened, what kind of growth rate were you looking at for Southern sort of on a standalone basis?

Okay. Absent AGL, absent bonus and all that -

Well, we want to go obviously - sorry, go ahead.

Okay. I'll answer. Absent AGL, absent bonus and all the new tax law we just got, it would have been 3% to 4%. And we would have been back to the litany of me kind of posing to you all the rhetorical question that we in fact face, that is we would become way excess cash flow that we talked about before and we said, there is kind of three things that you can do with it. One is, buyback your own stock. One is, buy somebody else’s stock and in the middle, buy assets. And what we have been seeing, what you've seen us do in that strategy with the buy up of bunch of assets particularly at Southern Power. We saw an opportunity with AGL not only to buy somebody else’s stock at a premium that is enormously accretive especially given where they were trading relative to their peers so our premium wasn’t nearly as high as what you see in the media, and especially relative to other deals and it accretes to our growth rate. And so, this thing has been a homerun ever since we’ve announced, and I think our stock has performed accordingly. But it would have been 3% to 4%, but we would have been dealing with what we do with the excess cash.

Understood. Thank you.

Yes, sir. Thank you.

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.

Hey Michael.

Hey guys. Hey, Tom. Hate to be the one to do this but might involve been asked and answered I think I hand it off to the next guy.

Oh! No, you’re a hero. Thanks. Appreciate the chat.

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Good afternoon.

Hello, Paul.

Hey, how are you doing?

Good. Hope you're well?

I am managing. I just wanted to ask you a couple of quick ones. What’s the GDP forecast for 2016?

Little over 2%.

Little over 2%?

Yeah.

Okay. Now when I look back at what you guys had or this time last year, you guys had about 3 and you expected 1.3%.

Yeah.

So when we’re looking at this, are we guys changed your GDP growth rate, and also by the way, I hate to do this, but is the leap year in this as well that's...

You know that does matter.

I know.

Yeah, Paul. This is Art. I think certainly GDP is a factor that we put into our forecast and it does have an influence. But one other things and Tom has already kind of mentioned it, it is our bottom-up approach, as we talk to all of our large industrial customers and we get a lot of information from them about what their plans are, what their expansions, what new models they might be bringing online, whatever, and we factor that in as well. So, it’s not just a top bound GDP driven number. So, it’s not going to always match up.

And let me just give you a story about that. So, when we went from 2014 to 2015, we had gas prices on the average to be kind of in the 4s to now in the 2, okay. So there were some people on the margin with co-generation facilities. So if prices in gas went down, they turned on their co-gens and stop buying from us. That also impacted industrial sales in a big way. You’re not going to see that thing delta this year, because you’re at a super low gas price, I don't know how much further lower they can go. But we’re not going to see that delta. And so what's remaining, this is an industrial growth rate that we think is achievable.

Okay.

It is absolutely a bottoms-up, boots on the ground kind of analysis. We do check it with our kind of big megatrend looking stat. But, we’re pretty confident with what we’ve got.

Okay. And then with respect to Julian’s question on the solar ITC, I wasn’t really completely clear about what the 2017 impact was. It sounded like it was about a 150 million that you guys saw on 2016 for the ITCs and then I just apologize because I just didn't really catch what you guys expected to have happened with that in 2017.

Yeah, it really depends on whether we’re going to do solar deal, wind deals or natural gas. So, it’s hard to say what it’s going to be then because it depends on what we commit to do and what we spent CapEx on, what clears into service.

Okay. But directionally do you think it might go down is that what…

Oh! Sure. Oh! Yeah. Absolutely.

Okay.

And what you’re going to do probably is, I don’t know - I’ll say on to the current plan that we forecasted. Who knows what's going to show up in the market and we'll adjust accordingly as we see it show up. But one of the things you can pivot to do, is do more wins, for example that would make it go down.

Right. And that would suggest the… but there could be a little bit of drag is that what you’re thinking in terms of at least in the near-term year-over-year?

No, listen. We feel comfortable about hitting our numbers that we’re showing you guys. Look, we’re giving you our best guess and we're giving you a conservative case. My sense is there’s going to be a bigger market and certainly I will challenge Southern Power to participate fully in that bigger market. And what they’re committing to right now. Remember we went through the discussion earlier on the call about going from a big CapEx number in 2016 to a lower CapEx number in 2017. That really just a reflection of where we are, we’ll push them to do more.

Okay. And then, just with Kemper and the negotiations on the CO2 contracts, how is that going and how should we think about the impact of low oil prices and the economics of Kemper on an operational basis given what we’ve seen with the big dramatic drop in oil gas?

Interestingly, I asked that question yesterday; in terms of appetite for CO2 people still have an appetite for CO2. For the EOR business, there’s a tremendous demand and in fact, we’ve been approaching for get Kemper. We've been approached about getting in the business of producing CO2 from other places. You may remember way back when we did one of our early pilots on carbon capture and sequestration at a plant Barry [ph] and we were sequestering the CO2 in the Citronelle [ph] fields there. We think there is tremendous demand for CO2 in the EOR business even at these prices. And I was a little surprised with that. In terms of the relative cost of energy we kind a cover that and other calls. And I just remember by baselines here so I'm going to just quote that I quoted before that had a $100 of barrel, the value of CO2 plus the host of other assumptions got us to about a buck in a quarter per million BTU equivalent at $50 a barrel, it was somewhere around to 2 to 2.25 equivalent. And so, we'll see what happened now.

Is that linear or I mean just as you know we've had a drop from there that just sort of that's what --.

Well, of course. We get that, but listen you know what and then I get the question all the time about how can you justify building nuclear when gas prices are low. One of the things we do know is that we don't know what's going to happen with gas prices. And they tend to be much more volatile than other fuel stocks. One of the advantages of Kemper relative to even other natural gas plant is that we've essentially fixed out our cost of supply. We have mime [ph] lignite, we know what that cost, so that's not going to vary. And so, we're going to be able to produce assuming a reliability profile at a very constant level and we recall also what has changed overtime to look at the performance of Kemper in the past year, just purely by running natural gas through the combined cycle unit. We've supplied one-third of the energy consumed by the Mississippi power customers out of the Kemper site. So, we're going to be able to provide reliability assurances and the regulatory process, everything is going to be very attractive.

Okay. And then just there is this - there have been some reports about the large coal inventory in light of the low gas prices and what have you. And I was just wondering, if there is any issue or any comments that you guys have in terms of the level of coal inventory and if anything has to change contractually or anything else you might see in terms of coal gas dynamics in the southeast because of the inventories you're seeing.

Paul, thanks for that and I want to monitor that with our [inaudible] on that. We prepare the most [inaudible] data in preparation with this when I think I just be --.

I told when you ask this I suppose.

But in fact inventory is up a little bit. But not that and we're going to be able to manage it down. Here is kind of the fun stuff. We have been able to manage down the contracts overtime. And so, from a supply standpoint, we've really shifted of course to PRB away from Central Apps, Illinois has also increased, Alabama remains a certain set of supply. So, we've been able to shift our supply. But the other thing that we've been able to do is work on transportation. We've been able to work constructively with the railroads and here is my [inaudible] data. When we talk about train sets and 2014 at our peak, we had 95 train sets moving coal around the United States. In 2015 that number has gone down to 75 and for 2016, we have 45 active. So, we've been able to take down the number of assets that are moving coal around the United States. That will serve to balance out our fuel loads in an economic manner for the benefit of our customers throughout this year and then going forward.

Okay, great. I really appreciate it. Thanks so much.

You bet. Thank you.

Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead

Hey Steve.

Hey guys. Hey Tom. Just a question on thinking about kind of Vogtle with the bonus depreciation. Does this is the $4 billion or $5 billion of cash include getting bonus kind of on Vogtle at least one units comes in. Okay, just one of them or both of them.

Both.

Okay. And does the 4% to 5% growth rate includes like the rate base impact of Vogtle from bonus depreciation too so it's kind of everything together.

I would imagine that it does. I can imagine need to be an impacted.

Okay. So you're including the full impact of bonus depreciation cash and rate base for Vogtle.

That's correct.

Okay.

And we mentioned that in our script actually. It was going to pick up both Kemper and Vogtle. So within those timeframes expert.

Okay. Thank you.

Yes, sir.

Our next question comes from the line of Ashar Khan [ph] with Wisdom [ph]. Please go ahead.

Hello, Ashar [ph].

Hey, Tom, how are you doing? Tom, I'm a little bit, lot of numbers, but I don't know if you can kind of like simplify or heard something wrong, and this I'm trying to understand the merger. So you said, if I heard in the commentary that the merger is going to add $0.10 in 2017 and 2018, if I heard it correctly.

Round numbers. That's right. Through the period, it's $0.10 accretive per year and then numbers are 9 and 10 and 11, but whatever.

Okay. But then I also heard that you said that you are using 1.4 billion of equity from the bonus depreciation windfall in terms of investing that into this new investment, which is AGL. So we don't have to utilize it. And to me 1.4 billion of equity is equivalent to on current today's stock price is equivalent to about $0.10 a share. And then you are saying that's also hitting us by $0.06 in 2016. So, to me that implies that the transaction is dilutive by $0.05. So what am I missing the numbers don't add up, the $0.06 plus $10.0 on equity avoidance plus 10, I'm just not getting it.

I would go back to the math. I would try to do before the kind of caveman [ph] up, we were always when you think about, and it really get into an argument of attribution of shares, okay. And we argued about whether to put it all on Southern Power and say, that we are financing all of AGL with cash coming from bonus and all this other stuff or whether to do a mix or whether just to say look, the nearest term use of cash is AGL and so therefore keeping the 1.4 billion remaining, which we did 200 million in 2015, 1.2 is our plan in 2016, we have just chosen to associate that with AGL. We could have done a variety of things. When you consider the total amount of CapEx, including the acquisition amount less the benefit of cash, we could have attributed that on a pro rata basis. The economic impact of AGL remains the same. Once we get a full year of earnings. Remember and maybe this will be helpful just to recall, when we did the announcement. Their EPS growth rate on a standalone basis was between 6% and 9% and their base case assumed essentially 7.5% and we thought there were opportunities to improve that we did, when you add AGL in the Southern and increases our overall growth 1% from 3 to 4 to 4 to 5 that represents about $0.10 a year. We are going to sustain that into the future. How you want to count the shares is almost a term of art. But the truth is, the fact that we're going to get at least 4 billion potentially over 5 allows us to offset a significant amount of shares that otherwise we would have issued. The firm is better off 4 billion to 5 billion in total.

Okay. I'll go back and do. But I don't know the math didn't work out. Second question, Tom on the more macro thing. I guess you were not the only one the companies that reported earlier, all three of them showed a huge drop in industrial sales in the fourth quarter.

Yeah.

Is this - and I think so what you mentioned in your macro piece and I guess mentioned by Dudley [ph] last night is that the strong dollar is hurting the industrial, manufacturing side. How long do you think that this remains there, is this just last quarter or are we going to see weak numbers year-over-year comparisons for the first half of the year or could you guys give us from your macro perspective?

Yeah, man and in fact, if you want to go back and look at a clip, look at the clip that CNBC, when I was on Squakbox with Dennis Lockhart in December. But let me give you just kind of the dumb overview again. When you look at quarter-by-quarter performance, we track very closely the top 10 I used to call sic codes, I understand they're called something else now, but standard industrial classification segments that represents 80, 85% of our sales in the industrial sector. The 2014 all ten of those segments they showed year-over-year growth, so it's a terrific forward-looking stories. And then we projected I guess a 1.3% increase in industrial sales. Then all of a sudden with worldwide economy of China, all that other stuff that we’re talking about, dollar exporting going down, we started seeing those segments start to show year-over-year weakness. In the first quarter, two of them turned negative. In the second quarter, I want to say three of them turned negative. In the third quarter, six of them turned negative. In the fourth quarter, it turns out seven of them turned negative. And then even now my momentum analysis would have showed that even if you were still positive, this is the momentum comment. You were less positive. Everything started showing into the slowing down in the industrial sector. Now, what Art said, it’s true and here’s what’s interesting, when these guys, we were preparing for this call, first started coming up with the sales forecast and then we’re showing a renewed growth in industrial, we had a lot of give and take and pushback and why do you really believe that. Go through a variety of factors. I think this notion that the industrial classes adjusting to the high dollar and low commodity prices. In this new market reality is one factor. Second factor, remember I mentioned before that with gas prices falling, we saw a bunch of cogen turned on that tended to depress industrial sales, that delta won’t show in 2016 anymore. So, as people adjusted the new reality, like for example primary metal, we saw that go way down, we think now some of primary metal is going to grow with the - associated with automobile, with transportation. We’re going to see that - we have reasonably from our bottoms-up analysis. And I’ll tell you another thing, Mike Jackson of Auto Nation commented on this in some of his commentary. Other foreign operations are being relocated and I’d say story for that already has been in Alabama with Mercedes Benz.

That’s correct.

So, some of our bottoms-up stories are giving us the reason to believe that in the Southeast now this is probably not true across the United States, in the Southeast, we’re going to see a renewal of industrial sales off of 2016. So look forward to occur in transportation, look forward to occur in housing and maybe some of the other sectors.

But would you agree that might show up more in the second half of the year rather than the first half?

Yes that would be my guess also.

Yeah that was my question. Thank you so much.

You bet. Thank you. Operator any more questions?

Our next question comes from the line of Mark Barnett with Morningstar. Please go ahead.

Hey Mark.

Hey guys, how are you today?

Great.

A lot of great commentary in detail today on the call, so thanks a lot for that. I just wanted to clarify one thing, it’s been a long one. Just wanted to clarify one thing about the proceedings that were requested by the PSC? Am I correct in understanding that if there’s no kind of dispute with the staff findings over the next six months there won’t be a public disclosure of those discussions or…?

No.

Okay.

I mean let me just clarify that and let me give the timeframes right too. We have 60 days in which we make filings with the commission with the staff. Then a six months class sorry, okay. After we make the filing there is a 30 day class that will allow interested parties, to file their own information. Then we have an evaluation of all this information with the staff and we try and reach a settlement as to its conclusion, okay. And once we’ve reached that conclusion, if we reach a settlement, there will be a period of time in which interested parties can finally evaluated and it would be ultimately adjudicated in a normal course as we do with almost any rate case or any other proceeding that we have. So there will be ultimately a hearing resulting after assuming we have a settlement agreement. Rest assure to that.

Okay. I just wanted to clarify that, otherwise thanks for everything today. It was great.

Thank you.

Take care.

Our next question comes from the line of Adula Bernie [ph] with CDP. Please go ahead.

Hey Adula.

Hey good afternoon, Tom. How are you?

Great and how are you?

I am doing okay. Couple of things, in terms of Southern Power it seems like obviously with the higher CapEx and anything like that it's very now production tax credit investment tax credit driven. How much of the stuff stands alone by itself. And I'm just wondering like I mean how much is this just all tax derivative as appose to underlying economics about that Federal tax policies.

Now, that's an interesting question. I mean look, I've been on record a lot. And how even the EIA would say that tax preference items at quarters renewable are way in excess of anything associated with coal oil and gas and even compared to nuclear was estimated to be 35 times was available there. What's fascinating is I think these are mature industries. And certainly with the way, the clean power plant is structured even without tax benefits. There would be a great demand to do wind and solar, just because of their carbon profile. Recall also that I think the United States in general is going to be really well-served if we pursue the full portfolio that I'm always fond of saying we're the only one really doing all of it, new nuclear 21st century coal and natural gas renewable energy efficiency. Look, the dual behind your question is a notion that these things has in my opinion excess economic returns relative to a tax policy that didn't favor one technology or another. But, I think given where EPA is going, especially with the price of carbon that's implied in what they say. Even without these tax preference items being so tilted towards renewable there would still be renewables growth.

And do you think that when you take a look at your own portfolio and your own projects how those fit within that construct that you just described?

Well, to the extent we sign off from their in their current tax laws. So certainly if you didn't have those tax benefits they would have a different profile. Certainly the market would reduce, but for what we have I mean it fits under the commercial terms in which we entered into. It's hard for me to imagine, you're certainly you're not suggesting would we have don't have we had not had the tax benefits I mean that is the law.

I understand this law, but I'm just wondering, how much of this is only because of the tax law that allows us to happen versus just the practical economics, okay.

I don't know.

Right. And also if we just think about back on the history of Southern Power overtime, as I recall there have been modernizations and just like recycling capital or whatever. So when we think about capital program for next few years here. What type of modernizations or pruning or whatever we want to call it? Do you think either is built in or is possible?

Yeah so we - anything built in, okay. But as we have demonstrated in the past and I like to fond of thing we're in the EVIA shop. If there is a better owner for our assets, in other words, they have a different discount rate, they have a different whatever. Assets who fit in the hands of the best owner on a risk return basis. We're always open for business for good ideas about how to deploy assets or bring them back in. So we'll see.

I mean I'm curious if you look back in your history here. If you never had, if you generally work on a nothing built in, what you end up usually realizing typically as opposed to a zero baseline.

Yeah I'm a little reluctant to kind of do that because those kind of deals are very opportunistic. We get approached all the time by people. We're always interested in doing what's best for our stockholders in this case. And in some cases these impact directly our customers. We just have to balance all that. I'd be reluctant to kind of give a statistic like that.

Okay. And one last thing. You may have addressed some of this in your opening script, and I missed the - I only got in on the Q&A. But I'm just wondering, can you maybe update us in terms of your current thoughts about the - how within the retail and the commercial sectors. How efficiency and technologies dampening sales and anything like that and how your strategy work either through rates structures and regulatory mechanisms in order to offset that dampening. So I assume it's both in your interest and everyone's interest to try to do that as much as you can as long as it as long as it doesn't impair your ability to earn your authorized returns.

What we're seeing right now as we even despite energy efficiency and everything else we have a growing economy and growing sales picture. Obviously, we're always interested in the best rate design that we can possibly have. We're certainly open to any good ideas there. And I know as our company is considering their kind of ongoing discussions with regulators that we will think about good ideas. But overall, we still feel good about our growth profile.

So then I guess my last I only have follow-up on that. does that mean that because of the growth profile that you feel you see economically that trying to move more to not a decoupled model, but getting more - moving more in terms of having base rates being covered, but to a fixed charge and becoming less volume metrics. Is that something that you're willing to because you like the growth profile that you're willing to hold off on or is that something that overtime you feel like you're probably going to move to anywhere or not.

Yeah, we get into a history lesson now. The industry has grown up basically on volume metric pricing okay. We have a whole lot of fixed assets stands to raise and if you were to more wanted to closely get a fair picture with customers that you would price fixed assets in fixed way and volume metrics base measures in a value metric way. Certainly, I would say the pendulum that swing more to kind of the fixed asset approach in Nevada et cetera. Certainly, room to go there. We're willing to listen to any good ideas going forward. And just remember that any pricing scheme, remember we're still in a growing area in the Southeast. And I think there is a mega trend we ought to keep in mind. The economy is getting more electrified as a result of the digital nature of the economy. And I think we'll still see growth going forward for some time to come. Thanks a lot, bud.

No, I appreciate. Thank you.

Yes, sir.

Our last question comes from the line of Dan Jenkins [ph] with the State of Wisconsin Investment Board. Please go ahead.

Hey, Dan. How are you doing?

Hi good afternoon, doing well. I just trying to get a little more transparency maybe into your gross potential sales growth expectations. It's a quite a bit from 2015 to 2016. I was wondering now if you can give us maybe some granularity and the customer growth you're expecting and it looks like it maybe some usage growth does that been driven by like maybe more single family home as opposed to departments or what's kind of the thinking there.

Yeah Dan, this is Art. Again customer growth we looked at last year, it was about just under 1%. We're looking for something kind of that for maybe a little more in 2016. Again, that goes back to our comment about in migration into the region. Home values around the country have risen back to a level where people are more willing to transfer sell their homes and move and they were say in the last three or four years. We've seen a number of new corporate headquarters moving into the Southeast as well. Those are having a positive effect. We're still seeing I guess a higher level of multi-family. Although that is beginning to peak at some point. So, you're going to see it balance out a little bit and I think that's part of our expectations. But you're still going to see a continuing use weather normal use erosion as you still have a new eras of appliances coming in that are more efficient. That's just going to be a natural, some traction from customer growth that we see.

Yeah, but the big slugs in the past for HVAC and now we kind a see it lighting kind of be in a big deal with LEDs and all of what.

Yeah, but HVAC is the biggest issue in the Southeast.

Okay. And then on the Vogtle just the major modules, the critical path items coming up. So, I was just wondering, if you can just update kind of the timing like, what are the next things for both unit 3 and unit 4?

Yeah, we got a slide on the deck on that, Dan but unit 3 it’s probably CIO3, CIO2 I think those are the last big modules that go inside containment, they are near completion and are scheduled before insertion within the next few months. Unit 4, completing the cooling tower installation it’s about 50% complete so that will be done in the near future. And then you add another ring on to unit 4 along with the major modules on unit 4 that’s CA20, CIO1 all the big modules that would be repeated on unit 4.

So just to make sure I’m clear, so you are saying for unit 3 CIO3 and CIO2 are probably our first - type of things?

Yeah, those are the remaining ones to go in unit 3 containment, outside containment you’ve got the turbine building tabletop is being completed and later this year it will actually probably install the turbines.

Okay. And then so for the unit 4 are the A20, CIO1 of those first half or second half type?

I don’t have that with me Dan but we can get it to you.

Okay, that’s all I have. Thank you.

Thank you.

Thank you. Operator, any more questions?

Mr. Fanning, I will turn the call back over to you for any closing remarks.

Thank you very much. I don’t know whether, this is a combination of a Berkshire Hathaway Annual Meeting or an S session, but it was an all-timer in terms of link. I appreciate your patience, we appreciate your interest in our company. I really feel like Southern had a great 2015, we’re turning the edge, value the functional risk and return, not only did we exceed our target that we set out for you, but also we have been cleaning up, continue to clean up significant risk hurdles. When you think about selling litigation at Vogtle, when you think about getting significant rates in place at Kemper, when you think about successful technical startup activities. I think the company is on a terrific upswing. When you think about adding AGL into the mix with the future, I think the future is quite bright indeed. So, thank you, again everybody and I'll look forward to chatting with you soon. Take care.

Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company fourth quarter 2015 earnings call. You may now disconnect.