The Southern (SO) Thomas A. Fanning on Q2 2016 Results - Earnings Call Transcript

| About: Southern Company (SO)

The Southern Co. (NYSE:SO)

Q2 2016 Earnings Call

July 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

Shahriar Pourreza - Guggenheim Securities LLC

Greg Gordon - Evercore ISI

James von Riesemann - Mizuho Securities USA, Inc.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Steve Fleishman - Wolfe Research LLC

Anthony C. Crowdell - Jefferies LLC

Ali Agha - SunTrust Robinson Humphrey, Inc.

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

Julien Dumoulin-Smith - UBS Securities LLC

Michael Lapides - Goldman Sachs & Co.

Angie Storozynski - Macquarie Capital (NYSE:USA), Inc.

Paul Patterson - Glenrock Associates LLC

Daniel F. Jenkins - State of Wisconsin Investment Board

Operator

Good afternoon. My name is Sylvana, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company Second Quarter 2016 Earnings Call. Southern Company second quarter earnings slides were posted today. They can be accessed at www.investor.southerncompany.com/webcasts. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded Wednesday, July 27, 2016.

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, Sylvana. Welcome to Southern Company's Second Quarter 2016 Earnings Call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company, and Art Beattie, Chief Financial Officer.

Let me remind you that we will be making forward-looking statements today in addition to providing historical information. Various important factors could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information and slides we released this morning and are available at investor.southerncompany.com.

At this time, I will turn the call over to Tom Fanning.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Good afternoon and thank you for joining us. As always, we appreciate your interest in Southern Company. This is an extraordinary time for Southern Company. In addition to our better-than-expected financial results for the quarter, we've had several major accomplishments over the past several months. I'd like to first discuss our business development activities, which are enhancing our low-risk, attractive return business model.

As you know, we completed our merger with AGL Resources on July 1 and subsequently renamed them Southern Company Gas. This acquisition was our first major step in a broader strategy to further expand our business in a meaningful way across the energy value chain. We purchased the gas infrastructure company with high growth projections at a great price, and in the process retained a top-notch natural gas management team.

The regulatory approval process was constructive and uneventful. We were able to close the transaction faster and at a lower cost, including our debt and equity financings, than we originally expected. Southern Company Gas is a great addition to our company and should contribute positively towards fulfilling her shareholder value proposition for a very long time.

Shortly after closing The Southern Company Gas transaction, we announced a strategic venture with Kinder Morgan, in which we agreed to purchase a 50% equity interest in the Southern Natural Gas pipeline system. Subject to Hart-Scott-Rodino review, we anticipate the transaction will be completed by the late third quarter or early fourth quarter of this year. This is precisely the type of natural gas infrastructure strategy we've discussed for almost two years, and we view this venture as an ideal complement to the newly expanded Southern Company. With natural gas being one of the United States' dominant energy solutions for the future, the industrial logic of this transaction is completely clear. And there's hopefully more to come.

Kinder Morgan is a recognized leader in natural gas pipeline development. Our two companies have identified a variety of specific growth opportunities which we expect to benefit those customers and investors. As those opportunities come to fruition, we will update you on their details.

Earlier in the quarter, we completed the acquisition of PowerSecure, a company known for its proprietary distributed infrastructure expertise. PowerSecure has a national footprint and continues to grow rapidly and expand its high-profile customer roster. We are impressed with the way in which PowerSecure is deploying its proprietary technologies and innovative customer-focused solutions to strengthen an already stellar reputation. This business is a way to play offense in the energy efficiency/distributed infrastructure sector, extending our customer-focused business model beyond the meter.

Lastly, I'd like to highlight Southern Power's most recent successes. In our first quarter earnings call, we shared our belief that the potential pipeline for renewable projects was larger than originally anticipated. Since then, Southern Power has continued to find value-accretive renewable projects that benefit 2016 and beyond. Already this year, Southern Power has announced 278 megawatts of new solar projects and 43 megawatts of new wind projects. And we anticipate more to come.

Art will highlight 2016 CapEx expectations in just a few minutes, but I want to reinforce two points we've made before. First, in the years ahead, we expect to pivot to a greater focus on wind projects, with the reemergence of gas projects within the next few years. Second, much of the additional growth capital this year will be invested to bring us growth in 2017 and beyond.

Let's turn now to an update on our major construction projects. First, the Kemper IGCC. Almost two weeks ago, we achieved our most significant milestone to-date, with the first lignite feed and the production of syngas on Gasifier B. This was a major accomplishment. This first production of syngas involved the operation of the front end of the plant, which includes many first-of-a-kind components related to TRIG gasification technology. This milestone is significant, as it validates the TRIG technology at a commercial scale.

We've also proven the back-end of the plant; the combined cycle units operating reliably on natural gas. Significant testing activities are in progress and are scheduled to continue over the coming days, leading to the initial production of electricity using syngas in combustion turbine B expected towards the end of next week.

Accomplishing this next milestone will likely present challenges, as the plant's 14 operational systems must be integrated for the first time. We have previously disclosed that both units A and B of the facility are expected to be fully integrated and in service by the end of September. We're closely monitoring these next critical steps in the start-up schedule, and we expect to learn a lot. We will reflect any necessary schedule adjustments in our second quarter 10-Q.

Let's move on to an update on the construction status of Plant Vogtle Units 3 and 4. Construction on Units 3 and 4 remains on track and productivity continues to improve as Westinghouse has effectively leveraged the construction expertise of its subcontractor, Fluor. The contractor has reaffirmed its confidence in the schedule and several new work fronts have been established with many critical areas implementing 24-hour coverage of craft labor to maintain the productivity momentum.

The nuclear island containment building with all six major modules now installed remains the critical path for Unit 3 construction. We expect the remainder of the year to include a number of major milestones for Unit 3, including the setting of Ring 2 on the Containment Vessel, placement of the Reactor Vessel and initial energization. Meanwhile, Unit 4 is progressing especially well with the lessons learned from Unit 3 and have resulted in measurable productivity improvements.

Early on, we highlighted the NRC's ITAAC process, which stands for inspections, tests, analyses, and acceptance criteria, as an area of key focus for the project. We began submitting ITAAC Closure Notices to the NRC in 2015, and the pace will more than triple in 2016. Thus far, this process is right on track, and all indications are that the NRC has done everything necessary to prepare to support this effort going forward.

On the regulatory front, we expect a vote on VCM-14 in August and the filing of VCM-15 shortly thereafter. The prudence process is ongoing with Georgia Power and the PSC (9:45) expected to report to the Georgia Public Service Commission by mid-October.

I'll now turn the call over to Art for a financial and economic overview.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Thank you, Tom. As you can see from the materials released this morning, we had solid results for the second quarter of 2016, earning $0.68 per share compared to $0.69 per share in the second quarter of 2015. For the six months ended June 30, 2016 we earned $1.21 a share compared with $1.25 a share for the same period in 2015. Excluding certain adjustments listed in the earnings materials, earnings for the second quarter of 2016 and the six-month period ended June 30, 2016 were $0.77 and $1.35 per share, respectively. This compares with $0.71 per share and $1.28 per share for the same periods in 2015.

Major earnings drivers for the second quarter of 2016 included retail revenue effects at Southern Company's traditional operating companies and lower non-fuel operating and maintenance costs offset by lower usage across all customer classes, higher depreciation and amortization expense and higher interest 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 previously placed in service in 2015 and in the first half 2016.

Moving now to an economic and sales review for the second quarter. U.S. economy continues to expand at a moderate pace. The service sectors are generally doing well, driven by strong consumer spending and a relatively robust labor market. Real GDP rose 1.1% in the first quarter of this year and the Federal Reserve Bank of Atlanta's current forecast for real GDP growth in 2016 is 2.4%. Overall, market fundamentals are positive and job gains remain fairly robust.

Total weather-adjusted retail sales are down 1.4% in the second quarter of 2016 versus the second quarter of 2015 and down 0.5% year-to-date. A combination of shifting economics and the replacement of old equipment with more energy efficient devices and appliances appears to be negatively impacting usage in our residential and commercial customer classes, outweighing positive economic trends.

The manufacturing sector remains challenged by global headwinds, including the strength of the U.S. dollar and volatility in commodity prices, which have hit energy-related industries especially hard. Also, worldwide event risk appears to be inhibiting major commitments of capital by many industrial customers. Weather-adjusted residential sales declined 0.2% in the second quarter of 2016, but are up 0.6% year-to-date. Residential sales growth continues to be driven by strong customer growth exceeding both expectations and actual growth in recent years.

Conversely, residential use per customer is constrained by a higher influx of multi-family construction as well as the replacement of old equipment with newer and more energy-efficient devices and appliances. Weather-adjusted commercial sales declined 1.9% in the second quarter of 2016 after five consecutive quarters of positive growth and are down 0.6% year-to-date. Year-to-date, we've added 3,300 new commercial customers versus 2,300 at this same juncture in 2015. These healthy customer growth trends are running counter to decreased energy demand related to eCommerce growth and lighting retrofits utilizing LED technologies.

Industrial sales declined 1.9% in the second quarter of this year and are down 1.5% year-to-date. Sales continued to be negatively influenced by stagnant global demand, weaker, albeit recovering, energy prices and a strong dollar. We are encouraged, however, by a variety of positive indicators. Manufacturing employment in the Southeast continues to outpace the rest of the nation, with manufacturing employment up 1.4% year-over-year. The ISM Manufacturing Index has risen in five of the past six months, jumping to 53.2 in June, the highest since February of 2015.

Our stone, clay, and glass and lumber segments continue to outperform compared to 2015 on a year-to-date basis, as these segments continue to benefit from the housing recovery in our region.

Economic development activity remains fairly robust, with a 166% increase in new jobs announced year-to-date and healthy capital spending across our region. The pipeline of active projects is on pace with 2015. However, despite an increase in the number of prospective jobs, potential investment seems to be slowing.

Political and economic uncertainty, both domestic and abroad, along with the continued strength of the dollar appear to be hindering business investment decisions in both the industrial and commercial sectors. As we've stated before, we remain encouraged that the geographic region we serve continues to attract businesses that are seeking well-established transportation networks, lower cost of living, a capable workforce, an attractive climate and low-cost energy. We believe all these factors continue to merit cautious optimism.

Before turning the call back to Tom, I want to briefly cover a few final items. First, our earnings estimate for the third quarter. We estimate that Southern Company will earn $1.16 per share in the third quarter of 2016, excluding any impact from Southern Company Gas and the related acquisition debt cost, as well as our investment in SONAT and the related financing cost.

Earlier, Tom addressed the continued success that Southern Power has had in developing its project pipeline in 2016. Because of that success, we are updating our forecast for Southern Power capital expenditures for 2016, including $500 million of placeholders for additional projects. Of the capital investments identified thus far in 2016, $2.5 billion is for solar projects and, consistent with our pivot toward wind, $1.4 billion is for wind projects. In total, we are increasing our 2016 Southern Power capital expenditures to $4.5 billion, an increase of about $2.1 billion.

Most of this increase supports projects that will contribute to income in 2017 and beyond and have the effect of strengthening and lengthening our growth rate. The 2016 capital investments update also includes expected capital expenditures of $800 million for Southern Company Gas in the second half of the year and approximately $1.5 billion for our investment in SONAT.

Finally, I want to provide an update on our financing plan. In the second quarter of 2016, Southern Company successfully completed a $900 million equity offering, an $8.5 billion debt offering at the parent company, the largest ever for a utility, and issued €1.1 billion of euro-denominated green bonds at Southern Power.

Our updated financing plan for the remainder of 2016 now reflects incremental financing activity, largely to support our increased level of investments at Southern Power as well as our investment in SONAT. It is also designed to be supportive of both our long-term growth and credit quality objectives. Our equity needs for the remainder of 2016 total approximately $2 billion. While a portion of this equity will be funded through our existing plans, our projected to exceed the typical capacity of these plans. Southern Company is committed to maintaining a high degree of financial integrity and our financing plans are intended to support our current credit profile.

At this point, I will turn the call back to Tom for his closing remarks.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Thank you, Art. We are extremely proud of our recent successes, and we're excited about how Southern Company continues to grow for the future. In recognition of this evolution, we recently unveiled a new brand and logo to better represent our focus on building the future of energy. Meanwhile, as we execute on our strategy and expand opportunities for future growth, we continue to maintain a concerted focus on preserving the company's risk profile.

As Art mentioned just a moment ago, our long-term objective with each incremental investment opportunity is to strengthen and lengthen our growth profile, which is supportive of our goal to provide superior long-term, risk-adjusted returns to our investors.

We plan to host an Analyst Day October 31 in New York City in lieu of our third quarter earnings call. This will be an opportunity to share our story, provide further insights into our growth drivers, provide outlooks and supporting details inclusive of our new subsidiaries and, importantly, provide access to a broader cross-section of The Southern Company management team, which I believe is the best and deepest bench in the industry. Our Investor Relations team will provide more details on this event before the end of August.

Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

Thank you. One moment, please, for the first question. And our first question comes from the line of Shahriar Pourreza with Guggenheim Partners. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hello, Shahriar.

Shahriar Pourreza - Guggenheim Securities LLC

Hey, Tom and Art. How are you doing?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Good.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Super.

Shahriar Pourreza - Guggenheim Securities LLC

So just two quick questions around Kemper. So congrats on producing the syngas a few weeks ago. But we're I think two to three weeks in to when you did the press release. Are you you still producing the syngas at that level, or have you seen any hiccups there since then?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Normal start-up. Normal start-up is what I would call that. So we went to about 30% capacity, if you will, on producing syngas. And as typical in any start-up, what you do is you get a certain level of activity. You evaluate the systems and how it's working. You back it off. You make adjustments. You bring it back up. You back it off. For example, just this morning, Art, I think we heard that they're back producing syngas with some other recent changes.

So I would argue that what they're doing right now is exactly what they should be doing, trying to ramp up productivity. We want to get to a level to produce electricity somewhere in the 60% to 70% capacity level. So that's what they're doing is ramping up the production of syngas and making adjustments along the way.

Shahriar Pourreza - Guggenheim Securities LLC

Got it. That's helpful color. And then just remind me at what point do you plan to file a rate case around Kemper? So I guess at what point will the plant run and produce syngas before you file for rates? Is it 60 days? 90 days? At what point?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, that's kind of a question of Art. So I think we want to demonstrate sustained performance. I think everybody wants that. We want that and the City Public Service Commission wants that. We haven't decided what that timeframe is. But we'll probably update that maybe in October and maybe beyond, but haven't decided it yet. But we want to sustain performance.

Shahriar Pourreza - Guggenheim Securities LLC

Excellent. Thanks. I'll jump back in the queue.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Great. Thank you.

Operator

Our next question comes from the line of Greg Gordon with Evercore ISI. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Greg. How you doing?

Greg Gordon - Evercore ISI

Good afternoon, guys.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Great.

Greg Gordon - Evercore ISI

Doing great. Thank you. Can you translate the capital spending at Southern Power from dollars into megawatts of capacity being constructed in both wind and solar and expected in-service dates?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So, interesting. That's an interesting question.

Greg Gordon - Evercore ISI

If you can't do it on the fly here, you get back to us. But that would be hugely helpful.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, man. You know what might do, Greg, there, again, that might October fodder. We have, every board meeting and sometimes in between board meetings, as the kind of landscape changes we update the Finance Committee of our board on what we call our backlog. These are the projects that are coming close to fruition and then we look down the road a little bit. So we always want to have some transparency from a governance standpoint on how we're allocating capital.

We have clear ideas as to which projects are most likely to provide that benefit, but we don't have a sense as to announcing in any public way right now how many megawatts that would be, where they would be, et cetera. Suffice to say, you know how conservative we are. When we move our CapEx and we've talked a lot about that CapEx, from $2.4 billion to $4.5 billion, we're seeing a very rich target environment.

Greg Gordon - Evercore ISI

Well, I would presume that the $2.5 billion committed to solar are projects that are contracted.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Oh, listen...

Greg Gordon - Evercore ISI

Or you've got a deal. And the $1.4 billion for wind is the same, and that the placeholder CapEx is some sort of risk-adjusted number for stuff that's in the pipeline but not yet firmly contracted or committed. Is that fair?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah and it's our best judgment. And you should know that, given our best judgment risk-adjusted, all that stuff, the actual feeling is that the numbers are actually bigger. This is our haircut to get what we think is a reasonable placeholder. When we put a placeholder in there, we think we're going to be able to execute on it. Every one of these projects has a term structure. In other words, long-term bilateral contracts, credit-worthy counter party. We're sticking to our investment thesis. So we don't like merchant exposure, et cetera.

Greg Gordon - Evercore ISI

Yeah, and that's why I'm asking. So it would be helpful I'm sure for everyone on the call to be able to at least have a sense of where the megawatts are being deployed and make our own assessment as to what the term structures look like in order to get a sense of what that predictable earnings stream is that you're building.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, just to be clear, as we have said, most of our solar has already been announced and most of our wind has not yet been announced. But we'll get you the best stuff we can.

Greg Gordon - Evercore ISI

Thank you. And where are we in the process of – and forgive me if you've given an update on this – going through the prudence review with the Georgia PSC that they'd indicated they wanted to do this year on Vogtle?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, as with any ongoing regulatory engagement, our best judgment is to just say very little and let the engagement work. We have made our filings in terms of information supporting what we believe is a very strong case for prudence. We've had the opportunity to let other people make filings. We are engaged with the Staff. We expect to rejoin whatever we conclude with the Staff in October with the full Public Service Commission. That's our current target.

Greg Gordon - Evercore ISI

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Other than that, I don't want to say too much about it.

Greg Gordon - Evercore ISI

So next milestone in October.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah.

Greg Gordon - Evercore ISI

Fantastic. I'll go to the back of the queue as well. Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Thank you, bud. Appreciate it.

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

JVR. How you doing?

James von Riesemann - Mizuho Securities USA, Inc.

Great. How are you?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Super.

James von Riesemann - Mizuho Securities USA, Inc.

Yeah, I have two questions for you. The first one is on this financing. Do you need Hart-Scott-Rodino before you can issue the equity?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

No. No, we don't, but it's certainly a consideration on the timing of when we get you the equity.

James von Riesemann - Mizuho Securities USA, Inc.

Just as a follow up to that, can you talk about how you might want to mix it between internal plans and external plans, this $2 billion equity that you refer to on the slides?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, Jim, really, I don't want to get into any of those details. We'll do it in the manner that we've done it in the past. And some will certainly be inside, as we said in our script, and some will be certainly an individual issuance of some type possibly.

If you look at run rate, we've actually raised internally about $0.5 billion through our internal plans year-to-date. So whether that matches itself in the second half, that would be kind of close to our expectation.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, so run rate, whatever need is less run rate equals public issuance. It depends on what the run rate is and everything else.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Of some type.

James von Riesemann - Mizuho Securities USA, Inc.

And with the $2 billion of issuance, does the guidance that you had on the slide, would that remain intact, would that hold for the year?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes. Absolutely.

James von Riesemann - Mizuho Securities USA, Inc.

Okay. And then in the second question, pivoting away from that, and the last one, is can you talk a little bit about this Westinghouse CB&I lawsuit and what it might mean either directly or indirectly for you?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, so we know some about it. I will say that that's a better question for Westinghouse and CBI. I'd rather not comment too much on whatever we believe the merits to be. We have evaluated whatever outcomes may happen as to its exposure to us, and we don't think it's very much.

James von Riesemann - Mizuho Securities USA, Inc.

What does very much mean?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Very little. Not much at all. We...

James von Riesemann - Mizuho Securities USA, Inc.

Okay. Got it.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So theoretically, Jim, if I were to try and go there, what would be a theoretical outcome would be some credit pressure somewhere or somebody's inability to do whatever. We just don't think it has much impact to us at all.

James von Riesemann - Mizuho Securities USA, Inc.

Great. Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, and if anything it's probably a potential upside to WEC's cash flow as opposed to a downside. But ask them that.

James von Riesemann - Mizuho Securities USA, Inc.

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Thanks, buddy.

James von Riesemann - Mizuho Securities USA, Inc.

Thank you.

Operator

Our next question comes from the line of Jonathan Arnold with Deutsche Bank. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Jonathan.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Good afternoon, guys. Thanks for taking my call.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Oh, you bet.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Quick question on – I think in a prior call, I don't remember if it was Q4 or Q1, you gave a number of the amount of ITC that you were expecting to realize in 2016 of $150 million. So I'm just curious, is that still on base. And how should we sort of think about that run rate on this higher spend as we look forward?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, Jonathan. I'd say – we gave you $150 million earlier. I'd probably say in the $170 million range would be a better estimate.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

And should we – I mean, as you're saying you're now pivoting more towards wind, should we anticipate that that's a number that fades as you move beyond 2016?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes, sir. That's correct.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. And then can I also ask around the Southern Power CapEx? You described 2016 as expected to be a high watermark. I mean, I thought it was an interesting choice of language. How far is the tide going to go out? Or is this a number we stay quite close to as you look at your project pipeline beyond this year?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, man. Staying quite close to $4.5 billion in a year would be pretty notable for Southern Power. Remember, I think one of the dynamic things we saw, remember, we thought all this tax law was going to expire. And so there was this great rush by so many developers to get a lot of projects done. Well, as it turns out, a lot of those projects in order to hit the deadlines, remained. So we don't see that dynamic occurring into 2017, 2018 and all that.

And remember, here's the other thing. Going back to things we've said in the past, all remain true. We talked to you about this divot. Remember that famous phrase. And a lot of you picked up on the divot. We filled in the divot, and we did that with Southern Company Gas. We're doing that with SONAT. We're doing that to some extent with PowerSecure. We're doing that with Southern Power's profile.

We'll update you completely on this lengthening and strengthening in October. But that's what's going on. That's this dynamic.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

That was actually going to be my other semantics question, the lengthen and strengthen. Should we take strengthen to mean solidify the current target or increase?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes, we want to cover that in October. If I had to pick at words, strengthen I think would mean broaden our sources of growth, improving predictability, cash flow. Lengthen says that with the nature of the investments we're making, we have much greater visibility into the future as to the viability of that performance. With respect to improving, we're going to deal with that in October.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. And just finally, it looks as though roughly $1 billion of the new equity is supporting the incremental spend at Southern Power. Firstly, is that how I should think about it? And should we be assuming targeting returns north of utility returns, or is this kind of seen as a complementary similar business these days?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Well, I think you're about right in terms of the equity allocation. And the returns continue to be something that we have to evaluate and stay disciplined on, especially with a delay in some of the recognition of the tax benefit. So those returns we hope will continue in the same range that we have earned over the past five to seven years.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

On an investment weighted basis, our contract coverage through the end of decade or so is about 90%. The other thing that you should know is we performed recently a comprehensive kind of ex-post review of everything we've done to-date. And it has been performing absolutely consistently with what we've done to-date at returns that exceed utility returns on a risk-adjusted basis.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Absolutely.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

It's been really good for us.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

So do they exceed the utility returns on a not risk-adjusted basis?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes. So let me say it back to you. I would say the risks are similar and therefore the returns must be higher.

Jonathan Philip Arnold - Deutsche Bank Securities, Inc.

Okay. That was sort of – thank you, Tom. Sorry to beat on that. I'll go back...

Thomas A. Fanning - Chairman, President & Chief Executive Officer

No, no, that's okay. Always great. Nice talking to you.

Operator

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

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hello, Steve. How are you?

Steve Fleishman - Wolfe Research LLC

Hey, Tom. How you doing? Good. So not to test the semantics more, but in the past when you've talked about the – it was really the AGL deal, you talked about moving from kind of a 3% to 4% to a 4% to 5%...

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Exactly.

Steve Fleishman - Wolfe Research LLC

...type growth. And so is this again saying, hey, maybe we can get more to the higher end of that or change that range, or not clear?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Steve, no, no, no, it's very clear to us. Here's what we want to do, though. Normally our practice is to kind of do our annual guidance in January, February, and then we update our long-term growth rate. And we've been very consistent and predictable and transparent about what we believe our long-term growth rate to be.

And you're right, we went from whatever it was to 3.4%, 3% to 4%, and then 4% to 5% with AGL. Now we're adding some other assets, increasing our investment in Southern Power. And obviously, that all has an impact. We'll evaluate that impact for you with much more transparency in October.

Steve Fleishman - Wolfe Research LLC

Okay. Is it fair to say – because one of the other potential drivers is this kind of incremental growth off of the joint venture on SONAT. Is that something we should have more visibility on by late October, then?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So had some magic words there in the script. Basically, I hate front running stuff like that. And when we get those things done, we have some specific ideas between us and Kinder Morgan about what we want to do. As we accomplish those things, we will let you know.

Steve Fleishman - Wolfe Research LLC

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I don't like to front run deals before they happen. That's always been our practice is to announce them when they happen.

Steve Fleishman - Wolfe Research LLC

Okay. And then just one technical question, and I guess this might be more for Art. But in your quarterly stuff, you used to have – you're now saying kind of $0.13 of other revenue impacts. It always used to be retail revenue impacts. So I'm just curious is there other stuff in there? I always used to view that as just rate relief. Is there other things in there now?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

You're talking about other revenue effects?

Steve Fleishman - Wolfe Research LLC

Yes.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Well, other revenue effects really is just rate changes across our service territory.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So it is just retail.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yes.

Steve Fleishman - Wolfe Research LLC

Okay. Okay. And then just any more color on the sales? Like it's the – sounds like the sales weakness just seems to be more conservation and maybe a little bit more of an impact than you thought on...

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So, yeah, Steve. We'll double-team it. But it is almost exactly what the Fed is talking about. Our data is matching them almost exactly, very interesting. I just had a meeting last week with them, last Thursday. And it's this. What we're seeing in the Southeast on the plus side is more expansion, more in-migration than we have seen in the past, more than our budgets and more job creation. And so that side of the ledger looks pretty good. When you look at usage, it looks a little worse. The net effect is kind of flat.

The usage account at the residential level could really speak to two things going on. And the Fed has been wrestling with this one as well. Savings rates are up. So people aren't necessarily taking improvements in their household income statements as a result of lower gasoline prices, for example, and going out and spending it. Maybe that's not so surprising coming out of a recession. The other one is greater penetration of energy efficiency. Outweighing that is people kind of diving into more of the digital economy, more devices, more whatever. Anyway, the net effect of all that right now is flat.

Commercial, same deal. We're up on customers, Art went through the numbers. We think that is energy efficiency. And that could be LEDs, it could be more efficient HVAC or whatever. And you want to know what that goes to, Steve, our response to that is really PowerSecure. That is, we think technology is enabling and customers are asking for this notion of making, moving and selling on their own premise. In fact, they're obviating in many respects the importance of the meter.

And so our response to that has been, number one, we want to do what's good for our customers and we're for energy efficiency. And every one of our companies has projects and programs and all that. But we want to start getting share there. And that's what PowerSecure is all about. And if you look at some very successful segments that may apply would be in the military and some areas related to that.

Industrial is a different kettle of fish. And it pretty – boy, if you look at the Business Roundtable, if you look at our own surveys with our own important customers, we just got through with your – I forget what you call it – the sounding board or something.

Steve Fleishman - Wolfe Research LLC

Yeah, the Roundtable.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Roundtable. And if you look at the broad data, it appears that starting sometime in the second quarter, maybe beginning in the first, industrial companies started really pulling back on capital deployment. When I was on Bloomberg this morning, they talked about in many broad measures how durable goods just fell off the table.

It looks as if that is kind of event related, whether it is more worries about economic malaise in Europe, Brexit, terrorism, lack of transparency out of China, whether it looks like the dollar versus other worldwide currencies, whether it's uncertainty about our own political process. It looks as if capital commitments by big industrials has really fallen off.

I'll give you a quick data point. The number of our economic development projects is about the same. The number of jobs is about the same, within 5%. But the number of forward-looking capital commitments of our economic development backlog is down about 50%. At least it is for now. We don't think those are cancellations. We think those are deferrals.

One other point on industrial. We have seen many of our major customers now start to consider consolidation. That may inure to our benefit if they consolidate away from higher-priced places in the United States to the Southeast, we'll see. The other place we've seen that is in extended outages and perhaps more comprehensive outages. They were going to take the outages, anyway. They're going to take them longer and do more during this period of uncertainty. That's what we think is behind the industrial numbers.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Steve, let me add a comment on the commercial side. I think I mentioned in the script that we had four or five quarters of growth on the commercial end. And this was the first drop we've seen in that in quite a while. We had a very strong second quarter in 2015 in commercial sales. So you're comparing year-over-year to a very strong growth rate a year ago. So we're looking into that.

When we look at the number of commercial customers we have, and there's almost 600,000 of them, it's hard to get a bead on exactly what every customer might be doing. But there are segments of offices and data centers where we're seeing drops in load. And we're not quite sure whether that's they're raising temperatures in their server rooms or whether they're actually moving data centers out of our territory to other facilities. So we're still doing research on that in order to get a better bead on what's going on.

Steve Fleishman - Wolfe Research LLC

Great. Great. Thanks. I guess we'll hear from the Fed shortly. Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yep.

Operator

Our next question comes from the line of Anthony Crowdell with Jefferies. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Anthony.

Anthony C. Crowdell - Jefferies LLC

How's it going, Tom? How's it going, Art?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Terrific. Hope you're well.

Anthony C. Crowdell - Jefferies LLC

I've never been better. Most of my questions have been answered. Just on O&M. You guys have had two great quarters in a row of lower O&M costs, things were helped out this quarter by $0.04. What could we think about second half of the year and any drivers in that on O&M costs?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, Anthony, we always manage our O&M, and especially this year is more normal than, say, last where we've spent less in O&M in the first half of this year compared to last year. We actually spent, as a percent of the total for the year, a whole lot more. Last year was a bit of an aberration in that regard. So you'll see a return of some of that spending getting close to what we think our total for the year will be, 3% to 3.5% increase is kind of what I've guided to I believe in our O&M. But, again, that's going to fluctuate based on our top-line base rate revenue growth. So we always manage the business around those parameters.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

And the other thing that we've talked about in past calls, recall that Georgia Power has agreed with the Commission to defer their rate case this year. So their next what is a triennial rate case will be around 2019. Recall our language around that was we believed that our ability to run the business and the levels of expense and everything else was manageable. So we're executing on that right now. So that's the other little thing you should think about.

I know particularly there are some business units in the system that may see some changes in staffing or some other things. We'll have to accept those severance costs as part of our ongoing business. But we're working through all that. We still believe it's very manageable.

Anthony C. Crowdell - Jefferies LLC

Okay. And just if – I know a bunch of guys tried to take a shot on this on Southern Power. You talked about high watermark this year, 2016, pivot towards wind. When you think of long term, what's you think the long-term CapEx level is at Southern Power?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Well, we're going to talk more robustly about that, Anthony, at the Analyst Day in October. We're not prepared to really address anything in 2017 and beyond. What you've got in our 2016 plan really is what you ought to go on for now.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So what was that, $1 billion in 2017 in $1.5 billion or so in 2018.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, that's roughly it.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So use that until we update you.

Anthony C. Crowdell - Jefferies LLC

Great. Thanks again. And I'll see you on Halloween.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

All right, buddy. Good seeing you.

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, great to have you with us.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Thank you, Tom. Good afternoon.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Good afternoon.

Ali Agha - SunTrust Robinson Humphrey, Inc.

First question. So given, Tom, where electric sales have come through through the first half year down, are you still sticking to your positive 1.1% for the year? Or what should be the new number we should think about?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, we were beating up our PhDs on that. I think we're not going to be 1% this year. I wouldn't be surprised you're below – you're below a 0.5%. It wouldn't surprise me to be 0.3%, just given everything that we've seen so far. The industrial isn't just going to – the industrial is the thing that's slowing us down there, and it isn't just going to turn around very quickly. If you held a gun to my head, I would say 0.3%, but it'll be less than a 0.5% is what I'm guessing.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Got it. Got it. And the second question, can you update us on where we stand on the SEC investigation into Kemper and when we expect resolution there?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

No, we just don't get updates on that. We've made our statement on that and I think it stands on its own. We have disclosed in our financials that we don't believe that's material.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Okay. And then when you look at this quarter itself, you started earlier in the year, I mean, at the end of the first quarter, talking about budgeting around $0.70, and you come out at $0.77 when you exclude all the stuff. Where do you think things came in better than expected?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

In terms of areas of spending?

Ali Agha - SunTrust Robinson Humphrey, Inc.

No, in terms of your earnings ending up at $0.77 versus your original guidance of $0.70.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah.

Ali Agha - SunTrust Robinson Humphrey, Inc.

That extra $0.07 that you picked up.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, I think it's mostly in the O&M sector. And we picked up a little bit of weather in the second quarter. Not a lot. But that was kind of offset by lower sales growth. So I'm still going to say Southern Power and weather.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Southern Power, yeah. And Southern Power's going to be a bit better than what we thought.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Yeah. The last question on Southern Power, Tom. In the past, given the CapEx spend and given the point you'd made that you were seeing things really come together in 2016, I think directionally you had been telling us 2016 maybe, 2017, next couple of years probably won't be able to sustain the kind of net income that 2016 will generate in Southern Power. Given the updated CapEx, et cetera, does that change? Or is that still directionally the way we should think about this?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Well, it certainly changes. We've suggested to you that a big hunk of this net CapEx increase is dedicated to 2017 and beyond. And so, we also have talked about the divots and how we think we've filled in the divots. Our current long-term growth rate as we sit here on this call is 4% to 5%. And what we've also said several times is we'll give you a compete update, complete transparency, complete whatever in October.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Yeah, understood. Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yep. 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.

Tom, how are you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Terrific. How you doing?

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

I guess you've answered that question a few times already.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, but still good.

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

Where are we on the Kemper A train and are there any issues there to keep an eye on?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Oh, listen, there's always issues. Having lived through Kemper, there's always issues, the unknown unknowns and everything else. But I'll say this, you always learn more in getting one unit ahead of the other and applying those learnings to the next unit. Haven't we seen that on Vogtle? Vogtle 3 has been going fine. Vogtle 4 is going a little better than expected because of what we've learned on 3, especially if you look at (52:11) plan and a variety of other things.

Recall B jumped ahead of A, and we made the adjustment in the schedule really because of the prolonged refractory work on A. Remember, that was the first one out of the chute on the fluidization trials. We learned that, adjusted on B, and, bam, B has jumped ahead and been doing great.

So I guess the last point I just want to make on that, really, Paul, to your question, goes to when we talk about delivering electricity out of B and then ultimately delivering electricity out of A, that really isn't good enough to declare COD. We've got to make sure that the whole system works well in an integrated fashion. And that's when we'll call COD. And we think we'll learn a lot here in the next couple of weeks.

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

Art, kind of curious as to why you're presenting 3Q guidance without AGL in there?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

That's because we've stayed that way. We gave guidance this year without AGL because it wasn't sure we would close AGL. So we wanted to be very pure about giving you the estimate, what we have going forward. AGL has significant periodicity, as we do, in their earnings streams. You get most of the earnings in the first half of the year and only about one third of their earnings come in the second half.

So when we talked about – remember when we announced the deal, it was all about how much they were going to accrete to our value proposition and everything else. Look, the information value of the second half of Southern Gas now – Southern Company Gas, is not particularly interesting. What is interesting to me is what the full year in 2017 will look like, how we're going to – assuming we get through FTC and a variety of regulatory approvals, get SONAT integrated into that. And then I think we'll have very interesting fun stuff to talk about in October. I just think for consistency purposes that's why we're not particularly concerned with the second half of the year in Southern Gas.

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

Got it. That makes sense. And then as you move in deeper and deeper into gas, and what have the four states you're in opined on rate basing gas reserve, I guess three states (54:50).

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Remember, yes, we had Florida, and then they kind of reversed themselves a little bit. You know, it's funny, Paul. We've talked about that, gosh, I can remember when I was CFO we talked about that.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

That was long time ago.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

That was a long time ago. It's one of these things, guys, it's interesting. So right now, I guess year-to-date we're 50% of our energy produced from natural gas and, I don't know, 28%, 27% from coal. With all the loads we're having now, those numbers are going to converge a bit. It may be that by the end of the year just given the demand and coal is starting to run a little bit more, we could see gas drop down into the very high 40%s and coal pick up just a bit. But what remains is that we are one of the nation's most important consumers of natural gas, whether it's through our pipes or whether it being consumed in our electric generation facilities.

One of the great advantages and one of the synergies of the deal really goes to the excellent capability of the folks at AGL – formerly AGL Resources. And so we're looking to see what are the different things we can do to keep prices as low to our customers as they possibly can be and we're working through all those synergies now.

An idea we've had forever has been this rate basing of gas. It never has risen high enough on the priority list of our commissions to really make a big push on it. If it becomes attractive, we'd certainly talk about it. If it becomes attractive enough, we'll certainly pursue it.

Paul T. Ridzon - KeyBanc Capital Markets, Inc.

Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes, sir.

Operator

Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Julien.

Julien Dumoulin-Smith - UBS Securities LLC

Hey. Good afternoon. How are you?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Super. Hope you're well.

Julien Dumoulin-Smith - UBS Securities LLC

Likewise. All right. So first cutting back to the Vogtle schedule. Obviously some of the updates from the PSC side of the equation here are suggesting some risk of delay. What's your expectation for these providing a next update on schedule, soup to nuts, if you will?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Well, I think that the most important evidence is that the contracts have a firm schedule. And you all – well, you all – we all were aware of some of the challenges that CBI was having, the hangover on litigation, the cash issues that CBI had. There was a whole kind of storyline around the challenges that the contractor group was facing. Cutting out the litigation and the overhang that produced with the settlement.

At the same time, Westinghouse buying away this piece of the business from CBI gives clarity to who's in charge. And then replacing CBI with Fluor has all inured to everyone's benefit. One of the things now that we have been able to do with Fluor on the site with Westinghouse firmly in charge is move to this full 24-hour coverage. One of the things we're doing is adding more craft labor to the site to be able to hit the productivity curves that we need to do. We expect to prove those things in the next quarter and months ahead. That is going to be the key to hitting our schedule.

The other thing is we have put in place in the new contract with Westinghouse incentives for meeting the fuel load as well as payment milestones for cash payments to Westinghouse and then ultimately to Fluor from us, anyway. So really to Westinghouse, that's all we care about. So there's a whole range of commercial incentives in place for that to happen.

We think we're making terrific progress. We're very happy. And the other thing I want you to hear is there's Unit 3. Unit 4 is actually progressing even better. So that one is particularly important to us with respect to the Production Tax Credits on the back end.

Julien Dumoulin-Smith - UBS Securities LLC

Actually, since you mentioned PTCs, how comfortable are you that you could get an extension of the PTCs if the schedule update comes out, perhaps putting that at risk?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

So number one, we don't believe that's going to happen because what we believe is what currently is in existence and we keep getting affirmed by the contractors and we have a very rigorous oversight. So we affirm the current schedule in place. And we're seeing productivity performance that shows that Unit 4 is actually improving certainly relative to Unit 3.

There's always ongoing conversations on Capitol Hill about taxes and policy and everything else. I don't think we're at that point yet certainly in needing that. The administration in place so far and Congress have both been incredibly supportive of this notion of promoting the Renaissance of nuclear in America. So, so far it's Southern and then it's Summer. We hear other projects coming to the doorstep. And I think as a national priority, Congress and the administration and even the new administration I think will be supportive in making sure that happens as well as it can.

One last point. I know I go on, but I can't make this point enough. For all the schedule changes and all the costs associated with the schedule changes, the benefits to customers have overwhelmed those costs. And when that thing was originally ordered by the Commission, it was going to be a 12% price increase. Now we think because the benefits have overwhelmed the costs, even with the schedule changes, we think that the price impact will not be 12%. It'll be between 6% and 6.5%. Price increases have actually come down over this timeframe.

Julien Dumoulin-Smith - UBS Securities LLC

That's great. Coming back to perhaps where you started the call, if you will, on the Kemper side. Can you elaborate a little bit more about what those criterias or specifics in terms of mix or duration of operation to kind of get you to that critical milestone where you feel comfortable filing? I mean, is there something specific or is it broader term here? (1:01:52)

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, it's a broader conversation. Look, there are tax laws that's kind of a pretty clear deals with synchronization and a variety of technical measures. I think we want to be able to demonstrate – this is something that I said earlier. I just want to reinforce it. We've been almost pedantic in how we've gone through the start-up process and the test packages. And generally speaking, when we have tried to turn something on, it has worked well. There's always stuff we got to fix and there's always improvements we can make. We've tried to make those along the way. But I think our processes have been proving themselves to be very valuable.

So we want to get to a point to demonstrate to the Commission on a sustained basis. There is no clear criteria between us and the Commission as what that is just yet. So we will develop that over time. And we're in conversation with the Commission and the Staff as to what that might be. At the end of the day, getting this done right is what's most important. And I think we're demonstrating that.

Julien Dumoulin-Smith - UBS Securities LLC

Got it. And last question, summarizing things a little bit. You obviously talked about success in cost cuts. But Georgia Power with the stay out for the next few years. Are you feeling comfortable you can continue to earn your ROE at that jurisdiction? And then I suppose more broadly, given the normalized sales growth trends or at least the sales growth trends in 2016, how are you feeling about normalized and how does that mesh versus the added CapEx and growth opportunities we've talked about in terms of the long-term growth rate? Maybe a little bit of a preview to the Analyst Day so I apologize, but I'd be curious.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

You guys are relentless. I'm telling you, you're relentless. No. No, no, no. I appreciate the question. I appreciate the interest. We are completely convicted we can do what we need to do to demonstrate our long-term growth rates and hit our tactical ROEs in every one of our subs. It's always a challenge. It's always hard work. But we are able to demonstrate that we can do that. And at the same time, let me remind you that we have the highest levels of reliability, the highest levels of customer satisfaction in the United States. So we're able to make it an and proposition. We will never sacrifice service to customers or reliability in order to achieve returns. We do both.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

And, Julien, just to be clear, on the Georgia rate issues, it excludes the NCCR rate, which is the Vogtle rate. So it's not an entire stay out for all rates at Georgia Power.

Julien Dumoulin-Smith - UBS Securities LLC

No. Absolutely. Well, thank you both very much. Take care. Good luck.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Always great. Thank you, bud.

Operator

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Michael.

Michael Lapides - Goldman Sachs & Co.

Hey, guys. Two easy questions for you. One, just want to make sure I follow this on Southern Power. The $1.4 billion, $1.5 billion of CapEx for wind, those are for projects that you haven't yet announced but you plan on announcing in the next four to five months in the back end of this year?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, we've just announced – what was it, 45 megawatts. Other than that, it's all new stuff.

Michael Lapides - Goldman Sachs & Co.

Got it.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

And it will likely have a 2017 and beyond impact.

Michael Lapides - Goldman Sachs & Co.

Got it. But it's CapEx you would spend this year?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yes.

Michael Lapides - Goldman Sachs & Co.

For projects that would come on-line early next year?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

That's right.

Michael Lapides - Goldman Sachs & Co.

Okay. Thank you. The other thing, I'm coming back really to Georgia and Alabama. I mean, your two biggest regulated subs. Just trying to think about the next couple of years in terms of what could present upside to rate base growth over the next three or four years at both of those large subsidiaries? Or should we continue to think of them as, outside of Vogtle, kind of flattening to even declining CapEx levels and, therefore, maybe higher free cash flow coming out of those two big businesses of yours?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I would jump into three segments. Art, jump in, too. I would go to – I wouldn't be surprised if Clean Power Plan resolves itself. And so you're going to start seeing what happens in terms of generation, both from ramping down and ramping up new forms of generation, ramping down old stuff and ramping up new stuff. That's thing one.

Thing two would go to environmental. I would go to ash ponds. I wouldn't be surprised. We've done a lot of public discourse about accelerating our activity on ash ponds and all that stuff.

The third would really go to resiliency and hardening and making sure that we provide the very best reliability, the very best customer service and serving growth. We continue to think we'll see growth.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

And the other thing to add here is Georgia's economy is probably the most healthy of all of our states, so you're going to see more growth there.

Michael Lapides - Goldman Sachs & Co.

Got it. Anything on the transmission side?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I would've put that under the resiliency thing.

Michael Lapides - Goldman Sachs & Co.

Okay. Got it. Thank you, Tom. Thank you, Art. Much appreciated, guys.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

You bet. Thank you.

Operator

Our next question comes from the line of Angie Storozynski with Macquarie Capital. Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Angie, great to have you.

Angie Storozynski - Macquarie Capital (USA), Inc.

Thank you. Thanks. So I just wanted to talk again about Kemper. So explain to me what happens once Kemper actually hits the COD and then you take some time to actually file a rate case? What's happening to earnings in Mississippi? I mean, how much of the AFUDC goes away and what happens while you're either waiting for the rate case to be filed or actually waiting for the new rates (1:08:02)?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, Angie. Good question. As we've said I think in the script that we're going to let it operate for a while in order to prove the technology. We would more than likely defer the cost, the operating cost and other cost except for the equity return, through an accounting order that would allow for recovery of those costs in the future or over time.

Angie Storozynski - Macquarie Capital (USA), Inc.

So there is no impact on earnings from the moment that the plant starts operations til when the final rate order comes in?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Well, AFUDC will go away because it's in service. But you can, as I understand...

Angie Storozynski - Macquarie Capital (USA), Inc.

And how much is it in 2016?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

I don't have a number – about $10 million a month?

Angie Storozynski - Macquarie Capital (USA), Inc.

$10 million. That's...

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

So that's a net income number as I'm being told. So it's going to be, what, $14 million on a pre-tax basis?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

That's part of our plan. That's all in our plan, Angie. Hello? Angie? Hello, anybody? Operator? Okay.

Operator

I'll move on to the next question, and that's from the line of Paul Patterson from Glenrock Association. Please proceed your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Paul.

Paul Patterson - Glenrock Associates LLC

Good afternoon, guys. How you doing?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey. Super. Hope you're well.

Paul Patterson - Glenrock Associates LLC

I'm managing. I wanted to just I guess follow up here on Kemper. So the question that comes up here is, I guess you're going to have COD, you're going to be in service. And I was reading the 8-K and I heard you guys. You guys are pretty confident that you think you're going to be able to pull the – that it's going to be happening by September 30. Do I understand that correctly?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

That's our current estimate. What we've tried to be very clear about, and there's some new language in this 8-K that really reflects... remember how – and in fact, I'm going go back to stuff we said, boy, we originally started this thing, we were talking to you all about risks. And beyond construction risks, we talked about how a combined cycle unit has three pieces that need to be integrated, that this unit was – this plant was going to have about 14, 13 or 14. And one of the challenges we always said was integrating the different systems in this plant.

Good news. That so far we think we've integrated or at least demonstrated maybe eight of those 14 systems. What's left, and we're going to learn a lot, like I said, in these next two weeks, is our ability to integrate successfully the remaining systems in order to produce electricity from syngas out of the combined cycle.

Paul Patterson - Glenrock Associates LLC

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

And, Paul, I just want to say that is really important information. And I don't think this is in the realm of it won't work. We believe it absolutely will work. But it's a matter of fine-tuning this engine.

Paul Patterson - Glenrock Associates LLC

Right. No, I understand. It's a complicated piece of...

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Okay.

Paul Patterson - Glenrock Associates LLC

I think I understand. I just wanted to make sure I wasn't – I read the 8-K, too. And I just wanted to be a little careful. Okay. And then in terms of the capacity factor, I mean when you guys are – when this thing is – let's assume that does come in by September 30. Should we have some expectation of what the capacity factor would be? I remember when you speak to Shahriar, it sounded like it was 60% or 70%. Just wanted to clarify that a little bit. What should we be sort of expecting in terms of the performance of the plant when you reach this "COD date"?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, so one of the things that's a topic of conversation with the Commission is really what will be the operating performance of the plant through its first 10 years or something like that. And in order to demonstrate the early sustainability, we want to ramp up the production of syngas to about a 60% to 70% capability. Now, how likely we are to get 60% to 70% average for the first year of operation, that's a whole different number.

And I think one of the things that just let us handle – maybe we can give you a better answer in October, but it's an understanding between us and the Commission as to what is the ramp up of performance. If you go back to many of the supercritical units in America, when you look at introducing new nuclear plants, there are always opportunities to improve performance and reliability and capacity factor over time. You don't hit full speed right away.

We'll share with you some of that, but I wouldn't expect 70% out of the gate. We need 70% to demonstrate, but then we'll take it down and fix and bring it back. So the effective number will likely be a little bit less than that, certainly in the first year.

Paul Patterson - Glenrock Associates LLC

Okay. And so I guess back to Angie's question, which was once you have the in-service date and then there's going to be this ramp-up period and you mentioned that it was in your numbers, that you guys were expecting the absence of AFUDC, et cetera. What is embedded in your numbers with respect to the absence of AFUDC in 2016 or 2017?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I think it's the $10 million we just talked about. That's been in our numbers.

Paul Patterson - Glenrock Associates LLC

For how many months?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I'm sorry?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

For how many months?

Paul Patterson - Glenrock Associates LLC

For how many months. I apologize for being a little bit unclear on that.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

No. No. No.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

I think in our 2016 plan, which, again, outlines the 4% to 5% growth, we would file a case some time spring mid-2017. And then you're going to get either rates in late 2017 or close to the end of 2017.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

But the working assumption would be nothing for 2017 until we get rates.

Paul Patterson - Glenrock Associates LLC

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, and let me throw something else out that is important. Along the way, we keep having this dribs and drabs of extra expenses along the way. One of the things that our guys have developed, some of that is extra O&M, some of it is unexpected capital, some of it has been improvements. And one of the improvements that we have made is the capability to deliver a dual fuel investment here.

So we fully expect this thing to be used and useful on synfuel. But in order to demonstrate the economics to customers, when we're not running on synfuel, we can run on natural gas. And if you believe natural gas prices are going to be cheap for some prolonged period, I'm just willing to bet we can deliver the economics to Mississippi's customers that they thought they were going to get when this thing was ordered. So the dual fuel capability when we're not running on syngas is going to be particularly important in the regulatory approval process.

Paul Patterson - Glenrock Associates LLC

So the flexibility of being able to use both fuels, if I understand you correctly, you think is an asset to showing the value to the regulators and what have you?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

You bet. We're going to still have to – yes. And we still have to demonstrate use and useful on synfuel. We get that completely and we're fully confident we can do that.

But the other thing that we can demonstrate is a highly reliable – when we're not running on synfuel, we're running on natural gas, highly reliable generating asset. Remember, now that C has been running now for well over a year and a half, almost two years – I guess it'll be two years in August – and supplies about a third of the energy for Mississippi Power's customers already. So we're going to be able to continue that and deliver synfuel. We think this thing is going to be a terrific asset for years to come.

Paul Patterson - Glenrock Associates LLC

Okay. Great. So just finally, has the syngas been burned at the power plant at all so far?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Has the – say it again?

Paul Patterson - Glenrock Associates LLC

The syngas that you produce, my understanding is you guys have produced syngas now. Has it been used at the power plant yet?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Oh, no, no. No. We're venting it. It...

Paul Patterson - Glenrock Associates LLC

Okay. You're just venting it?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

It's burned at a burner tip, essentially.

Paul Patterson - Glenrock Associates LLC

Okay.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

And I think we've got some of the pictures in the deck that show the syngas being vented.

Paul Patterson - Glenrock Associates LLC

Okay. And then just really quickly, just a follow-up on Steve's question. You guys were saying something about the personal savings – I sort of followed what you were saying about sales growth, but you mentioned personal savings rates being higher than expected.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yep.

Paul Patterson - Glenrock Associates LLC

And I was just trying to get a sense as to what rates were you guys expecting? What are you expecting in terms of – I don't know what the Fed's expectations are, what your expectations are in terms of personal savings rates.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Oh, they're higher than they've been historically. So if you looked at a graph of – now I'm doing Fed speak. But if you looked at a graph of personal savings rates, they were kind of in the 4% to 5% range, something like that, leading into the recession. The recession drove the savings rates way down.

And now coming out of the recession, the savings rates are returning to 4% to 5%, which is kind of where the Fed though it was going to – as you add income, you subtract savings, you should get consumption. And what was happening was the savings rates were breaking through and I think I've got this right, 5%, going into 5% to 6% to whatever. And so you weren't getting...

Paul Patterson - Glenrock Associates LLC

They were about 5.25%. They were about 5.25% I think the last couple of quarters.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

There you go. So what you're getting is more income with less consumption. And that's adding brakes to the economy. That's why the Fed continues to be surprised with even though the economy appears to be getting better from a jobs and wage standpoint, they're not seeing the consumption and, therefore, the follow-on economic driver. And we're seeing that in our stuff, too.

Paul Patterson - Glenrock Associates LLC

Thanks so much for the clarity. Really appreciate it.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

You bet. Thank you.

Paul Patterson - Glenrock Associates LLC

Bye-bye.

Operator

Our next question comes from the line of Michael Weinstein with Credit Suisse (1:18:55). Please proceed with your question.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey, Michael (1:19:00). Congratulations, man. New digs, huh?

Unknown Speaker

Thanks, Tom. Yeah, yeah, I think so.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Hey. That's awesome.

Unknown Speaker

Hey. With the Analyst Day being not only close to – not only on Halloween, but also just a few days before the election, I'm just wondering if you guys have had any kind of conversations at all with the two candidates, their teams? Any indications about what kinds of energy policies might be coming out of both camps at this point?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

I think both camps will be constructive. And, yes, we have had contact with both camps.

Unknown Speaker

Any sense of what might happen with the Clean Power Plan or...

Thomas A. Fanning - Chairman, President & Chief Executive Officer

You know what? I don't want to get into detail. In fact, let me kind of do it on another front. I'll be appearing with Ernie Moniz tomorrow at the Democratic Convention in the morning to talk about energy policy and innovation. Let me just say this. I know I'm an optimistic person. I've walked the halls of Congress. I try not to become bitter and cynical. But you know what? I think energy is one of the areas where we can show bipartisan support.

I met recently with Maria Cantwell and Lisa Murkowski, two terrific senators from both different sides of the aisle. I think they've been able to advance some important legislation. We've always had great leadership out of the house, Fred Upton, Ed Whitfield. I think we'll continue to get good leadership there.

I really believe energy policy is something that we can come together on and make improvements. Is it everything we want? No, probably not. But is it making good progress? Yes, I think it is. With respect to the administration in place, the Obama administration, certainly under the leadership of Secretary Moniz, who, without blowing smoke at him, I really believe he's been the best Energy Secretary America has ever had. Very practical, very focused on providing an all of the above energy solution for America. We have this unassailable advantage to drive the economy relative to any other economy in the world and I think we need to take advantage of it.

Now, we can get caught up in the politics of what each party's planks are and everything else, but I'll say this. I'm reasonably confident that either administration, whether it's Clinton or Trump, will be good for our industry.

Unknown Speaker

All right. Thank you.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yup.

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

Big Dan. Glad to have you.

Daniel F. Jenkins - State of Wisconsin Investment Board

Hi. Good afternoon.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Good afternoon.

Daniel F. Jenkins - State of Wisconsin Investment Board

Most of my questions have been asked and answered, but I have a few just some nuances on what's already been discussed. Just on the growth that you're seeing, you mentioned I think that Georgia is clearly the strongest territory. I was wondering if you could give any color on what you're seeing in the other geographies there.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, sure. Dan, I'd say Georgia and Gulf Power, the Panhandle of Florida are probably the strongest. Alabama and Mississippi are a little weaker. They're still growing, but they are not growing quite as strong as Florida and Georgia are.

Daniel F. Jenkins - State of Wisconsin Investment Board

Okay. And then in your financing plan on slide 12, I was just wondering if you could give some guidance as to where you expect The Southern Company Gas and the SONAT financing to come out of. Would you like for the SONAT, would that come out of the parent? Or would that come out of Southern Gas? Or would it be – what sort of entity should we expect to be the...

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, it will be issued at the parent. I'll tell you that much. But as you look at the graph, Southern Company Gas, that is truly their need for debt without SONAT. But it would include, if we put the SONAT investment, which I think we've (1:23:20) inside Southern Gas, then you would add the additional $400 million to that number.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Recall Southern Company Gas already has an interstate pipeline.

Daniel F. Jenkins - State of Wisconsin Investment Board

Okay. And then just going back to Vogtle. It looks like you made some nice progress this last quarter. But I was curious, I know last quarter you mentioned for Unit 4 that you expected to set the CA05, but you don't mention that this time. I was wondering was that done or is that still to be done, or?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

That is a good question. I thought you would ask me about Ring 3 or Ring 2. That's CA05. Yeah, I think it's done. From the information I have in front of me, just looked through it, CA05 is in progress and we're set.

Daniel F. Jenkins - State of Wisconsin Investment Board

Okay. And then I was curious if – what's the status of the shield building? I know that's been a critical path and a hurdle recently. What's the status of that?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, we've made great progress on the shield building.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Big 6 is in. All the big...

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Yeah, the shell building is what he's asking about. It was on a critical path. I think we it's pretty good progress along that line actually it's going a little better than what we thought maybe year ago. But great progress on that front.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

All the panels are on the side.

Daniel F. Jenkins - State of Wisconsin Investment Board

So what do you expect the critical path items then for second half of 2016 for both Units?

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Well – and I think we've outlined in the script the critical path remains within the nuclear island. And that's where it will remain. That's where all the new work fronts are going to be opened up, that's where all the productivity improvement is focused on in order to meet our in-service dates.

Daniel F. Jenkins - State of Wisconsin Investment Board

Okay. That's all I had. Go ahead.

Arthur P. Beattie - Chief Financial Officer & Executive Vice President

Thank you, Dan.

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Thank you, Dan. Always good chatting with you.

Daniel F. Jenkins - State of Wisconsin Investment Board

Sure. Thanks.

Operator

Ladies and gentlemen, in the interest of time, that was our final question. Investor Relations team will be available to answer any further questions you may have. At this time, there are no further questions. Sir, are there any closing remarks?

Thomas A. Fanning - Chairman, President & Chief Executive Officer

Yeah, thanks, everybody, for participating. Awfully exciting times, transformative times at Southern. And I think there's a lot of excitement here among the team in executing now. We will tell you all the news that's fit to tell you in October. It will be a lot of fun and look forward to that.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude The Southern Company Second Quarter 2016 Earnings Call. You may now disconnect your lines. Have a great day, everyone.

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