Southern (SO)

Q2 2011 Earnings Call

July 27, 2011 1:00 pm ET

Executives

Thomas Fanning - Chairman of the Board, Chief Executive Officer and President

Art Beattie - Chief Financial Officer and Executive Vice President

Glen Kundert - Head-Investor Relations and Vice President of Investor Relations

Analysts

Dan Eggers - Crédit Suisse AG

Mark Barnett - Morningstar Inc.

Michael Lapides - Goldman Sachs Group Inc.

Paul Patterson - Glenrock Associates

Paul Ridzon - KeyBanc Capital Markets Inc.

Jonathan Arnold - Deutsche Bank AG

Ashar Khan - SAC Capital

Andrew Levi - Caris & Company

Marc de Croisset - FBR Capital Markets & Co.

Ali Agha - SunTrust Robinson Humphrey, Inc.

James von Riesemann - UBS Investment Bank

Dan Jenkins - State of Wisconsin Investment Board

Steven Fleishman - BofA Merrill Lynch

Brian Chin - Citigroup Inc

Presentation

Question-and-Answer Session

Andrew Levi - Caris & Company

Compare to:
Previous Statements by SO
» Southern's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Southern's CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Southern CEO Discusses Q3 2010 Results - Earnings Call Transcript

Third quarter, you're projecting up $0.04. That would put you up $0.03 for the year, gets you to about $2.40? So you'd actually have to have a pretty sizable bump in the fourth quarter. Is that kind of what the expectation is? Or are you guys being conservative on the third quarter? Just trying to figure out the numbers.

Art Beattie

Yes, you'll see some -- the bigger pick-ups because of the COR from last year, the COR effects that won't -- you won't see much of that in the third and fourth quarter, and those will be reflected in rates -- this year as cash rates. So those will be reflective as additional pieces of gain. The -- you had a lot of weather in the numbers last year as well, in the third quarter. So that's a big driver.

Andrew Levi - Caris & Company

Okay. And then on Southern Power, I guess, at least I was. I was expecting kind of flat earnings for the year. Is that -- do you think it's -- you're looking like you might be up for the year? Is that possible?

Art Beattie

Yes. Southern Power is doing better than we expected. Most of that is energy margins and their ability to -- with those low-cost gas units, are able to sell into the markets. Their capacity levels are increased much over last year, and their energy margins have reflected that result. As to whether or not -- there were also some new contracts on the year-to-date or year-over-year basis that reflected a lot of increase, but a lot of those contracts started midyear last year. So you won't see the contract piece be additive for the rest of the year, but you could see some additions on the margin side.

Thomas Fanning

Yes. Andy, let me jump in on a couple of these too. Fourth quarter of '10, I guess it -- what was it?

Art Beattie

$0.18.

Thomas Fanning

About $0.18, was abnormally low for us.

Art Beattie

Absolutely.

Thomas Fanning

If you go back in prior years -- I just went and looked it up real quick. I mean, it's easy -- not easy, but I think it's normal for us to expect $0.30 or more. So with the normal progression, a normal fourth quarter very much in the strike zone there. This other thing with Southern Power is really pretty interesting. I know we've chatted with many of you in the past about our strategy about Southern Power. And I think what we mentioned to you was that just in -- I know it's a topic of conservation conversation early last year, 2010 and perhaps even in '09, keeping our powder dry a little bit while we assess what was going on with environmental regulations, as you all know, and it's happened with us. Heck, we've gone from 70% of our energy generation from coal to now about 52% from coal, with gas picking up the difference. And so what we're seeing is this notion of keeping our powder dry at Southern Power has turned out to be really good. And in fact, in this period before HAPs MACT takes effect, we're seeing that they've been able to generate, through energy margins, more net income. Their capacity factor for their combined cycle units has gone up this year to 50% from, say, a similar period last year, 38%. So we have reason to believe that they are going to do better this year, certainly than what we thought they would at the beginning of the year. And we think, frankly, there's pretty good reason why that should continue.

Andrew Levi - Caris & Company

Okay. That sounds good. And then just one last quick question back on the...

Thomas Fanning

Andy, one more thing I just want to say. No, no, no, I was just kind of thinking of it myself. But remember, we have a pretty sustainable idea of covering their capacity with long-term contracts. We actually have -- if you start thinking about what might happen 2015 and beyond, assuming we don't get any relief from schedule or consequence of HAPs MACT plus 316b plus everything else coming down the road, we actually think Southern Power is very well positioned from a long-term standpoint to do well in the years ahead.

Andrew Levi - Caris & Company

That's great. And then back on the LWAB.

Thomas Fanning

Yes.

Andrew Levi - Caris & Company

That allows you to begin the nuclear construction phase?

Thomas Fanning

So the LWAB, we've already done some work under LWAA, right? And then we've made so much progress today. LWAB, as it was filed 2 years ago, was very kind of defined. Essentially, what we will do is put rebar on the plant and then pour concrete on the base of the plant. So that'll be very sufficient for us to maintain schedule and cost estimates.

Operator

Our next question comes from Paul Ridzon with KeyBanc.

Paul Ridzon - KeyBanc Capital Markets Inc.

A couple of questions. What's a typical Alabama RSC adjustment relative to the $150 million that you've been authorized?

Art Beattie

Well, there's not a typical adjustment. Some year -- they didn't have an adjustment this year under their RSC mechanism. They're authorized to increase rates under the rate no more than 8% over any 2-year timeframe. So if they have a 3% increase in one year, then they can't increase rates the following year by more than 5%, and that's the way the rate works. So there is no normal increase. As you know, they've got other rate mechanisms as well such as rates for their environmental investments and expenses, but the $150 million or so that it will raise in 2012 is just under a 3% increase in base rates.

Paul Ridzon - KeyBanc Capital Markets Inc.

That helps a lot. The other question or one of the other questions, kind of relative to your $0.62 guidance, can you kind of parse out the pieces? I guess, you got about $0.6, $0.07 of weather.

Thomas Fanning

I'm going to pick [indiscernible]. Art fools around with that. We only do guidance once a year, and that's the range and then we update our guidance in October once a year. These are just estimates. So we're -- we tend to -- we yell at each other about that here. So Art's ready to go.

Art Beattie

For the quarter or the year-to-date period?

Paul Ridzon - KeyBanc Capital Markets Inc.

Quarter.

Art Beattie

Against the guidance, weather was up about $0.07.

Thomas Fanning

Estimates.

Art Beattie

Yes, estimates. And Southern Power is up about $0.02. Well, that'll -- there's a lot of other cats and dogs, but that'll get you there.

Paul Ridzon - KeyBanc Capital Markets Inc.

Okay. Then lastly, there's been some articles about in the press about you talking about potential for cost overruns at Vogtle, but your language sounds like you're pretty confident of getting this done on budget. Can you kind of just adjust to the economy there?

Thomas Fanning

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