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Southern's regulated utilities to provide 'lion's share of growth,' CEO says

Southern Co. said Feb. 21 it is recommitting to growth at its regulated utilities, while guiding toward more modest growth expectations at its competitive generation segment.

Southern is now "generally de-emphasizing" the contribution of Southern Power Co. to the parent growth rate, Chairman, President and CEO Tom Fanning said on an earnings call, citing "a bit of a slowdown in the market."

Those comments mark something of a departure from Fanning's more bullish projections for growth at the company's competitive generation subsidiary. In mid-2015, Fanning speculated Southern Power might grow to provide 15% of net income within the Southern corporate family, and in April 2016 scaled that tentative projection back to approximately 10%.

In 2018, management expects an earnings contribution of $325 million from Southern Power, with not much of that income projected to be driven by new projects.

Fanning noted, however, that the company still intends to pursue discretionary growth at Southern Power through a new agreement for 20 MW of solar generation, and a joint development agreement to develop 3,000 MW of wind with Renewable Energy Systems Americas Inc.

"So we're still pursuing all of that discretionary growth, and we'll see how that turns out," Fanning said. "With respect to the equity required for those growth opportunities, I think the kind of incremental equity will be minimal, and they'll likely be funded with things like third-party tax equity and internally sourced funds. When you think about that, you should think about that contribution in Southern Power as one of the variables that could drive us upwards in the 4% to 6% (growth) range."

Regulated utilities will provide "the lion's share of growth going forward," the CEO said, adding that Southern has "some of the best [regulatory] jurisdictions in America."

The company will spend $33 billion on its regulated utilities over five years, one of several assumptions underpinning its projected long-term EPS growth of 4% to 6%. Over 90% of Southern's planned earnings growth is based on regulated utilities and existing unregulated assets. The company's 2018 EPS guidance is $2.80 to $2.95 per share, with first-quarter 2018 EPS guidance of 84 cents.

Southern is counting on continued constructive regulatory results at the state level, which includes posttax reform plans to preserve cash flow and credit metrics. Executives said Southern plans to invest the proceeds from federal tax reform into its utilities after ratepayers see benefits.

Art Beattie, executive vice president and CFO, told analysts the company forecasts an average annual equity need of $1.4 billion over the next five years, 80% of which will be invested in its utilities. Fanning later added that equity infusions will only occur after they are authorized by state regulators.

"I think we can preserve our financial integrity and still deliver in the range of 5% to 7% rate reductions," Fanning said. "There could be a host of other things that could impact the regulatory treatment. But this is a win-win."

Southern's full-year earnings per share were significantly lower than in 2016, primarily due to its Mississippi utility abandoning the Kemper coal gasification project,

Executives also faced questions on the company's growth trajectory with and without the Vogtle nuclear plant expansion, a project they said has now overcome "significant risk-mitigating milestones."

Vogtle cost recovery contributes 6% to the company's earnings, according to Fanning. Even without that revenue stream, Southern would still be on track to hits its projected EPS growth of 4% to 6% over the next half decade. "We're just trying to point out the strength of the underlying business," Beattie explained.