While committing Atlanta-based Southern Company’s future tightly to its network of retail natural gas and electric utilities instead of traditional wholesale power operations, CEO Tom Fanning on Wednesday touted the benefits of federal tax reform.
“The net effect of the new law is that it is tremendously beneficial to customers and our economy,” Fanning said during a conference call to discuss earnings regarding the Tax Cuts and Jobs Act enacted late last year. “The lower corporate tax rate and the preservation of interest deductibility are expected to lower customer bills over the long-term and help drive economic growth throughout our service areas.”
However, the new law reduces cash flows to Southern, but Fanning thinks the impacts can be offset.
Precise regulatory mechanisms for realizing the tax reform benefits vary with each state in which Southern has operations, and Fanning said he wouldn’t speculate on the variances. The “how” is still to be worked out, but he expects to see a combination of “unwinding of regulatory assets or liability, or determining how we expect to restore our regulator-approved equity ratios.”
Florida utility Gulf Power, already has a settlement in place to handle the tax reform, which CFO Art Beattie called a model. “It is a great example of what we’re looking for in each of our jurisdictions, and it will be different for each of them,” he said. Action is underway by regulatory commissions in Georgia and Mississippi.
“In the natural gas business, we have a number of ongoing rate requests that will include dealing with tax reform; it varies by jurisdictions, and some action will be completed this year and some not until next year.”
Fanning stressed that Southern utilities can “preserve our financial integrity and still deliver rate reductions in the range of 5-7%,” based only on adjusting equity ratios. “There could be a host of other things that could impact the regulatory treatment of tax reforms.”
Executives were asked about whether construction would resume on two units at the Vogtle nuclear plant in Georgia and the future of Southern Power’s wholesale power business. Southern Power is expected to earn about $325 million this year, “but when you look at our overall plans, we are generally de-emphasizing the contribution of Southern Power to our growth rate,” Fanning said.
He was quizzed about why Southern would keep a business unit if it weren’t producing “meaningful growth.”
“We think the state-regulated businesses represent the lion’s share of our growth opportunities, and when you think about the equity needs, the utilities represent 80% of the shares, and that is the bulk of the growth going forward,” said Fanning. Southern Power’s net income isn’t going to grow much, but its earnings-per-share profile “will still deliver.”
About 94% of Southern earnings over the next four years are expected to come from the state-regulated gas and electric utilities, Fanning said. After 2022, the nuclear plant would be rate based in utility Georgia Power.
For 4Q2017, Southern reported net income of $496 million (49 cents/share), compared with $197 million (20 cents) in 4Q2016. For 2017, earnings were $842 million (84 cents), compared with $2.45 billion ($2.57) in 2016.
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