The Southern Company

Good afternoon. My name is Rita, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company second quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, July 30, 2020. I would now like to turn the conference over to Mr. Scott Gamow, Investor Relations Director. Please go ahead, sir.

Thank you, Rita. Good afternoon, and welcome to Southern Company's second quarter 2020 earnings call. Joining me today are Tom Fanning, Chairman, President, and Chief Executive Officer of Southern Company, and Drew Evans, Chief Financial Officer. Let me remind you we'll 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, Form 10-Qs, and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call, which are both available on our investor relations website at investor.suttercompany.com. At this time, I'll turn the call over to Tom.

Good afternoon, and thank you all for joining us. As you can see from the materials we released this morning, we reported strong adjusted results for the second quarter, meaningfully ahead of the estimate we provided last quarter. While we remain within our expected annual range of COVID-related revenue impacts, the second quarter impacts were not as severe as we originally estimated. Employees throughout the company have worked hard to maintain excellent levels of customer service and implemented thoughtful cost containment measures. Of course, our peak electric load occurs in the third quarter, and consistent with our longstanding practice, we will wait to address our annual guidance in October. Before turning to the business update, I want to recognize that these are unusual times on multiple fronts. Our role in the communities we are privileged to serve has never been more important and apparent. Whether it's our response to the COVID pandemic or working within our communities to promote racial justice, we continue to deliver results. I want to extend a huge thank you to our employees, customers, business partners, and public officials. Southern Company and our operating companies remain committed to supporting our communities today and throughout what is expected to be a prolonged recovery period. Let's turn now to an update on Plant Vogel Units 3 and 4. From a schedule perspective, we continue to remain focused on meeting the November 2021 and November 2022 regulatory approved in-service dates. We are maintaining an aggressive site work plan that targets a May 2021 in-service date for Unit 3 and seeks to provide margin to the regulatory-approved in-service date. From a cost perspective, Georgia Power's proportional share of the total project capital cost forecast increased in the second quarter by approximately $115 million to $8.5 billion, largely reflecting estimated COVID-19 impacts and other costs and a replenishment of contingency based on our projections for the remainder of the project. As a result of these collective actions, Georgia Power recorded an after-tax charge of approximately $110 million during the second quarter. Looking more closely at schedule, in the second quarter we experienced significant impacts from COVID-19, among other factors. While the recent workforce reduction was effective in decreasing density at the site and increasing efficiency, we were unable to achieve the anticipated level of production. Recognizing these challenges, in June we announced a re-sequencing of certain milestones. We shifted the expected start of cold hydro testing to the fall of 2020. With the timing of the structural integrity test and integrated leak rate test to precede cold hydro, both of these tests were successfully completed in mid-July. In fact, the integrated leak rate test approached only 30% of the allowable margin, an indication of the quality of the work being performed at the site. We accomplished several other interim milestones for Unit 3 during the second quarter. including the completion of closed vessel testing and the turbine assembly. The aggressive site work plan currently targets the September-October timeframe for the start of cold hydro testing. We now expect Unit 3 hot functional testing to commence during the fourth quarter, and we continue to see a path to Unit 3 fuel load by year end. However, recognizing that the aggressive site plan is now even more difficult to achieve than before the pandemic, it is important to remember that under the November benchmark, fuel load is not required until mid-2021. And as a reference point, even if Unit 3 fuel load occurred in March, it would support an in-service date of next summer. We also reevaluated our estimates for costs and time to complete the final phases of construction, which resulted in hours being added to the direct construction projections for both units. Reflecting these additions, today Unit 3 direct construction remains approximately 90% complete. We still expect construction completion of about 2% per month to be consistent with the aggressive site work plan, and completion of approximately 1% per month to be consistent with the November benchmark schedule. Importantly, even amid the outbreak of the pandemic and our need to significantly modify work practices, our average monthly construction completion rate was approximately 1.5%. Over the last four weeks, earned hours have surpassed our expectations relative to the November benchmark for each of the major work fronts, including electrical, mechanical, and civil. As we move ahead, critical areas of focus remain electrical and subcontract performance. Now turning to cost. We have always maintained that we expected to utilize our contingency account, but that was before the COVID pandemic occurred. As a result, we have increased Georgia Power's share of the total, capital cost forecast by approximately $150 million to $8.5 billion. This represents an increase of a little less than 2%, certainly not all, but largely due to the COVID impact. The second biggest factor was a re-estimate of the amount of effort and therefore hours required to complete the final phases of construction. Georgia Power allocated its remaining contingency and added new contingency of approximately $115 million, further reducing future cost risk through the completion of Unit 4. Embedded in the project's cost to complete are estimated COVID-19 related costs of between $70 million and $115 million for Georgia Power. Also recall the estimated cost of the time between the aggressive site work plan target dates and the regulatory approved November in-service dates or a scheduled cost margin of approximately $250 million is also included in Georgia Power's base capital forecast. Together, the replenished cost contingency and this scheduled cost margin continue to represent approximately 20% of the remaining estimated cost to complete. As we have said, we expect to utilize the entirety of contingency funds as we progress towards completion of the project. The team at Vogel Units 3 and 4 continues to work incredibly hard and drive meaningful progress at the site, even while managing through the pandemic. As we near the final phases of construction for Unit 3 and move closer to fuel load, I can assure you that the construction team, our management team, and our partners are more focused than ever on bringing the first unit of this historic project to completion next year. As we approach the final key milestones, we recognize that the aggressive site work plan is increasingly difficult, as most of our optionality relative to a May 2021 in-service date has been utilized, but both management at the site and workforce remain motivated to pursue the aggressive schedule to provide margin to the November regulatory and service dates. Drew, I'll turn it over to you now for an update on our financials and our outlook.