Good afternoon. My name is Kamika, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company 4th Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would now like to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Thank you, Kamika. Welcome to Southern Company's 4th quarter 20 12 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President and Chief Executive Officer of Southern Company and Art Beatty, Chief Financial Officer. Let me remind you that we will make 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 ks 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've released this morning as well as the slides for this conference call. To follow along during the call, you can access these slides on our Investor Relations website at www.southerncompany.com. In addition, these slides are now available to download or print. We plan to cover a lot on today's call.
Tom will provide an update on the company's 5 strategic priorities along with a few highlights of our 2012 operation. Hart will then provide an overview of our 2012 financial results and economic outlook on our 2013 sales forecast, highlights of our latest capital expenditure and financing plans and finally, our earnings guidance and dividend objectives. After closing remarks from Tom, we will move to Q and A. As always, our goal will be to engage in a full and open discussion, but we also want to be respectful of your time. Therefore, based on feedback we've received from many of you, we'll make every effort to end today's conference call no later than 2:15 p.
M. At this time, I'll turn the call over to Tom Tan.
Good afternoon, and thank you for joining us. Overall, 2012 was an outstanding year for Southern Company. As we move into 2013 and beyond, I'd like to provide you with an update of our 5 strategic priorities. The first priority is excel at the fundamentals. 1st and foremost, I want to commend our employees for one of our safest years on record.
Nothing is more important than the well-being of our employees, which requires constant focus and an unwavering commitment that we will return each one of them home to their families in good health at the end of each workday. While we were not perfect this regard in 2012, I'm very proud of our employees' commitment to our Target 0 safety philosophy. We also recorded another year of outstanding operational results. The peak season equivalent force outage rate for our fossil hydro generation fleet has been the leader in the industry for 6 years running and 8 of the last 9. We have also continued our superior performance in transmission and distribution reliability and our customers continue to benefit from our trend of improvement over the last decade.
We continued the ongoing transformation in our generation mix, generating more energy from natural gas than coal for the first time in our history. Largely as a result of our diverse portfolio and the ability to respond to low gas prices, our customers benefited from approximately $1,000,000,000 in fuel savings as compared with 2011. Our operational performance along with our strong commitment to service resulted in top quartile rankings for customer satisfaction for all 4 of our regulated utilities in 2012. All of these operational accomplishments are evidence of Southern Company excelling at the fundamentals, but this priority is a broader objective than indicated by any of these metrics. In fact, each of the other four priorities I'll discuss is an extension of this first priority.
The second priority is achieving success with our major construction projects, specifically Pamp Vogtle Units 34 and the Kemper project, both of which are continuing to progress in an outstanding manner. While projects of this scale and magnitude always face unforeseen challenges, we continue to demonstrate our ability to constructively manage those issues and achieve a favorable outcome. Since our receipt of the first ever combined construction and operating licenses from the NRC in February 2012, significant progress has been made on both units with construction now approximately 1 third complete. Specific accomplishments include complete assembly of Unit 3 containment vessel bottom head, 40 percent completion of the Unit 3 cooling tower and 90% completion of the Unit 4 containment vessel bottom head. We have also begun assembly of a Unit 4 condenser.
In addition, on Tuesday, the NRC issued no objection letters in response to our preliminary amendment requests. This enables final work to be completed prior to the pouring of base mat concrete. We intend to pour concrete following the expected issuance of the license amendments later this quarter. We are anticipating the Georgia Public Service Commission's response to the 7th Vogtle Construction Monitoring Report on February 19 and expect to file the 8th construction monitoring report in late February. Meanwhile, the Kemper project is now 75 percent complete and remains on track for its May 2014 commercial operation date.
To date, approximately $2,500,000,000 has been spent on the project. The plant is scheduled to begin startup activities this summer with first fire going to the CTs in June and the 1st gasifier heat up taking place in December. Reliable syngas is expected to begin flowing to the CTs in February 2014. As many of you are aware, Mississippi Power signed an agreement with the Mississippi Public Service Commission last week that includes a procedural schedule and framework for cost recovery for the Kemper project. This settlement demonstrates once again our long standing practice of engaging with regulators to achieve constructive solutions and provides a greater level of transparency on cost recovery for this project.
We held a separate analyst call regarding this settlement last Friday. A replay and related documents can be found on our Investor Relations website. As an update since that call, Mississippi made its first filing under the settlement agreement this past Friday. The company asked for $172,000,000 in rate relief, which represents a 21% increase in customer bills. If approved, we expect those rates to be implemented as early as April 2013.
Also, the legislation permitting securitization and multi year rate stabilization has been sponsored by the Chairs of the House Public Utilities Committee and the Senate Energy Committee. Both bills have been single referred and passed out of their respective committees earlier today. We look forward to monitoring their progress over the next few weeks. Overall, we continue to anticipate that Vogtle Units 34 and the Kemper project will benefit our customers with clean, safe, reliable and affordable energy for decades to come. The 3rd priority involves promoting a sensible national energy policy.
This is an area that is especially important right now with the fiscal issues the country is facing and the potential for economic recovery on the horizon. We have seen some progress in this area recently with the December passage of a bill that preserves a rational approach for dividend and capital gains taxes, a discussion in which we were particularly active. This development should help maintain our ability to attract capital for future energy infrastructure investments, but more work remains to be accomplished and we will continue to have an active voice in those debates. We will continue to argue for a balanced approach to energy resources and emphasis on energy innovation through proprietary research and development and the importance of restoring America's financial integrity, all for the benefit of the customers we serve. The 4th priority is promoting smart energy.
As you know, we achieved a major milestone in 2012 with the completion of 4,400,000 smart meter installations in Georgia, Alabama and Florida. We believe, however, that the concept of smart energy involves more than just the building of a smarter grid. It's a much broader concept that also includes generation, transmission, distribution and the beyond the meter uses of electro technologies. In fact, it's really more than all of that. It's really about energy innovation and the ways in which we can use technology to help drive better service and reliability for our customers.
We will continue to dedicate ourselves toward achieving that outcome. The 5th priority and it's really the foundation of our business is about valuing and developing our people. We will continue to drive performance and accountability in 2013, while also continuing our emphasis on succession planning and cross training. Over the past 2 years, we have transferred some 700 employees across system lines, improving the breadth and depth of our expertise and sharpening the skill sets of many of our key leaders. We will continue with this approach in 2013 beyond.
I'll now turn the call over to Art for a financial and economic review. Thanks, Tom.
As you can see from the materials we released this morning, we had strong 2012 results for both the Q4 and the full year. For the Q4 of 2012, we earned $0.44 per share compared to $0.30 per share in the Q4 of 2011. For the full year of 2012, we earned $2.70 per share compared to $2.57 per share in 2011. Our full year 2012 results include a $21,000,000 net benefit or $0.02 per share recorded during the Q2 of 2012 for an insurance recovery associated with the 2009 Merit bankruptcy settlement. Excluding this item, full year 2012 earnings were $2.68 compared with $2.57 per share for 2011.
As a reminder, our earnings per share guidance for 2012 was $2.58 to $2.70 and our adjusted results were in the top end of that range. Several factors affected our year over year results for 2012. 2 of the most significant drivers were the weather and our ability to respond to it as reflected in our successful effort to improve operating efficiencies in our business units. Weather in 2012 for our service territory was milder than normal across most of the year, which had a negative impact of 0 point opposite, driving a positive $0.09 per share impact. This means that weather had a negative $0.20 per share impact year over year.
Largely offsetting this impact was reduced non fill O and M for our traditional operating companies, which drove a positive $0.11 per share contribution for 2012 as compared to 2011. The other significant driver for 2012 as compared to 2011 was retail revenue effects for our traditional operating companies, which contributed a positive $0.22 per share. In our slides, we have provided a summary of all the year over year EPS drivers for 2012. We have also included drivers for the 4th quarter in the appendix for your reference. Turning now to a discussion of our retail sales results for 2012.
Total weather normal retail sales for the full year grew 0.4% over 2011 and 1.7% for the 4th quarter. Industrial sales grew at 0.2% for the full year 2012. After a weak Q3, 4th quarter industrial sales grew 1.2% over the Q4 of 2011. During the Q4 of 2012, 6 of our top 7 industrial segments reflected energy sales growth over the same period in 2011. Chemicals, our largest segment, grew 2% for the quarter.
Other highlights for the Q4 include Automotive Manufacturing with energy growth sales growth of 7%, petroleum refining with 6% and lumber with 9%. This expansion in 4th quarter energy usage was supported by 3% year over year growth in manufacturing jobs, twice the national rate and 1.4% growth in total employment in our geographic footprint. We ended 2012 with 23,000 additional residential customers. This helped drive weather normal growth of 1.1% in residential sales, our strongest annual growth in that sector since the recession began. While our 4th quarter numbers reflect the benefit of additional customers, they also reflect the expected reversal of the year over year revenue anomalies to which we alluded in our last earnings call.
As a reminder, we explained that Georgia Power had refined its methodology for calculating unbuilt sales using smart meter data, which provides greater accuracy compared to previous years in which the process required more estimates. As we peel back the numbers and look across our operating companies, we are very encouraged by what we see in the residential sector with overall growth of 1.1% in 2012, about half of which is accounted by customer growth and the rest by increases in usage, indicative of a strengthening economy. Despite promising trends in industrial and residential sales, our commercial sales have remained essentially flat on a weather normal basis. From an economic development standpoint, the potential project pipeline in our service territories remains robust. The current projection includes more than 300 potential projects representing up to 40,000 jobs $9,000,000,000 in capital investment.
The recent announcement of General Motors adding more than 1,000 highly skilled IT jobs in Atlanta for its new IT service center is evidence of the type of projects our jurisdictions pursue. This announcement adds to a string of 1,000 plus job announcements in 2012 that included major companies like Airbus, Caterpillar, Ingalls Shipbuilding and Baxter International. In fact, since the Q4 of 2010, we have seen a total of 10 such announcements, representing nearly $6,000,000,000 in capital expenditures. However, many companies continue to delay final decisions on expansions and relocations until Congress further resolves looming fiscal issues. These conditions, which were noted during our last earnings call, continue to persist despite congressional action in December on income, dividend and capital gains taxes.
Earlier this month, we reengaged with our economic roundtable participants. As a reminder, this group consists of several regional economists and executives from a handful of our largest customers. The roundtable participants helped to validate the observations we gleaned from our 4th quarter sales results and the assumptions we made in our 2013 forecast, which include forecasted GDP growth of approximately 2%. Most of the economists believe that most of this growth will be driven by the higher than 2% growth in the second half of twenty thirteen, offsetting what is likely to be a slow start for 2013, while Congress contemplates its fiscal issues. Most outlooks include an assumption for an improved global economy in 2013, which could positively affect exports out of our region.
Industrial production is seen as improving with an emphasis on business oriented goods. Participants also observed that housing markets in the region are continuing to rebound with foreclosures decreasing and inventories of developed lots falling towards replacement levels. These trends along with continued positive migration into the region bode well for continued residential customer growth in our markets. Finally, our roundtable participants were cautious in their outlook for the commercial sector, but do see growth emerging, particularly in the private sector. That brings us to a forecast of total retail sales for 2013, which we are projecting at 1%.
This forecast is essentially the midpoint of a potential a range of potential economic scenarios that result in sales growth of between 0.7% 1.3%. Industrial sales growth is projected to be 2% for 2013. This growth rate is reflective of previously announced industrial expansions as well as a continuation of some of the increased activity we saw in the Q4 of 2012. Commercial sales growth is projected to be 0.5%, while residential sales are expected to grow at 0.6%. Our residential customer growth assumptions for 2013 are consistent with our 2012 results of 23,000 new customers.
Now I'd like to update you on our latest capital expenditure forecast and our financing plans. Our 3 year forecast for capital expenditures totaled $16,500,000,000 As in previous years, the largest component of our forecast is maintenance, which totals $4,200,000,000 for the 3 year period. Environmental compliance spending, including our capital cost to comply with the MATS rule is also significant at $3,600,000,000 Of the $2,400,000,000 3 year total CapEx for Southern Power, approximately $2,000,000,000 is allocated as placeholders for potential acquisitions or new self built projects that fit Southern Power's rigid investment criteria, including the requirement for long term contracts with creditworthy counterparties. These placeholders contemplate additional solar projects, primarily in the Southwestern United States and efficient natural gas generation projects, which are a prominent part of Southern Power's portfolio. As mentioned in our last earnings call, we are exploring opportunities to apply our low risk business model in other regions of the country where co ops, municipals and perhaps even other investor owned utilities would benefit from securing long term capacity through bilateral agreements.
Moving now to our financing plan. Our forecast assumes long term security issuances of $9,000,000,000 for 20.13 to 20.15. This financing plan does not assume any refunding or refinancing of existing securities, something we have done extensively over the past few years to lower the average cost of our portfolio to 3.8%, while lengthening the average maturity to 15 years. We continue to target a consolidated equity ratio of approximately 44%. Based on the capital expenditure forecast of our traditional operating companies alone, we do not anticipate any equity needs for the 3 year period.
To the extent Southern Power finds projects that meet its rigorous investment criteria, we could need as much as $300,000,000 in any one year. Now I'd like to share our earnings guidance for 2013. For 2013, we are establishing an annual guidance range of $2.68 to $2.80 This represents a growth rate of approximately 4% over our 2012 EPS guidance range and encompasses numerous planning scenarios for normal variances in weather, the economy and operating expenses. Our long term earnings growth rate is 4% to 6%, represented by a range extrapolated from the top and bottom of our 2013 guidance annual guidance. This slight revision in our long term growth rate is consistent with the significant reduction we've seen in environmental compliance capital, which has been further reduced in our latest update to reflect the longer compliance horizon for potential coal ash and water rules and the cumulative effect of slow economic growth over the past few years.
One final note on our earnings outlook. Q1 2013 earnings per share estimate is $0.51 As most Southern Company investors know, our common dividend has been a key component of our value proposition for decades. 2012 marked the 11th year in a row that our dividend was increased, a practice that continued even during the difficult economic times of just a few years ago. We have always taken the long term view of dividend and recognize that the informational content of our policy around dividends and actions is important. Supported by the earnings growth assumed in our guidance, our financial plan contemplates a growing dividend consistent with the path chartered over the past several years.
I'll now turn the call back over to Tom for his closing remarks.
Thanks, Art. I am always proud and almost never surprised by our ability to deliver superior results. For more than a decade now, Southern Company has maintained a singular steadfast commitment to a low risk customer focused business model that in turn has resulted in an outstanding track record of operational and financial performance. Our ability to sustainably deliver clean, safe, reliable and affordable electricity continues to be the foundation for our success. We maintain that same focus for Southern Power, remaining committed to a low risk business model that delivers exceptional value to shareholders.
As we do with our traditional operating companies, we keep it very simple with Southern Power. In short, we require Southern Power to 1st, sign long term bilateral contracts 2nd, with creditworthy counterparties, primarily co ops and municipals and third, take no or minimal fuel or transmission risk. Sticking to this model has produced solid results for Southern Power since it was formed in 2001 and has kept that business unit poised to deliver continued value and growth going forward. Our ultimate objective is to deliver superior risk adjusted total shareholder return. Over the last decade, this has been driven by strong earned returns for our traditional operating companies, steadily growing cash flow and earnings at Southern Power, stable earnings per share growth, and finally a sustainable growing dividend.
All of this while maintaining the best overall financial integrity and credit ratings in the industry. In today's uncertain world, none of us in this industry know what challenges may lie ahead. Southern Company has demonstrated a track record of anticipating future challenges and managing them successfully for the benefit of our customers and our investors. We appreciate your interest in Southern Company and we take seriously our obligation to build successfully for the future. We are now ready to take your questions.
So operator, we'll now take the first question.
Thank Our first question is from the line of Greg Gordon with ISI Group. Please proceed with your question.
Thanks. Can you hear me?
Hey, Craig. How are you? Yes.
I can't complain. Always looking good on Bloomberg as usual.
That's enough out of you.
So I guess when I look at your earnings growth forecast for the next several years as articulated by the growth rate, your growth rate, the high end is slightly lower. You're at 4.4% to 6% versus what you thought you could do on a multi year basis off of last year's base earnings, which was 4% to 7%. And I know a lot of stuff moves around in your CapEx forecast, where you're spending money, how you're financing it. But if you could summarize what are the key factors that have caused you to reduce the high end of the growth rate for us that would be helpful.
Yes, it was simple. What we said last year, I know we got a lot of questions before about how do you hit 7% growth year over year over year. And it really dealt with the outcome on the match compliance. Remember last year and even the years before, we were projecting with the proposed Mats rule, something like 17 bag houses. As a result of the final rule, recall there were like 11 comments, 11 major segments of comments that were filed by EEI that we were pretty influential in.
1 of those dealt with schedule, 10 of them dealt with some technical issues that were critically important. And as a result of the resolution of at least 4 of those 10, it's caused us not to build 17 bag houses, but 4. There are other corresponding changes, but the net effect is that CapEx over the 3 year period is less than what we would have projected. The other thing that is in our CapEx that you will notice is that we have pushed out CapEx associated with ash and water. So we'll see how that resolves itself.
But in the 3 year period, we're not showing any CapEx associated with proposed rules there. Got you.
And so it doesn't have to do in any meaningful way with a reevaluation of what you think your authorized returns will be or whether or not certain assets are going to go fully into rates over time like Vogtle or the way that
the Kempter County plant is going to be treated?
It has absolutely nothing to do with those issues.
Okay. Thank you, Tom.
Yep.
On the outlook for Southern Power and then you tapered expectations a little bit. It sounds like you're getting more positive. Is that a fair read of your commentary?
Yes, Paul, let me deal with your O and M question first. If you look over the last 3 or 4 years, none of those years was normal in terms of our O and M spend. We were either holding back or spending more because of good weather. So it's an excellent question. But let's approach it this way from giving you a baseline to work with.
If you take 2012 non fuel O and M and you add from you add $200,000,000 to $250,000,000 back to that number and then grow that number by 3.5% to 4%, we think you're going to be in the ballpark of what a normal level of non fuel O and M would be that we're expecting. Now the second part of your question relates to Southern Power.
So let me jump on that one. I guess it's on your slide package on Page 20, we have some charts that shows a variety of statistics including Southern Power net income. You may note that in 2012, we had our best year ever in earning net income at $175,000,000 We did have one downturn that was in 'ten and that was really associated with the downturn in the economy. So that kind of explains that. Yes, we are bullish for Southern Power.
They have this wonderful, I think, business model that we replicated to have a risk profile similar to our traditional operating companies whereby we have a long term bilateral contracts, creditworthy counterparties, little or no fuel or transmission risk. We think that works wonderfully. We think frankly, we've been turning down business kind of outside the Southeast. And we think that we're willing to consider some projects outside the Southeast, but which meet our rigorous business model. Frankly, we think this is a gap that we can help fill in some of the deregulated markets, particularly in the near term, Texas and MISO.
So let's just see what happens there. Otherwise, we've been reasonably active in the renewable space. So you've noticed our announcements on solar projects. We've done the biomass deal and been immensely successful there in Texas. So I think we can continue that track record and continue to build for the future.
And just to see your financing plans, excluding any opportunities at Southern Power, did I hear you say there's no equity needs? Does that mean no DRIP or new program shares? How should I interpret that?
Yes. We would in 2012, Paul, we actually bought back some shares with the proceeds from stock options that basically left us at close to a 0 point in 2012. We would expect to do the same thing outside of Southern Power's equation in 2013 through 2015 as well.
So basically, again, depending excluding assumptions around Southern Power, a flattish share count for the next few years?
Yes. Thank you very much.
Thank you. Our next question is from the line of Ali Agha with SunTrust. Please proceed with your question.
Thank you. Good afternoon. Hi, Ali. Hey, how are you?
Good. Thanks. Listen, when I look at your again going back to your 2013 guidance, if I look at 2012, you reported $2.68 and then you told us that weather versus normal hurt you by about $0.11 So on a weather normalized basis, you would have been around $2.79 if my math is right. So your 2013 guidance $2.68 to $2.80 just that at best you're flat and could be down if you take the midpoint or lower. I know R talked about O and M, but is there anything else that's causing assuming normalized weather, why would you guys be flat at best in 2013 versus 2012?
Well, Ali, again, we talked a lot in the last call about the uncertainty around the economic outcomes in 2013 and we're still allowing for, I guess, some of that downside effect because there's still a lot of unknowns out there. There's still a lot of people on the sidelines waiting for signals to move ahead. And that has nothing to do with you've added back weather to the number without considering what we would have done with O and M. And the facts are we cut a drastic amount of O and M in 2012 in order to offset that weather impact. And so you can't make the single assumption that your earnings would have been, if weather had been normal, just adding back that piece.
It just doesn't work that way.
I mean, think about it. We improved earnings by $0.11 and we had headwinds of year over year weather of $0.20 So we've kind of been through this before, I think. We do manage our O and M based on the stress of the system, based on weather. Also with the advent of weather related revenues, maintenance. The evidence that this all works is borne by the fact that our operational performance in terms of our generation fleet, in terms of our transmission distribution, in terms of our customer satisfaction numbers are spectacular.
Okay. And Tom, if I could take a little further, because in your assumptions, you have assumed 1% weather normalized sales growth kind of midpoint for 2013. As I recall the old equation, that equates to about $0.08 or $0.09 of earnings incrementally in 2013. So it looks to me that it's all coming back to the cost side, going back to your point about the comparisons. Is that fair?
I mean because you're getting weather normalized sales growth in there. And yet again, you're seeing flattish comparisons. Is it all coming on the cost side?
I hate to say that it's all coming on one side. I think what we've been able to demonstrate on the cost side is that we've been able to manage our business exceptionally well from an operational and customer standpoint and respond to changing conditions, be they economics, be they weather, be whatever. This notion of value line, counting Southern as one of the handful of companies they follow, is having an earnings predictability score of 100%. While we can never predict the future, we've been able to provide for earnings per share growth over the years. That is regular, predictable, sustainable and that strategy has enabled us to have a dividend policy that likewise is regular, predictable and sustainable and allows us to have dividend increases even during downturns in the economy when a lot of people pulled back.
I think the strategy we're putting forward here with earnings per share range that we have and forward expectations of 4% to 6% earnings per share growth will enable us to
economic growth, we certainly didn't get the weather normal sales growth we expected in 2012. So you're starting from a lower base there. And our growth rate around the economy and our sales growth continues to be less than historical levels. So until we get back all of our segments back into full engagement, it's going to be difficult to move the range higher than what we have outlined here.
And just to Tom, one quick one on the contractor dispute at Vogtle. Any updates to share?
Not really. I really don't have much to say there.
Fair enough. Thank you. Yes, sir. Thank you.
Thank you. Our next question is from the line of Daniel Edwards with Credit Suisse. Please proceed with your question.
Hi, Daniel. Hi, good afternoon. This is Kevin on his team. So sorry for you couldn't appear. I guess another question on demand growth.
So I guess we fully appreciate your comments regarding uncertainty around D. C. Policy and the evolution of your tone from cautiously optimistic to just cautious last quarter. But nonetheless, it sure seems like the Southeast continues to outpace the rest of the country. And so how should we think about the visible industrial recovery kind of working into a residential demand recovery?
And what do you think the likelihood is that we're actually receiving the residential recovery today, but Yeah, Dan, I understand.
I wish you guys could see how we obsessively prepare for these calls and we really work on our language and try we really struggled with what our language should be about our expectations. And I forget what we said, we were optimistically cautious this time. Listen, we are seeing signs of recovery here. While we did see kind of a flattening in the last half of twenty twelve of industrial sales, when we look at our economic development backlog and we have think about this, only 0.3% of manufacturing facilities employ 1,000 people or more. The Southeast over the last 2 years has gotten 10 of those.
And in fact, we've gotten 5 recently. And some of those could be significant. Airbus has 1,000 people direct employees, but we think 4,000 indirect. You add on top of that Caterpillar and Baxter and Ingalls and a variety of other things, GM, IT workers. And we're starting to see, I think, in the residential and the customer growth numbers, the fact that we are adding jobs in the Southeast.
Look, we could be conservative here. I mean, I'll admit that. But let me give you one more comment on the fiscal side. When we gave you the comments in October on that call, I have to compliment our economic forecasting guys and the marketing people at Southern that are very close to their customers. I think we were right on the money with what happened in the economy in the Southeast.
And I feel good kind of about where we are now. I think the issues, remember we talked about uncertainty related to fiscal issues and the fiscal cliff and all that. We did avoid the fiscal cliff in a so called way. But I would argue what we really did was a tax patch What's helpful and certainly helpful to our industry in any dividend related investment. But we still have fiscal issues to deal with.
The constructive kind of evolution of that discussion really goes to the notion, I think that Congress will not use the national debt ceiling as hostage in these deliberations rather moving to a more constructive approach of proposing solutions, for example, that are sensible like requiring the Senate to come up with a budget. So we still have big issues, but I think the issues are being handled in a more constructive manner. And I think therefore, our kind of color on where we believe the economy is headed is slightly more bullish than we were say in the Q3. We are expecting a back end loaded economic recovery, but I feel pretty good about it right now based on what we see.
Okay. I guess, I guess, with the I guess, give us you have visibility into good like backlog of industrial drops coming to your region. And then like to Greg's question, it seems like the growth rate today was was lower due to a deferral of CapEx versus an abandonment of CapEx. And so should we assume that the growth rate, I guess the legacy growth rate of 5% to 7% could possibly return for the next guidance season for 2014?
Who knows what will happen in the future? But yes, I mean the near term the Greg Gordon answer was exactly the right answer. I mean how we got to 7% before was building a lot of bag houses, with 2017, it was that kind of CapEx environment because we were successful in arguing some of the technical issues on HAPS Mac for the benefit of our customers. We're not going to spend as much CapEx complying with Macs and therefore because we're deploying less capital, the growth rate dropped on the top side from 7% to 6%. But the fundamentals of our business remain strong.
Who knows what happens outside the 3 year period? And recall, the CapEx associated with ASH and with 316B and a variety of those issues are really out of this 3 year period. So the presumption as you're making is they're in the next 3 year period, we'll see. We only comment on the 3 year period we see ahead. Look, I think the fundamentals for our business are exceedingly strong.
And I think the cards we have, while we all have challenges, I'm very bullish on our ability to deal with the challenges of the future and maintain this kind of growth rate. I think our track record speaks for itself. It does.
Thank you. Thank you.
Thank you. Our next question is from the line of Kit Konalich with BGC. Please proceed with your question.
Good afternoon, guys.
Hey, Dan.
With regard to Southern Power, does your interest in other regions now have anything to do with a perception that there's a lower growth rate in the core region?
Not really, but I mean it is a little slower when you think about kind of our focus is on either renewables and that has been where the renewables are, Desert Southwest largely a little bit in Texas, otherwise gas fired generation. When you look at, I think, some of the flaws of the deregulated markets, the so called organized markets, they've not been able to build within those market structures long term capacity commitments. We think we have demonstrated success in a business model which permit those kinds of investments to occur. So we see some attractive markets available. Southern Power has brought some of those deals back to us and we have kind of said no that we like where we are.
The question we've been asking ourselves over the past year or so is why not? Why shouldn't we pursue those kinds of opportunities so long as we can still meet the rigorous business model that we have in place? I think we can do that.
And can you give us a little more color on the kind of a little closer view of what types of projects you'd be looking at? What regions? I think you mentioned Texas and MISO? Well, Kit,
it would be similar to what we've been doing. Southern Power's capacity is something like 95% gas fired. So it's going to be combined cycles, maybe some CTs. And the other thing I would just add to you, when we think about the Southern Power strategy, this is not a significant contributor in the next year or 2 or 3. Rather, our strategy here positions us well long term.
Said another way, we're going to be able to hit the 4% to 6% growth even without Southern Power adding new projects in any other region. Great. Thank you. Yes, sir. Thank you.
Thank you. Our next question is from the line of Mark Barnett with Morningstar. Please proceed with your question.
Hey, good afternoon, guys.
Hey, Mark. How are you?
I'm doing very well. Thanks.
Just a couple of
quick questions. I know this is kind of a ball that's going to stay up in the air until it doesn't. But do you have any kind of update on your expectations for those DOE loans for Vogtle? I mean, whether around timing or size, I know you can replace them pretty easily, but just some general thoughts there.
Yes, Mark. This is Art. We continue to negotiate with DOE. We've extended those discussions officially through mid year. We've had some recent positive movement in those discussions, and we still remain hopeful that we'll be able to come to an agreement.
But at the end of the day, we're still looking too at the fact that we've been able to finance a lot of Georgia Power's needs at record level of interest rates. So we still have to make the judgment about what's in the best interest of our customer. So we continue to move in that direction and hopefully we can come to some agreement with them on the loans this year, but you'll be hearing more about that throughout the year.
Okay. And I guess just maybe a follow-up some of the other questions about Southern Power. You mentioned there's going to be some upside. It's obviously going to be beyond the 3 year window. Does that mean that you're not currently participating in any RFPs whether in the Southeast or outside?
Really, I don't want to comment on anything they're doing from a commercial standpoint. I mean, in terms of participating with RFPs and everything else, if you just look at the trajectory of net income in the package that we've given you, I would follow if I were doing planning assumptions, I would follow that trajectory.
Okay. Thanks. Appreciate it, guys.
Thank you.
Our next question is from the line of Paul Patterson with Glenrock Associates.
I apologize if I missed this, but I noticed that your growth I was wondering whether that 0.6% sort of sales growth for GDP was still the case with your 2013 sales growth forecast? And if I am if it is, am I looking at it in that you guys assuming something between something basically at the top end of about 2.2% and something more likely in the midpoint, other 2% is for your GDP assumption?
GDP growth assumption is around 2%.
Around 2%. Yes.
And therefore our sales growth assumption is around 1% with a range around that. Okay.
So you guys are now using about a 50%. The 0.6% number is basically what you guys are still using. Is that basically the way to think about it? There's been no change in that?
Yes. Yes.
And so you can argue that formulation. We like to be a little conservative.
Okay. And then when we
look at Paul, let me add one thing. It's just kind of We always try and get Lanya at. There's been great interest in net of energy efficiency. Are we still seeing consumption growth? And in fact, we are.
We've done more science on that work that we showed a lot of you all. We've done more science on that work that we showed a lot of you all in October or I guess it was November at at the financial conference. And in fact what we're seeing is for the Southeast anyway, energy efficiency has almost no influence on the consumption of our customers. 88% or so of usage can be explained by either the income growth of our customers, the price of our product and weather. If you account for those three things, you're speaking for virtually all of the usage growth.
Okay. So you're seeing very little impact from energy efficiency in your service territory so far?
We are seeing energy efficiency, make no mistake. It's just not reducing usage. You may want to think about it as producing in essence a dividend to disposable personal income. And therefore people are having more money to spend on more stuff. I got you.
So what they don't so what they save with various appliances, they're re spending on other electric consumption. Is that
the way to think about it?
Yes. And just think about where the economy is going. We all have these goofy devices. We all have iPads and iPhones and bigger plasma TVs and everything else. And when we see the progression of people moving from small homes to apartments into now primary housing, we see a growth in kind of square footage per person, if you will.
We also have seen associated with a recovering economy growth in personal income. All of these things contribute to usage growth.
Okay. Now with the residential sales growth, it just seemed very strong in the 4th quarter. And I'm sorry if I missed this again. Why was it so strong in the 4th quarter? Was it because of the employment figures you're talking about?
I wasn't clear on that exactly. It's 5% plus, right?
Paul, that you recall in the Q3 call, we talked about a lot of that unbilled issue that we thought was going to rebound in the Q4. And then that is in fact is what happened. If you look back at the Q3 for residential sales, it was like negative 2.1%. In the 4th quarter, it was positive around 5 Yes,
I think so.
So what you saw here is a rebound. Now the percentages aren't alike, but they shouldn't be because you're moving kilowatt hours out of a very heavy quarter of usage into a quarter of usage which is rather light. So the percentages are going to get skewed.
Okay. And just on an annual basis, we don't have really any of that. Is that all evened out for
the year pretty much? Yes. I think you're
Our next Our next question is from the line of Jonathan Arnold with Deutsche Bank. Please proceed with your I'm sorry. Our next question will come from the line of Brian Chin with Citigroup. Please proceed with your question.
Hey, Brian. Hey, good afternoon.
More of a federal policy question, there's been a lot of media chatter since the inauguration speech about Obama's inclusion of climate change in that. And Tom, obviously, you're pretty close with a number of the key opinion makers in Congress and on Capitol Hill. With regards to this thought that the executive branch could try to resuscitate carbon regulation or carbon tax, any sort of updated thoughts there that you can give us relative to what you told us at EEI?
Yes. So
I think there's very little chance of anything like that getting through Congress. So you're right to kind of look at will EPA be able to put something in place that will advance that cause. So right now, we know that EPA is evaluating or has made a proposal on new sources. Interestingly, that Southern is the only company still committed to robust proprietary research and development. We've developed our own technology.
The County plant actually meets and exceeds the proposed new standards for carbon for new generation. So that's kind of interesting. We'll see how that goes. There's lots of comments going in and we'll wait eagerly to see what the final rule looks like. But it is pretty clear that if the proposed rule is anything like I mean the final rule is anything like the proposed rule, Conventional coal generation is just not doable.
So they're really making an energy policy statement there. One of the things that I've been pretty vocal about here lately And that is this energy policy issue, I've been very clear that energy policy is the purview of Congress. Congress has the portfolio really as we do in thinking broadly about the ramifications of such policy mechanisms. For example, we say we need clean, safe, reliable, affordable energy. EPA will tend to focus on clean without taking into account perhaps all the other issues that are so important to balance for our customers' welfare.
I go back to the families we serve, 48% of which make $40,000 or less. Those folks make tough kitchen table economic decisions every day. Their demand for energy is relatively inelastic. And so anything that EPA does, which adds cost to energy, tends to slow down our economic recovery and causes them to make choices for things like housing, healthcare, food and education. These are broad policy areas that are better handled in Congress rather than a single regulatory agency.
We'll be enjoined in this discussion as it evolves in the months ahead.
Great. And any thoughts on carbon regulation for pre existing plants being executed by EPA without compression?
We'll see. Nothing to say at this point. Understood. Thanks. You bet.
Thank you.
Thank you. Our next question is from the line of Michael Lapides with Goldman Sachs Asset Management. Please proceed with your question.
Hey, guys. Hey, Tom. Hey, Art. Two questions unrelated to each other. First question, can you talk a little bit about Vogtle just in terms of there was some testimony in the 7th monitoring report regarding just potential delays, especially if the concrete pour didn't occur in the Q4 of 2012.
Just kind of give a broad update in terms of just where you are versus the schedule and how the schedule may or may not move. And then second, when you think about Southern Power, there are more infrastructure funds and various energy funds out there than there probably are projects. And you have what is a collection of very good assets that many of which are contracted for a very long time. Just curious if you've thought about monetizing that business in terms of is that a business that's potentially better off in the hands of an entity that might capitalize it with significantly more leverage than a publicly traded utility company might use?
Yes. So, Mike, let me hit that last one first. We've kind of chatted about that for years. Wait a minute, we are EVA driven here. In other words, we always kind of look at what is the return on invested capital versus our cost of capital and if we can beat our cost of capital, we create value for shareholders at every dollar we invest.
So that's kind of how we think about Southern Power. And from time to time, they do kind of develop in the market opportunities to monetize those assets. We certainly consider that and you remember one time it got pretty hot. My caution to you there would be that we remain customer focused And many of our customers are co ops and munis who have entrusted us with full requirements obligations for long periods of time. We want to honor the relationship we have with those customers.
That's why we get the business. And so we're not going to just transact to get the next dollar. We want to be very careful to take a long term view on developing the customer base and growing as much value in a sensible way as possible. With respect to Vogtle, we've talked a lot about that in the past and I'm going to kind of point to the VCM-eight that you're very aware of. I mean, I'm sorry, VCM-seven testimony you obviously are very aware of and there was a lot of discussion VCM-seven In the VCM 7 discussion, it was clear that our contractors were operating on kind of a mid 17, mid 2018 schedule.
There was a schedule that our contractors were following. We had not agreed to that schedule. Recall that the commercial dispute we have of our contractors deals with delays that came from the licensing from the BCD to the COL and how that may manifest itself in the project. What I would do, I think most constructively here is point you to our filing in VCM-eight, which will be at the end of February, in which we will provide more clarity about our point of view on schedule.
Got it. Okay. Thank you very much, Tom. Much appreciated guys.
You bet. Thank you. Thank you. Our next question is from the line of Jonathan Arnold with Deutsche Bank. Please proceed with your question.
Hey, good afternoon, guys. Hi there. Sorry about before I cut myself off. Tom, one question I have just on the growth story is, you described 2013 as being a weak first half and then something of a rebound in the second half and then sort of it nets out to 1%. So what kind of sales growth are you embedding in your 4% to 6% earnings growth assumption beyond 13% percent?
And how does the segment pieces look versus what you've shown us on 13% which I guess is a bit weighted to industrial and less residential?
The longer term, I guess the longer the question will go to Jonathan, make sure I'm answering this right is kind of a longer term GDP expectation. And we kind of think that our electricity sales will migrate upwards into say 1.4, 1.5 kind of range for years beyond this year. Is that helpful?
So that's kind of what underpins your 4% to 6% or if we see that could it nudge you back up again or
is that
Yes. I'm sorry, go ahead.
No. So just to be clear, the 4% to 6% is predicated on 1% or more like 1.5% or am I getting too cute with the numbers?
You're a little cute, but it's 1% this year and beyond this year kind of 1.4% going forward. But the bigger indicator, I think, is watch CapEx. If you look at rate base growth based on the CapEx, we're showing roughly $5,500,000,000 a year augmented by whatever Southern Power does opportunistically, I feel very confident in our 4% to 6% range.
Okay. That's helpful. Thank you, Tom. And then in the can I also ask on Vogtle and there have been these press reports about the vessel being stranded in the port and issues with the railcar? Can you kind of give us your sort of version of what's going on with that story?
How big an issue is it? Is it not an issue?
Yes. I hope I don't offend anybody. I think it's been over reported a bit. The vessel never really left the car. We turned the car back up.
We put it back in the port and they're managing it. It provides interesting pictures, but I don't think it's particularly important. We'll be able to manage that little bump in the road, excuse the pun. And we'll continue with our progress in an outstanding way.
So not something that will influence you one way or the other really?
No, sir. Okay. Thank you.
You bet.
Thank you. Our next question is from the line of Anthony Krowdell with Jefferies. Please proceed with your question.
A question on Kemper in the press, some of the utility press had a story about on Monday about the Supreme Court in constitutionality of the, I guess, the settlement you entered into last Thursday. Can you provide any color on that?
Yes, Anthony, it's Art. There are a couple issues at Supreme Court, one being the Sierra Club's appeal. There is another issue that is brought by an individual out of Hattiesburg that is challenging constitutionality of the Baseload Act, basically that would provide for cash CWIP before the plant is operational.
And then the third one was this issue of actually the company who is really kind of muted by the company and the commission agreeing to the settlement agreement. And in front of the Supreme Court, those folks have basically put that issue in advance. Our expectation is ultimately that piece will be dismissed. So of the 3 pieces, one is kind of muted by the settlement agreement. We think it will be dismissed in the future.
The second is an individual from Hattiesburg. On the other side is the Attorney General of Mississippi. And then the third is just Sierra Club appealing the 2nd amended certificate, which we think is fine. Is there a timeframe when the Supreme Court has to act on this or they actually don't have a window when they have to give a decision on it? No timeframe that we know of.
Great. That's all guys. Thank you very much. You bet.
Thank you. Our next question is from the line of Andrew Weisel with Macquarie Capital. Please proceed with your question. Hi, it's actually Andy Serzinski. I most of my questions have been asked and answered, but I have a question regarding the O and M reduction in the Q4.
Could you tell us how much of that was associated with the Hurricane Sandy?
Yes, Angie, there was a number of things that influenced the 4th quarter. And one of those was, you hit it right on the head, was our sending I can't remember the number 2,400. People up north or some were there for up to 2 weeks. So that helped offset some O and M that we expected to be spent in our service territory.
That was about a penny.
A little under
a penny, but you round up to
a penny. Some other issues were bad debt expense was way down. It was not only down in the 4th quarter, but it was actually down throughout the year over year. That provided basically another penny of benefit.
And that was lower bills. So you had the benefit of lower fuel expense, you had mild weather, you had personal income growth associated with the economy. So as essentially disposable income went up, bad debt expense went down.
Yes. And then there were a variety of small accounting adjustments that might add to a half a penny, maybe a little more. I won't go into that detail, but we also had lower O and M than expected. We kind of back ended our activities on O and M to the 3rd Q4. And so that's why you saw more of it in the 4th.
But the facts are that because we ran so much gas generation last year, we were able to push a lot of maintenance outages that may have been scheduled on some of our coal units because they just weren't needed as much and we had some room to work there.
In fact, what was it? Our eastern coal units had a capacity factor in the high 20s. So they just weren't stressed very much. The other thing is along with smart grid, along with our smart meters, along with a variety of other initiatives that we have in place, the system is just operating more efficiently. We make systematic improvements in our business practices.
We create optionality in our expenses. And I think our 26,000 employees did a great job.
Okay. Secondly, the share buyback in the 4th quarter, I might have missed that in previous quarters. Have you done that before?
Well, we were trying to target our match our equity with what was going on in our construction program. And we target approximately a 44% equity ratio. So in order to get there, we had talked about, I guess, 2 quarters ago, 2 calls ago, about buying back some of that equity that was being issued to keep us at a certain target. We ended up the year at a 43 point 7% equity ratio, which is kind of right where we'd like to see it. So we're right on target with where we expected.
And the second time we we also funded a pension
of how much? Well, that's true. We put $445,000,000 into our pension this year at the end of 2012. Our PBO funding ratio was at 90% for the pension liability and is 84% when you throw in the non qualified liabilities.
So we're in great shape.
We're in
great shape from that perspective.
So we really took advantage
of good performance. Sorry, go ahead. I'm sorry.
My last question is the load growth assumptions. I heard your views on energy even slightly below even they expect about 1% or even slightly below 1%. So your 1.4% assumption, is that a function of migration into the Southeast?
Weather, EIA does not account for weather. When you account for weather, fact, if EIA dials down their national projections to the Southeast and then you account for weather, they are right on where we are. That's the difference. I think
it's also to point out that nationally, there's a lot of talk about weather being hotter than normal last year. Actually in the Southeast, it was very mild. So that's something that's influencing their numbers as well.
That's the point. Yes. So if you look at hot weather year and then you go to a normal weather year, the assumption would be from EIA that growth is low. Well, but when we do it, when we strip all the stuff out and we can get very granular, I really believe our numbers.
I was actually referring to longer term numbers, but that's fine. Thank you very much.
Yes, that's the same thing. Okay. Thank you.
Thank you. Our next question is from the line of Ashar Khan with Visium. Please proceed with your question.
Hi, good afternoon. Hi, Shar.
Can I just
ask you, I might have missed it, I apologize? Southern Power's profile of earnings starting from what you'd reported 12 going forward is what is incorporated in this 3 year outlook or in the growth rate? I apologize, I might be repeating a question.
I don't think we really specifically said anything about that. We're kind of we were 175 this year. We're kind of looking at 190, 175, 190. We're looking at some projected growth every year out of those guys. We generally don't comment on anything beyond the current year for them.
But you should expect some continued growth trajectory.
Okay. So you're saying this year between 175 190?
Yes. We're going to hold them accountable in their pay for improving on their performance in 2012.
Okay. Okay. Okay. Because I was just trying to think, right? You're putting in like nearly 15% of your CapEx dollars into the subs.
So there has to be some return coming from that CapEx dollars. So it depends on what
the projects are. So like if you do solar projects, which typically are much more kind of near term oriented in terms of their cash flow as a result of tax benefits, you tend to get more of a near term pop. If you're dealing with the gas combined cycle, those tend to have a longer construction period and longer term profile.
So
it just depends on what kind of projects they do.
Yes, but let me ask you, wouldn't you be more inclined to like even my home utility over here in New York has gone into solar. Isn't like solar and near term getting that more something more on your wish list versus building or getting acquiring a gas plant?
You know what, we really like long term results. We are always cost as a matter of corporate dogma not to invest in tax advantaged investments as a primary strategy because that tends to be addictive behavior in order to provide a long term growth trajectory. You have near term pops and you've got to double it for the next year and double it for the next year and double it for the next year and then you'll find yourself some years because of storm activity or a variety of other things and carry forward positions. And therefore, your tax benefits aren't worth what you thought they might be. I don't like particularly tax advantage investing as a long term good corporate growth strategy.
The other thing is they could disappear with the hands of Congress at any time, right? We know that we're in a revenue hungry Congress and how long can Congress afford to hand out preferential treatment to the renewables industry. So there will be some tax advantage investing in the form of solar investments, I get that, But we really like building long term books of business that we've done successfully in the past.
Okay. Okay. And then can I just can you just Tom, I guess there was this cooperation that you guys did with Turner, right?
Where does that stand in
this whole scheme of things?
Turner has been a great partner with us in co investing. I guess, what is the ratio, 90% to 10%. So we invest 90%, they invest 10%.
And
they're great guys. So how much investment has gone into that joint venture, can I ask?
We don't disclose that. Okay. Okay. It's not much from their side. I mean, what we do disclose of the projects we've done, so.
Okay. Okay. Okay. I appreciate it. Thank you.
Thank you. So do we want to take one last question? One last question.
Thank you. Our next question will come from the line of Dan Jenkins with State of Wisconsin Investment Board. Please proceed. Hello, Dan.
Hi. How are you? Excellent. Hope you're well.
Yes, good, except for the snow that's fallen up here. I was wondering, when we think about O and M, you talked a little bit about what's going on. But you've also announced a number of plant retirements, particularly small coal plants and so forth. And how should we think about that affecting O and M? Will that just be replaced with some other costs?
Or will those costs go away related to those plants?
Well, they're factored into our plan. They'll disappear as we move through time, but those units are probably have capacity factors that are well below the number Tom mentioned a moment ago. So their O and M levels and operation levels aren't very high to begin with. So they'll be factored into our plan and are reflected in our earnings growth rate.
Okay. And then I was curious in your last quarter you included a couple of slides that showed some upcoming construction for both Vogtle and Radcliffe. And I just wondered if you could give us an update. Are those still the key items that we should be thinking about in the first half of twenty thirteen? Or are there any revisions to those slides?
Yes. We are Dan, Tom already mentioned I think in his some of his remarks, we'll begin to finish up the rebar under these preliminary amendment requests that we have been given by the approved by the NRC. We head and those are expected to be done in the Q2 of the year. So that will move things within the nuclear island on along a good bit. So that's kind of where we expect to go with at least this version of milestones.
And when do given that you had that shipping problem with the vessel, when is that on-site yet? Or when will that be on-site?
I would expect it's going to be on-site within the next few weeks, sometime within the quarter.
When is it critical that it'd be there to just monitor that?
Not critical at all. It's way down the list. Okay.
How about with the Radcliffe? You had a number of items
that you listed there. Well, I think the pictures that we showed you on some of the slides do more justice than any of the specific descriptions because you can see just by the pictures alone year over year that plant has come a long, long way. We've got specific work on the gasifiers going on. That's going to be completed sometime within the next quarter. And that is a critical piece of it.
We still have piping that is being installed as well. So those are kind of the critical elements at this point.
Okay. That's all I had. Thank you. Thank you, Dan.
Thank you. And at this time, there are no further questions there. Are there any closing remarks?
Yes. Thanks very much, operator. I just want to thank everybody on the phone and I appreciate everybody's kind of economy and their questions. We love to engage you in a very transparent way. We hope we've done that on this call.
Certainly, if there's any follow-up, Dan Tucker, Art, myself, Jimmy Stewart, others are glad to engage you on any issues you want to follow-up on. Thank you for following our company. We'll do our best to earn your trust in the months ahead. Thanks very much.
Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company 4th quarter 2012 earnings call. You may now