Afternoon. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company's Second Quarter 2010 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 I would now like to turn the call over to Mr.
Glenn Cundart, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Michael, and welcome to Southern Company's 2nd quarter 2010 earnings call. Joining me this afternoon are David Ratcliffe, Chairman, President and Chief Executive Officer of Southern Company and Paul Bowers, Chief Financial Officer. Let me remind you that we will make forward looking statements today in addition to historical information. There are various important factors that 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. We'll also be including slides as part of today's conference call.
These slides provide details on the information that will be discussed on this call. You can access the slides on our Investor Relations Web site at www.southerncompany.com if you want to follow along during the presentation. Now at this time, I'll turn the call over to David Ratcliffe, Southern Company's Chairman, President and Chief Executive Officer.
Thanks, Glenn, and good afternoon, and thanks to all of you for joining us. I'm sure most of you are aware by now the changes in our senior management team that we announced yesterday. With my retirement from Southern Company on December 1, we have begun a transition in the office of Chief Executive. Tom Fanning, who many of you know very well from his 4 years as Chief Financial Officer, will become President of Southern Company on August 1. Tom is also with us on the call this afternoon.
Paul Bowers will be moving to Georgia Power on August 13 as Chief Operating Officer, while Art Beatty, who is also with us today, will become Chief Financial Officer. Tom, Paul and Art are key members of our management team and are well prepared for their new assignments and I know will do an outstanding job for us. As you can see from the materials we released this morning, we had a good second quarter, which was influenced by favorable weather and the continuing economic recovery here in the East. Since our last earnings call in April, we've had 3 significant new regulatory developments in our retail business, including a rate case filing by Georgia Power. Paul will cover the rate case filing in more detail in a few minutes.
First, on May 26, the Mississippi Public Service Commission approved the construction of our 5 82 Megawatt Coal Gas Vacation Project in Kemper County, Mississippi. Yesterday, the South Mississippi Electric Power Association signed an agreement to purchase 17.5 percent of the plant to fill the projected capacity requirements of its members. The plant which will use Mississippi lignite coal is scheduled to be placed in service in May 2014. The facility has a construction cost estimate of $2,400,000,000 The project which will feature 65% carbon capture capability as qualified for nearly $700,000,000 in federal incentives, including $412,000,000 in investment credits and $270,000,000 in clean coal power initiative funding. In addition, we are in advanced due diligence discussions for federal loan guarantees.
Mississippi Public Service Commission has also approved the construction work in progress mechanism, which will begin in 2012 and continue through the end of May 2014. We are pleased to now be under construction with the Kemper County project. We believe this plan is clearly the best choice for our customers and to repeat what Secretary of Energy, Steven Chu, wrote recently and I quote, the project is importance because it provides a viable option for using our abundant coal resources in a cost effective manner and reducing power plant emissions. My second update concerns our Vogtle nuclear project. Last month, we announced that Southern Company and the Department of Energy agreed to conditional terms on the nuclear loan guarantees for Units 34 at Plant Boat.
Under the conditional agreement, the loan would not exceed 70% of the company's eligible projected cost or approximately $3,400,000,000 and is expected to be funded by the Federal Financing Bank. The loan would be full recourse to Georgia Power and secured by a lien on the company's 45.7% interest in the 2 new units. The loan is expected to save Georgia Power's customers between $15,000,000 $20,000,000 annually in interest cost. The actual amount of the interest savings will depend upon the final terms and the timing of the specific borrowings. Final approval and issuance of the loan is subject to the receipt of the combined construction and operating license of the Nuclear Regulatory Commission and satisfaction of other conditions.
NRC's current schedule calls for finalization of its design control document review by October 2011. And we would expect to receive the COL by the end of 2011. As you know, the company received an early site permit and limited work authorization from the NRC in 2,009 and site work has been underway since that time. At this point, I'll turn things over to Paul for a discussion of our financial highlights for the Q2 and our earnings guidance for the remainder of 2010. Thanks, David.
First of all, let me say how much I've enjoyed working with all of you as CFO during the past two and a half years. Now as David said, our 2nd quarter performance was good. The results continue to highlight the consistency of our business plan to provide regular, predictable and sustainable performance over the long term. In the Q2 of 2010, we reported $0.62 a share compared with $0.61 a share in the Q2 of 2019 or an increase of 0 point 2nd quarter numbers compared to the Q2 of 2019. First, the negative factors.
Non fuel O and M reduced our earnings by $0.07 a share in the Q2 of 2010 compared to the Q2 of 2,009. This change is primarily due to a return to normal maintenance spending in 2010 for both our fossil and hydro generation fleet and our transmission and distribution network. On the generation side, approximately 3,000 more megawatts were involved in planned outages in the Q2 compared to the Q2 of 2,009. In the Q2 of 2019, we had the early termination of 2 of our international leveraged lease investments, which resulted in a gain. For the Q2 of 2010, we now show a reduction of $0.03 per share compared to the Q2 of 2,009.
Finally, an increase in the number of shares outstanding reduced our earnings by $0.03 a share in the Q2 of 2010 compared with the Q2 of 2019. Now let's turn to the positive factors that drove our earnings for the Q2 of 2010. Warmer than normal weather in the Q2 added $0.04 per share to our earnings for the period compared with the Q2 of 2,009. While the Q1 of this year was the coldest winter in 20 years, the Q2 was the warmest spring in 20 years and the 4th warmest in more than a century. Clearly weather has been a major factor this year and has added $0.14 per share to our earnings compared to the 1st 6 months of 2,009.
Increased usage and better than expected economic activity primarily in the industrial sector added $0.04 a share to our earnings in the 2nd quarter compared with the same period in 2,009. Other revenue effects in our traditional business added a total of $0.02 a share to our earnings in the Q2 compared with the Q2 of 2,009. This impact was driven primarily by revenue changes related to the recovery of environmental expenses and other investments at our operating company. Reduced depreciation and amortization added $0.01 per share to our earnings in the Q2 of 2010 compared with the same period last year. This increase was driven primarily by the continued amortization of excess cost of removal obligations at Georgia Power approved by the Georgia Power Georgia Public Service Commission beginning in Q3 of last year.
The increase was partially offset by additional depreciation from increased environmental, transmission and distribution investments. Lower interest expense also added $0.01 per share to our earnings in the Q2 of 2010 compared to the same period in 2,009. Increased transmission revenues in our traditional business added $0.01 per share to our earnings in the Q2 of 2010 compared with the same period in 2,009. Investment tax credits at Georgia Power added $0.01 per share to our earnings in the Q2 of 2010 compared with the same period in 2,009. In conclusion, we had $0.13 of negative items compared with $0.14 of positive items or a positive change of $0.01 per share over the Q2 of 2,009.
So overall, our quarter came in at $0.62 per share. Before I discuss our earnings estimates for the Q3, I'd like to update you on the Georgia Power rate case filing, the economy and the impact of the oil spill. On July 1, as required by its current accounting order, Georgia Power filed a retail rate case with the Georgia Public Service Commission. The requested increase is necessary to cover additional costs of required environmental controls and continue investment in new generation, transmission and distribution facilities to support growth and ensure reliability. During the past 15 years, Georgia Power has operated under 3 year negotiated rate settlement.
The 2010 rate case filing contains proposed enhancements to the current structure. The requested increase of $615,000,000 or 8.2 percent would be effective January 1, 2011 and is based on a retail return on common equity of 11.95%. The increase would be recovered through Georgia Power's existing base rate tariffs, including its environmental compliance cost recovery tariff, the demand side management tariff and the municipal franchise fee tariff. The filing also proposes an alternative rate plan, which enhances the existing tariffs and proposes 2 additional base rate tariffs. The first proposed new tariff is an adjustable cost recovery tariff or ACR.
If approved beginning January 1, 2012, the ACR will work to maintain Georgia Power's projected earnings within the ROE band established by the Public Service Commission in this proceeding. The ATR tariff proposal has a symmetrical sharing mechanism should the company actual earnings exceed or fall below the approved ROE band. The second proposed new tariff is a certified capacity cost recovery tariff. This tariff is designed to recover certified generation and associated transmission costs as well as capacity costs of certified power purchase agreement. If approved, these new tariffs along with the annual resets of the 3 existing cost recovery mechanisms would allow the company's rates to adjust more gradually than under another 3 year accounting order.
Testimony and hearings on the request will begin this fall and the company expects the Georgia Public Service Commission to issue a final order on the matter during December. We will keep you updated as the case moves forward. Last week, we convened another economic summit with executives from several of our industrial segments, including a rail transportation company as well as economists from a major private bank and the Atlanta Federal Reserve to discuss the outlook of the economy. Even with a diverse spectrum of industries represented, there was a consensus of opinion in 3 main areas. 1st, a double dip recession is unlikely.
However, the momentum of the economic recovery is slowing. The general view is that the Southeast is still well positioned for economic growth outpacing the U. S. 2nd, residential and commercial construction remains depressed, but the trend shows stabilization in the residential market. Apartment rentals and unoccupied homes are moving in a positive direction.
3rd, inventory restocking is slowing from the Q1. It is not expected to be a major economic driver going forward. Most economists, including those in our group, see modest growth in the second half of twenty ten. So the conclusion of our panel is that the recovery continues, but it is far from robust. Several of our participants mentioned that their industries will basically muddle through for the next 6 months.
Turning now to our own customer data. Industrial sales increased by 13% in the Q2 of 2010 compared with the Q2 of 2009. Quarter over quarter, the most significant increases were in primary metals, up 60.7%, Chemicals, up 25.9%, Transportation, up 14.5% and Paper up 16% compared with the Q2 of 2009. Year to date, we have seen positive growth in every segment except pipelines, rubber and apparel. The Tees and Krupp Steel Manufacturing Facility in Alabama hired approximately 1,000 people at its new facility and is continuing to commission production equipment, which will require approximately 200 megawatts.
In addition, Hyundai Heavy Industries announced a facility in Montgomery, Alabama to build high voltage transformer, which is expected to add another 500 jobs. All of the major automobile manufacturers in our service area continue to report steady demand for their products with an increase in production in Alabama alone of 71%. Adjusting for weather, residential sales increased by 1.4% in the Q2 of 2010 compared with the same period in 2,009. New connects have climbed to approximately 36,000 a year in the Q2, which represents a 47% increase over the Q1 of 2010. In addition, we're seeing positive customer growth of more than 7,000 new residential customers.
As expected, commercial sales remain our weakest sector declining at 1% on a weather normal basis in the Q2 of 2010 compared with the Q2 of 2009. Year to date, 20 10 commercial sales are down 0.7% on a weather normal basis, which is in line with our forecast. Commercial activity continues to lag with vacancy rates for offices of more than 22%. On the positive side, electricity demand by data centers increased by 7% in the Q2 reflecting our most active account in the commercial sector. In summary, the commercial and residential sectors are performing according to our forecast, while sales to the industrial sector in the second quarter are ahead of our plan.
Turning now to the impact of the oil spill in the Gulf. We know many of our customers along the Gulf Coast have been financially impacted by this accident. However, at this point, from both an energy demand and operational standpoint, we have not seen a measurable impact on our company. From an energy sales standpoint, the major impact would be seen in the commercial sector, primarily in tourist related businesses such as hotels and restaurants. Gulf Power in Northwest Florida has the largest exposure with some 125 miles of coastline along the Gulf.
While few beaches from Pensacola to Panama City have been affected by the oil, thus far we have not seen been able to identify any impact to our energy related sales since only about 5% of Gulf Power sales are to customers in tourist related segments. Another factor is that oil spill workers are occupying hotel rooms, which otherwise would have been filled by tourists. On the generation side, our plants along the Gulf Coast are operating normally and coal shipments by barge have not been interrupted by the oil spill. Turning now to our earnings guidance for 20.10. Our 2nd quarter results exceeded our estimate by $0.06 a share.
As we discussed, the quarter was largely influenced by weather and a gradual economic recovery we're seeing here in the Southeast, particularly from certain segments in the industrial sector. While we ended the 1st 6 months at $1.22 per share, it's important to remember that $0.14 per share of those earnings were due to weather. In addition, for the remainder of the year, it's important to remember that 3 major factors will continue to have a limiting effect on our earnings. Number 1, the 3rd year of a modified accounting order at Georgia Power. Number 2, a more normal level of O and M spending.
And 3, an increase in the number of shares outstanding. Given these factors and since a significant portion of our earnings are derived in the 3rd quarter, our guidance will remain at $2.30 to $2.36 per share with an emphasis on the top end of that range. Finally, our estimate for the Q3 is $0.94 per share. At this point, I'll turn the call back over to David for his closing remarks. Thank you, Paul.
As Paul explained, we had a good quarter and a solid 1st 6 months. But we are mindful that weather has been a major contributor to our earnings and that the economic recovery, while encouraging, remains somewhat fragile. It's important to reemphasize that the foundation of our business plan is a commitment to provide our investors with regular, predictable and sustainable financial performance over the long term. At this point, Paul and I are ready to take your questions. So Michael, we'll now take the first question.
Your first question comes from the line of Greg Gordon with Morgan Stanley.
Sorry about that. I was distracted for a second. So I guess my question I have 2 questions. The first question is, the $0.01 benefit from the lower amortization, was that lower than it otherwise would have been because you had the flexibility to reduce it visavis just having a strong weather quarter?
No, Greg, this is Paul. When you look at that $0.01 benefit, remember you had the COR, the cost for removal benefit from Georgia Power. At the same time, we're recognizing increased depreciation and amortization from environmental equipment and T and D equipment.
Okay. Okay. And then, you had I mean, I know you commented in your scripted remarks that you're still very cautious about prospective acceleration of demand. But for the 1st 6 months of the year, we've seen quite a dramatic recovery. And shouldn't that benefit you in your dialogue with the regulators?
Because obviously, the better the sales levels are, the easier it is to amortize the needed rate increases across customer base, right?
That's correct, Greg. That's absolutely correct.
Okay, great. Thank you.
Your next question comes from the line of Daniel Leggers with Credit Suisse.
Hey, good afternoon. Just following up or touching on Kemper a little bit more, can you just talk a little bit about the contracting on the E and C side, to give you confidence you can stay within the top end of the allowed cost the cost or the investment level the commission provided given the overruns that Duke has seen so far?
Dan, this is Paul. Both David and I will comment on this. When you look at the contract that we just signed actually yesterday with the Smeepo organization, it is an opportunity for them to get capacity, low energy cost capacity for their customers that they serve, the MCs in the southern part of the state. From the standpoint of where we stand from a Kemper County construction and execution, we've already secured about 20% of the cost already under contract. And by the end of the year, we expect to have 50% of that cost contracted for.
So we're real confident that we can make the contracted or the targeted price of $2,400,000,000 but we have the $2,880,000,000 cap that's available to us.
Okay.
And I guess, if you give a little more color on the customer growth you saw in the quarter, the 36,000 kind of run rate level. Where are those bodies coming from? And are you seeing an acceleration over the year that might give you confidence that number is going to continue to rise from here?
Yes, Dan, remember, I mentioned that customer growth was only 7,000 customers in the residential class. When you look at the 36,000, that's new Connect. So it's people leaving Connect now being reestablished in existing facilities and or new facilities. That new connect is a determinant if you will of the growth that we might be experiencing in the marketplace. So having positive quarter over quarter numbers is an indicator that we are having inward migration and that jobs are being established in the Southeast.
The other point I'll make is that when you look at our normal new connect from 2000 to 2,007, that number usually runs around 80,000 to 88,000. So we're significantly low normal.
But are you seeing an acceleration in that $36,000 number? Where was it the last couple of quarters on a run rate basis? And when do you think you get back to something closer to the historic level?
Last quarter, it was around 30,000. So that 47% increase is 36,000 over the 30,000. The aspect of when we get back, we're looking at 2012 when you have the residential markets returning to something more than normal. More than current normal.
More than
current normal. Thank you. You normal out here somewhere, Dan. We're trying to find it. I think I just think that what we're trying to do is to celebrate the fact that we see a little positive here.
I still think the long term reality is a function of job creation and we're still struggling with unemployment rates that are too high. And until we get those numbers headed in the right direction, I think we're going to be pleased with what we get, but I don't think we can talk much about an accelerated pace here. Okay. And I guess
just one last question.
As it goes to the Georgia filing,
Remind on the ability of the commission to approve an ACR or some sort of alternative rate making mechanisms. Is that something that they have the power to do? Or is that something that would also need legislative attention prospectively to get approval?
No, they can clearly do that.
Okay. Thank you.
Your next question comes from the line of Paul Ridzon with KeyBanc.
I think you already answered this, but
I didn't quite catch it. Did you take full advantage of the accounting order to depreciate on the depreciation?
Yes, Paul. When you look at it, it's $54,000,000 per quarter. So yes, we did recognize that this quarter.
And as we look
at the 3rd Q4 of 2010, should we expect similar O and M step ups of $0.05 to $0.07
When you look at O and
M spend overall, yes, we're at normal spending. Remember last year we had depressed spending in our company to respond to the economic realities that we're facing.
So we should see similar step ups? Yes. And then what's weather been like June 30 forward?
It continues to be warmer than normal.
And your 3Q guidance assumes normal today going forward or normal June 30 going forward?
Normal weather for the Q3 including July.
The entire month, okay. The entire quarter. Thank you very much.
You're welcome.
Your next question comes from the line of Jonathan Arnold with Deutsche Bank.
My questions were answered. Thank you.
And your next question will come from the line of Ali Agha with SunTrust Robinson Humphries.
Thank you. Good afternoon. Hey Ali.
Going back on to the guidance for the year, I understand the point you folks made of the $0.14 help from the weather and the negatives that you outlined in the second half, those of share count, etcetera. Those are also well known. And so I was just wondering, if you're assuming normal weather for the rest of the year and you picked up $0.14 through the first half, why would you not be raising your guidance for the year? What's the other negative that you may not have accounted for that's causing you to remain at these levels?
Well, remember, Ali, when you have like I said, there's 3 things. The normal O and M expenditures that we have is getting back on reliability schedules associated with our generation fleet, the vegetation management activity that we have around our T and D facility. So there will be a higher spend on O and M level. The other piece is to recall that we have the accounting modified accounting order at Georgia that limits, if you will, the capability of that company to earn over a certain amount.
Right. The Georgia part, I understand that that limits it. But the O and M step up and the share count increase, I mean, those are already budgeted into your original numbers to begin with, right? I mean so that's not incremental. I understand the limit on Georgia.
But is there anything else out there that is beyond these factors that is causing you to keep your numbers?
No, I think we disclosed the planning that we're doing on increased O and M spending and the increased number of and the Georgia order. Those are the things that are the major factors. And always the uncertainty around weather. We've seen the weather go the other way too.
Yes, right. Understood. Secondly, could you remind us what was how much equity did you folks raise in the Q2 and where are you now versus your plan for the year?
We have raised $344,000,000 so far this year through our pipeline and through Dribbble. Holly, one other thing too, as you look at our drivers and like we said on the opening of this call, the Q3 is our largest quarter in terms of our revenue and earnings. After the Q3, we'll make adjustments as necessary to our guidance, but not until then. Understood. And the $344,000,000 Paul, that's versus what about roughly $500,000,000 or so you have planned for the year?
$500,000,000 to $600,000,000 that's correct.
And last question, any initial feedback from the commission to those new tariffs that you're proposing? And any initial sense of are they receptive to it or not?
I think the early indications are that they're receptive to considering the concepts, but it's really early in that discussion.
Okay. Fair enough. Thank you.
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Hey guys, two questions. One on Kemper County, what if any do you expect in the way of litigation going forward? I mean usually the environmental groups continue to kind of battle it and what precedent if any in Mississippi exists in terms of whether injunctions ever get granted?
I think the most aggressive challenge we will continue to experience will come from the Sierra Club. Most of the other environmental questions have been answered. The Sierra Club as you know has filed an appeal. That appeal will be heard in Supreme Court. We're confident that we have addressed all of their concerns adequately, so we expect a good outcome there.
Okay. And when you think about
the Southern Power subsidiary, how should investors think about kind of the long term prospects of that business relative to your utility businesses, meaning higher growth, lower growth, similar growth when we just kind of think about it as a piece of the larger puzzle?
Michael, when you look at Southern Power, like we said before, it is a surrogate of a regulated model. It has long term contracted capacity for its generation unit. And what we also said is it was going to remain flat over the next 3 years because of the contracts that were evolving during this time. One of the issues that Southern Power is also facing is the downturn from the economy and having capacity that was allocated towards a requirement contract that is really not needed for another year or so.
Okay. Thank you guys. Much appreciated.
Your next question comes from the line of Jim Von Reisman with UBS.
Good afternoon, everyone. Hi, Jim. Hi, Jim.
Hi. Two questions. 1, did I hear you correctly that on the industrial sales, all the restocking efforts that the industrials were doing in the first half is basically now over? Did I interpret that correctly?
Jim, what we said is from the economic summit, the participants basically said that the pop that we had in the first half of the year resulted from much of the activity around restocking and they did not anticipate restocking to drive the second half of the year.
Okay. And then the second question is on, I'm confused about the 4th quarter. I know we're jumping ahead here, but if your guidance remains the same with the emphasis on the upper end, that means you're supposed you would report somewhere in the $0.20 range in the Q4. Can you tell us what would be the big drivers in 4Q? And would they be considered, call it, one time in nature, step up in maintenance or anything?
Jim, when you look at like we had said earlier, ongoing O and M is going to be in normal areas. We're going to be looking at maintaining the reliability of our network and ensuring that we provide the necessary maintenance on our systems to meet our customers' expectations on reliability and price for the future.
Okay. Now that the economy is we're in a new normal phase and some of the temporary O and M cuts have lapsed, what should we be expecting in terms of call it a normalized O and M growth year over year, so looking into 2011 and beyond?
Well, Jim, each year you have to assess the O and M spend based on the environmental equipment that comes in. I can't give you a smooth 3% growth rate on O and M or 4% growth rate because some of those numbers are driven by the scrubbers that come online during any individual year. They drive O and M significantly for us.
Okay. Thank you. Your next question comes from the line of Angie Storozynski with Macquarie.
Thank you. Two questions. On the Georgia rate case, could you tell us a little bit more about the timeline for the rate case, especially in association with the management changes? Could we imply, for instance, that come early December or late November, we could a potential settlement or some resolution to the rate case?
By definition, the rate case has to be finalized by the end of the year by December. And as you know, the scheduled calls for the hearings begin in October. Usually, they're completed in October and then the commission takes it under advisement in November and we try to finalize it in December.
Okay. And the second question is about your coal plants and dispatching of coal plants given where forward prices for Central Appalachian coal are. Are we already seeing are you already switching to natural gas? And what's your view about the future given where power natural gas and coal prices are?
I think we've explained before the economic dispatch regime that we use. So we're dispatching our units on the basis of the lowest cost and that's a function of as you suggest price of coal and the price of natural gas. So as it changes then the dispatch changes. We're still continuing to burn some of our coal piles in a managed fashion so that we're managing the inventory. We have the opportunity as gas prices go down and take advantage of that and we will do so.
Okay. Thank you.
Your next question comes from the line of Stephen Fleishman with Bank of America.
Yes. Hi, guys.
Just a question,
do you have a sense on when this Moody's review of the credit rating is going to end? And just is there any new data or other stuff you've been able to give them to kind of make the case on how they're looking at new nuclear?
I don't think it ever ends, does it Steve. No, I was being funny. I'm sorry. No, I hear you. We do have plans to meet with Moody's folks in the next couple of weeks and explain to them with as much granularity as we can about the current reality and what we're doing to manage the risk in the business, not just the nuclear risk, but others too.
Okay. But would it fair to say that you would still plan to keep your financing plan as it is and not change it just because of the way they're looking at new nuclear?
Yes, Steve. That's exactly right.
Okay. And then also, I think last we talked there was some movement on the bonus depreciation. Could you and Congress, could you just update us on that?
I'm not sure of your question. The bonus depreciation associated with the financing bill, it was attached to the agricultural bill, but we have not had any updates of late. It's now in the small business bill is what I understand and we'll see if it gets any traction.
And if that does not end up passing, does that change your financing plans at all?
No, it doesn't.
Okay. Okay, great. Thank you.
Your next question comes from the line of Nathan Judge with Atlantic Equity.
Hello. I just I just wanted
to start with a question with regard to environmental legislation. Clearly, there's been some push well, delay in passing potential carbon bills and renewable energy bills. Do you have a point of view of when that could come back to Congress and what the likelihood of something in the past future?
I don't know that we have any particular view beyond what's been reported in the press. As you know, it's a very complex piece of legislation and the time associated with trying to deal with a very complex bill like that is problematic in a Congress when they really don't have enough time. If you look at their calendar, they've got a lot of things they've got to do in the fall and trying to get it back on the agenda in the fall will be a difficult challenge, not impossible. But I think the biggest challenge remains trying to get the 60 votes that they need to pass anything of that magnitude in a clearly growing political season. So I wouldn't give it very high chances of coming back this Congress.
I think it's jump ball till we get through the midterm elections and see what the new Congress will look like and whether or not there's an ability to move something in a new Congress.
With regard to the EPA and the recent transport rule, do you have any sense as far as magnitude of what that could mean in additional CapEx for Southern Company? And if what are the more difficult things in that proposed rule that would make it difficult for you to, guess, comply?
No, we really don't. We like everybody else, we're trying to do the analysis on the concepts that have been proposed. And I emphasize the fact that it is a proposed rulemaking. And it is a difficult one to understand because it has some complex provisions with regard to in ter state and intrastate trading and whether you can use allowances and whether you can't. The bottom line of all of that is as we lower these numbers, the ability for us to continue to back fit additional equipment is fairly limited.
We've already made, as you know, significant investments. We've invested by the time we finished in 2012, I think about $10,000,000,000 And you get to the point where there's not enough space and you can't continue to achieve reductions with the existing technology. So until we see and understand exactly what the requirement is and how it's going to be implemented, it's awfully hard to figure out exactly what we might be able to do to continue to reduce emissions of SOX and NOx primarily. Nathan, from a capital standpoint, it's a trade off relative to environmental and like David was talking about or replacement of new with new generation. So from a capital budget standpoint, it's
relatively level.
Do you have an idea when you will know? I guess final after the finalization of the rules, but
The rule is going to be challenged, I'm sure. So it'll be I think it'll be well into next year by the time we get some definition on exactly what's required. And then you're running as part of that, you're running exactly what's required. And then you're running as part of that you're running into what I think is just an impossible date from a compliance standpoint. As I understood it, they're talking about a 2012 kind of compliance.
So that if there is any additional equipment, control equipment required, the timing and the ability to put that in place is extraordinarily
limited. Just one final question on the EPA. The recent 1 hour, particular rule that's been finalized, does that have any impact on any of your plants?
No, I think we've done the work again on installing major scrubbers and we got additional scrubbers that will go in service this year. Pretty much have committed. I think the longer term questions are, what are the entire portfolio of additional regulations, whether it's the transport rule or whether it's fine particulates, ash, mercury, additional HAPS, all of that as we've said many times needs to be coordinated in a fashion that allows us preserve reliability going forward.
Thank you. Your next question comes from the line of Vedula Murti with CDP US. Good afternoon.
Can you hear me?
Yes. Good afternoon. You alluded to
the interest savings associated with the nuclear loan guarantee. Can you tell us what that $15,000,000 to $20,000,000 annually is in relationship to what the alternative is that you're using as the benchmark for the calculation?
Yes. We're looking at a spread and made some assessments of around 50 basis points between what we could borrow from the Federal Financing Bank versus what we get into the marketplace.
Okay. So secondarily, in terms of these proposed rate mechanisms, if they're approved or can be implemented in some fashion similar to what you proposed, will this then kind of carry you through the Vogtle construction period without having to do these discrete specific updated cases? Is that basically the objective?
I think the objective would be to create a mechanism that would allow us to make routine filings throughout the entire period and rather than these massive rate cases to deal with increased cost or decreased cost in a small much smaller increments over the period of time, really not just during the construction, but through that for the future.
Okay. Last question, I'm wondering in terms of load growth and what are you seeing in terms of normalized usage per customer? Have our residential customers and some of the smaller customers started returning perhaps more normal usage behavior? Or have you noticed that conservation and other types of activities are persisting such that even you're going to even with the existing customer base, getting back to prior usage or usage growth levels might be challenged?
When you look at the residential market, it is we're seeing an uptick in terms of use per customer, roughly about 1.2% for the quarter, 1.2% for the quarter. We have seen that trend for the year. The year to date number is 1.3. From a commercial standpoint, the small commercial group, it's really an economic question, not a use per customer question, because the issue is economic viability, are they going to remain in business? And we're seeing some of the small convenience store type entities really close-up shop.
But that 1.2 and 1.3, those are weather normalized and take out the weather effect?
That's right.
Okay. Thank you very much.
Your next question comes from the line of Andrew Levi with Tudor, Pickering.
I think most of the questions have been asked. The only question that I guess I would really have and I don't know if your nuclear construction kind of precludes it, but are you looking to add any new not new generation, but any generation through acquisitions in any of your areas or on the non reg side?
Andrew, we always evaluate the market to assess opportunities out there. As you know, Southern Power has a piece of their capital budget as associated with market opportunities or acquisitions of new generation assets. So that is out there and we constantly look at the marketplace.
Thanks.
Your next question comes from the line of Kerry St. Louis with Fidelity.
Afternoon.
Hello. Carrie, you're back at work?
I am back at work. Thank you. I just wanted to follow-up on a couple of questions about balance sheet and credit quality. So if I heard you correct, there's just $500,000,000 of equity issuance plan for the year?
What we said, Carey, at the 1st of the year is that we would look at between $500,000,000 to $600,000,000 and that we would see if our internal programs could provide that Given some opportunities even with bonus appreciation out there.
Right. If I remember correctly, I think it was roughly double that amount last year?
But $1,300,000,000 last year.
Okay. And kind of tied into the Moody's review,
I guess it just seems to
me that if you're trending kind of lower on equity issuance that that's not real supportive of maintaining your current ratings?
Remember, Carey, we said last year that we sped up some of the equity issuance, so we could take advantage of the market. That's why we went that way. So we prefunded some of the equity requirements for this year, last year.
Right. Well, where are you? You guys don't give out any balance sheet information in the release. Where are we now on kind of that the equity ratio?
We're at 41.8%.
Okay. And if I remember correct, you guys were hoping to be kind of closer to the 42% to 43% level?
Over a longer term, that's correct.
Okay. And based on the comments I heard, I guess, the view is that you guys are struggling to kind of figure out is there a level of equity at Moody's that would allow you to maintain your current rating? Is that fair?
Kerry, the issue really is more of a business environment relative to the issues that we're addressing. 1 being the nuclear risk, nuclear construction risk, the economy as a risk and the regulatory environment was pointed out in Florida as a risk. So the business environment issues is what we'll be addressing and how we're mitigating some of those risks either through contracts or through things that are just naturally occurring and improving like the economy.
Okay. But do you feel that you've been provided with at Moody's a level of equity that you guys could obtain that would allow you to stabilize your ratings? Or do you feel that that number has not been provided to you?
Yes. From an equity standpoint, it's not an equity issue.
Well, or cash flow guard. I guess what I'm saying is, of course, you guys can choose to keep your ratings. If you make a decision to add equity, delever, there are choices that you have to keep your ratings. And you may choose not to do that. So that's what it sounds like to me today.
And I'm just trying to understand is that because you guys feel that it's unclear at Moody's what level ratios you need to have? Or is it that you've just chosen not like they're giving you numbers, but you're choosing not to get there?
Let me make one point, Carey. We're not choosing to reduce our ratings. We're very focused on staying fast and try to provide Moody's as much information about the future cash flow metrics that we see, the opportunities that we see in the marketplace on the improved economy, plus the risk mitigation measures that we put in place around collection of costs around nuclear plants and or Kemper County. So we are pushing those issues in terms of providing Moody's with additional information. Financial integrity is critical to us and we are going to focus on maintaining that credit quality.
We have done some assessments of what it would take to the impact of a downgrade at Moody's and it looks like a 10 basis point impact on a 30 year bond. Our objective though is to maintain our credit quality.
Okay. And then I didn't know is I missed the beginning of the call. Is Tom Fanning on the call or available for questions?
Yes. Hey, Carrie, I'm here.
Hi. I guess, and it's been some time with we spoken and I know maybe there's not a dramatic change in view, but obviously with you taking into the role, I mean do you have any thoughts about balance sheet and credit quality that you could expand on?
Listen, I think it's just very consistent with what you've heard Paul describe. The other thing I would just add is that I think we're in solid shape with S&P and Fitch that this really is a discussion with Moody's about the business environment just as Paul described. So David, Paul and I and others will go up there and we'll have a good chat with them and try and make them see the world our way.
Okay, great. I appreciate that.
Your next question comes from the line of Marc DeCrosstin with FBR Capital Markets.
Hi, thank you. Good afternoon. 2 very quick questions, if I may. Number 1, I don't think I recall that you I don't think you've given cash flow guidance for 2010. If you haven't, do you see a step up in cash flow from operations in 2010 versus 2,009?
Yes. A meaningful step up?
What I'd like to do is just have our team call you back if it's all right to get into the details of that.
Fair enough. And as a second question, I don't know if you can answer this, but it may be the case in industrial sales are just starting to slow down year on year in July. Is there any indication of that as a result of better comps last year?
Well, that's exactly the point. Remember, the Q3 of last year had the benefit of the cash for conkers run up. And what we saw was the segment of all our industrial customers associated with automobile manufacturing really tick up. And we moved to our average monthly consumption in the industrial sector to above 4,000 gigawatt hours per month. We're running currently around 4,003 100 gigawatt hours per month.
So from a standpoint of differences between July, August, September of 2009 versus this quarter, you won't see that much of a difference, I don't think, in terms of percentage change.
Great. Thank you. That's very helpful.
Your next question comes from the line of Danielle Cease with Dudek Research.
Thank you. All my questions have been answered, except for one. I was wondering if you had the ROE for the different subsidiaries, especially Georgia Power on a 12 month basis, do you have that? Excluding weather, if you have that, that would be even better.
Danielle, let us call you back and we'll have Jimmy or Glen call you That's all right.
Okay. Super. Thank you.
Your next question comes from the line of Raymond Leung with Goldman Sachs. Hey, guys. Thanks. Just a quick question on financing plans for what you expect. I know George Power just did a bond issue.
Can you talk about what you're expecting this year? Maybe give us a preview for 2011?
Sure, Raymond. We are expecting roughly we've already financed 1.146 $1,000,000,000 this year, we'd expect another roughly another $1,000,000,000 before the end of the year. From 2011,
we'll be in
the market on the debt side around $2,000,000,000
Any breakdown by operating units?
We can call you back to provide that to you.
Okay, great. Thank you, guys. Your next question comes from the line of Dan Jenkins with the state of Wisconsin.
Hey, Dan.
Management. I have just a couple here. On your I think you said your requested ROE in the Georgia case is 11.95. How does that compare to the current allowed what's the current allowed ROE? And what would like a delta of 1% due to your revenue request in Georgia?
The current range right now, Dan, this is Paul. It's 10.25% to 12.25% is the range with the midpoint set at 11.25 dollars and a 1% change about $100,000,000
Okay. On the O and M, the higher, the more normalized level of spending, when will that cycle? So that you said that Q2 is a normalized level. Will that cycle in Q4 or Q1 next year? Or when does that the comparisons become more comparable?
It will be the 1st part of next year, Dan. When you get into the January Q1 of 2011, you'll have more of a comparable O and M level. Remember also, the amount of O and M reductions that we had last year were in the range of $230,000,000 for 2009. So you're seeing that come back plus the normal activity that we have around our plants and maintenance.
Okay. And then just wondering if you could give a little more color on the weakness you're seeing in commercial. You mentioned that that was according to your expectations. But at some point, do you see higher activity out of the commercial sector? Or is that business just going to be weak well into 2011?
Yes. As you recall, when we set out our forecast for this year, we expected a positive 0.5% growth rate in commercial, which is relatively flat year over year. With the results that we've seen so far, we still see it being relatively flat year over year. There are some negative signs that are really showing up in our numbers relative to the grocery stores segment, which is a big segment for us that is a negative year over year result. And some of that is in the small category.
When I say small grocery stores, it's convenience stores or the smallest of the box stores, which are materially being reduced in numbers. The other piece in the commercial sector, a year over year assessment of customer growth, it's down 0.5%. So that segment, we expect to start picking back up in the Q4, but again, we'll be watching it from a cautious standpoint.
Okay. That's all I had. Thank you.
Thank you, Dan.
Your next question comes from the line of Paul Patterson with Glenrock Associates.
Can you hear me?
Yes, Paul.
What I wanted to ask you was really basically back on the economy. I believe you guys said that your expectations for growth in the second half remain at or below the experience in the first half. Could you just tell us what the I mean you also mentioned that you thought that Southeast was going to be doing better than the rest of the national economy. Could you give us a flavor for what you actually are expecting for the second half of twenty ten?
When you look at the industrial sector, in terms of just growth, Paul, is that what you're
No, I'm in GDP actually.
GDP. When you look at the data that we received from the economic summit that we had, they were basically saying a 2% to 2.5% growth rate.
Okay. And that's for the Southeast?
No, that's a national number.
That's a national number. But you guys think you think the Southeast doing better. I mean, my understanding is that the economy there is better situated, I thought, that you guys are indicating as opposed to
the U. S. Economy as a whole? That's correct. How much
should we add to that?
When you look at
the economic data that also and The Economist said that 2%, 2.5%, they had an assessment of the Southeast around 2.9% as well. So you get some numbers that are skewing on the upside, if you will, of the GDP numbers for the Southeast. But again, like we said in the Q1, we're going to be cautious about making any prediction. The numbers are positive, but we also see indicators where inventory did drive some of that. We have some robust growth out of the steel manufacturing sector and I'm sure you saw the Wall Street article that said prices are starting to come down.
So those type of signals says is there a demand for these products. Our Automobile segment, like I said in the opening statement, the production level of unit is up 71%. Well, remember at the peak of automobile production, we were producing almost 14,000,000 units. At a 71% increase, we'll be at 11000000, 11.5 1000000 units for the country. So we're still not back all the way to normal.
Okay. And so you're thinking about 2.9% for the second half. Did the economic summits suggest what you guys might be looking at in terms of 2011?
No, we don't. I don't have that in front of me.
Okay. Just curious. Okay. And then just finally, are the RTP, any change in that? Or is it pretty much what you guys saw last quarter as well and what you guys have been projecting for the year?
It's pretty much on track as far as what we projected.
Okay, great. Thanks a lot.
Your next question comes from the line of Michael Lapides with Goldman Sachs.
Hey guys, my apologies. I asked and answered.
Okay. Thanks, Michael.
And your final question will come from the line of Andrew Levi with Tudor, Pickering.
Guys, just back on the equity question. Why not do a chunk of equity and short the balance sheet and move on? What's the thinking on kind of trying to do the drip in the ESOP and not just doing one big chunk and kind of making the debt holders happy fixing your balance sheet and make it Moody savvy?
Andrew, we've had those we've had that discussion last year when we opened up the Dribble program, our continuous equity offering. And what we said at that time, which is true as well today, it is one that provides us a lot of flexibility to time the market appropriately for the value that we can get for our shares in the marketplace. Like last year, the dribble program provided 1.3 total program provided $1,300,000,000 of which about $700,000,000 was associated with the dribble program. I think that is the right mechanism to match our needs and the capital additions that we see to put equity into the marketplace.
And on the dribble program, do you have to authorize more? Is it or basically you can just continually do it without any type of a Board increase or anything like that?
Each year, we issue a shelf associated with a number of shares that we can put out in the marketplace. Okay.
And where are we right now on that?
I believe we have 10,000,000 shares on the shelf right now.
Got it. Thank you very much.
And at this time, there are no further questions. Sir, are there any closing remarks?
Yes. Thank you, Michael. I appreciate your help. Paul Bower has just breathed a huge sigh of relief since this is his last earnings call. I want to take this opportunity to say thank you to him.
He's done an outstanding job in the role as Chief Financial Officer for Southern. I know he's had an opportunity to get to know a lot of you folks and hope you will express your appreciation to him. He's not getting out of the lineup. He's just moving into another spot. Art Beatty is appropriately concerned about picking up that responsibility, but he's going to do a good job.
I'm planning his waiting in the wings to take over the reins and all of that is as it should be. We look forward to the October call and thank you for joining us today.
Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company's 2nd quarter 2010 earnings call. You may now disconnect.