Good afternoon. My name is Demetra, and I'll be your conference operator today. At this time, I would like to welcome everyone to The Southern Company fourth quarter 2015 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. If you have a question, please press the one followed by the four on your telephone. As a reminder, this conference is being recorded Wednesday, February 3rd, 2016. I would now like to turn the conference over to Mr. Aaron Abramovitz, Director of Investor Relations. Please go ahead, sir.
Thank you, Demetra. Welcome to Southern Company's fourth quarter 2015 earnings call. Joining me this afternoon are Thomas Fanning, Chairman, President, and Chief Executive Officer of The Southern Company, and Art Beattie, 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-K and subsequent filings. In addition, we will present non-GAAP financial information on this call. Reconciliations to the applicable GAAP measure are included in the financial information we released this morning, as well as the slides for this conference call. The slides we will discuss on today's call may be viewed on our investor relations website at investor.southerncompany.com. At this time, I'll turn the call over to Thomas Fanning.
Good afternoon, and thank you for joining us. As always, we appreciate your interest in Southern Company. 2015 was a tremendous year for Southern Company as we continued to see outstanding performance in our franchise operations. We saw strong financial performance from both our wholesale subsidiary, Southern Power, and our traditional operating companies. Our state-regulated utilities delivered these 2015 results despite the warmest December in the last 120 years. We continued our longstanding tradition of operational excellence, once again ranking among the best in our industry for customer satisfaction and solidifying our reputation as one of the most trusted energy providers in America. We experienced great success with strategic initiatives as both Southern Power and our traditional operating companies continued to build the energy portfolio of the future with significant expansions of their renewable energy resources.
In our ongoing quest to deliver superior risk-adjusted long-term growth, we entered into an agreement to acquire AGL Resources and create a platform from which we expect to compete for growth more broadly across the energy value chain. Now, regarding AGL Resources, I will just briefly add that activities related to the proposed merger are progressing in a timely fashion. The waiting period under the HSR Antitrust Improvements Act expired in late 2015, a necessary milestone for closing the transaction. In addition, AGL Resources shareholders voted in November to approve the merger. The merger remains subject to certain other customary closing conditions, including state regulatory approvals, and we are currently engaged in regulatory proceedings before the various state commissions. The transaction is expected to close in the second half of 2016.
In a few moments, Art will discuss the drivers of our financial performance in more detail and provide guidance for 2016. Before that, however, I will address the progress we've experienced with our major construction projects at Plant Vogtle and in Kemper County, Mississippi. First, an update on the Plant Vogtle units 3 and 4. As reported in our last quarterly call, we agreed to a settlement with our contractors for the two new units at Plant Vogtle. We have now finalized that settlement, and the related litigation has been dismissed. As a reminder, this $350 million settlement resolves all outstanding commercial issues for the project and amends our EPC agreement to provide even greater protections for customers. The settlement affirms and provides incentives for anticipated fuel load dates in December 2018 and 2019, as well as our expected in-service dates in June 2019 and 2020.
In a related transaction, Westinghouse acquired the nuclear construction arm of Chicago Bridge & Iron. This move positions Westinghouse and its affiliates as the primary contractor under our EPC agreement, and they have engaged with Fluor to provide day-to-day construction leadership. We have worked very closely with the contractors through this transition, and I'm pleased to say that thus far, we are very encouraged by the improved communication and efficiencies we've observed on-site. On January 21st, Georgia Power filed an application for review of the settlement with the Georgia PSC. Yesterday, the PSC made and approved a motion asking Georgia Power to file further information within the next 60 days pertaining to the prudence of the project to date, as well as the current schedule and cost forecasts. Other interested parties will have an opportunity to make filings of their own in response.
This will allow the PSC to consider the settlement agreement in the context of a more comprehensive review of the full project cost and schedule. The commission staff, which will not make any separate filings, will have six months to analyze these filings. If the staff identifies any issues of imprudence or unreasonableness, they are directed to work with Georgia Power toward a possible settlement of any such issues within that same six-month period. During this six-month period, there will be no hearings. If there is a settlement between the company and the staff, Georgia Power and the commission staff will file that for the commission to consider in the fall. If the parties do not come to a settlement, the commission will decide how to proceed. Let's turn now to an update on the Kemper County facility.
The combined cycle performed exceptionally well in 2015, providing over one-third of the electricity consumed by Mississippi Power customers last year. Major startup activities are ongoing, and we continue to transition to operational testing. Fluidization trials on the first of two gasifiers are complete, and we were able to begin the cure out process for the gasifier refractory. The fluidization process was an important validation of the scale-up of the technology as the operators were able to use the control system to circulate sand and air at design flow rate through the gasifier. A good rehearsal for the eventual introduction of lignite to the operation.
The team is currently working to repair a portion of the refractory on the 1st gasifier and making improvements to all of the nozzles in the refractory lining of both gasifiers to address hot spots identified during the initial cure out process for the 1st gasifier. The type of work to repair and improve the refractory lining is similar to the refractory replacement that will be a common part of the plant's long-term maintenance. However, these activities are time-intensive, and they are the primary driver for our schedule extension into the 3rd quarter of 2016. As always, quality and safety are our top priorities as we are taking steps to help ensure that Mississippi Power's customers will enjoy the benefits of a reliable source of low-cost energy for decades to come. We expect to introduce lignite to gasifier A this spring.
This critical step is the beginning of the important process of integrating all of the various systems of the facility. In December, the Mississippi Public Service Commission unanimously approved rates for the combined cycle assets already in service. Mississippi Power plans to seek recovery of the remaining assets after they are placed into service. Art will now provide a financial update, including an outlook for 2016 and beyond.
Thanks, Tom, good afternoon, everyone. As you can see from the materials released this morning, we had solid results for the 4th quarter as well as for the full year 2015. For the 4th quarter of 2015, we earned $0.30 per share compared to $0.31 per share in the 4th quarter of 2014. For the full year of 2015, we earned $2.60 per share compared to $2.19 per share in 2014, an increase of $0.41 per share. Excluding certain adjustments listed in the earnings materials, earnings for the 4th quarter and full year 2015 were $0.44 and $2.89 per share respectively, compared with $0.38 and $2.80 per share respectively for the same periods in 2014. As Tom mentioned earlier, our adjusted annual result of $2.89 was just above the top of our 2015 guidance range we established a year ago.
The major earnings drivers when compared to our $2.80 adjusted result for 2014 were residential and commercial sales growth, retail revenue effects, and tremendous success with renewable projects at Southern Power. These positive drivers were partially offset by increased shares, higher depreciation, operation and maintenance costs, and weather. A more comprehensive list of drivers is included in the materials we released this morning. Moving now to an economic and sales review of 2015. The economy within our region continues to experience modest growth. Favorable domestic market fundamentals include strong employment growth that have served to underpin consumer confidence and spending. At the same time, the effects of a strong dollar, low commodity prices, and economic weakness abroad have combined to constrain manufacturing growth in our region. Total weather-adjusted retail sales grew by 0.3% in 2015, led by commercial sales, which were up almost 1% for the year.
We experienced positive growth for the commercial sales in every quarter in 2015, which we have not seen since before the recession. Weather-adjusted residential sales grew by 0.4% during 2015. Growth in the residential sector has been fueled largely by customer growth as the Southeast continues to see positive in-migration. More than 37,000 new residential customers were added in 2015, an increase from 2014 when we added some 31,500 new customers. Industrial sales fell by 0.3% in 2015. We experienced a modest deceleration in industrial growth in our region as a result of the strong dollar, low oil price and natural gas prices, and significant economic slowdown in China and other emerging markets. We have seen the impact of these factors on three of our largest industrial segments: primary metals, chemicals, and paper.
However, transportation and housing-related industries have supported growth, and we expect those segments to continue to do well in 2016. Economic development activity remains robust and consistent with previous quarters' activities. Job creation and capital investment for 2015 exceeded 2014 levels, and the pipeline of potential projects grew significantly compared to recent years. Corporate announcements and potential projects represent a broad cross-section of industries, including automotive, primary and fabricated metals, aerospace, and chemical segments. Also within our region, Alabama was named the top state for economic development by Business Facilities magazine, and Georgia has been ranked first for business climate by Site Selection magazine for the third consecutive year. Despite economic headwinds from overseas, our regional economy remains in a positive growth mode.
During our most recent economic roundtable, the consensus of the participants was that the economy will grow in 2016, supported by robust employment and spending growth, modest income gains, and a steady housing recovery, all pointing to further growth in energy demand. Our sales growth guidance for 2016 is 1.1% for retail sales, 1.2% for residential sales, and 1% for both commercial and industrial sales. Before we cover the details of our capital expenditure forecast, financing plan, and earnings per share guidance, I'd like to speak to the impact of the recent extension of tax benefits on our financial outlook. We currently project that a five-year extension of bonus depreciation will improve cash flows by approximately $4 billion through 2020, and potentially more, assuming Southern Power is able to execute on its growth plan. This translates to a significant uplift in the value of the enterprise.
Over the next few years, some of the biggest tax benefits are expected to be generated by Plant Ratcliffe, Plant Vogtle Units 3 and 4, along with a variety of renewable energy projects and environmental compliance investments. Considering our customer-focused business model, this is very good news. All else being equal, our customers should benefit from lower retail rates over time. In addition to the implied reduction in regulatory risk, we expect to enjoy reduced exposure to both debt and equity capital markets over the next several years. Perhaps the greatest benefit of all these tax benefits is the level of cash flow support we project for our common dividend.
Of course, dividend policy is ultimately subject to the approval of our board of directors, but our expected cash coverage of dividends is greatly improved compared to how we characterize our dividend growth at the time of the AGL Resources merger announcement. We fundamentally believe that value is a function of risk and return. Given the magnitude of the dollars and the high degree of certainty inherent in these deductions, The Southern Company's value proposition should be greatly improved. We provided an updated forecast of capital expenditures for 2016 through 2018 in our slide presentation. This standalone projection does not include AGL Resources. Anticipating continued success at Southern Power, we are excited about the possibilities that exist with the extension of tax benefits for both wind and solar projects. We have enjoyed a higher than anticipated growth from Southern Power in recent years.
In fact, a year ago, our 2015 through 2017 CapEx forecast was approximately $3 billion. Today, based on our recent success, we estimate the same period to be about $5 billion of investment for Southern Power. Going forward, we expect to sustain that same level of activity and success. In fact, our Southern Power forecast for 2016 through 2018 includes CapEx of $5 billion for wind, solar, and traditional natural gas generation projects. Our CapEx forecast for our traditional operating companies does not include projects specific to the Clean Power Plan. If our ultimate compliance plans require investment prior to 2019, our current CapEx projection could or would increase. Our forecasted $1.8 billion investment in environmental compliance over the next three years is largely associated with EPA's effluent guidelines and final coal combustion residuals rule.
Included in the appendix of our slide deck are a projected financing plan, credit ratings, and a schedule of maturities, and a liquidity summary. Within our financing plan, you will note the anticipated debt issuances to fund the AGL Resources merger. We expect these notes to be issued shortly before the closing of the acquisition and to include a blend of maturities. Additionally, we are planning on a $1.2 billion in equity issuances in the calendar year 2016. As discussed earlier, the extension of bonus depreciation is expected to reduce our exposure to the capital markets, and that has resulted in a favorable impact to the remainder of our financing plan.
Considering the incremental cash flow, along with our United States Department of Energy loan facility for Plant Vogtle Construction, and an assumption that we will utilize securitized financing for a significant portion of Kemper, which is subject to approval by the Mississippi Public Service Commission, our exposure to the debt markets for our traditional operating companies over the next three years should be limited. Southern Power's debt financing needs will be driven largely by their success in finding suitable projects to fill the placeholders in the CapEx forecast. An additional benefit of the incremental cash flow from bonus depreciation is the effect on our need to issue new equity. We currently project no additional equity issuances beyond the $1.2 billion in 2016. Financial integrity and strong credit ratings have always been priorities for us, and that emphasis remains unchanged.
Our financial outlook, including our expected credit metrics in 2016 through 2018, has improved, and we continue to believe our credit profile is fully supportive of our credit ratings. Moving now to our earnings per share outlook. You will recall that we began issuing new shares in the fourth quarter of 2015 under our internal equity programs, largely to fund the AGL transaction and to reinforce our commitment to financial integrity. The cumulative effect of the shares issued in 2015 and projected for 2016 equates to a $0.06 diluted impact on our standalone 2016 earnings per share. In addition, the estimated impact of bonus depreciation is $0.04. For the cumulative impact of these shares and bonus depreciation, we would have been in the top half of our 3%-4% standalone projected trajectory for 2016.
Considering these drivers, our standalone 2016 earnings per share guidance, excluding any cost to achieve the AGL Resources merger, is $2.76-$2.88 per share. Assuming the AGL merger closes later this year, our long-term earnings per share growth outlook remains a range of 4%-5%. In addition, our earnings estimate for the first quarter of 2016 is $0.53 per share. I'll now turn the call back over to Tom for his closing remarks.
Thanks, Art. As evidenced by our discussion today, 2015 was indeed a remarkable year for Southern Company, and we enter 2016 with strong momentum. Our franchise business is performing at a high level, solidifying its industry leadership. We see great progress on major capital projects with the completion of the Kemper County facility on a near-term horizon and Plant Vogtle units 3 and 4 over 60% complete. We anticipate the addition of AGL Resources later this year, and we see a stable economy in a region poised for continued growth. Our cash flow and credit profiles are significantly improved, and we continue to project 4%-5% long-term growth in our business.
With the strength of our 26,000 employees and their commitment to provide clean, safe, reliable, and affordable energy to the customers and communities we are privileged to serve, we believe Southern Company is well-positioned to succeed in the months and years ahead. We are now ready to take your questions. Operator, we'll now take the first question.
Thank you. Ladies and gentlemen, if you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Dan Eggers with Credit Suisse. Please go ahead.
Hey, Dan.
Hey, Dan.
Hey.
How are you?
I'm good, thank you. First question for you, just on the load growth outlook. 2015 seemed maybe a little tougher than hoped. You look at the rally in 2016.
Yeah
maybe share a little bit more what you're seeing, particularly on the residential side? Are you seeing some usage gains, or what do you see sprucing that up? Then, on the industrial front, it doesn't seem like the world's getting a whole lot better, that the idea that that's going to bounce this year also.
Residential, we're seeing a continued in-migration of customers. That's the big deal.
Right.
We think that our projection of 1% is going to be driven largely by that. Interestingly, through the work I see in the Fed, we see similarly here in terms of consumption. Consumption is kind of flattish. You're seeing that also in the Federal Reserve data as well. That's not all bad. There's this long-term dividend by cheap oil, therefore cheap gasoline prices, cheap natural gas prices, all is accruing to increase essentially the disposal income of households throughout the Southeast. Interestingly, they're tending to increase their savings rate rather than their consumption rate at that point. Not all bad, because that typically serves as an insulator against future economic shocks. That would be kind of my first comment. Art?
Yeah, Dan, you asked about industrial. We commented about the three largest segments, primary metals and chemicals and paper were down last year. We expect them to kind of be flattish this year. There are still elements of strength in the primary metals group. I think if you look at automotive steel, there's still good demand for that. Architectural steel is actually doing pretty well to boot. In the automotive sector. Automotive is, or transportation is expected to expand. We've got expansions going on at some of the customers in our jurisdiction, Mercedes-Benz being one of those. There's model expansions as well. We expect those numbers to actually do well next year. The housing-related industries, primarily in Georgia, are expected to continue to grow, which is kind of a reflection of the continued growth on the residential and commercial end.
You know what, I commented earlier this morning on Squawk Box about this. Throughout 2015 as I appeared in that forum, culminating in a December meeting I had with Dennis Lockhart there on set. It was interesting. Our leading indicators started showing softening. Our lagging indicators commercial were really good. I had been kind of bearish, particularly in the December telecast. Our guys do a bottom-up forecast. We've done this business roundtable discussion here in the Southeast with all the economists of the major entities here. Based on a bottoms-up analysis, plus what we're seeing from the roundtable here in the Southeast, we do expect these major industrial participants to start adjusting to this new reality and improve their performance into the end of the year.
Okay. Got it. I guess just the bonus depreciation cash is a pretty huge amount of money coming back to you guys. Was there any way for some of that cash to offset the equity raise you guys need at AGL?
Yeah
Is there a way to mitigate down the numbers you guys gave when you announced the deal, so maybe the equity issuance is going to be less than the $1.1 billion or whatever the number was originally?
Let me take you through dumb math, then we'll talk about how we attributed it here. Dumb math. The number is going to be somewhere between four and maybe over $5 billion of cash. The $4 billion of cash that we talked about is really through 2020 and doesn't really assume that Southern Power executes its growth plan, which we think they will. The number could be higher, maybe over a longer time frame. That's kind of a source of cash. When we look at the uses of cash over time, we got into an argument here internally about how to attribute the benefits of that cash. Let's go through it, and let's just use the four billion number, although the number could be higher. We had always assumed in our former financial plan, assumingly by AGL, a $3 billion equity issuance over the time frame.
We're going to do four billion in cash. If you just use a 40% equity ratio, 40% times four billion. If the cash retires a mix of capital requirement, the equity portion of that would be 1.6. If the total amount of equity was three and you don't have to issue 1.6 now, that leaves you 1.4 to issue. When you look at the uses of cash, we could go through a variety of ways to attribute these shares. Since the biggest issue of cash is a near-term use, and that is to acquire AGL. We decided to allocate the new equity essentially to that project. If you think about it, $200 million issued in 2015, plus another $1.2 billion represents the balance of $3 billion less 1.6 equals 1.4. That's really the simple math.
Look, Dan, we could have allocated the equity to Southern Power. We could have taken a pro rata approach. This is just the way we decided to do it to keep the plans in place through 2016.
Okay. I guess just one last question. Just that cash or the reduction in the rate base growth because of bonus depreciation, there was enough room in the 4%-5% earnings growth band that reduced rate base deployment is not going to work you guys down in the growth rate you originally had provided in the fall?
There's a give and a take there, right? Essentially the take is, yeah, sure, it reduces growth. The other side is there's the benefit of excess cash and therefore less shares, as I just outlined with you, 1.6 less equity raise over the same time frame. Remember, part of this appropriations bill was not just bonus depreciation, it was ITC and PTC. You'll see a sustained Southern Power growth plan through this period. We think we're within that range. We're able to maintain it.
Okay. Got it. Thank you, guys.
Thank you.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead with your question.
Hello, Steve.
Yeah, hi. Hey, Tom and Art. How are you?
Good.
Just wanted to kind of clarify something here. When you announced the AGL deal, I think you said it was 4%-5% growth off of your standalone 2015 base.
That's right.
Is that correct?
That's right.
The midpoint of that was 282. Now you're saying 4%-5% growth off of your 2016 guidance, which is also still midpoint of 282. If I go out and look at the future, like I looked out to 2018, if you just take the 4%-5%, define that way, what was going to be 322 by 2018 would essentially be 308. Could you just be specific on what is the $0.14 difference between what you had said before and what you're saying now?
It's simply the shares associated with the preliminary issuance to support AGL, plus the estimated impact of bonus depreciation. Look, PE times EPS is a shorthand for value. When you think about the intrinsic value of Southern, we got bumped from the passage of this bill, an additional $4 billion-$5 billion and perhaps more of cash. When you look at the delta, the number is $0.04 here. That's how you get to 282, and we grow off of that, 4%-5%. It is inescapable. In fact, I would argue that the adjustment from a book standpoint is in earnings per share. The value adjustment is probably in the PE ratio. If you do a DCF on Southern, we just increased $4 billion-$5 billion just on cash from where we were before.
Take 288 at 5%, 276 at 4%, and that will be our growth trajectory going forward.
Okay. Then in terms of.
Hey, Steve, one more. Hey, Bud. Steve, one more thing, real quick.
Yep.
Recall also, we talked about, of course, this is all subject to the board approval. All of our credit metrics are improved now. We got lots more cash. All of our credit metrics are better. When you look at the dividend thing, if you want to do a Gordon Model approach evaluation, we're better off than we were. In other words, we said, given the earnings profiles and the growth rates and everything else, according to the board approval, we'll pay an additional $0.07 in 2016, then we would grow that to $0.08. Okay. We're on the same trajectory, assuming the board approves, and our cash flow metrics covering that dividend are somewhere between 20% better to historical performance, around 10% better to what we thought it was when we announced the AGL deal.
Yeah.
In other words, our ability to pay the dividend because of this cash is enhanced relative to where we are, consistent with the value proposition.
Okay. Should I read that as this just supports better the higher dividend growth that you talked about on the deal? Or are you suggesting?
That's exactly what you said
that there might be a chance to grow it even faster than you said?
Let's say at a minimum, it supports the growth that we said before. We'll always evaluate it year to year based on the board. My point to you is we're significantly better from a cash flow coverage or dividend standpoint than we were before this thing. We're able, according to the board approves, we're able to maintain what we said before, and we're even better off from a credit standpoint.
Okay.
That includes the assumption of an increase.
That included going from $0.07 to $0.08 in the increase.
Yeah.
Okay. I get that. Okay. One other question just on the Georgia review. The commentary by the commissioners seemed to be constructive. Do you view this as an opportunity to kind of go back to kind of getting a bit of a pre-prudence decision? Because I know that was initially the law, and then you settled that away. There's an opportunity to do that, or do you view this as kind of a risk? How should we interpret this review?
Steve, we think this is bullish. This is all associated with the settlement of the litigation. Recall, if you dial the numbers back around VCM, we decided not to pursue these courses because we were in front of litigation, and we didn't want to do all that. The commission felt, and you've seen a lot of public discourse about this, that the settlement was good for everybody. The commission is taking the lead in evaluating now, is this the right time to pursue prudence? We're following their lead. We'll prepare these exhibits in the next 60 days, and we'll pursue this process as outlined by the commission. Overall, we think this is very constructive.
Okay. I'm sorry, I just want to go over that one more time. The difference in the future earnings that we discussed, that is really all due longer term to the bonus depreciation, not having as much rate base because of that.
That's right.
Obviously, that's offset by financing, net-net, that is the reason for the difference?
That's right. We're going to maintain the, if you go through your Gordon Growth Model stuff, we're going to maintain the trajectory of the dividend. Payout ratio is up, but cash flow coverage of dividends is significantly higher.
Got it.
As our growth rate goes from 4% to 5%, payout ratio comes down pretty quickly in the years ahead. All we're doing is maintaining with better credit posture what we said before.
Okay. Thank you.
Yes, sir. Thank you.
Our next question comes from the line of Anthony Crowdell with Jefferies. Please go ahead.
Good afternoon, guys.
Hey, how are you?
Never been better. How about yourself?
Awesome.
Just two real softball questions, I guess. One is on Kemper. You had some, I don't know if you call it hot spots, or you had to, I guess, cure the refractory.
Yeah.
Is there a period where you get to where you're comfortable with now the gasifier and, I don't want to say out of the woods, but maybe the high cost or whatever of trying to get this thing online is past you?
Yeah. Let's be very clear, what we're doing with the refractory is not high tech. It really involved finding some hot spots, looking at that, not only fixing what was there, but making an improvement to both gasifiers. We're taking the opportunity to, once we get this thing up and running, it will run in a safe, reliable manner for years to come. We took the opportunity to make improvements. These are not high tech, nor are they reasonably expensive. However, they are time intensive. Taking these steps right now, we think will benefit us long term. Unfortunately, they do add about 2 months to schedule. That's what we've done. The startup process otherwise, as we were so excited, I guess the last time we spoke, the fluidization test and the more technical tests have gone beautifully.
We're very energized by the steady rate of progress in startup. Didn't like the delay, but we think that will serve us right in the long run.
Just lastly, if I move to Southern Power. It seems like, I don't want to say perfect storm, but you have maybe YieldCo or other companies that were investing in a lot of the projects that Southern Power was also investing in. Is there a lot more potential? You guys have a lot of cash, great cost of capital. That Southern Power really just takes tremendous advantage of this downturn in the market and sees a lot more projects open to them?
We're very excited about the opportunity for Southern Power in the next few years. We've demonstrated our ability to execute like champions. We've developed terrific relationships with the people in the field. Anthony, I think the first comment I want to make is, recall this $2 billion outperformance in capital deployment from 2015 through 2017, we think is sustained from 2016 into 2018. I feel very confident we're going to be able to execute there. There's some wild cards out there. It'll be fun to see when gas starts reemerging. Okay? That could even accelerate beyond what we're showing right now. Right now, I think we've got a good plan. We continue to execute in a very disciplined way, and we'll see where it goes. I have very positive views about our ability to execute for Southern Power in the years ahead.
One other thing, we just moved Buzz Miller over there, and he's a very talented guy, and I think we'll do great.
Great. Thanks for taking my question, guys.
Thank you.
Sure.
Our next question comes from the line of Paul Ritson with KeyBank. Please go ahead.
Hello, Paul.
Tom, how are you?
Awesome. How are you?
Well, thank you. I just want to make sure I understand. You've got in your guidance the shares to fund the acquisition, but no revenues from the acquisition.
That's why basically they're excluded from kind of ongoing EPS. Exactly right.
When are you assuming the deal closes? Are you just assuming it doesn't close in this year?
No, remember the earnings profile of AGL is such that it's front-end loaded. All their earnings are in the first half of the year. They don't really earn very much in the second half of the year.
Okay.
What I've been telling everybody is you shouldn't expect any contribution in 2016 out of AGL. On a standalone basis, as we suggested in the script, if you remove these kind of one-off items, we were in the high end of the 3%-4% range. When you bring AGL on, beginning in 2017 and beyond, we change our growth rate to 4%-5%. We feel very comfortable about that.
That includes AGL, obviously.
Yes, that includes everything.
Right. 2016 doesn't include anything for AGL.
Remember, AGL plus the fewer shares, plus the growth rate of Southern Power, gets us back to the 4%-5% that we told you we would do before. We think even with a higher payout ratio as the book EPS would suggest, the cash flow coverages allow us to pay that with even greater safety. We're in a better position on the dividend than we were before when we announced AGL.
For bonus P.
Yeah.
Just back to your comments on Southern Power. Should we look for you to What's the right scale in your tax appetite for doing more renewables?
I'll let Art kind of fill you in on that. We find ourselves, because of this excess cash and tax benefit, in a carry forward position. We are adjusting our IRR requirements. We have this very disciplined process we go through, particularly for the solar deals. I'll let Art go through that. Unchanged probably is our wind deals.
I think you just wrapped it up. It's just like he said, Paul. We're going to not be able to monetize some of the investment tax credits quite as quickly as we had expected for solar. However, it's a little bit different for wind because production tax credits are spread over a 10-year period. We'll still look at incremental solar, we'll look at incremental wind, and we'll still apply a very disciplined process, as Tom talked about, to our approach to every project.
We talked to you before in October about how we had a great backlog already in 2016. We think all those projects fit underneath our curves, even as they are adjusted.
Tom, I kind of heard you in the background this morning on TV, you didn't have my undivided attention. I had a couple things going on.
Come on, Paul.
I've been looking for a replay of it, can you just kind of review your comments you had about kind of a new age because of e-commerce or electronic?
Yeah. It's fascinating stuff. We really do have a great team of economists here, we're just seeing this now in a broader sense. Here's the issue. We had talked historically about leading and lagging indicators. In fact, I would argue our stuff is as good as anybody's in predicting the direction of the market. What we had been seeing historically is that industrial sales are the leading indicator. Even better than that is economic development, let's just stay with industrial sales. They create jobs. They grow personal incomes that are above normal for the Southeast. As we create jobs, people move in, they get those jobs, they get the higher incomes, they start consuming more. That's residential. Then as more people move in, the commercial sector comes in. They do dry cleaners and grocery stores and hospitals and schools.
There is an emerging segment in the commercial class. The commercial class is the lagging indicator. It matured really well during 2015. You say, "Is that a bearish signal?" There is an emerging important segment in commercial sales that really relate to the electrification of the economy. As the whole economy becomes more digital in its composition, we're seeing, especially in the Southeast, the advent of data farms, of server farms, of IT professionals. These jobs are two to three times higher than typically what would you see in a normal commercial job, like a restaurant or a school. These are really high-paying jobs, and they don't have the kind of correlation to industrial activity that you see typically from commercial to industrial.
Just as a supporting statistic, Georgia was just named the seventh fastest growing state in the U.S. for technology employment. This is a sustainable growth rate and doesn't have that correlation. Even if industrial starts to take off and all that again, these guys are going to sustain. We're very excited about that. The buying power, the economic quality of this segment is really good.
Your 1% forecast for industrial sales growth, that's just based on economic development activity you expect to start taking root?
Yeah. Plus, I think even the people that had been damaged a bit by the downturn and the malaise in the international economies and cheap oil and the strong dollar and all that, even there, we're seeing these people adjust to this new market reality. Let me give you a fun statistic there. Nationally, we're seeing the U.S. exporting down around 7%. In the Southeast, it was down only 2%, and that really picked up at the end of the year. The Savannah Port had a record year in terms of its activity. I think what we're seeing is some of these industries that had been hurt pretty bad, and maybe they're coming off a low base, chemicals, primary metals, et cetera, now adjusting to this new reality.
Yeah. I agree with that.
Thank you very much.
Yes, sir. Thank you.
Our next question comes from the line of Greg Gordon with Evercore ISI. Please go ahead.
Hey, Greg.
I don't think that it's possible to patent a dividend discount model. I think that was already done by someone else, thanks. A little bit more on the question of the visibility on the solar and wind stuff. I understand you said because you theoretically are going to be able to monetize ITCs now over a longer timeframe, your IRRs are higher. Every other utility holding company is in the same boat. If your marginal competitor for an incremental solar project is just Con Ed or Dominion or Duke, then you're all in the same boat, and it doesn't really change the competitive landscape. If your marginal competitor is someone who has got a similar credit rating and still has tax appetite, doesn't that put you at a theoretical disadvantage going forward in order to achieve your targets?
Yeah, sure, as you posited your question, yeah. In what we've already seen for the projects that we've already circled for 2016, I remember in October, I gave you great confidence about our ability to execute 2016 in a similar manner. I think we're going to be able to do that. We already know that those projects meet our hurdle rates, even with the adjustments. Don't forget about the importance of relationships, our ability to close, the fact that we've worked in joint development, if you will, for people to get power sales agreements that are suitable to our risk-return profiles. I think all this will work to our benefit. We don't see really any significant slowdown. I just wanted to let you know that we were looking at the time value of the cash.
It doesn't make a substantial difference, to be honest with you. I feel very bullish about our ability to execute the growth program.
Okay, great. I know that Steve asked this question a million different ways, and I come up with a slightly less lower number in 2018 than he does, but semantics. Is it solely the impact of bonus depreciation, all things equal, or are we also sort of seeing the compounding effect of slightly lower than expected sales growth in terms of sort of earned returns across the business as well?
It's all bonus.
It's all bonus.
Yeah. Bonus lowers your growth rate. Improving your growth rate is going to be less shares. Improving your growth rate is going to be the growth plan of Southern Power. We're going to keep rolling.
Okay. Last question.
Remember,
Sorry, go ahead.
Remember, we talked about $4 billion. I know we're conservative on all these things, but if Southern Power executes this growth program, it's going to be more than $4 billion. It could be, in fact, a little higher than $5 billion.
Got you. Last question, Georgia, things look like they're going in a positive direction in terms of them reviewing the settlement, them doing prudence. You also have a rate plan that you'll either get an accounting order for again this year or go through a normal rate case process as you usually do when you roll these things. Is that workload sort of theoretically achievable by the Georgia Commission? There's a lot of stuff for them to get done this year. Or should we expect some of this stuff to sort of roll into 2017 just by the sheer magnitude of what they're trying to accomplish with three major approvals pending here, the settlement-
Got you
the prudence review, and the rate case.
Yeah, man. Add to that, I think you know we're doing the Integrated Resource Plan. We have VCM 14 filed in February to be done at whatever it is, July, August, and then we have 15 in the middle of the year. If you think about it, we've got a lot of activity. I know when they had the suggestion to go through this process, the staff raised some issues about workload. Look, we all get that. We have a history since really 1995 of working very constructively with the staff and the Commission, and we'll find a way to balance the workload and achieve good results for everybody. It's a great point. Let's let the Commission figure that out, and we'll work with them to get good results.
Okay. Thank you, guys. Bye-bye.
Yes, sir. Thank you.
Our next question comes from the line of Michael Weinstein with UBS. Please go ahead.
Hey, Michael.
Hey, it's Julien here.
Julien.
Yeah, there you go. Surprise.
It's impossible.
Name switch. Yeah, just for the record, I just want to say we're both on the call. I'm going to let Julien do the talking.
You do all the work, he does the talking, right?
All fun, no play. Yeah. A quick question, if you will. Just to elaborate on the last series of questions around the growth rate. Can you be specific around the ITC benefits recognized in 2016, 2017, and 2018 as well? Sort of, what are we seeing this year, and what are you thinking going forward? Dominion just laid it out the other day. They're seeing, obviously, with the lower CapEx are rolling off, but what are we expecting? What are we baking in there? Is there an offset to the bonus depreciation, potentially, with more solar ITCs?
The problem is the bonus depreciation pushes out, stands in front of the monetization of the ITCs. The more solar you do, the more bonus you book, kind of pushes out the equation a bit. If you look at 2016 and 2017, looks we'll be back into utilizing tax credits, I believe, sometime in 2018.
How much, I'm just kind of curious, how much is baked into the 2018 number, just to be very clear about it? Are you saying
If I had to read, I'm looking at something Art has. It looks like, yeah, you're in there. You're kind of done in 2017. You're into it, consuming it in 2018, and you're done by 2020, 2021. It gathers itself up pretty quickly. It consumes it pretty quickly. We can give you a breakdown year by year, I guess, later.
Is there any incentive to delaying projects, just to kind of think about it out loud? If you're not getting the tax benefits now, why not push them off if you can renegotiate the deals, get a little bit better uplift?
You're talking about solar deals?
Yeah. There's talk out there in the industry of it. I suppose you guys could potentially be a leading indicator on it.
No. You know what? It's an interesting question. Here is something that we have talked about, but so far we haven't seen much of it. Remember when we thought there was going to be a cliff from 2016 to 2017, and we all said, "Boy, there's a freight train running to get deals done in 2016." We kind of said, "Well, you know what? If we get this extension," which we did, "would all the activity show up in 2016 or would it start to spill over into 2017?" We're seeing some of that, okay? We still feel that for the projects that were circled by us back in 2015 for 2016, that they're still going to happen pretty much in 2016. There could be some minor spillage, if you will, into 2017.
Here's what I think you're going to find more likely, and that is more projects now come to light. When you think about people starting to anticipate proactive responses to the Clean Power Plan, other states' activities with respect to renewable portfolio standards. Look, I think there is a tremendous appetite to grow both solar and wind in the years ahead. My sense is with the added ITC and PTC extensions, the market is going to well exceed, I'm just going to guess, what we all think is out there. The price for those projects will reflect the fact that the general participants in the U.S. are going to have bonus depreciation sitting on top of them. In other words, I think this will all resolve itself, and we will see additional growth. That would be my guess.
Got it. Can I just go back real quickly, clarify, we're getting some questions here. When we were talking about the ITCs, I was specifically inquiring around the earnings impact, not necessarily the cash. Is there any solar ITC earnings impact reflected in the 2016 guidance in 2017? Are you also delaying the earnings recognition?
No. For book purposes, you will still recognize the benefit of ITC. It's the recognition for cash that will be delayed until you've got room to take them.
The cash benefit gets delayed a bit.
That's right.
You're in the kind of, I don't know if I did an average of that, it's an average of, I don't know, two and a half with a four-year total kind of thing.
Right.
That's the time value magnitudes you're talking about.
Just to be clear, how much in EPS are we talking about in 2016 guidance?
In total for Southern Power?
For the ITC. Just I'm thinking about that being something of a quasi one-time that you want to think about.
I'm going to say it's about $150 million.
Of ITC benefit in 2016?
Yeah. Right.
All right, great. 2017 and 2018, I suppose it's proportionally lower based on the CapEx you're projecting? Is that probably a fair statement?
That's correct. It depends on the mix. Remember, the mix of wind and solar. We've just given you a number. We've not defined it any way between what's solar, what's wind, and what's gas.
Got it. All right, great. Thank you.
You bet. Thank you.
Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please go ahead.
Hey, Stephen. How are you?
Great. How are you doing?
Awesome.
Awesome. Most of my questions have been addressed. I just wanted to touch on new nuclear and check in on the Sanmen project in China. What's your sense in terms of the progress at Sanmen?
That's good. I guess their big holdups related to the reactor cooling pump, resolving those technical issues, those have been resolved. I think they're moving forward. I forget which one's which, but one's going to go in service this year, and I think Sanmen this year and early next year will be Haiyang. They're going well. With respect to new nuclear, certainly as the Clean Power Plan starts to mature and states' responses. We've said it before, there's really a big three, maybe a big four, in responding to that. I think new nuclear makes a lot of sense. Big scale, base load, no carbon emission. Clearly renewables will be a big player, will be for us, have been for us. When you see intermittent resources like wind and solar come to play, you're going to need two types of gas come in.
One piece of gas, which will be the ability for generation to follow the intermittency, will be CTs. We think you'll start to see CTs in a big way. It looks tough for coal, certainly new coal. If you want to look at base load looking gas, that looks like CCs. Those are going to be the trends that I think you'll see going forward. Right now, Georgia has filed its integrated resource plan. That really is not particularly responsive to the Clean Power Plan. It is way too far early to get a kind of cogent response by the state. You should view the IRP in Georgia as being pre-Clean Power Plan in its composition.
Understood. As you think about the Clean Power Plan, that can add additional opportunities, but probably a bit later on, just given the timeframe of that regulation.
Yeah. That's right, but you're going to get in this conundrum of whenever you decide, whenever it's accepted by EPA and everything else, if gas is going to be a big deal, and if you've got four years to start building combined cycles, and you got to have a response in place by 2022, for example, you got to start right away. That's why, I guess Art made the comment that you're going to start seeing potential changes in the CapEx budgets if CCs start to show up in the back end of this three-year budget we've laid out for you.
That makes a lot of sense.
Yeah.
Okay. Thank you. Just one last question just on Toshiba and Westinghouse. We're very pleased, obviously, with the settlement and improvement of the risk position. There's a little bit of press reports about the position of Toshiba and potentially looking at their investment in Westinghouse, but that looks more like a financial test rather than anything operational. I assume it's the case that the people that you want in terms of the team involved from Westinghouse, et cetera, they're there if Toshiba were to take a write-off of Westinghouse, that's not necessarily really it translates into anything different in terms of team composition or commitment to the business or anything of that sort.
No. Not at all, Stephen.
We would argue, look, that we're in such a better spot than we were. Think about the relative positions of the partners. We have a single point of contact now. They're not having this fight with each other. In fact, we're already seeing improvements on the site. We're going to 24-hour coverage, which we didn't have before. We're seeing an acceleration in the subcontractors for things like panels, Newport News, Oregon Iron Works. A much more focused workforce on site. This thing has been terrific. With respect to any, and I'll get Art to comment on this, but with respect to any credit issues at Toshiba, with respect to their ability to undertake their financial obligations under the contract-
Right
they provided us LCs-
That's correct
to meet their obligations.
When they were downgraded below investment grade, the terms of the contract required them to commit to letters of credit, which we received about a month ago.
They are written by strong banks that we're completely happy with.
Yep.
That's very helpful. Thank you very much.
You bet. Thank you.
Our next question comes from the line of Shahriar Pourreza with Guggenheim Partners. Please go ahead.
Hey, Shar.
Hey, Art and Tom. How are you?
Good.
Super.
Just looking at slide 10, the dip in CapEx that you're showing for Southern Power, I'm still trying to just figure out, is this the pull forward of demand under the old tax regime, or is that sort of Southern Power shifting out their CapEx profile given the higher hurdle rate or the less taxed appetite?
You're talking in 2017, Shar?
That's right. Yeah, in 2017. Exactly.
Yeah. I think it's a bit of the lack of supply at this point is that's going to have to adjust to the new market reality that you now have extended the ITCs beyond down to 2021, that you don't have as many projects that were in the mill, so to speak.
Yeah, you know what I mean? I think Art's right on the money there. I wouldn't be surprised that the market for that number grows. I feel good about our ability to execute within that growing market. Look at what we've done. That's why we want to make a point in the script about kind of the last 3-year forecast we gave you was $3 billion, and we did $5 billion, for heaven's sakes. Right now, we're saying it's going to be $5 billion for the next 3 years, and we're going to do $2.4 billion in 2016. That says, well, there's only $2.6 billion in the last 2 years. I wouldn't be surprised if that number grows. When you see the availability of these tax credits, when you think about people getting ready for the Clean Power Plan, the market's going to grow.
That we're showing right now, that's what we're going to stick with in our plan. I think there's room to grow.
You look at the RPS standards expansions, that will certainly drive some of the growth naturally anyway.
Absolutely.
Just sticking with the growth, large-scale acquisitions on the renewable side, I have to imagine there's willing sellers. Maybe you could just touch on, if you can, the recent media reports that Southern Power was potentially looking at SunEdison's portfolio.
Wow, I haven't seen that. I'm not going to comment on it. We are active. We have terrific relationships, have had terrific relationships with major developers. First Solar has been one.
Recurrent.
Recurrent, another. We work lockstep with those guys, that's why we're so confident about kind of our forward supply. Certainly, there are projects that are in existence, and if we're a logical buyer, we will participate really hard. I'll give you examples of where we've done that. In Georgia, after the solicitation process that went through, a lot of developers went and did deals there. We became a very attractive participant because we could execute with a great deal of financial resources and just work it really well. That's going to be in existence. With respect to any particular name, we would never comment on that. There's going to be stuff available, though.
Got it. Thanks so much.
You bet. Thank you.
Our next question comes from the line of Ali Agha with SunTrust. Please go ahead.
Ali, how are you?
Good, Tom. Good afternoon.
Good afternoon.
Just wanted to clarify a couple of points you'd made earlier, just to make sure I'm getting them right. First off, on bonus depreciation, is it fair to assume that the 4-cent hit, if you assume a 2016, is that a good annual number to think about for 2017, 2018 as well?
No, it'll go up as we move out in time, Ali. The facts are that we were actually a cash taxpayer in 2015, and before the extension of bonus, we probably have been one in 2016. It is a smaller effect in 2016, but it will grow over time.
Just remember, consistent with the guidance we've given you, we're going to overcome a continuing burden by less shares, growth plan, addition of AGL.
Right.
Mm-hmm. Yeah, no, I get that. Secondly, given this ITC and PTC extension, and Tom, you alluded to the fact that previously you were looking at a bit of a cliff in 2017. Off that 2015 earnings base for Southern Power, how should we be looking at the next three years? Relatively flat or growing given that these things have extended? How should we think about that change now from your perspective?
These guys hate me talking about this.
Of course we do.
I know. No, I'm actually talking about Southern Power, not you. We have continued to beat Southern Power's goals every year. Gosh, when I think about I want to go back to 2014. We estimated around 150 or so, and we got 170 or so. When we estimated 2015, we estimated 180, and we're going to get 215. Here's what's interesting. I'm going to give you a number in 2016 that's going to knock your socks off, I think. Remember we added to the CapEx, so our CapEx went from, I forget what we estimated, one two to two four, round numbers, in 2015. We said we're going to execute similarly in 2016. Imagine the CapEx that we've been expending on projects.
While we jumped up to 215, the effect of this acceleration of CapEx, at the end of 2015, we were spending CapEx, but didn't have projects in service. Once we go into service in 2016, you're going to see a great big jump. That jump could be as high as the high $200s to $300 million in net income. It's going to be a big bump. Consistent with the CapEx that we're showing you here, that number is not sustained. In fact, the less CapEx and this idea of the cliff and all that would show that our net income will come down in Southern Power to some level in 2017. Not prepared to talk about what that level is, I want you to know, don't expect 300 to stay the same every year thereafter.
I will just say, 2016 we expect a great year in net income contribution from Southern Power.
Yeah, absolutely.
Just remember, in 2017, 2018 going forward, AGL pops in and we estimated way back when, I think about $0.10 a year on the average. That's what really picks up for Southern in 2017, 2018, and beyond.
Also, can you remind us, Art, again, of the 2015 O&M number expense that you posted, what kind of growth rate should we be looking at annually going forward?
Okay, Ali. Going forward, we're going to stick with our 3%-3.5% number, but understand that there's no such thing as a normal year in non-fuel O&M. Looking back to 2014, for the operating companies alone, year-over-year, it's only up 1.2%. If you look at total Southern, it was up 2.3%. Lots of things influence those numbers. As a planning guide, I think 3%-3.5% is a good number.
You guys know for years, really, heck, going back when I was in the CFO ranks, we've developed this dynamic budgeting process where actually we approve a lower level of budget and then above that, we develop some flexibility that essentially creates optionality in our spending plan to match for different economic conditions and different weather. Such that's why we always hit our numbers. We're able to adjust spending. When we have warm weather during the summer, we're able to do more outages and more work. What underpins all that, the result is we have the best reliability for the wires and our generating system in the industry. It works exceedingly well, but Art's right. I guess you should use a 3.5%-looking number, just be cautious. We'll match that with revenue over time.
Yeah, there's other exogenous factors. We'll bring Kemper online. That will certainly make a difference in non-fuel O&M. As we bring other environmental pieces of equipment on, that will impact O&M as well. I'm really talking about base kind of stuff.
Yeah, understood. Last question. Tom, now with all these moving parts and these extensions and bonus, et cetera, if you look at your company on a standalone basis and pre the AGL acquisition announcement, and the financing that goes with that, obviously. If none of that had happened, what kind of growth rate were you looking at for Southern sort of on a standalone basis?
Okay. Absent AGL, absent bonus, and all that?
Well, bonus obviously. Sorry, go ahead.
Okay. I'll answer it. Absent AGL, absent bonus, and all the new tax law we just got, it would've been 3% to 4%. We would've been back to the litany of me kind of posing to you all the rhetorical question that we in fact face. That is, we would become way excess cash flow. It's what we talked about before, and we said there's kind of three things you can do with it. One is buy back your own stock, one is buy somebody else's stock, and in the middle, buy assets. What we had been seeing, what you've seen us do in that strategy, was to buy up a bunch of assets, particularly at Southern Power. We saw an opportunity with AGL not only to buy somebody else's stock at a premium that is enormously accretive, especially given where they were trading relative to their peers.
Our premium wasn't nearly as high as what you see in the media, and especially relative to other deals. It accretes to our growth rate. This thing has been a home run ever since we've announced it, and I think our stock has performed accordingly. It would've been 3% to 4%, but we would've been dealing with what do we do with the excess cash.
Understood. Thank you.
Yes, sir. Thank you.
Our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.
Hey, Michael.
Hey, guys. Hey, Tom. Hate to be the one to do this. Mine have all been asked and answered. I think I can hand it off to the next guy.
Oh, no, you're a hero. Thanks. Appreciate the chat.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead.
Good afternoon.
Hello, Paul.
Hey, how you doing?
Super. Hope you're well.
I'm managing. I just wanted to ask you a couple quick ones. What's the GDP forecast for 2016 that you guys are using?
Little over 2%.
Little over 2%?
Yeah.
Okay. When I look back at what you guys had for this time last year, you guys had about 3% and you expected 1.3%.
Yeah.
When we're looking at this, have you guys changed your GDP growth rate? By the way, I hate to do this, is leap year in this as well? This new.
You know, that does matter.
Yeah. I know.
Well, yeah, Paul, this is Art. I think, certainly GDP is a factor that we put into our forecast, and it does have an influence. One other thing, and Tom's already kind of mentioned it, is our bottom-up approach.
Yeah.
Is we talk to all of our large industrial customers. We get a lot of information from them about what their plans are, what their expansions, what new models they might be bringing online, whatever. We factor that in as well. It's not just a top-down GDP-driven number. It's not going to always match up.
Let me just give you a story about that. When we went from 2014 to 2015, we had gas prices on the average be kind of in the fours to now in the twos. Okay. There were some people on the margin with cogeneration facilities. As prices and gas went down, they turned on their cogen and stopped buying from us. That also impacted industrial sales in a big way. You're not going to see that same delta this year because you're at a super low gas price. I don't know how much further lower they can go, but we're not going to see that delta. What you're remaining with is an industrial growth rate that we think is achievable.
Okay.
It is absolutely a bottoms-up, boots-on-the-ground kind of analysis. We do check it with our kind of big mega trend looking stats, but we're pretty confident with what we got.
Okay. With respect to Julien's question on the solar ITC, I wasn't really completely clear about what the 2017 impact was. It sounded like it was, if I got it right, $150 million that you guys saw in 2016, for the ITCs, I apologize, I just didn't really catch what you guys expected to have happen with that in 2017.
It really depends on whether we're going to do solar deal, wind deals, or natural gas.
Okay.
It's hard to say what it's going to be then because it depends on what we commit to do and what we spend CapEx on, what clears into service.
Okay. Directionally, do you think it might go down? Is that what
Oh, sure. Oh, yeah, absolutely.
Okay.
What you're going to do probably is I don't know. Well, I'll say under the current plan that we forecast here, who knows what's going to show up in the market, and we'll adjust accordingly as we see it show up. One of the things you can pivot to do is do more wind, for example. That would make it go down.
Right. That would suggest, though, that that would be.
That would be more ITCs down, right.
That could be a little bit of a drag. Is that what we should think in terms of, at least in the near term, year-over-year?
No, listen, we feel comfortable about hitting our numbers that we're showing you guys. Look, we're giving you our best guess, and we're giving you a conservative case. My sense is there's going to be a bigger market, and certainly I will challenge Southern Power to participate fully in that bigger market than what they're committing to right now. Remember, we went through the discussion earlier on the call about going from a big CapEx number in 2016 to a lower CapEx number in 2017. That really is just a reflection of where we are. We'll push them to do more.
Okay. Just with Kemper, and the negotiations on the CO2 contracts, how is that going, and how should we think about the impact of low oil prices, excuse me, and the economics of Kemper on an operational basis, given what we've seen with the big dramatic drop in oil and gas?
Interestingly, I asked that question yesterday in terms of appetite for CO2. People still have an appetite for CO2. For the EOR business, there's a tremendous demand. We've been approached about getting in the business of producing CO2 from other places. You may remember way back when we did one of our early pilots on carbon capture and sequestration out of Plant Barry, and we were sequestering the CO2 in the Citronelle fields there. We think there's tremendous demand for CO2 in the EOR business, even at these prices, and I was a little surprised at that. In terms of the relative cost of energy, we've kind of covered that in other calls. I just remember my date lines here, so I'm going to just quote what I've quoted before.
At $100 a barrel, the value of CO2, plus a host of other assumptions, got us to about a buck and a quarter per million BTU equivalent. At $50 a barrel, it was somewhere around two to two and a quarter equivalent. We'll see what happens now.
Is that linear? As you know, we've had a drop from there, which is sort of unsurprising.
Of course. Yeah. We get that. Listen, you know what? I get this question all the time about how can you justify building nuclear when gas prices are low. One of the things we do know is that we don't know what's going to happen with gas prices. They tend to be much more volatile than other fuel stocks. One of the advantages of Kemper relative to even other natural gas plants is that we've essentially fixed out our cost of supply. We have mine-mouth lignite. We know what that costs. That's not going to vary. So we're going to be able to produce, assuming a reliability profile, at a very constant level. Recall also what has changed over time. Look at the performance of Kemper in the past year, just purely by running natural gas through the combined cycle units.
We've supplied one-third of the energy consumed by Mississippi Power customers out of the Kemper site. We're going to be able to provide reliability assurances in the regulatory process that we think is going to be very attractive.
Okay. There have been some reports about large coal inventory in light of the low gas prices and what have you. I was just wondering if there's any issue or any comment that you guys have in terms of the level of coal inventory, and if anything has to change contractually or anything else you might see in terms of coal, gas dynamics in the Southeast because of the inventories you're seeing.
Paul, thanks for asking that. I won a monetary bet with Art Beattie on that. We prepare the most arcane data. In preparation for this one, I think I just beat him.
I told him you wouldn't ask this, Paul.
In fact, inventory's up a little bit, but not bad. We're going to be able to manage it down. Here's the fun stuff. We have been able to manage down the contracts over time. From a supply standpoint, we've really shifted, of course, to PRB away from Central Appalachia. Illinois has also increased. Alabama remains a certain set of supply. We've been able to shift our supply. The other thing that we've been able to do is work on transportation. We've been able to work constructively with the railroads, and here is my arcane data. When we talk about train sets, in 2014 at our peak, we had 95 train sets moving coal around the U.S. In 2015, that number's gone down to 75, and for 2016, we have 45 active.
We've been able to take down the number of assets that are moving coal around the U.S. That will serve to balance out our fuel loads in an economic manner for the benefit of our customers throughout this year and then going forward.
Okay, great. I really appreciate it. Thanks so much.
You bet. Thank you.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please go ahead.
Hey, Steve.
Hey, guys. Hey, Tom. Just a question on thinking about Vogtle with the bonus depreciation. Does the $4 billion or $5 billion of cash include getting bonus on Vogtle, at least one of the units-
Yes, it does
when it comes in?
Yeah.
Okay. Just one of them or both of them?
Both.
Okay. Does the 4%-5% growth rate include the rate base impact of Vogtle from bonus depreciation too? It's kind of everything together?
I would imagine that it does.
Okay.
I can't imagine it not being impacted.
Okay. You're including the full impact bonus depreciation cash and rate base for Vogtle.
That's correct.
Okay.
We mentioned that in our script, actually. It was going to pick up both Kemper and Vogtle. Within those time frames, that's true.
Okay. Thank you.
Yep.
Yes, sir.
Our next question comes from the line of Ashar Khan with Visium. Please go ahead.
Hello, Ashar.
Hey, Tom, how are you doing?
Awesome.
Tom, a lot of numbers, I don't know if you can kind of simplify or I heard something wrong. This I'm trying to understand the merger. You said, if I heard in the commentary that the merger is going to add $0.10 in 2017 and 2018, if I heard it correctly.
Round numbers. That's right. Through the period, it's $0.10 accretive per year. The numbers are nine and 10 and 11, whatever.
Okay. I also heard that you said that you're using $1.4 billion of equity from the bonus depreciation windfall in terms of investing that into this new investment, which is AGL. We don't have to utilize it. To me, $1.4 billion of equity is equivalent to, on current today's stock price, is equivalent to about $0.10 a share. Then we are saying that's also hitting us by $0.06 in 2016. To me, that implies that the transaction is diluted by $0.05. What am I missing? The numbers don't add up. The $0.06 plus $0.10 on equity avoidance plus 10. I'm just not getting it.
I would go back to the math I tried to do before the kind of caveman stuff. When you think about it really gets into an argument of attribution of shares. Okay? We argued about whether to put it all on Southern Power and say that we are financing all of AGL with cash coming from bonus and all this other stuff, or whether to do a mix, or whether just to say, "Look, the nearest term use of cash is AGL," therefore keeping the $1.4 billion remaining, which we did $200 million in 2015, $1.2 billion is our plan in 2016. We have just chosen to associate that with AGL. We could have done a variety of things. When you consider the total amount of CapEx, including the acquisition amount, less the benefit of cash, we could have attributed that on a pro-rata basis.
The economic impact of AGL remains the same. Once we get a full year of earnings, remember, maybe this will be helpful just to recall when we did the announcement, their EPS growth rate on a standalone basis was between 6%-9%, and their base case assumed essentially 7.5%. We thought there were opportunities to improve that a wee bit. When you add AGL into Southern, it increases our overall growth 1%, from 3% to 4% to 4% to 5%. That represents about $0.10 a year. We're going to sustain that into the future. How you want to count the shares is almost a term of art. The truth is, the fact that we're going to get at least $4 billion, potentially over $5 billion, allows us to offset a significant amount of shares that otherwise we would have issued.
The firm is better off $4 billion to $5 billion in total.
Okay. I'll go back and do, but I don't know, the math didn't work out. Second question, Tom, on the more macro thing. I guess you were not the only one. The companies that reported earlier, all three of them showed a huge drop in industrial sales in the fourth quarter.
Oh, yeah.
Is this, I think so, what you mentioned in your macro piece and I guess mentioned by Dudley last night, is that the strong dollar is hurting the industrial and manufacturing side. How long do you think that this remains there? Is this just last quarter, or are we going to see weak numbers, a year-over-year comparisons for the first half of the year? Could you just give us from your macro perspective?
Yeah, man. In fact, if you want to go back and look at a clip, look at the clip that CNBC has of when I was on Squawk Box with Dennis Lockhart in December. Let me give you just kind of the dumb overview again. When you look at quarter-by-quarter performance, we track very closely the top 10. I used to call them SIC codes. I understand they're called something else now, but Standard Industrial Classification segments. That represents 80%-85% of our sales in the industrial sector. 2014, all 10 of those segments showed year-over-year growth. It was a terrific forward-looking story. We projected, I guess, a 1.3% increase in industrial sales.
All of a sudden, with worldwide economies, China, all that other stuff that we're talking about, dollar exporting going down, we started seeing those segments start to show year-over-year weakness. In the first quarter, two of them turned negative. In the second quarter, I want to say three of them turned negative. In the third quarter, six of them turned negative. In the fourth quarter, turns out seven of them turned negative. Even now, my momentum analysis would have showed that even if you were still positive, this is the momentum comment, you were less positive. Everything started showing that it was slowing down in the industrial sector. What Art said is true, and here's what's interesting.
When these guys, we were preparing for this call, first started coming up with the sales forecast, and they were showing a renewed growth in industrial, we had a lot of give and take and pushback and why do you really believe that? Goes to a variety of factors. I think this notion that the industrial class is adjusting to the high dollar and low commodity prices in this new market reality is one factor. Second factor. Remember I mentioned before that with gas prices falling, we saw a bunch of cogen turn on. That tended to depress industrial sales. That delta won't show in '16 anymore. So as people adjust to the new reality, like for example, primary metal, we saw that go way down. We think now some of primary metals is going to grow associated with automobile-
Sure
with transportation. We're going to see that renew. We have reason to believe from our bottoms-up analysis. And I'll tell you another thing, Mike Jackson of AutoNation, commented on this in some of his commentary. Other foreign operations are being relocated to the United States. A story for that, Art, is in Alabama with Mercedes-Benz-Benz.
That's correct.
Some of our bottoms-up stories are giving us reason to believe that in the Southeast, now this is probably not true across the U.S. In the Southeast, we're going to see a renewal of industrial sales off of 2015. Look for it to occur in transportation, look for it to occur in housing, and maybe some of the other sectors.
Would you agree that might show up more in the second half of the year rather than the first half?
Yes. That would be my guess also. Yes.
Okay. That was my que-- thank you so much.
You bet. Thank you. Operator, any more questions?
Our next question comes from the line of Mark Barnett with Morningstar. Please go ahead.
Hey, Mark.
Hey, guys. How are you today?
Great.
Good.
A lot of great commentary and detail today on the call, so thanks a lot for that. I just wanted to.
Thanks for joining us.
Clarify one thing. Yeah. It's been a long one. Just wanted to clarify one thing about the proceedings that were requested by the PSC. Am I correct in understanding that if there's no kind of dispute with the staff findings over the next six months, there won't be a public disclosure of those discussions or?
Oh, yeah. No.
Okay.
Let me just clarify that, and let me get the timeframes right too. We have 60 days in which to make filings with the commission, with the staff. A six-month clock starts. Okay? After we make the filings, there's a 30-day clock that will allow interested parties to file their own information. We have an evaluation of all this information with the staff, and we try and reach a settlement as to its conclusion. Okay? Once we reach that conclusion, if we reach a settlement, there will be a period of time in which interested parties can finally evaluate it, and it would be ultimately adjudicated in a normal course, as we do with almost any rate case or any other proceeding that we have. There will be ultimately a hearing resulting after assuming we have a settlement agreement. Rest assured of that.
Okay. I just wanted to clarify that. Otherwise, thanks for everything today. It was great. Appreciate it.
Super. Thank you.
Take care.
Our next question comes from the line of Vidula Mirtani with CDP. Please go ahead.
Hey, Vidula.
Hey. Good afternoon, Tom. How are you?
Great. How are you?
I'm doing okay. A couple of things. In terms of Southern Power, it seems like, obviously with the higher CapEx and everything like that, it's very Production Tax Credit, Investment Tax Credit-driven.
Yeah.
How much of this stuff stands alone by itself? I'm just wondering, how much of this is just all tax-driven as opposed to underlying economics without federal tax policies?
Now that's an interesting question. Look, I've been on record a lot in how even the EIA would say that tax preference items accorded renewables are way in excess of anything associated with coal, oil, gas, and gee, even compared to nuclear, was estimated to be 35 times what's available there. What's fascinating is I think these are mature industries. Certainly with the way the Clean Power Plan is structured, even without tax benefits, there would be a great demand to do wind and solar just because of their carbon profile. Recall also that I think the U.S. in general is going to be really well-served if we pursue the full portfolio that I'm always fond of saying we're the only one really doing all of it. New nuclear, 21st century coal, natural gas, renewables, energy efficiency.
Look, Vidula, behind your question is the notion that these things have, in my opinion, excess economic returns relative to a tax policy that didn't favor one technology or another. I think given where EPA is going, especially with the price of carbon that's implied in what they say, even without these tax preference items being so tilted towards renewables, there would still be renewables growth.
Do you think that when you take a look at your own portfolio and your own projects, how those fit within that construct that you just described?
Well, to the extent we sign up for them, they're under current tax law. Certainly if you didn't have those tax benefits, they would have a different profile. Certainly the market would reduce. For what we have, it sits under the commercial terms in which we entered into them. It's hard for me to imagine Certainly you're not suggesting would we have still done them had we not had the tax benefits? That is the law. I don't know.
No, I understand it's the law, but I'm just wondering how much of this is only because of the tax law that allows those to happen versus just.
Yeah. Who knows.
the practical economics. Okay.
Yeah. I don't know.
All right. If we just think back on the history of Southern Power over time, as I recall, there have been monetizations and just recycling capital, whatever. If we think about your capital program over the next few years here, what type of monetizations or pruning or whatever you want to call it, do you think either is built in or is possible?
Yeah. Vidula, we don't have anything built in. Okay? As we have demonstrated in the past, and I like fond of saying we're an EDA shop. If there's a better owner for our assets, in other words, they have a different discount rate, they have a different whatever, assets should sit in the hands of the best owner on a risk-return basis. We're always open for business, for good ideas about how to deploy assets or bring them back in. We'll see.
I'm curious, if you look back in your history here, if you generally work on a nothing built in, what do you end up usually realizing typically as opposed to a zero baseline?
Yeah. I'm a little reluctant to do that because those kind of deals are very opportunistic. We get approached all the time by people. We're always interested in doing what's best for our stockholders, in this case. In some cases, these impact directly our customers. We just have to balance all that. I'd be reluctant to give a statistic like that.
Okay. One last thing. You may have addressed some of this in your opening script, and I missed it. I only got in on the Q&A. I'm just wondering, can you maybe update us in terms of your current thoughts about how within the retail and the commercial sectors, how efficiency and technology is dampening sales and everything like that, and how you're trying to work either through rate structures and regulatory mechanisms in order to offset that dampening? I'd assume that it's both in your interest and everyone's interest to try to do that as much as you can, as long as it doesn't impair your ability to earn your authorized returns.
What we're seeing right now is even despite energy efficiency and everything else, we have a growing economy and a growing sales picture. Obviously, we're always interested in the best rate design that we can possibly have. We're certainly open to any good ideas there. I know as our companies consider their kind of ongoing discussions with regulators, that we will think about good ideas. Overall, we still feel good about our growth profile.
I guess my last follow-up on that, does that mean that because of the growth profile that you see economically, that trying to move more to, not a decoupled model, but moving more in terms of having base rates being covered, but through a fixed charge and becoming less volumetric, is that something that, because you like the growth profile, you're willing to hold off on? Or is that something that over time, you feel like you're probably going to move to anyway or not?
We're getting into a history lesson now. The industry has grown up basically on volumetric pricing. Okay? We have a whole lot of fixed assets. It stands to reason if you more wanted to closely get a fair picture with customers, that you would price fixed assets in a fixed way, and volumetric-based measures in a volumetric way. Certainly, I would say the pendulum is swinging more to the fixed asset approach, see Nevada, et cetera. Certainly room to go there. We're willing to listen to any good ideas going forward. Just remember that any pricing scheme, remember, we're still in a growing area in the Southeast. I think there's a mega trend we ought to keep in mind. The economy is getting more electrified as a result of the digital nature of the economy.
I think we'll still see growth going forward for some time to come. Thanks a lot, bud.
I appreciate it. Thank you.
Yes, sir.
Our last question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board. Please go ahead.
Big Dan, how are you doing?
Hi, good afternoon. Doing well. I just wanted to get a little more transparency maybe into your residential sales growth expectations. It's up quite a bit from 2015 to 2016. I was wondering if you could give us maybe some granularity into customer growth you're expecting, and it looks like maybe some usage growth. Is that being driven by maybe more single-family homes as opposed to apartments, or what's kind of the thinking there?
Yeah, Dan, this is Art. Again, customer growth, we looked at last year, it was about just under 1%. We're looking for something kind of that or maybe a little more in 2016. Again, that goes back to our comment about in-migration into the region. Home values around the country have risen back to a level where people are more willing to transfer, sell their homes, and move than they were, say, in the last three or four years. We've seen a number of new corporate headquarters moving into the Southeast as well. Those are having a positive effect. We're still seeing, I guess, a higher level of multifamily, although that is beginning to peak at some point. You're going to see it balance out a little bit, and I think that's part of our expectations.
You're still going to see a continuing use, weather normal use erosion, as you still have a new eras of appliances coming in that are more efficient. That's just going to be a natural subtraction from customer growth that we see.
The big slugs in the past were HVAC, and now we kind of see it lighting kind of being a big deal with LEDs and all of those.
Yeah, HVAC is the biggest issue in the Southeast.
Okay. On Vogtle, just the major modules and the critical path items coming up. I was wondering if you could just update kind of the timing, like what are the next things for both unit 3 and unit 4?
Yeah, we got a slide on the deck on that, Dan. Unit 3, it's probably CA03, CA02. I think those are the last big modules that go inside containment. They are near completion and are scheduled for insertion, I guess, within the next few months. Unit 4, they're talking of completing the cooling tower installation. It's about 50% complete, that'll be done in the near future. You'll add another ring onto unit 4, along with the major modules on unit 4. That's CA20, CA01, all the big modules that will be repeated on unit 4.
Just to make sure I'm clear, you're saying for unit 3, CA03 and CA02 is probably our first half type things?
Oh, yeah. Those are the remaining ones that go in unit 3 containment.
Okay.
Outside containment, you've got the turbine building tabletop has been completed. Later this year, you'll actually probably install the turbines.
Okay. For unit 4 are the CA20 and CA01, are those first half or second half type?
I don't have that with me, Dan.
Okay.
We can get it to you.
Okay. That's all I had. Thank you.
Yes, sir.
Thank you. Operator, any more questions?
Mr. Fanning, I'll turn the call back over to you for any closing remarks.
Thank you very much. Boy, I don't know whether this is a combination of a Berkshire Hathaway annual meeting or an EEI session, but it was an all-timer in terms of length. I appreciate your patience. We appreciate your interest in our company. I really feel like Southern had a great 2015. We're turning the edge. Values are functioning, risk and return. Not only did we exceed our targets that we set out for you, but also we have been cleaning up, continue to clean up significant risk hurdles. When you think about settling the litigation at Vogtle, when you think about getting significant rates in place at Kemper, when you think about successful technical startup activities, I think the company is on a terrific upswing. When you think about adding AGL into the mix for the future, I think the future is quite bright indeed.
Thank you again, everybody, and I look forward to chatting with you soon. Take care.
Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company fourth quarter 2015 earnings