The Southern Company - Earnings Call - Q1 2012
April 25, 2012
Transcript
Speaker 0
Good afternoon. My name is Sarah, and I will be your corporate operator today. At this time, I would like to welcome everyone to the Southern Company first quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. I want to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Speaker 6
Thank you, Sarah. Welcome everyone to Southern Company's first quarter 2012 earnings call. Joining me this afternoon are Tom Fanning, Chairman, President, and Chief Executive Officer of 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. 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-K and subsequent filings. We will 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, and you can access the slides on our Investor Relations website at www.southerncompany.com if you want to follow along during the presentation. At this time, I'll turn the call over to Tom Fanning, Southern Company's Chairman, President, and Chief Executive Officer.
Speaker 4
Thanks, Dan. Good afternoon and thank you for joining us. Before we turn to Art for a review of our first quarter performance, I'd like to take a few moments to update you on our recent progress on several important strategic fronts. On February 10, we received the combined construction and operating licenses for Plant Vogtle Units 3 and 4, the first new nuclear unit license in the U.S. in more than 30 years. Our nuclear development team has done an exemplary job in satisfying the requirements for these licenses, and I have every confidence that they will continue to provide strong leadership as the project moves forward. We are making significant progress at Vogtle 3 and 4, as those of you following along on the slides can see.
Work is already underway on the nuclear islands and cooling tower, and our heavy lift derrick, one of the largest in the world, is being assembled. With the new licenses in hand, we have made a smooth transition into the next phase of the project, and I look forward to sharing further updates with you in the future. Meanwhile, the state regulatory process for Vogtle 3 and 4 continues to move forward in a constructive manner. The Georgia Public Service Commission has approved $1.7 billion of project costs through June 30, 2011, and is currently reviewing the company's sixth semi-annual construction monitoring report, which reflects an additional $300 million of costs through December 2011.
In testimonies filed with the Commission, Georgia Power has outlined up to $2 billion of potential additional benefits related to Vogtle 3 and 4 that we believe further enhance the value of this project for our customers. The Commission's decision in this proceeding is expected in mid-August. With any project of this magnitude and length, commercial disputes are to be expected. Discussions between the owners and the consortium are ongoing regarding a number of matters, including issues related to the timing of the receipt of the design control document, or DCD, and the combined operating licenses, or COLs. As you may be aware, the construction of Vogtle 3 and 4 will proceed under a new licensing framework that is significantly different from the one used previously. In the past, nuclear plant operators designed and built their units first and then sought licensing approval for what they had already built.
Under the new process, the nuclear units are constructed according to the COLs and the underlying DCD. There are processes in place to assure compliance with the design requirements specified in the DCD and the COLs. One process we have discussed with you before is ITAC, which stands for Inspections, Tests, Analyses, and Acceptance Criteria. An additional oversight process is rigorous inspection by Southern Nuclear and the NRC that occurs throughout construction. As an example of this process, a recent routine NRC inspection revealed that limited details of the rebar construction in the Unit 3 nuclear island were not consistent with the DCD. We expect to receive official notice of this finding from the NRC. In the meantime, we are engaged in construction and constructive discussions with the consortium to identify appropriate action.
We can reasonably expect to encounter additional inspection issues between now and the time the new units are completed, as they are a normal part of the nuclear construction process. Our goal is always the same: to build the safest, most reliable, and most cost-effective nuclear generating units possible and to achieve our targets with regard to schedule and cost to customers. Elsewhere, on April 24, the Mississippi Public Service Commission finalized a new certificate of public convenience and necessity for the plant in Kemper County, Mississippi. This became necessary after the Mississippi Supreme Court's recent reversal of the Commission's previous order. In the interim, construction continued on the Kemper County site under a temporary authorization granted by the PSC on March 30 and will now proceed under the authority of the new permanent order.
Initial startup and testing are now only 14 months away, and we remain confident that this project will provide the best value to customers over the long term. Targets remain achievable for both the Plant Vogtle and Kemper County projects with regard to construction schedule and cost to customers. As important as these projects are, they are only part of our all-arrows-in-the-quiver strategy for building a 21st-century energy portfolio. Georgia Power is making significant progress on three new combined cycle natural gas units at Plant McDonough. The first of these units came online in December with a nameplate capacity of 840 megawatts and has actually been generating at significantly higher levels with an extremely efficient heat rate. The second unit is scheduled to begin operation later this month, with the third unit expected to follow in November.
Southern Power is also nearing completion of the nation's largest biomass generation facility near Nacogdoches, Texas. This project, which is scheduled to begin commercial operation in June, will provide needed power for the City of Austin through a 20-year contract. These projects are consistent with our ongoing commitment to maintain a diverse and balanced generation portfolio, thereby enabling customers to benefit from the best available combination of low energy cost and system reliability. During our last earnings call, we reported that our energy mix from the fourth quarter of 2011 was about 40% natural gas and 40% coal, with the rest coming from our lowest cost resources, nuclear and hydro. Compare that to 2007, when the mix was only 16% natural gas and 70% coal. As natural gas prices have remained low relative to other fossil sources, we have seen these fourth quarter trends continue.
We now project that our mix for the full year 2012 will be 47% natural gas and only 35% coal. Given the high level of interest in this topic across our industry, here is a quick summary of what we're seeing here at Southern Company. During the first quarter of 2012, our natural gas combined cycle fleet achieved an average capacity factor of 70%. Based on today's forward curves, we estimate we could burn more than 600 BCF for the full year 2012, or about 1.7 BCF per day, almost three times what we burned in 2007 when natural gas was only 15-16% of our generation mix. Southern Company gas purchases now account for more than 2% of all U.S. natural gas consumption, making us the third largest user of natural gas among U.S. utilities.
Even with natural gas prices below our forecast for 2012, we are well positioned for managing coal inventories and passing lower energy costs on to customers. To accomplish this, we've taken several proactive steps, which include increasing our ability to match coal purchases and burn through reduced volumes of contracted coal, maximizing and expanding onsite and offsite storage, working with our coal suppliers to defer, buy out, or renegotiate existing contracts, and conducting managed burns when necessary. Our current expectation is that we will burn less than 45 million tons of coal in 2012 compared to the nearly 80 million tons we burned at our peak in 2007. That said, we continue to maintain our operational flexibility to increase our use of coal in the event of a sharp reversal in the price of natural gas. There remains excellent optionality in our generation fleet.
As an illustration, by 2020, assuming a scenario of low natural gas prices and relatively high coal prices, our energy mix could be 57% gas and 22% coal. If fuel prices change to a high gas, low coal environment, the energy mix could be 34% gas and 45% coal. Under all scenarios, nuclear would remain in the 16-17% range. This level of flexibility will continue to be an important part of our operational planning philosophy going forward. As always, our ultimate goal is to benefit customers, and here we continue to succeed. As an example, earlier this year, Georgia Power filed a request to lower fuel rates. As proposed, this would reduce average fuel prices by 19% and average residential retail prices by 6%.
We think achievements of this sort are the very best validation of our business model, that everything we do is based on providing the best value for customers served by our operating system. I'd like to turn now to Art Beattie for a discussion of our financial highlights for this quarter, as well as an update on first quarter sales, the economic outlook for our region, and our earnings estimates for the second quarter.
Speaker 2
Thanks, Tom. In the first quarter of 2012, we reported earnings of $0.42 per share compared with $0.50 a share in the first quarter of 2011, a decrease of $0.08 a share. Let's turn now to the major factors that drove our numbers for the first quarter of 2012 compared to the first quarter of 2011. First, the negative factors. Weather effects reduced our earnings by $0.08 a share during the first quarter of 2012 compared with the first quarter of 2011. Weather was actually $0.06 a share below normal in the first quarter of 2012 compared with $0.02 a share above normal in the first quarter of 2011. Increases in non-fuel O&M expense for our traditional operating companies decreased our earnings by $0.01 a share in the first quarter of 2012 compared with the first quarter of 2011.
Increased depreciation and amortization, representative of our growing rate base, reduced our earnings by $0.02 a share during the first quarter of 2012 compared with the first quarter of 2011. The expiration of long-term capacity contracts for Southern Power reduced earnings by $0.01 a share during the first quarter of 2012 compared with the first quarter of 2011. Finally, an increase in the number of shares outstanding reduced our earnings by $0.01 a share during the first quarter of 2012 compared with the first quarter of 2011. Retail revenue effects in our traditional business were a positive factor, adding a total of $0.05 a share to our earnings for the first quarter of 2012 compared with the first quarter of 2011. In conclusion, we had $0.13 of negative items compared with $0.05 of positive items, or a negative change of $0.08 a share.
Moving now to a discussion of our first quarter sales and the economic outlook for the remainder of 2012. Sales growth was driven by the continued recovery of industrial sales, which grew by 1.9% in the first quarter of 2012 compared with the first quarter of 2011. Industrial sales were 97% of pre-recession levels for the quarter and 99% for the month of March. This growth was led by pipelines up 8.3%, transportation up 7.3%, primary metals up 7%, and chemicals up 2%. In our territory, manufacturing job growth outpaced overall job growth in the first quarter of 2012. Unemployment rates in the region have fallen to an average of less than 9%, and the level of confidence in our current outlook has been strengthened.
A growth in jobs likely contributed to the addition of some 15,000 new residential customers in the first quarter of 2012, a significant increase over the 2,000 customers added during the first quarter of 2011. This growth was the largest such gain in customers since the first quarter of 2009 and was broad-based, meaning that each of our traditional operating companies experienced growth. Reflecting some of the improvements in customer growth, residential sales growth grew by 0.6% for the first quarter of 2012 compared with the first quarter of 2011 on a weather-adjusted basis. Commercial sales declined by 1.3% in the first quarter of 2012 compared with the first quarter of 2011, also on a weather-adjusted basis.
Meanwhile, new economic development activity announced in the first quarter of 2012 is expected to bring another 5,000 jobs to our region, which would be a 36% increase over the same period a year ago, and another $1 billion of capital investment, a 52% increase over the same period a year ago. Chief among these was the announcement of a new Caterpillar manufacturing facility that will bring 1,400 new jobs to Georgia. More recently, Baxter International announced that it will create more than 1,500 jobs with a new production center outside Atlanta. Before I discuss our earnings estimate for the second quarter of 2012, I would like to update you on one other financial item. Earlier this month, we announced an increase of 3.7% in our dividend, thereby increasing the annual dividend rate to $1.96 per share. This marks the 11th consecutive year that we have raised our dividend.
Over the past decade, fewer than 10% of S&P 500 companies have raised their dividend more than 2% each year, and during that time, Southern Company raised its dividend an average of 3.5% per year. We also delivered an average annual total shareholder return of more than 11% with a low level of relative risk to the market. We are particularly pleased that our continued focus on providing superior value to our customers has enabled us to provide sustained value to our shareholders. Now, I'd like to move to a discussion of our earnings estimate for the second quarter of 2012. Our earnings estimate for the second quarter of 2012 is $0.65 per share. As a reminder, during our January earnings call, we shared that annual guidance for the year 2012 was $2.58 to $2.70 per share.
Now, I'd like to hand it back over to Tom for his closing remarks.
Speaker 4
Thanks, Art. In closing, I'd like to take a moment to address an emerging issue that has direct implications for American investors: the tax treatment of dividends and capital gains on investments. Historically, dividends have played a pivotal role in the financial well-being of American investors. In fact, over the last 80 years, dividends have driven nearly half of the value of the S&P 500. If you look at just the last 30 years, dividends account for nearly 60% of the index's total return. Over the last three years, dividend income has represented nearly 18% of all personal income growth in the United States. Over time, dividends have provided an important source of investment income for American investors, older investors in particular, and with baby boomers retiring in ever-increasing numbers, it is reasonable to expect that the need for that income will only expand in the coming years.
Our position is clear. First, we believe that the tax treatment of dividends and capital gains should be linked. Second, to encourage capital formation and therefore capital expenditures, and as a result, growth in jobs and the incomes of Americans, these tax rates should remain low. This is an issue that we are following closely and will continue to do so in the months ahead. As always, we will engage constructively with our elected government representatives, seeking an outcome that preserves the ability of dividends to continue to fuel our country's economic engine and ensure a stable financial future for its citizens. At this point, we are ready to take your questions, so operator, we'll now take the first question.
Speaker 0
At this time, ladies and gentlemen, if you would like to ask a question, please press star with the number one on your telephone keypad. Your first question comes from the line of Daniel Eggers with Crédit Suisse AG.
Speaker 4
Hello, Dan.
Speaker 6
Hey, good afternoon, guys. Just real quick, make sure I understood the 2012 guidance comment. You guys are reaffirming 2012 guidance as you provided on the fourth quarter call, and you're comfortable with that number still? I didn't misunderstand that.
Speaker 4
We only give guidance once a year, and we give it in January, and then we readdress it at the end of the summer peak season in October.
Speaker 6
Okay. With O&M, you had flexibility the last two years with good weather to, I guess, for lack of a better word, bank a little bit of O&M. O&M was up in the quarter year on year, even with volumes down. Are you guys looking for opportunities to help manage O&M over the course of this year to stay in line with that guidance band?
Speaker 4
Sure. It's what we always do. I wouldn't, you know, when I looked at the weather this quarter and I looked at our O&M, and I'll let Art comment on this later, but we feel completely confident of our financial plan. No reason to get exercised at all about what we did in the first quarter. You remember, most of our net income comes in the third quarter, and as a result, that's really the time in which to exercise the flexible portion of our operating budgets.
Speaker 2
Yeah, that's exactly right, Tom. Just to give you a little more color on the first quarter, we actually did underspend what we expected to spend on the non-fuel O&M side. On a year-over-year basis, it was a bit more, and a lot of that was related to pension and other employee benefits.
Speaker 6
Got it. I guess, Tom, with gas prices low and coal prices showing a little more resilience, and the mix you guys are seeing from a dispatch perspective, are you rethinking any environmental CapEx plans you guys have laid out in the sense of maybe pivoting more away from some of the upgrades on the coal plants just because it's harder to justify them against some of the gas options today?
Speaker 4
Not really, although that's a very interesting kind of question. As we've looked at the variety of variables that go into our decision-making process with how to comply with HACCP Act or Cross-State or CO2 or anything else, 316B, Effluent Standards, you name it, we go through a probability-weighted analysis and try and look at the range of outcomes that could potentially impact our customers. Ultimately, I think what we see is the path that we have chosen or are choosing currently, and it'll be final probably by the July call, maybe. We think that our plans are driven more by the timing of the regulations rather than necessarily any change in the short-term fuel markets.
Speaker 6
Got it. Thank you, guys.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Jonathan Arnold with Deutsche Bank.
Speaker 4
Hey, Jonathan.
Speaker 1
Good afternoon, guys.
Speaker 4
Welcome.
Speaker 1
Could I just ask, in your discussion of coal and gas, you talked about working a number of different options on contracts and then some forced burn and some deferral. Can you give us a sense of, is most of what you're doing deferring? Is it sort of an equal amount of all of the different ways of managing the coal contracts, or is there any kind of sense of what's the most fruitful area for you?
Speaker 2
It is a mixture of all, and if you look at the order we put them in, it is really driven by the economics. To the degree we can find additional external storage and internal storage of coal, we will certainly do that first. We will work with our coal companies to try to find optionality in the contracts or opt out of tons. That would probably be our next choice, and the last choice would be burning the coal in a planned burn gap or planned burn sense.
Speaker 4
The sense of it is right now the planned burn is exceedingly minor in terms of the overall fuel cost to customers at this point. We think it's like less than 1%. The other thing that really impacts us here, we started working on these switching strategies very early last year and even before because we could see the clouds on the horizon with respect to the HACCP Act and what that might mean to marginal units. Given that we saw then at least a 2015 timeframe, we started taking actions not only on our coal contracts but also on our railroad contracts. We think we have a very orderly process in place in which to accommodate the optimum fuel results for our customers.
Speaker 1
Okay. Thank you, Tom. Can you frame, you gave a sort of benchmark of tonnage in 2007 and tonnage in 2012. Can you just remind us how many tons of coal you burned in 2011? How 2012 is going to look versus 2011?
Speaker 4
It's 56 million tons.
Speaker 1
Does 56 go to 45 on a year-over-year basis? Is that correct?
Speaker 4
Yep.
Speaker 1
Okay. If I could, on just one other thing, when you give your growth numbers, the weather-adjusted, are you making a leap year adjustment in there as well, or is that just kind of, you know, one extra day versus one less day last year growth?
Speaker 4
I'll tell you a funny story. Actually, we didn't adjust it, but some years ago we talked about leap year being an explanation as to an earnings variance, and I made some goofy story about crazy earnings calls. We left that out this time.
Speaker 1
We're kind of underlying is probably a percent or so less.
Speaker 4
Yeah, 1.1%. Yeah.
Speaker 1
Okay. Thank you, Tom.
Speaker 4
Yes, sir. Thank you.
Speaker 0
Your next question comes from the line of Paul Ritten with KeyBank.
Speaker 1
Can you just talk about some of the drivers you're seeing in the second quarter relative to the second quarter of 2011?
Speaker 2
The second quarter of 2011, you might remember we had $0.07 of positive weather last year. You take that off and we would have been at $0.64, adjusting for nothing else in that result. The drivers this year would be some revenue effects from new rates in various of our operating companies across the system and expectations around low growth.
Speaker 1
Is that $0.07 versus normal?
Speaker 4
Yes.
Speaker 2
Yes.
Speaker 1
Okay, thank you very much.
Speaker 2
Yep.
Speaker 4
You bet. Operator, are there any other questions?
Speaker 0
Your next question comes from the line of Agnieszka Anna Storozynski with Macquarie Research.
Speaker 4
Hello, Angie.
Speaker 3
Hi, how are you?
Speaker 4
I'm wonderful. I hope you're well.
Speaker 3
I am, thank you. I have a couple of questions. First, about the low growth. You mentioned a couple of big industrial projects that are going to bring jobs in, and I wanted to know about the timeline, exactly when those jobs are coming. I also wonder, I understand that you have some O&M flexibility, but you are going against a pretty significant negative versus your guidance. You're assuming 1.3% year-over-year load growth. For now, the weather and then underlying growth are going against you. Could you also tell us basically, should we basically assume that it's a lower number in general? Is the economy growing at a slower pace than what you originally assumed?
Speaker 4
Let me hit the last one first. I'm going to hand over to Art for the economic development stuff. What's interesting about our earnings profiles, we were driving through our preparation for the call. One of the things that we noticed in our financial plan for this year, especially when you consider the pace of capital investment, we're spending around $6 billion a year, $18 billion if you add it all up over the three-year period, and how we're earning CWIP on Vogtle and Kemper County, the seasonality of our earnings is becoming more back-end loaded. What you see is what you all should expect is more back-end loading of our earnings performance. You kind of have a momentum that builds as we have more invested capital throughout the year. I would kind of caution you with that one.
The second one is we are completely confident that we have the flexibility, giving normal variances of weather to do what we need to do in order to achieve our targets. With respect to economic development, let me turn that back over to Art.
Speaker 2
Yeah, Agnieszka, you had asked about Caterpillar and the dates around that.
Speaker 4
Yeah.
Speaker 2
2013, that's expected to be complete and started, and the Baxter Labs is going to be a little bit longer in its runway. It's going to be about 2018 before you get to that 1,500 job scenario.
Speaker 3
Okay. The second question is about, you mentioned in your prepared remarks about the issues with the rebar and the CDC. Should we expect that it's going to have any impact on the delay, for instance, construction works?
Speaker 4
What we said before is our belief is that all targets are achievable with respect to schedule and cost to customers. The thing I just want to point out is, what we're trying to do is get people used to the idea that as we proceed through this complex, long-term, expensive project, you will hear about lots of things. This one we highlighted this quarter is just another one of what we believe will be many. In fact, there's already been several license modification applications made. We're just trying to get everybody used to the idea that these things will occur over time. You know, with respect, if in the future, if we ever decide to readdress schedule or cost or whatever, we do that in conjunction with our PSC. We have an ongoing relationship, and it's been a very constructive relationship to date.
I have no reason to believe it wouldn't be in the future.
Speaker 3
What is the heat rate of the new Plant McDonough?
Speaker 4
The first unit has been operating beautifully. In fact, its nameplate rating is 840. We hit a number like 960 at one point. Now, you can't count on that all the time. Remember, it operates more efficiently during cold weather, which is what it did, and its heat rate was around 6,500.
Speaker 3
Thank you.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Brian Chen with Citi.
Speaker 4
Hey, Brian. How are you?
Speaker 7
Very good. Good afternoon. Hate to beat a dead horse on this, but with the $0.66 guidance for 2Q, does that incorporate the weather as we've seen it up to this point in 2Q, or is that assuming a normalized weather pattern for 2Q?
Speaker 2
It assumes normal weather, Brian. You can try to make some judgments on weather, but you got very little bit of the quarter in there. My admonition to all of our people who have input into that is let's assume that we're going to be normal for the quarter.
Speaker 7
Okay, got it. Thank you.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Mark Barnett with Morningstar.
Speaker 4
Hey, Mark.
Speaker 6
Hey, there. Good afternoon. Quick question on a couple of just timing issues. With the DOE loans that you expect to start for Plant Vogtle and the Kemper County energy facility this year, could you just give me an update on when you expect those to sort of be finalized or where you are in the process? Second quick question, when does the QIP start to show up from Ratcliffe? Has that already started in the first quarter?
Speaker 4
I'll hit the loan guarantees. I'll let you guys clear.
Speaker 2
Yeah, the QIP has begun in Mississippi. You're talking about cash collection of the financing costs. Is that what you're referring to, Mark?
Speaker 6
Yes.
Speaker 2
No, that has not begun. There has been a request for that through the Mississippi Public Service Commission, but that has been preempted timewise by the other issue that they've addressed around the certification order. The timeline is probably going to be mid-year or so.
Speaker 4
It is good we got the order out. That was a good thing to get behind us. You know, with respect to this loan guarantee thing, remember we got our conditional loan guarantee with the DOE, I don't know, some two years ago now. There were a few ends to tie up before we felt we could make the first draw. We still remain hopeful that we'll have loan guarantees. As a matter of course, really, since Solyndra and reasonably recently, the DOE has proposed some new conditions that really relate to, we believe, more project finance conditions rather than a corporate credit, which is underlying the obligation to repay the loan guarantee that we have. We're working through those issues, and we're very hopeful that we'll be able to reach a successful conclusion. Rest assured, we will always act in our customers' interests.
If they ask us to do something that's not in our customers' interests, we won't go forward. I must say that the value that we are bringing to customers since certification has been rather extraordinary in my view, and we'll be successful whether we have them or not.
Speaker 7
Okay, thanks for the detail on that.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Ali Aga with Fund Trust.
Speaker 4
Hey, Ali.
Speaker 1
Hey, good afternoon.
Speaker 4
How are you?
Speaker 1
Good, thanks. Hey, Tom, to be clear on the remarks you've made, particularly as you've looked at the full year, if I'm hearing you right, obviously, when you initiated the guidance back in the beginning of the year, you've always assumed normal weather. You've highlighted how weather has played out. In terms of offset, should we really look at that non-fuel O&M as being the largest tool available for you to work against this unseasonably mild weather?
Speaker 4
That's right.
Speaker 1
Are there other tools or other offsets that you're seeing that could also be positive incrementally?
Speaker 4
We've been on this before in other calls, but that's obviously the biggest one. What we've talked about in depth before is the notion that we have a dynamic budgeting system. We essentially have some projects that are approved and funded. We have other projects that are approved and unfunded, so that if we get better than expected weather, we can do more stuff than we thought we would. We always have the ability to cut back if things don't work out well. Over time, and I'm talking like over a decade now, this has worked exceedingly well. To wit, look at our reliability numbers that lead the industry on so many different fronts. We've been able to provide for the care of our assets for the benefit of our customers in a very effective way.
Given the periodicity of our earnings, you should expect that the flexibility, the optionality within the non-fuel O&M regime will occur once we see what the kind of summer revenues will bring. We're not going to exercise a lot of flexibility and optionality in O&M right now. We're going to wait until we see a little more income, and then we'll be able to respond as we need to. We're completely confident of our ability to continue to do that. Let me also turn to Art here.
Speaker 2
Oh, Ali, one additional thing to think about is the last two years, 2010, 2011, we've had better than normal weather, and we've been able to use that to, in some degree, do some things, fix the roof while the sun's out, is Tom's favorite phrase. We've been able to do some things, and we think gives us a bit more flexibility going into 2012 than maybe a normal year would have. Yes, we still have flexibility and time available to utilize it.
Speaker 1
Okay. Second question, Tom. Coming back to the EPA, is it fair to say that, you know, the rules, particularly on MATS as they've laid out, are now pretty much set, and you and others are now working around that? Are you still thinking there could be significant changes to the timeline, to the rules? As far as the CASPR rule is concerned, I mean, you know, obviously in front of the courts, are you assuming it's back to square one there? Just an update on your current thoughts on the EPA rules.
Speaker 4
Remember when we think about the rules and our compliance, we've got to consider the whole succession of EPA proposals, some of which are out there, some of which are still in the offing at HACCP Act, and it's 316B, and it's Effluence, and it's Coal Combustion Byproducts, and it's Cross-State, and it's Ozone, and everything else, CO2. Look, what we do is represent the interests of our customers as effectively as we can. We think we are uniquely qualified to do that, given that we are the only company in our industry with a deep proprietary research and development effort. We think we were particularly effective in the HACCP Act rule. If you recall, there were 11 issues that we were largely responsible for calling out, one of which related to schedule. The other 10 were of a technical nature.
We believe that we got some accommodation on some of the 10 issues. That has given rise to, as Art Beattie has talked to you before about, a variance in the capital budget with respect to HACCP Act. We kind of estimated, what, up to $2.7 billion over the three-year period. We have suggested that as a result of the final rule, we may spend somewhere between $500 million to $1 billion less, depending on the number of baghouses, the extent to which we'll have to expand transmission systems, gas pipelines, and a variety of other issues. We still need more flexibility with respect to schedule. What you have seen is either us or people of a like mind continuing to effort a change to the HACCP Act rule, all again to benefit cost and reliability.
Speaker 1
Okay. Last question. Can you remind us, Art, what's the expected incremental equity that you've planned for 2012?
Speaker 2
Yeah, we've outlined, I think, the last call, $400 million this year, maybe up to $500 million next year, and about $1 billion in 2014. If we look at the first quarter, we raised about $115 million. That $400 million seems to be right in line with our expectations for the year. Now, those amounts could be less if we decide from the match perspective that we spend less money in the compliance side of that equation. Just keep that in mind.
Speaker 4
If match is $500 million to $1 billion less, we would spend something like 45% to 50% in that, less in equity.
Speaker 2
Yes. Yes.
Speaker 1
Thank you.
Speaker 4
You bet. Thank you.
Speaker 0
Your next question comes from the line of Mark Crosswhite with Scotiabank Global Banking and Markets.
Speaker 4
Hello, Mark.
Speaker 7
Hi, and good afternoon. Thanks for all that color on the coal and gas consumption. How many days of coal burn do you have in inventory at the moment? Could you give us color on how that's trended since the beginning of the year?
Speaker 4
About 60. It's about what we expected. What you see typically in terms of coal inventory at Southern Company would be a trending up going into the peak season, then a drawing down through the summer. That's what you would normally expect to see.
Speaker 7
Great, thanks. When you back in September 2009, when you were hitting very high levels of inventory, were you slightly above 70 days in that period?
Speaker 4
It depends on the plant and really the physical dimensions of the coal pile. What you get into there is these physical limitations driving your need to enter into a plan burn program. We are way less on any plan for a plan burn program this year than we have in the past.
Speaker 7
Great.
Speaker 4
Because we've already taken all the proactive steps that we mentioned earlier.
Speaker 7
Terrific. In general, you've got a lot of fuel flexibility, and that's played itself out over the years. Other than just having gas capacity around, what is it about your system that has made that possible?
Speaker 4
I have this expression, since I've come on, is honor the past and build for the future. I would go back to probably the time in which Alan Franklin was running the traditional utilities. This was actually before he became CEO. He was COO and ran all the Alabama, Georgia, Gulf, and Mississippi. At that time, we decided to balance our portfolio away from coal to gas. At that time, you may remember, there was this notion that, boy, if you could get some CPs, you could make a lot of money all over the place. Interestingly, the way the market evolved during the 1990s, we found it to be a much more kind of long-term play. CPs were way more expensive on a unit basis relative to the value, including the option value that we saw in combined cycles.
What we did, instead of arraying a bunch of combustion turbines all across the system, we tended to buy the more energy-intensive machines, and it has worked so well to our benefit today.
Speaker 7
The CPs are not what's lighting up now, Tom.
Speaker 4
No, that's my point. We bought a lot more CPs, not CPs, and therefore, we have the excess capacity factor capability that's really worked to our benefit.
Speaker 7
Thank you very much.
Speaker 4
You bet.
Speaker 1
Thank you.
Speaker 0
Your next question comes from the line of Michael Lapides with Goldman Sachs Group Inc.
Speaker 4
Hey, Michael.
Speaker 5
Hey, guys. Ask me a couple of questions, and a little bit unrelated to each other. First, could you comment about what you're seeing in small commercial demand? I mean, a pretty big discrepancy between what you're seeing in residential, what you're seeing in industrial, and small commercial. That's first. Second, Southern Power, I would expect for the portion of Southern Power that's uncontracted, you know, the 20% or so, you'd actually be benefiting substantially from some of the coal-to-gas switching that's happening in the Southeast. Surprised just a little bit at the kind of year-over-year decline at Southern Power in the first quarter just due to the commodity price. Third, can you give a little bit more insight at Vogtle, the rebar-related issue? I don't know, kind of dive in a little further about what's happening, what the NRCC, what does that really mean?
Speaker 2
Hi, Michael. Sorry. I'll go after the commercial questions. You know, commercial always lags growth from the residential side. To the degree we start seeing growth on residential, you'll begin to see at some point growth in commercial as well. You asked about small retail, and there was an article in the Atlanta paper a week or so ago that talked about the resurgence of small retail and beginning to see, you know, space in retail shopping centers being occupied more so than they have been in the past. It's beginning to bottom out, I would say. We do have some other trivia about tourism, and the coast is way up over where it was in the past. A lot of that is on the commercial end of the equation.
Speaker 4
Let me jump in. This is pretty interesting stuff. It is a lagging indicator, just as Art said. In fact, the number that you would point to would be office vacancies are kind of like 20% where they would normally be 15%. They are, in fact, lagging. A really interesting leading indicator, if you will, in commercial is that sales tax collections are up 5.8% year-over-year. What that tells you is that the velocity of purchases coming through things like Walmarts and Costcos and a variety of other things are increasing. That is also a function of improved job situation. Personal income is up 4.0% for the Southeast. You are seeing a decent leading indicator even inside of a negative lagging indicator. This all kind of fits together, and we think, you know, has a reasonably bullish story for the future.
Speaker 5
Got it. Okay, the other two items.
Speaker 2
Yeah, Southern Power.
Speaker 5
Yes, sir.
Speaker 2
You're right. We do have some more uncovered this year as we've had some contracts roll off in the first quarter of this year. Uncovered margins have increased, but they haven't offset the loss of the capacity revenues or the energy margins produced by those units that were under contract, say, a year ago, because volumes have just been down. Load is down across the board, and the opportunity to sell those units into the market just haven't been as great as they were, say, a year ago.
Speaker 4
I mean, some of the weather affected, yeah.
Speaker 2
Yeah.
Speaker 4
The last thing was Vogtle, the rebar situation. What did you want on that?
Speaker 5
Just a little bit more detail. What was it that the NRC saw during the inspection? Is it something that's a short-term fix, meaning, you know, the contractor comes in, it takes a couple of days to fix it? Is it something that could balloon into a larger term, longer-term item? Just in whatever detail you can provide, Tom.
Speaker 4
It deals with a very limited part of the rebar structure only in Unit 3, and it deals with the configuration of the rebar as it meets the wall structure. It's that finite detail, and it has to deal with, does it terminate directly into the wall or does it turn up? There is a solution that we're working through. I don't want to jump ahead of the NRC finally ruling in on this, but all I can say is it's not going to be anything that, in my opinion, materially impacts any of the schedule or materially impacts any of the cost. Otherwise, it's just this limited part of the rebar in Unit 3. For example, the steam turbine island and the rest of the rebar and everything else continues elsewhere. It's not like there's a giant work stoppage on the site.
It's just with respect to a limited part of the structure.
Speaker 5
Got it. Okay. Thank you, guys. Much appreciated.
Speaker 4
Mike, the point is these things will happen. What we're trying to convey to everybody is these things will happen. You'll hear about them. Certainly, if there's a material impact, we will certainly let people know.
Speaker 5
No, understood.
Speaker 0
Your next question comes from the line of Greg Gordon with ISI Group.
Speaker 4
Hey, Greg.
Speaker 6
Thank you. Sorry I got on your lead. By the way, Jim Cramer has nothing on you, Mr. Fanning. You crushed him on CNBC today.
Speaker 4
Yeah, I can't believe my corporate filters didn't stop your email today. Very intuitive.
Speaker 6
You look very handsome. I thought you definitely had some makeup on. I'm just wondering, as you guys think about this incredibly dynamic energy market that we're in with how gas has moved versus coal and different types of coal have moved versus each other, and you look at the spending that I know you've kind of answered a bunch of questions that relate to this, when you look at your overall capital spending plan over the next several years, do you still feel like the aggregate of what you will be compelled to spend to provide reliable service to customers still puts you firmly in sort of a capital intensity level that corroborates your earnings growth expectations? How do we think about how capital is going to move from coal to gas, no longer need to spend on environmental, but maybe there's incremental spending on pipeline infrastructure?
How does this all coalesce to you guys still feeling comfortable that you've got the same earnings growth prospects that you had two years ago?
Speaker 4
That's a heck of a question. You know what? Here's what I'd say. We're very confident in our three-year projection, which is what we're about. You're asking kind of the broader question, what does it look like? Let me give you an estimate of that optionality in 2020. You know, if natural gas could move from as low as $34 to as high as $57, with coal being as low as $22 and as high as $45, we see nuclear and hydro and other perhaps renewables and other things being around $21. What you're really asking that I think fills in the gap that we haven't talked about is, I think we were pretty well set for new capacity probably through the end of this decade, right? We've done Plant McDonough. We're doing plant rack with the Kemper County energy facility. We're doing Plant Vogtle 3 and 4. Plant McDonough.
We brought back Miller from wholesale to retail in Alabama. There may be some other expansions of gas assets, I think particularly in Georgia, that we will see. There may be some other things that we start to pick up that we really haven't talked about very much. The reason we haven't talked about it is because, in fact, they're unknown. For example, it may be, we're very happy, frankly, with our experience so far on Plant Vogtle 3 and 4. It may be that we have future nuclear expansion. To the extent we need to have more nuclear units in sight to keep this portfolio balanced, say we need that by the middle of the next decade. That would presume you start spending money the middle of this decade.
The other issue that we will see potentially is more CapEx associated with this litany that is continuing succession of other environmental matters, ASH 316B, and you name what else. It seems like there's always something out there. The only thing that we comment on specifically is our three-year growth projection, but we see lots of other things going. One last item, when we think about Southern Power going forward, we always think to ourselves, what a wonderful gas-oriented option that is. You know, it's something like 98% gas fired in the Southeast. We have great relationships. They've entered into a lot of what we call flow requirements customers that not only picks up current loads, but also allows them to build for future growth in the co-ops and munis markets where they specialize. As the economy picks up, we think there will be greater contributions from Southern Power.
For all those reasons, we follow the dividend policy that we do. Regular predictable sustainable increases in earnings per share permit us to increase dividends per share at a rate well above the rate of inflation. That's what we've done. It's what we plan on doing.
Speaker 7
The next three years, things haven't, despite really, things haven't shifted all that much under your feet. Beyond three years, there's a lot of different levers to pull depending on how the economy looks, but they're there.
Speaker 4
Yeah, exactly. The only thing that we've noted has been the HACCP Act and the potential for, you know, $500 million to $1 billion less on that, whatever it was, $18.4 billion aggregate number. That was mostly in 2014.
Speaker 7
Gotcha. Thank you, guys.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Andrew Evans with Bank of America. They're all in.
Speaker 4
Hey, Dave.
Speaker 2
Hey, Tom. How are you?
Speaker 4
Excellent. Hope you're well.
Speaker 2
Yeah, doing great. Thanks. Just a little more detail on some of the coal-to-gas data. Do you have handy just this quarter of 2012 versus the first quarter of 2011, the changes, what your gas capacity factors were, and what your coal capacity factors were?
Speaker 4
I'll do it from, do you have it versus 2011?
Speaker 2
Don't have it versus 2011.
Speaker 4
I'll go from memory. We'll get back to you on that. Do you have it?
Speaker 2
Okay.
Speaker 4
Capacity factor.
Speaker 2
Oh, capacity.
Speaker 4
Yeah, I know what you want.
Speaker 2
I'm going to say that, you know, a normal kind of capacity factor in the past was in the 30s. We saw it start to creep up a little bit last year. We need to come back and check this, all right? This is memory. I want to say we got into the 40s and we even bumped into the 50s a couple of times last year.
Speaker 4
Okay.
Speaker 2
Nothing like.
Speaker 4
We can circle back on that. Yes.
Speaker 2
Yeah, nothing like where we are now. We can get you absolute detail there.
Speaker 4
Okay. Just on your, I know this has been brought up a little bit, I think, just on your kind of when you're looking at your sales plan for the year, whether normalized, you know, how are you feeling on how that's tracking? I know it's still on, it's just one quarter.
Speaker 2
You know, as in weather, the economy is better than we thought it was. Remember, I guess we were projecting a GDP growth rate of around 2.6%, and normally electricity follows at about 60% of that growth rate. We've talked about that in the past. We've ratcheted that down to about 1.3%, so 50%. There are some other effects. Other people are estimating GDP growth this year to be 3%, not 2.6%. If we continue to have a 60%, not 50% kind of relationship, you could see an upward bias on the economy this year. We'll see. Time will tell. The only thing I can say right now is we're off to an awfully good start.
Speaker 4
Great. Okay, thanks a lot.
Speaker 2
You bet.
Speaker 0
Your next question comes from the line of Kit Connolly with Connolly Research.
Speaker 4
Hey, Kit.
Speaker 6
Hey, guys. How are you?
Speaker 4
Awesome.
Speaker 6
I wouldn't want to leave coal to gas with just 10 questions or so. Could you give us a little sense of, you know, I'm sure your folks are starting to think about what new contracts might look like with coal suppliers. Can you give us any sense of what you're seeing or thinking or anticipating about trends in coal pricing over the next, you know, two, three, four, five years?
Speaker 4
Wouldn't want to comment too much on that, but there are some very interesting dynamics that are going on. As we have suggested in the script, we believe that our flagship units will be robust energy providers well into the future. To the extent we make trades in term length of contracts, I think we can have more assurance that those units will be in place. If you think about kind of a term structure, we'll shorten up, obviously, on the marginal units and go longer potentially on the flagship units. You could see that, right? The other thing that we have seen is, obviously, when we think about our flagship units, you have Shear, Miller, and some other PRB potentially blending operations. More of an orientation towards Western coal rather than certainly Eastern coal. The other thing that would be a trend, I suspect, would be this.
We've always used kind of imported coal as a check against Central App, particularly, and perhaps others. You may see a little bit less of that, only because Central App seems to be less of a viable solution going forward. With respect to price, there's all sorts of things at play that are really unknowable at this time. One of the things we've suggested in that whole HACCP Act issue is if the objective of certain parties was to reduce the consumption of coal in the world, our coal is probably going to be exported to people like China and others, and it's going to get burned. It just won't be burned here.
If exporting markets do open up, as we think they might, and in fact, I want to say, and somebody's got the statistics here where the exports of coal was as high as it's ever been, at least in the quarter or for the year or something like that. Pretty high exporting of coal. You're going to see prices be a little stronger than otherwise you would think if only you were looking at domestic demand. Interesting stuff all the way around. Hard to predict what the future will hold. That's why it's so important to play to a portfolio as we do.
Speaker 6
Thank you.
Speaker 4
You bet.
Speaker 0
Your next question comes from the line of Jay Dodson with Wonderlic Securities.
Speaker 4
Hey, Jay.
Speaker 5
Hey, Tom. How are you?
Speaker 4
Excellent. Hope you're well.
Speaker 5
Very well. Thank you very much. Hey, just a quick question. Again, on coal to gas, you indicated you might burn 600 BCF in 2012, and we're making a comparison to 2007. I wonder what that comparison was for 2011?
Speaker 4
We actually have that. Somebody's got that. We actually do have it. Unbelievable. 400, I'm eyeballing a chart. 430.
Speaker 5
Awesome. To the coal side, you're sort of thinking more about the rail component of that. Can you talk a little bit about what contract flexibility you have and how much you're going down the road of renegotiating those contracts and how flexible the rail are being with you?
Speaker 2
Yeah, Jay, this is Art. Most of the rail contracts we have are full requirement contracts that don't require minimum values. When we look at terms, they're from one to six years, and we try to match up our coal in coal contracts and our other commodity contracts that we have for our plants. Longer-term contracts are tied, obviously, as Tom mentioned earlier, with our flagship units, which are going to be burning a lot of Powder River Basin coal over that timeframe. It depends on the contract and where the coal is needed and what kind of coal they're going to burn.
Speaker 4
Even when you consider all the fuel switching that's been going on in the United States, we remain an important coal consumer and an important customer of the railroads. I know I did this, gosh, back when I was CFO when rail delivery issues were of paramount importance. One of the things some other people did in the past was to build these short line railroads, and that's given us a great deal of flexibility in working constructively with our friends in the railroads.
Speaker 5
Gotcha. The full requirements nature of the contract essentially gives you the flexibility I'm talking about, so there really isn't a lot of renegotiation going on.
Speaker 4
No, there is an ongoing level of renegotiation. It's nothing that is extraordinary.
Speaker 5
Okay. Perfect. On to Vogtle, and I'm speaking specifically, Tom, of the dispute you mentioned regarding COL and DCD timing. Can you give us sort of a sense of the aggregate dollars that are in dispute?
Speaker 4
Hang on. I don't think that's been disclosed. Let me kind of beg off on that. We'll get to it later. You should just know, here again, there have been lots of commercial claims back and forth and all that already. We don't talk about those as a matter of course, only because they need to get viewed as kind of a basket. If we got into disclosing every commercial claim, whether it was sensible or not, and timeframes and everything else, as a practical matter, that's just not a good thing to do. As we get significant commercial claims, obviously, if it's material, we'll let you know. It'll be disclosed. Otherwise, until things are in the form of a formal claim, probably not good to talk about.
Speaker 5
No, absolutely appreciate how those things work. I guess maybe the better way to ask the question is, you know, how closely are you coordinating with your neighbor in South Carolina who, you know, basically already had these issues and settled them? They did talk about the number. That's why I was trying to get, and I'm not forcing you to give a number. I'm just trying to say they've been through this. Do you guys coordinate with them or talk with them or?
Speaker 4
Okay. They have a completely separate regime. In other words, they have a completely separate contract. I can't speak at all to the nature of their contract. All I can speak to is our experience. They obviously settled a claim.
Speaker 5
They did.
Speaker 4
We don't have a claim yet. We do know that.
Speaker 0
is a dispute around schedule. We do not have a client, and therefore we are not in a position to talk about it, other than to mention that there is one.
Speaker 6
Okay. Fair enough. Last question on Vogtle, back to the rebar issue. This was an issue versus the DCD? The Shaw Westinghouse didn't install it properly, or was there a problem with the DCD?
Speaker 0
I don't want to get too far into this one either. There will be a time for this one to come out. It really deals with, did the rebar, as it was installed near the wall section, meet the DCD requirement? That, I think, is the question.
Speaker 6
Gotcha. Nope, that answered the question perfectly. Thank you very much, Art, Tom. Appreciate the time.
Speaker 0
You bet. Thank you.
Speaker 4
Your next question comes from the line of Paul Patterson with Glenrock Associates.
Speaker 6
Hey, Paul.
Speaker 2
Hey, how's it going?
Speaker 6
Excellent.
Speaker 2
I just wanted to touch base with you to make sure I understood the load growth. Steve was asking us, it sounds like you guys are, on a weather-adjusted basis, still sort of sticking with the 1.3% load growth, but that it looks like it might be better because of stronger economic growth. Did I understand that right?
Speaker 6
You said it perfectly.
Speaker 2
Okay. Excellent.
Speaker 6
We're off to a good start.
Speaker 2
Okay. The second thing I wanted to ask you was the dividend policy. You mentioned about the potential for dividend tax change and your efforts to communicate investors' concerns. What if the taxes were to revert to the pre-Bush tax cuts, which is one of the potentials we see here with the less than perhaps a cooperative Congress? If that happens, does that change the Southern Company philosophy on dividends and payouts and what have you?
Speaker 0
Not in the near term. You know, one of the hallmarks of our dividend policy is one that is regular, predictable, and sustainable kind of characterization to it. It is so important in financial signaling theory to be consistent with your approach. We would have to believe that there was a fundamental long-term change in order for us to deviate, and we would only do that with extreme care. We really like the track that we're on. In fact, we've got all kinds of interesting statistics. I'm just dying to do one here. Companies that have increased their dividends over 2%, that has a yield over 2%, and increased their dividend over 2% over the last decade and have a positive TSR. There's only two companies in the S&P 500. We're one of them. We feel like this really inures the value accretion to our shareholders.
With respect to the public policy point here, you know, we've got to stay away from partisan politics and go to what's right for America. We shouldn't be pulling levers to increase our national revenue, if you will, when there are other more effective levers. Recall that if we tax capital formation, we actually hurt the ability of the economy to grow CapEx and therefore grow jobs and therefore grow personal income and therefore grow taxes. This is exactly the wrong policy to take at this time. One last point. When you consider stocks that have high dividend yields, those are particularly attractive during periods of low economic growth or high relative risk. That is exactly the global economic environment in which we are in.
Why in the world we would incent investors to be pushed into riskier capital gains-oriented investments and away from lower risk dividend yield-oriented investments is beyond me.
Speaker 2
Okay. We'll see what happens. Now, the other thing I wanted to ask you was just on the market response rates that impacted you guys a couple of years ago in sort of a significant way. Is there any impact that we're seeing associated with that, with this sort of unusual gas versus coal or anything like that that we should be thinking about?
Speaker 6
Yeah, Paul, they amended those in the last rate case such that they tied the fuel cost associated with the marginal fuel cost of whatever hour that energy was demanded. The volatility that we saw several years ago around those RTP rates is no longer there. If you look at it now, it's just not enough to solve it.
Speaker 2
Okay, great. Thanks a lot.
Speaker 6
Thank you.
Speaker 4
Your next question comes from the line of Dan Jenkins with State of Wisconsin Investment.
Speaker 0
Hello, Dan.
Speaker 1
Hi, good afternoon. First thing I was wondering was related to the financing plan. It looks like you issued about $1.25 billion of debt in the first quarter. On your financing plan, you mentioned that the DOE loans could be $2.3 to $2.8 billion in 2012. I guess I'm wondering, how should we think about the mix between the DOE as a source and the primary bond market as a source of financing for the rest of the year?
Speaker 6
Great question. We've got, actually, we issued $1.4 billion in the first quarter of new debt. When we look at the rest of the year, we think we've got about $2.6 billion left to hit our almost $4 billion target. To the degree that we don't get the loan guarantees, we'll be going to the markets to raise that capital. The markets have been in terrific shape to be able to handle that. We'll just have to wait and see where these loan guarantees end up from a benefit to the customer perspective.
Speaker 1
Okay. Do you have, I guess, what are the criteria that would determine, you know, the markets the better way to go or the DOE?
Speaker 6
It just depends on the terms and conditions that within SADD that the Department of Energy might require us to agree to in order to get the loan guaranteed. There are certain aspects of that that we're just not willing to do.
Speaker 0
Dan, we could fill you up with what that is. I don't think that's productive. We have the negotiation going on. Let's see if we can get through it.
Speaker 1
Okay. I was curious, I might have missed this at the beginning because I didn't get through right away, but on the nuclear construction, what are the main critical path items that we can look for in 2012, you know, so we can, as outsiders, monitor the progress and make sure that we're still on track?
Speaker 0
I think there's several issues going on right now. The shield building and the components related to the shield building are probably the most important. In fact, we've talked about this on prior calls in terms of helping you all, and I think that's our obligation to help you all understand kind of the major milestones and how we're moving forward right now. We'll provide that to you. Maybe we'll do a special call or maybe we'll do something, but we owe you that, I think, in the future. I would say in the near term, it's getting the concrete poured, it's getting the shield building in place, and moving ahead. Those are probably the, I would guess, the big items related to steel production are the big critical path issues right now.
Speaker 2
Yeah, I agree with that.
Speaker 1
Okay. Kind of related to the revenue impacts, you had $0.05 in the quarter of positive impacts. How were those spread between the operating units, and how much of that was rate increase versus stronger than expected demand?
Speaker 6
It is a mix of both, but you've got some interim rates going on at Gulf that were into effect. Alabama had a rate T correction that took place in the fall of last year that actually started going to benefit earnings in 2012. That's the majority of it. The rest would be adders from a little bit of growth that we're seeing.
Speaker 1
Okay, that's all I had. Thank you.
Speaker 0
Thanks, Dan.
Speaker 4
Your next question comes from the line of Jonathan Arnold with Deutsche Bank.
Speaker 6
Hey, Jonathan.
Speaker 3
Oh, my question was off. Thank you, Tom.
Speaker 6
All right. Hey, Dan.
Speaker 4
Your next question comes from the line of Michael Lazides with Goldman Sachs Group Inc.
Speaker 6
Michael again?
Speaker 7
Yeah. Hey, guys. Sorry. Real quick, Southern Power, two items. One, are you still 80% contracted? I think as you disclosed at one point at the end of last year, you've talked about having some contract roll-offs at the beginning of this year impacting Southern Power. Two, would you ever, I mean, Southern Power, you know, 8 gigawatts plus now, getting pretty sizable. Do you ever think about whether there are other alternatives for Southern Power, whether, you know, to monetize it somehow, separating it from the rest of the utility business?
Speaker 6
Yeah, Michael, that's hard. On the contract coverage through 2016, we're about 80% covered. We've had some contracts go off, but we've also got some new ones signed up under the Georgia IRP decision. They approved about 1,000 megawatts of Southern Power capacity coming on in 2016 or the 2015. 2016, yeah.
Speaker 0
15.
Speaker 6
Those, you know, you're going to lose some, you're going to add some back. That's the nature of the contract situation at Southern Power.
Speaker 0
Now, your other question is a very interesting one, and we have talked about that a lot in the past. You remember there was, I forget what it was, three or four years ago, the multiples on these kinds of contracted assets were really at a very attractive level. When you think about what Southern Power is, we really would need to be very conscious of our customer impact there. When you think about having a full requirements relationship in our territory with particularly co-ops and munis who we have a long-standing relationship with, it is conceivable that you would consider other potential owners, whether you sold it outright, sold a minority position, or did a variety of things. I think those kinds of decisions are more likely with, perhaps, if you will, the non-core pieces of Southern Power, particularly those that are outside our territory.
Now, one other item I would say, and a place outside our territory that we particularly like and we're gaining critical mass in, is in the Carolinas, Roland and some of the others, Cleveland County. We're developing a very good relationship. When you think about the nature of our service to our customers, it goes more than kind of a one-off hit-and-run strategy. We are built to last. Our assets have an economic life of 40 years or longer. I think one of the hallmarks of our industry is a long-term view. We believe in cultivating the relationship before we need it. We believe that the relationship, therefore, as we continue to grow our business in these areas of concentration, really matters. We take the how, if you will, into account as much as the what in terms of valuing that business.
Speaker 7
Got it. Okay. Thanks, Tom. Hey, just following up on your comment, does that imply you're less contracted now versus kind of that 80% average, meaning for the next two or three years and you kind of ramp up into that, or is it kind of a flat annual average over time?
Speaker 6
It fluctuates over time. In 2012, we're about 84% covered. 2013 drops to 81%. As the numbers kind of move around, it gets you to the 80% number by 2016.
Speaker 7
Got it. Go ahead.
Speaker 6
That's kind of the nature of it.
Speaker 0
Of course, the further out you go, it kind of has a long, slow slope down. We kind of have that intentionally in order to give ourselves some option value with the assets we have to sign things up later. A little bit of flexibility ain't all bad.
Speaker 7
Good, they're great assets. Totally understand. Thanks, guys. Much appreciated.
Speaker 0
You bet. Thank you.
Speaker 4
Your next question comes from a line of Anthony Christopher Crowdell with Jefferies LLC.
Speaker 5
Hey, Dan. How are you doing? Good afternoon. Just a quick question on Southern Power. When we're forecasting Southern Power, is the way to go about it assume like you guys view that as maybe like a regulated business and all the contracts you enter, you look for, say, a mid-teens ROE on whatever the asset value is, or treat that business as like a full merchant portfolio and kind of price it to, you know, wherever current forwards are or something like that?
Speaker 0
We don't disclose the internal rate of return of any contract, but we use as a general planning criteria about a 150 basis point premium on the contracted resources that we have. That's a general kind of statement. For the uncovered portion, which you look for as kind of a what's a reasonable expectation as to the energy margin, last year, I think Southern Power earned $162 million, somewhere around there. Right. That's a decent benchmark to use for last year. Use the criteria I just gave you and estimate for this year.
Speaker 7
Great. Thank you.
Speaker 4
At this time, there are no further questions, sir. Are there any closing remarks?
Speaker 0
No. Listen, we really appreciate everybody's attentiveness. We always enjoy these calls. It's always fun to chat about not only the issues related to Southern Company, but the issues related to our industry in America. We appreciate your following and look forward to chatting with you in the future.
Speaker 4
Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company first quarter 2012 earnings call. You may now disconnect.