The Southern Company - Q4 2011

Transcript

Operator (participant)

Good afternoon. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to The Southern Company Fourth Quarter 2011 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Mr. Dan Tucker, Vice President of Investor Relations and Financial Planning. Please go ahead, sir.

Dan Tucker (VP of Investor Relations and Financial Planning)

Thank you, Carrie. Welcome to The Southern Company's Fourth Quarter 2011 Earnings Call. Joining me this afternoon are Tom 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. 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'll also be including slides as part of today's conference call. These slides provide details on the information that will be discussed on this call. You can access the slides on our Investor Relations website at www.southerncompany.com if you want to follow along during the presentation. Now, at this time, I'll turn the call over to Tom Fanning, The Southern Company's Chairman, President, and Chief Executive Officer.

Tom Fanning (Chairman, President, and CEO)

Good afternoon, and thank you for joining us. As you can see from the materials we released this morning, we had a solid year overall in 2011. I'm especially pleased that in a business environment filled with challenges and uncertainties, our system still performed in an exemplary fashion, delivering exceptional value to customers throughout our territory. I'm also proud to report that on January 5, we celebrated our 100th anniversary as a holding company. You may be aware that on that day, Art Beattie rang the opening bell at the New York Stock Exchange. We were tapped by the New York Stock Exchange as a charter member of their new Century Club, and we held a celebration in Atlanta that featured our four most recently retired CEOs, as in Bill Dahlberg, Alan Franklin, and David Ratcliffe.

Few businesses can claim to have been around for 100 years, but Southern Company is now one of them. Even as we honor our past, we're already building for the future, harnessing the energy and innovative spirit of our more than 26,000 employees to begin our next 100 years. Against that backdrop, I'd like to take a moment to update you on where we stand with our five strategic business priorities. First, remaining committed to our business model. We continue to provide superior customer value in the form of industry-leading reliability, low prices, and exceptional customer service. The 2011 peak season equivalent forced outage rate for our baseload generation was 1.3%, the second best in our company's history, and it compares to a historical industry average of around 7%. We also continued a long-term trend of improved performance for our transmission and distribution assets.

Our employees performed heroically in restoring service to customers throughout 2011, during a series of catastrophic storms that included ice storms and tornadoes. Meanwhile, the price of our product remains well below the national average, and our customer satisfaction is among the best in the nation. These results and others are indicative of our strong commitment to customer value and are also a major reason Southern Company was named Power Company of the Year in December at the Platts Global Energy Awards. Second, achieving success with our major construction projects. Plant Vogtle Units 3 and 4 and Plant Ratcliffe in Kemper County, Mississippi, are progressing well. All targets related to cost and schedule remain achievable. Receipt of the combined construction and operating license, or COL, for Units 3 and 4 at Plant Vogtle is imminent.

In the meantime, nearly 2,000 workers are moving ahead with work on the site under the parameters of the original limited work authorization. Once the COL has been obtained, we will begin placing rebar in the Unit 3 nuclear island to prepare for the pouring of the first concrete for the containment structure. By year-end 2012, we expect to increase the number of workers at the Vogtle site to 2,650, ultimately reaching a peak of approximately 5,000 workers in 2014. The Vogtle project will ultimately impact some 25,000 jobs across the country, offering a much-needed boost to our nation's ongoing economic recovery efforts. At Plant Ratcliffe, we continue to make progress as we prepare to introduce 21st-century coal technology to the United States. As of December 2011, we have already confirmed 2/3 of the project cost and expect to have confirmed nearly 90% by the end of 2012.

We have 1,100 workers on site today and expect to have around 2,000 at the project's peak. Third, arguing for a sensible national energy policy. We continue to promote the concept of a common sense national energy policy that leverages all the arrows in the quiver: nuclear, 21st-century coal, natural gas, renewables, and energy efficiency, and develop technology solutions, not rhetoric, through proprietary research and development. On the regulatory front, we are currently reviewing and assessing the EPA's final 1,100-page order for utility MACT, now referred to as Mercury and Air Toxics Standards, or MATS. Our focus remains on finding the solution that is in the best interest of our customers. We are also involving other key constituencies in this review, including the communities we serve, as well as our state public service commissions and permitting agencies. We will discuss the MATS rule in greater detail later in this call.

Fourth, promoting smart energy. We are focusing R&D efforts on promoting clean, efficient, and economic electro-technologies to grow our share of energy sales. This year, we expect to achieve major progress adding to our smart grid infrastructure as we near completion of the addition of more than 4.6 million smart meters for customers throughout our territory. This initiative will lead to better data gathering, faster restoration times, and improved power quality, and provides one more illustration of our commitment to enhancing the value we provide to customers. Fifth, developing our people. I think it's interesting to note that our results in 2011 were achieved with about 25% of our officers in new positions.

In addition to leveraging our own outstanding bench strengths, we also brought in a few key leaders from outside the company, and we completed more than 400 transfers of employees between our various subsidiaries, further proof of our commitment to keep developing our workforce. The result of this is a more diverse, more experienced, and better functioning leadership team. Elsewhere, we continue to make strides in our efforts to build our reputation as an employer of choice. Since our last earnings call, we've been ranked by GI Jobs Magazine as the number one military-friendly employer among all U.S. utilities and the second highest among all U.S. industry. We were also recognized as one of the best places to work in America by Business Insider Magazine.

In summary, as our business continues to grow and evolve, we will pursue the successful achievement of these five priorities, all for the benefit of the customers and the communities we serve. At this point, I'll turn to Art for a discussion of our financial highlights for the fourth quarter and the full year, as well as our guidance for 2012 and a summary of our financial outlook for the future.

Art Beattie (EVP and CFO)

Thanks, Tom. First, I will review the fourth quarter and full year 2011 results. Then I will discuss our sales data, economic outlook, and sales forecast, followed by our capital budget and 2012 financing plan. I will conclude with our earnings guidance. As Tom said, our performance for the fourth quarter of 2011 was solid, as was our performance for the full year. In the fourth quarter of 2011, we reported earnings of $0.30 per share, compared with $0.18 a share in the fourth quarter of 2010, an increase of $0.12 a share. For the full year of 2011, we reported earnings of $2.57 a share, compared with $2.37 a share for the full year of 2010, an increase of $0.20 a share. Let's turn now to the major factors that drove our numbers for the full year 2011 compared with the full year 2010. First, the positive factors.

Increased industrial demand added $0.02 a share for the full year 2011 compared to the full year 2010. Retail revenue effects in our traditional business added a total of $0.60 a share to our earnings for 2011 compared with 2010. Most of this increase was the result of regulatory actions at Georgia Power that became effective in 2011. Other operating revenues, primarily increased transmission revenues, added $0.02 a share to our earnings in 2011 compared with 2010. Changes in our non-fuel O&M spending for our traditional operating companies increased our earnings by $0.06 a share in 2011 compared with 2010. This effect is due primarily to reductions in O&M spending in 2011 as compared to increased spending in 2010 that resulted in better than expected weather-related revenues in 2010.

A reduction in interest expense for our traditional operating companies increased our earnings by $0.02 a share during 2011 compared with the full year of 2010. The addition of new long-term contracts and higher energy margins at Southern Power, driven largely by the low price of natural gas, increased our earnings by $0.04 a share in 2011 compared with 2010. Finally, lower parent and other expenses increased our earnings by $0.01 a share in 2011 compared with 2010. Now let's turn to the negative factors that drove our earnings for the full year 2011. Weather effects reduced our earnings by $0.21 a share during 2011 compared with 2010. Weather was actually positive for the year, coming in at $0.09 above normal, but was negative when compared with the same period in 2010, which came in at $0.30 above normal.

Lower wholesale revenues at our traditional operating companies reduced our earnings by $0.05 a share in 2011 compared with 2010. This decline in revenues is primarily due to the expiration in May of 2010 of a long-term capacity contract. Increased depreciation and amortization reduced our earnings by $0.15 a share during 2011 compared with 2010. Most of this was due to the expiration at the end of 2010 of the Georgia Power cost of removal accounting order and also to increased environmental, transmission, and distribution investments. Other income and deductions reduced earnings by $0.05 a share in 2011 compared with 2010, the most significant contributor being a transition from AFUDC to cash recovery for Plant Vogtle construction financing costs.

Income taxes in our traditional business reduced earnings by $0.01 a share in 2011 compared with 2010, while taxes other than income taxes reduced our earnings by $0.02 a share in 2011 compared to 2010. Finally, an increase in the number of shares outstanding reduced our earnings by $0.08 a share in 2011 compared with 2010. In conclusion, we had $0.77 of positive items compared with $0.57 of negative items, or a positive change of $0.20 per share over the full year 2010. Overall, our performance for the year came in at $2.57 per share. Before I discuss our earnings guidance for 2012, I'd like to update you on our 2011 sales and the outlook for 2012, as well as our capital budget and financing plans. We'll begin with a look at our 2011 retail sales. In 2011, weather-normal retail sales grew 1% compared with 2010.

Meanwhile, GDP growth for 2011 was 1.8%. Sales growth was driven by the continued recovery of industrial sales, which grew 3.2% in 2011 compared with 2010. Industrial growth continued to be led by primary metals and fabricated metal sectors, which grew by 15% and 11% respectively in 2011 compared to 2010. These sectors were driven by demand for flat steel in the auto industry and steel pipe associated with oil and gas exploration and delivery. Petroleum refining and pipelines increased usage by 13% and 8% respectively in 2011, following expansions in production capacity. Other steady performers in 2011 included the transportation sector, up 4%, and chemicals, up 1%. As we have reported all year long, construction-related sectors, particularly related to housing, continue to experience weakness. Analysis suggests that a great deal of the positive industrial performance can be traced to increases in export activity.

The value of exports from the region is 25% higher today than in 2007, and market diversity has increased, with exports to Europe dropping by almost 1/3 and market share to Asia and Central and South America expanding. Residential and commercial sales continued to be flat in 2011 due to weak job growth. Now let's move on to the economic outlook for 2012. Earlier this month, we reconvened our economic roundtable group, which is composed of regional economists and major industrial and commercial customers served by our operating companies. The observations of the group, which are consistent with our own view, can be summarized as follows. The national economy is expected to grow in 2012, but growth will be weak and sensitive to shocks. GDP growth is expected to be between 2% and 3%. The industrial sector will continue to lead the recovery, with exports playing a major role.

The European economy will be a risk factor that could slow global economic growth. Employment is expected to grow, but not enough to significantly reduce unemployment. Job growth and increased availability of credit are keys to improving the housing market, which is a linchpin to the improvement of residential and commercial sales growth. Political and regulatory uncertainty is contributing to the lack of clarity about the pace of the recovery of the economy. Translating this into implications for sales, we project that based on a GDP growth assumption of 2.6% in 2012, retail sales growth will be 1.3%. Industrial activity is expected to continue to lead our sales growth at 1.6%, as export volumes remain strong and domestic demand increases. Manufacturing productivity is expected to continue to increase, aided by the ability of our region's outstanding port facilities to reach out to new markets and create new opportunities for growth.

Weak job creation is expected to continue, tempering residential and commercial sales growth. Residential sales are expected to grow at 1.3% in 2012, while commercial sales growth is expected to be 1.1%. The good news is that once the economic fog clears, stronger growth in the Southeast economy should return, given the strong long-term growth fundamentals of the region. Economic development activity remains steady, with more than 250 prospects considering locating within our territory, representing more than 40,000 potential jobs. The auto industry remains a strong player in the recovery. In 2012, Kia will expand its manufacturing capacity, adding 1,000 jobs, and a variety of auto-related companies will likewise add jobs this year. Meanwhile, Mercedes-Benz has already begun work on its previously announced expansion, which is scheduled to be completed in 2014.

All of this indicates a continuing preference to locate in the Southeast, which reflects our region's low cost of living and of doing business, abundant labor, and favorable climate. We remain confident in our region's ability to continue its ongoing recovery. Now I'd like to move to a discussion of our capital expenditure forecast for the next three years. Similar to last year, our forecast is composed of two major elements: our base forecast and potential compliance investments, which represent the uncertainty associated with MATS, as well as anticipated new coal, ash, and water rules. Our base forecast for 2012 through 2014 totals $14 billion. This reflects new generation for our traditional operating companies of $4 billion, including $2.2 billion for Plant Vogtle Units 3 and 4 and $1.5 billion for Plant Ratcliffe in Kemper County, Mississippi.

Other major components of this base forecast include maintenance capital of $4.3 billion and $1.8 billion for transmission and distribution growth investments. A crucial factor in the potential compliance investment portion of our capital forecast is the impacts of the EPA's new MATS rule. As Tom Fanning indicated earlier, we are reviewing the final rule issued in December, but a number of uncertainties remain. I would like to summarize those briefly. In the process of going from proposal to final rule, the Edison Electric Institute recommended 11 modifications to the EPA. One of these was related to the compliance timeline, while the others were more technical in nature. The final rule, which we expect to be published by mid-February, did not grant much additional relief on the compliance timeline. There were some technical adjustments, particularly to the particulate matter standard and the plant-wide averaging, which may provide some additional flexibility.

There were other changes as well, including emission limits during startup and shutdown that were offered. Much more analysis is needed before we know whether these changes afford us additional flexibility. As Tom indicated earlier, we are engaged in discussions with community officials and state regulators to incorporate their input into our compliance plans. We are fortunate to have strong community leadership and knowledgeable, constructive public service commissions and staffs in our territory. The participation of those entities will have an influence on our compliance plan and schedule decisions, and we cannot finalize our plan until those discussions are complete.

Based on our initial assessment, the compliance plan for Southern Company's 20,000 MW of coal-fired capacity could include the following: new emissions reduction equipment, primarily baghouses, on up to 12,000 MW of our flagship coal-fired capacity, potential retirements of up to 4,000 MW, and fuel switching on up to 3,200 MW of coal and oil-fired capacity to other fuels, such as natural gas. Our plans also include significant infrastructure improvements, including natural gas and electric transmission upgrades to ensure adequate reliability on our system. Based on that, our potential compliance investments for 2012 through 2014 are projected at a total of up to $4.4 billion. Of that, up to $1.6 billion represents potential compliance investments for other proposed rules around ash and water. Overall, our three-year capital forecast for 2012 through 2014 is for a total of up to $18.4 billion.

The major trend reflected in this forecast is that the potential compliance spending is ramping up as some of our base projects are winding down. The three-year breakdown also reflects that our potential compliance spending of up to $400 million in the first year is not a major component for 2012. We will continue to update you on our capital forecast as new details emerge. Now let's turn to a summary of our financing plan for the same three-year period. Long-term debt issuances are expected to be up to $10.4 billion over the next three years. In addition, DOE loan guarantees for Plant Vogtle Units 3 and 4 and for Plant Ratcliffe in Kemper County, Mississippi could represent up to $4.3 billion, or about 40% of the total. Our three-year financing plan assumes common equity issuances of up to $1.9 billion.

We stopped issuing new shares through most of our equity plans in early 2011. Since then, we have only utilized stock option exercises to provide new equity. We ended 2011 with an equity ratio of 44%, and our current plan assumes modest common equity issuances over the next two years. We anticipate turning our other equity plans back on later in this three-year horizon as potential environmental compliance spending increases. Overall, our financing plan continues to support our industry-leading financial integrity while maintaining our well-managed debt portfolio and a common equity ratio of approximately 44%. To begin our earnings guidance discussion, I'd like to take you back to what we shared with you during our Fourth Quarter Earnings Call a year ago and at our Analyst Day shortly thereafter.

At that time, we provided long-term EPS guidance that was based on our 2010 earnings guidance range of $2.30-$2.36 per share. We profiled a trajectory that grew the bottom of the range by 5% every year and the top of the range by 7% every year. As we said, our 2011 guidance was slightly higher than our long-term trajectory, largely due to the significant year-over-year improvement in earnings we saw coming out of the recession and some of the constructive regulatory results. We are providing a 2012 earnings guidance range of $2.58-$2.70 per share. This guidance reflects current uncertainties and normal variability. We believe our 5%-7% long-term growth trajectory, which is anchored to 2010 guidance, is still appropriate, and our 2012 annual earnings per share guidance is positioned largely in the top half of that range.

That said, we recognize that continuing to anchor long-term growth to 2010 guidance may be impractical over time. Therefore, we will now characterize our long-term earnings per share growth trajectory as being 4%-7%, as indexed against the 2012 earnings guidance range. As you can see from the slide, this is essentially equivalent to our original long-term trajectory. In fact, it narrows expectations in the near term to the higher end of the range we provided in 2010. In summary, our earnings guidance for 2012 is $2.58-$2.70 per share, and our longer-term growth trajectory is 4%-7% off of that range. As always, the variability in long-term range is based on several factors, including uncertainty in our compliance investments, an uncertain pace of economic recovery, and other considerations.

We remain confident in our ability to pursue our goal of growing earnings and dividends in a sustainable manner. Lastly, our estimate for the first quarter of 2012 is $0.45 per share. At this point, I'll turn the call over to Tom for his closing remarks.

Tom Fanning (Chairman, President, and CEO)

Thanks, Art. In closing, let me reiterate that our business model, priorities, and financial objectives remain in place for 2012. We are well-positioned to continue providing exceptional customer value, which should translate into exceptional shareholder value in the form of reasonable EPS growth with an attractive dividend yield at one of the lowest risk profiles in the industry. Despite the uncertainties that remain, we are confident in our ability to navigate the challenges of 2012 in much the same way that we have navigated the challenges of 2011, by staying true to our fundamentals and delivering on our commitments to customers, employees, communities, and shareholders. At this point, we are ready to take your questions. Operator, we will now take the first question.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Daniel Eggers with Credit Suisse.

Daniel Eggers (Analyst)

Hey, good afternoon, guys.

Tom Fanning (Chairman, President, and CEO)

Hey, Dan.

Daniel Eggers (Analyst)

Hey, just kind of now that we have MATS in place and you've put some numbers out there for what the environmental CapEx could be, are those numbers cumulative to what you'd have to spend over the entire compliance period, or is that just a three-year period and there would be additional spending in 2015, 2016 to get the full compliance as you see it right now?

Tom Fanning (Chairman, President, and CEO)

It's just three years.

Daniel Eggers (Analyst)

That would just be that three-year period. There would be more money in that queue beyond that.

Tom Fanning (Chairman, President, and CEO)

That's correct. Absolutely.

Daniel Eggers (Analyst)

When did you guys expect to kind of get through the process with your regulators to formalize that CapEx plan?

Tom Fanning (Chairman, President, and CEO)

I think we need to get clarity on the proposed rule. You know, from time to time, we move from proposed rule to final rule to published rule. Haven't we seen in cross-state that from final rule to published rule, things can change? We still wait with a lot of interest to see what the published rule will be. Like I said, we're going to have to go through with the states and all the people we mentioned to kind of fully assess. Remember, this is not some academic exercise. What happens here when you start talking about changing out plants and retiring or mothballing some or converting some, you're impacting tax base of local communities. You're impacting unemployment in largely rural areas. You're impacting real income of people out there. These are not bloodless decisions.

These are things we take very seriously when we think about how we engage with customers on a day-to-day basis. Look, the timeframe varies from state to state. You know that we deal in Georgia and Alabama and Mississippi and Northern Florida. Each state will have its own process and own timeline to go through. It's hard to say in kind of a general statement what that might be.

Daniel Eggers (Analyst)

Okay. With the 4%-7% growth rate, is that taking into account—would 7% reflect if you had to do the full amount of spending, or how does this environmental CapEx fit into that band?

Tom Fanning (Chairman, President, and CEO)

That's generally correct. The more CapEx we spend, the higher you are up in the range. Of course, there's other factors too, right? That's a reasonable way to think about it.

Daniel Eggers (Analyst)

That slide has vanished from my screen, but it seemed to go to the right further than a couple of years. Is this kind of a decade-long growth rate? Is that how you guys are thinking about it now?

Tom Fanning (Chairman, President, and CEO)

No, three years.

Daniel Eggers (Analyst)

Three years. Okay. All right. I'll let somebody else go. Thank you, guys.

Tom Fanning (Chairman, President, and CEO)

Yeah, hopefully it's back up.

Operator (participant)

Your next question comes from Brian Chin with Citigroup.

Brian Chin (Research Analyst)

Hi, good afternoon.

Tom Fanning (Chairman, President, and CEO)

Hey, Brian.

Brian Chin (Research Analyst)

Sorry if I missed this earlier in your prepared comments, but that base environmental number, does that already include some element of CASPER in it, or if the CASPER rules get finalized at some point in the next 12-18 months, do you expect a large enough?

Tom Fanning (Chairman, President, and CEO)

Are you still there, Brian?

Brian Chin (Research Analyst)

Yes, I'm here.

Art Beattie (EVP and CFO)

Okay. The base CapEx includes projects, most of which are currently ongoing. I believe the Daniel Scrubber might be in that particular project. When you talk about CASPER, most of the—we'll address most of the CASPER issues through the MATS compliance. You won't have a whole lot of stuff on top of what we're doing for MATS to comply with CASPER.

Tom Fanning (Chairman, President, and CEO)

In fact, let me just say this a different way too, because it's a very important point we raise right here. You know, it's one thing to say your CapEx budget is going to be influenced by MATS or by CASPR. What you really have to do, and what we've been consistent about arguing about here, is that the whole litany of cascading regulations coming out of EPA will have some bearing on what our CapEx and ultimately our generation transmission expansion plans ultimately will look like. We can make estimates on MATS and we can make estimates on CASPR, but ultimately, it's the whole consequence of what's happening with ash and 316B and a variety of other things. The other thing that I think we should point out here too, CASPR, the cross-state rule, has never been all that important on its own for Southern. In other words, we would handle that mostly through our dispatch, and it would show up in energy as opposed to capital.

Brian Chin (Research Analyst)

Great. Very, very helpful. Just one other follow-up question. Noticed that the retail sales growth outlook for 2011 was, I think, 2%. Now it looks like the outlook's closer to 1.3%. Just send me a little bit of extra color on what's causing that deceleration.

Art Beattie (EVP and CFO)

We are looking at a lot of uncertainty out there, Brian. One of the economists in our economic roundtable group kind of described it as fog on the road, and there's not a whole lot of clarity out there. When there's fog on the road, people either drive a lot slower or they don't drive at all. With that uncertainty and the range of GDP estimates you have out there, I think that's kind of describing the outlook we have. It's cautious in our regard. There are still risks out there, but the economic data we've seen here of late is on the positive side. That's positive.

Tom Fanning (Chairman, President, and CEO)

Yeah, let's go through some of that. We've seen unemployment tick down in December, particularly in the Southeast, about a half a percent, round numbers, in the Southeast. It looks like jobs are starting to be created. We do a survey of companies that are going to either, they're kind of three states in nature: increase hiring, keep hiring constant, or decrease hiring. Some time ago, it was 1/3, 1/3, 1/3 among those three. The Atlanta Fed now projects that it's about 45%, round numbers, 45% that will increase hiring, 45% that will keep it constant, and then 10% that will decrease hiring. We're starting to see signals. The other things we've talked about are all coming to fruition. Everything we've suggested in the past about economic development is in fact happening. As we start to see these expansions at Chevron or at Austell or at Mercedes or at Kia or at Gulfstream, those things are happening, and they will generate jobs as they come to fruition.

Brian Chin (Research Analyst)

Very helpful. Thank you.

Tom Fanning (Chairman, President, and CEO)

You bet.

Operator (participant)

Your next question comes from Paul Ridzon with KeyBank.

Tom Fanning (Chairman, President, and CEO)

Hey, Paul.

Paul Ridzon (Senior Equity Research Analyst)

Good. How are you?

Tom Fanning (Chairman, President, and CEO)

Super. Hope you're doing well.

Paul Ridzon (Senior Equity Research Analyst)

Yep. Just a quick question on drivers of 1Q earnings guidance.

Tom Fanning (Chairman, President, and CEO)

Go ahead.

Paul Ridzon (Senior Equity Research Analyst)

What are the drivers of one-Q earnings guidance?

Art Beattie (EVP and CFO)

On the fourth question, I thought you had a specific question happening.

Paul Ridzon (Senior Equity Research Analyst)

No, no.

Art Beattie (EVP and CFO)

Okay. Actually, a lot of it was driven by the same revenue effects that we described for the annual period, about $0.16 there. Weather was an offset at $0.08. Non-fuel O&M was a $0.05 positive. Depreciation and amortization was -$0.04. I believe this is outlined on the slide at the top end of the earnings slide. Did you want Q1 of 2012 or did you want Q1 of Q4?

Paul Ridzon (Senior Equity Research Analyst)

I'm sorry, I wanted Q1 of 2012.

Art Beattie (EVP and CFO)

Oh, okay.

Paul Ridzon (Senior Equity Research Analyst)

Oh, sorry.

Art Beattie (EVP and CFO)

Sorry.

Paul Ridzon (Senior Equity Research Analyst)

Oh, sorry.

Art Beattie (EVP and CFO)

Misunderstood.

Paul Ridzon (Senior Equity Research Analyst)

Sorry about that.

Art Beattie (EVP and CFO)

You have some rate effects that go into effect that were outlined in the same rate settlement at Georgia last year. The weather effect from last year, we had some positive weather in the first quarter of last year. As a year-over-year basis, you would expect some mitigation there. Our estimate of growth last year was stronger for sales growth in residential and commercial. It's a little bit weaker this year. Are you trying to get to our $0.45 earnings estimate for the first quarter?

Paul Ridzon (Senior Equity Research Analyst)

Yeah, I'm just trying to reconcile $50 to $45.

Art Beattie (EVP and CFO)

We had a lot of weather in last year, first quarter. I think that's the biggest driver.

Paul Ridzon (Senior Equity Research Analyst)

You have that offhand?

Art Beattie (EVP and CFO)

We can probably look at it. Hold on. Hold on.

Paul Ridzon (Senior Equity Research Analyst)

Opening that big black book.

Art Beattie (EVP and CFO)

Oh, yeah. Are you kidding me? That's $0.02.

Paul Ridzon (Senior Equity Research Analyst)

Thank you very much.

Art Beattie (EVP and CFO)

Yes, sir. Sorry.

Tom Fanning (Chairman, President, and CEO)

Yeah, you know, everybody knows that we do our estimates on a weather normal basis. Any comparison will just be set.

Paul Ridzon (Senior Equity Research Analyst)

Right. Okay. Super. Thank you.

Operator (participant)

Your next question comes from Greg Gordon with ISI Group.

Tom Fanning (Chairman, President, and CEO)

Hello, Greg.

Greg Gordon (Analyst)

Good afternoon, sir. I guess I got to ask because as I look at the tail of the tape and think about the economic assumptions that you've baked into your forecast since 2008, 2009, you generally erred to the conservative side, pretty much running out the strings since we came out of the recession in terms of the ultimate level of economic activity, sales growth, etc., that you've experienced. Is there a scenario that drives you? What scenario would drive you to the high end or above the high end of your earnings guidance range, or is there one that's even within the tails of your analysis?

Tom Fanning (Chairman, President, and CEO)

Oh, sure. I mean, you know, the question of, is there a tail in our estimates that would drive us one way or another? That's absolutely right. Now, you have to figure out how likely that is. I guess that's the key. Obviously, when you think about it, if you look at, and help me out with the numbers here, 1% change in sales is worth about $120 million in revenue, something like that. If we project, you know, 1.3%, so if we get up to 2.3%, you're up that much, right? Essentially, sales are flat. You're down that low. What we've been able to do is just kind of manage our system to adjust to the normal variables. That's how we've been able to be very consistent over time. For example, weather, changes in the economy, what's going to happen with commodities.

One of the stories I think that's interesting in our industry over the past year has been what's going on with natural gas. Southern Power obviously has benefited from that. What's going to happen with oil prices in the Straits of Hormuz? What's going to happen, therefore, to the weight of oil in the economy? What's going to happen with Europe? What's going to happen with our ability to generate real job growth and sustain the growth of the economy in light of this fog that Art metaphorically spoke for? Hopefully, this notion of tail risk is kind of that ±1%, $120 million. What's our ability to manage our business to accommodate those changes?

You know, Greg, over the years, we've been pretty good at both managing our business to fit within the variables that we normally face and providing the best operations, arguably in the industry, for the benefit of our customers.

Greg Gordon (Analyst)

Yeah, I see that. I listen very closely to what you guys say about economic activity because you appear to be very diligent and plugged into your customers, and that shows up in lots of ways. I guess I look at the earnings forecast and I contextualize it based on what you've actually earned relative to the guidance ranges for 2010, 2011, and now for 2012. You know, $2.37 in 2010, $2.57 now the guidance range. As investors look at the actuals, we're looking at a 0.4% growth at the low end to 5% on the high end off of what you've actually earned last year. I understand that you contextualize it in terms of your, you know, sort of your anchor aspirations off of 2010. I think it's just giving people some pause that maybe there's something going on in terms of economic activity not being as robust.

Tom Fanning (Chairman, President, and CEO)

No, I think if you just look at weather compared to normal the past two years, remember we're weather normal. That's the way we asked tonight. You had big weather two years ago, good weather, I mean, positive weather last year.

Art Beattie (EVP and CFO)

I think another thing, Greg, if you look at weather normal sales growth in residential and commercial, we've had basically flat growth for two years now. Our estimates about economic growth continuing there are still kind of tentative. We're still waiting for that to catch and start moving northward. We've estimated an increase in sales again this year, not quite as robust as we did last year, but we were able to offset that loss with what Tom just mentioned, some positive weather.

Tom Fanning (Chairman, President, and CEO)

If you go back, I'm interested in your comment about the context of earnings growth. That's why we show these charts that say we started with 2010, 230, 236, and we grow at 2007 and 2005. We explained why we thought we would be higher in 2011. Sure enough, we were. We explained why we think we're in the top half, roughly, in 2012. One of the benefits of the way we run our business is that we provide a business, I think, that provides for regular, predictable, and sustainable growth in earnings per share. That's been our history, and I hope it will continue to be our history. There's no lack of transparency in, I think, our assumptions of the economy.

Greg Gordon (Analyst)

Great. Thanks, guys.

Tom Fanning (Chairman, President, and CEO)

Yes, sir. Thank you.

Operator (participant)

Your next question comes from Ali Agha with SunTrust.

Ali Agha (Equity Research Analyst)

Thank you. Good afternoon.

Tom Fanning (Chairman, President, and CEO)

Ali, how are you?

Ali Agha (Equity Research Analyst)

Good, thank you. Hey Tom, I wanted to come back to your comments on the MATS rule that's come out. If I'm hearing you correctly, is the implication that the rules are now final? I know you said final versus published. There could be some tinkering there. Unlike CASPER, should we not assume any legal challenges? Should we assume that you're going to plan around this? Can you just give us a little more insight on your strategy on this?

Tom Fanning (Chairman, President, and CEO)

Sure. Strategy remains the same, really, for any of these issues that are in front of us, and that is to represent the interests of our customers, to provide the cleanest, most reliable, most economically sensible product available. Therefore, we will engage constructively in any front that represents the interests of our customers, whether that's a regulatory issue, a legislative issue, or litigation if necessary.

Ali Agha (Equity Research Analyst)

Okay. Is there a scenario in which you could see some kind of delays or legal challenges to this MATS rule?

Tom Fanning (Chairman, President, and CEO)

Sure. There always is. The question is, is there a scenario? The answer is yes. You have to assess the facts of the situation at hand and what the issues are.

Ali Agha (Equity Research Analyst)

Okay. My other question was, given the CapEx that you've laid out for us and whether you laid in the extra environmental CapEx on top of that, can you remind us what kind of annualized rate-based growth over those three-year periods that supports?

Art Beattie (EVP and CFO)

Yeah, Ali, this is Art. Roughly about 7%. Remember that that's a lumpy growth as plants go into service. You'll see fits and starts there, but on average, about 7% will run.

Tom Fanning (Chairman, President, and CEO)

Yeah, 7% to 8%. Yeah,

Ali Agha (Equity Research Analyst)

that's an annual number, right?

Art Beattie (EVP and CFO)

Correct.

Ali Agha (Equity Research Analyst)

Okay. Does that include the extra environmental CapEx in there as well?

Art Beattie (EVP and CFO)

That would be on top of that. It's further out. Remember, those projects won't go into service until after the 2014 timeline we've outlined for you.

Tom Fanning (Chairman, President, and CEO)

Remember, that's the difference. There's a difference between what clears in the rate base and what's spending before that.

Art Beattie (EVP and CFO)

Right.

Ali Agha (Equity Research Analyst)

I mean, on that note, last question, Tom. I mean, you look at your CapEx budget, and if you layer on top of that the environmental CapEx that's going to go in at some level, does that have implications to that earnings growth rate you've laid out for us, or does that still keep you in that 4%-7% range, even factoring in that extra environmental CapEx?

Art Beattie (EVP and CFO)

It's what we said before, I think. The more CapEx you will see, the higher in the range we will be.

Ali Agha (Equity Research Analyst)

it in the range?

Art Beattie (EVP and CFO)

Yes. Yes.

Ali Agha (Equity Research Analyst)

Okay, thank you.

Art Beattie (EVP and CFO)

You bet.

Operator (participant)

Your next question comes from Mark Barnett with Morningstar.

Mark Barnett (Analyst)

Good afternoon, guys.

Art Beattie (EVP and CFO)

Hey, Mark.

Tom Fanning (Chairman, President, and CEO)

Good afternoon.

Mark Barnett (Analyst)

A quick question on the retirement forecast. I know this was something out of 2011, but does that include, I can't recall if that included any impact from the ash and water rules? I know you give the kind of CapEx sensitivity there, but is that a number that might move higher if there's kind of a more aggressive case regulation?

Art Beattie (EVP and CFO)

Certainly, it could. I mean, you know, we believe that, for example, coal ash should not be classified as a hazardous waste. To the extent it was, that certainly would change our thinking on what our portfolio looks like.

Mark Barnett (Analyst)

Okay, you don't really have kind of a number around what that might look like?

Tom Fanning (Chairman, President, and CEO)

What we've said about ash and 316B, I think, is that we're looking at about, of the three-year CapEx, about $1.6 billion.

Art Beattie (EVP and CFO)

Correct.

Tom Fanning (Chairman, President, and CEO)

I think our assumption there is that it is.

Art Beattie (EVP and CFO)

It's non-hazardous.

Tom Fanning (Chairman, President, and CEO)

Non-hazardous.

Mark Barnett (Analyst)

Okay.

Tom Fanning (Chairman, President, and CEO)

A hazardous designation would change the game of energy supply in America in a really dramatic way.

Mark Barnett (Analyst)

Okay. When I look at that $1.6 billion number, that's almost all coming from the coal ash and not necessarily the water, or is it, I'm sorry, that's both. Okay.

Tom Fanning (Chairman, President, and CEO)

That's both.

Mark Barnett (Analyst)

Okay, thanks for the clarity on that.

Tom Fanning (Chairman, President, and CEO)

You bet.

Operator (participant)

Your next question comes from Andy Levy with Citi.

Tom Fanning (Chairman, President, and CEO)

Hey, Andy.

Andy Levy (Project Senior Analyst)

Hi, Tom. How are you?

Tom Fanning (Chairman, President, and CEO)

Excellent. Hope you're doing well.

Andy Levy (Project Senior Analyst)

I am trying to do well. Yes, thank you. Just a couple of questions. As far as the slight reduction in the growth rate, that's primarily kind of uncertainty around sales, is that?

Tom Fanning (Chairman, President, and CEO)

Yeah, it's really tied to the economy.

Art Beattie (EVP and CFO)

I wouldn't denote it as a reduction in the earnings growth rate. If you look at the slide, it actually still outlines the same cone of growth that we expected before. The 4% at the bottom, you might justify it based on some combination of scenarios that work against you, but it's still no different than what we outlined a year ago.

Tom Fanning (Chairman, President, and CEO)

Yeah, if we were using 2010 as a base, it's still 5%. All we're doing is the guidance we're giving you is in the top half, roughly, of the range that we've laid out here for two years.

Andy Levy (Project Senior Analyst)

Okay. That's for that growth rate off of 2011, not off of 2010?

Art Beattie (EVP and CFO)

No, it's off of 2012.

Andy Levy (Project Senior Analyst)

Of 2012, excuse me.

Art Beattie (EVP and CFO)

Yeah.

Andy Levy (Project Senior Analyst)

Okay. That's very important. Okay. Just as you're thinking, I mean, you know, the Fed came out today, you know, said they're going to keep interest rates low through 2014 versus 2013. In your assumptions, what were you assuming as far as, you know, this future financing and kind of where interest rates would be in 2013 and 2014 as an example?

Art Beattie (EVP and CFO)

Yeah. Andy, I don't have the specifics on what we're assuming, but we take generally the input off of what we get from the economic advisors to us. They may be a little higher than what the Fed kind of forecasted out today, but we can call you back and get you that number.

Andy Levy (Project Senior Analyst)

Okay, I was just thinking maybe there'd be some type of benefit for you, considering you guys do a lot of financing.

Art Beattie (EVP and CFO)

We do.

Andy Levy (Project Senior Analyst)

Is there any update on when we're actually going to get this COL? I mean, obviously, the process is basically done, but anything to share with us?

Tom Fanning (Chairman, President, and CEO)

Laura Fertel of NEI said it was imminent. You know, it's any day now. I know we're all impatient on getting this COL, but you got to remember this whole process undertaken by the NRC has been really thorough. It's been thoughtful. It's had the participation of all the different constituents that have an interest in whether or not nuclear is built in America. This thing all works to all our benefit. Getting it right and having everybody satisfied, dotting every I and crossing every T at the end of the day is a good thing because we got lots of years ahead of us and lots of money to spend. We all are impatient to get it, but I think it's actually a good thing at the end of the day.

Andy Levy (Project Senior Analyst)

No, I agree. I just thought this was more curious. Okay, guys, thank you very much. As always, you guys are doing a great job.

Tom Fanning (Chairman, President, and CEO)

Thank you. Appreciate it.

Operator (participant)

Your next question comes from Angie Storozynski with Macquarie.

Angie Storozynski (Analyst)

Thank you.

Tom Fanning (Chairman, President, and CEO)

Hey, Angie.

Angie Storozynski (Analyst)

Hi. How are you, Tom?

Tom Fanning (Chairman, President, and CEO)

Super.

Angie Storozynski (Analyst)

Okay. I just wanted to go back to the discussion about the low growth assumptions and the potential conservatism that is built into those numbers. I'm looking at your actual weather normalized data for 2011, and your sales grew about 1% versus 2.2% that you expected. I'm looking at the March presentation. Also, you are assuming quite a significant pickup year-over-year for commercial and residential sales. Can you actually, I mean, I don't quite understand what could drive this. I mean, you have maybe limited visibility on the economy, as we all do. What would be the drivers for commercial and residential growth?

Art Beattie (EVP and CFO)

Oh, Angie, this is Art. What we're assuming there is, as we mentioned in our script, I believe that job growth would begin. It wouldn't be a lot to alleviate the unemployment situation, but enough to stimulate growth in both our residential and our commercial areas. Tom alluded to an Atlanta Fed survey where CEOs of companies around the Southeast are now indicating that more of them are in a hiring position than they were six months ago. These are all indicators that we have that that will lead to more job growth, more household growth, create increases in customers on both the residential and commercial side.

Angie Storozynski (Analyst)

Isn't your residential demand more driven by migration into your states than really growth and usage?

Art Beattie (EVP and CFO)

There are lots of factors there. Migration is still continuing, but it has slightly dropped since the recession. We continue to look at those and try to evaluate what it really means for us as we move forward.

Tom Fanning (Chairman, President, and CEO)

Angie, that's a good point. Look, industrial activity creates jobs. Jobs create opportunities for people to move in. It unlocks the housing sector, and that creates more activity in stone-clay glass and building materials and a variety of other things. It primes the pump to restart the engine. Our belief is that we'll just start seeing the jobs, and in fact, this whole process will start to regenerate. The key, I guess, is housing at the end of the day. That's something that we look for very closely in all our statistics.

Angie Storozynski (Analyst)

Great. When I look at your fourth quarter results, there is at least a chunk of the earnings came from lower O&M. It's already, we've been a couple of years into managing expenses. Should we assume that if sales were to disappoint you, you have enough of other costs that you could trim to meet your expectations, earnings expectations?

Art Beattie (EVP and CFO)

Yeah. Angie, in 2010, you remember we had a lot of weather-related revenue, and we spent a lot of that money in the fourth quarter of 2010 doing extra maintenance. We actually pulled some outages out of 2011 into 2010. When you do a year-over-year comparison, O&M went down. That ability to do that, to fix the roof when the sun's out, actually puts us in great shape to be more flexible on O&M as we move forward into 2012.

Tom Fanning (Chairman, President, and CEO)

If you look at our longer-term trend, don't go year to year. If you went back three years, four years, I think our number is around 2.8% compound annual growth in O&M. It's a decent number.

Angie Storozynski (Analyst)

Okay, thank you very much.

Tom Fanning (Chairman, President, and CEO)

You bet. Thank you.

Operator (participant)

Your next question comes from Jen Van Rietsman with UBS.

Tom Fanning (Chairman, President, and CEO)

Hello, Jen.

Speaker 20

How are you doing?

Tom Fanning (Chairman, President, and CEO)

Excellent. I hope you're doing well.

Speaker 20

I'm doing great. Hey, a couple of simple questions. The first one is on financing, if you don't mind.

Tom Fanning (Chairman, President, and CEO)

Yeah.

Speaker 20

Back in December, Congress was considering this extension of the bonus depreciation to 100% in 2012 and then in 2013. They're expected to take it up again in February, right?

Tom Fanning (Chairman, President, and CEO)

Right.

Speaker 20

If it's passed, what are the sensitivities with respect to your equity needs going forward?

Art Beattie (EVP and CFO)

All right. Good question. I think the assumptions we have for bonus depreciation, assuming the 50% level, are $450 million-$600 million. If we were to get the extra bump, we'd pick up somewhere around $300 million-$400 million more. That's just kind of rough numbers.

Speaker 20

That incrementally into 2013, what does that look like?

Art Beattie (EVP and CFO)

Don't have anything on 2013, but it could be more. In our ability to actually use it, the effect on equity would certainly reduce the effects, but we'd have to manage that as we move through time.

Speaker 20

Okay. Second question, I'll use your phrase, fog on the road. You talked a lot about sales. Can you talk a little bit about what your customer growth expectations are?

Art Beattie (EVP and CFO)

Yeah, Jim, we actually had flat customer growth last year, which is again reflective of our results in the residential and commercial side. We're expecting about 14,000 customer growth in 2012, which again reflects the assumptions we're making on job growth within those particular areas.

Tom Fanning (Chairman, President, and CEO)

Let's kind of dimension that. In the good old days, back when I was CFO, we had something like growth of like 50,000 customers a year. Our number this year, we're projecting like 15,000, round numbers. You know, customers were flat last year, or even some people had slightly negative. Remember, we had these enormous tornadoes go through Alabama, for example, that devastated a lot of dwellings. You know, we had some effect. You got to kind of look through those numbers to see what was the tornado effect.

Speaker 20

Okay.

Tom Fanning (Chairman, President, and CEO)

Fifteen is kind of what we're expecting out of a normal number of 50, but we certainly haven't been there in a couple of years.

Speaker 20

All righty. Thanks so much. Have a great day.

Tom Fanning (Chairman, President, and CEO)

You too, bud.

Operator (participant)

The question comes from Jonathan Arnold with Deutsche Bank.

Tom Fanning (Chairman, President, and CEO)

Hey, Jonathan.

Jonathan Arnold (Analyst)

Good afternoon, guys. Can you hear me?

Tom Fanning (Chairman, President, and CEO)

Absolutely.

Jonathan Arnold (Analyst)

Okay. I had a couple of things. One was, I think some of the commentary around sort of ability to manage a slower recovery kind of seems to have been focused on 2012. What kind of sales number do you need to sort of in the 2013, 2014 to kind of keep you in that growth cone, if you like? You know, how long do you have, how far beyond 2012 could you keep sort of moving the expense needle to keep you in that channel?

Tom Fanning (Chairman, President, and CEO)

That's an interesting question. I suppose, you know, normally what you have seen with Southern is variability. Remember, we went through all these other factors. It's not just economic growth. It's weather and a variety of other things, right? If you saw sustained low economic growth, likely that would have some impact on the stress on your system and a variety of other things. In other words, you're not running your plants as hard. You're not having the stress on the wires, part of the business, etc. There is some correlation, if you will, between a slowing economy and a slowing O&M spend rate, number one. Number two, the folks that run our business, that make, move, and sell electricity, do a terrific job in thinking about the optionality of that bang for the buck with every dollar they spend on their base level of expenditure.

They have very clear ideas as revenues start to appear with the variability of weather, where they spend it and where we get the best bang for the buck. The truth in that shows up in our operating statistics, our industry-leading E4, our now more than 10-year trajectory of great performance in our transmission and distribution business. My sense is, Jonathan, through the period, I think we can handle, within the range that we've given you, a sustained, very low growth economy. Where wouldn't we, if that's your question?

Jonathan Arnold (Analyst)

Tom, can I just frame the question a little differently? It's like how much of the 4%, if you like, is coming out of capital spend and environmental, and how much is coming from just organic growth in the business? Could that frame it a little better?

Tom Fanning (Chairman, President, and CEO)

I don't know. You know, how much of the low end of the range? The low end of the range will be hit if you have bad economic growth, milder weather, and low CapEx. That's kind of how you get there. To the extent CapEx picks up, to the extent you have, you know, better weather, you're going to be in a different spot.

Jonathan Arnold (Analyst)

Low economic growth you'd define as?

Tom Fanning (Chairman, President, and CEO)

Like zero.

Jonathan Arnold (Analyst)

Okay, that's clear. Can I ask on one other topic?

Tom Fanning (Chairman, President, and CEO)

Sure.

Jonathan Arnold (Analyst)

Could you give us a sense of whether your contracted position on coal looks sort of any different going into 2012 than, say, it did going into 2011? You know, a sense that these kind of very low gas prices, sort of how much incremental kind of shift on the system we could see from coal to gas and partly due to contract and price?

Tom Fanning (Chairman, President, and CEO)

Yeah, look, you know, we've been very kind of transparent in the past. We've got some really interesting stuff to talk about here. In the fourth quarter, let me back up. Four years ago, or way back when I was doing CFO or COO even, we were about 70% of our energy from coal and about, you know, I don't know, 16% from nuclear, about 12% from gas, and the balance from hydro. In the fourth quarter, this was really surprising to me, maybe not surprising considering how cheap gas is now. Our energy production was 40% coal, 39% gas. I used to say we would reach a 40/40 split sometime after 2015. Sure enough, we hit it in the fourth quarter of 2011. Now, moving forward, given where gas prices are, we will continue to see much more gas production. It'll become more important.

In terms of how we're managing our fuel stocks, we have already, going back into 2011, started thinking about, in light of what may come down the road with the HACCP Act, now MATS, and a variety of other issues associated with new regulations out of the EPA, started putting more optionality into contracts, shortening up the term of those contracts, and thinking about how to be flexible in transportation arrangements. All of that is being taken into account. What I used to say four years ago would have been that if you looked at our weighted average whole supply, you were kind of in the three and a half to four-year range. Remember, it was 100% committed in the year, and then it would go to 80 and 60 and 40 and all that. Imagine that being shrunken a bit. It's shorter in its duration, and it is probably more flexible in any given year. What may be 100 today may be 60 tomorrow, may be 40, may be 20. We've already started working all that through the system.

Jonathan Arnold (Analyst)

Tom, do you think you could go north of 40% gas in Q1 here? It sounds like you're sort of on the threshold.

Tom Fanning (Chairman, President, and CEO)

Yeah, we're on the threshold. Time will tell, you know.

Jonathan Arnold (Analyst)

Okay. Thank you.

Tom Fanning (Chairman, President, and CEO)

You Bet. Operator, we have another question.

Operator (participant)

Yes, sir. One moment, please. Your next question comes from Michael Lapides with Goldman Sachs.

Tom Fanning (Chairman, President, and CEO)

Hey, Michael.

Michael Lapides (Senior Equity Analyst)

Hey, guys. Two quick questions for you. One, Art, have you ever framed what your EPS sensitivity is to every 1% change in retail load? That's the first one. The second one is, do you think you're at the early stages when it comes to residential and small commercial usage in terms of a structural change in the kind of the megawatt-hour demand versus GDP correlations?

Art Beattie (EVP and CFO)

I got the last one. You got the easy one, huh? Your first question was sensitivity to 1% change in sales. Was that it, Mike?

Michael Lapides (Senior Equity Analyst)

Yes.

Art Beattie (EVP and CFO)

Yeah.

Tom Fanning (Chairman, President, and CEO)

Yeah, that is. If sales is 1% higher or lower than forecast.

Art Beattie (EVP and CFO)

Yeah, I gave them revenue before. Right. It depends on how it's spread, Michael. If you do across all classes, it's about $98 million in revenue. If you assume that you don't mitigate it in one way in your spending side, then it would be about $0.075.

Michael Lapides (Senior Equity Analyst)

Got it. Okay.

Art Beattie (EVP and CFO)

Okay?

Michael Lapides (Senior Equity Analyst)

Thank you. On the other item?

Art Beattie (EVP and CFO)

On the other item, that was the relationship between GDP growth and electric sales, right?

Michael Lapides (Senior Equity Analyst)

Yeah, especially for res and small commercial.

Art Beattie (EVP and CFO)

Oh, I love this stuff. We argue with each other all the time about what's going on here. We have used in the past a relationship that has really borne its math. It carries its water as a theory, that you should look at electricity sales as about 60% of GDP growth. Now, what we've done here in our projections is use a number like 50%, not 60%. In our normal conservative nature, we backed off a little bit. There is a very interesting development in our numbers as we were peeling the onion, getting ready for this call. There is an interesting trend. If you look at usage, usage is flat among our customers, particularly in residential and commercial. There's always this interesting question about what's the penetration of energy efficiency, and yet usage was flat.

One of the things that we're debating right now is this idea that the economy is actually getting more electrified, if you will, that as the economy grows, more and more of the energy share is going to electricity-driven technology. I think you can see that with these beautiful plasma screen TVs and iPhones and iPads and all the other stuff we have. That's kind of interesting. What you may see is maybe some energy efficiency. Certainly, as you replace an air conditioner, you've got a more efficient air conditioner. I think you're seeing share of electricity as a part of GDP growth grow and some effect on either active or passive energy efficiency. The relationship appears to be constant, but the components within the relationship appear to be changing. Fascinating stuff.

Michael Lapides (Senior Equity Analyst)

Got it. Okay, I appreciate that. I'll follow up offline, guys. Thank you.

Art Beattie (EVP and CFO)

You bet.

Operator (participant)

Our next question comes from Nathan Judge with Atlantic Equities.

Tom Fanning (Chairman, President, and CEO)

Hey, Nathan.

Nathan Judge (Analyst)

Hey, good afternoon. Just on a general kind of macro question here, as we look across the United States, there's been a lot more natural gas coming to market than some had expected, at least I had a year ago. It seems to be continually, the price for it's continually falling. Just thinking about how that relates to your CapEx forecast and options as it relates to what you do as far as EPA-related retrofits and how close are we for you instead of using a bag house, you perhaps convert some more old plants into natural gas plants?

Tom Fanning (Chairman, President, and CEO)

Yeah, sure. Piece of cake. Let's kind of dive through that a bit. Of the 12,000 megawatts, those are our flagship units: Bowen, Scherer, Miller, some of Wansley, some of Barry, etc. Those will vary. The maximum amount of baghouses I think we're considering right now is 17. As we suggested, there could be a variable nature of that. We may require less, which gives us the spread that we tried to indicate to you. Please, let me reinforce with the community out there, we're trying to give you the best estimate we can. There's still a significant amount of uncertainty there. Number one.

Number two, when you think about the expansion plans going forward, remember that one of the advantages we have, being in an integrated regulated market as opposed to the so-called organized markets or merchant markets, is that we are able to account for expansion planning as a portfolio. We are able to iterate around optimal solutions between the types of generation and transmission solutions, and they are iterative. When I think about what's in front of us here, remember that some of our portfolio decisions have already been cast. That is 1,000 MW or so from Plant Vogtle Units 3 and 4. McDonough, 2,500 MW or a little bit more. Georgia Power is out for a solicitation. Largely, it's going to be gas, I think of around 1,500 MW. That's coming a little bit later.

We have Kemper County in Mississippi, which is going to have an environmental signature better than or equivalent to natural gas, 582 MW. Remember, some time ago, we moved Plant Miller, one of the greatest coal plants in America in terms of its efficiency and cost profile to our customers, moved it away from wholesale into retail. Alabama is pretty well spoken for. Those decisions have already been made. What you're talking about is really decisions around the margin. In other words, shutting down, mothballing, whatever the right word is, 4,000 MW, that kind of appears to be a dominant solution right now. We'll see.

Of the 3,200 we talk about, in more specificity, what we have said is likely candidates for that are older, smaller coal units that currently don't have SCRs or scrubbers that will be converted into rather high heat rate units, like 10,000-11,000 heat rate gas-fired units. Would we do more of that? No, that's about the right level, I think. There's not a lot of future bandwidth for variability in how we add to the system going forward. There's going to be some around the edges, but I wouldn't expect big changes. As I've suggested to you, we're already committed on a portfolio that we think meets all the needs of our customers in a clean, effective, low-cost way.

Nathan Judge (Analyst)

That's very, very thorough. Thank you. Just as it then pertains to the nuclear plant, could you provide some type of timeline or some type of idea what risks there are if, and I'm not suggesting that it will be, but let's say in six months' time or a year time or whatever it may be, investors should start looking at the NRC's lack of giving this COL out as being concerning?

Art Beattie (EVP and CFO)

In my opinion, the delay, whatever, of the COL, the reason we haven't gotten it, it's imminent, it's any day, you know, whatever you believe about that, that shouldn't be concerning at all. In the bigger scope of things, like I said before, I think I applaud the process we've gone through. Do I wish it's gone quicker? Sure. I think given the scope, given the timeframe, I think you're kind of quibbling around the edges here. I think it's more important to get it right and have all the parties involved be completely satisfied. That's where we are. Recall too, that the process that we follow in building Vogtle 3 and 4 is a commercial relationship between us and the consortium that is Toshiba, Westinghouse, Shaw. Recall too that we have a very transparent relationship with our commission, the independent evaluator, the staff, the PSC itself.

Recall too that from the time the plant was originally certified, we have delivered to the customers of Georgia Power over $1 billion of incremental value. Recall that takes kind of four forms. One is the fact that we had a variable contract and we fixed portions of that contract. You can look at our disclosure because otherwise, it's protected under a commercial agreement. Secondly, that we got loan guarantees. Third, that we got CWIP that will in order to benefit our customers by about $300 million. Fourth, CWIP, oh, production tax credits, that's the other one. I even think we're reasonably conservative there. Remember, the production tax credit amount was dependent upon how many nuclear projects were going to get built. You know, it's us and Scana, it looks like. I think our estimate there is conservative.

When we say that we've delivered over $1 billion of value, and you do recall that that is part of the testimony in the August proceedings in front of the Georgia Public Service Commission, I think we're in great shape. I think the Vogtle project, Units 3 and 4, is going to deliver tremendous value. I think that is shared by the people in the state of Georgia.

Nathan Judge (Analyst)

If I could just redirect that question, could you just give us a milestone and perhaps magnitude of, and I appreciate that, you know, unfortunately, some of the investors, including myself, don't have clarity into the processes as some do. I just wanted to see if there was a milestone that we could look to. I just take it in consideration what you said, and I think in your analyst day is about being year-end, and we're just past that now.

Tom Fanning (Chairman, President, and CEO)

Yeah, but I mean, okay, look, it's a 10-year project, and the delay has been about a month. Remember, the DCD was real important. We got a 50 vote on the design. I wouldn't attach a lot of angst to the delay of the COL. We still have, we've been able to work through the LWAD. Remember, I mean, the LWAA, and we still have, you know, a thousand people or more on site. They're doing productive work. We've been able to work within those structures in order to be efficient and effective. Recall too, we talked about when we say that all thresholds are achievable, that is, relation to cost and schedule, we have flexibility going forward. How we decide to execute that flexibility, in some respects, is a commercial matter between us and the consortium and us and our regulators. I wouldn't personally feel angst about where we are right now. I actually think that the project is going great.

Nathan Judge (Analyst)

Great. If I may.

Tom Fanning (Chairman, President, and CEO)

Yeah, I'm sorry. With that response, can I hit anything else specific? We'll have milestones. You mentioned milestones. One of the things that will be interesting as we go forward will be the development of what they call ITAACs. That's an acronym for some IT, AACS, and I never remember what that stands for. What those are are tests that will be developed around the systems of each of the units as we go forward. There'll be hundreds of them. It's almost like as you're building a house, you want to test the AC system, you want to test the kitchen, you want to test the... There will be several of those going forward. One of the challenges that we have said to ourselves in our...

You know, we meet regularly on this project, is to be able to talk about developing those thresholds, to talk about clumps maybe of systems as we go through them to let you know how progress is occurring. I think it's a very fair question. We need to kind of give you better clarity going forward. We'll work on that.

Nathan Judge (Analyst)

I really appreciate that. Thank you very much. I just have one last question. It's a little bit more of an informational question. Could you remind us how the Georgia riders work for the environmental spend specifically as it relates to this potential up to $2 billion, or I guess $4.4 billion in Georgia? Is there, more specifically, could there be regulatory lag there?

Art Beattie (EVP and CFO)

They are covered within the three-year rate hearings that Georgia Power has been going through for the last four or five processes. They'll defer them if they're not covered in the last rate case until the next rate case. If they're under construction or if they've been approved for construction, then they'll collect AFUDC, and that will be the normal accounting process.

Nathan Judge (Analyst)

Okay. If I do understand, if there is a fair amount of... There isn't equip though on those because they will have basically come in between interim rate cases.

Tom Fanning (Chairman, President, and CEO)

Yeah. Having been CFO of Georgia Power, you make an estimate, a forward estimate of the three-year period essentially. You essentially count your rate base going forward every three years. It's an accounting order. The commission has shown, and the staff has shown, a great deal of constructive thought as to how to recognize that over time. We've been reasonably flexible over time. There's a contemplation as to what it might be. To the extent there's a variance, there will be an AFUDC accrual. There will be a deferral in rate, and it will be captured in the next three-year accounting order. Recall too that we have never lost $1 of expenditure associated with environmental.

Nathan Judge (Analyst)

Absolutely. Thank you so much.

Tom Fanning (Chairman, President, and CEO)

You bet.

Operator (participant)

Our next question comes from Leslie Rich with JPMorgan.

Tom Fanning (Chairman, President, and CEO)

Leslie.

Leslie Rich (Equity Research Analyst)

Hi, we're going into hour three here on your.

Tom Fanning (Chairman, President, and CEO)

Hey, we love you guys.

Leslie Rich (Equity Research Analyst)

I just have a quick question on fuel. You know you're running your gas plants more, you're running your coal plants less. That's got to, over time, since it flows through to customers, result in some rate decreases. I'm just wondering, you know, that's a nice tailwind in terms of benefits to customers. Is that going to be happening? Has it been happening in 2011? Do we see a big adjustment there in 2012?

Tom Fanning (Chairman, President, and CEO)

Yeah, Leslie is hard. If you look at the balance of unrecovered fuel around the system, I guess Georgia's got the biggest balance at $130 million or so, $137 million under recovered. To the degree they'll benefit from increased gas burn, that balance will be mitigated sooner than they expected. No word yet on when that fuel rate will change for customers. Mississippi, actually, their commission approved a fuel rate reduction this month, a few weeks ago, that will begin in April, I believe, about $22 million. Alabama is under recovered about $31 million. I wouldn't expect anything immediately there. Gulf is actually over recovered about $10 million. It just depends on the company and what the balance is and when the commission will take action on it. You know, it's so fascinating. John Rowe and I got into this at one time. Southern Company benefits by low energy prices.

It's good for our customers. It's good for us. We pass through the benefits of the lowest lambda that we can offer. To the extent gas prices remain low, that is great for us and great for our customers.

Leslie Rich (Equity Research Analyst)

Does it have incremental positive benefits for Southern Power? Are those units, to the extent that they're not fully hedged, can they run more?

Tom Fanning (Chairman, President, and CEO)

Yeah, you bet. I'll give you, I'm still our now tank team here, but Southern Power did better than we expected significantly in 2011 as a result of that. Their energy margins were substantially higher. You know, we have designed that company to be gas-fired in the Southeast. As there are issues relating to retirement of assets in the Southeast and gas becomes a dominant solution, the ability for Southern Power to sustain its performance on energy margins and grow more, they have a lot of expandability on their site. We think it plays right into their strike zone.

Art Beattie (EVP and CFO)

Yeah. Leslie, if you look at the capacity factor of Southern Power's combined cycle units, they were up 10% year-over-ear. If you look at the capacity factor in the fourth quarter, I believe some of them were up in the mid-70% range.

Tom Fanning (Chairman, President, and CEO)

In 2010, for the year, we were 47% capacity factor. In 2011, it was 57%. If you just want to look at trends in the fourth quarter, it was 65%.

Leslie Rich (Equity Research Analyst)

Great. Thank you very much.

Tom Fanning (Chairman, President, and CEO)

You bet.

Operator (participant)

Our next question comes from John Alli with Decade Capitals.

Tom Fanning (Chairman, President, and CEO)

Hey, John. How are you?

John Alli (Analyst)

Excellent. Just a couple of quick follow-up questions. Jonathan Arnold was talking about getting to the bottom end of your growth rate. You said you'd have to have lower CapEx. Is that just base CapEx?

Tom Fanning (Chairman, President, and CEO)

It'd be lower everything. I mean, you know, however it is, it's hard to, you don't want to ever get in the business of tracing dollars. If we were substantially lower than what we're projecting, we're projecting $18.4 billion over three years. I mean, I don't know what that number would have to be to fall out. We described mild weather, no growth in the economy, less CapEx. That's kind of how you get there.

John Alli (Analyst)

Okay. Great. It looks like base CapEx applies around 7% rate-based growth.

Tom Fanning (Chairman, President, and CEO)

Yes.

John Alli (Analyst)

Okay. Is Southern Power experiencing any pressures from lower commodities or CASPER delay?

Art Beattie (EVP and CFO)

Southern Power benefits from lower commodities. Remember the way we structured their contracts? We have this very kind of well-developed notion here that risk matters as much as return in creating value. When we thought about at the inception of Southern Power, we set upon a set of contracts that served us very well over time. That is, for any contract to enter into, it really has two segments. One segment deals with return on brick-and-mortar investment, which is known over time through the length of the contract. The other deals with largely energy, and largely that's a fuel pass-through to the customers. When you think about the economic model of their contract business, it looks very much like an integrated regulated utility. They do have the ability to earn some margins above what we project in the base case should we sustain this low commodity environment. That's what happened in 2011.

John Alli (Analyst)

Gotcha. Okay, I'm just a little bit, I guess, not confused, but curious why the bottom end of the CAGR dropped if, you know, all these things point to at least sticking to what it was in, you know.

Tom Fanning (Chairman, President, and CEO)

I hope we didn't confuse people. If you go, the original projection we gave you on five to seven was based off of 2010. In fact, we are exactly there. We haven't deviated a bit. When you look now at 2012, just from 2010 to 2011 to 2012, if you use 2012 as a new base instead of 2010, we are projecting guidance in the top half of that range. The math of staying within that range, if we're in the top half of the range, the top remains seven. If you want to go to the bottom side of the range, five goes to four because we're in the top half. It is exactly where we've been. It just uses a different base.

John Alli (Analyst)

Okay, we shouldn't be reading into this that there's any more incremental risk than there was.

Tom Fanning (Chairman, President, and CEO)

No, not at all. In fact, I would argue there's incremental benefit. If you go to the slide in the package, you have a wonderful picture of what I'm talking about. Let me just say it a different way. The math is we are exactly where we said we would be way back in 2010, except that because we're starting in the top half of that cone of uncertainty, we may be in the near term better off.

John Alli (Analyst)

Gotcha. All right, great. Thanks a lot, guys. Appreciate it.

Tom Fanning (Chairman, President, and CEO)

You bet.

Operator (participant)

Our next question comes from Paul Patterson with Glenrock Associates.

Tom Fanning (Chairman, President, and CEO)

Hey, Paul.

Paul Patterson (Analyst)

Hey, how are you doing?

Tom Fanning (Chairman, President, and CEO)

Excellent. Hope you're doing good.

Paul Patterson (Analyst)

All right. Just a clarification here. You mentioned that there could be a change between the published and the final rules. Could you just elaborate a little bit more on that?

Tom Fanning (Chairman, President, and CEO)

See cross date.

Paul Patterson (Analyst)

Oh, just cross date?

Tom Fanning (Chairman, President, and CEO)

No, no, no. That's the example.

Paul Patterson (Analyst)

Okay, that was the example. Yeah, I was thinking the math thing, what the.

Tom Fanning (Chairman, President, and CEO)

From the time you get a proposed rule to a final rule, you think you kind of know where you are. Right. However, from the final rule to the printed rule to the published rule, there could be some minor tweaks. We saw that in cross days. I can't sit here and tell you today that what has been put forth as the final rule until it is finally published is going to be, in fact, the same.

Paul Patterson (Analyst)

Okay, I gotcha. When you say minor changes, I know that minor changes can mean big things. How should we think of that? In other words, are you thinking, I guess I'm just wondering, is there any potential chance that this could change a lot?

Tom Fanning (Chairman, President, and CEO)

If you ask Energy Future Holdings, where Texas became part of the printed rule under cross state, it was major to them. It wasn't major to us. It just depends on what the tweaks might be.

Paul Patterson (Analyst)

Okay, no clarity on that.

Tom Fanning (Chairman, President, and CEO)

No, okay. I have no idea what might change between now and the published rule.

Paul Patterson (Analyst)

Okay, I thought there might be something.

Tom Fanning (Chairman, President, and CEO)

Hey, and Paul, one more thing, if I could just add to people, there is still uncertainty in the final rule. For example, in the startup and shutdown, there's all kinds of language in there about standard work practices and a variety of other things. Really understanding what that means will have some bearing on compliance. There still needs to be clarity, even though we have a final rule.

Paul Patterson (Analyst)

Okay. Just to clarify some things here, you guys said that you had no customer growth. I mean, flat customer growth last year, is that right? Nobody, no increase in customers at all?

Tom Fanning (Chairman, President, and CEO)

Correct.

Paul Patterson (Analyst)

Okay.

Tom Fanning (Chairman, President, and CEO)

It was marginally negative, I think. You could write that off to storms and stuff.

Paul Patterson (Analyst)

Okay, that's because of, okay. In other words, you had storms that knocked people out, I guess. Is that what you mean?

Tom Fanning (Chairman, President, and CEO)

Yeah. If you recall the tornadoes that went through Tuscaloosa, right, that was a big deal. I think one of the dynamics in housing that we're looking for, you know, a normal unsold housing inventory in our area would be around 2.3%, 2.4%. We're kind of 3.5% right now in the Southeast. What we got to do is make sure that we eat into that inventory over time.

Paul Patterson (Analyst)

Okay. In terms of what, occupied houses, is that what you mean?

Tom Fanning (Chairman, President, and CEO)

Yes.

Paul Patterson (Analyst)

Okay. You're not concerned about a housing price rebound. We're not talking anything like, okay.

Tom Fanning (Chairman, President, and CEO)

No, no, no.

Paul Patterson (Analyst)

Okay. I just want to make sure. When you say 15,000, 14,000, 15,000 customers, I assume this is pretty much residential customers. Is that what we're talking about here?

Tom Fanning (Chairman, President, and CEO)

Oh, yeah.

Jonathan Arnold (Analyst)

Okay. What is that as a percentage of just a growth rate? What would that equate to?

Tom Fanning (Chairman, President, and CEO)

If usage is flat, it's going to be like, I'm looking around the table, 1% maybe.

Paul Patterson (Analyst)

It is about 1% customer growth.

Tom Fanning (Chairman, President, and CEO)

Let us get back to you on that. Let us get back to you on that.

Paul Patterson (Analyst)

Okay. I mean, what I'm sort of just trying to figure out here is that basically, if I understand you guys, you guys are basically looking at 2.5% growth rate in your service territory or in the Southeast in general, is that right? That's equating into about a 1.3% retail sales growth rate. Is that sort of roughly how we should think about this?

Tom Fanning (Chairman, President, and CEO)

Say that again, I'm sorry.

Paul Patterson (Analyst)

You've got 1.3% growth. You mentioned that you were using, I guess, some algorithm that basically came up to 50% GDP growth equals up, right? I'm just saying here, you're basically using like a 2.5%, a little bit more than that for what you're expecting will happen in GDP. Is that right?

Tom Fanning (Chairman, President, and CEO)

That is exactly right.

Paul Patterson (Analyst)

Right. Okay. I think that answers.

Tom Fanning (Chairman, President, and CEO)

The growth in customers is 0.4%.

Paul Patterson (Analyst)

Okay, customer growth is 0.4% that you guys expect.

Tom Fanning (Chairman, President, and CEO)

Yes.

Paul Patterson (Analyst)

What you're expecting is a rebound in usage, and that's being driven by people feeling better about the economy. Is that how we should think about that?

Tom Fanning (Chairman, President, and CEO)

It’s definitely.

Paul Patterson (Analyst)

I mean, leaving industrial customers out, I mean.

Tom Fanning (Chairman, President, and CEO)

Yeah, yeah. It's people moving out of apartments into homes, so usage goes way up. That's really just a factor of more homes getting occupied.

Paul Patterson (Analyst)

Okay. All my other questions have been answered. Thank you very much.

Tom Fanning (Chairman, President, and CEO)

You bet. What else?

Operator (participant)

Our next question comes from Gordon Howald with Doyle Trading Consulting.

Tom Fanning (Chairman, President, and CEO)

Hey, Gordon.

Gordon Howald (Analyst)

Hey, guys. Thanks for taking the call and for staying on so long. This has been kind of touched upon, but I'm going to ask it maybe in a little bit of a different way or looking for a different answer. I recognize, you know, all the uncertainty surrounding, you know, what the final regulatory EPA rules will be and, you know, what natural gas and power prices will ultimately be. Could you provide some color on the EPA-related CapEx? What could the financial impact be on customer bills for that incremental $4.4 billion number that you put out there, on a percentage basis, less than 15%, greater than 15%? Any color on that?

Tom Fanning (Chairman, President, and CEO)

Yeah, we've been pretty consistent with this. I'm sorry, I'm going to be a little vague just because we don't know yet. It depends on what state you're in and all that. What we have said is that after all of these expenditures clear to in-service, you're talking about 10%-20% across the United States, depending on where you live.

Gordon Howald (Analyst)

Right. That's fair. Could you give me a little color on what the base environmental spending is over the next three years?

Tom Fanning (Chairman, President, and CEO)

Yeah, we'll get to that in a sec. When I give you that 10%-20%, remember, I go back to something I said earlier. It's always hard to point out one rule. You really have to look at the consequence of all rules and the change in your generation and transmission expansion plans and the whole bit. All that has to be taken into account.

Gordon Howald (Analyst)

Absolutely.

Art Beattie (EVP and CFO)

Okay. All right. The base environmental is on this slide, I believe, and it's about $1.5 billion over the next three years. It would include the completion of projects that are under construction now. I believe a lot of those are in Georgia and some in Mississippi as well.

Gordon Howald (Analyst)

Essentially, spending that you would have done regardless of, or you know, that you would have done even without EPA proposed regulations such as CAF, which has obviously been stayed. Just things that you would have done anyway.

Art Beattie (EVP and CFO)

Correct.

Gordon Howald (Analyst)

Thank you. I appreciate all the color. Thanks, guys.

Tom Fanning (Chairman, President, and CEO)

Oh, you bet.

Operator (participant)

Our next question comes from Ashar Khan with Visium.

Tom Fanning (Chairman, President, and CEO)

Hey, Ashar.

Ashar Khan (Analyst)

Hi, how are you doing, Tom?

Tom Fanning (Chairman, President, and CEO)

Excellent.

Ashar Khan (Analyst)

Can I ask a slightly different question? Can you just tell us what the rate-based growth is from 2012 to 2014?

Tom Fanning (Chairman, President, and CEO)

It’s 7%-8%.

Ashar Khan (Analyst)

7%-8%.

Art Beattie (EVP and CFO)

Per year. It is lumpy.

Tom Fanning (Chairman, President, and CEO)

It is lumpy.

Ashar Khan (Analyst)

In the two years from 2012 to 2014 on, it grows by, if I can just say, like 15%. Is that correct from 2012 to 2014?

Tom Fanning (Chairman, President, and CEO)

Yeah, I mean, if you just do 7%-8% per year, and it's a little lumpy, but yeah. Okay, in numbers, you're right.

Ashar Khan (Analyst)

Okay. Does that include the environmental, or does that not include the environmental, that number?

Tom Fanning (Chairman, President, and CEO)

The environmental will be incremental to that.

Ashar Khan (Analyst)

Okay. If the environmental, if I'm right, if you include them, the higher end, then how much does it become?

Tom Fanning (Chairman, President, and CEO)

I don't know. It would clear after in-service. A lot of the environmental will clear in-service after 2014. We will be having AFUDC and a variety of other things. In terms of rate-based growth, which is a different question, that will clear when it goes into service. A lot of that would be after 2014.

Ashar Khan (Analyst)

Okay. You wouldn't get AFUDC positive impact, right?

Tom Fanning (Chairman, President, and CEO)

Yeah, yeah.

Ashar Khan (Analyst)

Tom, what then is, I guess, because we are cash flow deficient, I guess we can use a rule that we are losing like 2% or 3% of that growth in the earnings because of being a cash flow negative company. Is that correct? Is that the way we should kind of like think through this thing going forward?

Tom Fanning (Chairman, President, and CEO)

I wouldn't think about it that way. I mean, as a practical matter, when you look at Southern Company, you go operating cash, less dividends, you look at CapEx, we kind of look cash flow negative, but that's because we're growing. We're getting AFU, I mean, we're getting CWIP on Vogtle. We're getting CWIP on Kemper County, Plant Ratcliffe. Either it's been contemplated in a forward mechanism, so that would be Georgia, or in Alabama and in Mississippi, we have annual mechanisms which capture this stuff, and those are forward-looking. It depends on what jurisdiction you're talking about, but they generally self-regulate. In other words, to the extent you spend more in Alabama, the next series of RSE would pick it up.

Ashar Khan (Analyst)

What I'm trying to get from is that if you take the average growth rate, there's a discrepancy between rate-based growth and the EPS growth. What would you attribute that to? Some of it you're saying is regulatory lag. Is that what you're saying? I'm just trying to get a more precise way to what are the reasons between the 2%-3% difference between the two?

Tom Fanning (Chairman, President, and CEO)

As you grow assets, you're going to grow some O&M, and you're also going to have shares involved, right? More shares supporting it. That drags down. The relationship between adding assets to rate base is always a function of how much more O&M do you have. You have more depreciation as a result of more assets, and you have more shares supporting the mix of capital supporting every dollar of investment. You can't just say that a 9% rate-based growth equates to 9% EPS.

Ashar Khan (Analyst)

Okay. Basically, it's a function of, it's really that we are, as the rate base is growing, our ROEs on that rate base, actually earned ROEs, are declining over that period of time.

Tom Fanning (Chairman, President, and CEO)

No, no, no. It's not earned ROEs. It's the revenue requirement calculation on any investment. That really is constant. If you think, go ahead.

Art Beattie (EVP and CFO)

The forward-looking rate mechanisms address a lot of that as it goes into rate base. It's either picked up by the rate mechanisms and it's earned upon.

Tom Fanning (Chairman, President, and CEO)

Yeah, there's no, we're not missing anything anywhere. In fact, if you think about it, if you contemplate Georgia's structure as a three-year forward look when it's put into place, it renews itself every three years, and to the extent you miss your projection, it's deferred and you earn AFUDC on it. Alabama is forward-looking and adjusts annually. PEP is forward-looking and adjusts annually. I guess the only other one you would think about is Gulf. Gulf's in the middle of a rate case.

Ashar Khan (Analyst)

No, I understand that. I'm just thinking through it. You know, Tom, I guess, you know, EIX says they can grow earnings equal to rate base. I guess they don't do any equity and they haven't done equity for 14 years, 10 years, or I don't know how long. Con Ed can't do it because they had to do equity. I'm thinking as Southern is getting bigger and bigger and the CapEx needs are becoming bigger and bigger, I guess the ability to be able to grow earnings equal to rate base is now becoming more difficult because of the larger CapEx that is kind of like coming in because we have to issue equity to kind of finance it. I'm just trying to think through the paradigm.

Tom Fanning (Chairman, President, and CEO)

Yeah, Ashar, it hasn't changed. This has been the relationship at Southern Company. Go back and look at our rate-based growth over time. We'll be glad to kind of take you offline and go through the numbers. Our rate-based growth has always exceeded our earnings per share growth for a variety of reasons that we talk about: depreciation, shares, a variety of other things, O&M. We'll be glad to take you through that. There is nothing changing in Southern Company. This is a constant relationship.

Ashar Khan (Analyst)

Okay. Thank you so much.

Tom Fanning (Chairman, President, and CEO)

Oh, you bet. Glad you came on.

Operator (participant)

Our next question comes from Andrew Evans with UBS.

Tom Fanning (Chairman, President, and CEO)

Andy.

Speaker 21

Yeah, I've actually had enough. I'll ask my questions offline. Thanks, guys.

Tom Fanning (Chairman, President, and CEO)

Sure, you bet.

Operator (participant)

Our next question comes from Paul Ridzon with KeyBank.

Paul Ridzon (Senior Equity Research Analyst)

Could you have alternatively recast your growth rate by keeping it on a 2010 base, but saying 6%-7% off of that base? Would that have been the same?

Tom Fanning (Chairman, President, and CEO)

I think what we would have said, yeah. What we would have said is 5%-7%. You're reflecting the fact that we're in the top half of that range. Conceivably, you could go there, but we're conservative. We like to have enough spread to accommodate a challenged economy, worries about Europe, a variety of other things. Yeah, you're catching the point. If you start with 10%, we are at 5%-7%, and we're in the top half, that's where you come up with 6%-7%. All we're trying to do is just use a more recent base.

Art Beattie (EVP and CFO)

Yeah, we just recharacterize the same growth.

Tom Fanning (Chairman, President, and CEO)

The math is the same. We're not diving down on growth.

Paul Ridzon (Senior Equity Research Analyst)

You caught people by surprise the way you cast it.

Tom Fanning (Chairman, President, and CEO)

Okay.

Paul Ridzon (Senior Equity Research Analyst)

All right. Thank you very much.

Tom Fanning (Chairman, President, and CEO)

Yeah, sure.

Operator (participant)

At this time, there are no further questions. Sir, are there any closing remarks?

Tom Fanning (Chairman, President, and CEO)

No, we just want to thank everybody. I know this was a long call, but we always respect the fact that you guys are interested enough to call in and listen to our story, and we thank you for your interest. Hopefully, you found the time valuable. I know we did. Thanks very much.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does conclude The Southern Company Fourth Quarter 2011 Earnings Call.