management said April27 that they expect competitive generation subsidiary Southern Power Co. to continue to exceed aggressive growthforecasts, with an emphasis on acquiring wind assets.
Southern's2016 capital expenditure forecast for Southern Power is $2.4 billion, with $1.0billion allotted for 2017 and $1.5 billion in 2018, totaling approximately $5 billionin CapEx for the three-year period.
"Ibet you we'll be bigger than that in '17 and '18," Southern Chairman, Presidentand CEO Thomas Fanning said during the company's first-quarter earnings call. "You'llstill see solar. You will see more wind than we've traditionally done in the pastwould be my guess."
Net incomeat Southern Power rose to $50 million in the first quarter of 2016 compared with $33 million in the 2015first quarter and $34 million in the 2015 fourthquarter.
Fanningcautioned against Southern Power's net income contribution being perfectly consistentyear to year. "What I will say is I am reasonably confident that we're goingto spend more CapEx and therefore you should see net income contributions be a littlebit better than what we had had in our base case," he said. "To the extentthere is more of a tilt towards wind, those are kind of 10-year production tax creditsas opposed to the single shot you get from solar, so the net income profile followingthat CapEx investment will look a little different. Overall, we're seeing a verybullish market for Southern Power."
Fanningadded that he could see Southern Power growing to account for about 10% of Southern'snet income, even after the acquisition of AGLResources Inc. That estimate compares to the roughly 15% of net incomeFanning mused in July 2015that Southern Power could grow to within the Southern corporate family, though thatwas before the announcement of theAGL deal.
In additionto the recent extensionof renewable production tax credits making wind deals more attractive, SouthernPower also sees more opportunities, Fanning said. "With the extension of thePTCs we're seeing a lot of interest there. I think you also see in certain stateskind of policy level encouragement. You're seeing companies getting ahead of theClean Power plan. We're just seeing a good market for it."
Anotherbusy year for Southern Power would come on the heels of an acquisitive 2015 for the company, with executives sayingin October 2015 that they expected Southern Power to exceed its 2016 forecast. Asearly as April 2015, Southernexecutives noted on the company's first-quarter 2015 earnings call that SouthernPower had already hit its CapEx budget for the entire year. On April 18, the $264million purchase of a 150-MW wind farm in Oklahoma from developer .
In aninterview with S&P Global Market Intelligence on April 27 ahead of Southern'searnings call, Fanning described Southern Power's deal strategy for solar assetsof aligning with large developers such as FirstSolar Inc. and RecurrentEnergy LLC and its aim to develop similar relationships with wind projectdevelopers. Fanning explained: "Because we work with them through thedevelopment process, the process of them getting a deal and our due diligence inorder to buy the deal is therefore much more streamlined, much simpler, much moretimely. And so we're able to do these really big deals with strategic relationships."
Thishas allowed Southern Power to maintain its strict criteria for assets of only acquiringthose with long-term contracts and avoiding merchant deals. Although some generationinvestors have described an excessof liquidity in merchant markets prompting buyers to chase asset dealswith a greater exposure to volatile wholesale markets, Fanning said Southern Power'salliances with developers have insulated it from those market forces.
"Wedon't see that, but it wouldn't surprise me for nonstrategic buyers to be seeingthat," he said. "Strategic buyers have the ability, I think, to continueat scale in the way we've seen in the past. We've not been pressured that way."