美國南方電力 (SO) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Southern Company second quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode mode. Afterwards, you will be invited to participate in the question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Monday, July 22, 2002. I would now like to turn the conference over to Mr. Allen Franklin, Chairman and CEO of Southern Company. Please go ahead.

Thank you very much. And good afternoon. And thank you all for joining us again today. I'm pleased to be with you for our second quarter earnings call. Joining me today as always is Gale Klappa, our CFO. Let me again remind you that we will make forward-looking statements in addition to providing historical information. As you know, there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements, including those matters discussed in our Form 10-K and other SEC filings.

As you can see from the earnings materials we released this morning, we had an excellent quarter. Our businesses are performing extremely well. We're on track to meet or exceed our financial targets. Even though the markets have been in turmoil, I'm very pleased to note that Southern Company's stock has performed comparably well. From April 2nd of last year, the date of the merit spin through July of this year, July 19th of this year, our shares have gained more than 11 percent and we delivered a total return, including reinvested dividends, of nearly 19 percent over that period.

I think it's also significant that since September 11th, Southern Company's total return has outperformed the Dow Jones Industrial Average by approximately 20 percentage points and the SEP electric index by almost 30 percentage points. As we have mentioned to you following the spinoff of merit, we had hoped to increase the dividend in the second half of this year. Well, I'm very pleased to note that the strength of our business and our financials have allowed us to do so at this time. We have raised our annual dividend by 3 cents a share just last week. Our annual dividend is now $1.37 a share which based on Friday's closing price puts our yield at 5.7 percent. So we're still selling at a yield premium to the S & P Electric index. Development trends will come and go but we believe very strongly that dividends will continue to be an essential component of the total return package and certainly the package we offer to our investors. At this point, I'll turn things over to Gale Klappa for a discussion of our financial highlights for the second quarter, and our earnings guidance for the rest of this year. Gale?

Thank you, Allen. We're obviously very pleased with our performance in the second quarter. Obviously, our results are well ahead of our guidance, and I'll review the specific reasons why in a few minutes. First let's discuss our numbers compared to second quarter actuals a year ago. We earned 47 cents a share in the second quarter. This compares to 40 cents a share in the second quarter of 2001. That's an increase of 17.5%. For the first half of this year, the first 6 months, our earnings are 79 isn't a share. That's up 13 cents a share, or 19.7 percent over the earnings we reported for the first half of 2001. Now let's turn to the major factors that influenced our second quarter numbers.

First, I'll cover the negative factors. We saw an impact from additional operations and maintenance expenses related to new generating units that we placed in service. We also experienced lower revenues from industrial customers. And we have a greater number of shares outstanding. Finally, in this difficult economic climate, we experienced a downturn in our energy services business. Here's the breakdown. Increased O and M expenses primarily from new plants that we brought online in Mississippi, Florida, Alabama and Georgia reduced earnings by 3 cents a share. Lower base revenues from industrial customers contributed to a 1-cent reduction in earnings during the quarter. In talking with our manufacturing customers, we get the sense now that any meaningful pickup in manufacturing demand in the southeast will be delayed until 2003.

In our energy services business, the recession forced many of our industrial and large commercial customers to defer capital spending on energy improvements or to outright cancel plans for new projects. Given these difficult market conditions, the results of our energy services unit reduce Southern Company earnings by a penny. And then finally, the additional shares we have outstanding also reduced earnings by a penny per share in the second quarter. But on the positive side, we had several factors that added significantly to earnings in the quarter. These items include changes in depreciation at Georgia Power, weather, customer growth and rate increases, competitive generation and lower interest costs. Here's the breakdown of the positive factors. The change in depreciation, primarily related to the elimination of accelerated depreciation under Georgia Power's new rate plan, added approximately 4 cents a share to earnings this quarter.

As you know, a new rate plan took effect in Georgia on January 1 of this year. That rate plan also calls for a revenue reduction. So in the third quarter of this year, as seasonal demand increases, the effect of the revenue reduction and higher purchase power costs will more than offset the positive impact of lower depreciation, which as you know is taken evenly across the year. We experienced much more seasonal weather in this year's second quarter compared to the same period last year. You'll recall that in the second and third quarters of last year, we had the mildest summer weather in a generation. In particular, this year, we had 4 days in June when the temperature hit 90 degrees or above. That compared with no 90-degree days in June of last year. The impact of warmer weather added 3 cents a share to our earnings. In addition, customer growth and the impact of rate increases in Alabama, Florida and Mississippi and at our Savannah electric subsidiary in Georgia added 3 cents a share to our earnings. Then lower interest costs at the parent company added an additional penny a share.

Finally, better-than-expected performance from our competitive generation unit added a penny a share to our earnings for the second quarter. And we booked an additional penny a share from a one-time impact of a contract settlement with energy corporation. So overall, our quarter came in at 47 cents a share compared to 40 cents a share in the same period last year. As you know, our performance in the second quarter exceeded our guidance by 5 cents. One of the major reasons was the timing of expenses on a number of maintenance projects. This o and n timing accounts for approximately 2 cents of our better-than-guidance results. Then as I mentioned earlier, we gained a penny above guidance from a one-time contract settlement with Entergy so 3 cents of the 5 cents is non-recurring, or related to timing.

Turning now to our earnings guidance for the remainder of this year, it's clear that our retail and competitive generation businesses are performing better than planned. However, with continued uncertainty about the economy, and about the weather for the remaining summer months, we're choosing to be conservative about our earnings guidance for the full year. We are comfortable, however in raising our guidance by a penny from $1.73 to $1.74 a share. As you may remember earlier this year, we raised our guidance by 2 cents from a beginning year number of $1.71 to $1.73 a share, and now we are taking our guidance for the year up another penny from $1.73 to $1.74.

For the third quarter specifically, we are expecting to earn 77 cents a share. Again, our guidance for the third quarter is 77 cents a share. As Allen Franklin mentioned earlier, we announced one other piece of good news last week: Our board authorized an increase in our annual dividend rate of 3 cents from $1.34 to $1.37 a share. Our new quarterly dividend, which is 34.25 cents a share, is payable September 6 to shareholders of record on August 6. It's very clear to us that dividends matter. And they are an essential component in providing a competitive return to our shareholders. As you know, our business is not tied to spark spreads or to volatility in the price of natural gas. Ours is not a merchant energy business. Nearly all of our earnings are produced from our franchise business and from long-term wholesale power agreements. Our strategy is very straightforward.

Given our conservative business model and the fact that we expect to have a very visible and predictable stream of earnings going forward, we feel very comfortable in raising the dividend and we still project to meet our capital structure and payout objectives in the time frame we promised. Now, in addition to our dividend increase, our other major news involves Southern Company's entry into the retail gas business in Georgia. At this point, I'll turn it back to Allen for a discussion of our retail gas business and an update on key regulatory issues. Allen?

Thank you, Gale. Last month, we announced our intention to acquire NewPower's gas marketing business here in Georgia. We have submitted a bid of some $60 million. Our actual purchase price was $58 million. The breakdown of that price includes 28 million for customer contracts, customer service, and billing systems, and $30 million for actual gas inventory and accounts receivable. We received certification of the gas market in Georgia just last Friday and we have closed the transaction before the close of business that day.

Our entry into the retail gas business comes at an opportune time when the gas market in Georgia was open to competition in the late '90s, we made the decision not to enter the market at that time. We believe that there would be a great deal of customer confusion, billing problems, customer service issues that would dominate early years of gas deregulation in the state. We felt it would be more advantageous to wait and to enter the retail gas business after the initial shakeout. I strongly believe that that decision turned out to be the right one for us. We now enter the retail gas business as Georgia's fourth largest retail gas supplier with a 15 percent market share. With our brand strength and reputation for customer care, we think we can grow this business very cost effectively over time. Our gas marketing subsidiary will be known as Southern Company Gas. Starting out we'll utilize the customer support and billing services that we purchased from NewPower.

We have named Phil Saunders as the chief executive officer of Southern Company Gas and he will report directly to me in this position. Phil is a long-time employee of Southern Company. He has several years of experience running our competitive gas and competitive electric supply business in the U.K. as part of SWEB and we're very fortunate to have him in this post at this time. Our entry into the retail gas market is an exciting new step for us. For some time, we have been telling you that our goal is to offer more than one product to our customers. Southern company gas gives us another way to grow our products and services business and most importantly to do it in a manner that does not materially change our risk profile. Let me talk just a minute about R.T.O's. I know that a number of you are following the debate over the establishment of regional transmission organizations across the United States.

In the most recent development, we have found plans with FERC outlining our proposal for the governance and operation of the southeastern transmission organization. This rto would be composed of Southern Company, Entergy, Cleco and a number of public power entities including the city of Tallahassee, Daulton utilities, Georgia Transmission corporation, Jacksonville electric authority, the municipal electric authority of Georgia, Santee Cooper, the South Mississippi electric power association, and Sam Rayburn G and T in Texas. This would be one of the nation's largest rto's operating some 53,000 miles of transmission with assets of more than $9 billion. The structure chosen by the participating transmission owners as outlined in our filing will involve the hiring of a proven independent operator for the transmission system. The agreements between the operator and the transmission owners will provide incentives to the operator to maintain or enhance reliability, minimize operating cost and enhance the efficient use of the system.

We expect to receive comments from FERC during the fall of this year and to submit a definitive filing by the end of the year. As the rto process moves forward, we are looking closely with the public service commissions in our four states to ensure that the needs of our retail customers are protected. This concludes our formal remarks. At this point, Gale and I will be happy to answer any questions you might have. Operator, we'll now take the first question.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question-and-answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you are on a speaker phone, please pick up your hand set before entering your request. One moment, please, for the first question. The first question comes from Andre Meade with Lazard Freres. Please go ahead with your question.

Sure. Good morning. On your schedule of wholesale plans, I noticed a new 1855 megawatts in 2005. Is this -- what is this generally? Do you have specific location type of unit you'll build? Have you ordered equipment? Have you begun to sell output already from this unit?

This is Gale. The answer to all of the above is yes. In 2005, we basically have about 1855 new megawatts that will be coming online. There will be about just north of 600 megawatts and what we now call Franklin 3. We used to call that the goat rock plant. But last week, we named it after our senior lead leader. That unit, will be under long-term contract to DYNEGY. And they have signed a very long term contract for all the output of that unit. Then we'll be building about 1240 megawatts on an existing site near Savannah. Southern Company won a competitive state faction bidding process and it will be serving under long-term contract the output of that unit to meet Georgia power and Savannah Electric's growing retail needs. So those are two new units for us and they're all under long-term contract with the output completely sold.

Given the state of the power markets, why did you not investigate buying plants rather than building them?

Well, basically, these are plants for which equipment have been ordered and was already on its way. And the truth of the matter is that we have some flexibility here in terms of how we meet that demand. But for the longer term, there is no question that these units will be needed. And in the state faction bidding process in Georgia, there really was a need for the additional capacity.

Your earnings goals from wholesale business I think was 200 million by 2005. Do you need this extra 1855 megawatts to hit that?

No. We don't. In fact, [ Indiscernible ] In 2005, they will have just a partial year of results.

But with -- we would make the 200 million comfortably without that capacity.

That's right. These units will not be on until midyear '05.

Okay.

But we were not -- in balance, we were not counting on these units as part of that goal.

Got it. On your , your, uhm, Cap-Ex figures, you have a billion three for environmental retrofits. I guess it's about 3, 325 million a year. What I was wondering was, what -- I assume this is mostly for knox work on your coal units. And what's the overall program here? You know, where do you get to bio-5? What's your goal here? Or do you expect, you know, further expenditures of this magnitude going forward after 2005?

Andre, we both probably will answer this for you. The workhorse coal-fired power plants that we have particularly in Alabama and Georgia are all undergoing the addition of fcr as, electric Catholic reduction. And the FCS are already in place in plant bowl Lynn and plant Miller north of Birmingham and so a lot of the immediate expenditure over the next 3 or 4 years is in the upgrading for Knox. Now, over the course of time, between now and 2010, in our budgets you are going to see us spend a considerable additional sum of money for us to help the states in which we operate come under federal compliance. So we'll be spending close to 4 billion between now and 2010, already planned regardless of what Congress does to help our states immediate the emissions targets that they need to meet to come into federal compliance. Allen?

Might I add that, uhm, the lion's share of this 1.3 billion is for plants around Birmingham and around Atlanta especially. And it's related to ozone non-attainment, that's where the ground level ozone is below the level specified by the EPA. So near term, we're really working on the metropolitan areas trying to help bring those regions into compliance with ozone standards. There are still other longer-term environmental issues that will be -- that we'll be spending capital on over time.

Okay. One final question. Your non-fuel o and m line is up quite a bit year-over-year. You mentioned the -- one of the factors new generating units. But looks like you only have about 4 -- less than 5 percent new capacity this year versus next. All the new capacity is gas-fired, which compared to coal and nuclear I would assume would be much cheaper in terms of o&m. Is there other items here that's driving this line item up?

Andre, that's a good question. When you look at our consolidated statement, and you see non-fuel o&m up about 66 million, the lion's share of the additional o&m beyond what we talked about from the plants is really the consolidation of our other operating units in our synthetic fuel investment, et cetera. So really, the lion's share, the 3 cents of additional after-tax o&m expense from our core business is all coming from the additional plants that we brought online. The remainder of the uptick in o&m is really coming from our none core business units.

And the bulk of that is the syn fuels business?

Some of that is o&n from syn fuels business, some from Southern Telecom, Southern Link, energy services, outdoor lighting. So that consolidated number that you are seeing puts on one line all of the o&m from all of the companies.

And that brings up -- are most of those revenues there in other operating revenues?

Yes.

All right. So we see an increase there, too.

Yes.

All right. I, uhm -- I think I understand. That's it. Thanks.

Would you like to not effective tax rate?

I did the calculations. But feel free to tell me. [ Laughter ]

For 2 q, '02, our effective tax rate was 33 percented to 34.1 for the comparable quarter a year ago.

Great.

Thank you, Andre.

Bye bye.

The next question comes from Scott Pearl with Credit Suisse First Boston. Please go ahead.

Thanks. Good afternoon. On the Cap-Ex table on page 6 just taking a look at the competitive generation 2.0 billion from '02 to '05, just trying to reconcile that with I guess it was 2.1 billion in the first quarter in sort of how that relates with the plant, the new plant that's being built in 2005. Has something changed for the other plants or was that included in the last release?

No. When we put off the last release, we were anticipating that these contracts would be completed in those -- and those units would be built. So basically, this number covers those units, as well.

Okay. The, uhm, I guess on the prior page on page 5, the, uhm, the, uhm... operating -- funds from operations, I guess there's been a $200 million increase from the first quarter to the second quarter. Just trying to, you know, I guess work that into what you see, you know, going forward. You have only added a cent, really, to the EPS guidance for this year. Is there something else that factors into not getting picked up with EPS or is this more of a going-forward look of '03 and '04?

Actually, Scott, one of the -- we're continuing to refine the benefit of the tax stimulus package that was passed after September 11th. That is going to give us some near-term accelerated depreciation. And in part, this pickup in FFO in large part, actually this pickup in FFO was from us refining the near-term cash benefit of that tax stimulus plan. So really won't fall to earnings necessarily, but does give us some additional near term cash.

Do you have a feel for sort of what the magnitude is of that?

Right now, we think right around $100 million.

So the other 100 would be just improving earnings going forward?

Yes. That is correct.

Relative to the last time. Uhm, for the 2002 $1.74, do you have how that breaks out by segment?

We do happen to have that for you. Of the $1.74, we are expecting the regulated infrastructure business, our core operating companies, if you will, to earn about $1.54. Our competitive generation business we expect would contribute about 21 cents a share. Products and services about 2 cents. Synthetic fuels about 3 cents a share. Our leasing business, about 3 cents. And then would you offset that, Scott, by about a 9-cent reduction from holding company expenses principally interest on debts. That should net you out to about $1.74.

Thank you.

The next question comes Paul Ridzon with McDonald Investments. Please go ahead.

Could you let us know what you are expecting from accretion as far as the gas assets?

The first -- first of all, it's a relatively modest invesment for you about $60 million. So the accretion is going to be relatively small but we expect it to be -- include the [ Indiscernible ] Within just a few months so it's going to be positive soon, but it's -- the effect on southern company's total ds will be modest.

Since you kind of set up the segue for that being small, where do you think you see critical scale here?

It's -- first of all, it's the good business and it's an easy business for us because it's right here in Georgia and it's dealing with the same customers and the regulators and the same political structure that we deal with every day so it's an easy step for us. Long-term, I think there is as this electric market and the gas retail markets continue to evolve, there is still a likelihood long term that the ability to offer competitive gas and probably competitive retail electric service together will be very important to companies like ours. So it's really not a near-term scale issue. It's really not as much near-term earnings issue even though this is accretive. We just think it positions the company very, very well as the retail markets continue to evolve and become more competitive. To be able to offer gas and electric here in Georgia now. Scale could jump from pursuing this gas business more broadly. But that was not the motivation. The motivation was a strategic move that's accreted near term and it's a low-risk easy step for us.

Could we call it dipping your toes in the water? [ Laughter ]

Dipping your toes in the water? [ Laughter ] I guess you could call it that. We are going to learn a lot from playing in this competitive retail gas market here. We are going to learn how well we do in the retail gas market. I think there are a lot of similarities between being successful in a retail gas market and a competitive retail electric market. If we -- we very well may face that challenge down the road. It just makes a whole lot of sense for us. Your description is not bad, actually, because it's not a huge strategic leap for us. It's certainly not a huge financial leap but it makes sense and it prepares us for some things that come down the road with very little risk.

Just one unrelated follow-up. You mentioned weather was a 3-cent positive versus last year. Do you have a -- what weather was versus normal?

Yes. As a matter of fact, the weather in the second quarter of this year was -- so the weather people tell us, about as normal as any year in the past 30. So we came from very abnormally low weather, picking up 3 cents to normal weather. Now, normally, you would expect normal weather to give you a little bit more than 3 cents, particularly compared to last year's depressed demand. But we're still not seeing any kind of meaningful rebound out of the industrial group. In fact, if you look across the first half of this year, our sales to our manufacturing customers in the southeast are actually down 3/10ths of one percent so what held back any further gain was really the continued weakness in manufacturing in the southeast.

So this 3-cent pickup was consistent with your 42-cent guidance?

The 3-cent pickup was consistent with our 42 -- yeah, with our 42-cent guidance, that's right.

Thank you very much.

The next question comes from Paul Fremont with Jeffries. Please go ahead.

Two questions. One, can we get a status update on the gulf Power rate case? And the other is are we going to expect a similar weather-related pickup in the third quarter given the mild weather that you experienced last year and is that fully incorporated into your guidance?

If I could handle the second question first, yes, we would expect some weather-related pickup in third quarter earnings compared to last year. But there will be a significant offset to that because of the Georgia Power rate plan. If you recall, Georgia Power signed a new 3-year rate agreement with the Georgia Public Service Commission at the end of last year and that rate plan called for a $118 million one-time rate reduction. The revenue reduction that Georgia Power has agreed to is tied to kilowatt hour sales. So we are going to see a fairly significant decline at Georgia Power because of the rate plan and that will have some real offsetting effect on the weather-related up side so the weather-related up side basically offset to a large degree by the reproduction of Georgia power is already incorporated in the forecast we gave you. And then in terms of the Gulf Power rate case that rate case is settled. The Florida Public Service Commission granted Gulf Power company a $53.2 million annual rate increase. That's almost a 9 percent base rate increase. It was effective June 1 of this year. The rates were set at a 12 percent return on equity and the company can operate within a bandwidth around that the upper end is 1275 on equity. In the majority of that rate increase as you recall was to cover a new generating unit, ccgt, that was brought on service -- brought in service this year, plant Smith Unit 3.

Thank you.

You're welcome.

Ladies and gentlemen, as a reminder to register a question please press the 1 followed by the 4 at this time. The next question comes from Vedula Murti with SAC Capital. Please go ahead.

Good afternoon.

Hello.

Couple of things. One, under your rate plan, once you hit like a 12.9 percent roep, are you going to a sharing regime between shareholders and customers [ R.O.E.! Do you anticipate that you will be into the sharing zone this year?

At the present time, Georgia power does not anticipate going above the $12.95 this year.

Okay. I'm also wondering last quarter on the conference call, when we talked at least initially about '03, you had indicated at that point in time a outlook to, say, $1.85 would be too aggressive at that point in -- at that point in time. If one were to take your current $1.74 outlook for 2002, and use the bottom end of your growth range of about 5 percent, you end up like in the mid -- you come very close to the mid $1.80 area. I'm wondering if you can kind of comment a little bit about what you're seeing going forward for '03.

Well, we still believe over the long term minimum 5 percent EPS growth is the right area for us and the right kind of guidance. We just really need to see where we're at at the end of the year as we get through the summer months and into the fourth quarter -- if we get through the summer months and into the fourth quarter and get a better read on the economic an on the manufacturing sector of the economy in particular, we would ask you to be patient with us. We'll clearly give you some '03 guidance as we get toward the end of the fourth quarter but for the longer term, we think minimum of 5 on an annual basis is the right range for us. It could wobble one way or another as you know in any given year depending upon any number of factors including the economy.

Okay. And my last question is, I'm wondering, can you discuss a little bit some of your actual assumptions that underlie your pension accounting? And given the performance of various financial markets, whether we might be seeing any changes there?

Well, for starters, we are assuming about an 8.5% annual growth in the pension assets. Our pension plan is actually -- has actually performed better than that over the past five years on average. Obviously, with the markets and the it -- in the turmoil they're in we've not seen that kind of return so far this year. We did report some modest amount of pension income last year. We are projecting over the next five years for that pension income to decline to zero. And I think that's still a pretty good projection.

Just so we have a kind of a base idea, how much pension income what actually reported to Southern Company's net income in 2001?

I'm not sure we have that number in the room with us. But it was -- it was after tax in the neighborhood of 80 million.

Okay. So -- so what you're saying is that last year we saw about 80 million after tax of pension income in the reported financial results?

That is correct.

Okay.

You will see something in that neighborhood maybe slightly less this year.

Okay. I'm wondering, how is that recorded, then? How do you go about deciding how much actually you get of flows through in terms of being considered pension income like, for instance, this year, if the pension plan is flat to negative as an aggregate in terms of its own performance, how do you then decide how much pension income is allowed to go on Southern's books?

Well, obviously we do a reassessment every year of the state of our pension plan the. And our pension plan has a -- has a October 1 through September 30 performance year. So before Southern Company's annual results are reported, we have in hand the results of the pension performance for the 12-month period. And then as you know, there are very specific accounting rules that indicate to you what is appropriate to be put into income, if anything. Under the current rules, the returns are averaged over a five-year period so any kind of blip in the return upward or downward really gets smoothed in over a five-year period under the current rules.

So do you then choose then based on whatever this current five years says that there is an excess over and above what was assumed, do you just amortize that in straight line kind of thing?

You amortize it in straight line over five years, that is correct.

Okay. So what that would imply, then, is then that under the last fiscal -- under the last review for over the five years, you were basically overfunded to the tune of approximately, say, $400 million, and that's what kind of got reflected in terms of the $80 million amortization in 2001, correct?

It's probably a little bit more complicated than that and we can get with you off line and have our pension expert walk you through that but you're not far from wrong -- you're not far from right! [ Laughter ] It's a little bit more complicated than that there are 4 or 5 loops that you have to go through before you get to the number.

One last thing on this topic. And then I'll let someone else go. Is it possible that, given the sharp changes in the financial markets, even though it's only one year, that in fact, on a five-year rolling average you could see a more significant drop-off than, you know, than you might be thinking here?

Well, anything can happen, obviously, with the -- just looking at the last few weeks in the market. But one thing I would point out to you, because our pension plan performance year starts at October 1, we're coming off the weeks right after September 11th, which had a very, very negative impact on the markets. So we are starting off at what I thought was a pretty low base. Obviously, the markets have dropped back below that. But our annual return -- our annualized return, I should say, through May was 5.8 percent on the pension plan. So I take that back. Our actual return through May was 5.8. So annualized, it was almost double digits. Now, what has happened, obviously, in the last six weeks is not reflected in that number. But I doubt seriously whether you'll see a major -- a major difference in the number.

Okay. Thank you very much.

The next question comes from Norman Greenburg with Norman Greenburg Consultants. Please go ahead.

Hi. Congratulations on the continuing good performance.

Thank you.

I'm wondering with the markets being as they are particularly the senior security market, are you seeing any opportunity for substantial refundings?

We are indeed, in fact, you will see -- we have already seen in both Alabama and Georgia Power some of our long-term securities refinanced at very favorable new interest rates. And you'll see an announcement from Southern Company in the next few days about a refinancing that we expect to take advantage of, given the interest rate market very soon, as well. So, yes, indeed, we are seeing some ability to lower our financing costs overall with the current state of the interest market.

[INAUDIBLE] opportunities reflected in your guidance?

They are indeed.

What is does your capital ratio look like at the end of '02?

As you recall, we've committed to reaching a 38 percent equity ratio by the end of '03. We'll be just slightly below that given our current projections by the end of '02.

Okay. Again, uhm, you would be making up your mind on further gas expansion until you get some more opportunities or more experience with what you already got, right?

Yeah. We're -- we're, uhm, we look at this Georgia opportunity as a unique opportunity. We looked at it several years ago when they opened the market up. So this -- this is taking advantage of a very specific opportunity here in our backyards, and we very well intend to absorb this, understand it, make sure we're -- there is some synergy between gas and electric. So this is just what it appears to be, just a -- taking advantage of the unique opportunity here in our footprint.

After some experience with this I assume that, uhm, the possibility of expanding that into your other territories exists, although there is no certain thing?

That would be a fair statement.

Okay. Again, congratulations. Thank you.

Thank you.

The next question comes from Jim Von Reismann with J.P. Morgan. Please go ahead.

Hi, Allen.

Hi.

Can you hear me?

Yes.

Hi. Just a quick question. Most of the questions have been asked and answered. One is a N.I.T. question on the pension, who sets the return, is that the each of the state commissions on the pension plans? Or is the company doing that through your own pension advisors?

No, the company does that through our own pension advisors, plus, plus the board also takes a look at it.

Okay. Second question is on the capital structure. As you talked about reaching this 38 percent equity ratio, if memory serves me correctly, you plan to have only drip issuances of 600 million over this time frame. I thought the drip was going to run about 350 million annually. Is there a change in the policy?

No, there is no change in the policy. Because, Jim, we're slightly ahead of plan in terms of our equity , you're seeing a slightly lower number in terms of projected -- equity going forward. But you are correct, we have no other plans, no other need to issue equity outside of the dividend reinvestment plan for stockholders and the employee savings plan.

Okay, great, thank you.

Thanks, Jim.

Scott Pearl with Credit Suisse First Boston, please go ahead with your follow-up question.

Just one more quick question on Alabama Power. Just trying to just understand from looking at this information here. The income performance, uhm, at that subsidiary.

Okay. In terms of Alabama Power's net income, you should be seeing and we are seeing a pretty significant uptick this year compared to last year. Alabama Power has suffered a great deal last year in the industrial downturn. Of all of our companies, Alabama Power has the higher percentage of its sales going to industrial customers. In fact, almost 40 percent of Alabama Power's retail kilowatt hour sales are to industrial customers so Alabama power had a very difficult year from the net income standpoint last year. They were very successful in terms of obtaining annual rate increases to help offset the downturn in their financial condition. In fact, Alabama Power last year in July was granted a $17 million rate increase to cover a new plant that had come into service. Then in October, Alabama was granted another $58 million annual rate increase and then in April this year, another $55 million annual rate increase all to keep that company within it's allowed return on equity bandwidth. So we should be seeing and we are seeing a return to normal profitability for Alabama Power.

That makes sense. What confuse me a little bit was the operating revenues only increased by 2 percent but the income increased by 50 percent. So I didn't know if there was something on the cost side or maybe reduction in depreciation that contributed to that increase.

You're really seeing the impact of the base rate increases.

Okay. Thank you.

One other point, Scott. You have to look at base revenue not total revenue because within that mix, if you are looking at total operating revenues within that mix is fuel. And our fuel costs are actually down. So we can strip out for you and Glen can follow up with you the base revenue for Alabama Power. You'll see a different picture there.

The next question comes from Paul Ridzon from McDonald investments. Please go ahead with your follow-up question.

Last year's third quarter where was weather relative to normal? Do you have that available?

Yes. Weather was very mild relative to normal, very mild.

A nickel-ish type number?

Paul, we don't have that number in the room with us. But I would guess it was at least a nickel, yes.

Thank you.

There are no further questions, sir. Please proceed with your presentation or any closing remarks.

If there are no other questions, I may on behalf of Gale again just tell you thank you very much. First of all, if you are interested -- for your interest in Southern Company and for being in on our earnings call. Thank you very much, Gale. Do you have anything else?

No. We appreciate the support. Thank you very much.

Thank you, folks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.