美國南方電力 (SO) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Southern Company fourth quarter earnings conference call. All participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, press the one followed by the four on your phone. As a reminder, this conference is being recorded Monday January 27th, 2003. I would now like to turn the conference over to Mr. Allen Franklin, chairman and CEO. Please go ahead, sir.

Thank you, operator. Afternoon and thank all of you for joining us again today. I'm pleased to be with you for our fourth quarter earnings call. Joining me today as always will be Gale Klappa, our CFO. Let me remind you, as we always do, that we will be making forward-looking statements 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 matters discussed in the form 10 K and other SEC filings. As you can see from the materials we released this morning, we had an outstanding quarter and a strong year. In 2002, we delivered across the board on our financial customer service and operational goals. In all respects, 2002 was a very good year.

I'm pleased to note that Southern Company's stock also continued to perform extremely well for the full year 2002. Our total shareholder return, including past appreciation and reinvested dividends was 17.6%. And for the 10-year period ending 2002, a total return on Southern Company's stock again including reinvested dividends averaged more than 15% a year. In comparison to S & P, electric index has a average return of less than 6% a year. In addition, we raised our quarterly dividend ahead of schedule and the third quarter of last year, we raised it in the third quarter of last year and you'll recall we talked about raising it later last year. Our annual dividend rate is now $1.37 per share. Even with the stalled performance of our stock, our dividend yield was still 4.8%. Investment trends will come and go but dividends will continue to be an essential component of the total return package that we offer to our investors. At this point, I'll turn things over to Gale Klappa for a discussion of our financial highlights and the fourth quarter and our earnings guidance for this year. Gale?

Allen, thank you very much. Good afternoon, everyone. As Allen mentioned, we had a strong quarter and really an outstanding year. Obviously, our results were well ahead of our guidance and I'll discuss the specific reasons why in just a few minutes.

First, let's review our numbers compared to the fourth quarter and to the prior year. Fourth quarter 2002, as you can see, we earned 23 cents a share, increase of 7 cents a share or 44% above the fourth quarter of 2001. For the full year, we earned $1.86 a share. Thats up 24 cents a share from the results we reported for the full year 2001. The $1.86 a share includes the effect of favorable weather and a number of one-time items. Excluding these items are earnings from normal operations amounted to $1.75 a share.

Now, let's turn to the major factors that drove our fourth quarter numbers. First I'll cover the negative factors. We saw a cost impact as you would expect from additional generating units that we placed into service during the year. In addition, our energy services business continue to be hurt by the downturn in the economy and by an after tax charge which we'll discuss in more detail in a minute. Here is the breakdown of our results compared to fourth quarter actuals of a year ago. Higher o & m expenses primarily from new plants we brought online in Alabama, Florida and Georgia and from the maintenance of our network, reduced earnings by 12 cents a share. Depreciation and property taxes on our new plants also had a negative impact of 3 cents a share. In our energy services unit, we took an after tax charge of $9.8 million dollars or a little more than a penny a share to reflect the impairment of two contracts that called for us to build, own and operate energy facilities and equipment at customer sites. After a thorough management review, we have decided not to pursue the ownership and operation of energy equipment at customer locations in the future.

We will, however, continue to work on Turnkey energy efficiency projects for our customers. On the positive side, we had several factors that added significantly to our earnings. These major drivers include changes in depreciation at Georgia Power, weather, customer growth and sales mix, competitive generation and two important tax items. Here's the breakdown of the positive factors. Changes in depreciation, primarily the elimination of accelerated depreciation under Georgia power's new rate plan added to 5 cents of earnings this quarter. As you know, a new three-year rate plan, which included a reduction of $118 million in base rates took effect in Georgia on January 1, 2002. We also in this past fourth quarter experienced colder weather. In particular, the months of November and December were on average about 8 degrees colder than the final two months of 2001. So favorable weather added 5 cents a share to our earnings in the fourth quarter. In addition, customer growth, which continues strong and positive changes in our sales mix added 4 cents a share. Then we had two tax items and added a total of 5 cents a share to earnings in the fourth quarter. A new tax law, which took effect in January of 2002 allowed companies to receive a deduction for dividends paid to employees on shares on their 401K and employee savings plans. This deduction added 2 cents a share to our earnings in the fourth quarter. Then we were due an additional deduction reaching back to 2001 because of the structure of our employee savings plan. This extra tax deduction added 3 cents a share to our earnings in the fourth quarter. Our competitive generation business added a penny a share to the quarter and tax credits associated with the synthetic fuel business added a penny a share. In addition, better than expected performance of our leasing business added nearly a penny a share in the fourth quarter. Finally, lower parent company expenses which include lower interest costs added a penny a share to our earnings. Overall, our quarter came in at 23 cents compared to 16 cents a share in the fourth quarter of 2001.

Now, as you know, our performance in the fourth quarter exceeded our guidance by about 8 cents a share. One of the major reasons was the impact of the tax items I mentioned earlier. The extra deduction reaching back to 2001 on dividends paid to employees for their shares in their 401K and employee savings plans had a positive impact of 3 cents a share compared to guidance. Then a true up, based on the actual number of shares employees were holding in these plans, added another penny in the fourth quarter. Other positive factors which enabled us to exceed guidance were colder weather, which added 3 cents a share, better than expected performance of our leasing business, which added nearly a penny a share and our synthetic fuel business which also had a positive impact of a penny a share. On the downside, the $9.8 million dollar after tax write off in the fourth quarter and our energy services business had a negative impact of a penny a share from guidance. Overall, we came in at 8 cents a share above the guidance we had given you.

Now, before I discuss our earnings outlook for 2003, I'd like to briefly review our progress on several other key indicators. As you may recall, one of our important financial goals is to strengthen our balance sheet by raising our equity ratio. I'm pleased to note we are ahead of plan at meeting that goal. Under GAAP accounting, our ratio rose to 30.83%. We fully expect to achieve our target by year end 2003. Our Board of Directors will approve our 2003 capital budget at its meeting in February but pending board review, we project a total capital budget of $2.1 billion dollars in 2003. This new capital budget will be about $500 million lower than our actual capital spending for 2002. Given our very strong cash flows from operations of approximately $2 1/2 billion dollars for 2003, we do not see any need for a new public equity offering this year. We plan to fund our investments from internal cash flow from the sale of new shares from our dividend reinvestment and employee savings plans and additional debt offerings. Finally, if all goes well, we should be in a position to stop selling new shares in our dividend reinvestment and savings plans by the end of 2003.

I'm also pleased to report today that our newest business, Southern Company Gas is off to an excellent start. As you will recall, last August we acquired the retail gas customers of New Power in the state of Georgia. In our projections, we assumed Southern Company Gas would be profitable by the end of 2002. It has met and slightly exceeded those expectations. In just a few short months, Southern Company Gas has become the third largest gas marketer in Georgia now with some 223,000 customers. Turning now to earnings guidance for 2003.

It's important to note again that the $1.86 a share that we achieved last year included the effects of weather and one-time items that taken together add up to 11 cents a share. Here is the breakout of that 11 cents. A hotter than normal September and colder weather in November and December accounted for five of the 11 cents. The supplement of a contract dispute, which we reported to you at mid year with Intergy amounted to a positive one time a penny a share. In addition, the impact of one-time tax items totaled 6 cents a share. Also included among the one-time items is a penny per share write-off for the energy services unit we described earlier. So when we strip out weather and strip out the impact of the one-time items, our earnings from normal operations for 2002 were $1.75 a share.

Now, as we look at our 2003 guidance, we're making several key assumptions about our business. First, we're assuming weather normalized kilowatt sales growth of 1.35%. This sales growth is conservative. It assumes we have no meaningful pickup in the industrial sector of the economy. And that customer growth continues at approximately the same rate as last year at just about 67,000 customers. For our competitive generation business, our plan assumes modest growth for 2003.

As you know, stock prices are likely to be depressed this summer but we are not dependent on the stock market for our earnings in the generation of our business. Our wholesale power business remains solid and on track. Finally, our financial planning for 2003 assumes no new equity offerings other than the shares that we will be issuing through our dividend reinvestment and employee savings plans.

So given these underlying assumptions and normal weather, we're comfortable with a 2003 earnings estimate of $1.84 a share. This is 5% above the $1.75 from normal operations that we earned in 2002, and it's very consistent with our long-term growth target of approximately 5% a year. Again, our earnings guidance for 2003 is $1.84 a share.

One last point on earnings guidance for the first quarter of this year, our earnings target is 33 cents a share compared to earnings of 32 cents a share in the first quarter of last year. With the solid growth that we're projecting for 2003, I believe Southern Company will continue to be one of the strongest performers in the industry this year. At this point, I'll turn it back to Allen for a few closing remarks and an update on key regulatory issues. Allen?

Thank you, Gale. As we look ahead to the rest of 2003, I'm convinced we have the right plan in place and certainly the right team to execute it. I'm confident that we'll meet or exceed our promises. As Gale mentioned earlier, nearly all of our earnings are produced from the franchise businesses and from long-term wholesale power contracts with no major retail rate cases on the horizon this year. And a wholesale business that is not tied to sparch spreads are volatile in the price of gas, our strategy is very, very straightforward. It's a strategy that has produced positive results and good and bad economic environments. We'll continue to focus on executing the basics of our business providing value and a high standard of service for our customers and a solid investment for our shareholders. Our goal is to deliver as we have, year in and year out, the best risk adjustment returns in our industry.

In looking at the broader industry front, I know that a number of you are following the debate over the establishment of regional transmission organizations or RTO's across the country. Earlier in 2002, a number of transmission owners in the southeast, including us, the Southern Company asked the FDRC to approve certain provisions or proposed southeastern RTO. We call that RTOC Trans. In October, they approved these provisions, specifically the governance structure and certain operational principles. This RTO it formed would be one of the nation's largest operating some 53,000 miles of transmission with assets of more than $9 billion under its control.

In the most recent development, Southern Company and the other transmission owners selected the Electricity Supply Board of Ireland to manage, plan and operate the proposed RTO network here in the southeast. Exceter, the management consulting firm, will be working with the Electricity Supply Board of Ireland as a partner on this project. We're now in the process of putting an operational agreement in place with all of the RTO participants and the Electricity Supply Board of Ireland. While we regard the actions approving the outline for southeastern RTO as a positive step, the ultimate implementation of an RTO in the southeast depends at least in part on working through the many remaining issues and on state commissions being convinced that retail customers will benefit from this development. One of the unresolved issues is the assertion that it has jurisdiction over the retail use of the transmission system and a standard market design. State regulators in the southeast do not agree with this assertion and are not likely to approve our participation in an RTO if it would mean the states would lose their ability to control costs to retail customers. However, you may have seen an announcement earlier this month that FERC continues to issue a white paper in April on this proposed rule for standard market design. FERC has indicated that flexibility is needed to accommodate legitimate regional differences. We view this action as a positive sign and we'll wait to see the specific details.

In the meantime, we continue to work closely with federal regulators and with the Public Service Commissions in our four states to be sure that discussions regarding transmission go forward in a thoughtful manner. The RTO process, obviously, is far from complete, but remain optimistic that we can come to a positive outcome in this matter at least eventually. I hope we can. 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 would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone, please lift your hand set before entering your request. One moment, please, for the first question. Our first question comes from the line of Andre Meade with Lazard. Please go ahead.

Hi, good afternoon.

Hey, Andre, how are you?

Not bad. A few questions for you. In your 03 guidance of $1.84, what are you assuming for the annual trip of Alabama Power?

You mean the annual rate adjustments?

Yeah.

I believe Alabama Power will need about a $60 million true up adjustment related to a new plant that will be coming into service. As you probably recall, there are two pieces to Alabama Power's retail rate plan, if you will. One is the rate stabilization action if their return falls above or below a particular bandwidth. The other is an automatic rate adjustment for a new certified plant coming online. There will be some new certified plant that will probably require that one-time approximately $60 million adjustment.

Will there be any adjustment for the above or below the band earnings?

No, none projected at all, Andre.

Okay. Also, when you look at the Southern Power, you have the 1855 megawatts in '05, I assume you are still planning on building that. I guess my question is, given the state of the power markets and some of the, I guess it's soon market prices because we haven't seen any completed deals yet, are you precluded in any way from either buying plants that are already built or just contracting for that generation instead of building it?

Andre, I'm sure Allen will want to make a comment on that as well, but let me talk specifically about the 1855 megawatts in '05. 1240 of the 1800 some odd megawatts are already contracted back to our operating companies, particularly Georgia Power and Savannah Electric under a state bidding process. Those have a capacity need in '05. They put that need out for bid and actually it was about 1800 megawatts of need. We won 1240 of that. So those units will be built and sold under long term contract back to Georgia Power and Savannah. The Franklin three unit, about a 615 megawatt unit is under a 25-year contract with Dynegy. Obviously, if Dynegy continues to survive, then we'll continue to build that unit. Allen?

More directly to the question of could we supply that power out of other plants specifically to revive distressed capacity. Generally, those kind of firm taker pay contracts name a specific plant location from which the power should be delivered. That does not mean that if we can find lower cost capacity else where and it's to the benefit of us and the purchasing entity, that we couldn't negotiate another source if we could assure the same level of reliability and transmission availability. So that's certainly a possibility, but it would require a negotiation between us and the purchasing party.

Okay. So if you did decide to buy instead of build, you'd have to alter the contract it sounds like. Would there be any penalties for walking away from equipment purchases?

Well, there's always penalties for walking away from equipment purchases, and of course, that would be part of the economics of that would have to be considered in deciding whether to try to provide the power from another source or this source. But that's -- if you look at these contracts, we assume we're going to purchase the equipment as planned. We assume we're going to provide the power out of those sources, so any other option we consider would simply have to produce a better return. We -- at this point, we plan to build these plants and deliver the power out of these sites.

And Andre, the major equipment for all three of those have already been purchased.

If Dynegy was to file for bankruptcy prior to you starting construction, would the 615 megawatt plant then either be canceled if you didn't find another buyer?

It would depend upon the decision of the bankruptcy court. As you know, once a company goes into chapter 11, the bankruptcy court takes a look at every single contract. Every single business relationship that the company has, and the decision as to whether or not to keep that contract enforced would lie when the bankruptcy court.

I do have one more. Just looking at your parent company and other line, it lost $30 million this year, $30 million negative earnings. $88 million in '01 and $150 in 00, that's a steep drop. Is there anything going on other than the interest, reduction apparent?

There are two things going on Andre. One, clearly a major savings and interest cost given our strong credit rating. Huge uptake in terms of benefit from southern to lower interest costs. The second is the benefit of the 401K tax deduction that I mentioned earlier.

Okay.

The combined benefit after tax of the ongoing deduction for 2002 was about $30 million and then the one-time benefit reaching back into 2001 was about $23 million. So after tax, we picked up about $53 million in the parent line simply because of that particular tax deduction and the benefit from it.

Okay. That's it. Thank you very much.

Andre, you always want to know our effective tax rate.

Go ahead.

For '01, it was 33.2% for the entire year. For '02 it dropped to 28.6%. We actually had a negative tax rate with that benefit that I mentioned for the fourth quarter of '02.

What are you assuming for '03?

We're assuming a tax rate in '03 roughly the same as '02.

Got it. Okay, thanks.

You're welcome, Andre.

Our next question comes from the line of Carey Stevens with Morgan Stanley. Please proceed with your question.

Good afternoon.

Hi, Carey.

Hi, Carey.

I just have three quick questions. First is since you seem to be ahead of goal on the balance sheet, I was wondering what your target is now for year end '03. Since you are already at 38.3 are you expecting to be closer to 37%?

For year end '03, no, we would be closer to 39.

Oh, going up, sorry. Wrong way. So you think you'd be ahead by 100 basis points?

I expect that's right.

And on the guidance for products and services business, you had kind of a negative growth for year-over-year. I was wondering if you could go through the main drivers for that and still feel the expectation for $50 million in net income by '04 is still good?

Okay. Let's talk a little bit about the drivers for that other products and services business. We had, as you know, and as we've covered in the script, a disappointing year in our energy solutions unit. But if you stripped that out, we really were on target or ahead of target in every other one of the products and services. Our outdoor lighting business had an outstanding year ahead of plan. Our gas business, which we added in August beat the plan, and I expect we'll have a good year in '03. Our appliance sales division in Alabama was ahead of plan. Every other business unit that we include in products and services including Southern LINC our wireless business, had a terrific year. One of the few wireless companies in the entire industry making money. So we feel good about every other business unit in the product and services area other than Solutions, which you know had a very difficult year. We've always said $50 million was a hugely stretched goal for 2004. In our financial projections, we have not assumed $50 million, we had assumed $35. And my sense is, and Allen will want to comment as well, but my sense is we're very much on target to coming close or hitting that 35 million in '04. Allen?

I feel the same way. As we told you this past year and the year before that, I think we set a $50 million goal really to generate some innovation and enthusiasm internally and to just get these products going. From the beginning, $35 million was the number we were thinking about and counting on to hit our 5% EPS growth rate. I think we're right on track to do that. The energy solutions issue dealt with contracts where we actually owned assets on-site at manufacturing facilities owned by manufacturing companies. We have decided as Gale mentioned earlier, that that really is not our forte, so we've taken a one-time writedown on those assets. And I think when we get those cleared out, which I think they are pretty much cleared out now, even Solutions should be on a positive track. So look at it at how well we're doing in the other areas. We don't have that far to go to get to $35 million, so --

okay.

And still it's still a small part of our overall business.

Oh, yeah.

So we feel good about it.

Okay. And lastly, with respect to the competitive generation business, you're running kind of ahead of schedule there. You are talking about $200 million by '05, and we're already at $168. So I mean do you think that that $200 million was set with the expectation of kind of weaker wholesale pricing so that doesn't seem to have as much of an impact on you guys because so much has had. What's your comments now that you are already at $168. Could $200 be light?

I think we could possibly could do better than $200 if we didn't have an overage supply situation in the southeast. I would be highly confident we'd do substantially better than $200. Given the oversupply of capacity, I think $200 is still a good goal. I'll be surprised if we don't do that well or a little better. But I think given the depressed nature of the market and the oversupply of capacity, that's a very reasonable goal to stick with.

You said for next year, assuming roughly flatish, correct?

You're really up about 2 cents.

Okay. All right. Thank you.

Our next question comes from the line of Jay Yanello with UBS Warburg. Please proceed with your question.

Good afternoon. I think on the last call you said the pension contribution would be roughly $60 to $65 million in '03. I'm wondering if there's any changes with that? And also, gas marketing appears to be going well. With the cold weather we're having and high gas prices, can you just review any risk management plans you have in place to prevent any hits there going forward? Thank you.

Sure can. Go ahead, Allen.

Let me address the last one and Gale can add to it. And then talk about the income contribution to the pension fund. Generally speaking, as you've heard us say many times, we do not take natural gas price risks. And that's true in most all cases. In the case and one exception to that would be in the retail gas business, we -- even there, we attempt to hedge the whole wholesale price to match the retail price. There can always be a slight difference in quantities, but don't see any significant risk on the retail gas business. For our retail business, retail electric business, we have fewer fuel clauses where we pass gas prices on. So the volatility of gas prices is generally the risk of consumers, not stockholder as Southern. We have in recent months worked out agreements with some of our -- for some of our operating companies, specifically Savannah and to a degree Georgia Power where the state commission has shown interest in us hedging the gas prices for retail customers. Of course, the retail customers would ultimately pay for that hedge and benefit from it. But we have our earnings have very, very little corelation or risk related to gas prices.

Okay. So I guess the price you locked in the retail gas customers at is and the volume is reasonably within your statistical calculations and when you hedged that gas, is that correct?

That's exactly right.

And I realize this is a small part of the overall company. I'm curious how that's being managed.

We're being very aggressive on attempting to fully hedge the risk associated with the retail gas business. We can't -- there's not 100% hedge or 100% certainty, but it's down to a diminimous level.

And Allen is exactly right. I met with our Southern Company gas folks this morning. And as you know, we've had a bit of a cold snap here in the last few days.

That's why I'm asking.

And even in light -- I mean, our hedging program has been very effective. So even though gas demand is running about 15% above projection for January so far, we still have gas in storage that we can call on. So incrementally, even though we're buying some gas beyond what we hedged at a higher price, if you combine that with our gas in storage, we are still even though 15% volume ahead, we're still making incremental money on every firm sold.

Okay, thank you.

I believe you asked about pension income?

Yeah, if there was any change in the last call. The last call you said $60 to $65 million in possible contributions in '03. Is that reasonable still?

I think we meant '02. I can give you the exact number now.

Okay, sure.

These are after tax numbers. We had $71 million of pension income included in our 2002 numbers. We had projected '03 to drop, and it will drop. The latest projection is that pension income for 2003 will be down to $32 million. Of that number was expected and is included in our total earnings forecast.

And you is it ill have the 6.5% discount rate and 8.5% annual return?

That is correct.

Thank you.

And to put some sanity with that, we went back and we've actually exceeded over the last ten years the 8 1/2% return assumption. So our actual performance in the investments of our pension plan is better than the 8 1/2 over a ten-year period and we did lower our discount rate to reflect a lower treasury bond rates to 6 1/2. Thanks again. You're welcome.

Our next call comes from Paul Ridzon with McDonald Investments Please proceed with your question.

Good afternoon. I had a question on when you kind of took your 2002 earnings and normalized it, it looks like you took 6 cents out for tax benefit. Maybe I missed something but isn't there an ongoing component of deductibility of 401K dividends?

There is, Paul, and that's included in our number. The reason actually one piece we didn't mention, we just ran out of time, there's one reachback credit that we didn't mention, and that is the state of Georgia manufacturing and job retraining credits that actually went back to 1999. We were able to get them all in one loan subpoena so that is a part of that 6 cents. We able to get all in one loan so that is a part of that 6 cents.

What's the ongoing benefit of the 401K?

The ongoing benefit of 401K obviously is heavily dependent on how many shares of Southern stock is held by our employees in the plans. Our current estimate is approximately $25 million after tax.

Okay, thank you very much.

You're welcome, Paul.

Our next question comes from the line of Scott Pearl with Credit Suisse First Boston. Please proceed with your question.

Hi, good afternoon.

Hi, Scott.

Is it possible for you to, I guess you've alluded to it in one form or another but just break out the $1.84 into the segments that you usually report within?

We will be happy to do that. One of our focus is turning to the exec page where you have the breakdown. Are you out in Vail yet, Scott?

Not yet.

Okay. We would call -- we basically have six segments. Our regulated infrastructure business, those are our operating companies. Scott, you're looking for '03 guidance?

That's right.

Okay. Regulated infrastructure would be about $1.55 a share. Competitive generation, 25 cents a share. Our products and services business lines, 4 cents a share. Our synthetic fuel business and partnerships, 5 cents a share. Our leasing business, 4 cents a share, and all that would be offset by holding company expenses, largely interest costs of 9 cents a share negative. You add all that together and that should get to you $1.84.

Okay. On the fourth quarter, one thing that I was just trying to understand is you were flat year-over-year at the retail regulated business from an EPS perspective. Obviously insurance increased just a tad, but, um, just trying to reconcile that with the 8% pickup in volume. I guess is it something on the pension side?

No. Pension costs in the fourth quarter were about where we projected them.

Mm-hmm.

Really, I think our -- I really think the slight pickup in earnings in the fourth quarter would have been offset by the additional shares. There really was nothing unusual that we didn't expect from the fourth quarter regulated retail side. One thing you will recall is we were absorbing during the year about $118 million annual rate reduction at Georgia Power.

Right.

Basically, the regulated retail business was up $6 million in net income in the fourth quarter.

Right. Yeah, just with the volume increase, I would have expected to see maybe a little bit more, but I guess perhaps it's the rate reduction?

Yeah. We also had one other thing that did offset the volume increase, and we refer to this, you may recall, on our last visit. We had a number of deferred o & m projects in that we knew we wanted to get completed. Particularly our net worth maintenance in the fourth quarter. So we knew we were going to spend more than budgeted on nonfuel o & m in the fourth quarter. We spent basically our nonfuel o & m was up almost 17% in the fourth quarter compared to fourth quarter of '01. So that somewhat offset the volume increase.

Okay. And one last question, clarification on one earlier point. You said that the effective tax rate going forward should be about the same as 2002?

Yeah, it will be somewhere in the neighborhood of 28.8, somewhere between 28.6 and 29%. And again it's because of the sinfield tax credits and tax deduction that we're receiving under that new 401K tax deduction for our employees and shares they hold in the plants.

So the increase in sinfuel will offset some of the things that happened this year that go away?

I think so, yes.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Danielle Seats with Salomon Smith Barney. Please proceed with your question.

Hi. I just was wondering if you had the construction expenditures for '04 and 'also -- and also essential production for '03 and '04?

Okay. The construction expenditures for '04 or '03, Danielle?

'03 you gave it to us. I wanted '04, if you have it.

We don't have a breakdown specifically of '04, but we have '03 through four, five and six.

Okay.

And we can give that to you. Let me pull it up here. It's in our sources of uses. One of our focuses for grabing that page.

Oh, Altogether, right? The one for the whole period?

Yep. Let's see. We would expect about $9.4 billion of capital spending in '03, $55 '04, '05 and '06. Of that $9.4 billion, here's a breakdown for you. We'll be spending the bulk of that $9.4 billion on transmission and distribution. That's $4.5 billion. Nuclear fuel and retrofits is about $700 million. We're making a significant investment in environmental upgrades at our coalfired power plants. As you know, we've already invested a billion dollars in the upgrades. In the 03 thru 06 period we'll add another billion and a half on environmental investments. Fossil and hydroretrofits that are existing units that will be about $800 billion. And then everything else, all others is about $500 million. So in our regulated business, we'll be spending that will add up to about $8 billion. And there's a billion three that billed out the competitive generation units that we talked with you about. And that basically gets you to a rounded $9.4 billion.

Okay. And there is not really a huge fluctuation from year to year on your Cap Ex, I guess, because of the large portion of the regulated side, right?

That is correct. It is evenly divided across the four years.

Okay, great. And you have the sinfield production stays at level for four years or does it change?

We've got some sinfield production numbers here. And it goes up a little but stays roughly the same. Total sinfield production for 2002 was just under $18 million tons.

Thank you.

You're welcome, Danielle.

Next question comes from the line of Rose Marie Tevlo with Tevlo Associates. Please proceed with your question.

Thank you. My question's been answered.

Good. Satisfactorily I hope.

Yes.

Good. Stay warm, Rose Marie.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of Nathan Judge. Please proceed with your question.

Hello, Nathan. I'm calling -- I wanted to ask you've increased your expenditures for transmission and distribution going out. Is from something -- there something you've identified that you are increasing or is there just more projects than you expected originally?

Nathan, when you say we've increased it, compared to?

The third quarter.

Oh, compared to the third quarter. No, that's just normal fluctuations, Nathan.

And then just coming back to natural gas, as you see, it's my understanding that your natural gas marketing business is doing quite well despite not spending a considerable amount of investments into marketing. Where do you think this is going longer term? And what -- where does it fit in the company?

That's -- both of those of are good questions, Nathan. I think where it fits in the company is that as you know, our strategy is to stick to what we know how to it do and to stick to the markets that we understand which is the southeast and not venture into businesses that we don't really understand and where the risk is higher than our overall risk profile for the company. In the case of retail gas in Georgia, we're selling, in many cases, to the same customers that we sell electricity to. And we're dealing with the same regulators, same market, same politics. So it is from our standpoint as a natural, it overlays everything to do geographically and from a regulatory and political standpoint. So we consider it a very low risk business the way we participate in it. So it's -- it fits very well our low risk strategy and sticking to the southeast. And it's worked out that way. Longer term it's still to be determined. When we went into the retail gas business in Georgia, we didn't go into it with the intent of trying to expand into other states. We went into it because it fit our strategy and fit us geographically. And what we've said from the beginning is, we'll play it by ear. We want to make sure we fully understand the nuances of this business that we can run this small business we're in well before we think about expanding. So we didn't go into this with the intention of moving into other states. If we do well with it, if we feel like it fits our portfolio as well as we think it does, then who knows down the road, but that was not the intent when we went into it.

Thank you very much.

Nathan, we assume nothing's changed. It's still foggy and rainy in London?

As always.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four at this time. Our next question comes from the line of James Faclacker with Silkap.

Good afternoon. Following up on the fourth quarter, the deferred spending that you guys had done on the networks business. Do you have a rough idea of how much that actually was in the fourth quarter just so we can kind of, you know, normalize that for both spending as well as the o & m or excuse me, as well as the weather or maybe look it at from a full year perspective versus the $3 billion on the nonfuel l & m?

Right. James, if you just take a look at the annual spend, we came in just about exactly where we thought we would. And just about exactly where we wanted to be for the entire year. Until we saw what net income looked like through the summer months, we had deferred certain nonessential projects so that we could, you know, we could have a good handle on the year. So essentially, if you just want to normalize the spending, if you would just take the annual spend, that's about exactly what we wanted to spend. We just shifted the timing to make sure our revenue growth would be in the economy what we thought it would be. Nothing unusual and if you want to normalize it I would take the annual number and go forward because that's about where we're at.

And just to that point then, the 3.82 billion, can we grow that at some sort of inflationary rate or is that a constant?

You have to grow it a little bit because we'll have additional o & m coming from the completion of 4 generating units of Southern power this year. You have to grow the o & m. I would say grow o & m by 1, 1.5% for the basis business and add an o & m component for each of the 4 units coming online.

Great. Thanks for the help.

We have a follow-up from Scott Pearl with C S First Boston. Please proceed.

I just wanted to know if you've been able to determine since FAS 46 was passed if you will have to reconsolidate that operating lease and if so, what the income statement impact might be?

We are still looking at that. Obviously the new rules are still being promulgated by the FASB. We will have a decision on whether or not we have to consolidate that plant well before June. The options obviously are consolidate or restructure. Right now, we're working through the impact, but I would not expect -- I would not expect a decision on that before May.

Thank you.

Gentlemen, I am showing no further questions at this time. Please continue.

Well, very good. Good questions. Again, we had a good year. I hope you agree. We appreciate very much your interest in Southern Company and we'll be talking to you as we go along and certain at the end of next quarter. Thank you for tuning in.

Thank you, everyone.

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