美國南方電力 (SO) 2003 Q1 法說會逐字稿

Welcome to the Southern Company first quarter 2003 earnings conference call.

During the presentation, 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, please press the 1 followed by the 4 on your push button phone.

As a reminder, this conference is being recorded Wednesday, April 30th, 2003. I would now like to turn the conference over to Mr. Allen Franklin, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much and again, good afternoon and thank all of you for being with us again.

I'm very pleased to be with you for our first quarter earnings call of this year. I'm also pleased to introduce to all of you our new Chief Financial Officer, Tom Fanning.

As many of you know, Tom was named CFO of Southern Company on April the 11th. Prior to his new position, he served as CEO of Gulf Power Company in northwest Florida, which, of course, is a subsidiary of Southern Company. Tom has been with Southern for 22 years and has a solid financial background, having served as CFO of both Mississippi Power Company and Georgia Power Company. I know Tom will make a great contribution in his new role, in fact, he already is.

Before I continue, let me, as usual, remind you that we will be making forward-looking statements in addition to providing historical information. That many and various 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 all see from the earnings material, that we released this morning, we again had an excellent quarter. Our businesses are all performing well and we're very much on track to meet or perhaps exceed our financial targets.

I might add that over the past 10 years, through good economic times and not so good economic times, the total return on Southern Company's stock including reinvested dividends has averaged 15.4% per year. This return is well above the performance of the S&P 500 and S&P Electric Index.

At this point, I'll turn things over to Tom Fanning for a discussion of our financial highlights and for the first quarter, and for earnings guidance for the rest of this year. Tom?

Thanks, Allen.

Before we get started I'd like to say just how happy I am to be back in Atlanta in this role. As many of you know, I spent much of my career in the financial area at Southern and I really look forward to working with you all again.

So now let's turn to the financial highlights. As Allen said, we're very pleased with our first quarter performance. Obviously, our results were well ahead of guidance. I'll discuss the specific reasons why in a few minutes.

But first, let's review our numbers compared to the first quarter of last year. We earned 41 cents a share in the first three months of this year. This compares with 32 cents a share in the first quarter a year ago. That's a gain of 9 cents a share.

Now let's turn to the major factors that drove our first quarter numbers. On the negative side, we saw a 1 cent impact from additional shares we have outstanding and an impact of 2 cents a share from increased nonfuel O&M. But on the positive side, we had several factors that added significantly to our earnings in the first quarter. These items include weather, customer growth and sales mix, industrial sales, better than expected performance of our competitive generation business, and our products and services business.

Now, here's the breakdown. Colder than normal weather in January and February added a penny per share. And increased industrial sales also added a penny. Customer growth and price mix accounted for 3 cents. Our competitive generation business added 4 cents a share to our earnings in the first quarter. This contribution was due primarily to higher gas prices driven largely by colder weather in January and February that allowed us to optimize our coal-fired units, plus the additional units we brought on line.

As you may know, Southern Power added approximately 1600 megawatts of new capacity in June of last year. Our price and services business added 2 cents a share to earnings. This contribution came from the addition of Southern Company Gas to our products and services business and customer growth at Southern LINC, our mobile communications subsidiary. In addition, lower parent company expenses added a penny a share to our earnings.

So overall our quarter came in at 41 cents a share compared to 32 cents a share in the same period last year. Our earnings guidance for the first quarter was 33 cents a share. So we exceeded our guidance by 8 cents a share.

Two of the major reasons were colder weather in the first two months, and lower than expected operations and maintenance expenses. Weather added 2 cents per share, and lower than expected O&M contributed 3 cents per share for a total of 5 cents a share.

In addition, our competitive generation business added 3 cents a share to earnings, primarily from weather and the optimization of our coal-fired fleet due to higher gas prices. The 3 cents per share was already projected in our $1.84 guidance so it is largely a matter of timing.

Now, before I discuss our earnings outlook, I'd like to review the announcement we made earlier this month concerning our wholesale energy contracts with Dynegy.

As you're probably aware, we have negotiated an agreement with Dynegy, which we expect to close by May 30, to terminate all of our wholesale energy contracts in return for a one-time payment of $155 million. The payment from Dynegy should be booked in the second quarter of this year.

By agreeing to a financial settlement for the obligations under these contracts, we are helping to assure a more stable outlook for the long-term planning and operation of our competitive generation business. Given the events that have transpired in the independent power sector over the past 18 months, we believe this agreement is in the best interests of our customers and shareholders.

We have deliberately structured our competitive generation business to closely match the risk profile of our regulated retail business. With the removal of the Dynegy contracts, all of our counterparties have solid, investment-grade credit ratings with more than 90% being rated A or better. And as you may know, more than 75% of the megawatts in Southern Power, our wholesale subsidiary, are contracted with our own operating subsidiaries. The remainder of our contracts are primarily with electric cooperatives and municipal electrical authorities here in the southeast.

I should note that the settlement with Dynegy does not affect the 2200 megawatts of wholesale capacity we are bringing online this year. The output for this capacity is already contracted. We've announced several options to remarket the capacity that was committed to Dynegy. For example, we have signed several new wholesale contracts with cooperatives and municipal utilities (INAUDIBLE), where we've not committed new generating capacity.

Now looking beyond 2003, we are committed to meeting the operational financial goals we have outlined for you. Specifically the goal of earning $200 million of net income by 2005 from our wholesale generation business remains on track, even with the Dynegy settlement.

The settlement with Dynegy will provide a one-time gain of $88 million or approximately 12 cents per share. Of this 12 cents, 1 cent is for earnings that we already anticipated in our original 2003 forecast. As a result, the net impact on 2003 earnings will be a positive 11 cents a share.

Now, beyond 2003, the settlement will reduce our expected earnings by approximately 2 cents a share annually for the next few years.

Turning now to earnings guidance, it is clear that our retail and competitive generation businesses performed better than planned for the first quarter. And even though it's still early in the year, we now expect to exceed our current earnings guidance for 2003. Therefore, we are raising our guidance for the year to $1.86 a share from $1.84 a share.

Now, to summarize how we get from $1.84 per share to $1.86, we had an eight-cent per share gain in the first quarter compared to guidance. Weather added 2 cents to retail, competitive generation 3 cents, nonfuel O&M added 3 cents.

We expect the 2 cents per share gain from weather to be sustained for the full year, since we assume normal weather for the remainder of this year. The three-cent gain from competitive generation was from opportunity sales and although coming earlier in the year than expected we believe this gain is reflected properly in our annual guidance. The same is true for the 3 cents from O&M which is timing versus a real reduction in O&M.

As a result, only the 2 cents from weather should be added to the annual guidance of $1.84. Therefore, the new guidance for this year is $1.86 per share.

Now, for the second quarter, we're projecting to earn 45 cents per share. This does not include any potential Dynegy settlement impact. So for the second quarter we're projecting to earn 45 cents per share.

Now I'll turn it back to Allen for an update on key regulatory and legislative issues.

Thank you, Tom.

And looking at the broader industry front, I know a number of you are following the debate over the establishment of regional transmission organizations or RTOs, both here in the southeast and across the country.

The formation of these RTOs will be affected by two major efforts currently going on in Washington. First, the ongoing actions by FERC and secondly, potential congressional action on a comprehensive energy bill which will very likely include an electricity title.

As you probably know, on Monday FERC issued long awaited anticipated white paper to clarify its proposed rule on standard market design. Overall we were pleased that FERC has issued the white paper that seems to address many of the specific concerns we have and we have raised with FERC.

We believe that the white paper -- I believe the white paper advances the ball some. Clearly it should help our efforts here in the southeast to develop a regional transmission organization. It benefits not only consumers, but is also fair to all of the participants in the market.

More specifically, the white paper promises greater regional flexibility, particularly with respect to who pays the cost of new transmission. And that's an issue primarily between wholesale users of the system and retail customers. Also, how rights to the existing transmission would be allocated under the new standard market design and how reserve margins, specifically generation reserve margins, would be established for each region.

The FERC white paper also provides more protection for local end-use customers than did the original proposal, which is very important to us, since the vast majority of our revenue comes from retail customers. However, the white paper does not address all of our concerns, nor all the concerns of our state regulators.

Most importantly, the white paper retains the fundamental and most hotly protested and contested aspects of the proposed standard market design, specifically mandatory versus voluntary RTOs and FERC assertion of jurisdiction over retail service related to transmission. We also believe that a good deal more work is needed on the allocation of cost related to the existing transmission system and a more prominent role in the whole process for the states.

We'll continue to work with FERC in the states obviously to attempt to resolve these remaining differences. In the meantime, the Senate Energy Committee this week is debating an energy bill which may include a major electricity title. In fact, I just learned that Senator Domenici's committee has now, just a few minutes ago, voted the energy bill out of committee and we expect that bill to go to the full Senate floor early next week, perhaps as early as Monday.

As most of you are probably also aware, the House of Representatives passed an energy bill earlier this month. The bill contains an electricity title that would have a major impact on our industry. And I'm happy to say that we support most of the provisions of this House Bill.

The electricity title of the House bill repeals the Public Utility Holding Company Act, which we obviously support, and makes significant progress in addressing our concerns over FERC's proposed standard market design. Specifically, among a number of other things, the bill includes language that, first provides protection for native load customers. In other words, our retail customers. It ensures the sanctity of existing interconnection contracts. And it endorses the concept of participant funding for new transmission.

At the present time, we believe the prospects for passage of an energy bill which includes an electricity title in this session of Congress are reasonably good but in my judgment far from certain.

This concludes our formal remarks at this point. Tom and I will be happy to answer any questions you might have. Operator, we'll now take those questions.

Thank you.

Ladies and gentlemen, if you do have a question, you will need to press the 1 followed by 4 on your push button phone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your question, please press the 1 followed by the 3.

If using a speakerphone, please pick up your hand set before entering your request.

Once again, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4.

Our first question will come from the line of Andre Meade from Lazard. Please go ahead.

Hi, good afternoon.

Hello, Andre.

Two questions. One, on the Dynegy, I guess it's 600 megawatts that were earmarked for Dynegy, and now that they have paid you to terminate the contract, it sounds like you're trying to market the power that would have gone to Dynegy but haven't quite made a decision of whether to go forward and build this -- these 600 megawatts; is that basically correct?

There are actually three contracts, Andre.

One is a peaking contract out of plant (INAUDIBLE) which is a combustion turbine plant in east Georgia. That actually ends in 2005. And then there's a longer term contract out of (INAUDIBLE) plant Daniel, which is owned by Mississippi Power Company. And the third component is -would be capacity out of a new plant that was to come on line in 2005.

The current status is that, as all of you know, the wholesale market is pretty depressed here in the southeast. So when we did the economic analysis to determine that this was a fair deal or a good deal for us, we took a fairly pessimistic assumption about being able to remarket. And we're assuming when, again, when we did the analysis, they would maybe be able to remarket this capacity at about a fourth its value for the next two or three years and over time, get a bit more for it. Even with that pessimistic assumption it turned out to be a very positive settlement with us.

Going forward, we're currently, of course the settlement is not done. We have an agreement, but the final agreement is not signed and the check's not sent. But as we go through this process, we're beginning to look for other options to sell this capacity which is not yet built.

I'm happy to say that we have a number of contracts primarily with co-ops here in the southeast where we have agreements with them to purchase power that we have not yet committed capacity to. So I think over a few-year period we'll be able to place most all of this capacity, probably at its full value. It is obviously going to be a period for the next two or three years where I think that's not likely to be the case.

Now, that's our Number 1 base plan. If that doesn't pan out, if we find a better combination of sources to serve that capacity, then we would look at what schedule we should bring that 2005 capacity on with.

So what you're saying is generally true, we're in the midst of trying to decide where to place that capacity. We've currently expect to finish it but that may not be the case. But in any event, the economics are -- look very good for us.

Hey, Andre, this is Tom Fanning. I just want to clarify, in your question, you mentioned 610 megawatts. That really is associated with plant Franklin, unit 3. Plant Daniel is 216 megawatts and (INAUDIBLE) units 8, 9 and 10 10 are 75 megawatts each, or 225 megawatts in the aggregate.

Okay.

So essentially it's -- I'm sorry, those numbers you just gave me are what Dynegy was purchasing?

Right. They're over different periods of time.

So it's 216 megawatts out of Daniel, and three times 75 megawatts out of Tallberg.

Right.

Yeah, the Tallberg contracts ended in mid-'05.

In fact, they begin June 2000 and ended in May 2005.

Okay. And what was the duration of the Daniel contract?

Yes, again, in June 2001 and ended May 2011.

Okay.

I think Allen mentioned Franklin 3, June 2005 through May 2030.

Okay. So the Tallberg and Daniel, obviously, are trying to to remarket and we'll see what you get there. And Franklin, new plant in '05, which I assume you haven't broken ground yet, that may or may not -- that plant may or may not be built depending on your ability to find another buyer, right? I think that's basically -

Except we had done some construction on Franklin 3. It's certainly still at a point that we can delay it, but it was under construction.

Okay.

But still subject to delay.

Okay. And have you committed to buy the major piece of equipment?

Yes. In fact, we had committed to buy that before we signed the Dynegy contract.

That was the only -- we had committed to buy a number of turbine generator sets, all, every one we bought except one was committed to a specific contract. There was one and that ultimately ended up in Franklin 3 dedicated to Dynegy. Where we committed to the turbine generators without a contract.

So that's the one that's -- we already had before we started the -- signed the Dynegy contract and it is at that plant today partially constructed.

Okay.

Is there any flexibility on postponing the delivery date of that equipment if you couldn't find a buyer, could you push it out '06 or '07?

That equipment is already at the site.

Okay. It's paid for, delivered, you have it and the question is whether to finalize it or not?

Exactly.

Okay.

We'll clearly finish the plant, the question is whether we'll finish it in '05 or perhaps '07. Depending on the -- our ability to remarket or to apply it to existing contracts where we don't have committed capacity.

Got it.

Now, another -- looking at the industrial load growth, which is fairly strong, the results of Alabama Power, which were up considerably. The last two rate adjustments, I think you had 2% rate increases under the mechanism, and one of the main reasons was, were the declining industrial sales. Now that we see industrial load returning somewhat; one, when is the next rate adjustment and do you expect an automatic rate decrease as a result?

No, we clearly don't expect to see a rate decrease. In fact, we anticipate this year that Alabama Power will have another CNT adjustment associated with a purchase power agreement that they expect to undertake this year.

With respect to industrial sales, it's kind of an interesting question. We thought a lot about that, we're really trying to tear those numbers apart.

I think what we're seeing is, generally speaking, a bottoming out perhaps in our industrial sales, kind of in '02. And we're seeing some slight recovery in '03. But I'm not sure that I would call it anything substantial at this point.

I guess what we're seeing up in our region is automotive sales, paper and perhaps even ship building associated with the defense industry. And when I talk about paper, a lot of that we think across the United States is kind of a zero sum gain. That is, we've seen the consolidation of some plants into our service territory probably largely because we have cheap energy prices. We see still weakness in the textiles area in the primary metals area especially.

So the comment I guess on more robust industrial sales is, I'm not sure we see anything substantial occurring just yet. We're coming off a bottom in '02, hopefully we'll muddle through the rest of this year and our economists kind of seem to believe that we'll see more of a stronger pickup, either at the end of this year or going into '04.

Okay. Thank you very much.

Sure.

the next question will come from the line of Paul Fremont from Jeffries & Company. Please go ahead.

Thank you very much. Congratulations on an excellent quarter.

Thank you.

Two questions.

One is, the better margin that you've seen on wholesale sales for your coal-based fleet will likely persist for the rest of the year looking at forward electric prices that are either posted in Megawatt Daily or on Bloomberg. So would you not anticipate to do significantly better than your initial forecast, which would have been based on much lower forward-wholesale electric prices?

The second question is, can you comment at all on the ERISA suit that was filed against Mirant, in which you were named as a codefendant?

Sure. Let me comment quick on both of those. Tom may want to add.

We have found projected gas prices to be a pretty hazardous endeavor. We didn't expect gas prices to be nearly as high this winter as they turned out to be and we clearly made more money in our opportunity sales in the first quarter than we expected. Whether we'll do better for the rest of the year I'd say is totally open to question.

One point to remember is that our coal-based generation is by and large base-loaded; when our customers need it, it has to run for our customers. And we, most of the money we've made in these opportunity sales were out of regulated power plants that are coal-fired and we share some of that savings with retail customers.

In the summer, as it gets hotter, those units will be dedicated more and more to serving our retail load. So as it gets hotter and the load goes up, there will be, even though the competitive price of power may be very high, margins will likely be cut substantially because our coal-fired generation will not be available for that particular market.

The lawsuit that you mentioned there was a lawsuit recently filed against Mirant by a former employee under the ERISA laws that makes a claim that Mirant did not properly protect the 401(k) from Mirant's stock. We are named, we're not - Southern Company is named because we had an ownership interest or perhaps part of the time owned the company fully during the period of contention.

We're not -- the suit, my understanding is it doesn't allege that Southern Company specifically did anything, we're simply named because we were an affiliate of Mirant. But our lawyers have looked at it, they've talked to me. They show not much concern about any liability of Southern.

Obviously we're indemnified by Mirant for such claims. But even without that, I'd have to say on our radar screen, it looks like a pretty low risk suit to us.

And does today's announcement by Mirant with respect to their reaudit, will that result in changes in your accounting for discontinued ops for that business?

At this point, we don't think so. If you looked at the numbers, and this was for the numbers they issued were from 2000, 2001, as you recall, -- for 2001, we only owned 80% of Mirant for, basically the first quarter.

And if you look at the size of the numbers for 2000/2001 compared to Southern's earnings, which was about $1.3 billion in each of those years, and you consider that Mirant was accounting for its discontinued operations in both years, 2000, and 2001, which means that any restatement would have no effect on the company at this point or going forward or no effect on investors tip or future investors. Our assessment up to this point has been it does not require a reaudit, does not require a restatement.

But we, like you, just got this Mirant announcement. We'll be looking at it, talking about it, thinking about it. But at this point, we're -- we see no reason to change our previous view that that would not be required.

Thank you.

The next question will come from the line of Scott Pearl from CS First Boston. Please go ahead.

Good morning.

Good morning, Scott.

I had a question, you had mentioned that the 3 cents of improvement that you received out of the competitive generation segment, that was essentially incorporated in the guidance. And I was just trying to get an understanding for the 25 cents that you're saying for competitive generation for the year.

You know, I know about 95 hundred million dollars a year comes from the existing wholesale contracts that you have out of your generation, so that's about 13 cents. For the remaining 12 cents or so for the year, how is that split up between the 2500 megawatts or so of generation that has come on as part of your development program? And then how much, is it just the 3 cents that's assigned to the opportunity sales out of additional excess generation spot sales?

Yeah, let me kind of go through that.

Allen alluded to it in a little more detail, when he talked about that we generated that performance, $25 million or so, he said the majority was associated with regulated business units. In fact, it's about two-thirds.

We had about $6.5 million or so associated with core bilateral contracts already underway, core opportunity sales, another $8.8 million. So of the, what I would call 25 or so, you know, 15 or so was associated with sales that are attributable to core assets. Southern Power had about $9 million or so remaining.

And so, I mean are you saying roughly then -- that's not necessarily the way it'll work out for the year. For the year, I was just curious, it's probably not that same one-third, one-third, one-third it split for that competetive generation 25 cent number. Is most of that -- for the --

I think Allen kind of mentioned a little of this earlier, it really depends upon kind of seasonality. In other words, if you look at core assets that are largely base loaded. As you go through the summer months and we have high demand, there will be less of those assets available for these, so-called, opportunity sales. So the ratio between how much is associated with core assets and how much is associated with Southern Power will likely change over time based upon the demands in the southeast as we go through the rest of the year.

Okay. That's helpful.

On -- a question on the gas business that you have in South Carolina. I was wondering if you could just give us an update as far as what kind of market penetration, customer share, you've been able to achieve at this stage in the business and whether you see that increasing or whether it's gotten to a static point?

And then also, you know, just gain the fair amount of gas market volatility that we've seen, what your approach has been for managing that commodity fluctuation. Have you been essentially passing that on to the customer or have you been engaging in hedging programs?

Let me lead off on that and Tom can add to it.

Actually, the gas business is just here in Georgia. And to remind everyone, Georgia, actually, is the first state to, "deregulate" the sale of retail gas or the sale of gas, natural gas to retail customers. So the business we're in is as a retail seller of gas.

We don't own distribution systems or pipelines. We simply buy wholesale gas, sell it to retail customers. We handle the customer service, the billing and those kind of things. So it's sort of a middleman-type business.

And we got into it because it looked like it was real close to the other retail business, the electric business we're in, plus we thought it would be educational for us. And thirdly, we thought we could make some money.

It's worked out just very, very closely to our pro formas. We have, I think we have now 220 million -- I mean 220 thousand customers or thereabouts, plus or minus a few. We're actually picking up 5 or 6,000 customers a month, but, when we took over from New Power we found that they had done a very poor job of cutting off customers. We found a fair number of customers that hadn't paid their bills in a long time and weren't being cut off. So we've had a very aggressive program to cut those customers off but it's taken a little while.

So even though eve been adding customers at a pretty good clip we've also been cutting off customers at a pretty good clip also. So we're above where we were when we started, even counting the customers we've cut off. We're pretty close to getting through that process. We've done no marketing what so ever, but we're still having a fair number of new customers. And here in the next few weeks, next few months, we're going to start a fairly significant marketing program, we're going to start it sort of internally, friends and family-type program with our own employees and expand from there. But it's been - the margins have been about what we thought.

It's been educational. I mean, running a purely middleman-type retail gas sales business has been interesting, but financially it's pretty much right on target.

The only thing I would add, just to underscore what Allen said, it's pretty interesting. Base case that we thought we'd have, the business plan called for about 213,000, we're at 216, so we're just following our business case right down the line.

Then I think you asked about penetration. We're ranked fourth right now in the market. In Georgia. Georgia Natural Gas, Scanna and Shell would be ahead of us.

You also asked about hedging, I'd forgotten that, hedging gas. We attempt to fully price hedge the price of gas.

We have a system whereby we go out and sign new contracts with retail customers. We try to match the volume of gas that will be required with purchases of gas and with hedges of those prices. So on prices we're pretty much hedged.

You always have the risk in this business of volume because it's very definitely expensive to hedge both price and volume. So we take a little bit of risk on volume. The price is essentially fully hedged. But at the Southern Company level, even a very bad case exposure on volume is, you know, 2 or 3 million bucks, it's not material to us.

I was just curious, I know that people -- there's a fixed rate market down there and a variable rate market and if you were pursuing for of the variable rate market or if it's a situation where you're going offer customers where you're locking it in for a year at a time.

We offer both, but the more common agreement is a fixed price for a year.

Okay.

Just one last real quick data point question. With the syn fuel earnings for the quarter, what was the volume of production that goes along with that number?

I have that, two seconds here. Production for the quarter was 4.9 million tons.

And I think you had talked about a total for the year, something in the 18 million ton range; is that still essentially the goal?

Yeah.

Okay, thank you very much.

You bet.

The next question will come from the line of Jonathan Raleigh from Goldman Sachs. Please go ahead.

Hey, good afternoon.

Good afternoon.

A quick point of clarification, I guess for Tom. You talked about the weather impact for this quarter over last as being 1 cent positive.

Right.

And then later in your remarks you referred to 2 cents.

Right.

Was that 2 cents relative to normal?

Exactly. When you compare year to year, actually what the implication then is, you had a one-cent positive variance first quarter 2002.

Right.

Therefore, the year-to-year variance is a cent.

Right, okay. Fine.

Then I guess just picking up on the syn fuel question, from earlier, you know, there are a couple of companies out there who have built syn field projects and are looking to sell tax credits from those businesses. Some being more successful than others.

Any comments, Allen, relative to your appetite for, you know, maybe purchasing some of those tax credits and/or expanding maybe just on a pure asset basis the syn fuel generation?

That's a good question. And I think we're pretty happy with where we are, to be perfectly honest right now.

The syn fuel projects have been very good but just looking at the duration of those projects, what happens when they end, what kind of hold you create on them from an earnings standpoint, I think we have about the right amount.

It's about 5 cents a share, is kind of what we were thinking.

Okay. Thanks, gentlemen.

Thank you.

The next question will come from the line of Nathan Judge from Cazenove. Please go ahead.

Hello?

How are things in London?

Nice and sunny, for a surprise.

I actually had several questions.

I noticed the tax rate in the quarter seemed to drop and that was after a low tax rate in the fourth quarter. Could you just give me an idea what the tax rate will be for the full year?

28.9% is our effective tax rate, is what we anticipate for '03.

And I guess the reason for that is because you're using more of the tax credits related to your syn fuel?

Exactly. If you want an account for those differences, if you exclude tax credits or benefits associated with reinvested dividends you would get a number that looks like 37.3%.

Tax credits being about 6.6. Reinvested dividends about 1.8%. So 37.3 less 1.8 less 6.6 equals 28.9.

On products and services, when I looked at the numbers it seemed like products and services as you said added 2 cents. It seems quite robust. And your full-year projections, as I'm looking here, is 4 cents.

It seems like, at this early stage of the game, that that seems rather conservative given that you've added 2 cents already in the first quarter. And as you add more customers, hopefully through a successful marketing program, et cetera, that you could easily surpass that on your products and services.

Can you just give me an idea of what is in that estimate, the 4 cents?

Sure. I think the most important thing to recognize is that the gas business is seasonal. The first quarter would normally be a strong earnings quarter for the gas business.

So that is largely responsible for not having a more optimistic estimate, of what we're going to get out of products and services.

Let me add to that while Tom's on it.

It just so happens I was meeting with Phil Saunders, who's the President of the gas company just before I came down here. In fact, the -- it is so seasonal that for the next five or six months, the gas company will actually lose money. And we expect to end up at the end of the year slightly less profitable than we are right now.

You have a cold first quarter, you make a lot of money in this retail gas business, and you give it away over the next 4, 5, 6 months, and then you try to make up some of it at the end of the year. So our profitability from the gas business will be less -- likely it will be less in December than it is today.

Now, with other (indiscernible) we're happy with our Southern LINC, our telecommunication's subsidiary's performance. They're doing well, they're doing according to plan. We also have good experience in Alabama with, what do you call it, appliance sales and also Georgia with outdoor lighting. That's kind of how you add up to the 4 cents.

Fair enough.

On the new source review, I would like to get your thoughts on this, given that you, I believe, have a court case with the EPA on May the6th.

I know that there have been some other companies that of settled that exposure. What kind of discussions, can you give us an update on the whole progress of that suit?

Yeah, there are dozens of companies in dispute with EPA as you well know. Southern Company being one.

I think -- I guess now three or four companies have settled, a couple just in the last week or two, Dominion and Webco.

The key -- first of all, let me say, we're not in settlement discussions with EPA at this time. We think our progression is exactly the right position, very defensible.

The key activity going on now is in the Federal Court of Appeals here in Atlanta, there's a case, involving the Tennessee Valley Authority, where the EPA has made the same kind of claims against its sister Federal agencies it's made against us, many of the same issues. That's being litigated.

We've joined into that case not as a defendant, but as sort of a friend to the, (INAUDIBLE) friend to the TVA. We expect to hear something from that pretty soon. Of course, the court acts on its own schedule. We hope they get results.

It will not absolutely determine the ultimate outcome of our case, but there are a lot of common issues. So we're all participating in, and waiting on, thinking about, worrying about that case. And not much is going to happen until that case is resolved.

That's been going on for a good while, as you all know.

Thank you very much for that.

And then just finally, I've read in some reviews of the energy titles that you mentioned earlier in the call ,that it includes some subsidies for clean coal technology. Given that coal Southern has quite a considerable exposure to coal, it seems to me that it may be a benefit for the company or it may be a threat.

I would be interested to hear your thoughts on it longer term if indeed it is implemented on what you would see, how that would impact you.

Yeah, Nathan, it's clearly a benefit. It's something we support very heavily.

It probably doesn't affect our existing coal plants one way or the other that much. But our concern is that the country, in general, and the southeast in particular, is putting all of it's new generation eggs in the natural gas basket and the effect that could have on energy price volatility going forward. So we strongly support what the President's trying to do on clean coal technology.

We traditionally, Southern Company, has been the largest contractor with the Department of Energy and clean coal technology research. So this is no threat, it's -- I think it would be good for the entire country. And again, I don't really think it has any effect whatsoever on the existing plants plus or minus.

Thank you very much.

You bet.

The next question will come from the line of Doug DISDAYO (phonetic) from Ducane Capital, please go ahead.

Thank you, good afternoon.

Good afternoon.

I just wanted to follow up on a previous question on the Mirant reaudit as it relates to some of these nuisance lawsuits that I guess you've been named to.

Do your attorneys at this point think that it will accelerate those going away or is there any concern that the fact that the reaudit also, I guess, some numbers were changed in the year 2000, which I guess was the IPO year, is there any concern that those lawsuits could drag on for a while?

I don't think that -- in fact, I have one of my lawyers sitting right next to me. I don't think they see that being very material one way or the other.

I'm looking at my lawyer to make sure I'm -

He said correct.

He said correct. I think the answer is no, is -- as best our legal team can assess.

Okay. Thank you very much.

You bet.

If there are any additional questions, please press the 1 followed by the 4 at this time.

The next question will come from the line of Norman Greenberg from Norman Greenberg Consultants. Please go ahead.

Hi. I wonder if you would give me a quick run down on capital expenditures for this year and next year and the sources of capital?

Right. Since Tom is our new CFO he's going to handle that.

All right. Capital budget for this year, by functional area, we see, here we go. Capital budget we expect -- we see power generation -- wait a minute, hold on a second. There we go.

Power generation for this year, probably (INAUDIBLE) retrofits of about $171 million, environmental will be about $256 million. Nuclear fuel and retrofits, about $183 million; transmission and distribution will be the lion's share, be about $960 million or so. And then other would be about $100. So when you think about our regulated infrastructure, our total capital budget this year is about $1.66 billion, okay?

Okay.

Now, for the rest of our business, it's really pretty immaterial. Southern LINC tends to spend about $22 million or so, every year, towers and things like that.

Then you have Southern Power.

Southern Power, sorry about that, Southern Power, $377 million this year for that.

The total is?

The total is $2.1 billion this year.

That increases a bit over time. You might want to read the next two or three years.

Total company, the next few years, Southern Company total is $2.07 billion in '03, in '04, would be $2.31, and '05, $2.42.

How much money would you have to get from outside?

Yeah, what we have, let's see, sources of funds, here we go. What we see here is net cash from operations is about in '03, is about $2.5. And so your net financing is going to be about half a billion this year.

Okay.

And is there anything further in expanding the gas operation?

Not at this point. No.

We got into that business to, first of all, learn it, be sure we understood it and we're still in that process. We're going to get our feet under us and make sure our systems work. And then maybe we'll consider looking elsewhere. But nothing in the works.

Okay. I thank you.

Yes, sir.

Again, congratulations on running a fine company.

Thank you.

Thank you very much.

Gentlemen, I'm showing there are no further questions at this time. Please continue with your presentation or any closing remarks you may have.

Okay. Great.

Good questions, appreciate all of you tuning in and hope many of you are investors of ours. And that if there are no further questions, we'll look forward with talking with you after the second quarter.

Thank you very much.

Thanks very much.

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