美國南方電力 (SO) 2004 Q2 法說會逐字稿

Good afternoon, my name is Matthew and I will be your conference facilitator. At this time I would like to welcome everyone to Southern Company's second quarter 2004 earnings conference call. All likes have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. If you would like to ask a question during that time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the star then the number two. Thank you. I would now like to turn the call over to Mr. David Ratcliffe, CEO of Southern Company. Sir, you may begin.

Thank you. Matthew and good afternoon and thank you all for joining us. I'm pleased to be with you for our second quarter earnings call. Joining me today is Tom Fanning, our Chief Financial Officer.

Let me remind you that we will be making forward-looking statements today in addition to providing historical information. There are various important factors that could cause the 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 know, this is my first earnings call as Southern Company Chief Executive. I've had the pleasure of meeting some of you and I look forward to getting to know all of you in the future.

I want to make it very clear that while some of our senior officers have changed roles during this management transition, Southern Company's strategy has not changed. My goal is for Southern Company to continue to be the premier company in this industry.

Our goal is to deliver superior service and reliability to our customers at prices well below the national average. To our investors we will continue our pledge to be a low risk investment with a total shareholder return objective of at least 10%. I'm very encouraged about the future of Southern Company.

As you can see from the results we announced this morning, our businesses are performing right on track. Building on the momentum from the first quarter, we had a solid second quarter and we're on track to deliver on our financial and operational goals for 2004.

Looking forward, I believe we can continue to deliver on our business plan and meet the expectations of our customers and shareholders. We have a sound strategy and an outstanding team in place to deliver on that plan.

At this point, I'll turn the call over to Tom Fanning for a discussion of our financial highlights for the second quarter and our earnings guidance for the remainder of '04.

Thank you David.

Our second quarter was characterized by solid, stable and predictable performance. We met the guidance that we gave you in April, exceeding our estimate by only 1 cent.

We earned 48 cent a share in the second quarter of this year. This compares to 49 cents a share in the second quarter of 2003.

As I'll discuss in a moment, our businesses continue to perform well and met expectations for the quarter.

For the first half of this year, our earnings are 93 cents a share. This compares to 90 cents a share for the first six months of 2003.

As you recall in the second quarter of 2003, we broke out the impact on our earnings of the settlement with Dynegy which was 11 cents a share. For the second quarter of 2004, our earnings including the settlement with Dynegy, would have been 60 cents per share. For the first six months, our earnings would have been a $1.01 per share including the impact of the Dynegy settlement.

Here's a breakdown of our earnings for the second quarter compared with the same period of last year. All of the following discussions will exclude the one-time impact of the settlement with Dynegy. First, I'll go over the negative factors.

In our retail business, non-fuel O&M levels met our expectations for the quarter. As you may recall, we experienced timing-related under-runs and spending on a variety of projects over the last two quarters that we intended to complete.

That work was largely accomplished during the second quarter. As a result, our variance amounted to 4 cents a share.

Continuing with our retail business, taxes, including a settlement with the Internal Revenue Service covering returns for several years that benefited 2003, accounted for a 4 cent per share decrease from the second quarter of last year.

Turning now to our competitive generation business we had a good quarter. One that was also in line with our expectations. Earnings for this business were 2 cents below the same period last year.

As you may recall, in the second quarter of 2003, the combination of mild weather, high gas prices and generating unit availability produced results which, we predicted, would not be repeatable in 2004. For our performance to date, it is important to note that we are right on target.

Finally, the additional number of shares outstanding reduced our earnings by a penny a share.

Turning now to the positive factors, the impact of weather on our retail business along with customer growth were the major contributors to our earnings. The impact of more seasonal weather in the second quarter of 2004, compared to the same period last year, added 4 cents a share to our earnings.

The impact of mild weather in the second quarter of 2003 reduced our earnings by 3 cents a share, compared to the second quarter of this year. And the impact of more seasonal weather, particularly during the month of May, added a penny a share this year to our earnings.

So overall, the impact of weather added 4 cents a share to our earning compared to the second quarter of 2003.

The economic gains we saw in the first quarter were sustained in the second quarter. Growth and strong demand among all classes of customers added 4 cents a share to our earnings.

Finally, lower parent company expenses, primarily due to reduction of debt and trust preferred securities at the parent company, helped to add 2 cents a share to our earnings. So overall, our quarter came in at 48 cents, compared to 49 cents in the same period last year. Our earnings guidance for the second quarter was 47 cents a share, so we exceeded our guidance by a penny a share.

Before I discuss earnings guidance for the remainder of the year, I'd like to update you on a few items that have occurred since our last earnings call.

On May 25th, Mississippi Power received approval from the Mississippi Public Service Commission to reclassify 266 megawatts of Plant Daniel Units 3 and 4 to jurisdictional cost of service, effective January 1, 2004. The order also establishes a four-year amortization schedule for the regulatory liability.

In addition, the Commission approved the use of a forward-looking test year in a performance evaluation plan, PEP.

On another matter, last week on July 19, the Southern Company board of directors elected to raise the common stock dividend by 3 cents, or 2.1%. The new dividend is 35.75 cents per share quarterly, or $1.43 per share on an annual basis. The quarterly dividend is payable September 4, 2004 to shareholders of record August 2, 2004.

This is the third consecutive year that Southern Company has raced its dividend, and this marks the 227th consecutive quarter dating back to 1948, that Southern Company will have paid a dividend to its shareholders.

Our dividend policy remains consistent. Our goal is to recommend to the board regular dividend increases at approximately one half the rate of growth in earnings per share until our payout ratio can be sustained at or below the 70% level.

At that time we will consider recommending increasing our dividend at approximately the same rate of growth as earnings per share or about 5%.

Finally, I'd like to say a few words about our operations, our reliability, customer satisfaction and price.

First, I'd like to note that Southern Company set a new all-time peak demand for electricity of 34,750 megawatts on July 14th. We had an adequate reserve margin at the time of the peak.

Even with the additional demand placed on our system, our generating units performed well and we experienced no major operational problems in meeting this new peak demand. Not only did our generating fleet meet the peak demand without any major problems, but our transmission network carried the increased load without any serious interruptions to our customers.

The Southern Company's ability to manage a large and complex transmission network was recently documented by the National Electric Reliability Council, or NERC.

As a follow-up to the Northeast blackout, NERC recently conducted an audit of Southern Company's control area. As a result of their investigation, the NERC audit team considered Southern Company to be particularly strong in control area operations.

The report said that Southern Company has system operators who know their job, are aware of their authority and have management support. That Southern Company has made a serious commitment to training and the staff is highly skilled and that Southern Company has an impressive energy management system including excellent tools and facilities.

Overall, the report concluded that the audit team was impressed with Southern Company's control area operations.

Second, while our reliability remains high, as shown during the peak demand period, we also continued to pay close attention to customer service. For the fifth consecutive year, Southern Company ranked highest among utilities in a national survey of residential customers by the American Customer Satisfaction Index.

It's worth noting that Southern Company ranked second only behind Federal Express for all service companies that were surveyed. And earlier this month, J.D. Powers and Associates ranked Southern Company highest in overall satisfaction for residential customers [inaudible].

Third and finally, we were able to continue to deliver these results at prices which are 15% below the national average.

Turning now to our earnings outlook for the remainder of the year, it's clear that our businesses are continuing to perform well. However, while we've seen more seasonal weather during the first half of the year, weather for the third quarter has always had a major impact on our earnings.

As you know, about 40 to 50% of our annual net income is earned during the third quarter. As a result, we are maintaining our guidance for the full year at the range between $1.94 to $1.99, with an emphasis on the top portion of the range.

Turning now to our estimate of performance for the third quarter, we're expecting to earn 87 cents per share.

At this point, I'll turn things back over to David for an update on current regulatory issues.

Thank you, Tom.

As all of you know, Georgia Power filed a general case on July the 1st with the Georgia Public Service Commission. The company is requesting an increase in retail rates of 7%, which amounts to a revenue increase of $328 million.

We think that increase is very reasonable particularly since Georgia Power has not had an increase in base rates since 1991, and has actually decreased average base rates by 16% during that time. However, the company must now begin to recover the investment that has been made to meet the increase in demand for electricity that Tom referred to earlier.

Hearings on that case will be held beginning in September, and we expect a decision on the matter on or about December the 21st.

In a related matter, the ownership of Plant McIntosh was transferred by order of the Georgia Public Service Commission on May 24th from Southern Power to Georgia Power and Savannah Electric.

The plant will go into commercial operation in June of 2005. A decision on rate basings of the plant McIntosh is expected in December.

Before we take your questions, I wanted to cover one other regulatory issue that may be on your mind. On July the 8th the Federal Energy Regulatory Commission issued an order on a rehearing in the rule making establishing the tests by which the Commission will determine whether or not generators can charge market-based rates.

The Commission essentially rejected all the requests for the rehearing, but did make some clarifications on how the market power screens should be developed. Southern Company now has to file on or before August the 9th, two market power screens, a pivotal supplier test, and market share test, for its own and surrounding control areas.

We are likely to fail one of the two screens, as would most vertically integrated utilities that are not members of a large FERC-approved regional transmission organization. However, we continue to strongly believe that Southern Company does not have wholesale market power even in its own control area.

We believe that the screens adopted by FERC are flawed and therefore cannot make a fair or accurate determination as to the existence or lack of market power. We intend to make that case in our filing next month.

If FERC does not find our filing sufficient to reach a conclusion regarding the lack of market power, then we will have an additional 60 days to submit additional tests or recommend mitigation measures. Therefore it's too early to conclude whether or not Southern might lose market-based rate authority or the potential impacts of losing such authority.

At this point, Tom and I will be happy to take any questions you might have. Matthew we'll take the first questions.

As a reminder, I would like to remind everyone if you have a question press star then the number one on your telephone keypad. And your first question comes from Carrie Stevens from Morgan Stanley.

Hi. Good afternoon. I was wondering if you can maybe give us the quarterly and year-to-date split at Southern Power between wholesale and net income from like the contracted plants?

Sure. You know, the trends are as they have been in the past. What we've seen is, when you think about the split of total profits of competitive wholesale generation, they're split pretty evenly between Southern Power and what we call the embedded piece of that business. It's generally associated with the operating companies. Southern Power made about 22.4 million bucks during the second quarter. The embedded piece was 23.9. So the total was about 46.3 million.

In terms of the split between energy trading and our long-term contracts, again it's a split we typically see. The present dominance of course, is on the contract side, about 84% or about 38.7 million. The trading floor had about 16% or about 7.6 million.

Okay, great. And just two more quick questions. Related to this timing of O&M, is there any guidance you can give us on what, like type of spending this is so we can kind of think about, are there going to be other more heavy O&M funding throughout the rest of the year and how we can think about that?

Yeah, my sense is that the way you ought to think about it is, you remember from the fourth quarter '03, first quarter '04, you talk about under-runs and O&M. I think what we've largely done here is caught up. So you should see a return to more normal O&M for the remainder of the year. We were very pleased with that performance

Great. And then, I was just wondering if you could comment, I know you have pass-throughs on fuel costs, but just any comments on what you're seeing as a large coal burner in terms of long-term pricing trends for coal and also emission costs?

Well, certainly we've seen, I think the statistics we've used in the past is we've certainly seen increases in spot prices, but as we've also mentioned, at the same time, Southern Company had under contract essentially all of its coal that will be required for the remainder of this year. And so therefore, Southern has been very much more insulated than perhaps other companies in the industry.

We've tried to assess kind of what price impacts we've seen and they're really pretty minor to us so far this year.

And nothing with emissions or transportation issues?

You know, there's been some. The other kind of [case] people typically ask about that are disruptions in the transportation arena. And we've seen a bit of that, but I wouldn't say it's had a material impact on our operations at all

Okay, great. Thanks a lot.

Sure.

Next question is from Leslie Rich with Columbia Management Group.

Hey, Leslie.

Hi. This is actually Haim for Leslie.

Oh, hey, Haim.

How are you doing? I just wanted to ask you about the synfuel earnings for the year. Do you have any guidance on that?

Well, we were a little bit ahead of schedule, pretty well on track, there wasn't a major variance. I think as you go the earnings package, what we see is kind of for the three months ended June this year versus last year, not a lot. There is more of a variance on the six month difference but as we mentioned in the first quarter call, most of that variance was timing related.

Okay. Also a couple questions on synfuel in general. Have all the facilities passed their audit dates?

We have clean audits on our Alabama synfuels project and we believe we're just a signature away from having a completed audit on the Carbontronics project. The general statement is, we believe that we're in great shape in terms of any issues that have to do with the recognition of synfuel credits for Southern.

Okay. All the facilities do have private letter rulings?

Multiple.

Okay.

And I know it's been a question elsewhere, we feel completely confident in our in-service dates, not an issue for us. Just one last question. Do you have care to give any color on wholesale, just the general trends there? Yeah, it's been an interesting quarter. We talked a lot about this in explaining last year's earnings, you know, that we saw earnings in our total kind of opportunity sales, energy marketing business last year around 72 million and what we said pretty clearly was, not only did that beat expectations, we didn't think that was particularly repeatable this year. And so in thinking about kind of our earnings guidance this year, we ratcheted down those earnings pretty significantly.

We're doing beautifully versus our expectations. The margins have, that we've been able to see in the Southeast have certainly shrunk. And that's because remember our native load customers in the Southeast, and generally speaking, get the benefit of our cheapest energy first.

As we have seen a rebound in the economy and better weather, there has been greater demand from our native load and therefore, they have consumed more of the cheap energy. Remember the dynamic we saw last year was that we were able to take some excess, very kind of economic energy, and sell it to displace largely gas-fired energy in the competitive markets in the Southeast.

Well, we just haven't had as much of that and so therefore margins have shrunk and profits, as we have fully expected, have been just a bit lower than last year.

Okay. Thank you very much.

Sure.

Your next question is from Jessica Rutledge with Lazard.

Jessica.

Sorry, I was on mute. Two quick questions for you. The first is, I know it is a bit early to talk about potential consequences of losing market-based rate authority. But FERC gives some pretty clear guidelines about what the default would be if anybody ended up there. I think you guys probably are in a position to make a stronger statement about what the earnings impact would be if eventually that did happen. Is that something you're willing to comment on?

Jessica, as [inaudible] has said in the past, nothing has changed our mind there.

Where you would kind of go to is, had there been some sort of, would there be some sort of reduction in profits particularly on the opportunity sales side. We just believe if you did that it would be something that was not at all material to our earnings picture.

And have you challenged or will you be challenging the current SMA screen or do you plan to simply file and then deal with the consequences afterwards?

I think it's probably both. We will challenge the current screens and be prepared to deal with the outcome of that.

Okay. And then my last question, totally unrelated because I know Tom likes these. What --

It's not a leap year question is it?

No, no, no, no, no. But what are you seeing in terms of the demand recovery in the local economy down there? Sort of sector-wise?

Well, I'll be delighted to answer that but you know what, David is the Chairman of the Atlanta Federal Reserve Board so I'd love for him to jump here, too. Because he'll have even a better answer than I will, I'll bet. But I'll start out.

What we've seen is a sustained economy. That is of the 19 different standard industrial classification codes of industrial customers that we follow, 18 of the 19 are essentially taken together as a whole back to where they were before 9/11. We're very pleased with that.

And remember, we saw industrial growth in the first quarter of '04 at around 5%. This number was more like 3%. Two things working there.

Remember that we project in our financials something like a 2% kind of growth rate, so 3% is still positive relative to our kind of financial projections, but certainly the slope of recovery has decreased from the first quarter. That again, is what we have expected.

The same kind of, when you're talking about the real bright spots in the industrial picture, the same kind of things have continued to manifest themselves this quarter. That is particularly the industrial sectors in Alabama and Mississippi related to automotive and primary metals.

Remember what we've seen in Honda in Alabama is the opening a new product line. In fact David Ratcliffe and I went and toured the Mercedes Benz plant which has a really significant plant expansion going on there. Supporting this growth in the automotive industry are the first, second and third tier suppliers.

Further, I think the primary metals continues to show decent strength. Recent story there is we see that New Core Steel has purchased a plant, the Corus plant near Tuscaloosa, and so they're still seeing some growth there.

And then finally, chemicals is an interesting picture. We have a few very large customers there, Olin Chemical mainly, that produce chlorine, caustic soda, hydrochloric acid. We see that their capacity levels are essentially spoken for, for the end of the year.

So I think what I'm trying to convey here is a sustaining of what we saw, but a reduced slope of recovery.

I guess the negative spot would be remaining as we said before in the textiles area. We certainly have seen I guess base level of that industrial activity, essentially exported. Our sense is that you're kind of at an overall level something like 80% of the pre- 9/11 levels. My sense is there's a permanent amount of demand destruction there through exporting, I mean, through outsourcing, that's just not going to occur any more.

There are, however, a couple of bright spots even in the textile area for us. We've seen the carpet business, particularly some improvement. Customers like Mohawk Industry, they're showing some growth and certainly the higher-end textiles, like for example the polymer-related ends of that business associated with the automotive industry, have shown some good growth.

But overall I would say it's pretty good stuff. David, do you want to add anything to that?

I think you've summarized it well. I wouldn't say anything different from a District Federal Reserve standpoint, I think that's pretty accurate

Thank you.

Thank you.

Next question is from David Schanzer with Janney Montgomery Scott

Yes, good afternoon.

Good afternoon, how are you?

Okay. I was just curious with the Georgia rate case what's the allowed ROE that you're requesting?

Twelve and a half

Okay. And the test year is when?

It's July '05 to one year hence, so July '04 to July '05.

Okay. Great. And then lastly, what equity ratio? Are you using your actual equity ratio?

Just let me check that real quick. Hold on a sec. It would be equity ratio in place as of '04, July '04. So it'd be around 48%, somewhere around there

Okay, great. And then the other question I had, had to do with nuclear capacity factors. What were they for the first six months?

Believe it or not. Let's see, nuclear capacity factors, okay, here we go. Let's see, do I have an overall, overall looks like about 91%. Do you want them on a --

No, that's okay.

That's 91% with three outages I think, three refuelings during those, on three units.

Okay. And they of course were available then for the third quarter?

Yeah, oh yeah.

Full fleet's available?

Yeah, our production guys are very good about taking this notion of availability a step further and really introducing the notion of commercial availability, that is, we want to be available when the price of energy is at it's most valuable to our customers and so we make sure we get everything going.

Great. One final question, more out of curiosity than anything. When you hit the new peak how much capacity did you have in reserve at that point?

About 13%.

Great. Thank you very much.

Your next question is from Vic Katan with Deutsche Bank.

Yes, thank you. Tom or David, you have a history of settling rate cases, et cetera. Is there a way to settle this Georgia or does it have to go through the full litigation road and same thing for FERC. Is there a way to find a middle ground there?

Let me take those one at a time because they're quite different, obviously. The Georgia rate case, as you know, is actually is a process that we go through where we file the case in July and we go through hearings in September, October timeframe and then the Georgia Commission by law has to decide on our filing by the end of December, there's a six month window. We are in the third of three successive three-year accounting orders. None of those have gone to litigation, they've all been settled or finalized in that last month.

We're very optimistic and feel very positive about our ability to accomplish that in this case. So we would expect to reach some accord with the Georgia Public Service Commission in the December timeframe.

You asked also about the FERC opportunity to find some middle ground, and we don't have quite a strong a track record there in terms of positive outcomes, but, basically, because we have a philosophical difference about how the competitive wholesale market should go forward. Our philosophy hasn't changed. I will look forward to the opportunity to sit down with the Chairman to see if there's some ways to move forward that would allow us both to achieve our objectives.

And I would just add to that, at the end of the day remember that everything we do here at Southern is to put our customers in the center of our objectives. That is, we producing, as I tried to indicate in my remarks earlier, some of the nation's highest reliability, the nation's highest customer satisfaction and prices are awfully attractive, 15 to 20% below the national average. So for anything that we do, we have to make sure that our customers are spoken for here in the Southeast.

That sounds good. But one other question I have is that as you said before about your dividend policy, your 70% payout ratio is the threshold of growing the dividend closed to the earnings growth. And based on some of the numbers we do looks like you're almost there or close to there and next year you should be over that hump. So is that what we should be expecting then earnings growth and dividend [inaudible[?

Remember. Yeah, what we've tried to do is be very kind of careful about what our kind of sustainable earnings are. You may remember last year, I guess, if you look at as reported earnings I guess they were 203, but when we thought about what was sustainable and what was not, we used a base of about $1.87. If you grow that, if you just kind of run those numbers at 5% that would give you somewhere in the '05, '06 timeframe.

So we are getting closer?

We're doing well.

Thank you.

You're welcome. Thanks for being on the call.

Next question is from Jim Eunello with UBS.

Good afternoon. Any comment on the latest environmental litigation this time in the carbon dioxide news? Thanks.

How long do you have for me to answer this question?

Well, it's a busy day, how about 90 seconds max?

Okay. All right. Let me try. First of all, obviously we're disappointed that the AG's decided to initiate litigation when really and truly this is public policy and shouldn't be decided either by EPA or the Congress and I'd remind us all that C 02 has never been considered a pollutant.

We have, for a number of years, acknowledged the fact that global climate is a serious issue and merits a lot of attention, not just from the United States but from the global community. The reality is that if you shut down all of our coal-fired power fleet as well as the rest of the country, you have very little impact on global C 02 concentrations.

That doesn't mean that we shouldn't pay attention nor should we not consider additional research which we sponsor to find ways to burn coal cleaner, and look for ways to sequester carbon, we're doing all of that. I think we will move forward to respond to the lawsuit, just disappointed that we're trying to make public policy in the courts.

Thank you very much.

Once again, I would like to remind you if you have a question press star then the number one on your telephone keypad. And our next question comes from Wen Wen Chen from ABN Amro.

Hi. I have a couple of regulatory questions.

Could you speak up, we can barely hear you.

Is that better?

Yeah.

Have you given any thought as to what kind of mitigation measures you would propose if you do not pass both screens at FERC?

Oh, I think we've probably given a lot of thought to that, but I think we'll make the filing here on August 9th and I think we'll probably lay every bit of that out at that time.

Including possible mitigation measures?

That would be about 60 days after that.

Okay. I guess secondly, I just wanted to know if you had any guesses as to what might happen to the energy bill after the election?

That's Mr. Ratcliffe's.

Do you have a good guess as to who is going to win the election?

Well, I guess I don't want to say who my guess is.

I think the energy bill has a lot of very good provisions in it particularly the electricity title. And as you know, we were supportive of trying to move that forward. I think any time you get that complex a piece of legislation it is awfully difficult to get moved n Congress.

I would hope that after the election, that whoever the President is, would recognize the ongoing need for energy policy in this country that would balance our needs and move forward. If not with that complex sort of omnibus bill with bits and pieces that might be, we might be able to, we might have the opportunity to move forward with on a smaller increments if you will, so we're still optimistic that there are provisions that appropriately should be dealt with and can be dealt with.

Okay. Thanks a lot.

Thank you.

Your next question is from Ashar Kahn with SAC Capital

Good morning, afternoon, sorry. I was trying Tom, just checking with you, I guess you're running on a 12-month basis at the high end or above the high end of the range. I was just trying to look at, what are the variances which could negatively impact for the remaining next six months?

Gee whiz. It would be the typical stuff, it would be weather, I guess is the biggest thing you would look for. You know, Ashar, everything else so far appears to be really on pace. We are just following our plans this year, just right on target for the two quarter. So I guess if I had to say, I'm kind of thinking through all the different variables that impact us, I would say the biggest potential negative out there would be weather.

And any update in terms of any new, what you're seeing in the wholesale market further out, and for more contracts out there with municipalities or others?

Well, certainly our Southern Power group worked real hard and I think has a very robust backlog. We take it as policy not to talk about those things until we actually have something in hand. I'm not a believer in doing a lot of publicity around a bunch of letters of intent.

So what I would say is this, essentially I think there's a promising backlog of activity for us to follow. I think particularly attractive markets for us are in [Vacar], especially in the Carolinas and in Florida, and we're quite encouraged about the future of that business. Remember that we have a goal in place of achieving $300 million of net income by 2007. We're still very confident we can meet that goal

Thank you.

Yes, sir. Thank you.

Gentleman, at this time there are no further questions. Do you have any closing remarks?

No, I don't think so. I'd just say again I'm excited about the opportunity to be in this position. We're on track with our business plan, look forward to getting to know you folks.

Thanks very much.

This conclusion the Southern Company second quarter 2004 earnings conference call. We thank you for your participation. You may now disconnect.