美國南方電力 (SO) 2008 Q1 法說會逐字稿

Good afternoon. My name is Kimberly and I will be your conference operator today. At this time I would like to welcome everyone to the Southern Company first quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). If you would like to withdrawal your question, press the pound key. Thank you.

I would now like the turn the conference over to Mr. David Ratcliffe, CEO. , Sir you may

Thank you, Kimberly. Good afternoon and thank you for joining us. I'm pleased to be with you today for our first quarter earnings call. Joining me today is Paul Bowers, our Chief Financial Officer. Let me remind you we will make forward-looking statements today 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 discussed in our form 10-K and subsequent SEC filings.

As you can see from the materials we released this morning, we had a good quarter and were off to an excellent start for the year. Continued with our long standing commitment to customers through superior reliability, customer satisfaction and low prices we now also find ourselves well positioned with a transparent and stable regulatory framework during a period of significant capital investments. With Georgia Power's three-year rate plan, along with the formulary of base-rate mechanisms and clauses in Alabama, Mississippi and Florida, we have a great deal of transparency and cost recovery and in our overall financial profile for the next several years.

Turning now to a discussion of the economy, there are signs that economic growth in our territory is slowing. However, we expect the decline in the southeast will be less severe than in the U.S. economy as a whole due to the healthy demographic trends and a favorable business climate. The slowdown in construction of new homes has had a significant impact on the building products industry. We have seen a decline in sales to the stone wood products and carpet manufacturing sectors. On the positive side, job growth in the region is currently ahead of the U.S.. In addition, the southeast is expected to out perform the national economy in terms of both household growth, currently 1.8%, and population growth which is now 1.7%.

Finally as we emerge from this economic slowdown, we expect that the states of Alabama and Georgia will add nearly 280,000 jobs by the year 2010. At this point I will now turn the call over to Paul Bowers, our Chief Financial Officer for a discussion of our financial highlights for the first quarter and our earnings guidance for the remainder of 2008.

Thank you, David. As you mentioned we are off to a good start this year. In the first quarter of 2008 we reported $0.47 a share, that's an increase of $0.06 a share over the first quarter of 2007 excluding our synthetic fuel investments. Although synthetic fuel is no longer a factor in our 2008 earnings, we will still compare our results during 2008 to our ex-syn fuel earnings for 2007. On an as-reported basis, our earnings for the first quarter of 2008 were $0.02 a share above our earnings from the first quarter of 2007.

Now let's turn to the major factors that drove our first quarter numbers compared with the first quarter of 2007. First, the negative factors. Nonfuel O&M for our traditional operating companies had a negative impact of $0.04 a share on our earnings for the first quarter of 2008 compared with the prior period in 2007. This was primarily due to an increase in the number of planned out ages and the duration of outages associated with installing new environmental equipment, as well as an increased customer service expense. Increased depreciation and amortization, due primarily to increasing environmental investment reduced our earnings by $0.03 a share compared to the first quarter of 2007. Also consistent with our growing investment, interest expense for our traditional operating companies reduced our earnings by $0.01 a share compared with the first quarter of 2007. Finally, an increase in the number of shares outstanding reduced our earnings $0.01 a share in the first quarter of 2008 compared with the first quarter of 2007.

Turning now to the positive factors, increased revenues due to short term or market response rate and regulatory actions in Alabama and Georgia added $0.10 a share to our earnings in the first quarter of 2008, compared with the first quarter of 2007. Usage and economic growth added $0.02 a share to our earnings in the first quarter of 2008 compared with the same period in 2007. Total customer growth year-over-year was 1.1%. On average, weather in the first quarter of 2008 was normal, as it was in the first quarter of 2007. So weather was not a factor in our earnings. We had other contributions to earnings from our traditional business that added $0.03 a share in the first quarter of 2008 compared with the first quarter of 2007. This increase down primarily from allowance for equity funds used during construction or AFUDC, related to our environmental construction programs. In conclusion, we had $0.15 of positive items offset by $0.09 of negative factors so overall our quarter came in at $0.47 a share.

Before I discuss our earnings estimate for the second quarter, I would like to take a moment to discuss our recent dividend increase. As you may have seen last week, we announced a 4.3% annual dividend increase, effective with our second quarter dividend payment in June. The dividend is now $0.42 per share on a quarterly basis and $1.68 per share annually. This marks the 242nd consecutive quarter that Southern Company has paid a dividend to its common shareholders. In fact every year for the past 60 years, Southern Company has paid a quarterly dividend equal to or higher than the previous quarter dividend. Our dividend plus our financial objectives of regular, predictable and sustainable earnings for share growth and stable A credit ratings are key components of our overall low-risk shareholder value proposition when compared with the overall market. These financial metrics plus the future three-year period of comparative regulatory stability that David referred to earlier distinguish Southern Company from many of our peers in the industry.

Turning now to our guidance for 2008, it is clear our businesses are performing well. While we exceeded our first quarter estimate by $0.08 a share, a portion of this variance can be, can be attributed to O&M timing. Our current plans are for O&M to be on budget by the end of the year, given this and the potential for other variability particularly during the peak summer months, we are maintaining our current earnings guidance of $2.28 to $2.36 per share. Finally, our estimate for the second quarter is $0.55 per share. At this point I will turn the call back to David for his closing remarks.

Thanks, Paul. I wanted to update you on a significant event which has transpired since our last earnings call in January. As you may have seen earlier this month, Georgia Power and its partners, OFO Power, Municipal Electric Authority of Georgia and Dalton Utilities have signed an engineering procurement and construction agreement with Westinghouse and Shell Group to design engineer, procure and construction two AP 1,000 nuclear units. If selected and approved by the Georgia Public Service Commission, the units would be constructed at Plant Vogtle, near Augusta. Based on its current ownership interest, Georgia Power would own approximately 45.7% of the new units.

The signing of this contract is a significant step forward and if approved by the Georgia Public Service Commission, Vogtle units 3 and 4 could be one of the first nuclear plants to be ordered in the United States since 1978. However it is important to remember that this is another step in a long process. The next milestone is a selection of a preferred bid by Georgia Power. All bids will be submitted to the Georgia Public Service Commission by tomorrow afternoon, May 1st. The Georgia public service commission through its independent evaluation will review the nuclear EPC contract as well as all competing base load generation bids. From the alternative, Georgia Power will then select a preferred resource and expects to file an application for the certification in August of this year. The final step will be the certification preceding before the Georgia Public Service Commission with a decision expected in March 2009. Under Georgia law, once certification is obtained, Georgia Power would then be assured recovery of all capital cost spent on the project assuming they're incurred in a prudent manner.

At this point we have not provided a cost estimate for these two units, however if constructed, the project would include a combination of fixed price and indexed components. As discussed previously, the contract terms and conditions are part of a confidential and competitive solicitation monitored by the Georgia Public Service Commission's independent evaluator. After all bids are submitted, Georgia Power expected to release additional details regarding the project, including the total estimated cost of the plant. You may have seen in the 8-K we filed on April 8th, that we increased our capital expenditures budget for the next three years. The new CapEx forecast totals $14.4 billion for 2008 through 2010.

Our CapEx budget for 2008 remains unchanged at $4.4 billion. Our forecast includes $1.3 billion in 2009 and 2010 as a place holder in the event that the nuclear bid is ultimately certified. For units 3 and 4 at plant Vogtle the major capital dollars are expected to be spend from 2009 to 2015, with an expected commercial start date in 2016 for unit 3 and 2017 for unit 4. Nuclear energy is the best means of meeting some of the nation's future additional energy requirements without emissions of carbon dioxide. In addition to nuclear, it will take a host of new technology approaches as well as renewables and energy efficiency measures to achieve meaningful reductions in emissions of carbon dioxide.

To this end, we are working with the State of Mississippi and the Department of Energy to construct a coal gasification facility of approximately 600 megawatts in east central Mississippi to be completed in the 2013 time frame. The technology is the transport gasification process we developed in partnership with Kellogg Brand and Rood and the Department of Energy. We believe the Mississippi coal gasification option in addition to meeting additional load requirements in the region represents an excellent opportunity to demonstrate the benefits of this clean coal technology. Including the potential for carbon capture. You may be aware that earlier this month, the Mississippi legislature approved a bill that provided greater certainty of cost recovery. If approved by the governor, the measure will authorize the public the Mississippi public service commission to allow utility to recover all or a portion of its preconstruction costs and earn a return on its prudent construction costs of the new base load generation. As we continue both the nuclear project in Georgia and the IGCC facility in Mississippi, we will, as always, keep you informed and updated about our progress. At this point, Paul and I would be happy to take any questions you might have, Kimberly will now take the first questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Ashar Khan of SAC Capital.

Hello.

Hi. Just wanted to go I guess Georgia Power did exceptionally well and I was just trying to go a little bit beyond the items as to what generated that nearly 34% improvement in net income? I don't know if you can share with us whether O&M was flat or if it was a higher nonfuel margin -- or is this what was predicted in your budgets?

Well, this is a reflection of the base-rate increases we seen plus AFUDC equity component associated with the increased investment that we've made at George power. Plus they have seen continued momentum that they had last year in the industrial sector to continue into this year. There are some segments that are nonhome building related that are doing quite well. Those are the commodity-based segments like primary steel and those type.

Okay. So in essence, are you saying industrial sales were much higher than, were very strong. Is that correct? And then there's a higher AFUDC earning and I guess the nonfuel margin is better because of the rate case. Am I correct?

That's correct.

Could you just mention what happened I know it is a very small thing but anything unusual at Mississippi power? Earnings were down I guess $4 million.

They had a higher O&M, Ashar, for the quarter and a higher depreciation for the quarter. They also are -- the O&M is related to the valuation of our IGCC project.

Okay. Okay. Thank you very much.

Your next question comes from the line of Paul Ridzon of KeyBanc.

Hey, Paul.

Paul, your line is open.

I'm sorry. I was muted. You passed out $0.10 of upside from revenues from rate cases and MRR. Can you kind of tell how much of those was related to each?

Well, they're equally, Paul they're equally divided between rate impact associated with the regulatory actions in both Alabama and Georgia as well as the market response rate that is we have seen in Georgia as well.

You kind of talked a little about the market rate mechanism and what we could see in the balance of the year.

Paul, those products are prices or tariffs that have provide customers with options to make purchase decisions based on incremental market prices. This product has been around since the early 1990s, so over 15 years it has been with us at Georgia and at Alabama. Customers have choice windshield s with this product. They have the choice to continue to purchase patterns as they normally do, but it is really based on their own economic thresholds or margins within their own business. The other option they have is based on prices, reduce or change their usage patterns or select other pricing products. So given that as a platform for decisions, we don't see this the product being a carry-on for the rest of the year.

The question is sustainability. We think it will start adjusting based on the prices that they see and the customers will make some other buying decisions. Last summer we saw the customers adjust their usage patterns during our peak period almost 300 megawatts so it is a demand-response price product that based on individual customers economics, they make those decisions.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Scott Greenstein of Credit Sight.

Good afternoon, guys.

Hey.

You spoke a little bit about this already, but can you talk a little bit more about any changes in industrial demand since last quarter and the analyst day?

Well, sales for industrial were up 6% quarter-over-quarter. What we are seeing is if you take the segment that is non building related, it is still a strong growth area for us. Particularly the primary metals, transportation, we have seen activities around pipelines so I think it has been a robust momentum builder if you will for us in that segment. However, the down side is the lumber-related industries, those have seen a significant reduction in overall sales. Now if I said 6% I meant 0.6%.

We wish it was 6%.

Okay. That's helpful. Thanks a lot.

Okay.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Dan Eggers of Credit Suisse. Good afternoon.

Hey, Dan.

Just wanted to talk a little bit about what you guys are seeing on hydro conditions, how those have developed since we were at the analysts day and if you have seen any change in outlook for the rest of '08 at this point?

Good news it has been raining in the southeast. So we are in better shape going into this summer with regard to our reservoirs and the reservoir that gets most public attention in the Atlanta area is Lake Lanier, it is about 13 feet down. It was about 20 feet down last year. So it is in better shape also. We expect that if the Corps of Engineers operates that facility with a more conservative approach, which they are currently doing, that we should not be impacted during the summer as long as they provide the kind of minimum releases that we expect. We expect that our own production would, we budgeted about 50% of normal for hydro generation and we are running just slightly behind that so for this year. But I think that 50% number is a pretty good number.

Okay. And -- I'm sorry.

Excuse me. The forecast is still for drier I think than, drier than normal.

Okay. And then I guess just on the, kind of on the fuel supply conversation, how do coal inventories look and we have actually seen people sign contracts at pretty much prices. Are you guys having to sign up on price and how are deliverables from Latin America to you guys right now?

Inventories are great. We are right where we want to be going into the summer, you know, we always try to build a little inventory going into the peak period. No question that prices are up and to the extent we are trying to replace any supply, we would see that also. Good news is that we are about 90%-plus contracted for the year. I think it is 50% in, what is it, 50 to 60% in '09. So as we replace supplies or actually contract supplies in '09 and beyond we will again to see the impact of these prices if they stay there. Hopefully when rural supplies get back in balance maybe out of Australia and South America, we will see a little moderation in these prices.

Are you guys having any supply deliverabilities from South America at this point?

No, not at all, not at all, Dan. We have seen the shipping coming into mobile being backlogged because they're at full capacity at the port but we still get our deliveries.

We are seeing some asset sales happening in the southeast on the generation side, do you have a pretty big place maker for Southern Power from a CapEx perspective the next couple of years, have you guys looked at these recent auctions is and did anything look interesting where you put that to work sooner?

As you know, Dan we continue to look at opportunities within the southeast. Currently Southern Power is contracted through 2011 and for 92% of all its capacity and part of our strategy has been looking at acquisitions and we are very active in that space to try to find an economic opportunity that might exist out there.

Are you seeing, we saw a couple get sold here recently, are you guys seeing anything additionally coming or is it just kind of fit and starts.

It is more of the fits and stars, there's nothing uniformly going out there right now.

Okay. Thank you.

Your next question comes from the line of Tom O'Neill of High Bridge.

Good morning. I was just curious if you could clarify the statements you had made around Vogtle and the new build and just what you were looking for in August and then in March of to 20* 09, I was just curious when you would be given like notice to proceed to the Shaw group.

Sure. Let me go back through the process. It is a little bit convoluted but I think I can walk you through it. We will submit, we being George power will submit its contract terms and conditions on May 1st. In turn, the evaluation process which is governed by an independent evaluator will evaluate that bid along with any other bid that is are submitted as part of the RFP process between May and August. In August, they, that is the independent evaluator will make a recommendation to the Public Service Commission with regards to what they believe is the best alternative. In August, the Georgia Public Service Commission will begin a series of hearing to evaluate that recommendation in its context. They have until March of '09 to make that decision, meaning either agree and certify the decision around Vogtle or select some other alternative depending on what comes through the RFP process. They can decide earlier, but they must decide by March of '09. Does that help?

It does. Thank you very much.

Sure. Your next question comes from the line of Annie Tsao of AllianceBernstein.

Good afternoon. Two questions, Southern Power was down for the quarter, any particular reason and what kind of trend we should think about for the rest of this year for Southern Power?

One thing we have seen with southern power is an increase in their maintenance costs for the quarter associated with the inspections and part of their on going use of those turbines that that was an increase over last year. We are expecting them to be on target for the remaining part of this year. As you know, Tom had mentioned at the last later earnings call that we were budgeting $135 million per year for the next three years for Southern Power so we expect them to perform at that level.

Next question has to do with your CapEx I just wanted some clarification. You did mention for next three years, $14.4 billion. Is it $4.4 billion for '08 and the rest is for '09 and '10; right.

That's correct.

And then '09 and '10 is for the nuclear?

'09 and '10 is for the remaining environmental CapEx spend, our T&D capital, our new generation which includes the Vogtle expenditures so '09 we have $5.2 billion budgeted and 2010 we have $4.8 billion budgeted.

But only $1.3 billion of that is related to Plant Vogtle.

Oh that's the one, that's the one. Okay. Thank you.

Your next question comes from the line of Daniele Seitz of Dahlman Rose.

I just was wondering when do you start collecting on the return on your expenditures? Does it come after the decision of March '09 or do you have to wait for another case?

I assume you are talking about the potential to recover construction work in progress.

That's correct. Yes.

We are not at this point authorized to do that. So we would, right now if the commission certifies Plant Vogtle, unless we do something different it would be under the conventional financing process where we collect AFUDC through the construction phase, and then when it is commercial we put it in rate base.

Okay.

If we are considering whether or not we should discuss with the public service commission the idea of minimizing the cost to customers by taking advantage of a C process but that's a decision Georgia have to mag and the commission will have to agree to.

And would you ask for it, would you consider asking for it in 2009 or do you have to wait for a longer period?

We don't have to wait for any particular period. So it will be a matter of discussion here in the next year or so.

Thank you.

Your next question comes from the line of Nathan Judge of Atlantic Equities.

Hi.

Hello.

I also have a question on Vogtle. When you say the $1.3 billion dollars, is that your 45% or is that 100%?

It is our 45.7%.

With regard to your partners, what risks are, would Southern be taking that there would be a liquidity issue with your partners not being able to fund their CapEx commitment?

Nathan, I'm not aware of any risks right now.

Nathan, the process for them, they have to determine their take by July 2nd, they have to lock in their ownership portion on July 2nd. As far as liquidity, we don't see that being an issue at all.

If they weren't able to contribute to the CapEx plan of the build though, would there, what would happen in that event?

I think we would simply have to sit down and look at that situation as it revolves because there are multiple co-owners, we would just have to see what the situation is at the time.

Could you remind me of the process for the IDCC plant to Mississippi, what milestones should we be looking for?

Well, we have as we said we are working with DOE to try to get funding for the IGCC project in the form of transfer of the commitment that DOE had made to the technology commercialization in Orlando, also some tax benefits also some, some loan guarantees, provisions that we are working with them. We expect to get some ruling from DOE here in the next month or so. At that time, as I mentioned in my remarks, we would have to go back to the Mississippi public service commission and get them to certify the capacity and have a discussion with them about potential for construction work in progress on that project. It is still a lot of work to be done. We are doing the feed studies on the technology side at this point. So we still have a lot of work to do to put that project together, but we are moving through the process, hopefully by fourth quarter we shall know whether we are going to move forward.

And that would be above and beyond your planned CapEx or would that be already in the plan?

No, it would be above and beyond.

Nathan, one other point I will add is when David referred to the DOE process, last year, Mississippi Power submitted and received approval for $133 million of tax credit associated with this project. Opportunity is to try to expand that with clean coal power initiative funds and the other offerings being made for coal-based generation for the company.

Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS). I would now like the turn the conference back over to Mr. Ratcliffe for any closing comments.

Kimberly, thanks and thanks to all of you for joining us. We appreciate your interest and your ongoing dialogue with us. We look forward to the second quarter call later in the year. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.