Southern Co (SOMN) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Southern Company third quarter earnings release 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 one followed by the 4 on your telephone. This conference call is being recorded, Wednesday October 30, 2002. I would now like to turn the conference over to Mr. Allen Franklin, Chairman and CEO of Southern Company. Please go ahead, sir.

Thank you. Good afternoon, and thank all you have for joining us again. I'm very pleased to be with you to present our third quarter earnings. Joining me today as always is Gale Klappa, our Chief Financial Officer.

Let me again remind that 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 matters discussed in our Form 10-K and other SEC filings. Well, we had another strong quarter financial performance for our investors. We were able to deliver better-than-expected results and the third quarter marked the 10th consecutive quarter in which our share price increased. In fact, I'm told we're the only company in the S&P 500 that has gained in price for each of the past 10 quarters. For the year to date through yesterday, October 29, our total shareholder return including price appreciation and reinvested dividends was 24.3 percent.

In addition, we were the only electric utility in the S&P electric index to raise its dividend in the third quarter. As you recall, we raised our dividend by 3 cents a share annually to $1.37 per share again annually. Investment trends will come and go, but dividends will continue to be an essential component of the total return package that we offer to investors I'm pleased that we could demonstrate our commitment to the dividend with the higher dividend rate we announced in July. At this point, I'll turn things over to Gale Klappa for a discussion of our financial highlights for the third quarter and our earnings guidance for the remainder of this year. Gale?

Allen, thank you. As you mentioned, we had another strong quarter and we're very pleased with our performance. Obviously, our results were well ahead of guidance and I'll discuss the specific reasons why in a few minutes. But first, let's review our numbers compared to the third quarter actuals a year ago. As you see in the material that we released this morning, we earned 84 cents a share in this year's third quarter. That compares to 80 cents a share in the third quarter of 2001 or an increase of 5 percent. For the first nine months of this year, our earnings are $1.63 a share, that's up 17 cents a share, or 11.6 percent over the earnings we reported for the first nine months of 2001.

Now let's turn to the major factors that influenced our third quarter numbers. First, I'll cover the negative factors. We saw an impact from additional generating units that we placed in service. In addition, our energy services business continued to be hurt by the downturn in the manufacturing sector of the economy. And we had more shares outstanding at the end of the third quarter than we did at this time last year. Here's the breakdown. Higher O&M expenses primarily from new plants that we brought online in Alabama, Florida and Georgia reduced earnings by 6 cents a share. Depreciation and property taxes on these new units also had a negative impact of 2 cents a share. Our energy services unit continued to feel the impact of the manufacturing recession in the Southeast. The cancellation and deferment of energy improvements by our large commercial and industrial customers reduced earnings in our energy services group by a penny a share.

Finally, the additional shares we have outstanding reduced earnings by 3 cents a share in the third quarter. But on the positive side, we had several factors that added significantly to our earnings. These items include weather, changes in depreciation, customer growth and sales mix, and competitive generation. Here's the breakdown of the positive factors. Changes in depreciation primarily the elimination of accelerated depreciation under Georgia power's new rate plan, added approximately 4 cents a share to earnings this quarter.

As you know, a new three-year rate plan which included an annual rate reduction of $118 million took effect in Georgia on January 1 of this year. We also experienced much more seasonal weather in this year's third quarter. In particular, the month of September was the second hottest September in the past 15 years and the third warmest in the past 30 years, in particular. The impact of warmer weather over the summer, particularly again in September, added 6 cents a share to our earnings. In addition, customer growth and positive changes in our sales mix added 4 cents a share. And finally, our competitive generation unit added 2 cents a share to our earnings for the quarter.

So overall, the third quarter came in at 84 cents a share compared to 80 cents a in the same period last year. Now, as you know, our performance in the third quarter exceeded our divide dance by 7 cents a share. One of the major reasons was the impact of several tax items which together had a positive impact of 4 cents a share. Examples of these tax items manufacturing tax credits and job retraining tax credits from the state of Georgia, and the new federal tax deduction we received from dividends paid on Southern Company's stock held by our employees in their 401(k) savings plan. Of this 4-cent impact from tax items in the third quarter, a penny is a one-time trueup related to our consolidated tax return in the state of Georgia.

Other positive factors which enables us to exceed guidance were above-average weather which added 2 cents a share compared to guidance and better-than-expected performance of our competitive generation business, which added a penny. The impact of lower interest costs also added a penny to our better-than-guidance results so together, these positive items total 8 cents a share. On the negative side, our energy services business and costs associated with the startup of Southern Company Gas had a negative impact of a penny a share from guidance, so overall we came in at 7 cents a share above the guidance.

Turning now to earnings for the remainder of the year, the fourth quarter, it's clear that our business all year long has performed better than planned. As a reflection of this strong performance, we have already raised our guidance twice this year. We started the year as you recall expecting to earn $1.71 a share. After a strong first quarter, we raised our outlook to $1.73 a share. Then last quarter we raised guidance again to $1.74 a share. And now with the third quarter behind us, we're comfortable in tracing our guide -- increasing our guidance yet again this time to $1.78 a share. We will have higher maintenance expenses in the fourth quarter because work at our plants and on our network is ongoing that was deferred from earlier this year. But we should still earn 15 cents a share in the fourth quarter, again that's 15 share in the fourth quarter, and that would take our full year to $1.78 a share. I should point out to you that the $1.78 includes the effects of weather and one-time items that add up to 4 cents a share. A hotter-than-normal summer accounts for 2 cents.

The settlement of a contract dispute which we reported last quarter with Entergy amounted to a penny a share, and in this third quarter, we gained a penny from the one-time true-up on our Georgia state tax return. So if we strip out weather and one-time items, we expect that earnings from normal operations will be approximately $1.74 a share this year and reported earnings should be $1.78. So that's our outlook on 2002.

Now for a moment, I'd like to focus briefly on 2003. As always, we'll provide you with specific guidance during our fourth quarter call in January for 2003 earnings. However, we wanted to give you some insight into the factors that are shaping our thinking as we work to finalize our budgets and goals for next year. We continue to believe that the company is capable of delivering earnings per-share growth over time of approximately 5 percent a year. As you know, since the spin of mere ran, our earnings growth has been stronger than our 5 percent target.

For next year, though it appears that the soft economy will make it very difficult for us to exceed 5 percent earnings growth. The fact is that the Southeastern economy is simply not recovering as fast as many had expected it to. The manufacturing sector in our region seems to have stabilized over the course of the last few months, but it is not showing any signs of real recovery. For example, our industrial sales, that's sales to large manufacturing customers, our industrial sales for the first nine months of this year are still 5.7 percent below the same period two years ago and 3.6 percent below the same period in 1999. Many of our large manufacturing customers now tell us that they are not expecting their orders to rebound until the second half of 2003.

One positive, though, that helps to balance the picture is our customer growth. In the past 12 months, we have added 66,000 new customers. This is a growth rate of 1.7 percent and from everything we're seeing today, that trend will continue in 2003. So overall, we're taking a very realistic look at the impact of a slow and uneven economic recovery across the Southeast. But everything considered, we believe we'll still be one of the strongest performers in the industry next year. At this point, I'll turn it back to Allen for a few closing remarks and an update on key regulatory issues. Allen?

Thanks, Gale. As we've shown, our business model continues to demonstrate an ability to weather a very difficult economic climate. Our business is not tied to spark spreads or to volatility in the price of natural gas. Ours is not a merchant energy business. Nearly all of our earnings are produced from our franchise business and from long-term wholesale power agreements. Our strategy is very straightforward and is producing positive concrete results. I know that a number of you are following the debate over the establishment of regional transmission organizations, or RTOs as they're called, across the country.

In the most recent development, the Federal Energy Regulatory Commission, or FERC, approved the governance structure and operational principles for a Southeast Transmission Organization. This RTO would be composed of Southern Company, Energy, Cleco, Georgia transmission Corporation, and several public power entities including the city of Tallahassee, Daulton utilities, Jacksonville Electric Authority and Municipal Electric Authority of the authority of Georgia and santee Cooper. This would be one of the largest -- RTOs in the nation operating some 53,000 miles of transmission lines with assets under control of over $9 billion. We are certainly encouraged by FERC's approval of our proposed framework, this RTO.

We now have a basis to move forward and a foundation for continuing discussions with state commissions regarding the formation of an RTO. I will have to say, however, that FERC's order does not resolve many of the key concerns that Southern Company has in the state regulators (indiscernible). We have raised a number of questions with regard to the standard market design which are not addressed in this FERC order. As far as we're aware, FERC still intends to assert jurisdiction over the retail use of the transmission system in its standard market design proposal. Our state regulators are not likely to approve or sanction our participation in an RTO if it would mean the states lose their ability to protect retail consumers. So while we regard FERC's action approving our framework for a Southeastern RTO as a positive step, the ultimate implementation of an RTO in the Southeast depends at least in part on state commissions being convinced that retail consumers will benefit from such an RTO.

We will continue to work very closely with federal regulators and with the Public Service Commissions in our four states to ensure the discussions regarding transmission go forward in a thoughtful manner. The RTO process is far from complete, but we remain optimistic that we can still come to a positive conclusion. This concludes our formal remarks. At this point, Gale and I will be happy to address any questions you might have. Operator, we'll now take the first question.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdraw your reg station, please press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment for the first question. Our first question comes from the line of Andre Meade with Lazard.

Hi, good afternoon.

Hello, Andre.

Hey, Andre.

Couple of quick questions. One, when I look at the results for I guess all four operating companies not including Georgia, which had the rate decrease, there is a pattern of EBIT increasing faster than revenues, net income increasing faster than EBIT. The net income versus EBIT I think is easy to explain with your interest and tax reductions but I'm not so clear why EBIT is growing much faster than revenues. It looks like like you guys swapped cost of goods sold for O&M when you brought the new -- purchased power for O&M when you brought the new plants online you but is there something going on in the d and a line for these four operating companies, too that's helping that?

No. Andre, there is nothing really going on other than what we've talked about on the D&A line. He think there are a couple of items that might help to explain it. One piece of explanation is our -- our sales mix. And I have kind of referred to that earlier. Because industrial customers across the region really when you look back, their energy consumption is down compared to prior years, not compared to '01 but compared to prior years. What is really happening, therefore, is that our commercial and residential sales are making up a greater portion of the mix than they have in the past. So that's helping because obviously, our industrial customers have the lowest level of profitability. The other thing that may -- that may be throwing you off a little bit is the way the PPAs, the power purchase agreements, from units that are coming online from Southern Power are being booked at the operating companies. They're being booked not in the O&M line, for example. You are not seeing O&M from those units until the operating company -- in the operating company statements because the O&M is over at Southern Power.

Uhm, okay. I guess I'm still unclear a bit. I mean, I mean, just looking at Mississippi Power, you know, revenues are up 3 percent, that's the total dollar amount of residential plus industrial and commercial demand, EBITDA is up 12 -- or 13 percent. This is the nine months numbers. And I guess I'm still unclear what is happening there I thought most of the D&A reduction was at Georgia.

It is. It is, mostly. That's why I said there's really nothing else going on the on the D&A line. The one thing you may want to take into account there at Mississippi is they have done a really good job on controlling O&M costs.

Okay. Okay. Let me, uhm -- I might follow up with that later. Second question is on your pension income booked into -- book in earnings. I think last call you said 80 million after tax net income in '01 was booked, you expected less this year but didn't give a number. Do you now have an estimate of what you'll recognize this year from pensions and do you have a view on next year?

We do. In fact, I have very specific numbers in anticipation of the question. When I said 80 million on the last call, I was bringing that from memory and estimating the actual number was 77 million. So in 2001, we booked in our consolidated earnings line 77 million of net income from pension. This year is actually will be slightly higher at 87 million and then as we have been projecting for several years now that number starts to decline.

Current estimate -- and we're still finalizing the numbers for next year, but current estimate is in the range of 60 to 65 million for next year, and then we actually start to see that turn around where we actually have an O&M expense by 2006. One of the reasons why you are not seeing here the same kind of pension issues in terms of hurting earnings in the near term like you are on some other companies is really two factors. One, we've always been very conservative as we are on virtually everything in the assumption of earnings growth in our pension plan. We have never had an earnings growth assumption from the assets in our pension plan above 8.5 percent and that's what it is today. We'll be using a discount rate of 6.5 percent, and what happened, obviously, is in the -- in the bull market, we had earnings that substantially exceeded in the pension plan assets 8.5 percent. Because we use a five-year smoothing method on that we're still smoothing in some of the good years as well as the bad years now.

Also, our pension plan, while we were not happy that it had a negative year, compared to many, uhm, we had a really good performance from our pension plan management. It was only down 5.6 percent for the 12 months ended September 30. You put all those factors together and we're really about where we thought we would be related to pension income and that declining over several years and actually turning into pension expense by 2006.

Okay. Great. That was good -- a lot of good information. Just one last question. Your capital structure, 38 percent equity target by '03, considering where your stock is trading, is there any thought of doing a equity offer?

No, Andre. We continue to be able to raise about 350 million a year of new equity from the significant participation that we have in our dividend reinvestment plan. And we're actually ahead of schedule in improving our equity ratio and when you really look at how at least let me give you the Moody's calculation, for example. The way Moody's' would calculate our equity racial that 38 which is on a GAAP basis is much closer to 39 and given our risk profile, our conservative risk profile, our disciplined digs making, the lack of merchant exposure St. decision-making ] The rating agencies seem comfortable and we certainly are that that equity level merits a single a credit rating.

Okay. Thank you very much.

Thank you, Andre.

Next question comes from the line of Leslie Rich, Bank of America. Please proceed with your question.

Gale, I just had a question on one of the lines in the income statement. The other income line, it was down 29 million this quarter versus up 24 last year. I just wondered if you could explain what's happening.

I sure can, Leslie. That other income line is where we have dozens and dozens of miscellaneous type items. Things like land sales, things like very minor -- very minor mark-to-market from our trading floor. And it just so happened that last year, we had a number of things hit like -- like land sales, for example, where the number looked significantly better last year and those things are not in there this year. That's really the explanation. The numbers in a normal year would look much closer to what you are seeing this year compared to what we saw last year.

Okay. Thank you.

Thank you, Leslie.

Our next question comes from the line of Paul Ridzon with McDonald Investments. Please proceed with your question.

Good afternoon. We've heard a variety of outlooks for nuclear plant inspections. Can you tell us what your view is on what the increased requirements by NRC could do to planned out annual time and costs?

Are you talking about the stations or security issues or both?

Both, because they both coming up, actually.

I don't -- I personally don't see any major impact of either. I think from a security standpoint, obviously, security has been beefed up at the plants. But as far as the effect on the costs, it's pretty small and not material. And from the standpoint of any increase inspections from NRC, I would have to say at this point we don't see that being a material issue as far as the availability or the -- of the plants or the cost of the plants.

How are you doing your head inspections? Are you using electronic means or just visual at this point?

Reactor heads?

Yes.

We've just finished at plant Farley and a can't describe all the techniques we used. We didn't find any -- any difficulties. I'm sure it depends on what class a particular reactor is in and what the experience we have seen at other plants around the country. But we go to whatever means the particular class of head requires.

And having talked to our nuclear folks, Allen is right, we did do the most invasive type of inspection this time and it was clean.

Okay, thank you very much.

Our next question comes from the line of Norman Greenburg with Norman Greenburg Consultants. Please go ahead with your question.

Hi. Given the change that's taking place and the nature of the sources of your income, both are revenues and net income base, have you given thought to what kind of changes you should make in your capital ratio objectives? And if so, to what?

I'm not sure. Ask that question again. I'm not sure I understood that.

The nature of your revenues, the sources of revenues, have been changing gradually and it looks like they will be changing more.

Let me give you a very general answer to that. The only difference in the source of revenue is that our contract competitive generation business is growing a bit faster than our regulated business. But from the standpoint of -- of the risk of that business, given that it's a long-term contract business with credit worthy entities, a risk that business looks very much like the risk of a regulated business. And the fact that that percentage the -- percentage that that makes up of our total revenues increasing would not in itself cause us to change the accounting structure.

Normal, just to add on to Allen's thought, Norman. When we look at capital structure and when we look at what level of equity we need, we always look at with the rating agencies what is the level of risk we're taking. And as Allen mentioned, we have deliberately structured the competitive generation piece of our business to have a risk profile that looks like the regulated risk profile. That's not an accident. That's something we have done deliberately to maintain as conservative a risk profile as possible.

I'm glad to hear that it's the right direction to go. What are your capital ratio objectives overall?

By the end of 2003, we want to be on a GAAP basis at about a 38 percent equity ratio. The way at least Moody's looks at it that would be close to 39. And then we would have approximately 10 percent preferred in the remainder debt.

Thank you very much.

Thank you, Norman.

As a reminder, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4. Our next question comes Jay Yanello from UBS Warburg. Please proceed with your question.

Good afternoon. I have about a 300-foot question and a 30,000-foot question. First for Gale, how much are you guys borrowing right now in the short term market and what's your cost roughly right now? And what are your are assumtions in '03? My guess is rates will be going up in time. I'm just trying gauge what your assumption is going forward when and if rates rise. And the 30,000-foot question I guess is for Allen. Given I'm acknowledging you're conservative and disciplined approach but at the same time you have a very nice multiple out there. Given that relative valuation, and so many assets on the market, cab you just provide us with a general update -- can you just provide us with a general update of what you see down the road, what things might be on your wish list as far as potential asset acquisitions?

Sure. Should try your first question first?

That would be great.

Basically, we have about system-wide, I'm going to answer it two ways across our entire system of companies, we have about 3.6 billion that are -- that would be short-term debt under one year type arrangements. Some of which is commercial paper. At the holding company, we have commercial paper outstanding right now in the range of 560 million. Our effective interest cost on that commercial paper has been just super.

This year, so far our average interest rate for that commercial paper out stand something under 1.8 percent. We have not assumed and again we are just in the process of finalizing our budgets and goals for next year, but we are not assuming that 1.8 percent will stay in place. In fact, we have done some hedging and we will probably be very conservative and look in the range of, say, 3 percent next year. On average across the year for the shortest of the short-term debt. But it is clearly -- the fact that we have a solid balance sheet, a solid A credit rating has allowed to us take advantage of very, very low cost interest rate debt and that's been a hedge for us against the downturn of the industrial recession.

The second question regarding looking down the road at acquisitions that we might be interested in I think we should break that up into two pieces. One would be asset acquisitions. And I think there were the most likely scenario is the potential for some new generation speculative generation that's been built in the Southeast coming on the market at attractive prices. And if that were the case, which we haven't seen yet. We have seen a lot of plants can sell and a lot of plants delayed. But the really attractive new power plants we haven't seen come on the market at what we think are market-based prices in today's environment. We would be interested in that.

But let me add just a little caveat to that. And in an oversupply market which we're in in the Southeast there is more generation than is needed, and that generation that doesn't have a home either through a franchise retail business or through contracts is not worth a lot in the near term because there is simply no market for it. And an entity that -- if you don't have a contract, you might have to hold that capacity for two or three or four years with minimal revenue to support it. So our view of speculative generation coming on the market being attractive has to be at a very, very distressed level just looking at the market conditions.

The second issue relates to the potential acquisition or merger with more to company. And as we have said many times, we're always interested in that. We're not driven to acquire or to merge in any form or fashion, obviously, since we haven't done any of it. We have we have a very structured and disciplined set of rules that we go by in looking at an acquisition and it includes things such as it has to be accretive very quickly in a matter of months, not years. It has to be in the Southeast as we define the Southeast which is -- can be a number of states not just the four states we're in. It has to increase our growth rate. It has to be in a business that we really understand. Which would be the businesses we're in now. Let me add a general caveat. We have structured very deliberately the kind of investment we are which is intended to be a low risk predictable earnings dividend producing investment that would appeal to someone that's interested in double-digit returns and strong dividends and dividend growth. And we're simply not going to get into any businesses that damage or don't contribute directly to that type investment.

For example outside of the Southeast makes some more risky business because we don't understand markets outside the Southeast the way we do here. In venturing far afield from our basic business makes us a more risky business. So anything we do or get involved in, you can be assured that it will be consistent with our current strategy. We don't intend to let opportunities that come up divert us from what we think the appropriate strategy and investment type type investment we should be. And I think that's always a risk in attractive buyers markets, there's always a risk that companies will be allured -- lured off into areas that really don't fit them. And we're certainly not going to do that.

Okay. Thank you.

Our next question comes the line of David Thinkens with Capital Management Please proceed with your question.

Good afternoon, gentlemen. Quick question about your guidance going forward in and the base we're supposed to use. If I understood correctly, your guidance for 2002 is $1.78 of which $1.74 is what we should consider continuing operations.

That is absolutely correct.

And Gale, is the 5 percent guidance going -- of growth going forward, which number is that off of?

We would -- again, we have not -- I did not mean to give you specific guidance.

I understand. I think you said it would be tough to beat that number.

And we do think it would be tough to beat 5 percent. But the base that at the moment we think is appropriate would be stripping out the unusual impacts of weather and the one-time items, and that does take you as you indicated to $1.74.

Thank you.

You're welcome.

Our next question comes from the line of Carl Segenson with Kay Road Management. Please proceed with your question

Thank you. Good afternoon. Allen, I particularly appreciated your comments on the RTO or ITP as FERC would now have it. But I wonder if you could delve a little bit deeper into the state commission's attitudes and the likelihood that this plus some companies attitudes will have any direct effect on FERC finalizing the gig [INAUDIBLE]. It's not only the Southeast that seems to be opposed for reasons that you indicated but also the Northwest and with the meeting coming up and address these things in some detail, can you give us any guidance from your point of view on the kinds of comments that Southern or the operating companies will make to the FERC and whether you think they listen or whether they just have an agenda that has hearings and doesn't listen to what's being said?

That is a very good question. And I would say, I believe the view of FERC is changing. I would sigh until recently, -- I would say until recently, it seemed to me that FERC felt that they knew what the answer was with transmission and the proceedings and hearings and paper hearings didn't seem to dissuade them from that view. I think that's changed because I think the politics have changed. As you indicated, the Southeastern governors and the western governors along with the state commissions and in some cases the utilities have banded together to express very strong concerns to FERC directly and indirectly to FERC through Congress. And I think the level of that opposition and the groundswell of concern coming from the south and the west certainly has gotten FERC's attention. It certainly has gotten Congress' attention. We are now seeing debated in the energy Bill the potential of Congress actually telling FERC to vacate its standard market design rules. That would be unprecedented for Congress to tell a federal agency something that specific. Whether that will happen, I don't know. A good indication that FERC is beginning to listen is the approval of the [INAUDIBLE] RTO filing. I'm not sure six months ago that FERC would have looked as favorably on that filing. But because the utilities here support that and the states I think could be brought along to support it, I think FERC is trying to show more flexibility. I think they are trying to show the Congress and the states that they are listening. So that's a long way around saying I think FERC is listening more now than they were. And I certainly think the governors are having an impact.

Great. Thanks.

You bet.

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

Good afternoon. I was wondering if you could just give a little bit of color on the gas marketing experience in Georgia, just what your thoughts are of the market now that you've been in it a little bit and had a chance to experience it firsthand.

Sure. We can. I would say generally it has -- generally it has been about what we thought. There haven't been any real surprised in a positive or negative way. I would say that we have been encouraged that the -- our customer base is growing a little faster than we expected, even though we've done no advertising. And we felt like the Southern Company brand name and the Georgia Power brand name would be helpful and that's been confirmed and actually doing a bit better than we thought. I guess the other thing that's become obvious is that that -- the retail gas and retail electricity is never totally deregulated. I think the political consequences of price spikes and unavailability in those commodities is so high, the state commissions stay involved and we're -- I think even though that is, quote, an unregulated market, our Southern Company natural gas people spend as much time or more time dealing with the state commission as does Georgia Power Company. So no big surprises, but we are learning some things as we go along.

And Scott, if you have relatives in Georgia, the phone lines are open. They can find out at 1-800-socogas.

One other quick question. Can you remind us of the average length of the contracts in that portfolio? The new plants.

They run anywhere from five years to 15 years and beyond. I don't know if we've computed a weighted average.

Weighted average is about eight years.

Thank you very much.

Once again, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4 on your telephone. We have a follow-up question from Paul Ridzon with McDonald Investments. Please proceed with your question.

A sense of how many megawatts of the unregulated generation business roll off in the next couple of years?

We do have that. The megawatts that roll off, we really have no exposure at all until 2005. We have a contract that expires in 2005 at Plant Dahlberg which is a peaking unit and that's 400 megawatts.

You've got a goal to get 50 million out of your products and services by the end of '04. Could you kind of give an update as to your progress there and how the economy has impacted that?

I can certainly start out. Allen will have some thoughts to add, as well. As always, when you set an aggressive goal like that, you have some upside surprises and some downside surprises. Clearly, we will not have, in my judgment, as strong a year in products and services this year as we had last year. We earned about just over $20 million from products and services last year. Don't think it will be that good this year, principally because of what we talked about earlier, and that's the -- the really the drying up of manufacturing in large commercial customers starting any projects to improve their energy infrastructure. They're just not spending capital. And that has hurt our energy services business very much this year. But on the other hand, we have seen some other really positive things. Our outdoor lighting business in Georgia is just continuing to do just continuing to exceed our expectations. Our Southern LINC business has had a very, very good year. It will be one of the few wireless companies in America to actually earn money this year. So we -- overall, while I think 2002 will be a bit down in terms of products and services, nothing I've seen has changed our view that long term, that can be done correctly and disciplined and in niche that is we know can be a very good line of business for us and very profitable. Allen?

Yeah, let me just add that since we -- since this time last year, we added one additional component which is the retail gas business. That will make a contribution and let me remind you, I believe we told you this in an earlier call, that even though we set an internal goal of $50 million, which is very aggressive starting from scratch, we don't -- we did not count on -- do not count on 100 percent of that to hit our 5 percent growth rate. We really count on about 2/3 of it. So we were being a little bit hard on ourselves internally but we're leaving a little bit of a bumper at the corporate level.

On the C&I spending how much do you attribute to deferrals that you will eventually capture later down the road and how much is spending that's not going to happen?

That's really difficult to say. But in talking to our folks out at the energy services group, I mean, they are pretty optimistic that -- that a number of these projects will come back. It's just a matter of time. You're seeing, I know you're seeing all across corporate America significant reductions in capital spending. But some of this spending really does need to be done at some point in time. So I think a lot of it will come back and we'll see some rebound. Don't know exactly how quickly but I think we will see a rebound in that business unit.

Thank you very much.

Thank you.

Our next question comes from the line of Chris Melendez of UBS Principal Financial. Please go ahead with your question.

Good afternoon. I had a quick question. I was under the impression that for Southern Company you would only construct or add assets if you had a contract associated with the additional asset. I think that was said maybe on the last earnings call and also on the Southern Power new deal road show. I wanted to make sure that that's still in place because it sounded like that may -- if assets are really cheap, would you consider them without a contract.

No, that's still in place. I guess an asset could get cheap enough that you would take a chance on it, but it would have to be very, very cheap. The way we look at the wholesale power business, and this is the way we've always looked at the wholesale power business, that the real asset is the customer, it's not a generating plant. Anybody can build a generating plant pretty much anywhere in the south that they wish. And the price or cost at which different folks can build a plant is not that different. So owning a power plant is not a great asset, having a customer is a great asset. So we would be looking for a place to put the power from a plant before we bought it. We have some potential already, because we have some long-term contracts, especially with co-ops, where the demand grows over time and at some point it outgrows the capacity we've built and dedicated to that load. So there would be a place potentially under some circumstances to put part of a distressed plant, but we have not changed our view at all that we need customers before we invest in power plants.

Okay. Thanks for that.

Our next question comes from the line of Nicola with Seneca please proceed with your question.

Good afternoon. Actually, this is a follow-up to the previous question and that is, uhm, how many of your existing capacity is currently contracted in '03 and going forward judging from the (indiscernible) will be fully, and given that you plan to add 4,000 megawatts of competitive generation capacity over the next few years, how much of that capacity is currently contracted and what's the plan?

Essentially, all of it. All of what we have in place is contracted for and essentially all that we're building is contracted for.

Right. Okay. Thank you. And one more question on page 10 of your press release, you describe Georgia power, as one of the subsidiaries. You have the decrease net income available to 9 percent. What is the greatest driver for that?

The greatest driver for that is the rate plan that was put in place on January 1, which called for $118 million annual rate reduction.

Right. So it is fully -- is it primarily that or is there anything else that it is due to?

No. That is really it.

That is it?

And in one just ancillary fact that may be helpful to you, because the rate reduction is tied to kilowatt hour sales, you are going to see the largest magnitude of the impact of the rate reduction in the summer months when kilowatt hour sales are the highest.

When I add all the subsidiaries net income on this apparently, I don't get 559 from that income. I get 580. Is there an additional line somewhere?

I'll tell you what why don't we get through that and we will call you back off line and -- we're syncing up on the numbers.

Great, thank you.

Thank you.

Just one ancillary point for everyone related to the generation that this last gentleman asked about coming online in '03 that Allen said is fully contracted. It is. We have Franklin 2, which is named after Allen. It used to be named Goat Rock and now know why we named it Franklin. That's a 1500 combined cycle unit and we have Harris 1 and 2 which together with 1236 megawatts. Those three units are all sold out under long-term contracts back to Alabama power and Georgia power and then the remaining unit which is being built in conjunction with the city of Orlando will come on line next year and that is under a 10-year contract all sold out. That gives you an example of the manner in which we're approaching this business. So all of -- as Alan said all the megawatts are all accounted for under long-term contract.

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

Hi, good afternoon.

Hello.

Hey, Carey

I was wondering, do you have, uhm, cash flow roughly, you know, operating cash flow kind of guidance for '03 as well as a better breakout of specifically what '03 Cap Ex would look like?

Carey, we are finalizing all of that in our budgets and goals right now. And I don't have in the room with us an '03 cash flow estimate. But... let me just talk for a minute about the one number that I think we do have a pretty good handle on. And that's the Cap Ex for next year. Our Cap Ex will have peaked this year and I would expect Cap Ex next year in the $2.1 billion range maximum.

Okay, great. All right. Thank you.

Thank you, Carey.

Once again, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4 on your telephone. (Pause) Mr. Franklin, I see no further questions at this time. I will now turn the conference back to you. Please continue with your presentation or any closing remarks.

Terrific. Let me just thank all of you for listening in. Again, we had a what we thought was a very good quarter. Hope you agree. And we appreciate your continued interest in the company and in many cases support of the company. Thank you very much. Bye bye.

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