Southern Co (SOMN) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Southern Company first quarter 2004 earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time, if you have a question, please press star then the number 1 on your telephone. If you would like to withdraw your question, press the pound key on your telephone. As a reminder this conference is being recorded, Tuesday, April 28th.

I would now like to turn the call over to Allen Franklin, Chairman and CEO of Southern Company. Please go ahead, sir.

Thank you, operator, and good afternoon and thank all of you for joining us again today. I'm very pleased to be with you for our first quarter earnings call. As usual with me today is Tom Fanning, our CFO.

Also joining us by telephone is David Ratcliffe. David is actually visiting one of our subsidiaries in Mississippi. As you know, David will become CEO of Southern on July the 1st, after my retirement. This is my final earnings conference call, so I'm unusually pleased that we have a good report to give to you this afternoon.

Before I continue, let me, as usual, remind you that we will be making forward-looking statements in addition to providing historical information. There, of course, 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.

As you can see from the earnings material we released this morning, we had an excellent quarter. Our businesses are performing well. We're off to a great start to meet our annual financial targets.

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

Thank you, Allen.

We're very pleased with our first quarter performance. Obviously our numbers were well ahead of guidance, I'll discuss the specific reasons why in a few minutes.

But first, let's review our numbers compared to first quarter of last year. We earned 45 cents a share in the first three months of this year. This compares with 41 cents a share in the first quarter a year ago. That's a gain of 4 cents a share.

Now let's turn to the major factors that drove our first quarter numbers. On the negative side, we saw a 1 cent impact from the additional shares we have outstanding, an increased non-fuel O & M of three cents a share. On the positive side we had several factors that added significantly to earnings in the first quarter. These items include customer growth, sales to industrial customers, our synthetic fuel business, and lower expenses at the parent company.

So here's the breakdown. Customer growth and demand from residential and commercial customers accounted for 3 cents a share compared to the first quarter a year ago. Compared to the prior period, we had 71,000 additional customers, an increase of 1.7%, reflected in continued strong growth in our service territory.

Increased demand from industrial customers, especially in Alabama, accounted for an additional 2 cents a share in the first quarter. Sales to industrial customers increased by 5% compared to the first quarter of last year, reflecting continued strong demand from almost every industrial sector, including chemicals, primary metals, automobile manufacturing, and pulp and paper.

Our synthetic fuels added 2 cents a share, compared to the first quarter last year. These additional earnings were driven by primarily two factors. First, as you know, in the second quarter of last year, we discontinued adding to the reserve against the tax credits we have taken on this business. In addition, we saw increased production levels in the first quarter at one of our syn fuel project. This is a timing issue to offset lower production levels we anticipate later in the year, when this equipment is scheduled to transfer to another site.

Finally, lower parent company expenses added a penny a share to our earnings. As you may remember, last year we improved the equity ratio beyond our target of 38% to over 40%. This year, we have stopped the issuance of new shares, except for those required to support the exercise of stock options, which amount to approximately 2 million shares this year. We've also improved our equity ratio by reducing the amount of trust-preferred securities and commercial paper by approximately $500 million in the aggregate, year-over-year. So overall our quarter came in at 45 cents a share compared to 41 cents a share in the same period last year.

Our earnings guidance for the first quarter was 34 cents a share. So we exceeded our guidance by 11 cents a share.

There were several reasons why we exceeded our guidance for the first quarter. First, was the strong demand growth, particularly from industrial customers in Alabama and Mississippi. In Alabama we've seen strong rebound in steel, automobile manufacturing, and paper products. In Mississippi we've seen an increase in demand from chemicals and refining.

The next factor was weather. We experienced colder than normal weather in the first two months of the year with an unusually low average temperature, especially in February. In fact, the average temperatures during the month of February were the coldest we've experienced in 15 years.

The cold weather also contributed to earnings in some other areas of our business. Southern Company gas benefited from increased usage, and our competitive generation business has strong performance as a result of regional demand and favorable market conditions. O & M spending below anticipated levels, which will be made up during the remainder of the year, also added to earnings above guidance. The majority of this underspend on O & M was from maintenance on some of our fossil and hydro units, as well as transmission and distribution projects, which were scheduled, but not completed in the first quarter.

And finally, the syn fuel timing issues we discussed earlier also contributed to better than expected performance. So now, turning to our current earnings guidance, it's clear that all of our businesses are performing well. Certainly some of our excellent performance in the first quarter will be sustained for the year. However, given the nature of the variance we experienced and since the majority of our earnings are made during the summer months, we are still comfortable with our year-end earnings per share range of $1.94 to $1.99.

Finally in terms of our quarterly estimate of earnings per share, for the second quarter, we're projecting to earn 47 cents per share.

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

Thank you, Tom.

In looking at a broader industry front, I know a lot of you are following the proceedings related to market power tests, and the ability to charge market-based rates for the so-called supply margin assessment issue at FERC. After receiving comments and holding a technical conference earlier this year, FERC issued an order in mid-April changing the SMA test, or Supply Margin Assessment test. At this point, we're still reviewing the order and we'll be providing some comments. They're, in our judgment, various interpretations and some issues that are not that clear in the language.

On the surface, it would certainly appear that FERC has addressed some of our concerns that we expressed through comments, but we believe there's still problems with the proposal and those problems need to be addressed and we'll be providing further comments to FERC related to those problems.

Turning now to another issue at FERC, I know a number of you have been following the commission's review of two wholesale contracts between Southern Power, which, of course, is our competitive generation sub, and Georgia Power and Savannah Electric. The two contracts for Southern Power's McIntosh units were filed with FERC in April of '03. FERC accepted the contracts for filing subject to refund pending a hearing. The competitive bidding for these purchase power contracts was conducted in a state-sanctioned process that selected the most cost-effective, reliable supply options from the 42 proposals that were received. In addition to Southern Power, Duke Energy also won 600 megawatts of this RFP.

FERC's precedent indicates that affiliate contracts selected in such a manner -- that is, the competitive bidding process -- should be approved by FERC. The prior Southern Power contracts resulting from the exact same state-sanctioned process in Georgia were approved by FERC and we believe the facts in this case suggest the same outcome, or certainly deserve the same outcome. The FERC administrative law judge that's overseeing this matter requested that we enter settlement discussion with FERC's staff and two entities that are contesting the outcome of the RFP. Calpine [ph], a participant in the bid process, and Williams Energy, a nonparticipant in the bid process.

We're doing so, but thus far the discussions, the settlement discussions, have not resulted in a settlement. Since the settlement discussions are confidential I cannot comment on the substance of the talks. However, I will iterate that we believe the facts in this matter clearly support the approval of these wholesale contracts by FERC.

Before we take your questions, I'd like to close with a few personal comments. As I said at the beginning of the call, in a couple of months I'll be retiring after 34 years with what I believe is one of the best, if not the best company in this country. I'm looking to a change of pace personally. At the same time, I'm extremely proud of what we've achieved here at Southern over the past few decades, and especially what we've achieved since the spin of Mirant.

Among other things, we developed and fully implemented our regional business strategy. And as Tom said earlier, we've strengthened the balance sheet even beyond what our equity ratio target was, we've consistently exceeded our earnings growth target, and I'm very happy to say that we're back on track with increase in our dividends.

Now it's time for the Company to move on to the next phase, focusing on continuing that earnings growth over the long term, and at the same time, preserving the low-risk characteristics that this company is famous for.

David Ratcliffe is a great choice to lead Southern Company into the next phase, certainly my choice. I've worked with and observed David for more than 20 years. I've seen him excel in lots of jobs, all of the jobs he's held here at Southern. Of course, most recently as CEO of Georgia Power Company, which you all know, he did a terrific job. David's been a key player in the development and execution of the strategy I just talked about. That has produced the very solid results for our shareholders, customers, and employees. An extremely important strength of Southern, which I think is often overlooked, is the strong commitment this company has had for decades to management development and people development in general. That commitment to management development is what made this and is making this management transition at Southern seamless and, in our minds, simple. This company is in extremely good hands going forward.

This concludes my formal remarks. At this point we'll be happy to take 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 star then the number 1 on your telephone. If your question has been answered, and would you like to withdraw your registration, please press the pound key. If you are using a speakerphone, please lift your handset before entering your request.

One moment, please, for your first question.

Our first question comes from the line of Matt Neal [ph] with Reed Global Advisors.

Hi, good afternoon.

Hi, Matt.

I had two questions and my first one is in regards to the synthetic fuels business. And, you noted that some of the earnings additions were due to timing, but I was curious if there's any additions that we can see that could be expected to continue in '04.

Well, in terms of production levels, no. We limit the amount of alternate fuels credits we take to $125 million in the year. That's been consistent over the years, so what we're seeing in terms of timing is really just related to the production increases, the absolute amount of alternate fuels credits that we'll take this year will be constant, we believe.

The other just issue is the notion that we had been accruing adding to a reserve. We stopped that in the second quarter of last year, so that speaks to the other difference.

Right. Okay. So are you expecting your 2004 syn fuel tax benefits to be in line with those of 2003 and 2002?

Yes, that's correct.

Excellent. My second question, I know Mississippi Power isn't a huge contributor to your bottom line, but I was curious what were the main drivers for the 19% reduction in net income at that company?

Yeah, that would be found in the financials package, the earnings package we talked about. Let me just see. That's on page 10. Basically what you see, if you look at -- it's on page 10 of the earnings package for everybody following along.

If you look at kind of Mississippi and Gulf for 2004, what you see are pretty consistent results. I would say that the three months ended March 2004 are consistent. I think what you saw, the difference between '03 and '04 for Mississippi is the fact that in '03 they benefited hugely from opportunity sales, more so than they did in the first quarter of '04. So that's really speaks to the difference, I think.

Okay. Excellent. Thanks for your time.

Sure. Thanks for the question.

Our next question comes from the line of Leslie Rich of Banc of America Capital Management. Please proceed with your question.

Hi everybody. Allen, congratulations on your forthcoming retirement.

Thank you very much.

Hey, Leslie.

Hi. Just a couple quick questions. Allen, you made a comment that you're back on track to increasing the dividend. What's your sort of timing and outlook on your dividend policy?

You know, we started a couple years ago with -- going back just a little bit further, when we did the spin of Mirant, our payout ratio was up above 80%, and we said we wanted to get it down to at least 75% before we started increasing dividends. We were able to do that a good deal quicker than we thought. And we started a couple years ago increasing dividends.

And we said at that time that until we got our payout ratio down to a comfortable level, which we now think is about 70%, we thought we'd increase dividends about half the earnings growth, or half the EPS growth rate. And the EPS growth rate project and targeted is about 5%. We've done a little better than that, and we've been increasing dividends at about half that rate for the last couple of years. We're sort of on the margin of having the equity ratio as low as we'd like to have it.

I guess once it gets down to the -- which it has -- below 75%, closer to 70%, being as conservative as we are, we'd like to be sure it's going to stay down around 70%. So this summer I think the Board will start looking at, and management will make a recommendation, on dividends, so we're getting close, maybe not quite there, to where we want the payout ratio long term, but close.

Yeah, let me just kind of underline it. From Allen's comment, I don't think I would take any notion that we've changed our dividend policy. It's exactly as it has been.

Okay. And separately, could you talk about your coal hedging?

Sure. There's been quite a run-up in spot coal prices. Since our October fuel forecast, I think we've seen an increase in spot coal price of around 43%. Now, that impacts us rather minimally.

You know by this conservative nature and the way we run our business, we really speak to covering our coal requirements with contract coal and rely on spot coal rather minimally. So we've got essentially 100% of our coal requirements for 2004 covered with contract coal. It's a little less than that. It's something like 83% in 2005, then it goes down a bit from there. But you should consider, for the next two-and-a-half years or so, we're pretty well covered with contract coal and we'll be exposed rather minimally to spot coal.

Okay. And when are you planning on filing the rate case in Georgia?

It'll be right around the beginning of July, and we should get a decision sometime in December of this year.

Okay. And then finally what were your opportunity sales during the quarter?

Let's see. Opportunity sales during the quarter, if I could extend that to include power marketing, which would include some decisions that we make that would add to the opportunity sales, power marketing was $18.7 million. That's on total competitive wholesale generation profits of 55.7. That would remain 37.1, associated with long-term contracts.

That's net income?

Yes, ma'am.

Okay. Great. Thank you.

Our next question comes from the line of Nathan Judge of Atlantic Equities. Please proceed with your question.

Hello, Nathan.

Hello, Allen. I hope that you enjoy your time and your next -- your next focus, I guess.

I wanted to ask about the weather impact. Could you just clarify what the weather impact for the quarter was?

Sure. I love talking about this. If you just look at the normal method that we use to calculate weather impacts, what you would see is 1 cent positive to our weather budget. What we think, however, happened was that we may have seen a greater than normally measured impact by weather.

Let me explain that a bit. One of the interesting statistics was during February we had the coldest February that we've had in 15 years. Normally what we see in the winter time in the southeast is kind of spikey. We'll have spikey temperature moves. We'll have a cold snap followed by a warming trend. What we saw in February, in fact, were very low high temperatures that were sustained for the month. Now, we saw an interesting development in residential consumption patterns that we think modeled what we typically see in the summer.

Let me just go through this a bit. In the summer, when you see sustained high temperatures, say a whole week above 95 degrees, is this thing kind of an additive pattern throughout the week as the sustained high temperatures progress people feel hotter, and essentially their consumption starts going up rather like a curve, rather than a straight line. So what they tend to do as the sustaining high temperatures continue to evolve, they turn the thermostat down.

Well, we think that same pattern occurred in the wintertime. We normally don't see that, as it was sustained low high temperatures, people felt colder, and they started turning the thermostat up. So by normal measures, what we would say is that weather speaks to 1 cent positive in our favor, but we think it might have actually been a bit higher than that.

Very interesting. Allen, just if you could reflect back on the FERC, what is the best outcome from the FERC? What could be the up-side with FERC in this decision and perhaps settlement? What would be the best-case scenario there?

Referring to the McIntosh cases?

Yes, sir.

I think the best outcome would be the contracts are simply approved, and we make minor procedural modifications going forward to the bidding process. I think that's not only the best outcome, looking at precedence, but that's what the outcome should be.

And what possible changes could come to the bidding process?

Things such as having a third party evaluate the bids as opposed to the company under the auspices of the Georgia Public Service Commission, which we would be more than happy to accommodate now.

Is the company still of the opinion that the -- kind of the worst case scenario, that they could put it under cost of service which would actually probably result in a higher return?

I'm not sure how to judge that, Nathan. That certainly is an option to be considered, to put it in cost of service, clearly, you have to have the state commission support that. And I wouldn't want to speculate. They certainly are supportive of what we've done so far, but I wouldn't want to get ahead of them and speculate on how they would view that.

So it's hard to say what the worst case is. I think the right case is for it to be approved, as I said earlier, and it seems to me if FERC ventures very far from that, then they're deviating from the precedent they've set over a number of years.

And just one final question on that. What's an expected time frame for the resolution?

The time has not been set. The final calendar for the hearing has not been set. Clearly it'll -- we expect to the go to hearing this summer sometime.

But we're still in settlement talks right now.

Sure. And just lastly on the energy bill, could you provide us on your perception of how that's progressing?

Well, there's still a major effort, or an effort, in fact, I listened to some of the discussions in the Senate last night on C-SPAN where Senator Domenici, who is Chairman of the Senate Energy Committee, is still trying to find a way to push either the entire package or more likely a slimmed-down package through the Senate. From hearing the discussions last night and hearing Senator Reid's comments, it's -- on the democratic side, I was not very encouraged.

There's still what appears to me to be a big gap between what the Senate is willing to accept and what the House is willing to accept. The House apparently, and Chairman Barton, is looking to get the entire package, including the MTBE issue, or nothing. So I would have to say that they're stirring the pot some, and it's not a dead issue, but the odds of a significant energy bill passing don't look that great to me.

Thank you. And again, Allen, best wishes.

Thank you, Nathan. I appreciate that.

Thanks, Nathan.

Thank you. Our next question comes from the line of Steve Fleishman of Merrill Lynch. Please proceed with your question.

Hi, gentlemen.

Hey, Steve.

Tom, that was great weather soliloquy there.

Did you like that? [LAUGHTER]

I was wishing that question hadn't been asked. I had asked Tom that question a couple days ago and I was sorry I asked it.

We'll just make sure not to ask Tom about the weather. Allen, I had a question regarding on your discussion of the FERC SMA test proposal. You did indicate that while you thought there was some positive progress there, you still have some problems with it. Could you elaborate a little more on what the problems are, and how concerned are you, if it stays as it is, that you might find that you do have certain elements of market power?

Well they're too different. I can tell you we don't have market power. There's no question. The question is whether a particular test shows that we do or don't.

An indication that we don't is to simply look at opportunities here in the southeast, how many competitors there are. We were just looking at this Georgia Power, Savannah Electric RFP. We had 42 bids. We were oversubscribed by -- what did we say? Without us --

Without us, nine times.

-- Nine times, and including our proposal, we were oversubscribed 15 times. So there is just an abundance of wholesale capacity, much of it not committed here in the southeast. It's probably the most competitive market in the world right now.

If you look at the amount of capacity available versus the demand for wholesale power. So it's not a question in my mind of where we have market power, it's whether the test that FERC devises truly reflects market power here in the southeast. What we have problems with is this: When looking at whether a company has market power, the position the company has, what should be considered is the level of demand for the product -- in this case, wholesale power -- and the availability of alternative competitive choices. How many megawatts -- other than the company being considered, how many megawatts of wholesale power are out there for sale compared to the demand. And if there's a great deal more supply than demand, when you're not including the company under question, the company clearly can't have market power.

So that was our argument, or our point we made so strongly with FERC, is that when you're looking at whether you have market power on the wholesale market, first of all you have to not consider and take out of the equation generation that we own that can't be sold in the wholesale market. And that is generation that's committed to either wholesale -- long-term wholesale contracts or our retail business. And they have given some significant consideration to that proposal in these latest tests. Where we think they're still a bit off track is when they're looking at the way they compute the demand for electricity, demand for the wholesale power.

First of all, instead of looking at peak days and peak periods, they're looking at all periods of the year and creating an average demand, which, in truth, the average demand never exists. We think they should be looking at peak demand, not average demand.

And secondly, they're looking at what share, if when you look at the amount of generation available to sell into that market, and add up all of our generation, how does that compare to that demand, which in my judgment is irrelevant. It should be how much other competitive generation is out there available to serve that demand, not what our share of -- what our generation is as a share of that demand.

For example, if there's 1,000 megawatts of demand and we have 2,000 megawatts of generation available to sell to it, but there's 20,000 megawatts of additional generation out there, we don't have market power. But they have gotten interested in and proposing things like if you -- if your total generation of available to sell into that market is 20% of the market, you de facto have market power, which to me is just nonsensical, so we have a philosophical difference of opinion on that point and that point is still inter-laced through their market test.

That was about like Tom's explanation of weather. Does that make sense to you?

Yeah -- no, it does make sense to me. I guess they have asked you and a few other companies to make a filing within 90 days based on what they've proposed.

Correct. 60 days, I think.

Okay. Do you plan to -- and I assume you're going to -- you're making some kind of appeal or rehearing on what they came out with.

Absolutely.

Are you going to file this thing within 60 days or seek a delay in that or how --?

I think we'll be able to file it, yeah. I mean, our arguments are, first of all, I think extremely sound, and not very complicated.

Okay. Thank you.

Thank you. Our next question comes from the line of Daniele Seitz of Maxcor Financial.

Thanks. Just wanted to ask, since your first quarter earnings are very strong and -- or at least stronger than expected, and you still have the same guidance, does that mean that the rest of the quarters might be weaker? I mean, is there any one specific quarter that you think is likely to be not as strong?

No, not at all. I think it's just somewhat our conservative nature. I think you look at kind of the sustainability of the performance we've had so far. I think -- let me just give you an example on the economy. One of the really bright spots we've seen in Alabama has been the steel industry. There's been a lot written recently about there's such demand in steel, is that sustainable?

For example, the price and availability of metallurgical coal is now somewhat impaired, and, in fact, even one of the other kind of major product inputs to that industry is scrap metal, and the prices of that have gone up just purely as a result of supply and demand factors. One of the things we just wonder about is just the sustainability of the tremendous increase we've seen in primary metal.

I guess the other thing is, you know, just quite simply, we make the vast majority of our net income during the summer, and here we are in the first quarter, I think it behooves us to just take kind of a conservative view, and let's see what happens for another quarter or so before we change guidance.

We really just need to see a little more data, Daniele. And some of the 11 cent above guidance we know is timing.

Right, yeah.

But you certainly shouldn't think that we're looking at a future quarter and think it's going to be softer than what we've projected. That's not the view. We just need to see a little more data.

That's all. There's no dark clouds on the horizon that we know of.

Just wondering about the SMA issue again. Do you expect that FERC is actually pushing for this very super RTO because it seems that other companies feel that they can come up with a better computation if they are in a bigger pool. Would that -- is it going to unearth again the potential for another large RTO?

Yeah, Daniele, I'd say that potential has never gone away. We've been in some fits and starts. We had the C Trans thing, which got a little too complicated, and the states were not supportive, and it made sense to discontinue that.

We're still interested in trying to find an RTO that's not overly complicated, that clearly leaves the states in the jurisdictional situation they're in now. But gives up some control of transmission to make sure that it's used in a nondiscriminatory way, which we do already. It provides some greater regional planning, some greater regional assurance of reliability. All those things we still support. It's a matter of finding the right combination that will suit or fit FERC's minimal requirements as those requirements evolve related to RTOs, and that are still acceptable to our state.

So we're still in the hunt to try to put something like that together, and clearly if we had that, then this SMA test, regardless of how it's defined, becomes less of a problem.

The numbers would come up better if you are?

Well, we think so. We still don't know how -- exactly how to apply the test, but certainly that appears to be a significant mitigating factor if you're in an RTO.

Great. Well, again, we'll miss you. Congratulations and well done. Bye.

Thanks, Daniele.

Our next question comes from the line Ed [ph] Shracon [ph] Ed AC Capital [ph]. Please proceed with your question.

Good afternoon and congratulations on a good quarter.

Thank you.

Tom, can I just ask you, looking forward, in terms of contractor generation, are you finding more opportunities, or it's just status quo, and as things come along you'll pick up something? Could you just give us some picture as you look forward?

Obviously, I can't comment on specific situations, but I certainly can kind of broadly paint a picture where we are active in our development opportunities, both on the bilateral long-term front as well as in full requirements front. Since we signed, I guess, our last long-term bilateral with McIntosh, before that it was Stanton associated with the Orlando Utilities Commission, really since those we've been fairly active on the full requirements front with, NCMPA, Piedmont Municipal Power Association, and a variety of others. We think there's more of that business to do as well, so frankly, we're encouraged that we see opportunities that will fulfill our growth requirements to support our financial plan.

We still feel very good about the notion that we can deliver, long-term, 5% earnings per share growth, and that will be made up of 3% from the retail regulated businesses, 2% from the competitive wholesale business. We feel good. A lot going on.

Thank you very much.

Yes, sir. Thank you.

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

Hi, good afternoon.

Hey, Carrie.

Hi. Wanted to just touch on a few quick items, and then a little bit longer. Georgia Gas, do you know what the contribution specifically for that business was this quarter versus last quarter?

Yeah, they had great first quarter. They made a little over $6 million this quarter.

Okay. Do you know what you were planning for this year for the entire year?

Yeah, actually, we're planning on them losing about $6 million for the year. You know that their earnings pattern is such that they make most of their money in the first quarter, and then a little bit in the fourth quarter, especially kind of weighted towards December. So it's normal to expect that they'll have kind of a profit in the first quarter, and then that will be taken down through the second and third, and then you wait and see what happens in December. But certainly it's a good start.

Above --.

Yeah, it's a little bit above budget.

And then do you have the ROE for Georgia Power for the latest 12 months?

Yes, we do. Just a second, and I'll get my hands on it exactly. Our average return on equity for Georgia Power, that's corporate return, was 1426.

Okay. And that's usually, what, 150 basis points?

Yeah, it's actually more than that. That number is kind of a number we use over the long -- like the five-year planning horizon. It was actually bigger than that in '03. Retail return in '03 was 12.07.

12.07.

Yep.

Okay. Great. And then obviously -- the pickup in industrial sales was fairly encouraging. I'm just curious what you guys may have been forecasting this year for industrial sales, and maybe like versus past experience, like once you see -- how many quarters of increase in industrial sales do you need to start feeling like it's a permanent kind of shift, you know, or permanent kind of retention of that growth?

Well, it's -- you know, it's funny. My feeling about the sustainability of that performance really doesn't go -- I guess it goes somewhat to the passage of time, but it really goes to the other economic factors like I was talking about with steel and a variety of other things.

Do you know what you guys were forecasting? Because I know you guys give like a retail sales growth estimate, but do you know maybe what you were thinking regarding industrial sales for this year?

Do you have the budget for the year?

We're certainly running ahead of that. We're up 5% year-over-year and I think we were forecasting, what, 2% industrial sales growth, and that was off a low base. We were --

Yeah.

We're just now getting back to the numbers we saw in 2000, which was the peak industrial sales year for us. So we've been in a trough now for two or three years. We saw glimmers of growth in the latter part of last year, then we saw really strong growth here, and assuming that's not just making up inventory in a short-term spurt, we'll start seeing employment growth, so I think another quarter of sales growth and we'll start to feel pretty good.

Every card that's turned over is helpful. Let me give you some other kind of numbers that help, I think, this idea.

Reviewed 2003 real quick. We were kind of flattish. We had some fits and starts, first, second, third quarter. 2.7% in the fourth quarter, which showed us some promise, and then some momentum, and now five. Let me give you some other statistics that I think you'll find interesting.

Industrial sales now for the first time have risen to a level that equals where we were in the year 2000. So prior to 9/11 when we had all those difficulties. We have interviewed many of our large industrial customers and they are giving us encouraging signs. For example, 53% are projecting to increase production this year, versus 9% reducing.

Hours of operations. 26% are projecting increases relative to 2% decreasing. The other thing you will look to is employment. One of the things you always kind of see is that contract employment is the leading indicator; that full employment is the lagging indicator. Well, in fact, what we saw in the first quarter is that employment gains in the first quarter of '04 have exceeded all of our results for all of the year 2003. So all that feels pretty good.

Okay. That's a big help. All right. Well, congratulations, Allen.

Thank you.

Thanks, Carrie.

Our next question comes from the like of Vic Kitan [ph] with Deutsche Asset Management. Please proceed with your question.

Thank you. Allen, we'll miss you. You've done a great job, and you are leaving the company in good shape for Tom and David Ratcliffe, but the question I have is, do you see the challenge they face is more than what you faced?

Well, it's going to be easy compared to what I faced. [ LAUGHTER ] I look back, actually, I was thinking about this the other day, to the 70s and 80s, there's always been a big challenge. I remember in the early '70s, the Arab oil embargo, our coal prices went to $6 to $50 in a matter of months. We had all these nuclear plants under construction and the load growth went negative. Inflation rates in the late '70s were 20%, interest rates were 20%, inflation rates were less than 20%, interest rates were 20%. And we needed, in this company, we needed rate increases at Alabama and Georgia in excess of 20%. That was a challenge. That was a challenge you could hardly see the end of.

And then with the spin of Mirant, clearly we had some major challenges. Our capital structure needed strengthening substantially, we had to get our payout ratio down, we wanted to do that as quickly as possible, I mean, that looked like a pretty significant challenge, doable, but a challenge, and we got that done a good deal quicker than we thought. Now you look out into the future. It looks -- there's some challenges, but I think very manageable. Clearly settling this federal/state regulatory regime and getting the ground rules straight is a challenge, but that will get done and I think it'll get done in a way that the states agree with. I think that's just where the political center of gravity is now. It may not be exactly what the states want, but it's not going to be something that the states are totally opposed to.

And then looking longer term, what we all face, are the environmental issues in keeping a reasonable balance between continuing to improve the environment, and make no mistake, environment has improved dramatically and continues to improve, but keeping some balance there for American business between improving the environment and cost. So I think the issues looking forward are primarily that we can see now, are primarily regulatory, and at the federal level. And I think we'll manage those.

David is very good with federal regulatory issues around our external affairs organization, and external affairs is an area where we're pretty good. There are some challenges ahead, but I think they're certainly manageable and not greater than those we've seen the last 20 or 25 years.

That's a good answer. But David is on line, so maybe would he care to respond what he sees the challenge for him?

I think it's going to be much harder than Allen ever imagined. [ LAUGHTER ] Actually, I think Allen captured it very well. Every generation's had its challenges, and I think he outlined the challenges that we face. We've got a tremendous team of folks that are very bright and very dedicated to our success. I'm absolutely confident we're figure out how to continue to succeed.

On that point, David, the folks on the call just to get to see Tom and me and will be seeing you soon, but we have -- our management counsel, which is 12 or 13 people, are all very, very bright people, very qualified, they've all been put in those jobs in the last two or three years, and they're all Southern Company people, been with us a long time, so there's tremendous depth in this company from a management standpoint, and a tremendous amount of expertise in all these functional areas, and I wish all the folks on the phone could know the quality of the people here at Southern as well as we do.

Thanks, Allen, and we'll look forward to seeing David.

Thank you very much.

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

How big is the syn fuel reserve that you accumulated and what's your strategy for unwinding that reserve?

$36, $37 million. There is a senate investigation committee right now that's just kind of evaluating the whole section 29, alternate fuels/syn fuel issue. And I think once we get some certainty there then we'll be in a better basis to consider whether to reverse that reserve.

Could you hang some numbers on some of the items you cited for your 11 cent improvement verse guidance?

Sure. I'll start this way, and you can take me deeper if you want. How about that?

What I would kind of say is this: 11 cents total. I would say that if you look at kind of the retail performance so far, including demand, including variety of other things, you know, at least a couple cents of that is sustainable. Then I would say of the remaining nine cents, a little over a third is probably O & M related. I would say a little over a third is kind of weather, and I would say the balance is probably made up largely of other items including syn fuel, Southern GAS, competitive generation, we had an initiative set out for those folks, looks like they've largely accomplished their initiatives in the first quarter. So that's kind of how it would break down.

The O & M piece, will that reverse to the year, or are you going to be able to keep some of that?

I think largely it will reverse in the year. We thought the hydro was around 17 million or so, we've -- that's largely responsible because we moved a lot of outages, some into the second quarter, far fewer into the fall. T & D would be the other big area with a little over 10 million, so we expect to spend that money.

Thank you very much.

Sure.

Thank you. Our next question comes from the line of Paul Patterson of Glenrock Associates.

Most of my questions have been answered, but if you could just remind me, in case I missed this also, I was distracted briefly, the depreciation and amortization, why is that down again, and what do you see this being for the year?

What we have is essentially it's down -- is that what you're talking about, down 4 million, 241 versus 245?

Right.

Basically what we have is the amortization of regulatory assets of about 23 million for the PDA that Georgia Power reduced depreciation and amortization in '04. There were some increases in depreciable plant because we increased the amount of capital investment we had, but it was really the amortization of regulatory assets of 23 million at Georgia that will reduce the D&A, depreciation and amortization, in '04.

Okay, so that's 23 million over the year that you see that being, or is that 23 million that happened in the quarter?

That's over the year. Over the quarter.

Over the quarter. So ordinarily if it wasn't for that, we would have seen, I guess, $21 million more in --.

Yes, that's it.

Okay. And is that the discretionary stuff that you guys had, or is that just basically the amortization schedule? As I recall, you guys had some flexibility with that, or maybe I'm confusing -- I could be confused with somebody else.

That's not discretionary.

That's not discretionary. Is the discretionary stuff taken care of?

Yes.

Okay. Thanks a lot, guys.

Sure. Thank you.

Ladies and gentlemen, as a reminder, to register a question please press star 1. Our next question comes from the line of Rosemary Peblo [ph] of Peblo Associates. Please proceed with your question.

Hi.

Rosemary, how are you?

Fine, thanks. How are you?

Terrific.

Good luck to you, Allen, on your change. I don't know whether you discussed this because I came in a little late, but with regard to the effort by some holders of Mirant to make accusations about -- it reminds me of the war, what you knew and when you knew it, what is going on there, and what is the risk and is this just an attempt to attach anybody with money who can possibly fill that big hole that Mirant made in their valuation?

Let me give you my impression, and Tom can do the same, and we have our general counsel here that, if he wants to add to it, can add to it. Just generally speaking, when a company is in bankruptcy, and there are lots of creditors, then they cast a net very widely to look for deeper pockets. And from our standpoint, from what we know, I, personally, see absolutely no merit to any of these claims. Of course, you can never predict what happens in a court of law or especially a bankruptcy court.

I would agree. The action taken by Mirant, I guess it's too bad, but it's to be expected. Doesn't surprise us.

Thank you.

Sure.

Mr. Allen, there are no further questions at this time. I will now turn the call back over to you. Please continue with your presentation or closing remarks.

Okey-dokey. Well, again, let me just say that we had very good quarter. We all feel extremely good about where the company is. I think the economy getting back on what appears to be a growth path is most encouraging.

The management transition here at Southern has gone incredibly smoothly and seamlessly, and I think you're going to really like David. I know you already know Tom, but I think you're going to really like David and what does he here at the company. And I've enjoyed immensely dealing with all of you folks being in this industry for a long time, and I'll stay in touch with how the company is doing, but I'm certainly -- I'm going to let -- obviously David run the company.

We have a practice here at Southern which I strongly support, that once an officer retires, they leave the Board, that's exactly the way it should be. So maybe I can get to see you folks from time to time. And we appreciate your interest in the company.

Tom, you have anything else you want to add, or David, anything you want to add?

No, sir.

No, I don't have anything, Allen.

Terrific. Well, thanks for calling in, and we'll be talking to before you long.

Thanks everyone.

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