Southern Co (SOMN) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Alexandria, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Southern Company third quarter 2004 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question you may do so by pressing star 2.

I would now like to turn the conference over to Southern Company's Chief Financial Officer, Mr. Tom Fanning. Mr. Fanning, you may begin.

Thanks, very much. Good afternoon everyone, and thank you for joining us. Pleased to be with you for our third quarter earnings call. David Ratcliffe, our Chairman and Chef Executive Officer, is not on the call today. Instead, David is down in Orlando, Florida, with governor Jeb Bush and Spencer Abraham, the Secretary of Energy, to announce Southern Company's participation in a major clean coal technology project. I'll discuss this project in more detail in a few minutes.

Let me remind you that I will be making 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.

As you can see from the earnings materials we released this morning, we had a very solid quarter, despite weathering the most damaging storm in Southern Company's history. Our businesses are performing well and we're own track to exceed our financial targets for the year.

Before I discuss our earnings in detail, I'd like to take a minute to review events which had major impact on Southern Company and our customers. When hurricane Ivan came ashore along the Gulf Coast of Alabama and northwest Florida on September 16th, it left a wide trail of damage and destruction across our service area. Immediately following the storm, we had nearly 40% of our 4 million customers without electric service. About 60% of Alabama Power's customers were out, and Gulf Power had 90% of its customers without service immediately following the storm. More than 50% of Gulf Power's transmission system was out of service or damaged, and its largest generating facility was off-line due to extensive damage.

However, our companies were well prepared and restoration work began as soon as it was safe for crews to proceed. More than 1500 employees and contractors from within Southern Company were sent to northwest Florida to help begin the restoration process. For example, Alabama Power sent tree trimming crews, helped secure lodging for workers, and took customer calls when Gulf Power's call center was evacuated. Georgia Power helped purchase transformers, poles and wire, took customer calls, and helped with financial assessment of damage. Mississippi power took customer calls, delivered tons of food, ice, and other supplies, and set up tent cities for workers. Savannah Electric also handled customer calls, sent crews and helped with daily accounting functions.

In addition, some 4,000 outside workers from 23 states and Canada were brought in to help restore service in northwest Florida. We owe a debt of gratitude to all of these people. Without their assistance we would not have been as successful in making a timely restoration of service. Hurricane Ivan was a major test for our company. Nearly one-half of our customers who were without service were restored within 24 hours following the storm. Within three days, nearly 75% of all customers impacted had their service restored. And, within one week, almost 95% of service had been restored.

Two weeks after the hurricane, anyone who could receive service had their power restored. In addition to the outside help we received, this remarkable restoration process would not have been possible without a grit deal of teamwork within Southern Company. The merits of a utility with integrated operations were clearly demonstrated as each of our operating companies came to the aid of Gulf Power.

Turning now to our financial highlights, our third quarter represented another period of solid, stable, and predictable performance. I'm pleased to say that despite these challenges we achieved the estimate that we gave you in July. We earned 87 cents a share in the third quarter of this year. This compares to 85 cents a share in the third quarter of 2003. As I'll discuss, in a moment, our businesses continue to perform well and met expectations for the quarter. For the first nine months of this year our earnings are $1.80 a share. That's an increase of 5 cents a share over the earnings we reported for the first nine months of 2003, excluding the settlement with Dynegy.

Here's the breakdown of our earnings for the third quarter compared with the same period last year. First, the negative factors. Increased O&M costs compared to the third quarter of 2003 reduced our earnings by 3 cents a share. As will you recall we underspent O&M in the third quarter of last year. Expenses at the parent company reduced our earnings by a penny a share due to a positive tax adjustment recorded in the third quarter of 2003.

The performance of our competitive generation business reduced our earnings by a penny per share compared to the third quarter of 2003. This was due to lower opportunity sales compared to the prior period. As you may remember, last year we had a rare combination of market and operational factors which led to an exceptional level of opportunity sales. The additional number of shares outstanding had a negative impact of a penny a share.

Finally, the southeast experienced mild weather during the third quarter of this year, as well as the third quarter of 2003. However, since the impact was the same for both periods, the weather conditions had no impact on earnings.

Now, for a breakdown of the positive factors. Our regulated retail business added a total of 7 cents a share to our earnings. Increased demand for electricity by industrial customers and continued strong customer growth added 4 cents a share to our earnings compared to the third quarter of 2003. Overall demand from industrial customers across Southern Company in the third quarter increased by 2.7% compared to the third quarter of 2003. Increased demand for electricity by industries in Alabama has been particularly impressive with growth in demand for the quarter up 5.8%. This growth should be sustained into 2005. Mercedes of Alabama is expected to complete a $600 million expansion of its current facility in 2004. The new facility is expected to begin production in January 2005, and is projected to add some 2,000 more jobs.

A credit for AFUDC equity, or, allowance for funds used during construction, related to the transfer of the McIntosh facility from Southern Power to Georgia power and Savannah Electric, as well as additional items, added 3 cents a share to our earnings for the quarter. Increased production in our synthetic fuels business added a penny per share to our earnings for the third quarter, compared to the prior period in 2003. So, overall, our third quarter came in at 87 cents a share, compared to 85 cents a share in the same period last year.

Turning now to earnings outlook for the remainder of the year, it's clear that our businesses are continuing to perform better than expected. Our earnings for the first nine months of this year are $1.80 per share. Our estimate for the fourth quarter of this year is 21 cents per share. Therefore, we expect to exceed the top end of our range for earnings guidance of $1.99 per share for the full year, with an estimated total of $2.01 for the year. At this point, I'd like to conclude the prepared remarks section of the earnings call with a brief update on our competitive generation business.

As you know, our competitive generation business is a major contributor to our 5% average long-term growth in earnings per share. Our goal is to grow earnings in our competitive generation business in such a manner that it contributes about 2% of the 5% earnings growth goal. I'm pleased to note that we are continuing to grow this important segment of our business. Since our second quarter earnings call we have signed several contracts with cooperatives, municipals, and utilities in the super southeast. During the month of August we signed three power supply agreements with Florida Power and Light to provide 955 megawatts of capacity for five years, beginning in mid 2010.

These contracts with Florida Power and Light, our largest customer, represent a continuation of our longstanding relationship with FP&L. The capacity to serve these contracts will be provided from the Franklin 1 and Harris 1 unit, at Southern Power, and (indiscernible) unit 3, a coal-fired unit located in Georgia. The agreements will require approval by the Florida Public Service Commission. We also signed a contract with North Carolina Municipal Power Agency, or NCMPA-1, located in the western section of North Carolina. Under the terms of this contract, Georgia power will provide a 50-megawatt block of peeking capacity to the utility from June 2007 to September 2010.

During August, we also signed multiple agreements with a new wholesale customer, Flint Energy, which is located in south Georgia. The transaction with Flint is a ten-year arrangement, beginning in 2005, and is contingent upon various approvals. In addition to these new contracts, we are continuing to pursue additional wholesale opportunities in the super southeast region. Finally, it was announced yesterday, that Southern Company, in partnership with the Orlando Utilities Commission, has been selected by the Department of Energy to build and operate a 285-megawatt coal gasification facility. This state-of-the-art facility, which is scheduled to begin commercial operation in early 2010, will be located at OUC's Stanton Energy Center near Orlando.

The cost of the project is estimated at $557 million, including four years of operations, maintenance, and process evaluation expense. Southern Company and OUC are expected to contribute some $322 million towards the project,with DOE's portion totaling $235 million. This project will demonstrate a coal gasification technology that we have been developing, in partnership with DOE, at our power systems development facility near Birmingham, Alabama.

The gasification facility in Orlando will turn coal into gas for generating electricity, while significantly reducing emissions of sulfur dioxide, nitrogen oxide, and mercury. In addition, the technology produces a 20 to 25% less carbon dioxide, on the average, than coal-based generation in place today. We're very proud to be participating with the Department of Energy and the Orlando Utilities Commission in this historic energy project. This is tangible evidence of our support of the Bush Administration's commitment to pursue the commercial development of the clean coal technology. Coal gasification should be at the heart of this nation's plan to utilize our vast reserves of coal.

At this point, I'll be happy to take any questions you may have. Operator, we'll now take the first question.

Certainly, sir. I would like to remind everyone, in order to ask your question please press star followed by the number one on your telephone keypad at this time. We'll pause for just a moment to compile the Q and A roster. Your first question is from Greg Gordon of Smith Barney.

Good afternoon. Hey, Greg. How are you? My hat's off to you guys. You always underpromise and overdeliver.

Thanks.

As we look at the earnings expectation going into the end 2004, it's sort of once again a little bit better than what you had hoped would you achieve going into the year. When we think about your 5% growth aspirations, and think about 2005 fiscal year, I know you haven't given official guidance yet, at least I don't believe you have.

We have not.

What are the key issues that we ought to think about. in terms of is there some -- are there pluses and minuses that we ought to think about, in terms of the 2004 fiscal year, that we base that, sort of an ongoing number that we can then think about what you grow off of? Or, is that $2 base, sort of, where you guys think you start?

Well, I think the biggest variable, at this point for 2005, will be a successful resolution of the Georgia rate proceeding. Clearly, that's very important to our forward earnings capability. Outside of that, the rest of our companies are performing quite well. We just think through it a bit, Alabama Power had approved recently an environmental clause. We think that will start operation in 2005. We had, earlier this year, some regulatory activity in Mississippi, with respect to their [pep] clause, and also, with respect to putting plant Daniel in the rate base, so that seems stable. Gulf doesn't have, to my knowledge, other than storm damage recovery, any significant regulatory issues in front of it. Savannah, the smallest of our subsidiaries, has some issues going forward with recovery of fuel, and perhaps a rate filing. So, overall, we appear to be in very stable shape, I think, from the retail regulated business.

And the industrial revenue growth rates are accelerating back now after being somewhat depressed over the last couple of years?

Yeah, I think the economists had it just right when they made the call for beginning of a recovery in the fourth quarter of '03, then going forward into '04, you may remember, that we saw a large pickup in the first quarter of '04, and then what we've really seen since the first quarter is a sustaining of that improvement, and I think we see that again, and I think what we tried to allude to here is, from the activity we see in the southeast, we feel positive about our ability to have that performance sustained into '05.

And that factors into your ability to find clients for the output of your merchant generation business as well?

Well, we don't do merchant generation. You know, all of our contracts are bilateral in nature, having average life of the remaining contracts of a little over 10 years.

But my point is, your ability to continue to find counter parties for those type of deals is a function of the --

Of good economic growth, it sure is. So, that certainly helps well, our environment In the southeast, and really the environment of all of our customers that ultimately make the retail sale.

Of course, at the end of the day, the key X factor is being able to once again get a rational outcome in Georgia?

I think so.

Thank you.

Your next question is from Ashar Kahn with SAC Capital.

Congratulations, Tom.

Thank you, Ashar, I appreciate it.

Tom, can you share with us, that if weather had been normal, and I don't know what the impact of any of the hurricane is, what the earnings impact would have been, what additional earnings could you have booked?

Yeah, let me just give you a couple of statistics there, because, I always hate to deal in "Would have" and all that, but let me give you two statistics. Remember, we said that weather was bad in general during the third quarter. And, you know, it's not just weather, because, you know, the way people adjust sales is to essentially take a cooling or heating degree variance. Essentially, weather should be adjusted not only for the heating or cooling degree variance this time, but also for the damage or lost revenue associated with things like hurricane Ivan. If you look at -- so third quarter '04, third quarter '03, weather variance was zero. Had you adjusted for, not only the cooling degree impact of weather, but, also, hurricane Ivan, I think our total retail sales would have been up about 3%. I think that'd amount to about a 5% earnings per share impact in the third quarter.

So, that would have meant that your earnings could have been about nearly 5 cents higher, correct?

Just on that basis. It's not clear at all, because you would have other impacts with O&M, and a variety of other things, so, I wouldn't want to make that stark a conclusion, but, certainly, weather helped keep earnings where they were reported.

And, do you see this industrial sales going in, this is something which is maintainable? I know you mentioned something in the press release in the comments, but do you think it's maintainable for the next 12 to 24 months?

You know, I think, so, you know, and that's a pure guess on my part. But, if you look at the nature of kind of what's going on here, plant expansions that will be completed, for example, in January of '05, so, you know, in the employing of new jobs, and if effect on first, second, and third tier suppliers, the fact that we have an attractive economic environment, with historic, continued historic low interest rates, I think it's just a positive environment for everybody to think about. You know, another factor is, especially the metro Atlanta area here in the southeast, you know, historically the southeast has been an economic environment, which tends to have a lot less down turns in the economy and faster recovery relative to the rest of the United States. One of the things that helps us is this kind of continued in-migration of people. For example, Atlanta gets about 500 new residents per day, and those people are typically coming from the Midwest and the Northeast. All of that serves to help residential construction, all of that is help, even when has otherwise been a tough economic sector, and that's even textiles. While there's been probably some permanent textile demand loss, due to apparel manufacturing, another element of textiles has been carpet, and kind of the polymers sector of textiles have been doing very well. We've seen production shift moving from, kind of, five to six days per week now, to six to seven days per week. I guess, in some total, when you just look at the different sectors of our economy, we feel pretty good about 2005.

If I can just ask, any update as to when you might expect to hear from the FERC in response to the market power issue?

No, in fact, we haven't. It was originally, you know, on the calendar in September, then it was removed. It was not on the calendar in the recent October meeting, so, we just don't know at this point.

Your next question is from Carrie Stevens of Morgan Stanley.

Hi, Tom. Good afternoon.

Hey, Carrie.

Couple of questions. You just mentioned the weather in the third quarter. I'm trying to remember from a year-to-date basis, were you running ahead of expectations on weather, or what was the first six months like again?

Yes, let's see. I actually have that. Let's see. Compared to budget we were like 2 cents up. For the first six months.

Okay. Great.

In fact, it's down for the quarter. So, net 3 cents down.

Okay. Great. I just wanted to ask about what trends you're seeing. I know last year you had very strong plant performance. You know, mainly (indiscernible) and coal, maybe could you give us an update on what you're seeing, with respect to capacity factors and how your plants are performing this year.

Beautiful. Love to do that. Love to do that. In fact, our (indiscernible) hydro guys had another all-time record this year. What we're measuring is not only just kind of annual E-4 but peak season E-4. We want to make sure that the generation is running when we have the best available market to sell into. That peak season is kind of May 1st to September 30th, by our definition. And, in fact, this year our peak season E-4 for (indiscernible)hydro was 1.32%, versus 1.69% for last year. Our nuclear fleet, by the same token, had a terrific year. Capacity factor for the third quarter was 98.22%. So, year to date for September was 93.4. So, both of those sectors of our business are doing beautifully. As well, you may remember last year, we set records on transmission reliability. Essentially for the third quarter we maintained that performance.

Okay. Great. Two more quick questions. First, could you give your assumption for sales growth for -- well, I guess, I don't know, have you shifted your, like, ongoing assumption for sales growth with the rebound in industrial, or how are you thinking about that? And then, a comment on O&M timing. I know that's been something that you guys have kind of been playing catch-up on, and I'm just curious, is that differential done now, or should we expect that to continue going forward?

Let me hit the last one first. O&M is pretty well on track now. Let me throw in a small caveat, I guess I always have to do that, right?

Yeah.

The small caveat, will be, we've got to figure out where we are after all these storms. We sent a good amount of crews to help out, not only Gulf Power and Alabama Power, but, also with Frances and Charley we sent a lot of people down to Peninsula Florida. We kind of want to take a look at that. My overall comment is still true though, that we feel like we're pretty well on track. The first question had to do with sales. What we're projecting in our financial plans is this 2% demand growth. It's clear that we've done a little better than that this year, but we're still projecting too going forward.

Actually, one more thing. Do you have the split for the third quarter and year to date on the amount of contribution from the competitive generation plant versus opportunity sales?

Sure. No problem. Okay. Let's see. How about this? We saw the relationship we always typically see, and that is, remember when we talk about competitive generation, it's really two pieces. Right? One is Southern Power, and one is, what we call the embedded, or otherwise, the off system sales from the five retail regulated businesses we have, Alabama, Georgia, Gulf, Mississippi, Savannah. That split was just about 50/50. If you look at total profit, total net income for competitive gen for the quarter, 73.2 million, 37.5 came from Southern Power, 35.7 came from our embedded companies. Okay? If you want to make a split between, say, what was kind of our opportunity sales, relative to our long-term contracts, we actually did just a touch better than we thought we would on the opportunity sales. We did 15.5 million in the quarter, and, therefore, the long-term contracts contributed 57.7. There again, that should add up to 73.2.

Great. Thanks so much, Tom.

Sure. Thank you.

Your next question is from Vic Katan from Deutsche Bank.

You mentioned about Southern Power could contribute 2% of the overall 5% growth. Could you remind me what the percent is of income is coming from Southern Power right now?

14. 14%.

14%. I see. And the kind of returns you get from Southern Power, are those similar to what you get from utility's return?

We don't like to talk about that very much, even on a project by project basis. The kind of thing we like to say there is it is a bit better, you know, couple hundred basis points or so better than the retail regulated business.

Uh-huh. So, in order for you to grow to overall growth of 2%, you have to grow this part of the business about 15%, I guess?

Yeah, long-term. It's actually been better than that in the near-term, but that's kind of a long-term number.

And, are there any environmental issues which might help you or hurt you in this growth plan?

You mean for Southern Power, or do you mean for anything?

For Southern Power, then for the rest of the business, too.

I wouldn't think that Southern Power was at all sensitive to environmental issues. You know, that, all the new plants that we've built so far, absent this gasifier, which we're actually very excited about in Orlando, that really fits right down, I think, the strike zone of the nation's national energy policy, and, I think, is really, to my knowledge, anyway, I could be wrong on this, but I think it's the first real commercial sized IGCC unit in the United States. It's not a plan, it's a reality, assuming we get it done. Other than that, all of Southern Power's plants have been gas-fired. Probably, is a big environmental issue there. I think, with respect to the operating companies, the retail regulated business, you know, we have a fairly significant CapEx budget over the next 10 years associate with environmental, and assuming we get -- we continue this kind of constructive regulatory treatment we've gotten over the past decade or so, if that continues into the future, then that should provide the basis to grow earnings in the future.

Your next question is from [Mona Pureak] with Prudential.

Hi, this is Verdi Tolintino. My question for Tom is, can you give more information on the Flint Energy deal? You mentioned it was 10 years beginning 2005. I didn't get the size of the deal.

Yeah. Okay. Let's just see. It actually varies over time, the size of the deal. It looks like it varies between 25 megawatts in the very near term. There's another block, and that kind of starts in 2005 and goes through 2014. There's another block that goes from April '06 to 2014 that's 50 megawatts. There's another block that's 75 megawatts, going from 2010 to 2019. So, there's a variety of different agreements there.

Is this like a full requirements deal, or is this just like block power?

It's full requirement.

And, then for the new IGCC facility you announced, has that been contracted yet, or are you also looking to contract that out when that comes on line?

OUC will be the power taker out of that, and they're a partner of ours in the contract.

Your next question is from Nathan Judge of Atlantic Equity Nathan.

Good morning. Good afternoon, Tom.

Nathan, how are you?

I'm well, thank you. Just want to actually follow up on the environmental issues. There's been a lot of discussion of what if, about Kerry, if he were to be elected president, and what the ultimate outcome could be if he were to try to push forward environmental. How do you think this could play out for Southern? And just play on that, the Alabama agreement that you just reached.

Sure. Let me hit the Alabama agreement, then I'll talk about kind of the election and all that, environmental policy. The Alabama agreement was signed such that, very similar, if you're familiar with Alabama's CNP, certificate new plant rate mechanism, their environmental mechanism would work something like that, where at the end of every year they would submit a proposed environmental spending for each year. They would earn on it. At the end of every year there would be a true-up, then a submittal of next year's expenditures and they would continue forward on that basis. We expect there would be a 1% rate increase in, kind of, '05 and '06 under that agreement. So, that's kind of the near term look at the Alabama situation. You know, with respect to the election, it's interesting. It's hard to sometimes see through the politics and the rhetoric. It's clear, I think, to those of us at Southern that think about these things, given the United States' huge advantage it has in its vast coal resources, we have hundreds of years of coal supply, and I think, a desire to not be reliant upon outside sources for our energy needs, that clean coal technology should be one of the center pieces of our national energy policy. Certainly, along with that would be nuclear, and I think, certainly, providing more infrastructure for natural gas is kind of the way we think the United States should go. My sense is, whoever's elected would follow in those ideals, I think.

With regard to energy policy, could you just comment -- there's been a recent agreement by a large nuclear producer on the recovery of funds from the DOE, with regard to the storage issue. Could you give us an idea where Southern is, with regard to that, and then kind of, perhaps, add some perspective on that?

Yeah, I'd kind of rather -- I don't have a lot of information to offer, in respect to that. We have not received any indication, nor have we pushed forward, as this other company has, and so, I think, that's just something I couldn't offer a whole lot on right now .

Historically, Georgia Power has been required to file an initial one-year plan, but has always strived to reach a three-year plan, some type of settlement between the staff and the intervenors and things, when we look forward as to the timetable, does Georgia power plan to provide a three-year plan, (inaudible)and what would be the timing around it if there was that option?

Well, certainly I think the most importantly, the customers of Georgia Power have benefited from this kind of stability of rates, and remember the fact that Georgia Power has rates that are some 20% below the national average. Under the prior three extensions of this accounting order, which each accounting order has covered a three-year period. We have, each time, filed a one-year proposal, as our filing, and negotiated to the three-year bases. My sense is that it would serve Georgia's customers well to see a similar type of agreement struck. We'll just see how that turns out. It's a process, that we think that worked well for not only the customers but for the company, the intervenors, everybody that has an interest in rates at Georgia. so, let the process run and see how it turns out. We're expected to receive an answer sometime in, kind of, mid to late December, and so, let's just see how the process runs.

I really appreciate your time. Thank you.

Your next question is from Paul Patterson of Glenrock and Associates. Paul, you may proceed with your question.

Just to follow up on a few things here, I guess I missed what the earnings impact that was going to be associated with the coal gasification, and when that was going to be coming in again?

Yeah, it's going to start at about 2010, and we did not say what the earnings impact would be.

So, 2010?

Yes.

Then the McIntosh, did that contribute 3 cents of (indiscernible) in the quarter?

No, what we said was 3 cents in other things. There were some other things associated with that. But, I guess it was kind of the big catch-all. McIntosh is the biggest piece of that 3 cents. It alone represented about 1 cent. There were other things in there.

It represents 1 cent?

Yes.

When will it be completed?

June 2005.

Okay. And so, we'll getting that (indiscernible) until it's completed, is that correct?

That's correct.

Is there any other large project like that? That's driving it, or --.

No.

So, the other stuff is just basically, sort of equipment and stuff that you're putting on to the system on a general basis so we can (indiscernible) the run rate, is that right?

Yeah, sure.

And then, I guess once McIntosh is in there, would we be expecting the rate relief to kick to certain degrees to cover that depreciation and operating expense, et cetera?

That's right.

Just want to clarify that. Thanks a lot.

Sure.

Your next question is from Theresa Ho from Solomon Brothers.

My question is just on the Georgia rate case, and I'm sorry if you've already answered this, could you sort of discuss the climate now, as it compares to what the environment was like during the last rate case, the makeup of the intervenors, make up of the commission?

My sense it's similar. I wouldn't say there's a tremendous difference. The intervenor group has always had, and has shared in the benefits of in the past, I might add, the past three accounting orders we've been able to strike. They certainly are engaged in the process, as they have in the past. I would say -- I would say it's just very similar, Theresa. I can't think of any different material at all.

Okay. Thank you very much.

Sure.

I would like to allow the participants an additional moment to pose any initial or follow-up questions they may have. If you would like to present an initial or follow-up question, please present those questions at this time by pressing star 1. Your next question is from Danielle Seitz of Maxcor Financial.

Do you hope to get a similar rider for environmental cost in Georgia, or is it more difficult to get that in that state?

Well, so far the environmental expenditures have been handled very well through the three-year accounting orders that Georgia power has been under for roughly the last decade or so. So --

But you don't see that?

Well, right now we're just focused on getting this next agreement done, and that's something we may think about later, but right now we're focused on the rate case.

And can you comment, or say anything, about what is happening between your company and FERC ,and are we supposed to be expecting anything coming from all the noise, or is it just noise?

That's anyone's guess. You know, I'd say there's -- I say this a lot in public forums, and I really believe it to be true. I know that sometimes the relationship between FERC and Southern gets played up a lot in the media. Honestly, FERC and Southern have the same long-term interest at heart, that is, a competitive wholesale generation business, fair and transparent to everyone. We believe that, they believe that, we're both working to that end. I think, given the nature of business in the southeast, given our high degree of reliability, our low prices, our industry highs, customer satisfaction. I think what we must demonstrate to our customers first and then to our regulators, and frankly, our elected officials in the southeast, that they will be better off under a material industry structured change, so we're both working to that end. We'll continue working in a constructive manner.

One last question which is more long term. When do you visualize the need for additional capacity in any of the states, where you operate now? It seems that you are going through the end of that construction program.

Yes, maybe the end of this decade in Georgia, would be my guess.

Okay. Nothing before that?

Right.

Okay. Great. Thanks a lot.

Thank you.

Your next question is from Dan Jenkins, from the State of Wisconsin Investment Board. Dan.

Hi. I had a question on the hurricane and the costs associated with that. I forget, how do you guys handle that down there? Do you have like -- do you accrue those costs then charge them against a reserve, or do they run right through the income statement?

No, you have it exactly right. All of our jurisdictions, essentially, you have a cost, you hit some of that cost against insurance, then the noninsured costs, generally go against storm damage reserve, we accrue to those reserves every year, so, it's something that's been around for a long time in the southeast.

Is there like a true-up for that, or how does that --.

Certainly, that balance is reviewed, and the accrual rate, therefore, is reviewed from time to time to make sure it's sufficient to meet our needs.

So, do you anticipate given the Ivan damage that you, maybe, might need to increase the charge for that?

I think we just have to go jurisdiction by jurisdiction and look for the most practical and suitable method for each jurisdiction.

Okay. Then, I was curious, you know, you show in your release your project sources and uses of funds. I was wondering if you could give a run down of where you're at currently on each of those categories.

On -- let me just go through CapEx budget. I guess that's the easiest thing. Let me start there. CapEx budget. I think we spend about $2.1 billion per year over the next three years. About 50% of that is transmission distribution related, just about every bit of that is growth related. There's a smaller portion that's related to the normal maintenance. 25% is environmental related, 25% is (indiscernible)hydro and nuclear generation. That would be my best summary of it.

I was wondering if you could give like where you're at through the third quarter of '04.

For CapEx?

Well for the sources and uses, the categories you show there. On page --.

What page?

Page 5 of your release.

Give me just a minute. Let me get there . Well, let's see. CapEx, we're a little under for the year. We expect to be under our capital budget for 2004. We are cash flow from operations is just what we thought it would be. We have undertaken our financings as we thought we would. So, I would say, I mean, if I'm just looking at that, funds from operations we're right on track with what we thought we would do for the year. We have a small amount, it's kind of a technical matter, of equity issuance this year, and it's something I'm actually going to fix for the forward years. Right now, when options are exercised, we issue new shares. That is the only equity issuance you see in 2004, and, frankly, for the next five years. Next year we'll be offsetting that effect, so all forward years, excluding this little minor effect in '04, there'll be no new equities sold. And, we'll be able to keep our equity ratio above 40%. In effect in 2003 we prefinanced five years worth of equity. Just looking at that rest of it here, I guess the only thing I haven't commented on is dividends, and what we have in place is a dividend policy, that's very well established, and what we have said is, and what we've followed is, that we have a dividend payout ratio target of 70% or below. Once we get below 70% then we will consider increasing our dividends per share growth rate at something approaching the rate of growth of earnings per share, or 5%. Until we get below 70%, then we will do, as we have done for the last three years, and that is, seek to increase our dividends per share at a rate of growth, roughly half the earnings per share growth rate. The last three years has been around 2.2 and 2.1%. So, we'll continue on that track. That's what you kind of see projected there.

Okay. And then, I was wondering if you could give us any update on the -- basically, the (indiscernible) and the environmental lawsuits that you've mentioned in your last 10-Q's.

Really hasn't been any material developments in either one.

The last thing I was wondering, the decline in the off-system sales, what, kind o, do you think was driving that? Was it just mild weather in other parts of country?

You're talking about the opportunity sales. Last year we kind of had a positive, perfect storm, if you will, and I love talking about weather, but I'll try not to wear everybody out. What we had last year, I mentioned that the weather was similar in effect this year and last year. Well, but last year it was different. In effect, Atlanta area, particularly, had mild weather, whereas the rest of the southeast was pretty normal. This year we saw weather that was all over the southeast. In other words, it wasn't unique to where we had a more attractive market to sell into. What that tended to do was to reduce the margin in the southeast that we could sell into. That is, the clearing price, which is generally set by combined cycle gas-fired energy, actually, went down a bit as well, you know, that our -- 71% of our energy comes from coal. A lot of the way that we've been able to make margin on opportunity sales, remember that our retail customers get the benefit of our cheapest energy first, so, they get the benefit of all the hydro and the nuclear and just about all the coal to the extent their demand is less, therefore, that may expose some of the coal-fired energy into the market we can sell it. Our coal prices have been up a bit. So, reduced demand all over the southeast tended to hold down the clearing price, combined cycle gas. The coal prices have come up, so, our what we call bottom [sack landa], or the first marginal price that we start making wholesale sales, actually increased. So, net-net what had been, kind of a, $10 to $15 per megawatt hour margin in the southeast, actually reduced a bit to something under 8 bucks per megawatt hour. I guess that's the biggest impact. That's really it. I think last year was just exceedingly abnormal.

Okay. Thank you. I'll see you in San Diego.

Fantastic. Appreciate you being on the call.

Your next question is from Peter Hark of Tallon Capital. You may proceed with your question.

Thank you. Tom, just want to make sure I understand the regulatory process for McIntosh.

Sure.

Right now it's following a separate process from the General Rate Case. Is there thoughts that that will be combined with the GRC, or will it continue on a separate track?

Yeah, our sense, is right now that those issues will be kind of decided jointly.

Okay. So, whatever you get in terms of ROE or cap structure, we should apply to whatever they allow in from McIntosh, is that right?

I don't know I want to go that granular at this point, but, that would be a logical assumption, but I can't say it's exactly what's going to happen.

Secondly, obligatory question on earnings for fourth quarter.

Yes.

Trailing 12 for me is 202.

Yes,

If I add back the 5-cent charge in last year's fourth quarter, suggesting a down fourth quarter. Don't know why that would be. Was hoping you could rationalize that for us?

Oh, sure. In fact, we looked at that ourselves. We kind of go through both the top-down and bottom-up process on these earnings estimates that we do. Essentially, the difference you could kind of write it up to is a difference in assumption on opportunity sales. Remember, last year we kind of budgeted 19 million and we made 72 million. This year, as you can see, while we're doing much better than our budget, we originally had $35 million kind of budget, and we've had our own kind of internal incentives for our people here. We're certainly doing well, but we're not at all on the pace that we were last year, and I think, that is, you know, kind of a broad statement, the difference between fourth quarter '03 and what we project now for the fourth quarter '04.

Okay. Are there any other costs coming in, for instance, plant additions that are on a competitive side without contract, or any contract roll-off's we should be concerned about?

No. No, no. We're very well contracted. Remember, you know, in fact, we like to talk about this. We are the anti-merchant. We have essential coverage of our capacity in the competitive generation side. Really, the first time you see a roll-off of capacity is -- a roll-off of contract capacity is 2010. And, I think we've said before, that if we're able to successfully complete approval with the Florida Public Service Commission on the FPL deal, and frankly, some of these other deals, which is why we thought it was important to mention on this call, we certainly increase now our coverage well beyond 2010. We think that's a particular strength of ours.

Perfect. And lastly, just remind us again, what the new plant additions will be for 2005 besides big Mac.

That's it.

That's it. Okay. Thank you very much.

Certainly. Thank you.

Your next question is a follow-up question from Greg Gordon of Smith Barney. Greg.

I have a follow-up question on your dividend comment.

Yes.

If you guys achieve your earnings growth aspiration in 2005, given the current dividend growth rate, by my math that puts you just under 70% payout ratio. So, given what you just said about your longer term dividend policy, would it then be fair to say that the management would be comfortable going to the board in 2006 and realigning the dividend policy to the earnings growth rate? Obviously, it's a long way away from now, but if all those things were true.

Greg, you're all over that. We are going to be right on the edge, and it's just something that we'll have to consider. As you pointed out, you said it very accurately, ultimately, that's the board's decision. But, if we're able to follow through on a 5% long-term growth path, and if the earnings results are regular, predictable, sustainable, those are all the issues that we look at going forward, and we'll certainly take those into consideration.

If you execute there is an in -- potential inflection point in '06?

If you just do the math --.

Enough said. Thank you very much.

Mr. Fanning, there are no further questions. Would you like to make any final remarks?

No. Thanks very much for everyone's participation. We're certainly pleased with this quarter's result, and look forward to our call, I guess, in January. Thanks very much everyone.

Ladies and gentlemen, thank you for your participation in today's conference call, this does conclude the call. You may now disconnect.