Southern Co (SOMN) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Southern Company fourth-quarter 2004 and year end earnings conference call with Tom Fanning, Chief Financial Officer and David Ratcliffe, Chairman, President and Chief Executive Officer of Southern Company. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you Mr. Ratcliffe. You may begin your conference.

Thank you very much, and good afternoon and thanks for joining us this afternoon. I am pleased to be with you for our fourth-quarter earnings call. Joining me today is Tom Fanning, our Chief Financial Officer. Let me remind you that we will be making forward-looking statements today in addition to providing historical information. There are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements. Including those discussed in our 10-K and other SEC filings.

As you can see from the materials we released this morning, we had an outstanding quarter and a very strong year. In particular, we take pride in the fact that our earnings for 2004 are an all-time record for Southern Company, including the period prior to the spinoff of Mirant. It's clear our strategy has benefited our investors and with record-setting reliability priced at from 15 percent below the national average and outstanding customer service, our strategy is also working to the advantage of our customers.

In 2004 we delivered across the board on our financial, customer service and operational goals. In all aspects 2004 was a very good year. In our regulated business we successfully completed major rate proceedings in 2004 in Alabama, Georgia and Mississippi, which will provide earning stability going forward. In addition, these rate proceedings will enable us to recover a significant amount of capital we are committing to help ensure the reliability of our network and for the installation of equipment on our generating fleet that will help the environment.

In our competitive generation business we continue to successfully execute our regional strategy in 2004. We signed several wholesale contracts with major utilities, as well as cooperatives in municipal suppliers in the southeast. Our typical wholesale contract is now more than 13 years in length, thereby significantly reducing remarketing risk until the middle of the next decade.

In addition, last year Southern Company took a leadership position in the nation's development of clean coal technologies. As you are aware, the Department of Energy awarded Southern Company and our partner, the Orlando Utilities Commission, the right to build an advanced 285 megawatt coal gasification facility in Central Florida that will be operational in five years.

As you can see from our results in 2004, despite record storm damage last year, the southeastern economy continues to grow as individuals move to our region and businesses locator expand their operation there in our four states. I'm very encouraged about the progress we've made in 2004, and while there will always be challenges, we have a proven business model and a team in place to execute it.

At this point I will turn the call over to our Chief Financial Officer, Tom Fanning who will review our earnings and provide guidance for 2005.

Thank you David. As you mentioned we had better-than-expected results for the quarter and an outstanding year. Obviously our results exceeded our guidance. I will discuss the specific reasons why in a few minutes, but first let's review our numbers compared to the prior year. In order to more clearly illustrate the impact of several onetime items on our earnings, we prepared several slides that are visible on our webcast. A reconciliation of our earnings number is included in an appendix to these slides which you can access on our website www.SouthernCompany.com.

In the fourth quarter of 2004 we reported 27 cents a share. That's an increase of 10 cents per share from the fourth quarter of 2003. In December the Internal Revenue Service included its audit for the years 2000 and 2001. As a result of its audit, our fourth-quarter earnings included the resolution of two tax items, one related to Mirant, and the other to synthetic fuel. The net of which increased earnings by 3 cents a share. I will discuss both of these issues in more detail in a few minutes.

As you recall, our reported earnings in the fourth quarter of 2003 included a onetime after-tax expense of 5 cents a share associated with the regulatory treatment of plant annual. With the exclusion of these onetime items, our earnings for the fourth quarter were 27 cents a share. This compares with 22 cents a share or an increase of 2 cents from the prior period on an ongoing basis. For the full year, we earned $2.70 a share. That is up 4 cents a share from the results we reported for the year 2003.

Again, our net income for 2004 included the positive impact of the tax items while our earnings in 2003 included a net 6 cents per share gain due to the Dynegy settlement and the regulatory action in Mississippi. Excluding the impact of all these onetime items, our results for 2004 exceeded the prior year by 7 cents a share or $2.04 a share in 2004 compared with $1.97 a share in 2003.

Now let's turn to the major factors that drove our numbers for the full year compared with 2003. For consistency purposes, the numbers for the rest of my discussion will exclude the impact of the onetime items in 2003 and 2004. First, I will cover the negative factors. Here's the breakdown. Non fuel O&M in the retail business decreased our earnings by 18 cents a share in 2004 compared to the prior year. This is due largely to continued growth in the Southeast and a replenishment of storm reserves. Also, as you may recall we deferred O&M coal and am expense is planned for 2003 into 2004. Additional shares outstanding primarily related to the issuing of additional shares during the fourth quarter of 2003 and the exercising of stock options decreased our earnings by 4 cents a share.

Finally, our competitive generation business reduced our earnings for the full year by one penny. This negative impact was due primarily to extraordinary opportunity sales in 2003 which were 3 cents lower a share in 2004. However, net income from additional long-term contracts was 2 cents a share higher in 2004. So the difference was a penny a share. So, total negative factors reduced our earnings by 23 cents a share in 2004.

Now let's turn to the positive factors that drove our earnings. Continued customer growth and usage and higher sales to industrial customers increased our earnings by 19 cents a share in 2004. It's worth noting here that the economic gains posted in the first half of 2004 were generally sustained in the second half of the year. Every industrial segment with the exception of textiles has recovered to pre September 11 levels, and even textiles are 80 percent of pre September 11 levels. The biggest growth areas are steel, automobile manufacturing and chemicals.

Marginally better weather in 2004 compared with 2003 added 4 cents a share to our earnings versus the prior year. It should be noted weather was below normal in both years but slightly better in 2004. Lower interest cost due to re-financing activity and a reduction in outstanding debt capital added 5 cents a share to our earnings in 2004 compared with 2003. Now this 5 cents a share increase, 4 cents was at the parent company, and a penny was in our retail business.

Increased levels of synfuel production added 2 cents a share for our earnings in 2004 compared to the prior year. So the total positive factors increased earnings by 30 cents per share. Overall our year came in at $2.04 cents a share or an increase of 7 cents a share over 2003. Before we turn to guidance for 2005 I would like to update you on several key business and financial issues.

As you know, on December 21st the Georgia Public Service Commission granted Georgia Power a rate increase of 194.1 million or 4.2 percent. The three-year agreement will allow Georgia Power the opportunity to earn a return on equity of up to 12.25 percent, any earnings over that threshold will be shared with two-thirds going to customers as rate refunds and one-third to the company. The Commission approved the transfer of plant McIntosh to Georgia Power and Savannah Electric at fair market value of 385 million plus completion costs. This amount is approximately $16 million less than the companies paid Southern Power for the units.

While the amount of rate release in this proceeding was less than the Company had sought, we believe that with careful attention to cost control, Georgia Power will be able to earn at the level necessary to help Southern Company meet its financial target. In other regulatory activities last year the Alabama Public Service Commission approved a rate mechanism for the recovery of retail costs associated with state and federal environmental laws and regulations. Under the plan retail rates are expected to increase approximately 1 percent in 2005 and 2006.

Alabama Power agreed to a moratorium until March 2007 on any retail rate increase under the rate stabilization and equalization plan. In our Mississippi jurisdiction the state public service commission directed Mississippi Power to reclassify 25 percent interest in plant Daniel units three and four as a retail resource effective January 1, 2004. Under the order Mississippi will apply to 60.3 million regulatory liability recorded in 2003 to earnings over the four-year period, 2004 through 2007. The Commission also authorized Mississippi Power to use a forward-looking test year in its performance evaluation plan.

Finally, Savannah Electric filed in November for a $23.2 million rate increase or 6.5 percent in retail base rates. The company is requested a 2.5 percent return on equity and filed a traditional one-year rate request, as well as a three-year accounting order. With the rate activity we concluded last year we removed a significant amount of risk and added more certainty to our earnings.

As I noted earlier in a discussion of our fourth quarter earnings, the Internal Revenue Service concluded its audit of Southern Company through 2001. As a result, all tax years in which Mirant was included with our federal return have now been resolved. As a result of this audit, Southern Company paid $39 million on Mirant's behalf and will seek to be reimbursed by Mirant as an unsecured creditor. Based on our assessment of the collectibility of this receivable, we reserved 13 million in 2004. The impact of this reserve is a negative 2 cents a share in the fourth quarter.

In the completed audit the IRS raised no issues related to our synthetic fuel tax credit. As a result, we reversed the reserve we have taken to cover potential exposure on this business. The reversal of this reserve added 5 cents a share to our fourth quarter earnings. The net result of those items was a positive 3 cents a share in the fourth quarter and for the year.

I'd like to turn now to a discussion of our wholesale energy business. Our competitive generation business continues to meet its financial goals. Our goal for this business is to earn $300 million by 2007. We've not changed this goal despite the transfer of plant Macintosh to Georgia Power and Savannah Electric. We will continue to look for additional opportunities to add to earnings in our competitive generation business.

In summary, we remain confident we can still meet this more challenging goal by continuing to add long-term contract and to supply other generation related services to our customers. Continuing the discussion of our competitive generation business I would like to take a minute to discuss several major contracts that we've announced recently.

Last week we announced a full requirement to customer contract with a new customer, Flint Energies. Flint Energies serves 250,000 customers and is located in southwest Georgia. Under this ten-year contract Southern Company will supply Flint Energies with approximately 200 megawatts of additional capacity. Southern Company will be responsible for serving all of the capacity and energy needs of Flint Energies.

In addition, you may have seen where the Florida Public Service Commission unanimously approved our contract with Florida Power and Light. Under this agreement Southern Company will provide FEO with 955 megawatts of capacity for five years beginning in mid 2010. This capacity to serve these contracts will be provided from the Franklin 1 and Harris 1 units in Southern Power and plant Sherer unit 3, a coal unit located in Georgia. These contracts with Florida Power and Light our largest customer represented a continuation of our long-standing business relationship with FPL. In our opinion this agreement represents a win-win situation between both companies, one that ultimately benefits customers in Florida.

We have also signed contracts with Progress Energy in November of last year. Under the terms of this contract we will sell 424-megawatt capacity to Progress Energies Florida operating unit. The agreement covers five years and begins in 2010. The capacity to serve these contracts will be provided from unit 3 at plant Shear and unit 1 at plant Franklin. Like the FTO (ph) agreement these contracts are subject to approval by the Florida Public Service Commission.

Let's now turn to our earnings guidance for 2005. As we have said in the past, we believe that over the long-term we can achieve 5 percent growth in earnings per share. Last year in order to more appropriately reflect the normal variability in our business results, we began using a range of 4 percent to 6 percent growth or $1.94 to $1.99 as the basis for our earnings guidance in 2010.

Our earnings for 2004, excluding onetime items was $2.04 per share. Establishing our earnings guidance for 2005 we took the $2.04 and excluded items that we viewed as non-sustainable. In our view we had approximately 7 cents per share of items that were not sustainable in 2005. These non-sustainable items included 2 cents a share at Southern Power due to opportunity sales, 3 cents a share at Georgia Power due to the change in Georgia Power's earnings range and 2 cents a share at the parent company associated with tax items.

Based on these non-sustainable items, we adjust the 2004 earnings for guidance purposes to $1.94 a share, which is within our range for 2004. To $1.97 a share, I am sorry, which is within our range for 2004. For 2005 consistent with our long-term view, we are growing that range by 5 percent from 2004 a share to $2.09 a share. Therefore our guidance for 2005 will be a range of $2.04 per share to $2.09 per share. This range is in line with our goal of achieving earnings per share growth over the long-term of approximately 5 percent. Again, our guidance for this year will be a range of $2.04 to $2.09 per share.

One last point on our earnings guidance for the first quarter of this year, our estimate is 39 cents a share. So overall our earnings guidance for 2005 is driven by what we believe will be the strong performance of our regulated retail business and a continued positive contribution from our competitive wholesale generation business. These projected results are consistent with our objective to provide 5 percent growth in earnings per share over the long-term. It is important to remember that we are achieving these results with what we believe is one of the lowest risk profiles in the electric utility industry.

And going forward, we will continue to emphasize a low risk approach in all of our businesses. At this point I will turn it back to David for his closing remarks.

Thanks, Tom. As we said earlier, in nearly every aspect, 2004 was a year of significant achievement on behalf of our customers and shareholders. In our retail businesses, we concluded a significant amount of regulatory activity in nearly every jurisdiction. Even with this additional activity, our prices remain some 15 percent below the national average. On the operational side of our business, we withstood the most severe storm to ever hit Southern Company's service territory. By utilizing both internal and external resources, we were able to restore service to our customers in record time. I'm extremely proud of the way our employees responded to this emergency, and very grateful to those companies which provided us assistance.

We continued our outstanding record of helping to ensure reliable supply of energy in the region. In an audit of our control area, the National Electric Reliability Council said that Southern Company was particularly strong in its controlled area operations. The report concluded that Southern Company has system operators who know their job and who are aware of their authority, and have management support. In the area of customer service for the fifth consecutive year, Southern Company ranked highest amongst utilities in a national survey of residential customers by the American Customer Satisfaction Index. It is worth noting that Southern Company ranked second only to Federal Express for all service companies that were surveyed.

Our challenges in 2005 will be to continue to execute our strategy, and whenever possible to exceed the expectation of our customers and shareholders. I'm confident that we have a team in place to deliver this goal. At this point in time, I will be happy to take any questions you might have. Operator, we will now take the first question.

David, if I could, I need to jump in real quick. It was just pointed out to me I had a couple misstatements. I just want to clarify them real quick. Excluding onetime items, our earnings for the fourth quarter were 24 cents a share. I might have said 27 cents a share; 24 cents a share excluding onetime items. As well, another item, Savannah Electric is filing a return on equity of 12.5 percent. And one last thing, our earnings -- I think everybody knows this, but our earnings guidance for 2004 was $1.94 to $1.99. I just want to be clear with that. All right, let's take the first question.

(OPERATOR INSTRUCTIONS) Ashar Kahn (ph) from SAC Capital.

Good afternoon and congratulations on a good year and a great regulatory outcome. Could you just share with us what are we are, you earned in Georgia Power in 2004 and what ROE have you assumed for 2005?

ROE was right at 1370 for 2004 and 2005 we are looking at 13 and 1/2.

Okay. And could you just (multiple speakers).

It was 1395 in '04.

Okay, and could you share with us a little bit update at what you are seeing in FERC in terms of change in leadership over there and outcome on the market power issue?

You hear lots of rumors and there's lots of talk about that, but we don't -- we will see any changes as they occur just like anybody else will, I don't think we have any unique insight into any of that.

Okay. Thank you very much, and again congratulations.

(indiscernible) of UBS.

David or Tom, can we have maybe comments on the M&A environment given the Exelon deal and some comments by other managements out there, just what you are seeing now and what you might be thinking going forward? Thank you.

A lot of talk and activity obviously following the announcement of that deal. Certainly I don't think our position has changed at all. Let me just recap that for everyone. As you all know we have four criteria that we look at for all of our merger and acquisitions announced, which is an ongoing activity here at Southern. Certainly we want to make sure that any prospective merger or acquisition will contribute positively to our 5 percent growth target. We want to make sure that it is accretive in a matter of months, not years. We want to make sure that it is credit neutral, and want to be consistent with our super southeast strategy. It is our job to continually survey the environment. We look hard at all those things. But as I have said in the past, it is my opinion that the likelihood of us pursuing one of these things is just not very likely.

Okay. Thank you.

Leslie Rich (ph) of Columbia Management.

I wondered if you could walk through that nonrecurring 7 cents that you are stripping out for '04 because I wasn't really clear on why you were excluding this. The tax item I understand that is non-recurring but why Georgia Power and wholesale sales were nonrecurring.

All right. Well, if Georgia Power earned, had a retail return of 12.70, and that converted into a corporate return of 13.95. When you consider the earnings range what we have done is projected Georgia Power to be at near the top of their earnings range, and that converts to a corporate return of around 13.50. So really what we've done is just recalibrated Georgia down a bit. That accounts for 3 cents. And then I guess what was the last one? Tax adjustments?

No, you said 2 cents for wholesale.

Got it. Competitive generation opportunity sales. As you know, we always try and take a fairly conservative approach in projecting opportunity sales. Just for those of you who are following us a long time you know this but for people who are new on the call, you may remember something like 91 percent of our energy is generated from very cheap sources. About 70 percent goal, 16 percent nuclear, 4 percent, 5 percent Hydro, something like that, the balance from gas. What we have seen typically is that those resources, coal, nuclear and Hydro have been on the margin cheaper than what we see typically on the margin in the Southeast wholesale markets from an energy standpoint.

Once we satisfy the native requirements of our retail lows, they get the benefit of the cheap energy first, then we are able to sell excess cheap energy to offset, displace higher priced on the margin gas-fired energy in the Southeast. We typically kind of budget that number at a level like 35, I think next year we will talk about $38 million. In 2004 we made in what we call these opportunity sales, $53 million. So if you take 53, subtract 38, you get something like 2 cents a share, somewhere around there.

Carrie Stevens of Morgan Stanley.

Good afternoon. A couple questions. First, I wanted to just go over kind of the CapEx forecast. And I noticed, as you pumped it from '04 to '06 to '05 to '07 there was a pretty big step up in environmental and then competitive generation. Just on the competitive generation, is that the coal plant in Florida?

Yes, the step up in the environmental spending is just because we dropped a cheap year and added a more expensive hear.

It is not that '05 and '06 is higher; it's just all concentrated in '07?

The way I think about it is '07 is higher than '04. Okay? And what we see kind of over the three-year period is that a significant amount is associated with the Bowen and Gorgas scrubbers which are now coming on we think around '08 as a targeted service date. So you are seeing more expensive environmental spending coming on.

Okay. And then for the competitive generation, is that the new coal plant in Florida?

No. You know what it is, it is kind of a placeholder. What we have in there, if you just kind of look at competitive generation, it is we have really modest numbers in '05 and fairly modest in '06, and then in '07 we step up to a number like over $700 million. That is solely a placeholder for a potential acquisition of a plant or a facility in our super Southeast target area. So it is just a placeholder.

With respect to your environmental spending, I know you had large accomplishment last year with an environmental rider in Alabama and that you were considering pursuing that in Georgia. Do you have any update there?

Not really. I think when you think about it, the Georgia folks consider any and all options going forward. The relationship I think with the commission and now for the I guess it is the fourth time we've been under the accounting order, there hasn't to my knowledge been any disallowance of environmental expenditures. We feel like that structure has handled us very well to date. So we will continue to consider other alternatives, but so far we've been very gratified with how the commission in Georgia and in particular the accounting order structure has handled the environmental expenditures.

Okay. Great. And then a question for David. I just was curious, I know someone asked about FERC and such, but maybe you could just comment on kind of your view on the outlook for an energy bill and also clean skies legislation.

With respect to the last one first, the clear skies legislation as you know is being debated in the Senate as we speak, and I think we are hopeful that Senator Inhofe will in fact be able to get the bill out onto the floor, although that will take some effort because it is basically a ten, nine committee and as you know we probably will lose at least one Republican, so it makes it pretty much a tie. We are desirous of trying to get some of the Democrats to move and we are working on that. We are also very confident that if it gets onto the floor we will have to have debates about climate change and that makes it more difficult to move through the Senate given the split in the Senate.

So I think while we are optimistic and we will work hard, I think it is pretty steep hill on clear skies in the Senate, and that probably means that EPA goes forward with the care rule in the latter part of the first quarter as they are under an order to try to issue rules around Mercury. And they have indicated that they will move forward to do that. So I think that is sort of how we see clear skies. The energy bill seems to have more attractiveness to this administration in terms of priorities, and we made an awful lot of progress the last time; we got stuck on issues that really didn't affect our industry. If some people who are sponsors in those issues are willing to compromise, and I think there is a real good chance that we could actually get the energy bill teed up again and moving. We're very pleased with the electricity provisions of the energy bill, so we would be strong supporters of trying to get that done this year.

Okay, great, and I remembered I had one last follow-up question. With respect to emission allowance costs, are they essentially a pass-through in all of your jurisdictions, Tom?

they are except for Georgia, but they haven't been an issue much in Georgia. We feel confident that we will be able to handle whatever we need to do with those in any future proceedings.

Great. Thanks so much.

Paul Ridzon of KeyBanc Capital.

Could you give some estimate of what the storm cost and what how much below normal weather was for the year?

Below normal, weather was 4 cents below normal for the year; storm costs, let me just get that for you, hang on a second. Wait a minute. Do you want the total cost of the storms, or do you want how much is associated with recovery? Because you know, we had some associated with insurance and some other things. Here. How about storm reserve balances? I think that is kind of what you are getting at.

Yes, exactly.

Okay, beautiful. Alabama. Year end, 37 million. Georgia, 11 million. These are all negatives. This is the Gulf had a negative -52. Mississippi was a positive 5. Savannah a positive 8. The total was negative -87 million. We have planned in every jurisdiction to get back to a normal looking balance in a reasonable timeframe.

Why wouldn't you when you go through your normalization of '04 kind of add back the 4 cents of weather and some of the storm impacts?

What's interesting let me hit the storm impacts first. The storm impacts didn't hit us all that badly. Its pretty interesting. What you see at Gulf Power, even though when you look at customer accounts, they are down about 5000 customers, but in fact sales didn't get impacted all that badly. The customers at Gulf seem to have remained in the Gulf area and instead of being in residences they may be like in FEMA housing or in apartments or in rental properties. And in addition what we're seeing is an uplift in economic activity in that area as you would expect in the kind of housing products sector. If you adjust for Ivan, adjust for weather, total sales were up 3.3 percent. So hurricanes didn't have that much of an influence, not as much as you might have thought. And what was the first part of your question?

Why your normalization wouldn't add back 4 cents to assume normal weather for 2005.

The range we put out typically accommodates weather. When you think about the 5 cents we have, we think of that as kind of a normal weather pattern. Our O&M is kind of designed to fluctuate with weather. So we think it is something that we could normally handle at that level.

And just one quick question. What is your synfuel reserve, and when and kind of how do you plan on unwinding that?

Well, we did that in the course in my discussion we did that in the fourth quarter of '04, our reserve was $36.7 million, and we unwound that in the settlement of the IRS audit for the years 2000, 2001. As I said before, no issues were raised until the basis of continuing with the reserve were just eliminated.

So the total reserve has been unwound?

Yes.

Garren (ph) Miller of UBS.

Number one is can you break down the '05 '07 spending by year, and number two, in terms of the $1.9 billion of net increase in debt and preferred, can you break that down by year and by sub?

Sure. So you want a breakdown in the capital budget by year?

Yes.

Okay. So let's work with the $7.9 billion. 2005 will be 2.2 billion. 2006 will be 2.4 billion. 2007 will be 3.2 billion. Now the second question was? Say again.

The $1.9 billion of net increase that you are projecting in debt and preferred, and how are we looking at that by year end by sub?

Let me just get my hands on that. I could kill you with details here. Let me try and give you -- how about this -- I will do a summary of security sales for the next five years. Would that be helpful?

Sure.

Let me work first with 2005. Alabama we expect to sell a little over $400 million. We think that will be mostly Senior Notes. Georgia, $475. That would be about $350 of Notes and maybe $125 of trust preferred. And these are all obviously estimates.

Right.

Gulf, 157 would be about 100 million of notes and about 55 million of trust preferred. So the total in '05 is a little over one billion. Six, Alabama is going to be about 820, a little over 800 million. All of that it looks like Notes. Georgia, 265. All that is Notes. Gulf, 30. All of that is Notes. Savannah, 30. That's Notes. Okay?

Yes.

And 2007 you get about 2.1 billion, and probably why this is going over the 1.9 is you are now refinancing what you sold. I will just run through the numbers real quick. Alabama about 1.1 billion, just about all that is notes. You've got a little bit of maybe a little preferred in there, maybe 200 million. Georgia is in 975, so maybe 675 is Notes and the rest of it is preferred. Gulf, 40 million preferred.

Thank you very much.

Yes sir.

David Dickens (ph) of Deephaven Capital.

Can you talk a little bit about what you're seeing in terms of the coal supply situation? We are hearing that there continue to be deliverability issues in the Southeast stemming from a number of factors -- rains from the hurricanes impacting mine production, the flooding of the river systems disrupting transportation. Which really kind of led to low stock files across the region and have caused utilities to burn more gas for baseload power and look to imports some South America. I was actually surprised to find out this week that you guys have contracted for three-quarters of one million tons of Colombian coal coming in through Charleston. At prices that when you factor in seaborne freight are pretty expensive.

Well, there's a lot of stuff there, let me kind of hit it this way first. We heard, too, that there were supply disruptions, price volatility all that. It is part of our conservative nature to contract with just about 100 percent of the current year supply of coal. So we didn't see nearly as much volatility as somebody who would rely on spot prices. We did see some price increases, but it wasn't nearly as much as the spot markets would indicate, number one.

Number two, did we see significant supply disruptions anyway due to flood, derailment, whatever? The answer is no. Certainly we saw some effects. It is not absolute, but in fact we didn't see any kind of disruptions in supply which would have been material to our operation. I think we talked about this in the third-quarter earnings call. Our target for the year, just kind of in round numbers is 30 days. We finished our peak season through the summer at about 26. The hurricanes did have some effect. It took us down to about 20, but we came back and we finished the year somewhere a little above 25 days. So we feel like our supply levels are normal.

The other thing that I think people should keep in mind is Southern is either first or second in the nation in terms of procuring coal. We get coal from all over the United States and we import about a little over 10 percent from Columbia. What's interesting is a lot of the disruptions in the coal supply came from the Central Appalachia area. Let me break that down a little bit. About 27 percent of our coal through a number of different vendors is procured through this region. About 15 percent kind of from the South especially Alabama, about 5 percent from the Illinois Basin, 37 percent of our coal is taken out of the Powder River basin and a fairly modest amount, 3 percent or so is taken out of Rocky Mountain region; we kind of call that the Southwest. So you can see that we are benefited by having a tremendous amount of supply diversity.

Jonathan Arnold from Merrill Lynch.

Just have a quick question on the tax rate. Even if I for the full year 2004 ad back the 3 cent onetime piece and then the additional 2 cents that you called out in your slide, I still get a rate somewhere below 30 percent.

About 28.

I was just wondering what is a reasonable rate going forward for 2005 and beyond?

That number is reasonable. We carry that kind of number for the few years now.

Paul Patterson of Glenrock Associates.

I wanted to follow up on a couple of questions. First of all, what is your expectation for synfuel in 2005?

10 or 11 cents.

10 or 11 cents? So pretty similar to what it is right now, a little higher than what it is right now, is that right?

It is similar. It is 10.5 cents if you want to spread it apart, and remember some of that is credit -- 8 cents or so and the balance is site lease fees that we have.

Okay. But you also said that you reversed some reserves this year in 2004, right?

That's correct.

And they are all done, you have no more to go?

No more reserves that is correct.

So that didn't show up in the $74 million of synfuel -- that is somewhere else?

Correct.

And then the other question I had and I wasn't clear and I guess it is going back to Paul Ridzon's question on the storm damage, what was the actual EPS impact of the storm damage over the full year when you put in weather, when you put in what is recovered and everything else? What is the actual earnings per share impact that storms cost you?

Essentially none.

Oh, there is no impact at all?

Yes.

Stephen (indiscernible) of Talent Capital.

Congratulations on another solid year. Trying to get some more information on the comp generation side. What are the amounts in the '05 guidance for competitive generation I guess including the 38 million of opportunity sales?

Let me just get that. Hold on a second. We are looking for about 90 million or so from Southern Power. Throw on another hundred or so from the embedded side. So 200 million or so would be a decent number, maybe a little under that. Maybe a little over that. Around 200 million is a decent round number.

And that 200,000 includes the 38 budgeted for opportunity sales?

Yes.

Excluding the opportunity sales you are about 160, and this year you were, you had 53, right, of opportunity sales in '04, so you are actually down year to year, is that right?

Let me just nail that down for everybody, I typically get this question, so let me kind of go through it. Competitive generation for 2004 was around $220 million for the full year. We think that Southern Power had about 111. The embedded side was about 109. So that is about 50-50. In terms of how you break that up between the trading floor and contract, trading floor meaning opportunity sales, had 53 out of the opportunity sales and about 166 or so and that should get you right about to the 220 or so.

Okay, how does that compare again, the 200 million dollars in total and of that you budgeted 38 for opportunity sales, so net net.

Let's say this, of the 90 million is Southern Power and the 120 million would be the embedded side for '05.

That's 210, take out the 53, sorry take out the 38, right?

Yes.

And so you got 172 for the excluding opportunity sales, just the.

Contracts.

Just the contracts.

And the contracts this year were about 166.

Okay, and can you give us some kind of feel for -- I know it is dependent on what the load is in your retail business, but how much load you have assumed from the retail business? How much do you have available outside the retail business and how much those contracts assume?

Well, the contracts don't have anything to do with our load in the retail business. Those are -- we get profits associated with our contract based on capacity, not energy. Remember we don't take fuel risk. The only thing that would be impacted by load would be associated with opportunity sales after we satisfy native retail load with our cheaper coal, hydro and nuclear. If there's anything left over, then we compare that to -- generally what is on the margin of Southeast is prime cycle gas. Now that varies a little bit. We've seen stock coal prices go up a bit. Sometimes we've seen -- in fact including transportation and other things it was a number -- it was about 70 percent of the time coal was on the margin, and about 30 percent of the time gas was on the margin to calculate what I would call bottom-of-stack landa (ph). That is the first price that we would sell into the wholesale market once we satisfy our native retail load.

What we do is compare that to combined cycle prices in the Southeast. What is interesting is -- so what you get there is a picture of what's the margin in the Southeast going forward. The margin really shrunk. Certainly from '03 we saw dollars per megawatt hour somewhere in the probably 15 to $20 per megawatt.

What we see now is prices that are shrinking down. For the year it averaged about $12 per megawatt hour. In the first half of the year it was about $16 per megawatt hour. That was about a clearing price in the Southeast of about $48. That is combined cycle energy, largely our bottom-of-stack landa. The price at which we started making sales was around $32 per megawatt hour. So that gives you about 16.

However, in the second half of the year that is where all this coal on the margin really started increasing. And in order to calculate bottom-of-stack landa, we price call it the margin. So the calculation for the second half of the year gave us a clearing price of around $50 per megawatt hour versus about 44 for bottom-of-stack landa for us. So the margin shrunk from 16 to 6. So that's kind of what we're seeing going forward here.

So if we take a price of $6 a megawatt hour and back into what the load is on the opportunity sales, that will give us a good idea of what the load you are expected to come out of the --?

But as you know, that is a very -- I've tried to make that simple for people -- that is a very complex calculation because it occurs kind of what time of day, how much rainfall you're going to get, what's the temperature going to be, and I know people laugh at me about talking about whether, but the weather patterns matter. In 2003 we had a cooling sink over Atlanta during the summer. It was hot everywhere else. Last year it was kind of mild everywhere. Believe it or not, those types of patterns have a significant influence on what kind of energy is required for our native load first and what we'll have left over to hit the opportunity sales market.

How many megawatts do you have that is still uncontracted, that could be contracted?

Not many. Let me just get that for you exactly. Hold on a second. The subscription level through the year is going to be around 90 percent. What is left over there are the Dahlberg unit, (multiple speakers) megawatt, something like that.

Right. Thanks.

(OPERATOR INSTRUCTIONS) Daniel Eggers of CSFB.

With President Bush talking more about being constructive on nuclear generation, obviously you guys are one of the front runners out there. It seems like in Congress and Senate appropriations, Yucca Mountain seems stuck right now. How important is that getting unstuck to making real progress on future development?

I personally believe it has to get unstuck. We have to have a permanent repository for high-level waste and that is a good one. It has been an awful lot of good work has gone into it, a lot of good funding, we just have to get it unstuck.

Is that realistic, and is that something we're going to see this year do you suppose?

I certainly hope so and I think it is realistic.

Got it. The other question just on market power issues and cost of service, I know you guys have talked previously about it not being material impact here, material earnings if you lost market base rate authority. I guess if you can just give a little more color on that and then also what would be the potential refunds or capital at risk? Have you guys done the math to figure out what that would be right now?

I guess our going assumption is that the deals that we currently have in place would be grandfathered. And so therefore really what you are left is some slice of our opportunity sales, not all of our opportunity sales. So you're really talking about, and I've always hesitated to throw a number out there because there is a host of assumptions behind it and frankly who knows. All I can say is it would be some portion of the opportunity sales we've assumed, and we've told people that we think it just wouldn't be material.

Got it. Thank you, guys.

Nathan Judge of Atlantic Equities.

Could you just go in to greater detail about your '07 assumptions? I know you set a target for Southern Power making 300 million by then. But you also have a placeholder for acquisitions. Could you just give us a bit of color on how much do you need to make an acquisition in order to get that 300 million, or are there things in place that will get you there already?

Through a variety of plans we have in place, which I don't like, I really can't talk about our backlog of things that we think are on target for that timeframe, we only announce deals when they are done. We think that we will get very close to the 300 million with what we can see right now. I would say that the gap remaining is somewhere less than $10 million right now. And I would argue that as always in these projections we take this fairly modest view about opportunity sales.

Is there a particular reason why you have set aside a placeholder for '07 for that business?

No. We just -- when we came out of the gate from the stent (ph) of Mirant, remember that we set in place competitive generation is a very important business unit and a contributor to Southern Power, I mean to Southern Company's earnings per share growth prospects. We set in place a 2005 goal for $200 million. Well, we hit that pretty quickly, and in fact we hit it in the third quarter of 2003. Finished 2003 around 224. So I think it seemed logical the next logical step was kind of a $300 million number and I think that is really what drove the choice of 2007. I don't think there was any particular notion about picking a year. But that is what fell out. When are we going to hit 300 million? 2007.

And just lastly, could you just give us an update on Southern gas, how that is progressing and any color on that?

Sure. Southern gas had really a good year. Now for everyone's benefit remember that Southern gas is just a tiny company in terms of our profit picture. But they did pretty well. You may remember that in 2003 they had some difficulties in earnings. They were going to lose a couple cents a share, and they actually did better than that. We projected them to lose around 6 million this year. They actually made about 2. What contributed to their better-than-expected performance, their churn was down significantly. In 2003 their churn was 15.8 percent. We knocked that down to around 10 percent in 2004.

Bad debt remember was a big deal in that kind of still evolving market retail deregulated gas in Georgia. Bad debt in 2003 was around a little over 10 percent, maybe around 11 percent. By the end of 2004 we had knocked down our bad debt to about 2.6 percent. So much more attractive number. Now in the course of the year we lost customers; we changed our customer count from around 192,000 to about 174,000. But in fact those are better paying customers and the financial results were better. So overall we're very gratified even though they are a tiny piece of our profit picture, we're very gratified of their performance for the year.

Thanks very much.

At this time there are no further questions. Gentlemen, do you have any closing remarks?

No, just thank you very much for tuning in and look forward to working with you this year. Thanks, everyone.

This concludes today's Southern Company fourth-quarter 2004 and year ending earnings conference call. You may now disconnect.