Southern Co (SOMN) 2005 Q2 法說會逐字稿

Good afternoon. My name is Judy and I will be your conference facilitator. At this time I would like to welcome everyone to the Southern Company's second quarter 2005 earnings 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. [Operator instructions] Thank you.

At this time I would like to turn the call over to David Ratcliffe, Southern Company's President, Chairman, and Chief Executive Officer. Mr. Ratcliffe, you may begin your conference.

Thank you, Judy. Good afternoon and thank all of you for joining us. 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 the 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. Our businesses are performing well and we're on track to meet our financial targets for the year.

Most of you know Northwest Florida and South Alabama were hit by Hurricane Dennis on Sunday, July 10th. We were fortunate that Dennis did not have as severe an impact on our operations as Hurricane Ivan did last October. However, that's not to diminish the fact that Dennis was still a severe storm and many of our customers sustained damage to their homes and property. Our companies were well prepared for Hurricane Dennis and restoration work began as soon as it was safe to proceed. Nearly 5300 employees and contract personnel from within the Southern Company were dispatched to help restore service. In addition as with most large storms, several hundred crew and support personnel from outside Southern Company were also involved in helping get customers back on line.

Immediately following the storm, 241,000 Alabama Power customers and 242,000 Gulf Power Company customers were without electricity. Within 72 hours approximately 90% of our customers had their service restored and within five days almost all customers who were able to receive service were back on line.

This remarkable restoration process would not have been possible without a great deal of teamwork. Once again, the value of integrated operations was clearly demonstrated.

At this point I'll turn the call over to Tom Fanning for a discussion of our financial highlights for the second quarter and our earnings guidance for the remainder of '05.

Thank you, David. Our second quarter was characterized by regular, predictable and sustainable performance. We earned $0.52 a share in the second quarter of this year. This compares to $0.48 a share in the second quarter of 2004.

As I'll discuss in a moment, our businesses continued to perform well. For the first half of this year, our earnings are $0.95 a share. This compares to $0.93 a share for the first six months of 2004. Here's the breakdown of our earnings for the second quarter compared with the same period last year. First, the negative factors. Milder than normal weather reduced our earnings by $0.04 a share compared to the second quarter of 2004. Overall, the second quarter of this year was the second mildest second quarter in 15 years.

Finally, as we mentioned last quarter, our earnings were reduced $0.04 per share from certain regulatory matters which is attributable to the expiration of certain provisions of Georgia Power's 2001 retail accounting order. So in total we had $0.08 of negative items compared to the second quarter of 2004.

Turning now to the positive factors. Residential and commercial customer growth and usage, as well as the impact of a retail price change at Georgia Power, added $0.05 a share to our earnings compared to the prior period. The number of customers was up 1.5% compared with the prior period in 2004, which indicates the Southeast region continues to attract new residents and businesses. In fact, according to a government survey released last week, four of the top ten fastest growing counties in the United States, as measured by new home construction, are located in Georgia.

Industrial revenues increased earnings by $0.02 a share compared to the second quarter of 2004, reflecting the sustained strength we saw in 2003 and early in 2004. The increased consumption by industrial customers reflects strength in the automobile manufacturing, chemicals, and primary metal sectors.

Other operating revenues as well as other income inductions(ph)[inaudible] added $0.03 per share to our earnings. The primary drivers here were the transmission revenues and AFUDC primarily related to plant McIntosh as well as a number of smaller factors.

Finally, our wholesale generation business added $0.02 a share to our earnings compared to the prior period. In addition to a small contribution from the recently acquired Oleander facility, wholesale earnings were primarily higher due to new contracts commencing in 2005. So in total we had $0.12 per share of positive items compared to the second quarter of 2004. Our earnings estimate for the second quarter was $0.49 a share. So we exceeded our estimate by $0.03 a share.

Before I discuss our earnings estimate for the third quarter, I'd like to cover some important items that have occurred since our last call in April. We are continuing to sharpen our focus and concentrate on those businesses that provide the most favorable returns and add the most value for our customers and shareholders. As a result of this process, we have signed a letter of intent to negotiate the sale of the assets of Southern Company Gas to the Cobb Electric Membership Cooperative. Cobb EMC, located north of Atlanta, serves approximately 185,000 electric customers.

Since we launched Southern Company Gas in 2002, we have enhanced its customer service record and improved profitability. The Company has been completely transformed from the business we purchased, and as a result, during the past few months, we've had three unsolicited offers expressing an interest to buy our gas business. Negotiations are still continuing, but we are optimistic that we would reach a final agreement shortly and close the sale in October.

On a related matter, we are in the process of closing one of our other niche businesses, Southern Company Energy Solutions. This business performs turnkey projects such as boiler and distribution system upgrades with our large commercial and industrial customers. Since Energy Solutions is not a significant contributor to our earnings, and there are other alternative providers of these products and services, we decided to exit this business. So in summary, we're continuing to sharpen our focus on the business we know with the customers we know and in the place we know.

Now let me give a brief update on Hurricane Dennis. As a follow-up to David's discussion, while we don't have a final estimate on the damage from this storm, it appears that the cost will be approximately $60 million for Gulf Power and $30 million for Alabama Power. Both companies are working with their respective public service commissions to recover these costs. We do not expect the recovery of these costs to have an impact on our earnings.

Turning now to our earnings outlook for the remainder of the year it's clear that our businesses are continuing to perform well. Therefore, we are maintaining our guidance for the full-year at the range of between $2.04 and $2.09 per share.

For the third quarter, we're expecting to earn $0.89 per share. Again, our estimate for the third quarter is $0.89 per share. However, weather, particularly in the third quarter, always has a major impact on our business. As you know, about 40 to 50% of our annual net income is earned during the third quarter, and thus far, we've experienced the wettest July on record, and the fourth wettest month ever for the Atlanta area. Just within the past week or so we've enjoyed the return of good hot weather. So as you can see, there's a lot of variability during this high demand period.

One additional note on guidance. In keeping with the financial presentation at our analyst meeting in May, and being consistent with the approach that several of you have adopted, we are going to begin discussing annual earnings guidance on a total basis, which is the current $2.04 to $2.09 per share and also on a sustainable basis, which excludes earnings from synfuel. As you know, the availability of our synfuel tax credits is due to expire at the end of 2007. Therefore, our current sustainable earnings guidance, excluding synfuel, is $1.93 to $1.98 per share.

At this point I'll turn things back over to David for his concluding remarks.

Thanks, Tom. I know that many of you are interested in the Energy Bill which has been approved by a House Senate Conference committee. Let me just briefly say that the Electricity Title of this Bill contains several sections that will positively impact Southern Company as well as the electric utility industry. Given the high profile of energy issues today this legislation appears to have a better prospect for passage than any Energy Bill in recent history. Therefore, we are optimistic about its success.

At this point, let me stop and we'd be happy to answer any questions you might have. Operator, we'll now take the first question.

[Operator instructions] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Leslie Rich with Columbia Management.

Thank you. Could I ask you a question on the hurricane expenses?

Sure.

That $90 million, did you defer it for future recovery or was in that July or June, I'm sorry, I forget.

That’s in July. And yeah, it is deferred to future recovery and we'll be working with conditions on exactly how, from a regulatory standpoint, we get that done.

Okay. But historically you've had a very good track record in terms of recovery of those kinds of expenses, right?

Absolutely.

And then could you just go over an update at FERC on the market base rate authority and also the affiliate transaction case?

Well, let's think about it. Market base rate authority, we've had the 206 filing deferred and I think that the timing of the hearings for that has not been determined. The FERC chief judge will assign an administrative law judge and we'll set a pre-hearing conference and set a timetable for that. Was the other, Leslie, the other question was on the ISE?

Yes.

You know that there was a 206 with respect to the ISE and Southern Power on May 5th of this year. I guess the issues around that include the just and reasonableness of Southern Power pooling agreement and their inclusion in the pool and whether any of the Southern Companies have any issues with respect to the standards of conduct.

Certainly we believe we're in good shape with that respect. The hearings for that matter are scheduled to begin I believe in June of 2006.

Okay. So with the change in leadership at the commission, do you sense that there's any change in direction or it's too soon to tell?

Well, certainly these are important matters, and I think it's kind of premature to comment on how Chairman Keleher is going to view these things and through his leadership on the commission. But we think the facts support our position, and we'll see how the case goes as we go forward in time.

Thank you.

Your next question comes from the line of Greg Gordon with Smith Barney.

Thanks. Good afternoon.

Hey, Greg.

Two quick questions. Can you talk about what you're seeing in terms of the structural evolution of industrial demand in your different regions and whether or not we ought to extrapolate current trends into our outlooks for that segment?

And second, it looked like the biggest incremental delta quarter-over-quarter in earnings contribution came from Alabama Power. Is there anything specifically going on there that we ought to focus on?

Let's just go back to industrial performance real quick and the economy. At the risk of, you know, sounding like a broken record the story just remains the same. When you go back to kind of 2003, the economists, I think, called the situation just right, at least in the Southeast. They called for a robust recovery in the fourth quarter continuing into the first quarter and really the early part of 2004. Well, in fact, that's exactly what happened, and you remember kind of into 2004 we saw really large industrial growth rates.

My sense is since then what you've seen is a sustaining of that increased performance. You know, adjusting for weather and everything else, I think our industrial performance really is pretty good quarter-over-quarter. Second quarter 2005 to second quarter 2004, you saw about half a percent increase in sales to the industrial sector.

The drivers of industrial performance really since then continue to be the automobile manufacturing area, steel, chemicals, I guess food and paper are picking up a little bit now. We saw the plant expansions at Mercedes, Honda, and Hyundai. Steel's contracting a little bit nationally but we're still seeing strength in the Southeast.

The only area where we've seen any kind of major decline has been apparel manufacturing. That segment of the textiles industry. By that token there's been great performance elsewhere in textiles. For example, you know, almost a part of the flip side of the bad weather we've had on the Gulf Coast of Florida and into Alabama, building materials has been going quite well, and carpets, as a part of the textile industry, has really been doing pretty well.

So my sense is, you know, when you look at kind of the major demographics in the Southeast, I've spent a lot of time on industrial, residential, commercial, our overall customer growth rate continues to be just steady as a drum beat. You know, I gave the statistics on the four counties being among the top ten fasting growing in Georgia. Atlanta has about 500 new people enter it every day. I think we've talked before about how we think that over the next 25 to 30 years we'll see a lot of something like 30, high 30's, 30 to 40% of the United States will be in the Southeast.

So I think the overall macro economic features respecting both residential, commercial to go along with industrial, actually feel pretty good. Not to say we don't have our problems, but I think overall the picture is pretty acceptable.

And did Alabama Power, was there anything specifically that accounted for the big improvement quarter-over-quarter?

Well, yeah, one thing was O&M probably is significantly down in the second quarter compared to the first quarter. Remember, some of that was due to the storm damage reserve reversal that we had. Transmission, it's really kind of an O&M story I think at Alabama. Plus, I think they continue to see good growth in their industrial sector. Let's see, kilowatt hour change industrials in Alabama, they're up 2%. So their industrial growth is really pretty good as well. So O&M plus industrial growth.

Thank you.

Sure.

Your next question comes from the line of Paul Ridzon with Key McDonald. Could you give some flavor as to where the upside, the $0.03 upside versus guidance particularly in the face of a weather headwind, kind of how you achieved that?

Sure.

When I think about, you're talking about the estimate that we have?

Yes.

It's really in, $0.01 I think is attributable to the retail regulated business, and I think what you see there is that the negative weather was largely offset by good cost management, if you look at O&M, second quarter '05 to second quarter '04, it was essentially flat. So, you know, normally you'd expect some inflation and other normal expenses to occur. So being flat on O&M was probably a benefit. And then you couple that with the growth that we're seeing, as I just kind of went through with Greg that helped us about a penny relative to our estimate.

Competitive gen relative to our estimate was pretty well on target. You know the nature of our businesses. We don't have a lot of variability in the estimate, it's mostly long-term contracts. As I mentioned before, in the last call, it's really the EMC 30 deal, plus we added just a month of the Oleander deal. So you're left kind of with $0.02 that beat our estimate.

One is just timing, and I think that's related to synfuel. The other one is, you know, for all these other little businesses we have, believe it or not, they've all kind of beaten this estimate by somewhere between 1.5 and $2 million. There's a whole litany of them. But they would include, as I've mentioned Southern Gas, Southern Company Energy Solutions and SouthernLINC.

All of those are businesses are performing a little bit better than expected. You add them all up, it's about a penny. So there you go. You get about a cent better on the retail regulated business and $0.02 in what I would call other, $0.01 the little businesses, $0.01 associated with synfuel timing.

Is the cost management going to come back in the back half of the year or was that kind of, were you just able to see some short-term opportunities?

Well, you know, one of the things that we try to do is kind of look at our O&M plans compared with our how system is being stressed, and so certainly is I think there's a pretty good correlation to weather. Certainly the first half of July got off to a terrible start on weather with all the rainfall and below average temperatures, but just as a lot of the United States is experiencing with us right now in the past week to ten days, weather has come back pretty strong. We set a peak yesterday, might do it again today, we'll see. We'll just have to keep an eye on weather and how stressed our wires and generation business is.

The businesses you're divesting, are those going to be in disc ops?

Yes.

Okay. Thank you.

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

Good afternoon.

Hello. How are you?

I'm well. Thank you. Just on the gas business as a follow-on, is that a business that you want to be in longer term?

You know, I don't think, Nathan, that that fits our strategy particularly well long-term.

It's interesting, at one time, and this is sometime ago, when we talk about Southern Company Energy to serve your world, you know, it intentionally didn't say electricity to serve your world. And in fact Southern Company even today, absent the gas business, has a big interest in gas given that a certain amount, in fact, a growing share of our generation business is fueled by gas. And, in fact, I think of the total throughput consumption of gas equal to the total throughput of Atlanta Gas Light in a year. So we're kind of exposed to gas in a big way. But from a retail standpoint I don't think it's particularly important to our strategy going forward.

Fair enough. Just with regard to SMD and the recent is ruling by FERC on SMD. As you look forward, and some of David's comments on the potential passing of the Energy Bill and perhaps some of the repeal or adjustments in PUCA. How does that stack up for Southern Company longer term with regard to M&A? Is it a more favorable environment and would the Company look more intensely at opportunities?

Nathan, I don't think we look more intensely. I think we've said all along we're not adverse to M&A activity provided it meets our business criteria. As you know we've got some pretty rigorous criteria about how we go about looking at those.

Repealing the Holding Company Act would make it easier for us to acquire outside of the Southeast, obviously, but the rigor that we would maintain in approaching that would be exactly the same in terms of it's got to make sense for us. It's got to meet our criteria going forward.

Sure. Absolutely. Just on the coal situation, I know you've got a very diversified source of coal but there's been some Powder River Basin issues. Have you seen any issues with regard to getting coal?

Certainly we've seen some disruptions but not material. We have about 30 days of supply on the ground overall and it differs from plant to plant, of course. But overall we feel comfortable with our position.

And then just lastly on Mirant. There's been a lawsuit filed. Could you just give us an idea of the Company's position and any thoughts there would be much appreciated?

Our position has been very clear. We don't think there's any merit to the claims and the challenges that have been put forward in that lawsuit, and we will defend ourselves vigorously. We would probably respond to that lawsuit in the next 30 to 45 days.

Thank you very much.

Good to hear from you, Nathan. Thanks.

Your next question comes from the line of David Schanzer with Janney Montgomery Scott.

Good afternoon.

Hey, David. How are you?

All right. I may have missed this, but could you tell me what the effect was on, in other words, what earnings would have been had you had normal weather?

It's hard to say, because probably you would have seen a like variance in O&M and a variety of other things. Certainly if we had had better weather it might have helped us, but I can't say that it was $0.04.

The weather effect, if you just calculate it by itself was $0.04, but it doesn't necessarily follow. Like I mentioned before, you tend to see with Southern a pretty high correlation between O&M and weather. And so as we saw weather down, O&M was flat year-to-year.

All right. And you mentioned in the package that you sent us about reclassification of some customers from large C&I to small C&I. I just wanted to verify, that's actually been accomplished and it's reflected in the quarter?

Yeah, we actually have it kind of, I guess the last paragraph, or not in the last paragraph, but on the front page of the earnings release we went through a decent amount of detail there.

Essentially, the Georgia rate decision had varying increases by class, and in evaluating certain customers all of a sudden it appeared that colleges, universities, and airlines may be better suited in the commercial class instead of being classified as industrial customers. And so in effect what you're seeing is the difference of moving them from industrial to commercial. The number that I like to quote in terms of electricity sales does reflect adjusting for the reclassification.

Okay. Great. And then lastly, could you just give us an update on the status of the nuclear units?

They're running great. Let's see. Our capacity factor for the second quarter was right around 90%, 91.63%. And they're going great guns. During this high demand period they've really played a key role in meeting the needs of the Southeast, so they're going great.

Okay. Great. Thanks.

Your next question comes from the line of Ashar Khan with SAC Capital.

Good afternoon.

Hey, Ashar, how are you?

Tom, as you look at Georgia Power for the year their earnings are basically flat for the six months. Is that what you forecast for the year? I just want to understand the impact of the rate increase and why it's not showing up in the net income. It's just, I guess [inaudible] just get your observation.

It's really weather driven. Also, Georgia moved some O&M expense from 2006 actually into 2005. You know we try and take a long-term view on earnings as I kind of went through in the forum, we really do try and take a five-year look at least, and so all of our CEOs throughout the Southeast do just a terrific job of managing their businesses.

Let's see. The other thing is, I expect that we should see more profitability for Georgia as a result of the rate increase probably in the third quarter.

If you kind of look at the positive and negative factors I outlined, there was the positive impact of the rate increase offset by the negative impact of losing the accounting treatment that we saw back in 2001. We think that negative impact will be fairly constant quarter-to-quarter-to-quarter, but the price increase impact should benefit us in the third quarter.

Okay. And then could you give us, on the competitive business, how much were opportunity sales?

Oh, sure. Let me just get that exactly for you. Okay. Here we go. The same trend that we saw last quarter is continuing, and that is much more profit associated with the long-term contract than, for example, the trading floor.

In the second quarter of 2005, we call it the trading floor actually, it's opportunity sales largely. We made $9.4 million that was 16% of the total. Long-term contracts was $49.7 million that was 84%. And, so therefore, the total was $59.1 million.

Could you also give what it was last year on a similar basis?

Sure. Absolutely. The trading floor was 7.6, contracts were 38.5, total was 46.1.

Okay. Thanks.

So what you saw was trading up about 1.8, contracts up 11.2, total, 13.0. So, contracts up 11 out of the 13 million.

Okay. And, Tom, just going back to the third quarter what I have is last year you had, I guess, pretty horrible weather as well. If I remember, August was the weakest August in I guess some history as well. So I know you mentioned about July and catching up, but for comparison purposes weather didn't help you in the third quarter last year, and you also had hurricanes and all that. So I'm just trying to think about positives and negatives. I guess the retail rate growth, I mean, weather, if it is normal, could be a positive. Anything else in the positive or negative category to look into the quarter?

Ashar, you've got a great memory. Just compared to normal in 2004, we had a normal July. As you mentioned, we had a horrible August. It was negative $0.04 in the month of August. And then we were down one in September for a net negative five. Okay? So that's what we saw in '04. I think earnings per share for the third quarter of '04 was $0.87 a share.

Right.

So we're projecting, or we're estimating anyway, 89. We'll see. We got off to just a horrible start here. I know everybody's focused on hot weather right now, but the facts are for the first 18 days anyway this month weather was pretty bad here.

Okay. Thank you.

Sure.

Your next question comes from the line of Danielle Seitz with Maxcore Financial.

Thanks. Just two questions. One on the Energy Bill, could you list the major items so far that would be particularly favorable to Southern Company? And the other question is more, is tiny, it's about AFC. What do you see for this year and next year if ever you have a number?

Let me speak to the provisions of the Energy Bill first of all. The things that, a couple of things were not in there that we were pleased to see. The renewable portfolio standard didn't make it, which we thought was the right policy decision. We did get some language in the Senate around participant funding that we think is directionally appropriate, probably not as strong as we'd like but we're comfortable with that language. We did repeal the Holding Company Act that we talked about earlier.

I think the provisions around nuclear incentives associated with indemnity and for the first series of reactors is a good stroke for revitalizing the nuclear industry. There are multiple other provisions for accelerating depreciation of transmission, distribution investments and also pollution control equipment, along with just mandatory reliability standards that I think will allow to us operate the systems more consistently across the country.

I think there are long list of things that I would put in the positive category about this piece of legislation.

I would just add to what David said, if you look at all the kind of tax proposals that are coming out of conference right now, we think it might improve cash flow annually something like $30 million. That's a real rough guess at this point. So don't take that one to the bank but that would be a best guess, $30 million.

Now, about AFC, what I would show is that AFC for 2004 for the quarter, was 9.5 million. For 2005 for the quarter was 14 million, a difference of 4.5. Year-to-date the numbers are for 2004, 17.7, for 2005, 30.9, difference 13.2.

Uh-huh. And you don't have any numbers for '06 at this time?

No.

Okay. Just also briefly, the two discontinued operations, Southern Gas and the Energy Solutions, what was the impact, the annual impact on earnings? Relatively small?

Well let's think about that for a minute. I'm not sure we're going to discontinued operations perhaps on Southern Company Energy Solutions. That's kind of a wind down as opposed to a sale or a closure. We're kind of winding it down over time. We had certain contracts that we're still paying attention to and will fulfill our obligations under those contracts. What you will just see is kind of a diminishing level of activity there until it finally expires.

With respect of Southern Gas, we have some numbers right now that are highly preliminary and I'm just a little reluctant to send them out, but I think that we're going to recognize at least a small profit on the sale of that business.

Okay.

It will be small.

Okay. And on an ongoing basis, you said you didn't represent that much of an earning. It didn't really show in the earnings per share very much.

Oh, no. Just to refresh everybody's memory, Southern Gas, I guess when I first got in this job in 2003, was somewhere going to lose about $0.02, something like that. We think this year it would probably be at least breakeven. They're doing a great job over there. The Southern Company Energy Solutions was really just a couple million of net income going forward.

Great. Thank you.

Sure. Thank you.

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Hi. It's Paul. Can you hear me?

Yes. Paul. Thanks for dialing in.

What I wanted to ask you guys was, I guess what I heard was that weather was a negative $0.04 of earnings and growth was plus 5. Is that correct?

Growth plus the price increase.

Plus the price increase.

And in fact it was, Paul, let me just kind of go through that a little bit more. The $0.05 really related to growth plus price increase for residential and commercial. And then growth plus price increase for industrial was two. So taken together was seven.

Okay. That explains it. And then you also said that your cost, you know, you remarked about how you kept costs flat and in the first quarter it wasn't like that. And you mentioned that part of that was because weather was weak, and is that-- could you just elaborate a little bit on that as opposed to sort of, you know, it was Paul Ridzon's question, I guess. I mean, what should we expect I guess just going forward about how that O&M line might work?

Sure. You know what we try and do, I talked a lot about our kind of dynamic operations budget, if you will, where we try to match the level of spending with the level of kind of activity given by the weather. So frankly, if you get a lot of good weather and revenues are up you tend to spend more. If the system is not stressed due to bad weather, then you tend to spend less. So what we do is, as the system is stressed by weather or is not stressed by mild weather, we tend to spend more or less. The net effect is that we factor out a lot of the variance from weather.

Let me just add to that just another brief comment. We've never had problems identifying things we need to spend money on when it comes to O&M. We've gotten very, very good, in my judgment, in the last three years, in prioritizing the O&M so that we know what needs to be spent where, and therefore we create some discretionary spending. And as Tom said, when revenue allows us to we're able to do things that we know we need to do long-term for the business.

If weather is adverse and revenues are down, then we're also able to do things that once again we thought about on an unemotional basis to identify that have the least impact on business if we don't do it.

And just to continue that, so what we do is actually plan for the variability of weather. And just to demonstrate how well that works, our reliability of the transmission and distribution system and the reliability of the fossil/hydro system is among the nation's best. Just here recently as we're setting peaks our system is well positioned to be able to respond to the needs of our customers.

Okay. So when we're looking at this weather impact we should take into account obviously the O&M thing, but does it appear then in terms of growth plus the rate increase that you talked about, that the rate increase is probably a bigger component of that $0.05 and that $0.02, respectively for residential and industrial than economic growth, right? Because year-over-year you've got less kilowatt hours that are being sold except for the industrial, I guess.

I would say, yeah, if you just kind of add them together, of the $0.07, four of it is due to the price increase.

Okay. And then in terms of July's Hurricane Dennis, you mentioned that 60 million was Gulf Power was the expense there. Does that include lost sales?

Oh, no, it doesn't, but lost sales weren't that big a deal. Lost sales for Gulf were somewhere around 1 or 2 million. Alabama, they were 4 to 7 million. And that number in Alabama includes kind of cool and rainy weather so it's kind of hard to identify how much was exactly due to a hurricane and how much was kind of the associated weather pattern immediately following.

Okay. And then just to clarify your answer to Danielle, on the $30 million you said you expected maybe potentially you qualified that from the Energy Bill. You mentioned that as cash flow and you also mentioned this accelerated depreciation on a tax basis et cetera. Is there any sort of net income number that would be associated with that other than redeployment of that cash?

Not a whole lot, no. You're right, it's more of a working capital issue. So it'd flow to net income to the extent you required less working capital.

Okay. And the finally, synfuel hedging for 2006, we've seen oil prices go up a bit. I was wondering if you guys could give us an idea about what your synfuel hedging, if you have any, looks like for '06 or '07?

We have not hedged for '06 and '07. Certainly I think we've mentioned to folks that we have hedged for '05, and I think our hedge is in great shape. I think right now we're looking at prices would have to average somewhere around $72.50 for oil on NYMEX as of yesterday.

So, going forward we think we're in pretty good shape. We're certainly considering 6 and 7 for an opportunity to take action. Right now it's pretty expensive to hedge out for 6 and 7. So we'll continue to monitor and keep our eye on it and take action we think as warranted.

One final comment. In keeping with talking about our guidance ex synfuel, when you think about the quantum of earnings associated with synfuel remaining, if you include '05, '06, '07, you take that finite stream of cash flow, discount it at 10% divide through by the number of shares, it's sort of $0.25 a share. Let's say, you know, $0.07 or $0.08 of that is already hedged, say $0.08 is hedged, so you're left with $0.17 a share for 6 and 7. But, Paul, it's a good point, and Ken Grane, who kind of runs that side of our life and I are working on that and thinking about it continually.

Okay. Great. Thanks a lot, guys.

You bet. Thank you.

Your next question comes from the line of Rudy Palentino with Prudential Equity.

My question was answered. Thank you.

Great. Thank you for calling in.

Your next question comes from the line of Vic Khaitan with Deutsche Asset Management.

Hi, David and Tom.

Hey, Vic, how are you?

Okay. Thank you. I got one question about this environmental spending you have on your budget for 2005 to 7, $2 billion. Is that pretty much baked in, in terms of you have a contract with the supplier of equipment, et cetera and approval by the regulators to spend that money?

Let me first go to the second point. Three of our four states, you know, have environmental clauses. Alabama just got one last year, Mississippi's had one for a number of years, and certainly Gulf has one. And in Georgia, while both Georgia Power, nor Savannah have an environmental clause, I think that we've been very fairly treated in the succession of accounting orders that began in 1995 with respect to environmental spending. So we feel comfortable that we'll be treated fairly going forward for those expenditures.

I would say that for some of the big expenditures we have going on for scrubbers and SCRs, either we've already circled up the major equipment vendors or we've been working with them over a long period of time and helping in fact, to develop the technology, and that we feel confident that we have the equipment we need at the time we'll need it.

Okay. And on this Energy Bill which David was talking about, the main issue is that this MBTE issue is still facing it, or is it resolved or what?

It's not resolved, but I think it was punted, in our language. It's not going to be a discussion in the Energy Bill.

So the chance of it passing is pretty good then.

I think so.

I see. Good. Thank you.

Thank you, Vic.

Your next question comes from the line of Dan Jenkins with State of Wisconsin Investment Board.

Good afternoon.

Good afternoon.

On the Hurricane Dennis costs, am I right in that did you recently, at least in Alabama, get a rider or true-up mechanism for storm damage, or is that not the case?

No, we didn't. Alabama treats it as the way it has treated it for years and that is, they'll get specific recovery from the commission when they need to, just as they did after Ivan.

Okay. So it will just be deferred and then decided in your next rate case, or how is that?

It will be a special storm damage reserve.

Okay.

That it will run through. There's a special section of rates that is associated with filling up your storm damage reserve. And so to the extent they need to get permission from the commission to have a negative balance in the storm damage reserve. They'll get a section of rates approved to replenish the reserve over a period of time.

I assume you probably used up the reserve that had built up when they had Ivan?

Let's just think that through. When Ivan came through the cost to Alabama was around $98 million. And when Alabama went through a process to get recovery they had a reserve balance as of the end of June of around $4.2 million.

Now, we expect that when you think about the storm damage associated with Dennis for Alabama it was around $30 million, which we think was probably all O&M. And so Alabama will work with the commission to assure recovery of that. We feel that we'll be treated fairly as we have in the past.

And the mechanism in Florida is it similar or is it different?

It's pretty similar. Let me just go through that again. Ivan was a big deal to Gulf. It was $140 million. Gulf went through a series of negotiations and reached a settlement. And in fact, had been carrying a deficit balance of around $41.5 million at the end of June that they would, in fact, recover I think over 24 months.

So when you think about what Dennis did there was about 60 million of storm damage. About 10 million of that was capital some of that gets added to rate base, some of that is insured; $50 million of expense roughly. And Gulf will work with the commission to add that to the balance or get some other sort of treatment. There's been a lot of discussion among Florida Progress, FPL about different methods including issuing some bonds associated with those expenses.

So Gulf's going to wait until we get through with the rest of the storm season and we'll figure out what to do there. So we think, there again, we'll be treated well.

What kind of time frame do you typically recover those costs over? Do you have a feel for that?

It really depends. Like I said, at Gulf right now they're on a two-year schedule to recover. So it just depends. They negotiate that with the commission.

On your sale of the Southern Company Gas, what's your book value of that operation? Do you have that?

It's going to be around $55 million, something like that. It's a small business.

Okay. But you expect that you'll probably be either a small gain on that sale, you think?

Yes.

Okay.

Small gain.

Then I was wondering, on your Page 5 of your release where you show the projected sources and uses of funds?

Yes.

Do you have what those amounts are for the first half of '05, the first six months, the actual amounts?

Yeah, just a second. I think we do. Hang on. I'll tell you what. How about if we just call you back with that? I'll get either Glen Cundard or Jimmy Stewart to give you that information. Is that all right?

That will be fine.

Thanks, Dan.

Then my final question is on the last page, Page 10, where you break down revenues and earnings for the various segments. Alabama Power, their revenue increase is quite a bit lower than the other segments, it appears. Is that, what's driving that is that kind of as expected, or is that, did the weather hit them more severely than the other units?

Well, there's a lot of things going on there. Excluding retail fuel, the PPA pass through to revenue and wholesale fuel, operating revenue increased by 7 million. The increase is kind of related to the price of territorial wholesale contracts. This is about a little over 7.5% increase and a retail rate increase for their CMP Eco-clause, which was effective in January of 2005. So there was some accrued transmission revenue was eliminated in the consolidation. So it was as expected. There's not really a big surprise there.

Okay. And then the increases at the other units is that more like Georgia, I imagine that's the rate increase driving that?

Yes. Excuse me. One more thing. The other side that you see in Georgia is what we call the embedded wholesale. Remember, when we talk about competitive generation, there's the Southern Power side and embedded means wholesales sales from our five operating units.

One of the big transactions that commenced this year was our EMC 30 contract and revenue increased on that a pretty big amount associated with Georgia this year. So a lot of that may be wholesale.

Okay. And then just on the Southern Power unit, in the quarter the revenue was down 18% but earnings were still up 9% on the EBIT, and then 12.6% net income, while for the year it was, those were still negative. What was kind of different in the second quarter versus the first quarter?

We shifted from market to contract TPAs there.

Okay.

But I'll tell you what, we'll follow-up with you there also.

Okay. That's all I had. Thanks.

Your next question comes from the line of Steve Fleishman with Merrill Lynch.

Hi, guys. Just in the quarter it looks like you got kind of a decent below the line benefits on your income taxes being down.

Yes.

Is that all synfuels or is there some other stuff there?

Great call there, Steve. Yeah, it's mostly synfuels. There's a reduction also in preferred dividends that helped us out a bit. We redeemed a $30 million preferred stock issue and saved about 150 basis points.

Okay. But do you have a sense, Tom, what the tax rate's going to be for the year?

Well, I guess right now our effective tax rate's around 27%. I guess that projects pretty well for the year, maybe 29 or so. It just depends. But, yeah, that's kind of a ballpark number, 27 right now.

And I know this is a small item for you, but the other income net kind of switched about $12 million.

Where are you looking?

Just in the income statement.

Yeah, other income would be cats and dogs. Gee whiz, let's see. It's outdoor lighting at Georgia Power, it's a little below the line business they had, timing of an ESOP contribution, customer fees, contract termination fees. It's kind of a lot of small things.

Okay. And I guess one other totally separate question. I'm just curious on your view of it seems liken Entergy recently essentially gave up on market-based rates temporarily at least in a proceeding. And do you, you know, what's your take on what they did and what your plan is if at all?

Well, I don't feel that comfortable talking about Entergy. It depends on whether they're long or short in their [inaudible], so whether it has any impact. We've said before that it wouldn't have a material impact to us in the near-term, anyway. But, you know, it is important, I think, long-term this issue of market power. And it's pretty clear to us, anyway, that the facts support our position, and so we feel that currently it's worthwhile pursuing this issue with FERC.

I have one last question actually now that I think about it. With respect to your environmental spending and scrubbers, would you characterize everything being on time and on budget or have costs gone up or have time frames delayed at all?

No. As a matter of fact, on the margin, I'm talking about little bits now, and looking at the whole stream of environmental spending over the next ten years, on the margin it accelerated just a little bit. Okay? And I would say that some of the costs have gone up a little bit. Only because when you get into the balance of plant and the site-specific engineering costs, taking all those things into account, they went up.

But I will say that when you consider this year's ten-year number, 6.6 billion, and then you consider next year's number, at least right now I'm expecting to see a small reduction. Because the first, you'll be dropping a bigger year kind of 2005, and picking up a smaller year. Now, I guess that would be 2015. So for the first time you'll start to see the other end of that kind of that normal curve of environmental spending.

Overall we feel very good about it. It's certainly in the near-term we feel good about it. There's more variance in the back end of that estimate obviously.

Sure. Okay. Great. Thanks a lot.

Sure. Thank you.

Your next question comes from the line of Douglas Lee with UBS.

Hi. Good afternoon.

Hi. How are you?

Good. As a follow-up to Vic's question earlier regarding environmental spending, can you please break down the 2 billion to be spent between 2005 and 2007 between the operating companies?

I can do it pretty quickly. Let me do it kind of this way. And if you want more detail I'll have Glen and Jimmy call you, but let me break it down this way.

Generally speaking, over the ten-year period, 6.6 billion, you should see about 4 billion for scrubbers, about 2 billion from SCRs, and then a little bit associated with bag houses and mercury control. I would say that over the next three years, Alabama represents about half of our environmental spend. Okay? That's why it was kind very important for them to get an environmental clause in place last year.

Right. Okay.

Now, beyond that I've got all the detail right here. I'm afraid I'd take everybody's time up. So I'll follow up with Glen and Jimmy and have them give you all the detail you want.

Thanks. I appreciate it.

You bet. Thank you.

Your next question comes from the line of Vedula Murta with Tribeca Global Management.

Good afternoon.

Hey, Vedula. How are you?

I'm good, thanks. With regard to the Energy Bill you mentioned some of the incentives for new nuclear construction. One, I'm wondering if could you be a little bit more specific as to what exactly those incentives are, and if that in and of itself would get the consortium that you're a part of to take proactive steps going forward. Or are there other things that need to also be put in place before a serious effort to, you know, build a new nuclear plant occurs?

Let me start and Tom can add to this. But as we understand it, the provisions are included would provide for some indemnification, basically $500 million for the first two reactors, $250 million for the next four reactors. If those reactors were approved and in construction and were somehow delayed because of some regulatory issue that was unforeseen. A lot of details obviously to be ironed out about exactly the terms and conditions of all of that. We would like to have seen more money.

The particular part of this provision that is troubling to us is that it is subject to approval by the appropriations process that is always, as you know, very involved in the Congress. And so there's some question about if you're out there, way out in the future and something were to actually happen that you needed this, and had to go through an appropriations process would you actually get the money. And having been through Yucca Mountain funding, we're not as excited about that as we would have been had they actually provided for the funding as opposed to making it a subject of the appropriations process.

The other provisions have to do with investment tax credits and production tax credits which are pretty straightforward. With regard to whether or not those provisions are enough I think we simply have to continue to move forward through the new start consortium to work with NRC and DOE to try to secure as much, I guess, just agreement on how we would go forward and certainty about that process as we possibly can. I think we're headed down that road. I don't think we'll move any faster with these provisions, and we'll continue to work to try to strengthen these provisions perhaps in subsequent modifications if we can.

Because my understanding or recollection is that you need to-- the consortium should they choose to go forward with a new unit, they need to get a design to actually be approved by the NRC and that there is no new generation design that is currently been already approved by the NRC or gone through the process. Is that correct?

I think the Westinghouse design is very close if not already approved or certified by the NRC. The GE design and the European design still remains to be certified, if you will, by NRC. I think that process is moving forward.

All right. Thank you very much.

Thank you.

Your next question comes from the line of Dan Eggers with CSFB.

Hi. Good afternoon.

Hey, Dan.

How about I follow-up after the call, you guys have been talking long enough. No offense, of course.

Yeah, right.

Your next question comes from the line of Scott Engstrom with [inaudible] Asset Management.

Hi. How are you?

Hey, Scott.

Just want to follow-up on your comment, Tom, on the coal situation or lack of a situation. Were you guys, the reason it's not such a big deal with you, did you have a little bit larger inventory? Did you kind of see this coming? Have you been using more imports or is it just that you're just not using much PBR coal?

In fact, something like 40% of our coal supply is PRB. You know, I think it's actually a number of factors. We have relationships with a number of different vendors. We have excellent relationships with the transportation company. We have, I think, a conservative posture with respect to our coal inventory and we tend not to rely on spot coal. We, you know, have essentially this year's spoken for with long-term contracts and next year, I think it's essentially a similar position. We're already something like 83% under long-term contract. We're out in the market for the balance of the position. So we kind of have it circled, anyway.

So I think what you should see from Southern, and the other thing, kind of days of supply on the ground right now, in some cases, particularly along the Gulf Coast, we have accounted for bigger coal stocks in anticipation of the storm season. So, you know, overall, I think, as you look at Southern you should generally expect to see a conservative operating practice.

You know, when I go back to my talk about the circle of life, we really do pay attention to reliability, low price and customer satisfaction. Our fuel procurement program is one extension of that conservative philosophy.

Okay. And then did you, you said kind of across the system you have 30 days? Is that what you said?

Yes.

And where is that relative you to, say, this time last year or what you would consider normal number of days?

It's very normal. Last year I think we entered with 20, I mean, entered with 30 and finished with 26.

Okay. Great. Thanks a lot.

What I mean is the peak season there.

Right.

So we're at 30 right now.

Our next question is a follow-up from Danielle Seitz with Maxcore Financial.

Okay. I apologize. The 5% growth rate is based upon the ex synfuel number?

Say that again, Danielle.

The 5% EPS growth rate which seems to be a normal trend for you, would that be based on the excluding synfuel number?

Yes. I went through a little bit of a presentation in our analyst meeting where I was able to show that even excluding synfuel and even excluding these kind of year-to-year upsides that we get that we just can't count on as sustainable. We've been able to deliver since really 2000, 2001 time frame, 5.5% earnings per share growth. So when I look forward in the financial plan what I do is kind of set the metrics for our financial plan for the operating companies to earn a certain performance of ROE and therefore EPS contribution. And then we kind of back into what do we need out of competitive gen.

I think while challenging for everybody no one at Southern would say that our financial plan is easy to do, it's very challenging for everybody, we have confidence that we can deliver on our long-term plan.

Great. Thank you.

Sure.

At this time there are no further questions. Okay.

Well, thank you all very much again for joining us. We look forward to next quarter.

Thanks, everyone.

This concludes today's Southern Company second quarter 2005 earnings conference call. You may disconnect at this time.