Southern Co (SOMN) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Alexandria and I will be the conference operator. At this time I would like to welcome everyone to the Southern Company first quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to our host, President, Chairman and Chief Executive Officer of Southern Company, Mr. David Ratcliffe, followed by Southern Company's Chief Financial Officer, Mr. Tom Fanning. Gentlemen, please go ahead.

Thank you, Alexandria, and good afternoon and thank all of you for joining us. We are pleased to be with you for our first quarter earnings call. Alexandria pointed out joining me today is Tom Fanning, our Chief Financial Officer.

Before I continue 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 maters discussed in our Form 10-K and other SEC Filings.

As we report on our first quarter this afternoon, you will hear that our major businesses, our retail regulated business and our competitive generation business are performing well.

In fact in our wholesale energy business, we have several promising initiatives that are in the final stages of development. and while it is our policy not to make preannouncements, we believe that these business activities may accelerate projections we’ve provided to you thus far.

In addition, since our last earnings call, we’ve had three new developments on the regulatory and a legal front. First, at the Federal Energy Regulatory Commission. We’ve reached a settlement on issues related to the intercompany interchange contract. Second, we’ve also reached a settlement with the environmental protection agency in the Alabama new source review case. And third, we/ve received the summary judgment in favor of the company on the ERISA lawsuit related to Mirant shares in our employee savings plan.

On the legislative front, we are monitoring the tax reconciliation bill and its potential impact on our synfuel business. We will discuss these issues in more detail in a few minutes.

We remain committed to our guidance and, in fact, we believe the prospect of Southern Company has improved since the beginning of the year.

At this point, I will turn things over to Tom for a discussion of our financial highlights for the first quarter and our earnings guidance for the rest of '06.

Thank you, David. Our first quarter results show that our retail business and our competitive generation group are performing well with our guidance right on plan. Let's review our numbers compared to the first quarter of last year.

We earned $0.35 per share in the first three months of this year. This compares to $0.43 first quarter [a year ago. That's a difference of $0.08 per share. For the first quarter $0.03 per share below our estimate.

Now let's turn to the major factors that drove our first quarter numbers. First the negative factors. Our earnings were reduced $0.07 per share due to increased non-fuel O&M compared with the prior period. Of this $0.07 per share $0.02 per share was related to accelerating certain generation maintenance projects; Another $0.02 per share is from the expensing of the employee stock options; and an additional $0.02 per share is associated with the amortization of deferred storm costs and environmental cost recovery.

The impact on weather on our earnings first quarter was negative $0.01 per share compared to the same period of 2005. Weather in the first quarter actually reduced our earnings by $0.02 per share compared to normal. However weather was a minus $0.01 per share impact in the first quarter of 2005 compared to normal. So during the two quarters, the difference was a negative $0.01 per share.

Interest expense on securities issued by our operating company reduced our earnings by a penny per share compared with the prior period in 2005.

Our synfuel business had a negative impact of $0.02 a share on our earnings. I will discuss this issue in more detail in a few minutes.

Higher parent company interest, security redemption costs, and the loss of earnings associated with the sale of our retail gas business contributed to a negative $0.02 variance compared to the first quarter of 2005.

The settlement related to the NSR suit, which is a positive development for the company, contributed to the remaining negative variance of $0.01.

So, in total, we had $0.14 per share negative items compared to the first quarter of 2005.

Turning now to the positive factors. Increased usage and economic growth and the results price changes among all customer classes added $0.05 a share to our earnings in the first quarter compared to the prior period.

Our competitive generation business added a penny a share to our earnings. This increase largely due largely to new contracts with municipal customers, and electric member cooperatives in the Southeast.

So, overall, our quarter came in at $0.35 per share compared to $0.43 per share in the same period last year.

Our earnings estimate for the first quarter $0.38 per share, so we came in at $0.03 a share below our estimate. The variance to our estimate is due primarily to the reserve taken on synfuel and the NSR settlement.

Before I discuss our earnings estimate for the second quarter, I would like to cover some important items that have occurred since out last callin January.

As you may have seen last week we announced a dividends increase of $0.06 or 4% annualized payable June 5 shareholders of record May 1. The dividend is now 38 3/4 cents on a quarterly basis, $1.55 per share annually.

Our objective is to grow the dividend at approximately our long-term earnings growth target of 5 percent. Our most recent action is a prudent step toward that goal. This plan is consistent with what we presented last May at the Analyst Meeting.

We also announced earlier this month that we have reached a settlement agreement concerning Southern Company's Intercompany Interchange Contract. The IIC governs what is commonly referred to as Southern Company [inaudible].

The settlement is still pending FERC approval, but we are pleased to have reached an agreement with the key parties.

Under the settlement, Southern does not agree with the claims of affiliate preference. However, we have agreed to certain restriction related to Southern Power’s dealing with affiliates and other modifications to the IIC, such as further clarifying restrictions on access to transmission, retail planning information, more process definitions and transparency.

Upon resolution of this IIC matter, we will work toward settlement of our market-base rate proceedings.

As I discussed in the review of our earnings, the reserve we took to cover an estimated 40% phase out of our synfuel tax credit as of March 31, reduced our earnings by $0.02 per share.

Given the current price of oil as we enter the second quarter, we are evaluating the options for our synfuel business. The tax reconciliation bill currently before congress includes the language that would enable synfuel producers to use the price of oil from the prior year, instead of the current year, as a basis for determining whether or not tax credit would be phased out by what percentage. Using the 2005 price, we would recognize full value of the synfuel credits generated in 2006.

We remain optimistic that this issue will be addressed by Congress in the very near future. In the meantime, we are taking steps to limit our exposure, including what we hope will be a temporary curtailment at one of our synfuel units.

As a reminder, we have excluded synfuel from our sustainable earnings guidance of $2.03 to $2.08 per share. And the value of those tax credits, no phase out, only represents about one half of 1% of our share price.

Turning now to our guidance for 2006, it is clear that all of our businesses are performing well.

As David mentioned earlier, we have several promising initiatives underway in our wholesale business. As you know, our projections include placeholders for development activities at Southern Power. The financial projection we are currently providing you contemplate spending about $250 million per year over the next three years, acquisitions and or expansions. We believe the pace of that investment may accelerate significantly and in the next few weeks, we expect to be in a position to announce some new business developments at Southern Power.

Given the continuing execution of our plan, we are still comfortable with our year end EPS range of $2.03 to $2.08 per share excluding synfuel effects. Assuming full value for synfuel earnings, our range is expected to be $2.15 to $2.20 per share. In terms of providing an estimate for the second quarter, we are projecting to earn $0.49 excluding synfuel effects and $0.54 per share with full value for synfuel – assuming passage of the tax reconciliation bill.

Now I will turn it back to David for his closing remarks.

As Tom has just outlined, our businesses are performing well as we execute our plan.

As I mentioned earlier, I am pleased to report that we've reached an agreement with the environmental protection agency on one of the major clean air act applications that was filed by the EPA in November of 1999. We believe this settlement could be instrumental in resolving the remaining issues.

In those lawsuit the EPA claims that violation of new source review requirements occurred at eight cole-fired generating facilities operating by Alabama Power, Georgia Power and Savannah Electric. There were two central issues in the case. The first issue involved the definition of routine maintenance, repair and replacement, and the correct test for calculating emissions increases. The second issue concerned the construction of certain units at Alabama Powers plant Miller and Georgia Powers plant Scherer.

The action against Georgia Power and Savannah Electric has been administratively closed since the Spring of 2001, and none of the parties has sought to reopen the case. Therefore the settlement involves five plants owned by Alabama Power.

To settle the claim at plant Miller, the largest plant named in the suit, we have agreed to make a $100,000 payment to resolve EPA’s request for a civil penalty. In addition we will transfer $4.9 million worth of 2007 emission allowances to a nonprofit organization. Furthermore beginning in January, 2021, there will be no transfer of excess allowances assigned to plant Miller outside the Alabama Power system.

The settlement involving plant Miller will enable us to proceed with the installation of additional environmental control equipment at that facility.

Turning briefly to a discussion of our nuclear energy initiative, we intend to file a early site permit this summer, for a third unit at the Vogtle Plant near Augusta Georgia. With the strong population growth and economic expansion we are experiencing here in the Southeast, we are committed to providing clean, efficient and low cost generation to our customers. We believe nuclear energy must be part of the growing demand for energy in our region and our nation.

The initiative at Plant Vogtle, as well as other nuclear projects we’re contemplating, will help ensure that we provide as many options as possible for our future.

At this point, Tom and I will be happy to take any questions you might have. Operator, we will now take the first question.

Certainly, Sir. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Paul Ridzon with KeyBanc. Paul.

Good afternoon. How are you?

Tom Fanning - Southern Company - CFO, EVP and Treasurer

How are you?

Okay. I just had a couple of questions about the synfuels. One was the extent to what sort of flexibility you have with regards to potentially taking units off or putting them in stand by mode? And then being in the event of a positive tax development in Washington, whether you could catch up by increasing production for the balance of the year and how long could you do that?

And then secondly does your $0.54 2Q guidance contemplate the $0.02 from the first quarter coming back because of some positive passage in tax law?

I think [inaudible] --

You guys are really breaking up. We really heard about half of the call. I think maybe if you step up to the speaker phone.

How is that?

Much better. Thank you.

Okay. As you know about $0.12 of our synfuel - [inaudible] our synfuel is worth about $0.12 annually. That's about $0.03. So what you saw in the first quarter was a reserve against a phase out. The $0.55 that we talked about, is $0.49 for the second quarter plus a reversal of the reserve in the first quarter. So therefore that's the $0.05 so that's the second question.

The first question really goes to the amount of flexibility we have. We've already I think gained a course of action to take on a hot idle. This essentially not shutting down production and not spending, keeping everybody there, preserving our options. I think, we and our partners, both are optimistic as movement in Washington. Certainly we are in a position to do that. Anything else?

We actually didn't hear the last part of the response after, basically we didn't hear what you had with regards to flexibility.

What we have is -- can you hear me now? Hello? Hello?

Yes

Okay. Can you hear me now, is that okay?

I think that's better but still a little breaking up.

Okay. Basically we've already undertaken an action to put us in a position of what we call hot idle so that it will preserve our operations. Both we and our partner are optimistic that we’re moving to reconciliation bill. Thirdly we've taken steps reduce our exposure.

Our next question comes from the line of Dan Eggers with Credit Suisse. Dan?

Good afternoon, guys.

Good afternoon.

First question, looks like industrial volumes were down in the quarter, obviously, with the maintenance, should we assume that given the fact that you guys spent a little more time getting equipment in good shape that we should have a good make up or a good summer season for wholesale sales again this year?

Yeah, I think our O&M is basically is right on plan. So I think we are in real good shape. You know, our equivalent forced outage rate which we aim to have peak period performance during the summer period to be in just terrific shape. We think it's going to be great. You know the industry average on EFOR is about [inaudible]. We've been kind of [inaudible] so we expect to have that [inaudible]

If you can hear me, I'm not sure but the next follow-up question is with the consolidation of Savannah Power into Georgia. That should be earnings neutral this year? Should we think about some sort of an earnings contribution in future years given some of the consolidated savings opportunities?

Yeah. It is going to be, but what you ought to just thinking about is typical financial formulation for each, that is as you may remember from [inaudible] seminar think about 7 to 8 % earnings per share growth. In essence 80% of the retail regulated business. Competitive Gen target is 300 million net income by 2007.

For the retail regulated business it is 13.5% consolidated. So what you ought to just and I think we [inaudible], what you ought to assume is that the consolidation of Savannah and Georgia, number one will be earnings neutral [inaudible] all of the transition costs will be in severance [inaudible]. Secondly will enable [inaudible] probably will file in [inaudible]

You guys are still about every other word. I will let somebody else go and see if they can get through better.

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

Good afternoon.

How are you?

I'm fine but I think the problem is universal, we are getting every other word, I will ask the question, you answer it and I will see what the answer was in the transcript. One of the questions I had was coal deliveries. Are you experiencing any particular problem? I know you had to diversify the fuel source as far as the coal is concerned but I was wondering whether or not if the problem has tricked down to you folks.

Not really. As I've said in other forums to answer the question, have we seen interruptions? Sure, I guess everyone has seen interruption. But have they been material, have they been an impact to us.

That was my question.

Yeah -- no.

And then secondly I notice that there is in terms of quantity sales that the large C&I contribution in the quarter was slightly under what it was last year. Is that more seasonal kind of thing having to do maybe with weather or is it sort of the beginning of an erosion in the large C&I base?

No, I don't think there's any erosion. The economy in the southeast is real good. I think the other issue you might want to take into account is hurricanes.

Okay. All right. Thanks.

Sure. Thank you.

Ladies and gentlemen, our next question comes from the line of Rudy [Telatino] with Prudential Equity.

Hi, I believe you said that you were going to spend a little bit more for wholesale generation opportunities CapEx wise. And I was just kind of wondering what type of opportunities that you would see or that you see out there that you are going to pursue?

Yeah, Rudy, it's been just along the line of kind of thing we have been testing over the past year or so.

You know that kind of a [inaudible] targeted and held as place holders to roughly $750 total. I think the majority of that could be this year and a lot of it, most of it could be announced soon The kinds of people we are talking to are the kinds of, customers we are targeting especially the cooperative, that sort of thing, in our target areas. North Carolina and Florida.

And what type of - I understand you are targeting those folks but are you still looking at combined cycle generation or kind of looking more towards developing new coal type facilities.

I think predominantly we will be looking at coal - I mean gas fired systems.

Okay. Thank you very much.

Our next question comes from the line of Dan Jenkins from the State of Wisconsin. Dan?

Hello. Again I'm having a little trouble hearing you but we will try to get through this. On the first page of your release in the second paragraph you talk about the factors that led to the decline in the earnings. And I was wondering if you could write the dollar amount down by each of the issues that you discussed there, the various reserves and accelerated O&M and so forth.

If you could help me out here with the question,, where are you?

On the first page of your release, the second paragraph there you talk about starting with the second sentence, the year to year decline was attributable primarily to, and then you list stock option expense, reserve taken for phase out of tax credits, costs related to accelerated planned O&M work, and then expenses associated with the settlement.

What's your question?

What's the dollar amount for each of those items.

You know what you ought to do? We will be glad to give you the precise information after the call.

Okay.

Somewhere between 7 to 8 after tax, that would just an estimate.

Okay. Then you mention that the decline in industrial sales you think is probably mostly attributable to the hurricane effect.

Yeah, I think so. In fact forward picture for industrial sales growth is good. I mean even our largest single site customer, Chevron they've announced [inaudible].

What do the industrial sales look like say in Georgia and Alabama compared to Mississippi? Is Mississippi like significantly down versus the other states.

Mississippi industrial is down 77% so if you take them out of the equation and everybody else [inaudible] it essentially is [inaudible].

You are kind of cutting out there, did you say Mississippi is down 7%.

Alexandria, if we could interrupt just a moment. I think that if you can give us about one minute we will move into a better phone.

Okay. Not a problem, sir. [OPERATOR INSTRUCTIONS]

Hello?

Are you there?

Yeah, Yeah, that better?

Significantly better.

How about that? Sorry about that inconvenience, folks.

We apologize. If you take Mississippi out, they are down 7.7% so the rest of them would look fairly normal.

Okay. Then you mentioned in the release that the number of customers served is increased 1.3% in the first quarter that for your long-term guidance you mention that you project 1.8% long-term customer growth.

That's right.

Do you expect to pick up that pace as the year goes on or --

Yeah, if you adjust for hurricanes that 1.3 grows to 1.7.

Okay.

And see, the issue on hurricanes and people and customers is really interesting. I mean what we have seen is a net increase in migration of people into our service area territory as a result of Katrina especially and I guess Rita secondarily.

And it's hard to track customers because what you see is a lot of people living in temporary housing, living with relatives, living in a variety of different forms where you don't capture traditional numbers of customers. When you look at sales increases, residential sales excluding hurricanes and weather adjusted were up 2.9%. So I think that also adds to the fact that there is more people in our service territory than there were. So I tend to believe the 1.8% projection going forward.

Okay. And then on page eight of your release you can break down the earnings by segment kind of and you had 70 million in earnings from competitive generation in the first quarter and given that your target is 300 million from competitive generation by '07, it looks like maybe are you, would you say you probably ahead of pace for that '07 number especially given these new opportunities you are seeing?

Well, where we are, we made $270 last year. We are kind of projecting $285 this year and I would say we are a penny ahead of last year and I would say we are right on pace to do what we said we would do this year.

You know, a lot of the rest of the year will determine our ability to generate significant earnings through, through the summertime and also in the shoulder period into the fall. I would say we are right on target and feel good about it.

And I think the growth aspects that we mentioned earlier are really promising.

Okay. Then the last thing I have is on the last page where you break it down by state operating unit.

On the Alabama Power they show a 25% increase in earnings before income taxes but then a 12% decrease in net income available to common. I was kind of curious what's happened between the big increase and the before taxes and then the negative result on the bottom line.

Remember last year we made an adjustment for storm damage and a corresponding tax adjustment, $45 million, that's the difference in Alabama. With excess deferred income taxes we reversed out in order to offset the storm damage. We can certainly follow up with more detail on that if you want.

Thanks.

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

Good afternoon. Tom, how should we look at these new investments in terms of what kind of returns you are looking for?

Sure. And we will give you all the details when we get them but you should kind of look at it this way.

I think for what we are contemplating and essentially for the very near term, the deals we think will be ready to announce in the next few weeks. We think that the majority of our earnings are going to have tremendous earnings power we think in the years 2010 and beyond but there will be some near term earnings impact.

And remember that as long as they fit within the financial plan we've already outlined with you we don't contemplate issuing any equity of any material amount until about 2009.

So we think that in the near term they will contribute to our earnings objectives and we will certainly outline that when we have the deals in front of us to talk to.

Okay

But I think they are going to be positive in the near term and certainly even more positive 2010 and beyond.

Okay. And then could you just elaborate a little bit on the FERC agreement earlier this month? You guys had mentioned a lot of refunds and this and that in the K. Could you just elaborate where the whole process is?

Well, in terms of we've reached a settlement in the IIC and there are several other matters including market power and other things. Those discussions are essentially held in abands pending the resolution of this settlement and we will begin in ernest on those issues following the conclusion of this one.

What time frame should we look at?

I don't know. We will commence those discussions like I say in detail and we will just see I guess in the next three months or so would be something that we will certainly have an update for you at the next earnings call.

Okay. Okay. Thank you.

Our next question comes from the line of Nathan Judge with Atlantic Securities.

Hello. Sorry, I apologize in advance as I am going to ask you to repeat a couple of, I think points that you have already probably said. Unfortunately I wasn't able to hear them properly. Could you just repeat the timing again of these investments that you were talking about of the competitive gen business?

Yeah, I think the vast majority of the 750 we've targeted, okay, so a big number will occur this year, we believe. Magnitude. I would rather stay away from specific numbers until we have the deals to announce but I would say magnitude you are probably in the range of goosh, five, seven or so this year and then the balance next year and a little bit into '08. But we will be able to speak I think to most of that investment pretty quickly.

If I was to read that correctly it sounds like you are having significant success in targeting and actually closing on these deals. Is there a possibility as you go forward that the 750 number increases?

Oh, sure. We will see how that goes but that's absolutely right. What we want to do as we get these near term successes we will lock them up and certainly our project development people will continue working. And we always have active backlog.

This is a little unusual for us to be talking about it this way only because we think it's going to happen so quickly after this earnings call it's significant enough that we at least wanted to forewarn people to be looking for it pretty quickly. Certainly we will continue working and certainly we think we will have success. We will see how that goes down the road.

Is there a, some type of indication of what your backlog would be?

No. We follow lots of projects. I never mention that to people. Our conservative nature is we just like to announce things when they get done.

Fair enough. I thought I would ask any way.

Good try, Nathan.

Just with regard to the synfuels, could you again, I again apologize but I couldn't hear properly, with regard to the second quarter, you are looking for $0.48 without synfuel, $0.54 with synfuel, of which $0.02 would be associated with reversal of the reserve you took in the first quarter. Do I have that correct?

It was 49 and 54.

49. Okay. Thank you very much.

The difference with $0.05 plus $0.03 normally plus $0.02 reversal to the reserve. Assuming you get the bill.

Just to clarify again, in order to begin, unless there is some legislative clarity on this oil prices would need to come down below 69 which I believe is your break even for that.

That's 50% phase out, yes.

Thank you very much.

Our next question comes from the line of with Celine [Majshan] with UBS.

Good afternoon. I have a question on the second quarter guidance. Does it exclude any contributions from synfuel oil. Basically looking at a flat quarter year over year, just for the fact that the second quarter last year you saw extremely mild weather. My question is what are the factors that would likely be done on the coming quarter?

Okay. Let's see. We expect to see a continued pick up in residental, commercial and industrial growth. We think that will represent some things.

We may say a continued increase in O&M, interest taxes and other, depreciation is up a little bit. So those things kind of offset each other. We will see, I think, an increase in competitive generation a little bit.

And those are the significant variances. I guess what you see is residential, commercial, industrial growth and as a planned offset O&M, interest, taxes and depreciation.

Some of these offsets in terms of line item depreciation, especially O&M, are these kind of timing related or just like in the first quarter or just a normal course of business.

It's kind of a lot of both, maintenance timing and we are having an increased environmental spend so there's some O&M related to that, A&G, pension, stuff like that.

One last clarification, how much was weather versus normal for the second quarter of last year?

Weather was $0.03 negative. In other words it was milder than what we would have expected.

Okay. All right. Thanks.

Our next question comes from the line of Paul Patterson, Glen Rock Associates.

Do you hear me?

I hear you fine, thanks, Paul.

I wanted to, sorry to do this but I'm not completely clear on what this new investment thing is. Is it $750 million that you are planning on announcing pretty soon of new investment in the competitive areas.

What we said was the financial plan in fact what's reflected in the earning package is about 250 million a year, so 750 million total for three years. And the reason we are alluding to it here rather than just kind of normally waiting until it's signed is we believe in the very next few weeks that we'll announce a substantial portion of that committed.

Okay. And is this going to be new generation that you are going to be building?

What we said is it could be acquisitions or expansion or both.

Okay. And I'm sorry just because the sound quality was hard for me. Did you guys clarify what kind of plant or what kind of nature of the fuel or whatever that might be in there?

We did talk though that most likely it would be gas-fired. I mean that's typically what you see these days. What we said broadly about the nature of the competitive generation is certainly and through the end of this decade any way most generation would be kind of gas-fired. I think since the last ten years or so 95% of it has been gas-fired.

And then what we say is kind of 2010 to 2015 we are looking to see some gas-fired but also the advent of clean coal. You're familiar with our IGCC project in Orlando. And probably 2015 and beyond you will continue to see some gas, maybe some coal and but also now the advent of new nuclear plans.

Did you guys talk about M&A at all?

No.

And then synfuel, the synfuel legislation, did you guys indicate when you think that actually might come about or could you just give a little more elaboration as to when we actually might see the Congress finally act on this special legislation that the industry seems to want.

Yeah, you know, it's funny, this is something that we frankly expected to already have occurred and it's just been delayed. It's hard for us and anyone else to handicap vagaries of politics but our sense is that it will come, we are at least optimistic any way that it will come at a reasonable time frame here.

Okay.

Other than that I can't hesitate, I mean I can't hazard a guess.

So this month you think?

This month meaning April? It could be before Memorial Day, certainly.

Okay. I will follow up afterwards. Thanks a lot, guys.

Our next question comes from the line of Raymond [Leung] with Bear Stearns.

Just with respect to this potential announcement on generation how does this affect your capital needs for this year and sort of the overlay, what may be needed at the operating companies.

What you ought to look for, remember that our financial plan is structured such that we contemplate the 750 million of CapEx at Southern Power plus all the other financial requirements of the operating companies without the need to issue any material amounts of new equity probably until about 2009 or even later than that, just depending.

And so what you will see is certainly there will be some, the financial plan is robust enough to contemplate accelerating that spending without issuing any new equity. So it would largely be financed with debt at the Southern Power level most likely.

Thank you.

Sure.

Our next question comes from the line of David Schwartzman with US Trust. David, you may proceed with your question.

Hi, have you or could you give your debt level as of March 31?

Sure. Debt level, okay, long-term debt.

This consolidated, right?

Long-term debt is about 11.7 billion.

And short term?

Short term looks like, let's see, 2 billion, somewhere around there.

Roughly 2 billion. All right. Thank you.

2 billion within a year plus notes payable.

Thank you very much.

Mr. Fanning, Mr. Ratcliffe, I would like to allow the participants an additional moment to pose any initial or follow up questions that they may have. [OPERATOR INSTRUCTIONS]. Our next question, is a follow-up question from Paul Ridzon of KeyBanc. Paul?

Since Paul Patterson brought it up but didn't kind of follow up what are your views on M&A and does this accelerated Southern Power spend maybe take a sense of urgency off that view for utility deals?

I'm not sure there was ever a sense of urgency there. You know, this is something that I talked to you all about a lot. Southern has always considered M&A as part of its strategy.

I think the issues that compel us to undertake M&A as a vehicle to undertake more of our strategy would be that the criteria are met. That is, it contributes positively to 5% growth, that it's accretive in a matter of months, not years, that it is credit neutral and that it is faithful to our strategy.

So it's something we've always considered. As a sense of urgency people talk about all these deals are happening around you, and people refer to Excelon and Duke and FPL. I don't think that really adds to our urgency.

I think we make all of our decisions based on what's best for our customers first and our shareholders and I think the four criteria we have given you remain the same. I don't feel a sense of urgency other than to deliver value to our customers and our shareholders.

Then, just thank you for that response. And then with regard to the potential deal you are announcing, I mean is it one large distressed player out there who has indicated a lot of assets in that region for sale. Do you, are you, the terms that you are seeing these assets that attractive that you are contemplating?

Let me just say this. I am not going to comment on any rumor but you know that our model has been that we don't particularly view the merchant model as particularly attractive. And what we typically do as apart from say merchant generators is view the asset in these transactions as being the customer and the revenue contract having some term over period of time. Typically you should look for us to follow that model.

Could you buy assets and then kind of in one fell swoop have a customer lined up.

Perhaps. We will make the announcement in due course.

Is it okay to go home early tonight? Thank you very much.

Sure. Thank you.

Our next question is a follow-up question from Ashar Khan with SAC Capital.

I want to get a break up on the competitive gen between, you know, asset optimization earnings versus bilateral.

You bet. In fact I would argue that the quality of our earnings even though it's only up a cent the quality of our earnings for the first quarter is really good. If you look at the break out between trading floor asset optimization as you refer to it and contracts, 92% in the first quarter is associated with long-term contracts, only about 8% is trading floor. In terms of dollars at 5.5 million, and 64.3 million.

Okay.

78.9 In total.

Could you compare it with last first quarter?

Sure, delighted. Asset optimization trading floor last year was 7.2 million, so it actually went down 1.7 million. Contracts went up from 50.8 to 64.3. That's an increase of 13.5. So for the quarter, first quarter '06 versus first quarter '05 we were up 11.8.

Okay. I appreciate it. Thank you.

And the break down there, we did 88 and 12 before in terms of percent, 92 and eight here.

Thank you, sir.

Sure. Thank you.

Gentlemen, there appear to be no further questions at this time. I would now like to turn the conference over to Mr. Ratcliffe for any further remarks.

Alexandria, thank you for your help and again folks we apologize for the inconvenience at the front end. If anybody has any follow up questions please don't hesitate to call us and we thank all of you for joining us.

Ladies and gentlemen, thank you for your participation in today's Southern Company first quarter earnings conference call. This concludes today's call. You may now disconnect.