Southern Co (SOMN) 2006 Q3 法說會逐字稿

Good afternoon. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company third quarter 2006 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 session.

[Operator Instructions]

Thank you. I would now like to turn the call over to Mr. Ratcliffe, President, Chairman and Chief Executive Officer. Please go ahead sir.

David Ratcliffe; Thank you, Casey, and good afternoon and thank all of you for joining us. We're pleased to be with you for your third quarter earnings call. And 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 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 strong quarter and our businesses are performing well.

As you may remember on the earning call a year ago we discussed the devastating impact that Hurricane Katrina had on our customers, employees and the economy of the Mississippi Gulf when it struck on August 29th, 2005. Nearly 14 months after Hurricane Katrina, considerable progress has been made in rebuilding of the infrastructure and the economy of the Mississippi Gulf coast.

While considerable work remains, the leadership of the Mississippi Congressional delegation, Governor Barber, and the state and local officials, along with the strong commitment by the private sector has accomplished much.

Following Hurricane Katrina, the gaming industry was visually destroyed. Today nine casinos have returned to operation, and as of September, total gaming revenues have returned to pre-Katrina levels. While FEMA trailers still dot the regional landscape, homebuilding activity is well underway.

Thus far here in 2006 some 400 new single family homes have been constructed within our service territory, with a total of 550 expected by year end. By the end of next year, we expect to have a total of more than 1,300 new homes constructed.

The Chevron refinery at Pascagoula, Mississippi has announced that it's evaluating a major expansion of its existing operations and will add liquefied natural gas terminal, which is expected to be operational by 2010. In summary, destruction and devastation have been replaced by optimism and opportunity. The positive attitude shown by the people on the coast of Mississippi as they rebuild their lives and their communities is truly inspirational

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

Thank you, David. Our third quarter was marked by the strong performance of our retail business and, as I'll discuss in a few minutes, much of it related to an ongoing robust economy along with sustained customer growth and increased customer usage.

We earned $0.99 a share in the third quarter of this year. This compared to $0.97 in the third quarter of 2005. Excluding our syn fuel investments, we earned $0.99 a share in the third quarter compared with $0.94 a share in the third quarter of 2005.

For the first nine months of this year, we earned $1.86 per share compared to $1.92 per share in the same period last year. Excluding our syn fuel investments, our earnings for the first nine months of this year are $1.86 per share. That's an increase of $0.03 a share over the $1.83 per share of earnings we reported for the first nine months of 2005, again, excluding syn fuel.

Here's the breakout of our earnings for the third quarter compared with the same period last year. First, the negative factors.

Increased non-fuel O&M cost compared to the third quarter of 2005 reduced our earnings by $0.02 a share. This impact reflects more normal levels of expense compared to a year ago where we were focused on hurricane restoration efforts. Lower market base rates in the industrial sector contributed to a negative impact on our earnings of $0.02 a share in the third quarter compare to the same period in 2005.

Higher interest expenses in the third quarter of 2006 related to increases in working capital for our retail operating companies reduced our earnings by $0.01 a share compared to the third quarter of 2005. Finally, the reduction of tax credits related to our synthetic fuel investments lowered our earnings by $0.03 a share in the third quarter of 2006 compared to the same period in 2005.

Now, for a breakdown of the positive factors. Continued customer growth and usage among all classes of customers increase our earnings by $0.04 a share in the third quarter of 2006 compared with the same period in 2005. That $0.04 is comprised of $0.03 for residential and commercial customers and $0.01 for industrial customers.

Taxes and other income added $0.02 a share to our earnings in the third quarter compared to the prior period. This is due primarily to tax credits at Georgia Power. Other operating revenues added $0.01 per share to our earnings in the third quarter of '06 compared to the same period in 2005.

The effect of warmer weather added $0.01 a share to our earnings in the third quarter of 2006 compared to the third quarter of 2005. The third quarter of 2006 was $0.04 above normal, while the third quarter of 2005 was $0.03 above normal. So the net effect of warmer than normal whether was $0.01 a share.

Reduced expenses at the parent company added $0.01 per share to our earnings in the third quarter of 2006 compared with the same period in 2005. This improvement was due primarily to higher storm-related insurance costs in 2005.

The operating lost of Southern gas in the third quarter of 2005 also added $0.01 a share to our earnings. Since we exited the retail gas business, these costs did not impact our earnings in the third quarter of 2006. So overall our third quarter came in at $0.99 a share compared to $0.97 a share in the third quarter of 2005. And excluding syn fuel, we earned $0.99 compared with $0.94 in the same period in 2005.

Before I discuss our earnings estimate for the fourth quarter, I'd like to provide a brief update on several items of interest. In August of this year, we experienced four peak load days in a nine-day period and set new peak demand records for our generation and transmission resources.

The combination of our long-term planning and our focus on day-to-day operations provided ample generation and transmission resource to meet our customers demand for electricity.

The performance of our generating facilities and the skilled employees who operate and maintain them set a new all time peak season record for availability. During the third quarter, our generating fleet performed an equivalent forced outage rate of 1.09%.

For the nine months year-to-date in 2006 our nuclear and fossil hydro generating fleet had an equivalent forced outage rate of slightly over 2%. This compares very favorably with the electric utility industry, which historically averages approximately 7% according to the NERC Generation Data Availability System Report.

Finally, our transmission and distribution assets also performed extremely well during the summer peak period. Our customers experienced no major outages or disruptions during the periods of peak demand, a credit to our experience to well-trained personnel and also our ongoing investment in transmission and distribution infrastructure. As a result, our year-to-date performance indicates that 2006 could be another record-setting year for transmission reliability.

Throughout the entire Southern Company system, our employees did an excellent job of planning for the peak season in keeping our assets available to serve our customers. In addition to the weather, the record-breaking demand we saw this summer was due in part to steady economic growth taking place in the southeast. Most -- every industrial sector that we tracked with the exception of basic textiles showed quarter-over-quarter growth, including chemicals, pulp and paper, and primary metal.

In the automobile manufacturing sector ground was broken last year for the KIA plant to be located in West Georgia. Georgia Power will be the electricity supplier for this new facility, which will create nearly 3,000 jobs when it reaches full production in 2009.

In addition, Hewlett Packard has announced it plans to open two large data centers in Georgia whose electricity requirements could be roughly equivalent to that of the Kia facility. And while housing starts have slowed to more sustainable levels, we see strength in this sector compared with the rest of the nation.

Nationally, housing permits decreased by over 20% compared with the prior year, thus returning to 2002 levels. However, here in the Southeast, the level of new home permits is holding similar to last year's levels. So relatively speaking, the demand for housing in the Southeast reflects continued strong inward migration of new residents.

Turning now to our earnings outlook for the remainder of the year, it's clear that our businesses are continuing to perform very well. And in keeping with our past practice, I'm going to provide an earnings estimate without syn fuel earnings included. Our estimate for the fourth quarter is $0.22 per share. This fourth quarter estimate implies an earnings estimate for 2006 of $2.08 per share, which represents performance at the very top of our guidance range.

Again, this estimate of $2.08 per share for 2006 excludes any syn fuel earnings. Finally, let me repeat that as a result of previously announced actions we've taken, syn fuel earnings should have a slightly positive impact on our financial results for 2006.

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

As Tom has just outlined, our businesses are performing well as we execute our plan. Before we take your questions, I'd like to update you on two relevant business items. As you know, we're moving forward with plans to build two additional nuclear units at our Plant Vogtle site near Augusta, Georgia.

In August, we submitted an early site permit to the NRC, and it has been normally accepted. Our early site permit is the first to be based on a specific technology. The Westinghouse AP1000 design. We plan to submit our application for a construction and operating license to the Nuclear Regulatory Commission in March of 2008. The specific activities required to meet this deadline are in progress and on schedule.

You may have seen earlier this month, the Federal Energy Regulatory Commission responded to the settlement we reached with the parties in the Intercompany Interchange Contract case. The settlement offered that had been pending before the commission dealt with the participation of Southern Power in the Southern Company Generation pool. The commission accepted the settlement subject to our agreement to certain modifications.

Under the proposed modifications, the settlement will unable us to continue to operate as we have operated for many years and will allow us to maximize the efficiencies of our system. Under the modifications, there will be increased emphasis on separation of certain functions involving Southern Power and the other operating companies. Specifically, we will maintain a separate staff to perform generation planning and wholesale marketing activities that are solely for Southern Power.

While we do not believe that the settlement submitted by the parties required modification, we have accepted the FERC order and are beginning to put the required changes in place. Because the system power pool will continue to operate as it has and our wholesale contracts will remain intact and unchanged, we do not anticipate any material financial impact as a result of the modified settlement.

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

Thank you. [Operator Instructions]

Your first question comes from Paul Ridzon with KeyBanc.

Good afternoon. Can you hear me?

Yes, Paul, great.

Did you have Southerngas last year in the forth quarter

Yes.

What did it contribute?

Well, it contributed a little bit positive. It was almost nothing for the year. And just remember that, as we mentioned, you know, the third quarter is not a good profit quarter for that kind of business.

The fourth quarter and the first quarter of the following year would be the time when they make the most money. December would be the -- probably the biggest revenue month for the fourth quarter of '05. Southerngas contributed about $0.005.

And what's the annual profile of Rowan and DeSoto look like?

Well, we typically don't disclose that. What I have said about that in the past, Paul, is the profile I talked about it in the aggregate of not only Rowan and DeSoto, but also Franklin III transactions. And you may remember what I said about that -- I think this is in the -- probably the April call or the July call, one of those two. It had quite a significant impact, but really following 2010-2011 timeframe.

And at that point, I think I suggested that its net income may approach that of about half of Mississippi Power, so kind of in the very high 30s to $40 million dollars. In the near term, it's a good deal less than that just because of the structure of the some of the contracts that we assumed.

And can you clarify your goal for Southern Power to hit 300 million by '07? Does that mean calendar '07 or calendar '06?

That -- typically is in that calendar '07. What we have said in the past is -- we said on the last call, in fact. It was my point estimate for competitive gen was 292. And I said, well, I wouldn't be surprised if we hit 300. You know, I don't know. I may modify that a bit.

If you dive into the results and I'll be glad to dive into them just a little more, unlike other years, we haven't seen kind of a level of profitability for a lot of good reasons in the certainly optimization side, the trading and marketing side, particularly the performance of opportunity sales. Gas prices are down.

And I'll go through that if you want, but that's really the difference. When you consider the difference between trading and marketing and contracts, contracts are up. Trading and marketing are down.

So where would you put the point estimate now?

292, 293. I don't know. You know, it's still -- you might see some peaky look at weather. We had that happen last year in December. Obviously, October and November are just kind of very calm months in that business.

And then, if you could kind of, on the M&A front kind of the regions that you most likely that we should be looking?

For us to be looking?

Yes.

We've always been very consistent I think with our views on mergers and acquisitions. You know we've had the same criteria in place that we've always had and that's the contributing to the 5% growth creative in a matter of months and not years.

And we typically have said that that kind of translates to being creative by year or two. We believe our stock trade is much on its low risk profile as it does its attractive return characteristics. And so therefore, we would want any such transaction to be credit neutral.

And we really like our strategy and so we would want -- whoever we were considering to be consistent with our strategy. Now, remember, we've kind of been through the mantra in the past of the business we know, with the people we know and the place we know.

So that kind of suggests the super southeast region. Remember two of in the January call of this year we suggested that with the elimination of the Public Utility Holding Company Act, we'd be willing to extend our look a little more but not a whole lot more. So we would still be focused on the southeast.

Thank you.

Sure. Thank you.

Your next question comes from Dan Eggers with Credit Suisse.

Hi. Good afternoon.

Hi, Dan.

First question is little nitpick, how much of the $0.04 pick up for customers growth this year was offset because of the storms last year?

You know the way I can give you a more precise answer is go to sales, if you look at our kilowatt hour sales -- if you look at kind of total retail sales of 2.4 year-over-year for the third quarter, you might want to back out of --I don't know, about two tens or something like that.

So in other words the sales growth right now looks better than it did than -- than it would have if you had not had the hurricane last year

Okay.

See what I'm saying. So that 2.4 is a little high.

Okay. You guide as Paul opened the door so -- I'll ask the question. Can you give a little more color on opportunity sales and kind of what happened this year in magnitude of change year-on-year? And how you expect that versus normal?

Yes. Really, I'd love you. It's interesting stuff. What we -- let me give you having -- give the data I normally give and then I'll give a little color around it. When we breakout kind of how competitive generation has done remember that our competitive business is broken into two pieces.

One relates to Southern power and one related to what we call our embedded competitive generation or that's the part associated with our retail operating companies; Alabama, Georgia and Mississippi and Gulf Power. Let me go through those a bit.

In the third quarter of '06, for competitive Gen we earned about $89.4 million. That's actually about 3 million bucks less than the third quarter of '05. Now, Southern power did a little better. Southern power in the third quarter of '06 earned $45.9million compared to $39.3 million a year ago.

That's due to the pick up primarily of the DeSoto contract. Rowan, which we also closed this quarter is just too late in the quarter to have much of a net income contribution. So a good bit of that Southern power pick up is associated with the DeSoto contract.

The embedded contract went down just a bit and that's really because we had a couple of contract end, MCNPA 1, Alabama Electric Cooperatives, another contract there in. But it -- its just -- it's a lot of little cats and dogs that really don't matter to a whole much about 4.5 million bucks. And also, opportunity sales were down there.

Let me give you the base numbers. Embedded competitive gen was for 2006 416 compared to 517 a year ago, so that's a little moreover 10 million bucks. The contract side was down about $4.5 million. The trading and market opportunity sales were down $5.6 million, okay.

When the other way we break that out is by just looking at trading floor versus contracts. What we have seen is fairly consist in the past. We see about 80% of our profits associated with the contracts, with the remaining bulk of it associated with the trading floor.

Trading floor profits quarter-to-quarter, third quarter '05 to third quarter '06. Third quarter '06, 15.8, third quarter '06, 26.9, so you're down to the shade over $11 million. Contracts for the system on the other hand were up. '06 third quarter was 71.6, third quarter '05 was 64.0 and the logic behind all that really is pretty clear, when you think about it we saw a tremendous men cuss decrease in gas prices.

Further we saw sustained hot whether in the southeast. And just for -- to remind everybody remember the way our pool works is that our native customer loads get the benefit of our cheapest energy. So if we produce 70% of our energy from coal and 16% from nuclear, 4% to 5% on a normal year from hydro.

Now, we've had less rainfall this year so that number looks like 1% for the third quarter. And then the balance with gas, so what you get in third quarter '06 is good economy, good sustained hot whether that wasn't very picky until you had good demand here in the southeast.

And so our bottom of stack Atlanta that is the first price after having met the requirements of our native retail load we are able to sell into the wholesale market was reasonably similar to the past. Although, a bit lower just because of natural energy prices going down.

If I look at those numbers, bottom of stack Atlanta in the third quarter of '06 was about 52.5 bucks, okay. If I look at the third quarter of '05 that's down from about 62 bucks, so you're down about 9.5 bucks from bottom of stack Atlanta. The market price to Southern went down significantly. That's the market price for energy you see and that's typically defined by combined cycle gas fire and energy.

In the third quarter of '05 that was $90 little over that for a megawatt hour and Southern it was $61.70 per megawatt hour. So that's a reduction of $28.5. So you can see the difference, yes, our bottom-of-stack Lambda went down a little. But the market price and therefore the marriage inside went down significantly for opportunity sales.

The other thing you will see as a result with gas prices being so low. We produce a lot more gas fired energy and in fact at times our gas fired energy supplying some of our higher price coal. In fact our gas production was up 43%. Anyway, I know it was a little long winded, but that's what happened.

Very helpful. If I back tracked to one of the first things you said, when you looked at the Southern power earnings 393 to 459 and seeing a decent chunk of that coming from the DeSoto, is that financing constrained also is that included the cost of some sort of financing of 495 or is that centralized down apparent.

Listen. We corporate finance all of Southern power assets

Okay. I should -- when I think about how profitable that contract is I need to finance that also, I guess is the question?

No. I mean, not on top of what I told you

Okay.

That assumes our corporate financing structure at the project level. It's just part of Southern power corporate.

Okay.

You don't need to add another financing burden that's address.

Okay. I got it. One other question I guess just given your perspective into this with the election getting remarkably close and talk of potential change in control in the house, can you just run through some of the big policy issues we should be keeping an eye on those things. You guys are focused on right now.

Hello. It's David. I think the same things that we've always been focused on clearly the questions around tax policy and the questions around environmental issues long-term energy strategy with regard to nuclear capabilities. I think those are the key things from our standpoint.

Do you see any risk of any of those changes or involving materially or do you think that we're overreacting to some of these concerns, right now?

Well, I suspect that we're over creating. One thing that I've observed is that remember that it is difficult to pass anything through the Congress with the kind of split that we have in both the senate and the house. And complex legislation things such as climate change or major energy piles that it is particularly difficult to achieve.

So even if the house were to turnover and you were to change leadership, I suspect that nothing significant happens until we get into a new administration in '08 and pass '08 elections. So I think we're in this period of time where we may not get much done period. So sometimes I think that's good and sometimes I think it's bad.

Got it. Thank you, guys for all the time.

You bet. Thank you, Dan.

Your next question comes from is Rudy Valentino with Morgan Stanley.

Hi. What the settlement of the IIC, is that market power case still open and what is you're out look for selling that case. And will the IIC settlement also impact you ability to win new business in the Southeast.

Yes. The market power case sill is in place. Let's just say we are moving forward. We tried to reach settlement. We ended settlement talks. We're in the middle of August and have jointly senate the preceding judge, a list of issues for hearing. So what we believe right now is that kind of written testimony and discovery will be conducted over the next several months. And we'll enter a trial type hearing, which will probably commence late February of 07. Now, the other question that you had related to our abilities to undertake new business in the Southeast.

Yes. That's the -- and I'm not aware of the total issues of what you agreed to in the IIC settlement, but is that going to impact your ability to like win new business in the Southeast in other words can you start to corporate load into your control area, you know?

Sure. We -- the simple answer is yes. We'll still be able to compete for those types of things. Remember that especially in Georgia and in Alabama there are well defined procedures in which resource requirements are identified and solicited from either the host utility company or from the open market. And those are jointly pursued with the commissions and time tested procedures. So we'll be able to participate under those types of mechanism as we have in the past.

Okay. And I don't know if this is all too early, but can you give us an idea what you guys plan to do in Georgia for next year as far as rate filings go.

Yes. It is too early. We'll likely file in July of 07 and look for result late December'07 to take effect 11,'08. Beyond that its way too early.

But that is the process requirement that we file in July and we get a decision by the end of the year.

Okay. Thanks so much for your time.

Good bye. And thank you.

Your next question comes from [Alex Canyo] with Merrill Lynch.

This is Jonathan Arnold. Can you hear me, guys.

Sure. Jonathan, good to see you.

Thanks. Can you just tell me a little more about the -- you talked about some tax credit numbers and this Georgia power, I think in this quarter.

Yes. Sure.

And whether that we have had more of that during the year or expecting more on Q4 or exactly going on that.

Well, there are varieties of cats and dogs, the one you've heard of in past years. A State retraining tax credit that amounted to maybe a third of it, half of it related to kind of a new issue. It's a state port tax credits. I don't know whether you will get that more or not. We're under some discussion with the state with respect to the availability of those tax credits going forward. I don't know whether that's going to repeat itself or not.

But those numbers you gave us were the Delta versus Q3 of last year.

There wasn't much last year because Delta amounted about $3.8 million or about --.

Okay. And then can you just remind us where you are versus normal and whether year-to-date?

Sure. Whether year-to-date is plus $0.04 and that was all just about all during the third quarter.

Thank you.

You bet. Thank you.

Your next question comes from Greg Gordon with Citigroup.

Thanks. Two questions, one just to make sure I heard you correctly will regard to your competitive generation profile. You're still confident that you can get to around $300 million of net income in that business in fiscal year '07.

And as tenure of how you get there is of evolving a way from opportunity sales as you layer in more of sort of contract generation positions and layer in more assets in to that business. Is that a fair regurgitation of what you said?

Yes. Sure it is. We're going to be close this year whether it's 292, 293 or 300. I mean we're just about there, we're just about there, we're around the doorstep. And your characterization of moving more towards long-term contract in terms of the profit make-up is absolutely right.

Okay. So you're actually going to be pretty close to that number this year.

Yes.

Okay. Any chance we'll get an update on whether your going to establish new targets in that business given, your ahead of schedule or do you think that given the reduction in the visibility for opportunity sales that the 300 mark in '07 is still really a more rational expectation?

I wouldn't get too hung up on the difference between 292 and 300 at this point. And I can sure you David and I in fact chatted yesterday with the people at Southern about what the right goals ought to be and really kind of crystallizing our thinking about that going forward.

So certainly as we get the kind of right information available internally as we get commitments from all those that have to differ those results we'll certainly let you guys know.

And then you know the other thing that strikes me listening to all the economic development in your service territory is, actually spoke to you CEO, a couple days ago and I don't think people realize that Georgia is in fact the fourth fastest growing state in the country.

Let me give you another good stat there. Everybody familiar with Lapfer curve right. Arthur Lapfer the economist behind that and covers main - actually has a ranking of state economy. He ranks Georgia No. 1 in the United States in a recent publication.

My point is that I think you have been talking about 2% customer growth and 2percent usage growth customer as being sort of reasonable inputs. Are you seeing acceleration or deceleration in versus your expectations given the backdrop that you sort of articulate to do us and how does that translate into what we assume is basic topline revenue growth-rate overall?

What we have in the package I think is 17 and 18 in customer growth. In terms demand growth it's kind of 2. What we're seeing there is usage kind of going up, people living in bigger homes more plasma screen TVs, more personal computers that sort of thing. The long term kind of macro-economic trend we see is this migration to people from the northeast and Midwest down to the southeast.

And we can use this static in the past that kind of I think around right now the about a quarter of the nations population lives in the southeast and by 2030 the migration pattern suggests that maybe as much as 40 percent of the nations population living in the southeast. So this notion of kind of above national average customer growth should continue.

Whether the usage pick up continue or not the function of the economy and then in the southeast the economy is still pretty good. Unemployment rates in the southeast are 4.1% compared to natural average of 4.7%. The economy is probably still good. David, the chairman of the board of the Federal Reserve Bank in Atlanta, he probably has more to add.

I don't have a lot more Greg, you and I were in the conference this past week where you remember there was tremendous amount of conversation. And I think the drum beat around contraption is efficiency will continue to grow us. I suspect that will offset usage by customer to some level. So I think the numbers really not going to add a problem they are pretty good numbers.

Thank you, guy.

Thank you.

Your next question comes from [Danielle Seep] with [Dowmen Bros].

Hi. I just was wondering if could you remind us of the cost for pre-clearing your filing for the (inaudible) plants. And also how do you intend to recover those costs overtime? That would be great.

I think you're referring to the accounting order that was passed at Georgia Public Service Commission that provided for I think $51 or $52 million dollars of recovery of cost associated with developing the nuclear option and in the State of Georgia.

And this recover all of the cost until you filed and what's happening to I mean is it a automatic recovery or will you just file for it, as you file otherwise [cases]?

That will put us in a position to recover most of it - just about all the costs associated with those ASP and COL. I suppose there will be other costs that will likely be capitalized. That would be cost associated with putting in an order for the vessel reactor and variety of other things. But for the cost that would otherwise be expensed associated with developing the option, it would be recovered annually.

And at this time the NOC is assuming that you will get your COL when after your file?

I think that's a stretch. We said we would file in March of '08.

Right.

And perhaps 10, 11 timeframe. It will take two or three years.

Okay. Thanks.

It takes 42 months after we file is kind of what we think.

Great. Thank you.

Sure, thank you.

Your next question is from [Andy Strovinski] with HSBC. Andy your line is open.

Hello. I'm sorry, I was on mute. I have a question I just the first one is about the fourth quarter estimates and your expectation on the $0.22 which is almost flat compared to the fourth quarter of 2005? And I just wondered if we going to have Rowan plant, for the full quarter, why are you expecting these pretty flat results?

Yes. Sure. If I look at kind of fourth quarter in past years, let's thing about it in '05 it was $0.21, let's see, let me go back and look just a second, there we go, yes, $0.24 in '04, $0.22 in '03, those included (inaudible) fuel. So you don't want as a back out $0.3 out of those guys, so maybe $0.21 in '04 and kind of $0.19 in '03 and $0.20 in '02.

One of the other things we're looking at that's kind of interesting as an opportunity for us to take advantage of in the fourth quarter is taking a look at retiring some trust preferred security. Those are at the parent level.

Okay.

As you know those trust preferred securities because they're not under a regulatory jurisdiction, when you redeem memories and this is then the costs will flow through your income statement immediately. And the total cost of all the three of those securities could be as much as, I don't know$1.07 or so. I don't know whether we'll do all three of those issues or not, one issue that we're really focused on would be about a $0.005 cent. So we're taking into account a lot of different things, normal whether, the potential for doing some security redemptions at the power.

Great.

And other loss gas prices which will hold opportunity sales down below where we normally expect

Okay. So one more question. How about the operating and maintenance cost, when I look at them they seem you know, they're growing about 2.2% and that's what we should expect in the third quarter, is that the lower insurance costs that accounts for lower costs the R&M expenses?

Yes. You got it. When I think about it, you're 2.2 sounds pretty good, remember that part of that includes what we call clause expenses, in other words storm recovery for which there is dollar-for-dollar revenue offset. All right? So, when I think about I think in the presentation of cents per share was $0.02, $0.01 is associated with clause oriented expenses and the other expenses, what I would call kind of normal O&M and most of that within transmission and distribution.

Okay. Thank you.

Yes.

Your next question comes from Terran Miller with UBS.

Good afternoon.

Hello Terran.

How are you?

Great. How are you?

I'm fine thank you. Are you planning on replacing those trust prefers either at the optical or the wholesale or just as debt retirement outright at the parent?

Probably retire them. We will probably replace them with debt overtime, probably some combination of short-term debt. We may do one of those hybrids, but we'll see.

Okay. Thank you.

Your next question comes from Paul Patterson with Glen Rock Associates.

Hi, can you hear me?

Yes. Sure, Paul, great.

Just want to follow-up on for one question on the tax credits from Georgia. Its $0.02 and one is a fuel tax credit and another is a job retraining or surtax credit. I wasn't completely clear on whether or not how much you guys have been earning in this I guess year-to-date, you know the nature of the tax credit I guess?

Paul, the fuel tax credit was just this quarter. And then the rest of the job retraining credits its are something that's kind of occurred year-over-year

Okay. And so going forward it's little fuzzy in terms of whether it's continuing or not is that I mean I'm just not clear sounds like obviously the fuel stuff, so I was wondering --

The one that is unclear is the forward situation forward tax credits that we get investment tax credits or certain capital expenditures, that that we develop as a result of taking business through the port of Savannah. I think that was unclear that much -- is going forward...

Okay. And that's about half of it?

3. 8 million, it's about $0.005.

Okay. And that's about half of it.

That's 3.8 million, that's about $0.50.

Okay. And then our depression growth in the quarter seems a little bit lower than normal. Is there something that's happening there or driving that?

I'm sorry. Could you say that again, I'm sorry.

The growth and depreciation was only about $2 million, which is a little bit lower that what your rate has been in that and I was just wondering if there's been a change there or anything? I mean...

Nothing jumps off the page at me. Certainly our rate-base is continuing to grow.

Right. I mean it just -- it looks like.

The one thing I guess we have remember we have the accounting order at Georgia Power, which provides for set changes in rates over the three year period. I wonder if the balance of it might be taken up with that. We can certainly get back to you on that.

Okay. That's fine. And finally, just a bigger picture question. With respect to you know, the super Southeast strategy and M&A candidates power plants M&A candidates. How do you deal with some of the market power concern that sort of come up?

I mean obviously you guys are now further along in your case and what have you and you have an idea about what people are thinking. And I'm wondering is there any limitations of how big you guys can get in Southeast. I mean just from looking at you are big and of course there has been some speculation here and there about possible M&A team ups and I just wonder how big can Southern get in your estimation

Is there any limitations or what would your limitation be in terms of how much bigger you can get before you might have a market power problem within the acquisition, that you're following?

Well. I think those are things you can consider on a case by case basis. Certainly if you want to increase the size of enterprise through a merger or an acquisition for any particular candidate you will get a different answer. And I think that's largely driven by, you know, geographic proximity, transmission constraints and variety of other issues.

And certainly there is different ways to test that. We've all seen kind of the new answers there between first Department of Justice and a variety of other things. That's something we have to address on a case by case basis and see what unfolds.

Is there a hard and fast rule that I guess in terms of you know how much bigger you can get in theory of that.

No.

Okay. Thanks a lot.

Sure.

[Operator Instructions]

Your next question comes from Raymond Leung with Bear Stearns.

Hi guys. Just want to follow-up on a question about reduction in the hybrids or possibly looking at that. You also mentioned potentially reducing some debt at the parent company. Can you sort of elaborate what you're thinking more there?

Well, it was really more than trust preferred and see my view on trust preferred and even these hybrids, where you get some equity credit Southern I would say is very kind of disciplined on one hand and conservative on the other.

We view those things ourselves as debt instruments. And even though they have equity like characteristics which were received in some respects favorable treatment from the rating agencies.

And in fact some advantages from a risk management standpoint they are debt. And so when we look at Southern portfolio not only at the parent, but across everyone one of the subs and then on a consolidated basis we go through a rigorous analysis of duration, and average life, average cost and we try and pick the best part and we also analyze risk capital, risk capital to us is everything that includes short-term debt to commercial paper, anything having a maturity of less than a year. Available rate securities, which may have long maturity, but which have reset or put mechanism inside a year maturities, due with any year.

We manage our risk capital appetite, according to what other risk, we see exogenous to the company. So we take all at into account. So I don't get caught up in the notion that hybrid securities are true equity, they're not. They may have equity like characteristics and we may consider them.

But in fact, at the end of the day they are debt, so we'll use them as appropriate. We have an appetite and we'll just see going forward what the best choice is for our liability structure.

Great. Thank you.

You bet.

Your next question comes from Justin McCann with Standard & Poor's.

Hello. I would like to get David's thought on, what the impact of the termination of the recent mergers of BNE industry as whole as well as the South East.

Well, I think certainly it should give all of us a bit of pause with regard to the likelihood that they will be easy to achieve. I think M&A work traditional is difficult with the exception of the Duke Energy success. These things have away of bogging down and thing in a time when we all are looking at the need to raise prices and some folks are in a more difficult situations MNR price free situations.

You give the regulator and all the political process an opportunity to confiscate more of the potential savings that might be appropriate and therefore it will make it very difficult to get these things done. I think there is a lot of pressure on regulators and I think that pressure will continue. We throw in the prospect that you might be involved in a political season also.

It's obviously by virtue, what happened in these last two situations, pretty difficult situation. So, I think it says to us is, we're going to have to be smart about what we do and how we do it and do a lot of leg work on the front-end in the process to try to prepare. You know, certainly the regulators for a better understanding of why these things may make sense and where the customers benefit long-term.

Thank you.

Your next question comes from Darin Conti with Wachovia Securities.

Good afternoon gentlemen.

Good afternoon.

Yes. I have quick question of Georgia Power. So if could you explain some of the topline weakness in Q3?

Sure. It's really the Georgia has a very large portion of their industrial segment tied to what we call it market sensitive, market driven rates, they are real time pricing. In fact, Georgia Power historically is being one of the leaders in that important conservation oriented pricing schemes because energy prices have been down a bit lately real time prices were down and that is reflected in the topline performs of the company.

Okay. Thank you

You bet.

Your next question comes from Nathan Judge with Atlantic Equities.

Good afternoon.

Nathan, how are you?

I'm well. Thank you. I just want to ask a question about coal generation and the potential for it in the southeast. I know you've got some nuclear plants. But what could fill the gap between now and when you get these nuclear plants on?

We talk a lot about that. We're very proud of our facility, you know, and Wilsonville, Alabama. You may note that Southern either spends or controls, more expenditures and research and developments than any utility in the electric utility industry and we have developed a long Kellogg Brown and Root technology associated with integrated coal gasification.

We've also done some work in the past that looks at coal liquefaction that is reasonably similar. We think that, that technology of the business case bears fruit, as we hope it will we'll have great promise, not only in the Southeast, but anywhere where there are low grade coal fuels.

What's interesting about your question, too, is that there are a kind of windows of opportunity that we see for different kinds of new technologies. Between now and say the end of the decade we still see gas fire generation being the generation of choice. But between say, 2010 and 2015 or so, we may see the opportunity for new fully controlled pulverized coal, but also our own integrated coal gasification technology and others. Beyond kind of 2015 and 16 along with those other technologies we will see, we think the reemergence of nuclear.

Is there -- why would there be reluctance between now and the end of the decade to look at fully controlled clean coal?

It takes a long time to permit. You got to get the right sites.

And you have the wild card of what's the climate change strategy and what's the impact on cost of coal as a function of carbon control.

Yes. Just following up on that, because I suspect that might be a reason. With (inaudible) you've talked about the Congress maybe in a dead lock between now and let's say 08. But following that what is the realistic opportunities for looking at carbon as emission and putting in some type of cap in trade or tax or something on that? What is your perspective and view on that?

Well I think we've always said that again, the potential to pass legislation is very difficult in the next two years. And depending on what happens with the new administration and depending on what happens with the ongoing science and the ongoing political debate, most people would expect us to try to engage in some kind of policy decision making and implement some kind of control mechanism, whether it's a tax or whether it is a cap trade mechanism in a new administration.

And that would mean probably not the first year, might be 2010,where you actually pass legislation that gets debated in the timeframe perhaps in TN so your. At that point of time the encouraging thing to me is we're further down the road with nuclear, we're further down the road with actual construction of IGC technology. We know more about carbon capture and sequestration perhaps.

So we are in a better position fro the technology standpoint to make informed policy decisions. And that's the point that we've tried to make all along is, I don't think this is a cliff we're about to fall off. So we have sometime and should take time to deliver the technology that would enable us to set sound policy. In the meantime, we should certainly appropriate money put to fund the technology demonstrations and we should resolve the issues remaining around new nuclear and accelerate the development of new nuclear technology.

And just last question on this. At the state level, is there any initiative or any desire to consider different types of -- and I'm going to make it more broad environmental constraints relative to federal mandates. Thank you.

Well, I think in the -- in our states the only activity we see at this point is in the State of Georgia with regard to the mercury rule and in the State of Georgia is considering whether to adopt federal standard or they require more stringent standard. The State of Georgia is also in the process of developing into energy task force report or energy plan for the future. I don't believe that other states in our jurisdictions are considering more stringent environmental requirements.

Your last question comes from Dan Jenkins with the State of Wisconsin.

Good afternoon.

Hey Dan, how are you?

Very Good. First of all I was wondering upon page 5, you know where you list the sources and uses of funds, if you could provide an update for year-to-date '06 of operating cash flow and CapEx and so forth?

Well, let's see. I don't have anything year-to-date. I could talk about it is our performance is very consistent with, everything we said so far. In other words my projection for cash flow for '06 remains as it has. We're on track, there is nothing unusual going on.

I actually don't have year-to-date cash flow information at my fingertips particularly, I guess the only thing -- this is just going to be kind of rough, but I've got about $2 billion of cash flow from operations through the first nine months. Dan I'll be glad to carry this with you and going as much detail as you want after the call, how about that.

Okay. That sounds fine. And another thing that you've got $350 million of debt maturing that Alabama Power on December 1, and do you anticipate, refinancing that, probably in the fourth quarter.

Sure. And we'll see what form that takes. One of things that we're kind of particularly proud of is the fact that, we have been really active in looking at maximizing this duration of our securities. There is a report that's put out by Citigroup that we like showing people and it has on the X-axis average life and it has on the Y-axis average cost.

And it shows that Southern company's average life of securities is about 14 years, which is right at the top of the industry. And it also shows that we're about the lowest in terms of average cost. And a lot of that is due to -- I think the fact that Southern historically has been very focused on selling securities with call options in them.

In fact, among all of the companies that I look at, about 42% of our long term debt right now has call options in it. The security you're referring to also -- now that's -- that means that will do, so look for us probably to go long with that and with the call protected security most likely.

Okay. Let that call I assume that would be like a make whole or ...

No. We don't like those.

Okay.

We like no call fives in our meter with all calls coming out on a retail security or much more reasonable premium on an institutional security.

Okay. And then I was wondering on your page where you show the financial re-divided first unit utilities you know you already talked about the Georgia power a little bit but I was curious on the Mississippi power, you know, was up 11.8 in the third quarter as a big piece of that because of hurricanes last year or is there something else going on there?

It was -- they had a increase in their rate regulatory regime they call it path performance of valuation plan. And there -- if you take out fuel revenues which you know is dollar in for dollar. Their base revenue increased by $16 million dollars as a result of the path action that was effective April, 2006. And that -- also they had increased they had increased usage among all classes in recovering from the hurricane as David suggested earlier in his remarks, it's been a very significant growth story.

Okay. What kind of impact can we expect in the fourth quarter you know just the fact you know, the hurricane last year versus you know basically no hurricanes this year?

Similar to the third quarter over third quarter in other words total retail sales you should, I'm just going to guess, you should see somewhere around 2.5 or so percent. Maybe low two's somewhere in there which pretty healthy.

Okay. And then last thing I was wondering on the syn fuels, you know we've seen oil prices come down quite a bit from where they were there in the third quarter. Sort of a threshold level at oil prices where you know does syn fuel credits start to become more of a factor?

I'm so glad you asked that. You know given our conservative debts here that what we like to do and we don't think about syn fuels is part of our a kind of normal operating earnings. So what we did in '06 was essentially take three steps to reduce our exposure to what at that time were really high oil prices.

The first was to curtail operations at one of our facilities. The second was renegotiate a partnership agreement where our partner may have a different tax appetite and frankly a different view on what oil prices were likely to be. And then the third thing we did was enter into a series of financial hedges, which even accounting for asset impairments.

The net effect of these three actions we took, we disclosed at that time would have a slightly positive impact to earnings. We're close enough to the end of the year we believe that kind of range will be $0.01 to $0.03 contributions and earnings per share. And we have restarted that one facility where we curtailed operation that's our Carbontronics facility.

We actually also send out an A.K. recently describe the fact that we took a series of similar looking actions the financial hedges, et cetera, for 2007. And I can report now I think that for 2007 we think we've locked in a range of performance of our syn fuel operations between within $0.02 and $0.07 for the year.

Thank you.

You bet. Thank you.

And we have no further questions at this time. Gentlemen, do you have closing remarks.

No. I'd just like to thank you for joining us. And, Casey thanks for your moderation of the call. Thanks everyone

This concludes today's Southern Company third quarter 2006 earnings conference call. You may now disconnect.