Southern Co (SOMN) 2007 Q2 法說會逐字稿

Good afternoon. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company second quarter 2007 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. Mr. Ratcliffe, you may begin your conference.

Thank you, Janice. Good afternoon and thanks to all of you for joining us. I am pleased to be with you for our second quarter earnings call. Joining me today is Tom Fanning our Chief Financial Officer. Let me remind you that we will make forward-looking statements today in addition to providing historical information. There are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements including those discussed in our Form 10-K and subsequent SEC filings.

As you can see from the materials we release this morning our businesses are performing well, and we're on track to meet our financial and operational goals for the year. On June 29, as required by its current accounting order, Georgia Power filed a rate case with the Georgia Public Service Commission. The request is necessary to recover additional costs of required environmental controls and continued investment in new generation, transmission, and distribution facilities to supported growth and ensure reliability. The modest request of 5.98% would be effective January 1, 2008. The filing is based on a future test year ending July 31, 2008, and a retail return on common equity of 12.5%. As you probably are aware, the previous four Georgia Power rate cases have resulted in negotiated three-year settlements. Given this history the Company also filed an option that includes additional increases of approximately 2.65% and 0.61% in January, 2009 and 2010 respectively. These increases are to cover additional environmental costs and previously certified purchase power agreement costs. Testimony and hearings on the request will begin this fall, and the Company expects the Georgia Public Service Commission to issue a final order on the matter during December. As always we'll keep you updated as the case moves forward. At this point I will turn things over to Tom Fanning for a discussion of our financial highlights for the second quarter and our earnings guidance.

Thank you, David. Our second quarter results were consistent with our business plan to provide regular, predictable and sustainable performance over the long-term. We earned $0.57 a share in the second quarter of this year. This compares to $0.52 a share in the second quarter of 2006. Excluding our synthetic fuel investments, we earned $0.55 a share in the second quarter of this year compared to $0.52 a share in the second quarter of 2006.

For the first half of this year, our earnings are $1.02 a share. This compares to $0.87 a share for the first six months of 2006. Excluding our synthetic fuel investments we earned $0.97 a share in the first six months of this year compared with $0.87 per share in the first six months of 2006. Here is the breakdown of our earnings for the second quarter compared with the same period last year. First, the negative factors. Interest expense and depreciation and amortization reduced our earnings by a total of $0.02 a share compared to the second quarter of 2006. This is primarily related to our increasing environmental and transmission and distribution investments. Non-fuel O&M, primarily related to year-over-year scheduling differences and increased costs from maintenance projects at some of our fossil and nuclear plants had a negative impact of $0.02 a share on our earnings in the second quarter. Finally, an increase in the number of shares outstanding due to additional equity issued through our employee plans reduced our earnings by a $0.01 a share.

Turning now to the positive factors, positive revenue effects in our traditional business including changes in rates at Alabama and Mississippi added $0.03 a share to our earnings in the second quarter of 2007, compared with the same period in 2006. Weather contributed $0.01 a share to our earnings in the second quarter of 2007, compared to the same period in 2006. Weather in the second quarter of '07 was actually $0.03 above normal. However, weather in the second quarter of 2006 was $0.02 above normal. We had other contributions to earnings from our traditional business that added $0.03 a share in the second quarter of 2007 compared with the same period in 2006. These contributors included, transmission revenues, tax credits, and allowance for equity funds used during construction or as you know, AFUDC. Our Southern Power unit added $0.01 a share to our earnings in the second quarter of this year. This increase is due primarily to an increase in capacity sales under long-term contracts and asset optimization activities.

Before I discuss our earnings estimate for the third quarter, I would like to update you on an important item that has occurred since our last call in April. As you may remember, every three years Georgia Power participates in an integrated resource planning process where the Company jointly along with the Commission decides on demand projections and the necessary resources to meet that demand. On July 12, the Georgia Public Service Commission issued its decision on a 5-0 vote on this year's integrated resource plan. The Commission approved the addition of base load capacity in 2016 and 2017, along with other necessary capacity additions. Georgia has also proposed a construction of two additional nuclear units at Plant Vogel as a means of meeting that additional capacity need. The Commission instructed Georgia Power to continue pursuing the self-build nuclear option and to issue a request for proposal later this year. Specifically, the Commission requested proposals for base load resources that provide the benefits of reduced long-term fuel risk. The RFP is expected to be issued by November 2007 and will be a competitive process over seen by an independent evaluator. Bids would be due early February 2008 for review by the Company and the independent evaluator. Georgia Power would then submit its certification request by mid-2008 for its proposed resource, and the Commission would rule on the request in December of 2008.

Turning now to our guidance for 2007, it is clear that we are executing our strategy and that our businesses are performing well. While our year-to-date results have been ahead much of plan, it is important to note that approximately 45% of our annual earnings have historically come in the third quarter. Our current plan assumes we will continue to spend more on O&M than last year to maintain our operational performance and reliability standards. Given these factors, and the potential for other variability during our peak season, and in keeping with our past practice, we're maintaining our current earnings guidance of 2.13 to $2.18 per share excluding SYN fuels. Including earnings from SYN fuels our estimated earnings per share range in 2007 is $2.18 to $2.25 per share.

Finally, our estimate for the third quarter is $0.94 per share excluding SYN fuels. Again, that's $0.94 per share without SYN fuels. Including SYN fuels, our estimate for the third quarter is $0.96 per share. At this point I will turn the call back to David for his closing remarks.

Thanks, Tom. On our April earnings call we discussed the status of the IGCC facility that Southern Power and its partners are building near Orlando. The project is moving forward and is scheduled for commercial operation in 2010. Ground breaking for the facility is now planned for early September. Since the early 1990s a major research program to develop the transport gasification technology has been conducted at our power system development facility near Birmingham, Alabama. With our IGCC technology moving towards commercial operation we're started to go turn our research efforts towards development of carbon capture technology at the power system development facility. This effort is still in the early stages, and we're currently talking with other partners about participation and funding. Additionally, Southern Company is beginning to work this year on a carbon storage demonstration in Mississippi. The project will be located in Mississippi Power's Plant Daniel and will involve the Department of Energy, Electric Power Research Institute, the Tennessee Valley Authority, and the Southern States Energy Board. The continued development of technologies to utilize coal in a manner that minimizes impact to the environment is a major priority for the United States and Southern Company. We believe technology must play a significant role in the long-term solution to climate change. The development of better clean coal technologies as well as a new generation of nuclear plants, the use of renewables and energy conservation must all contribute toward reducing emissions of carbon dioxide. We'll keep you updated on all of these research and development efforts as they progress. At this point, Tom and I will be happy to take any questions you might have, and Janice will now take the first question.

Thank you, sir. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Dan Eggers with Credit Suisse.

Good afternoon.

Hey, Dan, how are you?

I am real well, thank you. Since you kind of finished on the carbon policy question can you give us flavor from what your folks are seeing in DC, obviously the RPS (Inaudible) input forward may or may not have had 60 votes and the house is in process of looking at their energy bill that they're going to go to conference on. Can you give us flavor on what you are seeing on that front and strategically how you plan to address this if Bingaman is successful in his RPS plan?

Let me talk a little bit. You're talking two different thinks. Let's talk first about the RPS effort and as you know, Bingaman tried to move forward on that and was unsuccessful on the Senate side. There is now an effort on the House side as you may be aware to try to move a piece of legislation. Rich Bacher from Virginia and Chairman Dingle on the house side have been pretty clear on the record opposed to an RPS standard. It looks like it will be introduced on the House side, so that debate will emerge probably here in the next month or so. For all of the very same reasons that we were opposed to it on the Senate side, we will oppose it on the House side, and I want to make sure that people understand that our opposition is not to renewable energy at all, it simply is to a mandated portfolio requirement in our region of the country that is unachievable with existing technology, and the way that has been designed so far in the proposals, it would simple wind up being a situation where we would buy credit from other parts of the country in all likelihood, the western United States, where there is as you know a proliferation of wind capability that simply does not exist in the southeast, but the economics of the proposals would simply make it more attractive to our cost to our customer to buy those credits. We think that's the wrong result from a renewable concept. What we're trying to do in the southeast is to focus on the technology implementation that makes sense. We think Biomass has a lot of potential. We're doing some landfill methane work, so we believe that that decision is best left to the states given the technology capability that might be available in the states, so we will continue to oppose a mandated federal renewable portfolio standard on both the Senate and the house side.

Now, with regard to the climate legislation, there are more and more concept that are emerging, the latest of which on the Senate side has been certainly the Bingaman proposal and they were several of my peers in the industry who stood with Bingaman when he proposed his piece of legislation and pointed out that there are some elements in the Bingaman legislation that are very attractive compared to other alternatives. They also were fairly quick to say it doesn't have everything we as an industry would like, so the industry as such has not endorsed any particular bill. I personally have said that the Bingaman's Bill has elements that we like, such as a, slow start, such as a fairly reasonable requirements and time frames, although I would hasten to add that even those I have some concern about given the state of the technology available to us. I like the notion of safety valves or off-ramps. Those are important concepts in whatever legislation moves forward. I am not ready to endorse Bingaman's proposal because I think we can make it better. I am anxious to see what Senators Lieberman and Warner get together in a bipartisan fashion and propose, I suspect that that will come out here between now and the end of the year, on the Senate side.

On the House side, it is clear that the persons in the driver's seat are Chairman Dingle and Rick Bacher, and it is clear that Bacher intends to draft a piece of legislation around climate change for proposal here in the next month or so depending on the timing. We will work with him to include concepts that we think makes sense. He has been very cooperative and very understanding of the issues that we face. The key to all of these pieces of legislation is what we have said from day one. It is every so important that we understand what technology is available when and what the cost of the deployment of that technology will be and what the corresponding impacts will be on the economic reality of this nation. It is also important that we consider that this is a global issue that we are dealing with, and we must make sure that in whatever legislation we finally implement that it has provisions for us to make course corrections in the event the rest of the world does not come long with the regimes that we and the Europeans might implement, so I think there is still a tremendous amount of work to be done to flush out the concepts. I think the debate is a good process because we're informing the policy makers on both the Senate and house side which is important that before we legislate, we understand the consequences. That takes a lot of time and effort. I suspect that we will continue the dialog into next year. I suspect that given a Presidential Election year the likelihood of getting this kind of complex legislation passed during a Presidential Campaign and the politics have given this President the opportunity to sign a piece of legislation on the way out of his office is not something that the democrats would like to do. They would rather wait and continue to work on legislation in hopes that they have the White House in '09 and can pass a piece of legislation the latter half of '09, early '10.

Remember, it has taken us in the Energy Policy Clean Air Act, pieces of legislation that are this complex require a great deal of research and education and thinking. I am pleased that that effort is going on. I think we'll get there. I suspect -- well, I don't suspect. I know there are people who think we should do something tomorrow. I personally believe that we should do a lot more work in understanding the implications of whatever we do on this nation and its economy. We're in a very, very good position in this country because of the economic strength that we enjoy. We should be smart in policy-making and not jeopardize that future. That is probably a lot more than you intended, but that's a pretty good summary of where I think we are.

That was very helpful. Thank you, David. Tom, one question on third quarter guidance at $0.94 or your $0.04 better than normal last year because of weather. Is that basically the major adjustment?

Yes.

Is there any other adjustments? I know there is a plus for Southern Power that should be there and you have some customer growth.

No, Dan. Southern Power just kind of we think just rocks along. You have a little bit mover shares. We expect to spend a little bit more O&M, and then you will have a growth adjustment, but you're right. You were $0.04 positive in weather in '06. That's really the big adjustment.

Got it. Thank you, guys.

Sure. Thank you.

Your next question comes from the line of Paul Ridzon with Keybanc.

Actually Dan asked me question about the third quarter. Thank you.

All right. Thanks, Paul.

Your next question comes from the line of Rudy Tolentino with Morgan Stanley.

Good morning. I just wanted to follow up on Dan's question about the carbon. Can you just -- I was wondering if you can comment on how you believe that carbon credit should be allocated? There is some people talking about should be allocated to generators, some people talking about it should be allocated to load. Wondering if you can give me an idea of what your views are.

We believe we should follow the same model we use in allocating the SO2 allowances. That has worked well, and we think that makes the most sense.

Okay. And another question is unrelated to carbon is I know given the increase in construction costs, do you expect to do any changes to your cost estimates for your Florida IGCC project?

No. We made a pretty significant revision after the feed study this spring. Don't anticipate any significant changes going forward.

Okay. Thank you very much.

Thank you.

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

Good afternoon.

Hello, Nathan, how are you?

I am well. Thank you. I just wanted to ask on a very different question here about coal. There has been quite high inventories recently, and do you have any annotations about what's the future for that and what you are doing and it would be quite interesting, I think.

Our coal inventories are up. I think we got about 41 days of supply right now on the ground. In fact, coal has been a great source of energy to combust and create electricity. It has been returned to very reasonable levels, and the spreads that we're seeing, for example, from our bottom stack [lando] which is generally coal to the markets in the southeast have been pretty a attractive. We see about a $15 spread between kind of $15 per megawatt hour between what the clearing price for energy is in the southeast and what we generate it for having met first all the needs of our native retail customers. We think that also the difficulties that we saw say a year or two ago with respect to transportation have largely been cleared up. Of course there is always challenges along the way, and you may remember that we were treated pretty well through that process, but we think it is a great fuel type, and the future looks bright.

Let me add to that. We typically try to go into the summer with a little bit better stock piles than we would during the spring and fall in anticipation of peak loads, so the fact that they're up slightly is not -- when you say 41, I think we characterize that as normal full load kinds of numbers.

Yes. Science higher than we have been in the past. You may remember from other calls, we've been in -- I remember last year we might have been 36, and ended the year in the high 20s or something like that, so we're a little bit above.

Based on that, I would suspect that going forward electricity price in the southeast is going to be coming back given some of the pullback in coal. How does that play out into the Georgia rate case, and does that change any of the your position at all and your ability to get what you asked for?

What's interesting is over 90% of our unrecurrent fuel balances are covered in rates right now, so that's a positive. The second thing is as you're aware and for the benefit of others, you know that as a system we generate about 70% of our energy from coal, about 16% from nuclear. On a normal year, we would do about 4 or 5% out of hydro. You may not know, but the southeast is in a pretty significant drought, so that number this year might be 1 to 2% out of hydro, so the balance then falls to gas. In a normal year we would be about -- in considering how in-expensive coal, nuclear and hydro is relative to gas, about 90% in a normal year. This year is may be 86% or somewhere around there is really in-expensive relative to the price of gas, and let's not forget the volatility of gas relative to these other fuel types. That has served us and it is really interesting. I guess the whole industry is in an environment where you've seen some increasing price pressures, and we suggested this I think a year ago. I am pleased to say that what we suggested last year is coming true.

We have been saying that our prices were 15% below national average on the whole, and we say if you really want to be detailed about it, I guess it was at the end of '05 it was 14.2%, and now what we're seeing is that our prices as a system are 17.6% below the national average, and in other words the strength of our generation type and our fuel sources thereof have served to help our total prices actually get more attractive relative to national averages, so that works for the benefit of our customers. When you think about the CapEx programs we have in place going forward, particularly environmental programs, that is serving to protect and enhance these very efficient, very low priced generation sources to the benefit of our customers, and I might add in the state of Georgia prices are there 17.9% below average. This has been a great advantage for us, and we think going forward it will be a much more stable advantage.

Approaching the rate case, what do you think is your biggest risk if you want like the comment on that?

Well, I think this is a rate case that centers primarily on environmental CapEx. Certainly there are a host of issues including the CapEx associated with building out the infrastructure necessary to meet the growing southeast. If you want later I will be glad to give you all the economic data but let's just say the economics of the east continues to be really strong, and we're building to meet those needs. If you look at kind of where I think the billing cost issues center, it will be on I think environmental CapEx. I think as I said before, number one, those requirements are by law, so therefore they're required. Second, it protects and enhances this really attractive low cost highly reliable generating fleet that we have that gives these low prices to our customers. And of course it is good for the citizens and the environment, so my sense is we feel very positive frankly about the issues going forward in the rate case. Of course ROE will always be an issue in any rate proceeding. We think we've been treated fairly over the years, and since the 2004 proceeding, in fact, if you just want to look at ten-year treasuries as a proxy for some costs to capital, it is up 30 basis points from when we last filed, so we feel confident in our ability to demonstrate our return on equity.

The only thing I would add to that, Nathan, is when you look at the operating metrics for the Company, the Commission has no reason to be mad with the Company at all. In fact, I would argue that we're operating the franchise at superior performance levels compared to the industry. When you think about customer satisfaction, reliability numbers, whether it is forced outage rates or transmission distribution frequency of outages or duration of outages, the numbers are just really, really strong, so we are going in from, I think a position of strength.

I think that is right, and one other item I would say, we have talked for awhile about how this bed rock of performance in terms of reliability, low prices and customer satisfaction has served us well over the years and I think helped create along with the good work of our regulators a constructive environment here in the southeast, and I think that environment has helped to get the good results we show every year. I think the integrated resource planning process I referred to that was put forth on July 12th this year with a 5.0 vote is further evidence of this kind of constructive relationship where we together with the mission and their staff are able to address the kind of challenging issues of future demand, resources required to meet that demand, how we procure those resources, and we're very happy with the result.

There has been a trend in the industry, some of the other electric T&D companies have been talking about decoupling. I would be very curious to hear your thoughts on that and then just my last question would be if you could give us more information on Southern Power, the difference between embedded in the other? Thank you.

Sure. Glad to. I don't think decoupling makes particular sense for us right now. When we think about resource additions, I think we first start with effective conservation programs, demand size management programs here in the southeast, an important part of integrated resource planning process that's just been promulgated by the Commission, there were five new conservation programs put forth that if they develop as we hope they will will serve to offset 70 megawatts of capacity in each year kind of starting in the late part of this decade, so we're very excited about kind of how we might continue to work on conservation and energy efficiency. We do believe; however, that those programs should not be undertaken with great subsidies, in other words, let the normal economic signals that ultimately customers will decide on work to the benefit of everybody concerned, so I think that's an important factor that we're all seeing. With respect to future --

Let me add about the decoupling concept, I don't like the notion at all to be honest with you, I think there are very sound reasons why you won't -- the notion of usage and rates and cost to be coupled together so that everybody has a good understanding of what's going on and what the requirements to meet the demands of a customer base and the infrastructure required, I think when you begin to decouple things, you create -- you destroy linkages that make good sense. Rather than that, I think what we are doing along with other people in the industry is emphasizing to the regulator the need to create better incentives around conservation, demand site management and efficiency programs so that that we are able to actually earn on those kinds of programs. Historically we've basically recovered our costs and sometimes not even recovered our costs and that's not the right message. I am comfortable that as we work through this discussion with the regulatory agencies that we can find a way to create good incentives for us to invest more and earn more as a reasonable return on those investments associated with demand side management programs or efficiency or conservation programs. I think that's a better by to go than beginning to separate the fundamental indicators of this business.

And I should add in the programs that were put forth in the IRP there is some modest protection for the equity participant that accounts for some portion of foregone revenues, so I think there again it is another demonstration of being treated fairly. Does that cover that section, Nathan? Do you want me to go on Southern Power? Is there more you want to do on that?

Can I just clarify that? Two things there. One is what particular programs, 70 megawatts a year is quite a considerable amount. Just how you're doing that, and then just again can you repeat that part about equity protection?

Yes. There is five different programs that we're proposing to put in place. A lot of them go to energy efficiency, they go to more efficient energy appliances, they go to insulation. They go to customer education, the equity participants protection is really a calculation where by we will essentially measure the difference between the avoided cost and the cost of the program and take the present value of that and then we would essentially earn on something like 15% of that difference net present value, and you would make that calculation every year.

Thank you.

Is that okay with that?

Yes, thank you very much.

You want to talk about Southern Power. Let me hit that broadly and you can take me where else you want me to go. Southern Power had a good quarter. I have broken out these details in the past. Let me do it again this time. The first thing I look for in the business is how the breakout is between long-term contracts and short-term, and we actually made a bit of a refinement on that that I think will be helpful to people. When we think about long-term contracts during the second quarter of '07, 76% of our earnings were associated with that piece of the business. When we enter into these contracts that typically have two segments, one is capacity and therefore you earn a fixed earnings portion over time that stick to the length of the contract and the second portion is energy where the variable side is predominantly fueled with a little variable O&M, so 76% of our earnings for total wholesale, that would be Southern Power and the embedded wholesale with associated long-term contracts. There are two other pieces one of which we talked about a lot, and that is our trading, our marketing opportunity. That's this notion of having met the needs of our retail customers first with our cheapest energy. We sell any excesses into the wholesale market in the southeast. 11% of our earn earnings were tied up in that, 8.3 million, the long-term contract of 56.4 million.

There is a piece in the middle that we talk about, too, and I want to break it out to give you more transparency this time, and that's the contract optimization piece. This is not nearly as volatile as the trading market opportunity side, and it is kind of from a risk standpoint probably much closer to the long-term contracts, basically contract optimization revenue show up in your units run and you have heat rate and availability guarantees, and essentially 12% of our earnings, 9.2 million came from that. Let me break that out simply, 73.9 million out of both wholesale and Southern Power-- of competitive wholesale from embedded and Southern Power, 56.4 from long-term contracts, 9.2 from contract optimization, 8.3 from trading or marketing opportunity, so I don't know how you want to categorize that, but I would say well over 80% of those profits are low risk, kind of long-term in nature. Between Southern Power, embedded wholesale, Southern Power earned about 40 million, 39.9 during the second quarter of '07. Of its contract, it was about 27.5 million, contract optimization 9.2, opportunity sales about 3.2. Remember given the predominance of the long-term contracts we entered into several new transactions last year, the DeSoto transaction, down in Florida, the Roan transaction up in North Carolina, and we had a step-up in capacity revenues associated with the EMC 11 deals here in Georgia. Embedded Wholesale kind of had a similar profile, 28.9 million in long-term contracts, 5.1 million on the market opportunity side for 34 million total.

Could you just give us the comparison in to-- second quarter of '06, quickly?

Sure. Be glad to. In second quarter '06 I started with total wholesale. Okay? This will correspond. I will give you the high level numbers. If we want to dive into more detail, maybe we should do that off line in the interest of time, but total wholesale was 71.7, and it was about 83% long-term contracts during that period. When I break it out between embedded wholesale and Southern Power, 39.9 million embedded wholesale and about 31.8 associated with Southern Power during that same period.

Very comprehensive. Thank you very much.

You bet. Delighted.

Your next question comes from the line of Mark Siegel with Canaccord Adams.

Good afternoon.

Good morning. Good afternoon.

Just wondering what your plans might be for further adoption of advanced metering technologies and any size or scale and timing associated with that, those project science.

You bet. We're delighted to chat about that. We're spending about ,kind of between now and 2012, we're spending over $400 million on putting in place advanced metering, and the distinction we would make is AMI, and what that means is it is basically two-way communication between the customer and us. It is not just drive-by kind of data recording automated of what's going on in the meters. The AMI is the most advanced kind of meters out there. If you think about kind of capital deployment we're going to spend about 10 million this year. We're just getting started I think probably Georgia Power is getting off to a good start, but starting in 8, 9, '10 we'll spend a little over 100 million each year deploying these advanced meters, and then we'll finish it up with about 50 million in '11 and 50 million in '12.

Great. That's all I have.

You bet.

Your next question comes from the line of Scott Engstrom with [Glennhymn] Capital Management.

Good afternoon.

Hello, Scott.

A couple of questions, a lot of questions out at the forest, I had a couple of questions about the trees.

[ Laughter ]

Alabama Power has been very strong both quarters. Is that kind of on plan? Is there anything special going on there and same kind of question for Georgia which has been down year-over-year in both quarters. Are those on plan at both of those or is there something going on specifically?

I will start you off with a forest answer and then I will dive into the trees a little bit. The forest answer is remember we have kind of an internal objective here to get ROE of about 13.5% at the corporate level taken together for all of our operating companies, everybody operates that at within that basis. We actually get incentive pay based on achieving those kinds of goals. Every company strives to earn those kinds of levels. Frankly, Alabama has been doing well. They've had attractive weather there. All the Companies work really hard to manage expenses and I think we've done a great job so far. Other than being blessed in an area in the United States which has a great economy and good weather and coupled with a terrific management team as each of the operating company that is is able to not only keep prices low but also deliver the best reliability and the best customer satisfaction arguably in the United States, I would say they're doing a great job, and it is our objective to hit kind of 13.5%, so I would argue we're on plan.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of Vedula Murti with Trebeca Capital Management.

Good afternoon.

Vedula, how are you?

Okay. I joined the call a little lated. Apologize if you address this had earlier. Can you give us an update about your JV I think with KBR in terms of trying to do the International IGCC business?

Yes. I mentioned earlier in the script that we went over -- that we were continuing to explore the potential commercialization of that business. We are in discussions with KBR and not ready to give a whole lot of definition of that because we're still in discussions with them, but as I said, we expect to put a game plan together by the end of the year, and we'll communicate that later in the year.

Yes, Vedula beyond kind of commenting directly on KBR and the whole commercial venture which states we'll roll out later, we remain very excited about the viability about the technology we developed. In fact, we building a project in Orlando about 280 net megawatts, and we think it is going to work well. We think it is important for the nation's energy future to remain committed to coal as an energy resource, and you may remember our technology is focused on low rank coals, particularly western coal, wig-night, that sort of thing, and that represents about half of the nation's coal supply and frankly half the world's coal supply, so we think it is a viable technology development. We'll continue to focus on it.

My second question and again I apologize if this it was addressed, have you guys given any examination as to whether Southern Power right now is in the most optimal structure and there might be another way either an IPO or some other type of means to maybe realize getting more value recognized within of Southern Company stock.

It is a terrific question. In fact, in my opinion given what we've seen in other transactions around the United States certainly there probably is locked up value inside Southern Company associated with Southern Power. We're very proud of the business we built there and the men and women that have worked hard to build that business over the years have done a terrific job, and I think not only have they built a growing profit segment for the the Company that's provided excellent growth, they've done it in a low risk manner consistent with our overall business direction. When you look at other deals that have been done and you apply the kind of multiples to Southern Power, there is a suggestion that perhaps there is some additional value associated with that company. However, when you consider the different alternatives, it is a little bit of a challenge how best to realize it and let's just think about this as a couple examples. Were we just to sell it, I think there would be a tax bill that would eat into the value. Would you consider just spending it as we did with Mirant in the past, of course we would, but I think we would want to add critical mass such that there would be sufficient liquidity so the stock would trade in an attractive manner. I think for now while we continue to look at these things and please rest assured if there is a better owner of Southern Power than Southern Company we would certainly consider that taking into account not only not only the financial aspect but also all the issues related to the customers that we currently serve then we would consider that, but I think at the right time the best answer is let's continue to grow the Company in the manner that we have in the past for the foreseeable future.

All right. Thank you very much.

Sure.

Your next question comes from the line of Daniele Seitz with Dahlman Rose.

I was wondering can you go over the totals for base load resources that you intend to ask for and how much megawatts are you looking for and when you say base load do you account for any combined cycle or is it just coal? I was just wondering.

Sure, sure, sure, delighted. Appreciate you being on the call. How about if I just review the results in the IRP at Georgia, the integrated resource plan. In my view there is four segments of new resources, and let's kind of think about it that way because the first segment should be conservation and energy efficiency, so we think that 70 megawatts a year starting in the -- I don't know she's the late part of the decade, that's kind of Segment one. Segment two, is associated with we have a Plant McDonna inside the Parameter highway here, the Perimeter highway circles Atlanta Proper if you will. It is a coal plant, fairly old, inside the confines of the highway. What we propose to do is to shut down about 500 megawatts of these old coal facilities and in their place build three combined cycle gas units each combined cycle will be about 840 megawatts. Okay? The first two units, the 1680 will clearly be subject to retail jurisdiction. The third unit, again 840 megawatts in the IRP, the Commission claimed I think 425 megawatts subject to retail jurisdiction, and is reserving the right to put into retail jurisdiction the remaining 415 based on n a evaluation later this year. So that's kind of Segment two. Segment three, relates to 2012 resource need, likely will be filled by competitive bid of either combined cycle or combustion turbine or some combination there of, capacity size will range between 1,000 to 1,300 megawatts and likely as I mentioned before that would be competitive bid. The final resource segment will be associated with what I spent a little bit of time on in the script. That will be the potential addition of nuclear assets. We would target Plant Vogel as the site, Units 3 and 4. We would add 1,000 megawatts for Unit 3, 1,000 megawatts for Unit 4. Remember that Georgia Power has several co-owners so that our ownership share there would approximate between the two units just about 1,000 megawatts, the co-owners then would own the rest of the megawatts, and as we mentioned the Commission has provided that we undertake a competitive bid and evaluate other base load resources having the characteristic of low fuel volatility. I think that kind of points you at perhaps at a competing nuclear alternative or a competing coal alternative, and I guess we shouldn't rule out somehow if you could make a combined cycle gas you unit look like a base load unit if you were able to fix and remove the volatility characteristic of its fuel supply. I think that would be the major resource additions we're talking about.

Great, and you anticipate that this will be nailed by next year?

This will be what?

This will be confirmed by next year in terms of the winning bids?

For the nuclear side?

Yes.

Bids should be in, I think RFP would be in late this year. Bids should be in in February '08 and kind of mid-summer the Commission will make an evaluation on the bid.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of Tom O'Neal with Ohio bridge.

Good morning.

Hey, Tom.

Just a quick question hopefully you haven't covered this already. Do you have update on the comments made earlier in the year about switching from gas to electric heat?

Sure. There was some conversation about what the inflection pointed was and should we look for something. Essentially I would kind of go to it is always hard to look inside kind of household economics and what is it that would cost someone to spend essentially capital dollars and save energy and all that stuff. The best indication if I were you to look at inflection pointed for substituting a highly efficient electric heat pumps for gas heat would be that we have across the system some level of co-generation where they can either run a co-generation process that's largely filed either by a steam or gas, and then sell excess electricity to us. The inflection point there seems to be around $6.50 per million BTUs. My suggestion is if you're around 650 per million BTU on gas, you will likely see some continued switching from gas heat to electric heat pumps. We made terrific progress from '05 to '06, and that's what showed up in the first quarter of '07. Since then we've been with gas prices reasonably constant. We've seen some improvement '07 versus '06 we're up new market sales about 6.3%, and I would say, too, market penetration data very high penetration data around the Gulf Coast, less so up north.

Great. Thank you.

You bet.

Your next question comes from the line of Annie Tsao with AllianceBernstein.

Good afternoon.

Hello, Annie.

I am wondering if you can kind of explain your industrial kilowatt sales is down for the quarter and also for the year-to-date?

Sure.

That trend, keep on going that way and why is it heading down?

Yes. That's been a relatively con kind of development over the past few quarters. What's been going on there is -- in fact we talked among ourselves about rebasing this, but just on straight year-over-year comparisons, the industrial segments have been strong uniformly except for textiles. If you think about textiles, we should really break that into two pieces. What I would call the low-end textiles that would be yarn manufacturing, apparel manufacturing, have seen significant moves offshore. I would say the high-end textiles have remained instead and I strong. That would be carpet and polymer materials that could be associated with automobile manufacturing. So of the 19 major SIC codes that we follow in the southeast in our area, 18 of them are doing great. Let me give you highlights there. In Mississippi, I think we have now seen the announcement of an expansion at Chevron. Our largest single site customer, and also we have an announced they're doing an LNG facility as well well we are seeing an expansion more growth associated with the pipelines that serve that business. In Alabama has been a super bright spot in terms of automobiles, so we see Honda, Hyundai, and Mercedes-Benz do particularly well, and you get the first, second and third tier suppliers there, and we've just announced the location of a new steel mill in the southern part of the state near Mobile, ThyssenKrupp, so that's very exciting. We think that represents the addition of several hundred megawatts a load later this decade.

In Georgia we've seen the recent announcement of Kia which is very exciting for the state, and then we've also discussed I think in the past some expansion of these very large data centers. In fact, two of the data centers we've identified, they're big enough to where two of the data centers have kind of similar load characters as the Kia plant. These are very significant and we're excited about the prospects moving forward. One other thing that causes industrial sales to go down from time to time is just the shifting of some facilities into the shifting of some facilities to different processes. The second quarter results in Gulf, for example, Gulf industrial sales were down about 12%, but that's because one of their big customers, International Paper is shifting from white paper products to brown paper products, so it is just really a retooling of the plant. If I were to adjust our industrial sales statistics for kind of ex-textiles, you would see an increase of about 0.5%. I guess if I would just overlaid on all of that one more data point, it is the kind of general trend in the southeast but also in the United States that we're shifting from a manufacturing economy to a service economy. You should kind of expect to see sales growth kind of lag the other sectors going forward.

And maybe you already talk about it, but I probably miss it. Georgia Power, why the income goes down?

I think it is just an issue with O&M and a variety of other things. It is really just timing more than anything. I don't look for any negative trends there. Thank you.

You bet. Thank you.

Your next question comes from the line of Dan Jenkins from state of Wisconsin.

Good afternoon.

Hey, Dan, how are you?

Pretty good. Just a commented first given treasury yields are down 11 basis points, maybe only 20 higher than last time than 30.

I guess the point is that we we shouldn't be treated any worse anyway.

Right. Kind of on the Georgia case, though, what was the ROE in your last case there and then assuming say a 1% change in the ROE? How would that affect the percentage change in the revenues just so we kind of have a guide as to what the volatility is in that based on what rate you're granted?

Okay. The (Inaudible) is going to be kind of hard to answer and I will answer the first question and maybe I can get to it. When you think about ROE in the Georgia rate case remember that they operate within a band, really as most of our companies do. The band for Georgia Power is on the low-side, 10.25 and on the high-side 12.25. The reset point I think for the last three-year accounting order that was put in place was 11.25. I think the first pointed is what's the reset point. That's going to be the point at which rates are set on, and then there will be -- if it is done in this time as in the past, there will be a band around that.

What the Company is challenged to do is to operate within that band, certainly if we earn outside the band to the high side, then we have a rate refund to customers two third to customers, one third retained by the Company, but in this three-year period we did not exceed that and remember how I talked about this 13.5% corporate objective. Georgia Power because of a variety of factors typically earns, I don't know, 140, 150 basis points above kind of that retail return for wholesale and a variety of other reasons. Now, the challenge is in answering this 100 basis pointed question you pose, and we we can probably do research and look at it, I am not going to have an answer for you here but just if you change the reset, it will just change kind of how we react to it. What happens to the band around the reset, there is a variety of questions. It is a more complex question than it sounds like on the outset. We'll be glad to spend time with you on the phone afterwards but it is not a simple answer. One thing I want to underline, 2006 across the system may have been one of the best years Southern Company has ever had in terms of reliable, low price, customer satisfaction, safety, in terms of a variety of factors. When you look at what's gone on in the state of Georgia since the last accounting order, look at the 5-0 vote and IRP, of course there will be challenges but I think we'll be treated fairly.

Okay. Then on Page 5, where you present kind of your financial outlook, I was wondering if you can give me the year-to-date '07 numbers for the operating cash flow and the CapEx and then comment on how those numbers are versus the plan?

Okay. Let me just turn to it real quick. Hang on, let me first give you CapEx for '07. We expect to spend within the traditional operating companies about 3.6 billion. When I look at CapEx for the first -- when I look at CapEx for the first six months, I think we're generally on track and so you would expect to see about half. When I look at operating cash flow for the first six months, $960 million operating cash flow for the first six months which again is in line with the plan. Everything is according to plan. We have no major deviations right now.

OCF, you said year-to-date is 960 million.

Yes.

You spent about 1.8 -- in CapEx.

Around that. The CapEx is probably going to be a little back end loaded given that a lot of it is associated -- you kind of have two issues going on here. A billion of the CapEx is going to be environmental in Georgia this year, and I know David and I, in fact, went up and visited Planted Rowan recently and they're making great progress, but I would guess if I looked at the profile of CapEx it wouldn't exactly be 1.8, but it might be a little less with a little more to come in the second half of the year. We can fine tune that for you, but that's what I would expect.

Okay. And then kind of related to that, what's the financing plan for the second half? Do you expect to issue debt or hybrids or what? Preferred or have you decided that yet?

Sure. Kim Green, is our Senior Vice President of Finance in charge of all of that stuff. We expect to do 4.2 billion for '07 in terms of security issues, have already done 2.8 billion. That leaves us 1.4 billion. Of that 1.4 billion, a billion is maturities, 400 million is new money. I kind of enjoy talking about this, but in terms of hybrids and all of that stuff, I think what you see with Southern is we have a very rigorous internal risk assessment and liability management practice. And we really look hard at all the new ideas that come forth from the financial community, but I think we have a bias that kind of is encapsulate with this saying, in that, in finance there is lots of trick but there's no magic, and so when we look at some of the hot ideas out there, we really try to peel the onion to say in the long-term what is the appropriate risk characteristic despite what current rating agency treatments might be. It is real important for us to understand our own moral compass about those issues. So we'll consider all the new ideas including hybrids, but I would say that we value simplicity and transparency in our capital structure.

Okay. Thank you.

You bet. Thank you.

Your next question comes from the line of Adam Cowen with Credit Suisse.

Good afternoon, gentlemen, actually my question had been answered. Thank you very much.

Okay.

Your next question is a positive follow-up question from Paul Ridzon with Keybanc.

When you said that you gotten approval for your IRP self-build, and then you're going off for RFPs, are you going off for RFPs to build the base load nuke or --

Let me clear that up. Sorry I didn't make that clear before. The approval is to pursue the self-build option for nuclear at Vogel. The Commission given the the long lead time involved, they are prudent in evaluating competing alternatives. It is clear that at the time in '08 we will likely not have absolute firm price commitment from vendors, equipment suppliers, that sorted of thing, so it may that be our self-build option would include some degree of indexing with respect to the ultimate price. It is the commission will make a determination to evaluate as a benchmark our own self-build option against these competing alternatives that would be put forth in February of '08.

Okay. That clears it up. Then just, David, I guess we can't go by a quarter without asking your M&A thoughts of late?

I am sorry, my what?

Your latest thoughts on M&A?

Well, like we said many, many times, we try to pay attention to what's going on in the marketplace. We have a pretty rigorous list of criteria that we use to evaluate that proposition. We know a lot about folks in our neighborhood, and I always like to say we're paying attention, so I do think just as a matter of personal opinion, I think the environment right now is such that it is more difficult to achieve synergies and retain the synergies in an M&A prospect when you're faced with rising prices and the regulator's desire to mitigate rising prices and the temptation associated with complicated the synergy. I think they have gotten more difficult, not less difficult.

Thank you very much for the update.

Your last question comes from the line of Mark Siegel from Canaccord Adams.

Hi. Just a follow-up on the AMI deployment for clarification here. Given the timetable that you put forth, do you guys currently stand with -- are there outstanding RFPs or are we in the pilot phase or how do I think about that?

Yes. We have RFP of outstanding right now with a variety of vendors.

Okay. So it is --

We haven't selected one vendor yet.

So it is multiple technology evaluation at this point?

Yes.

Okay. Great. Thank you.

You bet.

Gentlemen, are there any closing remarks?

Not other than to to say thanks everybody for joining us.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.