Southern Co (SOMN) 2008 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time I would like to welcome up to the Southern Company second quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

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

Thank you. Good afternoon and thank you for joining us. I'm pleased to be with you for our second quarter earnings call. Joining me today is Paul Bowers, 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. The materials we released this morning show our continued strong performance and that we are on track to meet our earnings targets for the year.

Our business model as you know is not tied to spark spreads or to volatility in the price of natural gas and outside is not a merchant energy business. Nearly off all of our earnings are produced from our franchise business and from long-term wholesale power agreements. Our strategy is very straight forward and has produced positive concrete results for both customers and shareholders. In an environment of increasing cost from environmental expenditures, new generation to meet increased load and rising fuel costs, higher retail prices remain below the average price in the southeast region and approximately 15% below the national average.

As a result of lower prices, high liability, superior customer service and a regulatory environment that has been constructive and stable, we should find ourselves in a period of relative stability for the next two and a half years. The capital expenditures we have committed for our retail business, some $13.3 billion through the end of 2010, either are or are expected to be included in rates. The transparency and cost recovery and in our overall financial profile for the next two and a half years, I believe distinguishes Southern Company and has contributed to our ability to produce consistent results in challenging economic conditions. Our focus will continue to be on delivering reliability, low prices and superior customer service. While at the same time providing our shareholders with attractive risk adjusted returns. I'm confident that we have the team in place to deliver these goals. At this point I will now turn the call over to Paul Bowers, our Chief Financial Officer, for a discussion of our financial highlights for the second quarter. And our earnings guidance for the remainder of the year.

Thank you, David. Our second quarter results were consistent with our business plan. For the second quarter of 2008 we reported $0.54 a share which compares to $0.57 a share or $0.03 a share below the second quarter of 2007. This includes a non-recurring after tax charge of $67 million due to changes in our assessment of the tax position associated with our leveraged lease transactions. It also includes our earnings from synthetic fuel investments in 2007. Excluding these two non-recurring items our earnings were $0.63 a share or $0.08 a share above our earnings from the second quarter of 2007.

Now let's turn to the major factors that drove our second quarter numbers. This discussion will exclude our synthetic fuel business and the one time charge for leveraged leases. First the negative factors. Increased depreciation and amortization due primarily to increasing environmental investment reduced our earnings by $0.04 a share compared to the second quarter of 2007. Nonfuel O&M for our traditional operating companies had a negative impact of $0.03 a share on our earnings for the second quarter of 2008 compared with the prior year period in 2007. This was primarily due to an increase in the number of planned outages. Weather reduced our earnings by $0.01 a share in the second quarter of 2008. Weather was $0.02 above normal in the second quarter but was $0.03 above normal in the same period in 2007. So overall weather effect was a negative $0.01 a share.

Taxes other than income taxes primarily related to franchise fees which track revenues, reduced our earnings by $0.01 a share in the second quarter of 2008 compared with the second quarter of 2007. Finally, an increase in the number of shares outstanding reduced our earnings by $0.01 a share in the second quarter of 2008 compared with the second quarter 2007.

Turning now to the positive factors. The impact of positive revenue effect in our traditional business including customer growth, changes in retail rates plus additional revenue attributable to variable market response rate added $0.17 a share to our earnings in the second quarter compared to the second quarter of 2007. Increased AFUDC attributable to our construction program added $0.01 per share to our earnings in the second quarter of 2008 compared with the second quarter of 2007.

Lower expenses at the parent Company added $0.01 a share to our earnings in the second quarter of 2008 compared to the prior year period. In conclusion, we had $0.19 of positive items, offset by $0.11 of negative factors so overall our quarter came in at $0.63 per share or $0.08 per share better than the second quarter of 2007 excluding both synfuel and charges related to our leasing businesses.

Before we turn to guidance for the remainder of 2008 and our estimate for the third quarter I'd like to update you on a couple items that impact our performance. First, it's clear that customer growth has slowed, particularly in a residential market. In response to the downward trend in construction activity caused by excess inventory. Customer growth while still positive is now 0.9% compared with the second quarter of 2007. Customer growth in the second quarter of 2007 was 1.6% compared with the second quarter of 2006. Building permits declined at a slowing rate in the second quarter indicating that we may be nearing the bottom of the slow down in new home construction. Installation of new meter sets may have also bottomed out in the second quarter at 5700 per month; compared with 5,000-meter sets in the month of February.

Alabama Power actually reported an increase in meter sets in June, suggesting that housing in Alabama may not be as over built as the housing market in Georgia. The commercial sector. Nonmanufacturing employment growth continued to exceed national trend at 1.2% compared with a .4% nationally. The over supplied office market in Atlanta saw a small increase in vacancy rate in the second quarter while gaming revenues in Coastal Mississippi dropped in April but rebounded in May. In the industrial sector the lowering of demand for new housing has impacted industrial sales in the stone, wood product and carpet manufacturing sectors. Overall we have seen a decline in sales of 1.8% as compared to the second quarter of 2007. The majority of the reductions in industrial sales occurred in the second quarter occurring in the month of May, with significant reductions in operations over the Memorial Day period. However, sales to the pulp and paper, primary metal and the fabricated metal sectors which represent approximately 25% of our industrial sales, continues to produce at high levels of activity.

In addition to above average job growth we have seen an increase in economic development activity in both Alabama and Georgia. Which supports our contention that the southeast should emerge more quickly from this economic slowdown than the U.S. as a whole. Finally, we expect that the space of Alabama and Georgia will add nearly 280,000 new jobs by the year 2010.

Turning in our to Southern Power I'd like to update you on some recent developments at our competitive generation subsidiary. Yesterday we signed an extension of our existing contracts with ten Georgia Electric Membership Corporations or EMCs eight contracts were extended beginning in 2010 through 2031. And two contracts were extended beginning in 2013 through 2034. EMCs are currently projected to purchase 500 megawatts of power in 2008 under the existing agreements. Their purchases are projected to grow to more than 1400 megawatts during this extension.

In another development in June our Franklin three unit went into commercial operations. Although the contract with constellation energy does not begin until January we have sold forward the output of this unit and will contribute to our earnings for Southern Power this year. Finally, we project that over 30,000 megawatts of new generating capacity will be needed in the super southeast between now and 2017. Our ability to bring new generation online at very competitive prices as well as our relationship with wholesale customers should enable us to be a successful participant in new bid opportunities.

Turning now to guidance for 2008. It is clear that we are executing our strategy and that our businesses are performing well. As you know, we exceeded our second quarter estimate by $0.08 a share. However, given the variability of weather, continued uncertainty surrounding the economy and the fact that we generally derive approximately 45% of our earnings in third quarter, when we also see the most weather variability we are maintaining our current earnings guidance range of $2.28 to $2.36 per share. Finally, our estimate for the third quarter is $1.01 per share. At this point I'll turn the call back over to David for his closing remarks.

As you can see from our report this afternoon despite a challenging environment, we've had a good first half of the year. And we are on target to meet our operational and financial goals for 2008. Speaking on a personal note I was very pleased and honored to become Chairman of the Edison Electric Institute at our annual convention last month. As an industry we have a number of challenges in front of us reducing emissions of carbon, building new infrastructure and pressures from rising commodity and fuel costs just to name a few. I look forward to working with my colleagues in the industry as well as policy makers, regulators, members of the financial community and other stakeholders to achieve positive out comes on these issues. Also our industry through EEI will be involved in the formulation of energy and environmental policies by a new Presidential administration and a new Congress seeking to meet the expectations of the American people. We look forward to our role in this important national debate. At this point Paul and I will be happy to take any questions you might have. We'll now take the first question.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Leslie Rich of Columbia Management.

Good afternoon. I wondered if you could spend some talking about your wholesale sales, your volumes were up in the quarter as well as year to date, but yet your net income for Southern Power is down quarter over quarter and also year to date. So I wondered if you could talk about why your margins are compressing in that business?

Sure, Leslie. One of the things that I'll add is that with the advent of Franklin 3 coming online also Oleander 5 in Florida coming online which has a contract attached it to it, plus Southern Power has a contract with Hog Bayou, a Calpine asset that they are selling out of as well the volumes are up. We also had increased O&M in Southern Power, significant increase because most of the plants went through an outage under the long-term service agreement that they have with EE. As you know we have to take those out for maintenance every so often. These are tied to the number of starts that they have for those units. And this year we took most of our units out for maintenance.

Then separately could you talk about hydro conditions? Last summer hydro was a big issue, the drought and all that, how are things looking this summer?

Leslie, we began this year in better shape than we did last year. Most of our reservoirs were at full, especially in Georgia and Alabama, but as we got into June we had below normal weather in terms of rainfall for specifically in Alabama. Georgia still is maintaining a full pool position but Alabama is a little bit receding in terms of its full status. We are up a little bit on our hydro production year over year compared to last years extreme drought but still being very cautious as we go through this summer.

Leslie, I would just add we budget about 50% of normal last year and then and we are pretty much on budget at 50% below our normal expectations. That's what we got baked into our forecast.

So last year you saw hydro production down, gas production up. This year you expect it to be sort of a more than normal balance?

No, it will still be below what we would consider to be normal but not as bad as last year.

Okay. Thank you.

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

Hey, Nathan.

Good afternoon. Just wanted to ask a couple of questions. First, could you give us an update on any developments with any new developments with your TRIG technologies, your IGCC, any new developments there and how is that going as you see it today?

Nathan as you know we've been working on the project that we call Kemper County over in Mississippi. Basically we continue to work with the leadership in the state of Mississippi and the Department of Energy to try to move the project forward. The next event will be Mississippi Power's filing of a certification of need for the capacity with the Mississippi Public Service Commission which will occur next month. That will begin their review of the project and its economics. We also have other regulatory proceedings associated with some of the tax benefits that will move in parallel with that. So we are continuing to step through the process as required to get the approval for that project.

Has there been any other interest in that technology or everybody is still waiting -- are company's waiting on the sidelines until there is some ready of that plant up and running.

I think people are still sort of standing on the sidelines waiting to see if we are actually going to move to a commercial demonstration and I'm sure some people will wait until its up and running to -- again, to consider that as a technology choice.

I'd also like to here your thoughts on the recent ruling to, about care and the Federal Appeals Courts and as you've noted SOX to NOx credit has fallen a significant price. Could you just give us how that would ultimately play out with the customer and (inaudible)?

Let me make sure I understand understanding the question, Nathan. Are you saying you want to understand how the financial impact on the price of the allowances will impact customers?

There are two parts, I guess two parts to the question. Ultimately what do you see the resolution to the SOX/NOx care issue under a new President and timing et cetera if you have any insight there that would be appreciated? And also the financial implication for Southern Company/customer in the region?

Let me start with the ruling and then I will let Paul talk about the financial consequences to us. I don't have any particularly good crystal ball here, certainly not better than anybody elses. I think the decision was not a good one because it creates more uncertainty at a time when we are all trying to get some certainty around what are the requirements going to be. I think there's going to be significant effort to try to either legislatively reimplement the care rule which my expectation is that the will be difficult to do because there will be a lot of effort to create what's typically termed a 4P move and bill which would include carbon dioxide legislation. That just makes two very complex legislative efforts with regard to care and climate change put together to be extraordinarily complex. So I think we are going to muddle along here and hope that the Congress would take the lead and simply pass a simple piece of legislation that would reimplement the care rule and we have to deal with climate change in another legislative initiative. But I really don't, I'm not sure that I'm very optimistic about that.

Nathan, associated with the financial implications, the provocateur of care, the thing that we had to remember is that we still have to complete with the national air, ambient air quality standards, the state implementation plan. So those are driving our compliance strategy. When you look at our [FO2] allowances that we have purchased, we purchased those under a compliant strategy focus. And go through the regulatory body to recover those costs for compliance. So when we look at our intermediate need, they've now been elongated because we have some extra allowances that care would have reduced the numbers of because of that 2 for 1ratio. Right now when we look at it we had to look at, what does it mean to our intermediate group of plants, do we have more allowances now to cover some of those, so that could have an effect on our capital spend for the future.

Thank you very much for that.

Your next question comes from the line of Steve Fleishman of Catapult.

Hi, Steve.

Hi, can you guys here me?

Yes.

Hi, guys. Just to clarify, I think through the first half of the year you've beaten your own guidance by about $0.16 a share. So from the standpoint of maintaining your guidance for the year, I know you tend to be pretty conservative and you don't know what things can come up in the third quarter and the like but is there anything fundamentally that would be holding you back?

I tell you what we look at, third quarter last year you have to remember that that was one of the record-setting heat waves for us. As a matter of fact it was additional $0.06 last year relative to the weather. Then you have increased depreciation, increased O&M for this year. So we are holding firm with the range that we have. As you know when I opened up these comments, this is 45% of our revenue in this quarter. So we need to get through this quarter first before we make any assessment for the future.

Okay. Secondly, on the market response sales, could you just talk a little bit more about what's been happening with those and maybe you could even break out within this quarter that revenue of I think you said $0.17, how that broke out between market response, growth and rate relief? And then just what to expect on the market response sales going forward.

Let me give a little background on the market response, market based response rates and then Paul can talk about financial consequences for the quarter and then going forward. I just remind everybody that may not be familiar with it, these are rates that have been in place for over 15 years and it's primarily about 2000 customers mostly in the state of Georgia and Georgia Powers customer base that have the opportunity to choose based on an hour ahead or a day ahead price. And the price is determined as a function of the marginal cost of producing energy. So the customer has the right to choose or to buy price protection products to cover their choices. So their choice is functional -- is basically a function of their economic reality and their production capability and their ability to move their production around during all peak periods. So it really gives them a lot of flexibility to choose what to do. On average this has been a very attractive rate for these customers over its history.

Steve, one of the things I would add to the description, it is an optional rate. Customers like to be on this rate and it's approved by the commission in term of the structure. The marginal portion that David described is just that. Those customers if they can manage their loads they buy on the margin. As we start projecting out our resource requirements, that marginal piece is not taken into consideration because it's a bearable load that comes and goes based on those customers. From a financial standpoint I'll break it down. Primarily for this quarter, $0.07 of our earnings per share were attributable to the market response rates. Now for the third quarter going forward, we have projected higher rates for these customers given the norm that we always see higher costs in the summers. So that isn't our estimates going forward.

Okay.

Steve, I hope you have a sense that it's pretty hard to project much of that because it's such a function of the customer situation. The economic activity with regard to their particular industry. Higher generation availability and stack and that's why it's a realtime rate. It's pretty hard to project much.

Sure. I have one last question which is just to get an update on the new nuclear proposal in Georgia.

It's much like the comment that I made about the Kemper County project, IDCC in Mississippi, is simply stepping through the regulatory process. We made the FP filing and the COL filing with the RFC. The good news about the COL filing and the RFC response was that it was a complete. Meaning we don't have to go back and add anything else. They will begin to evaluate it. So it should be on a good track. We will present the certification process to the Georgia Public Service Commission next month in August as a part of the future needs for the plant. They have until March of next year to decide. They can decide earlier but they have until March to decide whether or not to certify that capacity if they give us a green light and agree that we should build and then we will move quickly to move forward with construction.

Thank you.

Your next question comes from the line of Angie Storozynski of Macquarie.

I have a question, given the recent slowdown and the power demand growth in your service territories and the fact that you are not going to have any substantial rate case over the next three years should we assume that your realized ROEs will simply drop? Or in other words, how does the recent growth in fueling hour sales, this is interest in your projection of sales that you have in recent rate cases or settlements?

Let's go back and maybe make sure we are on the same wavelength because I made the comments about the relatively stable regulatory environment. We have mechanisms in place in both Alabama and Mississippi and to some degree in Georgia to make periodic filings for both base rate increases and for rate increases necessary to recover capital costs associated with either new capacity in some cases and/or environmental costs. So there are rate mechanisms that are in place. What I was saying was because those are in place we expect a relatively stable period of time from a regulatory standpoint. That does not mean that prices will not go up during that period of time. The only place where that's not true for base rate is in Georgia Power where we are on a basically three-year cycle and we would expect to file again in 2010 in Georgia. We have to under that agreement with the Georgia Public Service Commission. I don't believe at this time we have any plans in the Gulf jurisdiction to make a filing but we could during this period of time.

We don't expect, and I think we said in the economic data that we produced, we don't expect any continued erosion of revenues. In fact our revenue growth still remains positive overall. We continue to have significant in migration of new customers into our territory. We have pretty strong economic expansion in some of the primary industrial sectors, as Paul mentioned the primary metals and metal fabrication, the automotive industry continues to expand. So we think we are getting to the bottom of the housing crisis situation with our new meter sets at the residential level sort of bottoming out, or at least we hope so. I think we believe that we are in pretty good shape for the next two and a half years.

Your next question, Ashar Khan at SAC Capital.

Trying to get a sense of the residential and industrial sales decline, is that all Georgia and Alabama? I'm trying to track that down to the subs.

From a residential standpoint I would say the majority would be in Georgia, primarily. When you look at the decline because of the inventory and the number of vacancies, Alabama had a slight decline, Gulf had a moderate decline but it's primarily Georgia that is driving some of the residential sales. When you look at the vacancy rate our normal is about 2.5%. We are running about 3% on vacancy rate. That means we have roughly 130,000 residential structures without people in them.

And then--.

Let me add something to that, Ashar, because I think it's, we need to make sure we understand, we are trying to make sure we understand what we are reporting here, too. We, when a person leaves a residence for some reason whether it's foreclosure or whatever and the meter is still connected we don't count that as a lost customer. That's still a customer. But there's nobody using energy on the other side of the meter. So what we are seeing we think as to Paul's point is about the increased houses available in the marketplaces or houses where nobody is using electricity. So usage is down. I suspect we are also seeing some simple economic reality of people deciding to turn some things off and use less. So I think it's a grand combination of both of those things on the residential side.

Paul, what have you assumed for 2008 versus 2007 for growth? Could you remind us in your budgeting?

Right now for growth, around 2% energy sales wise.

2% growth in energy sales wise?

Yes.

So right now if I look at -- we are at 0. -- year to date, am I right, so the total retail sales are up 0.2%. Am I right? So that you plan that, your initial planning was 2%. Am I looking apples-to-apples to that number?

When you look at our overall sales total for retail we are roughly at a 0.1% increase over last year.

And you were predicting 2?

That's right.

And so if it was 2% versus the 0.1, what would be the additional earnings? Could you just tell us the variance, what the higher earnings would have been if you were running at 2%?

Ashar, I think I will have to go off-line with you on that and ask our guys to give you a call back to get into that level of detail if that's all right with you.

Okay. Fine. Thank you.

Ashar, obviously that's my assumption about the mix of customers and the margin associated with the different customer rates. So it needs a little bit of work to give you a good number.

Okay. Thank you.

Your next question comes from the line of Tom O'Neill with [Highbridge].

Just curious if you could give an update of your coal inventory situation and any upcoming fuel filings we should expect?

Yesterday we received approval of a fuel case in Gulf Power. So that was the last fuel case that we had filed in the system. So that's moving forward and I think those rates come into effect September 1. We have a targeted inventory of 40 days, right now we are at 36 days as we sit here. We've had some interruption in some supplies due to the flooding in the Midwest. And as gas prices were higher we had some increased burn. So from an inventory standpoint we are in good shape.

Thanks.

Your next question comes from the line of Jeff Coviello of Duquesne Capital.

Good afternoon. I had a follow-up question on care. You mentioned that probably the most hopeful thing that could happen was that the U.S. Congress passed some sort of simple enabling legislation that let care to be reinstated and it sounds like you're optimistic about that. I was wondering if there was any -- should we be watching the House or the Senate for that and if it was going to happen when do you think it would be most likely?

Well, Jeff, that's a great question but I can't tell you where to look or when to expect it. I know that there were hearings yesterday in the Senate, I think on Senate Energy and Commerce or maybe environment and Public Works but there were people testifying about the need for some certainty. So it's getting some play. But when you get to the practicality of moving legislation in this Congress, knowing that they are out of town tomorrow, I mean on Friday, not back until Labor Day and then you got to get to the elections, I just don't give us much hope for moving things forward. I wouldn't say it's impossible but I'm not sure it can get done.

Again, like I said, I think when it begins to move there's a very good likelihood that there will be a lot of folks trying to tackle a bunch of different things on it as they always do. Remember that the court actually remanded the decision to EPA to adopt a rule that was consistent with the opinion. So there is some chance that EPA could try to move forward to do something but it's also difficult for EPA to adopt a ruling in this environment.

It sounds like the Congress isn't going to be able to do anything until after Labor Day at the earliest and the politics of the--?

I think that's for certain.

Okay. That's helpful. Thank you very much.

Your next question comes from the sign of Steve Gambuzza of Longbow Capital.

Hello?

Hello.

I was just wondering if you could explain how it is that you're kind of on plan in terms of earnings guidance when sales have been so far below expectations from a retail standpoint? Is it that the market based response rates, do those essentially benefit from lower -- the sales you said on the market based response rates do they eventually benefit from lower retail load growth so that the earnings there are offsetting what normally would have been retail revenues?

No, I think there are two things going on here. One is that market based rates benefit from higher gas prices and higher marginal fuel prices. And that's one of the things that drove the second quarter contribution. The other thing is that, and we talked about this earlier. That if, going into January, we saw the implementation of rate increases in Alabama and Georgia and Mississippi that had been approved by the Public Service Commission so that prices were actually higher going into this year.

I guess but didn't those rate increases, didn't they take into account an expected level of load growth that didn't actually transpire?

That's correct. And the market based rate contribution helped make up some of that.

But I guess do you -- all things being equal, are you able to sell more power at market based rates when retail load is lower than normal?

No.

Okay. Thank you very much.

Your next question comes from the line of Timothy Yee at KeyBanc.

Could you talk just a little bit more about Franklin 3? You had mentioned that it had come into service, how much capacity is that? And you had sold some of the output, what's your earnings impact contribution for the year and was that contemplated in guidance?

Well, when you look at, I will go to the last point of your question first. There was some contemplation of Southern Power having Franklin 3 on early. So when we project out Southern Powers earnings we had assumed a certain portion of Franklin 3 in that number. Now Franklin 3 is a 640 megawatt combined cycle gas unit that was mothballed back in 2003, 2004 time frame. This unit was originally sold to [Donaghy] and that contract was bought out of from Donaghy in that 2004 period. We mothballed the unit to search for additional capacity contracts for it. Ended up selling the capacity to progress ventures who in turn sold it to continue insulation energy and that contract comes into play in January of 2009. Couldn't itself laying. When we go to a mothballed or a storage plant there are some anticipated issues with shaking out the construction, shaking out the unit for the unit. And what we try to do is bring it on early to the see if we have any shake down if you will and the unit right now is doing quite well. And our folks in Southern Power went forward to the market and sold some capacity out and it has some contribution to margin but it's also contemplated in the $135 million net income target for that Company.

Thank you.

Your next question comes from the line of Andrew Levi of Brencourt.

Thank you very much. I'm all set, thank you very much.

Your next question come from the line of Dan Jenkins of State of Wisconsin Investment.

Good afternoon. I just wanted to clarify a little bit on, I think you said earlier on the $0.17 benefit and from retail nonfuel that $0.07 of that was the market response rate effect?

That is correct, Dan.

And then so I was curious, then, of the remaining $0.10 how much of that is due to the rate increases that went into effect and how much is, say, from customer growth?

Well, $0.01 is from customer growth and the remaining part of that is just rate increases.

Okay. And then I was also wondering if you can give us an update on where you're at on your CapEx spending and if the budgets are the same as you projected at the beginning of the year? For CapEx?

We are pretty much right on budget. Dan as it relates to our CapEx band, as you know we have a three-year CapEx spend for our operating company at $13.3 billion. We are basically right on target with that.

Okay. And then as far as any debt that you might need to issue, I know you have about 700 million that comes due in the second half of the year. I was wondering if you could give us some guidance on your debt plans for the second half?

We going to finance approximately $1.2 billion through the remaining part of this year.

Okay. Thank you. That's all I have.

Okay. Thanks, Dan.

(OPERATOR INSTRUCTIONS) Next question, a follow-up from Leslie Rich of Columbia Management.

I wondered if I could circle back to the leveraged lease charge and have you walk through an explanation of that?

Sure you can. What do you want to understand about it, Leslie, can you narrow it a little bit?

Are these tax benefits that you took that you had to reverse or?

That's basically correct.

Is this related to SILO/LILO lease accounting or is this something different?

That's exactly right.

It's three SILOs that were retained by Southern Company as part of the spin out of Mirant in 2001.

Is that the extent of it, the issue is now over?

Well, the, I mean what we did was decide to go ahead and take a charge because of the IRS success in certain other cases and the accounting recommendation that would go ahead and book what we did. We still are in litigation with the IRS over the issue with regard to our leases and may affect some settlement with them in the future.

But the charge that you took covers 100% of the amount up for debate or there's potentially more?

Substantially what we expect our exposure to be.

Okay. Great. And just secondly separately on your coal, David, it would be interested to hear your thoughts on the coal markets since you're such a large consumer of coal and--?

Well, I'm really disappointed to have to be paying $130 for Central Appalachia coal. You remember part of my background was managing that back in the '80s for Southern Company and that's a long way from where we were then. I think our hope is that some of the supply out of Australia and other parts of the world comes back and by this time next year we are back at something closer to what I would consider to be a normal price which may be in the $50 to $60 terms a ton for Central App. The Columbian sources that we draw on are also extraordinarily expensive, they're at $135 or have been. So we are seeing significant increased cost like everybody else. Powder River Basin is not quite as volatile so there's some good news and we rely on a good bit of that for our supply.

Have you indicated publicly how -- are you fully contracted for 2009? I know you tend to do lots of very long-term contracts and layered in from multiple different supply basins with multiple different contract lengths. Do I need to worry about '09 or?

No more than I do.

Leslie as you know our contract strategy for the current year is usually to try to be at 95 to 99% covered and the second year out as you will for next year will be 60 to 70%, third year out will be around 40, 50%. Right now we have taken that strategy up in terms of locking in reliability supply and for next year we are right at 99% committed.

And you have fuel pass through in all your jurisdictions, right?

Correct, Leslie.

Thank you.

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

Good afternoon. Can you hear me? Hi, this question is going back to your kilowatt sales. Can you see the commercial and also industrial down about 2%, or more than 2% as well. Can you break it down in terms of from Georgia or Alabama and what's the trend that you see going forward? For your kilowatt sales?

We talked a good bit about the residential situations. I think that's pretty clear. The commercial--.

But that's -- yes.

Commercial business is slowing but still positive, year to date the industrial business was down in the quarter and we talked about the fact that we think that most of that occurred in May when some of our major industrial customers decided to take their annual maintenance cycle which is around Memorial Day where they take a week. So I think what we've got to do is get into this quarter and see if the industrial production is back to a normal level.

Annie, we have also had the Chevron refinery in Mississippi out for an extensive time associated with an expansion at that facility. So we anticipate that to come back online during this quarter, maybe the fourth quarter.

Okay. So you think for the rest of the year, in like, it might be a little bit better or you see the trends will continue?

Our expectation is that we still have the weaknesses in those industry segments that are attached to the housing market. And we still see growth coming out of the primary metals transportation, fabricated metals where we have had growth in the past. In anticipation of these targeted as we go forward.

Well, last question has to do with the economy with the economy slow down, can you comment on your uncollectibles?

Sure. Annie, we keep a close eye on that as any time when you are in an uncertain economic time but we have not seen a discernible increase in any of our charge-offs and our arrears in fact got better from March, '08 to June, '08.

All right. Thank you.

You're welcome.

And off follow-up question from Steve Gambuzza of Longbow Capital.

A quick question on the coal. It sounds like you've actually gone a little bit ahead of your, first you are a little bit ahead of where you'd normally be for 2009 in terms of your hedge profile?

That's correct.

Okay. Just, it's, I guess when listening to the comments about you being hopeful that supply, the supply situation would work itself out and that we would see something approaching more normal prices by 2009, I take it from your hedge position that you don't really put a lot of, you are not necessarily sure that that hope is going to be met. Is that fair in price?

Go back to the, who is, wrote the book said hope is not a strategy, we decided to go ahead and make sure we were covered for next year.

Some of that too, those contracts have a market opener, it gives us the visibility to the market for the prices of coal. So we want to purchase based on reliability.

Thank you very much.

At this time there are no further questions. I will turn the call back over to Mr. Ratcliffe for any closing comments.

We don't have anything except thanks to everybody for joining us today. We look forward to seeing you all on the third quarter call. Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.