Southern Co (SOMN) 2010 Q2 法說會逐字稿

Good afternoon. My name is Michael and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company second quarter 2010 earnings call. (Operator Instructions). I would now like to turn the call over to Mr. Glen Kundert, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Michael. Welcome to Southern Company's second quarter 2010 earnings call. Joining me this afternoon are David Ratcliffe, Chairman, President and Chief Executive Officer of Southern Company, and Paul Bowers, Chief Financial Officer.

Let me remind you that we will make forward-looking statements today in addition to 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 filings.

We'll also be including slides as part of today's conference call. These slides provide details on the information that will be discussed on this call. You can access the slides on our investor relations website at www.southerncompany.com if you want to follow along during the presentation. Now, at this time, I'll turn the call over to David Ratcliffe, Southern Company's Chairman, President and Chief Executive Officer.

Thanks, Glen, and good afternoon, and thanks to all of you for joining us. I'm sure most of you are aware by now the changes in our senior management team that we announced yesterday. With my retirement from Southern Company on December the first, we have begun a transition in the office of Chief Executive. Tom Fanning, who many of you know very well from his four years as Chief Financial Officer, will become President of Southern Company on August 1. Tom is also with us on the call this afternoon. Paul Bowers will be moving to Georgia Power on August the 13 as Chief Operating Officer, while Art Beattie, who is also with us today, will become Chief Financial Officer. Tom, Paul and Art are key members of our management team and are well-prepared for their new assignment and I know will do an outstanding job for us.

As you can see from the materials we released this morning, we had a good second quarter which was influenced by favorable weather and the continuing economic recovery here in the Southeast. Since our last earnings call in April, we've had three significant new regulatory developments in our retail business, including a rate case filing by Georgia Power. Paul will cover the rate case filing in more detail in a few minutes. First, on May 26, the Mississippi Public Service Commission approved the construction of our 582 megawatt coal gasification project in Kemper County, Mississippi.

Yesterday, the South Mississippi Electric Power Association signed an agreement to purchase 17.5% of the plant to fill the projected capacity requirements of its members. The plant, which will use Mississippi lignite coal, is scheduled to be placed in service in May 2014. The facility has a construction cost estimate of $2.4 billion. The project, which will feature 65% carbon capture capability, has qualified for nearly $700 million in federal incentives including $412 million in investment tax credits and $270 million in clean coal power initiative funding. In addition, we're in advanced due diligence discussions for federal loan guarantees.

Mississippi Public Service Commission has also approved the construction work in progress mechanism, which will begin in 2012 and continue through the end of May 2014. We're please to now be under construction with the Kemper County project. We believe this plan is clearly the best choice for our customers. To repeat what Secretary of Energy Steven Chu wrote recently, and I quote, "The project is of national importance because it provides a viable option for using our abundant coal resources in a cost-effective manner and reducing power plant emissions."

My second update concerns our Vogtle nuclear project. Last month we announced that Southern Company and the Department of Energy agreed to conditional terms on the nuclear loan guarantees for units three and four at Plant Vogtle. Under the conditional agreement, the loan would not exceed 70% of the Company's eligible projected costs, or approximately $3.4 billion, and is expected to be funded by the Federal Financing Bank. The loan would be full recourse to Georgia Power and secured by a lien on the Company's 45.7% interest in the two new units. The loan is expected to save Georgia Power's customers between $15 million and $20 million annually in interest costs. The actual amount of the interest savings would depend upon the final terms and the timing of the specific borrowings.

Final approval and issuance of the loan is subject to the receipt of a combined construction and operating license from the Nuclear Regulatory Commission and satisfaction of other conditions. NRC's current schedule calls for finalization of its design control document review by October 2011 and we would expect to receive the COL by the end of 2011. As you know, the Company received an early site permit and limited work authorization from the NRC in 2009, and site work has been underway since that time.

At this point, I'll turn things over to Paul for a discussion of our financial highlights for the second quarter and our earnings guidance for the remainder of 2010.

Thank you, David. First of all, let me say how much I've enjoyed working with all of you as CFO during the past two and a half years. Now, as David said, our second quarter performance was good. The results continue to highlight the consistency of our business plan to provide regular, predictable and sustainable performance over the long-term. In the second quarter of 2010, we reported $0.62 a share compared with $0.61 a share in the second quarter of 2009 for an increase of $0.01 a share.

Let's turn now to the major factors that drove our second quarter numbers compared to the second quarter of 2009. First, the negative factors. Non-fuel O&M reduced our earnings by $0.07 cents a share in the second quarter of 2010 compared to the second quarter of 2009. This change is primarily due to a return to normal maintenance spending in 2010 for both our fossil and hydrogeneration fleet in our transmission and distribution network. On the generation side, approximately 3,000 more megawatts were involved in planned outages in the second quarter compared to the second quarter of 2009.

In the second quarter of 2009, we had the early termination of two of our international leverage lease investments, which resulted in a gain. For the second quarter of 2010, we now show a reduction of $0.03 per share compared to the second quarter of 2009. Finally, an increase in the number of shares outstanding reduced our earnings by $0.03 a share in the second quarter of 2010 compared with the second quarter of 2009.

Now, let's turn to the positive factors that drove our earnings for the second quarter of 2010. Warmer than normal weather in the second quarter added $0.04 per share to our earnings for the period compared with the second quarter of 2009. While the first quarter of this year was the coldest winter in 20 years, the second quarter was the warmest spring in 20 years and the fourth warmest in more than a century. Clearly, weather has been a major factor this year and has added $0.14 per share to our earnings compared to the first six months of 2009.

Increased usage and better than expected economic activity, primarily in the industrial sector, added $0.04 a share to our earnings in the second quarter compared with the same period in 2009. Other revenue effects in our traditional business added a total of $0.02 a share to our earnings in the second quarter compared with the second quarter of 2009. This impact was driven primarily by revenue changes related to the recovery of our environmental expenses and other investments at our operating company.

Reduced depreciation and amortization added $0.01 per share to our earnings in the second quarter of 2010 compared with the same period last year. This increase was driven primarily by the continued amortization of excess costs of removal obligations at Georgia Power approved by the Georgia Public Service Commission beginning in the third quarter of last year. The increase was partially offset by additional depreciation from increased environmental transmission and distribution investment.

Lower interest expense also added $0.01 per share to our earnings in the second quarter of 2010 compared to the same period in 2009. Increased transmission revenues in our traditional business added $0.01 per share to our earnings in the second quarter of 2010 compared with the same period in 2009. Investment tax credits at Georgia Power added $0.01 per share to our earnings in the second quarter of 2010 compared with the same period in 2009. In conclusion, we had $0.13 of negative items compared with $0.14 for positive items for a positive change of $0.01 per share over the second quarter of 2009. So, overall, our quarter came in at $0.62 per share.

Before I discuss our earnings estimates for the third quarter, I would like to update you on the Georgia Power rate case filing, the economy, and the impact of the oil spill. On July 1, as required by its current accounting order, Georgia Power filed a retail rate case with the Georgia Public Service Commission. The requested increase is necessary to cover additional costs of required environmental controls and continued investment in new generations, transmissions and distribution facilities to support growth and ensure reliability.

During the past 15 years, Georgia Power has operated under three year negotiated rates settlement. The 2010 rate case filing contains proposed enhancements to the current structure. The requested increase of $615 million, or 8.2%, would be effective January 1, 2011, and is based on a retail return on common equity of 11.95%. The increase would be recovered through Georgia Power's existing base rate tariff, including its environmental compliance cost recovery tariff, the demand side management tariff and the municipal franchise fee tariff.

The filing also proposes an alternative rate plan, which enhances the existing tariffs and proposes two additional base rate tariffs. The first proposed new tariff is an adjustable cost recovery tariff, or ACR. If approved, beginning January 1, 2012, the ACR will work to maintain Georgia Power's projected earnings within the ROE band established by the Public Service Commission in this proceeding. The ACR tariff proposal has a symmetrical sharing mechanism should the Company's actual earnings exceed or fall below the approved ROE ban.

The second proposed new tariff is a certified capacity cost recovery tariff. This tariff is designed to recover certified generation and associated transmission costs, as well as capacity costs of certified power purchase agreements. If approved, these new tariffs, along with the annual recess of the three existing cost recovery mechanisms, would allow the Company's rates to adjust more gradually than under another three-year accounting order. 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. We'll keep you updated as the case moves forward.

Last week, we convened another executive summit with executives from several of our industrial segments, including a real transportation company, as well as economists from a major private bank and the Atlanta Federal Reserve to discuss the outlook of the economy. Even with the diverse spectrum of industries represented, there was a consensus of opinion in three main areas. First, a double dip recession is unlikely. However, the momentum of the economic recovery is slowing. The general view is that the Southeast is still well-positioned for economic growth outpacing the US.

Second, residential and commercial construction remains suppressed, but the trend shows stabilization in the residential market. Apartment rentals and unoccupied homes are moving in a positive direction. Third, inventory restocking is slowing from the first quarter. It is not expected to be a major economic driver going forward. Most economists, including those in our group, see modest growth in the second half of 2010. So, the conclusion of our panel was that the recovery continues, but it is far from robust. Several of our participants mentioned that their industries will basically muddle through for the next six months.

Turning now to our own customer data, industrial sales increased by 13% in the second quarter of 2010 compared with the second quarter of 2009. Quarter-over-quarter, the most significant increases were in primary metal, up 60.7%, chemicals, up 25.9%, transportation, up 14.5% and paper, up 16% compared with the second quarter of 2009. Year-to-date, we have seen positive growth in every segment except pipeline, rubber and apparel. The ThyssenKrupp steel manufacturing facility in Alabama hired approximately 1,000 people at its new facility and has continued commission production equipment which will require approximately 200 megawatts.

In addition, Hyundai Industries announced a facility in Montgomery, Alabama, to build high-voltage transformers which is expected to add another 500 jobs. All of the major automobile manufacturers in our service area continue to report steady demand for their products, with an increase in production in Alabama alone of 71%. Adjusting for weather, residential sales increased by 1.4% in the second quarter of 2010 compared with the same period in 2009. New connects have climbed to approximately 36,000 a year in the second quarter, which represents a 47% increase over the first quarter of 2010. In addition, we're seeing positive customer growth of more than 7,000 new residential customers.

As expected, commercial sales remain our weakest sector, declining at 1% on a weather normal basis in the second quarter of 2010 compared with the second quarter of 2009. Year-to-date, 2010 commercial sales are down 0.7% on a weather normal basis, which is in line with our forecast. Commercial activity continues to lag with vacancy rates for offices of more than 22%. On the positive side, electricity demand by data centers increased by 7% in the second quarter, reflecting our most active account in a commercial sector. In summary, the commercial and residential sectors are performing according to our forecast while sales to the industrial sector in the second quarter are ahead of our plan.

Turning now to the impact of the oil spill in the Gulf. We know many of our customers along the Gulf Coast have been financially impacted by this accident. However, at this point, from both an energy demand and operational standpoint, we have not seen a measurable impact on our company. From an energy sales standpoint, the major impact would be seen in the commercial sector, primarily in tourist-related businesses such as hotels and restaurants.

Gulf Power in northwest Florida has the largest exposure, with some 125 miles of coastline along the Gulf. While a few beaches from Pensacola to Panama City have been affected by the oil thus far, we have not seen -- been able to identify any impact to our energy-related sales, since only about 5% of Gulf Power sales are to customers in tourist-related segments. Another factor is that oil spill workers are occupying hotel rooms which otherwise would have been filled by tourists. On the generation side, our plants along the Gulf Coast are operating normally and coal shipments by barge have not been interrupted by the oil spill.

Turning now to our earnings guidance for 2010. Our second quarter results exceeded our estimate by $0.06 a share. As we discussed, the quarter was largely influenced by weather and the gradual economic recovery we're seeing here in the Southeast, particularly from certain segments in the industrial sector. While we ended the first six months at $1.22 per share, it is important to remember that $0.14 per share of those earnings were due to weather. In addition, for the remainder of the year, it is important to remember that three major factors will continue to have a limiting effect on our earnings.

Number one, the third year of a modified accounting order at Georgia Power. Number two, a more normal level of O&M spending. And three, an increase in the number of shares outstanding. Given these factors, and since a significant portion of our earnings are derived in the third quarter, our guidance will remain at $2.30 to $2.36 per share with an emphasis on the top end of that range. Finally, our estimate for the third quarter is $0.94 per share.

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

Thank you, Paul. As Paul explained, we had a good quarter and a solid first six months, but we're mindful that weather has been a major contributor to our earnings and that the economic recovery, while encouraging, remains somewhat fragile. It is important to re-emphasize that the foundation of our business plan is a commitment to provide our investors with regular, predictable and sustainable financial performance over the long-term.

At this point, Paul and I are ready to take your questions. Michael, we will now take the first question.

(Operator Instructions). Your first question is from Greg Gordon with Morgan Stanley.

Hello?

Sorry about that. I was distracted for a second. My question -- I have two questions. The first question is, the $0.01 benefit from the lower amortization, was that lower than it otherwise would have been because you had the flexibility to reduce it, vis-a-vis just having a strong weather quarter?

No, Greg. This is Paul. When you look at that $0.01 benefit, remember you had the COR, the cost of removal benefit from Georgia Power. At the same time, we're recognizing increase, depreciation amortization from environmental equipment and TND equipment.

Okay. I know you commented in your scripted remarks that you're still very cautious about prospective acceleration of demand, but for the first six months of the year, we've seen quite a dramatic recovery and shouldn't that benefit you in your dialogue with the regulators. Because obviously the better the sales levels are, the easier it is to amortize the needed rate increases across the customer base, right?

That's correct, Greg. That's absolutely correct.

Okay. Great. Thank you.

Your next question comes from the line of Daniel Eggers with Credit Suisse.

Hello, good afternoon. Just following up -- touching on Kemper a little bit more. Can you talk a little bit more about the contracting on the ENT side to give you confidence you can stay within the top end of the allowed cost -- the investment level the commission provided, given the overruns you've seen so far?

Dan, this is Paul. Both David and I will comment on this. When you look at the contract that we just signed, actually, yesterday with the MEPO organization, it is an opportunity for them to get capacity, low energy cost capacity for their customers that they served, the EMCs in the southern part of the state. From the standpoint of where we stand from a Kemper County instruction and execution, we've already secured about 20% of the cost already under contract. And by the end of the year, we expect to have 50% of the cost contracted for. So, we're real confident that we can make the contracted or the targeted price of $2.4 billion, but we have the $2.88 billion cap that's available to us.

Okay. If you give a little more color on the customer growth you saw in the quarter, the 36,000 run rate level. Where are those bodies coming from and are you seeing an acceleration over the year that might give you confidence that number is going to continue to rise from here?

Dan, remember I mentioned that customer growth was only 7,000 customers in the residential class. When you look at the 36,000, that's new connects, so it's people leaving connects now being re-established in existing facilities and/or new facilities. That new connect is a determinant, if you will, of the growth that we might be experiencing in the market place, while having positive quarter-over-quarter numbers is an indicator that we are having inward migration and that jobs are being established in the Southeast.

The other point I'll make is that when you look at our normal new connects from 2000 to 2007, that number usually runs around 80,000 to 88,000. So, we're significantly below normal.

Are you seeing an acceleration in the 36,000 number? Where was it the last couple of quarters on the run rate basis? When do you think you get back to something closer to the historical level?

Last quarter, it was around 30,000. So, that 47% increase is 36,000 over 30,000. The aspect of when we get back, we're looking at 2012 when you have the residential markets returning to something more than normal -- or more than current normal.

-- or more than current normal.

Or more than current normal, thank you.

A few normal out here somewhere, Dan. We're trying to find it. I just think that what we're trying to do here is to celebrate the fact that we see a little positive here. I still think the long-term reality is a function of job creation, and we're still struggling with unemployment rates that are too high. Until we get those numbers headed in the right direction, we're going to be pleased with what we get. But I don't think we can talk much about an accelerated pace here.

One last question. As it goes to the Georgia filing, remind -- on the ability of the commission to approve an ACR or some sort of alternative rate-making mechanism. Is that something they have the power to do, or is that something that would need legislative attention, prospectively, to get approval?

They can clearly do that.

Okay. Thank you.

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

I think you already answered this, but I didn't quite catch it. Did you take full advantage of the accounting order to depreciate -- on the depreciation?

Yes, Paul. When you look at it, $54 million per quarter so yes, we did recognize that this quarter.

And as we look at the third and fourth quarter of 2010, should we expect similar O&M step-ups of $0.05 to $0.07?

When you look at O&M spend overall, yes. We're at normal spending. Remember, last year we had a depressed spending in our Company to respond to the economic realities that we're facing.

So, we should see similar step-ups.

Yes.

And then what's weather been like June 30 forward?

It continues to be warmer than normal.

And your Q3 guidance assumes normal to date going forward or normal June 30 going forward?

Normal weather for the third quarter, including July.

The entire month.

Right.

The entire quarter. Thank you very much.

You're welcome.

Your next question comes from the line of Jonathan Arnold with Deutsche Bank.

My questions were answered. Thank you.

Your next question will come from the line of Ali Agha with SunTrust Robinson Humphrey.

Thank you. Good afternoon.

Hi, Ali.

Going back, Paul, to the guidance for the year, understand the point you folks made of the $0.14 help from the weather and the negatives that you outlined in the second half does a check on, et cetera. Those are also well-known. I was just wondering if you're assuming normal weather for the rest of the year, and you picked up $0.14 for the first half, why would you not be raising your guidance for the year? What's the other negative that you may not have accounted for that's causing you to remain at these levels?

Remember, Ali, when you have -- like I said, there's three things. Normal O&M expenditures that we have is getting back on reliability schedules associated with our generation fleet. Vegetation management activities that we have around our TND facility, so there will be a higher spend on an O&M level. The other piece is, if you recall, that we have the modified accounting order at Georgia that limits, if, will you, the capability of that company to earn over a certain amount.

Right, the Georgia part I understand, that that limits it, but the O&M step-up and the share count increase, those were only -- were budgeted into the original numbers to begin with. Right? That's not incremental. I understand the limit on Georgia. But is there anything else out there that is beyond these factors that is causing you to keep your numbers?

No. I think we've disclosed the planning that we're doing on increased O&M spending and the increased number of shares and the Georgia order. Those are the things that are -- the major factors. Always the uncertainty around weather. We've seen the weather go the other way, too.

I understand. Secondly, could you remind us of what -- how much equity did you folks raise in the second quarter and where are you now versus your plan for the year?

We have raised $344 million so far this year Probably one other thing, too, is if you look at our drivers. Like we said on the opening of this call, the third quarter is our largest quarter in terms of our revenue and earnings. After the third quarter, we'll make adjustments as necessary to our guidance, but not until then.

Understood. The $3.44, Paul, that was -- roughly [2500] or so you have planned for the year?

[2500] that's correct.

And last question, any initial feedback from the commission to those new tariffs that you're proposing and any initial sense of, are they respective to it, or not?

I think the early indications are that they're receptive to considering the concepts, but it's really early in that discussion.

Okay, fair enough. Thank you.

Your next question comes from the line of Michael Lapides with Goldman Sachs.

Hey, guys, two questions. One on Kemper County, what if any do you expect in the way of litigation going forward? Usually the environmental groups continue to battle it. And, what precedent if any in Mississippi exists in terms of whether injunctions ever get granted?

I think the most aggressive challenge we will continue to experience will come from the Sierra Club. Most of the other environmental questions have been answered. The Sierra Club, as you know, has filed an appeal. That appeal will be heard in the Supreme Court. We're confident that we have addressed all of their concerns adequately. So, we expect a good outcome there.

Okay. And when you think about the Southern Power subsidiary, how should investors think about the long-term prospects of that business relative to your utility businesses, meaning higher growth, lower growth, similar growth, when we just think of it as a piece of the larger puzzle?

Michael, when you look at Southern Power, like we've said before, it is a surrogate of a regulated model. It has long-term contracted capacity for its generation units. What we also said is, it was going to remain flat over the next three years because of the contracts that are evolving during this time. One of the issues that Southern Power is also facing is the downturn from the economy and having capacity that was allocated towards a requirement contract that is really not needed for another year or so.

Okay. Thank you, guys. Much appreciated.

Your next question comes from the line of Jim Von Riesemann with UBS.

Good afternoon, everyone.

Hello, Jim.

Two questions. One, did I hear you correctly that on the industrial sales, all of the restocking efforts that the industrials were doing in the first half is basically now over? Did I interpret that correctly?

Jim, what we said is, from the economic summit, the participants basically said that the pop that we had in the first half of the year resulted from much of the activity around restocking, and they did not anticipate restocking to drive the second half of the year.

Okay. And then the second question is on -- I'm confused about the fourth quarter. I know we're jumping ahead here. But if your guidance remains the same with the emphasis on the upper end, that means you're -- you would report somewhere in the $0.19 or $0.20 range in the fourth quarter? Can you tell us what would be the big drivers in fourth Q and would they be considered, call it one time in nature? Step up in maintenance or anything?

Jim, when you look at -- like we had said earlier, ongoing O&M is going to be in normal areas. We're going to be looking at maintaining the reliability of our network and ensuring that we provide the necessary maintenance on our systems to meet our customer's expectations on reliability and price for the future.

Now that the economy is -- we're in a near-normal phase and some of the temporary O&M cuts have lapsed, what should we be expecting in terms of, call it a normalized O&M growth year over year? So, looking into 2011 and beyond.

Jim, each year, you have to assess the O&M stand, based on the environmental equipment that comes in. I can't give you a smooth 3% growth rate on O&M or 4% growth rate because some of those numbers are driven by the scrubbers that come online during any individual year. They drive O&M significantly for us.

Okay. Thank you.

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

Thank you. Two questions. On the Georgia rate case, could you tell us a little bit more about the timeline for the rate case, especially in association with the management changes? Could we imply, for instance, that come early December or late November, we could have a potential settlement or some resolution to the rate case?

By definition, the rate case has to be finalized by the end of the year, by December. And as you know, the schedule calls for the hearings to begin in October. Usually they're completed in October and then the commission takes it under advisement in November, and we try to finalize it in December.

Okay. Second question is about your coal plants and dispatching of different coal plants given prices there were forward prices for central Appalachian coal ore. Are we already seeing -- are you already switching to natural gas, and what's your view about the future, given (inaudible) where natural gas and coal prices are?

I think we've explained before the economic dispatch regime that we use. So, we're dispatching our units on the basis of the lowest cost. That's a function of, as you suggest, price of coal and the price of natural gas. As it changes then the dispatch changes. We're still continuing to burn some of our coal piles in a managed fashion so that we're managing the inventory. We have the opportunity to -- if gas prices go down, to take advantage of that and we will do so.

Okay. Thank you.

Your next question comes from the line of Steven Fleishman with Bank of America.

Hello, guys. Just a question, do you have a sense on when this Moody's review of the credit rating is going to end? Is there any new data or other stuff you've been able to give them to make the case on how they're looking into nuclear?

I don't think it ever ends, does it, Steve? I was being funny. I'm sorry. We do have plans to meet with Moody's folks in the next couple of weeks and explain to them with as much granularity as we can about the current reality and what we're doing to manage the risk in the business. Not just a nuclear risk, but others, too.

Would it be fair to say that you would still plan to keep your financing plan as it is and not change it just because of the way they're looking at new nuclear?

Yes, Steve, that is exactly right.

Okay. And then also, I think last we talked, there was some movement on the bonus depreciation in Congress. Could you just update us on that?

I'm not sure of your question.

The bonus depreciation associated with the financing bill. It was attached to the agricultural bill, but we have not had any updates of late. It's now in the small business bill, is what I understand, and we'll see if it gets any traction.

And if that does not end up passing, does that change your financing plans at all?

No, it doesn't.

Okay. Great. Thank you.

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

Hello. I just wanted to start with a question with regard to environmental legislation. Clearly, there's been some push -- delay in passing potential carbon bills and renewable energy bills. Do you have a point of view of when that could come back to Congress and what is the likelihood of something being passed in the future?

I don't know that we have any particular view beyond what's been reported in the press. As you know, it is a very complex piece of legislation and the time associated with trying to deal with a very complex bill like that is problematic in a Congress when they really don't have enough time. If you look at their calendar, they have a lot of things they have got to do in the fall and trying to get it back on the agenda in the fall will be a difficult challenge. Not impossible, but I think the biggest challenge remains trying to get the 60 votes that they need to pass anything of that magnitude in a clearly growing political season. So, I wouldn't give it very high chances of coming back this Congress. I think it's jump ball until we get through to midterm elections and see what the new Congress will look like and whether or not there is an ability to move something in a new Congress.

With regard to the EPA and the recent transport rules, do you have any sense as far as magnitude of what that could mean in additional CapEx for Southern Company? What are the more difficult things in that proposed rule that would make it difficult for you to apply?

No. We really don't. Like everybody else, we're trying to do the analysis on the concepts that have been proposed. I emphasize the fact that it is a proposed rule making and it is a difficult one to understand because it has some complex provisions with regard to interstate and intrastate trading, and whether you can use allowances and whether you can't.

The bottom line of all of that is, as we lower the numbers, the ability for us to continue to back fit additional equipment is fairly limited. We've already made, as you know, significant investments. We've invested, by the time we finish in 2012, I think about $10 billion. And you get to the point where there's not enough space and you can't continue to achieve reductions with existing technology. So, until we see and understand exactly what the requirement is and how it is going to be implemented, it's awfully hard to figure out exactly what we might be able to do to continue to reduce emissions of [socks and knocks] primarily.

Taken from a capital standpoint, it is a trade-off relative to environmental (inaudible) like David was talking about or replacement of new -- with new generations. From a capital budget standpoint, it is relatively level.

Do you have an idea when you will know? Finalization of the rules?

The rule is going to be challenged, I'm sure. So -- I think it'll be well into next year by the time we get some definition on exactly what's required. Then you run it -- as part of that, you're running into what I think is just an impossible date from a compliance standpoint. As I understood it, they're talking about a 2012 compliance so that if there is any additional equipment, control equipment required, the timing and the ability to put that in place is extraordinarily limited.

Just one final question on the EPA. The recent one-hour particulate rules that have been finalized, does that have an impact on your plans?

No. I think we've done the work, again, on installing major scrubbers and we've got additional scrubbers that will go into service this year. We pretty much have committed. I think the longer term questions are, what is the entire portfolio of additional regulations, whether it's transport rule or whether it's fine particulates, ash, mercury, additional aps. All of that, as we've said many times, needs to be coordinated in a fashion that allows us to preserve reliability going forward.

Thank you.

Your next question comes from the line of [Pedula Merty with CDP US].

Good afternoon. Can you hear me?

Yes. Good afternoon.

You alluded to the interest savings associated with the nuclear loan guarantee. Can you tell us what that $15 million to $20 million annually is in relationship to what the alternative is that you're using as the benchmark for the calculation?

Yes. We're looking at a spread and made some assessments of around 50 basis points between what we can borrow from the Federal Financing Bank versus what we get into the marketplace.

Okay. Secondarily, in terms of the proposed rate mechanisms, if they're approved or can be implemented in some fashion, similar to what you've proposed, will this then carry you through the Vogtle construction period without having to do -- be discreet in specific updated cases? Is that basically the objective?

I think the objective would be to create a mechanism that would allow us to make routine filings throughout the entire period and rather than these massive rate cases to deal with increased costs or decreased costs in a small -- much smaller increments over the period of time. Really not just during the construction, but through the future.

Okay. Last question, I'm wondering in terms of load growth. What are you seeing in terms of normalized usage per customer? Are residential customers and some of the smaller customers started returning perhaps more normal usage behavior? Or have you noticed that conservation and other types of activities are persisting such that -- even with the existing customer base, getting back to prior usage or usage growth levels might be challenged?

When you look at the residential market, it is -- we're seeing an uptick in terms of use per customer, roughly about 1.2% for the quarter. We have seen that trend for the year. The year-to-date number is 1.3%. From a commercial standpoint, the small commercial group, it is really an economic question, not a use per customer question because the issue is economic viability, are they going to remain in business. We're seeing some of the small convenience store-type entities really close up shop.

But that 1.2% and 1.3%, those are weather-normalized and take out the weather effects.

That's right.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of [Andrew Levi] with Tudor Pickering.

I think most of the questions have been asked. The only question that I would really have and I don't know if your nuclear construction precludes it, but are you looking to add any -- not new generation, but any generation through acquisitions in any of your areas or on the non-reg side?

Andrew, we always evaluate the market to assess opportunities out there. As you know, Southern Power has a piece of their capital budget that is associated with market opportunities or acquisitions of new generation assets. That is out there and we constantly look at the market place.

Thanks.

Your next question comes from the line of Carrie Saint Louis with Fidelity.

Good afternoon.

Hello.

Carrie, you're back at work?

I am back at work. Thank you. I just wanted to follow up on a couple questions about balance sheet and credit quality. If I heard you correct, there is just $500 million of equity issuance planned for the year?

What we said, Carrie, is the first of the year we would look at between $500 million to $600 million and that we would see if our internal framed programs could provide that.

Okay.

Given some opportunities even with bonus appreciation out there.

Right. Because if I remember correctly, I think it was roughly double that amount last year?

$1.3 billion last year.

Okay. Tied into the Moody's review, it just seems to me that if you're trending lower on equity issuance that that's not real supportive of maintaining your current ratings.

Remember, Carrie, we said last year that we sped up some of the equity issuance so we could take advantage of the markets. That's why we went that way. We prefunded some of the equity requirements for this year, last year.

Right. Well, where are you -- you guys don't give out any balance sheet information in the release. Where are we now on the equity ratio?

We're at 41.8%.

Okay. If I remember correct, you guys were hoping to be closer to the 42% to 43% level?

Over a longer term, that's correct.

Okay. And based on the comments I heard, the view is that you guys are struggling to figure out, is there a level of equity at Moody's that would allow you to maintain your current rating? Is that fair?

Carrie, the issue really is more of a business environment, relative to the issues that we're addressing. One being the nuclear risk, nuclear construction risk, the economy is a risk, and the regulatory environment was pointed out in Florida as a risk. The business environment issues is what we'll be addressing and how we're mitigating some of those risks either through contracts or through things that are just naturally occurring and improving, like the economy.

Okay. But do you feel that you've been provided with that Moody's -- a level of equity that you guys could obtain that would allow you to stabilize your ratings? Or do you feel that that number has not been provided to you?

From an equity standpoint, it is not an equity issue.

Or cash flow. What I'm saying is, of course, you guys can choose to keep your ratings. If you make a decision to add equity, de-lever, there are choices that you have to keep your ratings and you may choose not to do that. That's what it sounds like to me today. I'm just trying to understand it because you guys feel that it is unclear at Moody's what level ratios you need to have? Or is it that you just have chosen -- they're giving you numbers, but you're choosing not to get there?

Let me make one point, Carrie. We're not choosing to reduce our ratings. (multiple speakers) -- stand fast and try to provide Moody's as much information about the future of cash flow metrics that we see, the opportunities that we see in the market place from an improved economy, plus the risk mitigation measures we've put in place around collection of costs around nuclear plants and/or Kemper County. But we're pushing those issues in terms of providing Moody's with additional information.

Financial integrity is critical to us. We're going to focus on maintaining that credit quality. We have done some assessments of what it would take -- the impact of a downgrade at Moody's, and it looks like a 10 basis impact on a 30-year bond. Our objective, though, is to maintain our credit quality.

Okay. Then, I didn't know -- I missed the beginning of the call. Is Tom Fanning on the call or available for questions?

Yes. Hey, Carrie, I'm here.

Hello. It's been some time since we've spoken and I know maybe there's not a dramatic change in view, but obviously with you taking into the role, do you have any thoughts about balance sheet and credit quality that you could expand on?

Listen, I think it is very consistent with what you've heard Paul describe. The other thing I would just add is that I think we're in solid shape with S&P and Fitch. That this really is a discussion with Moody's about the business environment, just as Paul described. David, Paul, and I and others will go up there and we'll have a good chat with them and try to make them see the world our way.

Okay. Great. I appreciate that.

Your next question comes from the line of Marc De Croisset with FBR Capital Markets.

Thank you. Good afternoon. Two very quick questions, if I may. Number one, I don't think you've given cash flow guidance for 2010. If you haven't, do you see a step up in cash flow from operations in 2010 versus 2009?

Yes.

A meaningful step up?

What I would like to do is just have our team call you back if it's all right to get into the details of that.

Fair enough. As a second question, I don't know if you can answer this, but it may be the case in industrial sales are just starting to slow down year-on-year in July. Is there any indication of that, as a result of better comps last year?

That is exactly the point. Remember the third quarter of last year had the benefit of the Cash for Clunkers run up. What we saw was the segment of our industrial customers associated with the automobile manufacturing really tick up and we moved to our average monthly consumption in the industrial sector to above 4,000 gigawatt hours per month. We're running currently around 4,300 gigawatt hours per month. From a standpoint of differences, between July, August, September of '09 versus this quarter, you won't see that much of a difference, I don't think, in terms of percentage change.

Great. Thank you. That's very helpful.

Your next question comes from the line of [Danielle Sinks with Doodach Research].

Thank you. All of my questions have been answered except for one. I was wondering if you had a -- the hourly for the different subsidiaries, especially Georgia Power, on a 12-month basis. Do you have that? Excluding weather, if you have that. That would be even better.

Danielle, let us call you back and we'll have -- give me -- Glen will call you if that's all right.

Okay. Super. Thank you.

Your next question comes from the line of Raymond [Lung] with Goldman Sachs.

Hello, guys. Thanks. Just a quick question on financing plans for what you expect. I know Georgia Power just did a bond issue. Can you talk about what you're expecting this year, and maybe give us a preview for 2011?

Sure, Raymond. We're expecting roughly -- we've already financed $1.146 billion this year. We expect another -- roughly another $1 billion before the end of the year. From 2011, we'll be in the market on a debt side around $2 billion.

Any breakdown by operating units?

We can call with you that and provide that to you.

Okay. Great. Thank you, guys.

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

Hello, Dan.

I have just a couple here. On your -- I think you said your requested ROE in the Georgia case is 11.95%. How does that compare to the current allowed -- what's the current allowed ROE and what would like a Delta of 1% do to your revenue request in Georgia?

The current range right now, Dan, this is Paul, is 10.25% to 12.25% is the range with a midpoint set at 11.25% and a 1% change of about $100 million.

Okay. On the O&M -- the higher, the more normalized level of spending, when will that cycle so that -- you said the Q2 was a normalized level. Will that cycle in Q4 or first quarter of next year or when does that -- the comparisons become more comparable?

It will be the first part of next year. Dan, when you get into January first quarter of 2011, you'll have more of a comparable O&M level. Remember, also, the amount of O&M reductions that we had last year were in the range of $230 million for '09, so you're seeing that come back, plus the normal activity that we have around our plant and maintenance.

Okay. And then, just wondering if you can give a little more color on the weakness you're seeing in commercial. You mentioned that that was according to your expectations, that at some point -- do you see higher activity out of the commercial sector or is that business just going to be weak well into 2011?

As you recall, when we sent out our forecast for this year, we expected a positive 0.5% growth rate in commercial, which is relatively flat year-over-year. With the results that we've seen so far, we still see it being relatively flat year-over-year. There are some negative signs that are really showing up in our numbers relative to the grocery store segment, which is a big segment for us. That is a negative year-over-year result. And some of that is in the small category. When I say small grocery stores, it is convenience stores or the smallest of the box stores which are materially being reduced in numbers. The other piece in the commercial sector, a year-over-year assessment of customer growth, it's down 0.5%. So, that segment, we expect to start picking back up in the fourth quarter but again, we'll be watching it from a cautious standpoint.

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

Thank you, Dan.

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

Can you hear me?

Yes, Paul.

What I want to the ask you was really basically, back on the economy. I believe you guys said that your expectations for growth in the second half remain at or below the experience in the first half. Could you just -- could you tell us what the -- you also mentioned that you thought the Southeast was going to be doing better than the rest of the national economy. Could you give us a flavor for what you're actually expecting for the second half of 2010?

When you look at the industrial sector -- in terms of just growth, Paul?

GDP, actually.

GDP, when you look at the data that we've received from the economic summit that we had, they were basically saying a 2% to 2.5% growth rate.

Okay. And that's for the Southeast?

No, that was a national number.

That's a national number. You guys think -- you think of the Southeast is doing better. My understanding is that the economy there is better situated I thought that you guys were indicating as opposed to the US economy as a whole?

That's correct.

How much do we add to that?

When you look at the economic data also and the economists said that 2%, 2.5%, they had an assessment of the Southeast around 2.9% as well. We get some numbers that are skewing on the upside, if you will, the GDP numbers for the Southeast. But again, like we said in the first quarter, we're going to be cautious about making any predictions. The numbers are positive, but we also see indicators where inventories did drive some of that. We have some robust growth out of the steel manufacturing sector. I'm sure you saw the Wall Street article that said prices are starting to come down.

Those type of signals says there is demand for these products. Our automobile segment, like I said in the opening statement, the production level of units is up 71%. Remember at the peak of automobile production, we were producing almost 14 million units at a 71% increase, we'll be at 11 million to 11.5 million units for the country. So, we're still not back all the way to normal.

Okay. You're thinking about 2.9% for the second half. Did the economic summit suggest what you guys might be looking at in terms of 2011?

No, I don't have that in front of me.

Okay. Finally, the RTP, any change in that or is it pretty much what you guys saw last quarter and what you projected for the year?

It is pretty much on track as far as what we projected.

Okay. Great. Thanks a lot.

Your next question comes from the line of Michael Lapides with Goldman Sachs.

My apologies, asked and answered.

Okay. Thanks, Mike.

Your final question will come from the line of Andrew Levi with Tudor Pickering.

Guys, back on the equity question. Why not do a chunk of equity and shore up the balance sheet and move on? What's the thinking on trying to do the drip in the [ESOP] and not just doing one big chunk and making debt holders happy and fixing the balance sheet and making Moody's happy?

Andrew, we've had that discussion last year when we opened up the dribble program, our continuous equity offering. What we said at that time, which is true as well today, it is one that provides us a lot of flexibility to time the market appropriately for the value that we can get for our shares in the market place. Like last year, the dribble program provided $1.3 billion -- total program provided $1.3 billion, of which about $700 million was associated with the dribble program. I think that is the right mechanism to match our needs and the capital additions that we see to put equity into the market place.

And on the dribble program, do you have to authorize more or basically you can just continually do it? Without any type of forward increase?

Each year, we issue a shelf associated with a number of shares that we can put out in the market place.

Okay. And where are we right now on that?

I believe we have 10 million shares on the shelf right now.

Got it. Thank you very much.

At this time, there are no further questions. Sir, are there any closing remarks?

Yes. Thank you, Michael. I appreciate your help. Paul Bowers just breathed a huge sigh of relief since this is his last earnings call. I want to take this opportunity to say thank you to him. He's done an outstanding job in the role as Chief Financial Officer for Southern. I know he's had an opportunity to get to know a lot of you folks and I hope you'll express your appreciation to him. He's not getting out of the line-up. He's just moving into another spot. Art Beattie is appropriately concerned about picking up that responsibility, but he's going to do a good job. Tom Fanning is waiting in the wings to take over the reins and all of that is as it should be. We look forward to the October call and thank you for joining us today.

Thank you, sir. Ladies and gentlemen, this does conclude the Southern Company's second quarter 2010 earnings call. You may now disconnect.