Southern Co (SOMN) 2010 Q3 法說會逐字稿

Good afternoon. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Company third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I would like to now turn today's call over to Mr. Glen Kundert, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Celeste. Welcome to Southern Company's third quarter 2010 earnings call. Joining me this afternoon are David Ratcliffe, Chairman and Chief Executive Officer of Southern Company, Tom Fanning, President of Southern Company and Art Beattie, Chief Financial Officer. Let me remind you 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 filings. We will 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 will turn the call over to David Ratcliffe, Southern Company's Chairman and Chief Executive Officer.

Thanks, Glen. And as most of you know, this is my last earnings call. And as we've announced, Tom Fanning, currently the president, will take over on December 1 as chairman, president and CEO. So today, I have the privilege of delegating this lead position on our call to Tom Fanning, someone that you all know very well. So, Tom?

Thank you, David. On behalf of all of Southern Company's employees, I would like to thank you for your service to our Company. Your leadership over the years has made us all proud. You've delivered outstanding results for the benefit of our customers in the southeast, and you've done it in the right way. We wish you the best in the years ahead.

Now, turning to those of you on the call, good afternoon, and thank you for joining us. As you can see from the materials we released this morning, we had a solid quarter, which was influenced by warmer weather and the continuing industrial recovery here in the southeast. As you know, we have a rate case proceeding underway in Georgia. Georgia Power's witnesses presented testimony earlier this month in the case, and you may have seen where the PFC staff and intervener testimony was filed last week on October 22. The PFC staff and intervener hearings will be held on November 8 through 10. The case appears to be moving forward on schedule, and we expect a decision on or about December 21.

Finally, I would like to mention how well our generating fleet performed during the peak season, from May 1 to September 30. During this peak season period, we experienced record customer demand for electricity of more than 97 million-megawatt hours. We also set a record for natural gas generation, producing 20% more electricity from our natural gas fleet than ever before. Our fleet once again delivered exceptional reliability, producing a peak season equivalent forced outage rate, or EFOR, of 1.67%. This is the ninth time in the past ten years that our EFOR has been below 2%. The industry average is 7%. This history of exceptional operational performance demonstrates our commitment to providing reliable service to our customers. At this point, I will turn things over to Art for a discussion of our financial highlights for the third quarter and our earnings guidance for the remainder of 2010.

Thanks, Tom. First of all, let me say that I've enjoyed meeting and getting to know many of you over the past few months and I hope to meet many more of you in the weeks and months ahead.

As Tom said, our third quarter performance was solid. The results continue to highlight the consistency of our business plan, to provide regular predictable and sustainable performance over the long term while keeping customers the central focus of everything we do. In the third quarter of 2010, we reported $0.98 a share compared with $0.99 a share in the third quarter of 2009 for a decrease of $0.01 per share.

Before we turn to the financial highlights discussion, I would like to discuss two important regulatory matters that affected our third quarter earnings. First, as you probably recall, in August of last year, the Georgia Public Service Commission approved Georgia Power's request to amortize $324 million in a regulatory liability account related to cost of removal obligations, as a reduction to expenses. Under terms of the order, Georgia Power was allowed to amortize up to $108 million in 2009 in achieving a retail return on equity of up to 9.75%.

Georgia Power amortized $48 million under this quarter for 2009. In 2010, Georgia Power was allowed to amortize up to $216 million in achieving a retail ROE of no more than 10.15%. Due primarily to weather-related revenues, Georgia Power expects to only amortize approximately $150 million in 2010. Amortization in the third quarter of 2010 was reduced to reflect that lower expected level with year to date amortization under the order for 2010 totaling approximately $113 million. While this order eliminated the need to file a rate case in 2009 and we believe was the right thing to do for customers in the midst of a major recession, it did have the consequence of limiting the Company's return on equity in 2009 and 2010, below authorized levels.

Turning now to the Alabama jurisdiction, in August of this year, the Alabama Public Service Commission granted Alabama Power the ability to increase accruals to its natural disaster reserve. Under the new order, Alabama Power is allowed to make additional accruals to the reserve, regardless of the balance in the account. The intent is to use these additional accruals for storm-related expenses or reliability expenses and to defer or perhaps even avoid higher charges to customers. The Alabama Public Service Commission has oversight of both the additional accruals and the utilization of the accruals for reliability expenditures.

Given the better than expected recovery in the industrial sector and warmer weather, Alabama Power opted to accrue an additional $40 million into the reserve in the third quarter, which could be earmarked for future reliability improvements. The current balance in the natural disaster reserve at the end of the third quarter is approximately $118 million. The collective effect of these regulatory actions in Alabama and Georgia, which will both work to mitigate rate increases, reflect our continuing philosophy of operating our business for the long-term benefit of our customers and shareholders and working with our regulators to maintain a constructive regulatory environment.

Now, let's turn to the major factors that drove our third quarter numbers compared with the third quarter of 2009. First, the negative factors. Non-fuel O&M reduced earnings by $0.15 a share in the third quarter of 2010 compared to the third quarter of 2009. This change is due primarily to a return to normal maintenance spending in 2010 for both our fossil hydro fleet and our transmission and distribution network. The expanded natural disaster reserve at Alabama Power was also a factor in this category, as were higher A&G costs in the third quarter compared to the third quarter of 2009. O&M spending in our traditional business year to date is 13.8% higher than it was in the same period of 2009, reflecting these higher levels of spending. Year to date, for 2010 compared to the first nine months of 2008, our O&M spending on a compound growth rate basis increased by 2.5%, excluding the natural disaster accrual in Alabama Power made this year, showing that we have returned to more normal levels of O&M spending.

Higher depreciation and amortization in the third quarter of 2010 compared with the third quarter of 2009 reduced our earnings by $0.07 a share. This was driven primarily by a reduced amortization of Georgia Power's regulatory liability, which I referred to earlier, as well as increased depreciation for environmental and transmission and distribution investments. Lower wholesale revenues in our traditional business reduced our earnings by $0.03 a share in the third quarter of 2010 compared with the same period in 2009. These reductions were primarily -- were due primarily to the 1,200-megawatts of capacity at plant Miller in Alabama, returning to retail service in 2010 after the expiration of a long-term wholesale contract. Customers will benefit from the return of this facility to retail service since it is one of our most efficient and lowest cost facilities.

Taxes other than income taxes reduced our earnings by $0.01 a share in the third quarter of 2010 compared with the third quarter of 2009. Lower revenues at Southern Power reduced our earnings by $0.01 per share. This decline in revenues is due primarily to slightly lower levels of contracted capacity and reduced demand from full requirements from customers as a result of the recession. Finally, an increase in the number of shares outstanding reduced our earnings by $0.04 a share in the third quarter of 2010 compared with the same period in 2009.

Now, let's turn to the positive factors that drove our earnings for the third quarter of 2010. Warmer-than-normal weather in the third quarter added $0.15 per share to our earnings for the period compared with the third quarter of 2009. Retail revenue impacts in our traditional business added a total of $0.11 per share to our earnings in the third quarter of 2010 compared with the same period in 2009. This impact was driven primarily by non-fuel revenue changes related to the recovery of environmental expenses, a portion of plant Miller in Alabama returning to retail service and other investments at our operating companies. Increased usage in industrial growth added $0.02 a share to our earnings in the third quarter compared with the third quarter of 2009. Finally, other operating revenues, primarily transmission revenues, added $0.02 a share to our earnings in the third quarter of 2010 compared with the third quarter of 2009.

In conclusion, we had $0.31 of negative items compared with $0.30 of positive items, or a negative change of $0.01 per share over the third quarter of 2009. So overall, our quarter came in at $0.98 per share. Before I discuss our earnings estimates for the fourth quarter, I would like to update you on our outlook for the economy for the remainder of 2010. We are continuing to see a gradual economic recovery here in the southeast, which is being driven primarily by the industrial sector. Industrial activity in the southeast continues to expand, driven by modest economic growth domestically and more robust growth internationally.

Our analysis and recent updates from our economic summit panelists suggests that we are seeing an increase in manufacturing productivity, use of temporary employees and longer work hours, without the addition of new permanent employees. Panel members tell us that this situation is likely to continue until employers are convinced that the recovery is sustainable. When productivity improvements and temporary labor can no longer sustain higher levels of production, then we will see job creation and a corresponding improvement in the wage growth and consumer confidence, the final stage of economic recovery cycle. Early signs of this transition are beginning to appear as the unemployment rate in Alabama has fallen from 11.1% to 8.9% in the past nine months.

Turning now to our own customer data, industrial sales increased by 7.3% in the third quarter of 2010 compared with the third quarter of 2009. Industrial sales in the third quarter were 94% of pre-recession levels, and they continue to exceed our expectations. On a year to date basis, the most significant increases were in primary metals, up 37.7%, transportation, up 14% and chemicals, up 15.5%. One of our major steel producers in Alabama reports growing demand for its products which serve the auto industry.

In conjunction with this trend, the steel industry is forecasting an 8% increase in demand for its products in 2011. ThyssenKrupp continues to ramp up its operations in Alabama with stainless steel production scheduled to begin in 2012. In the transportation sector, all of the auto manufacturers in our service territory are operating five days a week with some Saturday production.

Kia motors and Hyundai motors announced that they are consolidating all of their SUV production at the new Kia facility, adding 600 new jobs at their West Point Georgia plant. Hyundai's facility in Alabama will be fully utilized for the production of models other than SUVs. The exporting of goods produced in the southeast continues to help support the region's economy. In the third quarter, the port of Savannah, which is the fourth largest container port in the US, set an all-time record for products shipped to overseas markets, surpassing the previous records by more than 20%. Retail consumer goods, paper and paper products, food and automobiles were among the top 10 commodities shipped from our ports -- from ports in our territory.

Continuing with customer category data, adjusting for weather, residential sales increased by 0.1% in the third quarter of 2010 compared with the same period in 2009. Commercial sales continued to contract, declining 0.8% on a weather normal basis in the third quarter of 2010 compared with the third quarter of 2009. For the year to date, 2010, compared with the same period in 2009, commercial sales are down 0.7%, on a weather normal basis. The total year to date retail sales are better than we originally expected, led by the industrial sector. Thus far, these improvements have largely occurred without significant job creation.

As the recovery continues and the economy expands, this is expected to translate into improved opportunities for growth in our residential and commercial sectors. Turning now to our earnings guidance for the remainder of 2010, our third quarter results exceeded our estimate by $0.04 per share. As we discussed, the third quarter was largely influenced by warmer than normal weather and an improving industrial sector, but offset by higher O&M expenses and the impact of these regulatory items that I discussed earlier.

For the remainder of the year, it is important to remember that two major factors will have a limiting effect on our earnings. One, a more normal level of O&M spending and two, an increased number of shares outstanding. Given mese factors, our earnings estimate for the fourth quarter is $0.16 per share, which means we expect to earn $2.36, which is at the top of our guidance range. It is also important to remember that in the long term, we remain focused on growing earnings per share at an average of 6% and in a range of between 5% and 7%. At this point, I will turn the call over to David for his closing remarks.

Thanks, Art. And as Tom and Art have explained, we had a very good quarter. Clearly, weather and an improving industrial sector have influenced our results this year. Certainly, the economy, primarily industrial sales, have exceeded our expectations for the first nine months of this year. We always plan for normal weather, but the weather in 2010 has been anything but normal. We believe that capturing some of this unexpected upside for the benefit of our customers as we were allowed to do in Alabama is absolutely the right thing to do for the long term sustainability of our business. As we've said countless times, the customer is at the center of everything we do. If we operate our business with the customer in mind, we believe we can continue to deliver regular, predictable and sustainable results over the long term. At this point, we are ready to take your questions. So Celeste, we'll now take the very first question.

(Operator Instruction) Your first question comes from the line of Greg Gordon with Morgan Stanley.

Thank you very much. And I think I speak for a lot of people in the industry when we say we will miss you.

Thanks, Greg.

So the only thing in the quarter that was done that was outside of the plan when you entered the quarter was to use the opportunity to increase the reserve in Alabama. Or was there any other sort of opportunity taken to accelerate maintenance or move projects around in the quarter or the year because of the opportunity that was created by the weather? Or is that sort of $0.03 reserve the sum total of those things?

Greg, this is Art. We have done a lot of maintenance this year in comparison to last year. Yes, the warmer weather has helped us do some additional things in terms of vegetation management and those kind of areas. We spent $190 million, almost $200 million more in the third quarter this year in O&M than we did last. And you got to remember that we've got more facilities to maintain and operate this year. There's five new scrubbers operating on the system and two new bag houses. So, O&M is a function of that, plus also some increased costs associated with labor.

Okay. But just to -- if it was possible to sort of separate out the things that you had to deal with versus the opportunities you took because the heat drove a little bit extra revenue, you had the $0.03 in Alabama. Were there any other sort of items that were accelerated into the quarter because you had an opportunity to sort of make hay while the sun shines?

Well we're doing a lot of that in the fourth quarter. We've got many more megawatts of outages scheduled in the fourth quarter of this year compared to last year. Which is again, a part of our equation for the fourth quarter and where earnings will come in.

Great. Thank you very much.

Your next question comes from the line of Ali Agha with SunTrust Robinson.

Thank you. Could you remind us how much equity was actually issued in the quarter and where you are year to date versus your plan for the full year?

Sure, Ali. We issued -- hold on a second. We have issued $610 million year to date in the equity program. I do not have the breakdown of what amount was issued in the third quarter. But again, most of that is funded through our programs, the dividend reinvestment, stock options, savings plan, those kind of issues. We did issue $73 million through our dribble program in the third quarter. Is that the kind of detail you're needing?

Yes, thanks. And what is the current plan for the full year? Are you pretty much done?

Well, again, we will have a lot of our programs that will operate through the end of the year. We never make a comment on the dribble program. We will use that program as we need, as need sees fit. I will remind everyone that the Company will take advantage of bonus depreciation and some other tax-advantaged items that will help probably defer some of our financing, and we will talk more about that in the January call.

Okay. But just as a follow-up, is it fair to think about $500 million or $600 million as kind of an annual run rate going forward? Or as you mentioned, deferring or financing costs could lower those numbers in the future years?

The $400 million to $500 million is what we normally fund through our base programs.

Got it. Okay. Thank you.

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

Can you just review again what the impact of the backing off the amortization and the Alabama contribution was for earnings?

Paul, basically, it is about $0.07 a share. I believe $0.04 for the Georgia reversal and $0.03 for the Alabama reserve allocation.

And your rate case, is it July of 2011 test year, right?

Which state? Georgia?

Georgia, sorry, yes.

August 31.

August 31, 2011?

It begins August 31 of 2010 and then goes into 2011. It's a full year, isn't it? August 1 for 12 months.

We're looking at each other. I think it is in August to August.

Okay. Thank you very much. Thank you.

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

Hi, guys. Congrats on a good quarter. On the Georgia Power rate case, I thought you had updated to ask for a calendar year forward test year, and there has been some push-back from the interveners about whether to do that or to do a summer to summer. That's my first question. The second is, it seems that in mass, the interveners have basically come out opposed to the alternative rate plan, opposed to things like the environmental and the capacity cost recovery writers. How do you think about, if those things are not implemented, what does that mean for the timing of potential future rate case proceedings in Georgia?

Well, Michael, you know that we have operated under a three year rate plan with the Georgia commission, I guess the last five rate cases that they filed, the last 15 years. The -- obviously, we proposed some improvements, we thought, to the three year rate plan process. The commission obviously will make their decision. It could be another three year rate plan. It could be something -- some pieces of this or maybe full adoption. That's for the commission to decide, and that's what they're in process of doing.

Got it. Okay, thank you guys. Much appreciated.

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

Hi, guys. Just with respect to the growth rate, I think you reaffirmed the 5% to 7%.

Yes.

Should we continue -- is that off of the, when you think about it, the 2010 expected base?

That's correct.

Okay. So it is not like going back to -- because you had a couple of years that were a little below that, given the economy and the like. But that's off of the base in 2010?

That's correct.

Okay.

It the range though.

Right. 5% to 7% range?

Correct.

It is growing the range of earnings that we talk about.

So starting with the 230 to 236 and then growing 5% to 7%?

Right.

There you go.

Okay. And I guess just -- because conceptually, part of the reason the 230 to 236 was lower was due to the weak economy, and now that it has come back somewhat, and in theory, would that mean that the growth rate in theory should be either better or off of a higher base?

Well, we have also had higher O&M kind of influencing that. But if you look forward, the economy you say is recovered, it's certainly recovered on the industrial side. We hope that bleeds over to the residential and commercial growth in the future, but we're not prepared to talk about that, and we will come back to you in January and hit those issues.

Okay. Understood. And I guess one other question. Its just with respect to the testimony of the parties that came out in the Georgia case, how do you feel about the chance to be able to settle that case at this point, given what you saw?

I will answer that one since I'm going out the door. (Laughter) Steve, we've done this for at least five times now so, we've always reached a settlement. We're optimistic about that. We think the attitude of the commissioners is good and positive. I think the filing by the staff was bound into the low end, so I think there is ample room to find a settlement, like we always have.

Okay, great. Thank you.

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

Good afternoon.

Hello, Nat.

I just wanted to touch on CapEx. I know you haven't provided -- I didn't see any updated CapEx numbers in the quarter, and I think you will probably wait until the fourth quarter to come in. But just considering some of the environmental restrictions coming down the pike, I think there was a three year plan of $2.4 billion from 2010 to 2012. What are we looking at when we kind of roll in 2013 and roll off 2010, which was a lighter year I believe, in the environmental controls?

Nathan, we're just -- we're not ready to talk about that. We're still -- that will be a January discussion when we put forth another set of CapEx that includes 2013. We're in the process of building those now, but we're just not ready to communicate anything about that.

Let me ask it a different way. If there is a are resurgence (inaudible) taking control of the House and maybe some more seats of the Senate, how do you see the political situation unfolding as it relates to potential EPA rules?

Nathan, I think the situation will remain pretty stalemate. I think everybody would suggest, all the pollsters seem to indicate that the Republicans take over the house as you suggest. Probably not the Senate, which means the house is still pretty evenly divided and difficult to pass any complex legislation. Just as soon as you get the house seated, you got to remember that people will start focusing on the presidential election in 2012, so the likelihood that they take up something as complex as climate legislation or even a rewrite of the Clean Air Act would be a challenging proposition going into a presidential race. Now, what that means is if we can't do things legislatively, then we're destined to continue on a very difficult regulatory route with EPA. And as you have seen already, there will be continuing challenges to almost every rule making, whether it happens to be mercury, or 316-A on the water side or any of the other HAPs regulations. That will simply continue, and it will be a slow, difficult process.

Can you quantify any potential retirements and as it pertains to potential rules, sensitivity to rules, have you given us any guidance as far as any particular 316, like a D, how that could potentially impact the company?

No, we haven't given you any. We are still trying to get our hands around all of that obviously, and understand what the regulatory proposals will be. And it is pretty difficult to assess the impact without knowing what the definitive rules will be. But we're running different scenarios.

And I will ask the last question. On the PCB, as that has been promulgated, is there any estimates of cost, or is that incorporated in your guidance? And that will be all for me, thank you.

The coal combustion by-products is still -- it has been promulgated, but it hasn't been finalized. And again, we're running different kinds of scenarios there. Obviously, the difference between hazardous and nonhazardous is pretty significant. The hazardous would be much more expensive than a nonhazardous. And again, until you get final regs, pretty hard to determine exactly what you do. And even then, you got to look at that in the context of what else might occur for the coal fleet.

Thank you very much.

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

Good afternoon. A couple of quick questions. One, first, a clarification. When you say growing earnings 5% to 7%, you mean, of course, earnings per share, correct?

That's correct.

A question on demand on the commercial side. What do you see -- what would be the factors that could lead to a rebound in that customer group? And do you expect some kine of rebound in 2011, based on discussions with your economists? Or anything that you might be seeing internally?

Our -- we've got a couple of indicators we look at, on the commercial side. It really has been weak. The office vacancies are one thing that we kind of look at and basically, the last two or three quarters, they have held pretty constant at between 20% and 25%. It is not a good number, but it hasn't gotten any worse. Sales tax collections have risen for the first time since 2007, and that is a good indicator that retail sales are picking up. But basically, the commercial market will follow the residential market. And until the consumer gets back into the game and we see some progress in the unemployment picture, , the commercial market growth is probably going to lag.

Now, some of our economic panelist members have indicated that for 2011, GDP growth may not be any better than it was in 2010. There is not a lot of strong drivers out there pushing it. But we believe that the southeast still has an advantage here, mostly because of the industrial sector and our productivity and efficiency of the facilities in the southeast. So, we're hopefully for some bleed-off of that performance into these other

So, would it be fair to characterize it as follows. You're seeing -- you expect residential demand to start recovering first, and then you might expect commercial demand to recover following that? Is that a fair --

That's correct.

Is that a fair characterization? Okay. And last if I may, if natural gas stays where it is currently, do you have a sense right now for the coal tonnage that you might be consuming in 2011? I think a number that was floated in the past, I can't recall for 2010 or so, was 70 million tons, or 77.

Yes, this is Tom Fanning. I will just jump in there. Gas prices have certainly had a change in how we've generated electricity in the recent history. In the past, Southern Company has generated something like 70% of our energy as coal-fired generation. That number has fallen considerably, and it has been displaced by natural gas. So what we see right now is coal down into 60% or below, even as low as 56% and the delta being taken up by natural gas, with nuclear remaining constant and hydro being in the 2% to 3% range.

Okay. Thank you.

Your next question comes from the line of Ashar Khan with Visium Capital Markets. Your next question comes from the line of Paul Ridzon with Keybanc.

A quick follow-up. What are you kind of hearing -- I know EEI has had some high level conversations with Lisa Jackson. What do you see as potential for softening of regulations going forward?

When you say softening the regulations, I think -- I wouldn't go there, because she has a responsibility she's got to fulfill. Some of that is court-directed. I think what we are hoping for is a more rational approach in terms of phasing in these regulations over a period of time. Again, there is still some room on coal combustion byproducts. There is still room on mercury max, there is still room on the ozone standards. So, none of those have been finalized at this point. We are hoping that the outcome there can be a more reasonable, in the sense that it is achievable at a reasonable cost and a reasonable time frame.

Do you think the max standard is going to carry a lot of weight or just get in compliance?

You mean the mercury max?

Yes.

I think the difficulty there is achievability. The technology exists pretty comfortably at a certain level, but the higher you go in terms of removal rates, if you get up into the 90%, 95% removal, we're just not sure there is a technology that can achieve that.

And this Fanning again. Coal is not natural gas. And when you think about the different kinds of coal and the different kinds of technology used to combust coal, you can't -- it is difficult to assign top 15% of any sort of technology to all coal combustion. So, it is a difficult proposition even to consider.

Thank you, again.

Thank you.

(Operator Instructions) You have a question from the line of Greg Gordon with Morgan Stanley.

A follow-up question on the mercury rules and the ozone rule and cater, the whole train wreck chart that you guys have laid out for us. As you look at the backdrop and the uncertainty around timing and technological efficacy, how much time have you taken to think about sort of what I guess call the gas dividend? With natural gas so plentiful and cheap, is Southern considering as an option a much more aggressive diversification away from coal? Or is there enough uncertainty around the long-term price and supply that you still want to stay heavily reliant on coal out in the foreseeable future?

Yes Greg, this is Tom. Our position on that remains constant. We believe that the right national energy policy is one which has a balanced approach to the choice of fuels. So, we believe, and that's why we're investing in new nuclear, 21st century coal, as we're doing in Kemper County. We believe that gas will play an important role going forward and likely will increase in its percentage. We believe there must be an expansion of renewables. However, we all take into account the concerns about the cost effectiveness and reliability of those issues and in fact, energy efficiency. That is, the generation you don't have to produce is something that will be important in the future.

So saying that, this notion of the rush to gas is something that you probably won't see us do. We've already laid plans for new nuclear. We've laid plans for clean coal. We have brought back one of the most efficient and inexpensive coal plants in America for the benefit of Alabama's customers. And with plant McDonough in Georgia, inside the perimeter highway for the city, we have -- we are in the process of retiring a coal plant 500-megawatts and building in its place 2,550-megawatts of highly efficient, modern combined cycle gas. You will see us use all of those. The logical consequence is gas will be more important, but it will not be to the exclusion of the other fuels.

Thank you very much.

Greg, the only thing I would add to that is while I think everybody feels a lot better about supply on the gas side, to your question, the wildcard is still what is the long-term price of natural gas? And at what price does it get -- at what price does shale gas get to market?

And I will tell you just one more on that. Value is a function of risk and return. And no matter what you think of nominal prices of gas, we believe it will remain volatile. And so volatility is as important as the nominal price to industrial America and the welfare of our customers.

Thank you very much.

Your next question comes from the line of [Jonathan Reader] with Wells Fargo.

Good afternoon, gentlemen. If I heard correctly, you're forecasting then $37 million of core amortization during the fourth quarter. Can you remind us what it was during the fourth quarter last year?

Well, actually, we reversed more than we accrued in the fourth quarter of 2009, and so the delta will be, let's see, can we get back to you on that?

Sure. And then the other question I had regarding just kind of fourth quarter, are you guys planning on accruing any more to the natural disaster reserve?

We don't have any current plans, but again, that is highly dependent on weather, the spending on the O&M. There is lots of factors that can go into that decision.

Okay, but in the $0.16 guidance, that is not baked in as of now?

No sir.

Okay, alright. Thanks. See you guys out at EEI.

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

Yes, guys, you can just give an update on litigation still outstanding on Vogtle and on Kemper County?

To my knowledge, the only thing on Kemper County is the Sierra Club lawsuit that was remanded from the Supreme Court back to the chancery court in Harrison County, Mississippi. I don't -- I can't remember if will there is litigation on Vogtle. There may be a challenge from an environmental group, River Keeper kind of group on water use.

Yes, I thought one of those groups, maybe it was Friends of the Earth, was challenging -- had challenged the original order and maybe even the text of the law that gave -- that drove the regulation. A little bit of a timing technicality issue, if I remember correctly.

We can follow-up with you with a little more detail on the status of that suit.

That sounds great. Thank you, guys.

(Operator Instructions) You have a follow-up question from the line of Nathan Judge with Atlantic Equities.

I wanted to follow-up on a question about coal and coal supply, kind of two related. Where do you stand with your coal inventories? And the seconds is what potential is there of actually blending in the PRB thermal into your mix to help perhaps achieve the transport rules, maybe some of the compliance rules that are coming down, or is that even an option for Southern?

Nathan, we are currently at 43 days. I believe at the end of last year, we were at 57 days. With the warmer temperatures we've had this summer, we have taken inventories down quite a bit. Our target is still 38 days, so we're a bit above where we target. In terms of blending in Powder River Basin, and I believe we do that at some of our plants.

Yes, this is Fanning. We have done some experimenting around, I guess the most significant effort there is at plant Daniel where we blend in somewhere around 25% of the Powder River Basin than with the other coal. It always is an option. But what you got to remember is these boilers, I think sometimes that people seem like primitive technologies. Well, in fact, they're not. They're very finely tuned machinery, and they require a very kind of tight band of the chemical quality of the coal in order to work properly. So, it is not as widespread as you might think.

Just as far as shipping costs are concerned for your coal, actually coal supply, I've heard comments about increased fees coming from pricing from the railroads. Can you just give us an insight on what you're seeing there and coming to your level of comfort where you perhaps look at other options (inaudible) coal?

Yes, we've obviously contract with a lot of different rail providers. With the western coal, the Powder River Basin coal, we were able to get longer-term contracts at fairly aggressive pricing. But those contracts kind of overlap and have different timeframes to them and generally, three to four years in tenor.

Art and I were at a conference, and we heard a lot of theories about pricing power of railroads. We haven't seen that at Southern. Our railroad contracts, as Art said, match pretty closely, and maybe extend just a little beyond our coal commodity contract. We just haven't seen any significant move in the price of the transportation charge to any significant degree.

Just lastly, on the renewable side, I think you had -- can you give us an update on how (inaudible)

I'm sorry, you cut out, Nathan.

Just as far as the solar projects that you have with regards to -- I think with Ted Turner and how that is progressing.

It is going great. I think we already have a -- it is a 30-megawatt deal. In New Mexico, we have 10 more operational, 10 more megawatts about ready to be turned on and we will finish the other by the end of November, December. It is going fine.

Thanks.

You bet.

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

Good afternoon, everyone.

Hello, Jim.

Just a question, I haven't heard it asked today, but in light of your growth aspirations, can you refresh our memories about your dividend policy?

Well, dividend policy that we like to follow is commensurate with our growth in earnings, regular, predictable, sustainable. We like to target it at a payout ratio in and around 70%. And we know how important the dividend is to our shareholders, and we're committed to maintaining that growth, so long as our growth in earnings continues to hold that up.

And we have been on a trajectory of $0.07 a year for the past few years, and that looks like an acceptable trajectory. Of course, that is up to our board.

Thank you.

And there are no further questions. I will now turn the call back over to management for any closing remarks.

Thanks, Celeste. Let me just take a little personal liberty here to make some comments before we wrap this up. As all of you know, in July, we announced that I would retire from Southern Company on December 1 of this year. During my tenure as CEO, I've enjoyed getting to know you and working with those of you in the financial community. You have my sincere respect for the job you do, and I thank you for your analysis and coverage of our Company, your investment in our securities as well as your advice and counsel.

During the past 40 years, it has been a privilege to work in this great Company. And since 2004, it has been an even higher privilege and honor to serve as the chief executive officer of the Southern Company. As I prepare to enter retirement, I know this Company is in very capable hands. I know that Tom Fanning and his management team will do a outstanding job and will continue our long-standing tradition of excellence. Thank you for joining us today.

Ladies and gentlemen, this does conclude today's Southern Company third quarter 2010 earnings call. You may now disconnect.