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Southern Company (NYSE:SO)

Q4 2009 Earnings Call

January 27, 2010 1:00 pm ET

Executives

Glen Kundert – Vice President, Investor Relations

David Ratcliffe – President & CEO

Paul Bowers - CFO

Analysts

Dan Eggers – Credit Suisse

Jonathon Arnold – Deutsche Bank

Leslie Rich – Columbia Management

Steve Fleishman – Bank of America/Merrill Lynch

Ali Agha – SunTrust Robinson

Michael Lapides – Goldman Sachs

[Abdula Merti – CDC U.S.]

Paul Patterson – Glenrock Associates

Glen [Becthold] – Raymond James

Angie Storozynski - Macquarie Capital

Operator

Welcome everyone to the Southern Company fourth quarter 2009 earnings call. (Operator Instructions) I would now like to turn the call over to Glen Kundert, Vice President of Investor Relations. Please go ahead, Sir.

Glen Kundert

Thank you and welcome to Southern Company’s fourth quarter 2009 earnings call. Joining me today is David Ratcliffe, Chairman, President and Chief Executive Officer of Southern Company and Paul Bowers, our Chief Financial Officer.

Let me remind you that we will make forward-looking statements today in addition to providing historical information. There are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements, including those discussed in our Form 10-K and subsequent SEC filings.

We will be including slides as part of today’s conference call. The slides provide details on information that will be discussed in today’s call such as our current three-year forecast for capital expenditures. In addition, these slides provide reconciliations for certain non-GAAP financial information that will be discussed on this call. You can access the slides on our Investor Relations website at www.southernco.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, President and Chief Executive Officer.

David Ratcliffe

Thanks Glen. Good afternoon. We thank all of you for joining us. As you can see from the information we released this morning we had a good quarter and a solid year of business results. Despite the economic headwinds of 2009 we continued to build out high quality infrastructure and provide high levels of customer service at affordable prices. We also continued to set operational, regulatory and financial milestones which are the hallmarks of our commitment to our customers and our shareholders.

On the operational side of our business our fossil and hydro generation organization achieved an industry-leading peak season equivalent forced outage rate of 1.4% against the industry average EFOR rate of approximately 7%. During 2009 we completed seven major environmental construction projects including four scrubber installations and with an in-service cost of 29% below the industry average.

On the transmission and distribution side of our business 2009 was the best in our history for reliability performance. We also made significant progress on the installation of automated meters, installing more than 1 million smart meters bringing the total number deployed to over 1.9 million against our target of 4.5 million meters by 2012.

In our nuclear business the early site work for Units 3 and 4 at Plant Vogtle is well underway on support buildings, water pipe installation and concrete batch plant. We have removed more than 3 million cubic yards of dirt to an average depth of 54 feet for the reactor building.

On the regulatory side of our retail business we had a constructive year. At Alabama Power base rates in 2010 will begin to reflect the recovery of costs associated with the return of 1,200 megawatts of fossil capacity to retail service. This capacity had been previously dedicated to our wholesale business. Retail base rates in 2010 will also begin to reflect the in-service status of four large scrubbers. These increases in retail base rates will be more than fully offset by fuel rate decreases resulting in a net 7.4% decrease in retail rates.

At Georgia Power we received certification for the Vogtle 3 and 4 units. Both the Georgia legislature and the Public Service Commission authorized the use of construction work in progress in rate base for nuclear construction. In addition, Georgia Power avoided an early rate increase request in 2009 by receiving approval from the Public Service Commission to amortize a regulatory liability account. This partially offsets the decline of retail revenues in 2009 and 2010.

Gulf Power Company received regulatory approval for the recovery of a major scrubber project at Plant Crist and an 885 megawatt purchase power agreement. Rate impacts at Gulf Power in 2010 will be mitigated a recently approved fuel rate decrease of 3.5%.

Finally, Mississippi Power received a favorable outcome on the needs request for additional generating capacity. We propose to meet this need with the Kemper County IGCC facility and expect a decision by May 1 of this year. If approved by the commission construction could begin later this year with an in-service date targeted for 2014.

Turning now to Southern Power in October we announced that Southern Power had agreed to acquire Nacogdoches Power LLC from American Renewables, the original developer of the project. We are moving forward with construction of the 100 megawatt biomass facility with completion expected in 2012. The asset has a 20 year PPA with Austin Energy which serves the city of Austin, Texas. Also in December 2009 Southern Power closed on the acquisition of the West Georgia generating assets from LS Power in exchange for our De Soto facility and $144 million in cash.

In addition, Southern Power completed the construction of Stanton B, a 300 megawatt combined cycle plant for the Orlando Utilities Commission bringing the unit in ahead of schedule. Finally at Southern Power construction began last year on the Cleveland County Generation Plant in North Carolina, a 720 megawatt combustion turbine facility. Purchase power agreements are in place with the public power entities in North Carolina and commercial operation is expected in early 2012.

On the financial side of our business we also performed well. First on the cost containment initiatives throughout the company our cost containment initiatives throughout the company resulted in a $230 million reduction in operation and maintenance expenses compared to 2008. During 2009 we issued $1.3 billion in new equity through our various plans including the continuous equity offering program or [dribble]. On the debt side we issued $3 billion in long-term debt with an average interest rate of 3.6% and an average maturity of 19 years.

At this point I will turn the call over to Paul who will continue to review our financial performance for 2009 and provide earnings guidance for 2010.

Paul Bowers

Thank you David. First I will review our fourth quarter and full year 2009 results. Then I will discuss our capital budget, our financial results and requirements, our economic outlook and conclude with guidance for the full year and first quarter of 2010.

In the fourth quarter of 2009 we reported $0.31 per share, an increase of $0.07 per share from the fourth quarter 2008. Excluding adjustments related to our leveraged leases in 2008 we earned $0.31 per share in the fourth quarter of 2009 on an average increase of $0.05 per share compared to the fourth quarter 2008. For the full year we reported $2.07 per share, a decrease of $0.19 per share over the prior year. Excluding adjustments relating to our leveraged leases in 2008 and our Mirant settlement in 2009 we earned $2.32 per share in 2009 or a decrease of $0.05 per share over our results for 2008.

Now let’s turn to the major factors that drove our numbers for the full year compared with 2008 excluding leveraged leases adjustment in 2008 and the Mirant settlement in 2009. First I will cover the negative factors. Here is the breakdown. The reduction in retail sales had a negative impact of $0.19 per share on our earnings in 2009 compared to the full year 2008. Lower usage and sales was particularly evident in the industrial segment which I will cover in more detail in a few minutes.

Higher interest expense in 2009 reduced our earnings by $0.05 per share compared to the prior year. Weather reduced our earnings by $0.02 per share in 2009 compared with 2008. Weather in 2009 was a negative $0.03 per share compared to normal. And weather in 2008 was a negative $0.01 per share for a total of a minus $0.02 per share. Taxes other than income taxes reduced our earnings $0.02 per share in 2009 compared to 2008.

Increased depreciation and amortization due primarily to increased environmental transmission and distribution investments reduced our earnings by $0.05 per share in 2009 compared with 2008. Finally, an increase in the number of shares outstanding reduced our earnings by $0.06 per share in 2009 compared to the prior year.

Now let’s turn to the positive factors that drove our earnings in 2009. Lower non-fuel O&M expenses added $0.15 per share to our earnings in 2009 compared to the prior year. We were able to reduced O&M spending in our traditional operating companies by $187 million compared to 2008 and as David said, $230 million in the overall business. Going forward we expect to see a permanent O&M reduction of $100 million which will affect the rate of growth in our O&M over time.

Other revenue effects added $0.11 per share in 2009 over 2008 primarily due to increased monthly service charges and revenues associated with the recovery of investment in environmental equipment partially offset by lower market response rates to large commercial industrial customers which had a negative impact of $0.25 per share so the net effect was a positive $0.11 per share. Other income and deductions, mainly AFUDC, contributed $0.04 per share to our earnings in 2009 compared to 2008. Parent company and other added $0.03 per share to our earnings in 2009 compared to 2008. Finally, Southern Power added $0.01 per share to our earnings in 2009 compared to the prior year. This increase was due primarily to new contracts, energy margins and construction performance on the Stanton B project.

So in conclusion we had $0.39 per share of negative earnings drivers and $0.34 per share of positive earnings drivers compared to 2008. Overall excluding leverage lease adjustments in 2008 and the Mirant Settlement in 2009 our year came in at $2.32 per share compared to $2.37 per share or a decrease of $0.05 per share.

Turning now to our capital budget, our capital expenditures for the three-year period of 2010, 2011 and 2012 are expected to be $16.4 billion. In this budget we have included $14.5 billion for our traditional operating company. The major categories in this budget are: $2.1 billion for the construction of Units 3 and 4 at Plant Vogtle, $800 million for the completion of the three McDonough Cycle units in Georgia, $1.8 billion for the construction of the Kemper County IGCC project in Mississippi, $4.2 billion for maintaining and expanding our transmission and distribution network including smart grid investments, $2.4 billion for environmental controls which includes $1.4 billion for seven scrubber installations.

As you can see we have included $1.9 billion of capital at Southern Power. However of this amount some $1.2 billion is targeted for potential acquisitions so this should be considered discretionary capital. So the overall capital budget for 2010 through 2012 is $16.4 billion reflecting the requirements needed to meet the long-term growth of the region plus environmental liability requirements.

Our external financing needs continue to be driven primarily by our capital expenditures. We expect to issue a mix of fixed income securities and equity that support our A credit rating. As David mentioned earlier we issued $1.3 billion of new equity in 2009. As we evaluate our overall 2010 cash flow forecast including potential benefits such as bonus depreciation which could arise from the stimulus legislation there is a possibility we will be able to meet our equity needs totally through our traditional employee and Southern Investment plans. These plans have historically provided $400-500 million of equity per year. However, we will keep our continuous equity offering program in place in order to provide flexibility in how we meet our needs in 2010 and beyond.

On the debt side we plan to issue approximately $6.9 billion in long-term debt over the three-year period with $3.7 billion at new money and $3.2 billion in maturities.

Turning now to a discussion of the economy. We will begin with our customer sales data which will all be reported as weather-adjusted. Total sales decreased by 4.5% in 2009 compared to the full year in 2008. Industrial sales were down 11.7% in 2009 compared with 2008. We had an increase in industrial sales in the third quarter due largely to the cash for clunkers program. In the fourth quarter sales declined by 6.8% as compared to the third quarter of 2009.

Commercial sales declined 1.2% in 2009 compared to the prior year. As expected, sales in the commercial segment continued to weaken in the fourth quarter declining by 1% compared to the fourth quarter of 2008. Residential sales in 2009 remained basically flat in relation to 2008 with a slight decrease in sales of 0.7%. Southern Company benefits from a strong customer mix with a good balance between residential, commercial and industrial sectors.

On the industrial side nearly 2/3 of our sales are derived from six major categories; Non-manufacturing which is our largest segment is driven by energy use from pipelines, coal mining and natural gas processing facilities. On the commercial side office buildings and retail outlets account for nearly 40% of the sales. Traditionally the Southeastern economy has been driven by a vibrant and expanding industrial base that has been supported by relatively low cost of business, an excellent transportation network and a modern infrastructure. In turn, a growing economy has encouraged strong migration to the region which has helped drive residential and commercial activity.

The great recession as it has been called has interrupted these trends but we do not believe it has permanently altered the competitive advantages of the reason. For 2010 we are forecasting an increase in total retail sales of 1.8% which reflects the continuing recovery in the economy. We are forecasting a 2.6% increase in industrial sales in 2010 compared to last year. This increase should outpace US industrial activity reflecting newer, more efficient manufacturing facilities in the southeast as well as an increase in export activity. Residential sales are expected to increase by 2.5% in 2010 over 2009 as we continue to work off excess housing inventory and see more inward migration to the region.

The commercial sector will continue to be sluggish but we expect to see a slight increase in 2010. In 2009 we focused on providing you with as much transparency on the economy as possible. We wanted you to know what our economic data and our customers were telling us. Earlier this month we reconvened our panel of economists and industry representatives to get their latest perspective on the economic outlook for 2010. The observations of the panel can be summarized with four major conclusions. The economy seems to have stabilized over the past 4-5 months. Sales of existing homes have increased and some industrial sectors such as primary metals and chemicals are seeing higher rates of capacity utilization.

Economic activity in 2010 will be muted with a GDP growth rate between 2-3%. Unemployment will continue to remain high as businesses are reluctant to hire new workers and consumers are hesitant to spend. As a result there was little enthusiasm on the part of the panel for robust growth in the next six months but more optimism over the next 12-18 months.

A sustained economic recovery will require the growth of private sector jobs to support consumer spending and industrial production. At least 3% GDP growth will be needed to increase employment. Worldwide economic growth and the low value of the dollar are creating export opportunities for manufacturers which means the southeast is still better positioned than most other regions of the country.

So in conclusion as we have been saying a slow recovery slope resembling a Nike Swoosh is still the best way to describe this economic recovery.

Turning now to our earnings guidance for 2010. I should note that despite the economic challenges we faced in 2009 we delivered on the guidance range of $2.30 to $2.45 per share. Last January we expanded the range of our guidance due to the uncertainty of the depth and severity of the recession. Today while we believe there is less uncertainty over the economy than there was at this time last year it is important to remember that we are still in the early stages of the recovery from this major recession.

In addition, we are in the final year of a three-year rate plan at our largest subsidiary Georgia Power. For 2010 our guidance range is $2.30 to $2.36 per share and our earnings estimate for the first quarter of 2010 is $0.42 per share.

Turning now to our financial goals. To achieve our objective of providing shareholders a superior risk adjusted return over the long-term our financial plan assumes top quartile ROE performance which in turn supports a strong, stable dividend and industry leading financial integrity. Our goal is to grow the dividend in a regular, predictable and sustainable manner consistent with a long-term target payout ratio of approximately 65-70%. Since 2005 we have grown our dividend annually by 4%.

Finally, in the long-term we remained focused on growing earnings per share at an average of 6%.

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

David Ratcliffe

Thank you Paul. As you have seen despite 2009’s economic challenges it was a year of significant operational, regulatory and financial achievement. Furthermore we budgeted some $14.5 billion over the next three years to continue investment in our traditional business, consistent with our vision of a cleaner fleet of existing facilities, more than 4,000 megawatts of new generation with a lower carbon footprint and a smarter, more efficient electric grid.

This commitment reflects our strong and unwavering belief about the long-term future growth and development of our region. Finally looking outside of our traditional business you may have seen the announcement yesterday that we are partnering with a visionary business leader and well known environmentalist Ted Turner to pursue the development of renewable energy products in North America.

Southern Company and Turner Renewable Energy, a company owned by Ted Turner, have signed a Memorandum of Understanding and formed an alliance for the development of renewable energy projects in the United States. The initial focus will be on large scale solar photovoltaic projects. As you may know, Ted Turner is the largest individual landowner in the United States and owns approximately 2 million acres of land. The Southern/Turner alliance will bring together the project development, financial and operating strengths of Southern Company with the land resources and constructive environmental leadership of Ted Turner. We believe the partnership unites two visionary parties in the goal to develop a new generation of energy projects.

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

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Dan Eggers – Credit Suisse.

Dan Eggers – Credit Suisse

On the long-term 6% EPS Growth rate obviously the first half of this year is feeling slow. Do you think 6% is the right growth rate off of the new 2010 guidance or do you think where we settle out for 2011 that is where you are going to see that 6% growth rate?

Paul Bowers

For 2010 going forward.

Dan Eggers – Credit Suisse

So this is the new baseline and we will grow from here?

Paul Bowers

That is exactly right.

Dan Eggers – Credit Suisse

As it relates to Gulf you have no need or plans to file a rate case in Florida given the dare we say challenging regulatory environment?

David Ratcliffe

I think our objective would be to stay out of that environment as long as we can.

Dan Eggers – Credit Suisse

Any lessons to be learned from what we saw in Florida as far as it applies to regulatory proceedings for you in the same region, particularly Georgia this year?

David Ratcliffe

I think the situation in Florida is particularly complex and driven more by the political dynamics than it is the real needs of those companies and the regulatory realities. I think our folks, one of the things we have done in the jurisdictions where we have been more active from a regulatory standpoint. There is a lot of work on the front end to try to create transparency and understanding by commissioners and staff members the realities of our business. I think the situation in Florida with the restrictions on the ability to communicate with commissioners and staff make that extraordinarily more difficult. I think we have a better situation in the other jurisdictions than we do in Florida.

Operator

The next question comes from the line of Jonathon Arnold – Deutsche Bank.

Jonathon Arnold – Deutsche Bank

We noticed that the depreciation charge for the quarter picked up from the third quarter and we are wondering can you shed any light on how much of the regulatory liability amortization in Georgia you may have taken in Q4 or for the year as a whole and how that calibrates versus I think a 975 ROE floor?

Paul Bowers

As you know, the reversal allowed for $108 million to be realized in 2009. With the, if you will, a 975 retail return target, Georgia Power utilized $36 million of the $108 million in 2009.

Jonathon Arnold – Deutsche Bank

If I could on a similar topic as you have calibrated your guidance, what are you assuming in terms of utilization of the same mechanism in 2010 and how does that sit with the 10.15 ROE?

Paul Bowers

As we look and contemplate this year we assume the company will utilize all $216 million to offset operating expenses of the company because of the downturn in revenue. As I mentioned in the opening comments when you look at Georgia Power you have the last of the three-year rate plan. And what we contemplated in 2009 is to try and avoid a finding of a rate case during this tough economic environment. We were able to strike the deal with the Public Service Commission in terms of looking at ways to mitigate that need.

This reversal allows for that $216 million in 2010 and in that it provided a target of 10.15 ROE on the retail side of the business. We are assuming that Georgia Power can come close to getting that 10.15 and that is what we are targeting for them.

Jonathon Arnold – Deutsche Bank

Is it reasonable to assume what you didn’t use in 2009 that you did earn a 9.75 ROE and that you are more or less guiding for 10.15 ROE in 2010?

Paul Bowers

It is correct to assume that in 2009 because we had some benefits of revenue in the fourth quarter. From a retail standpoint I can’t say it is going be exactly because returning to some more normal O&M expenditures for Georgia Power and I would tell you we will try to get to the 10.15 but we have scenarios of them earning around 10 in the retail environment.

Jonathon Arnold – Deutsche Bank

Even with the 216?

Paul Bowers

Right.

Operator

The next question comes from the line of Leslie Rich – Columbia Management.

Leslie Rich – Columbia Management

Could you give a little color on the wholesale sales number for the fourth quarter? It was down almost 19%. I am just wondering what the primary drivers were there. Also, what you are seeing in terms of fuel mix? Are you still running your gas plants more than your coal or has that fuel mix changed?

Paul Bowers

On the wholesale market primarily the revenues have been driven by lower fuel price so you are seeing that show up. Also the opportunity in the marketplace with the decline in the economy just aren’t there so that also has an effect. From a standpoint of our dispatch, gas prices did move up in the fourth quarter so we started seeing coal generation being dispatched ahead of gas. As we project, going forward that dynamic will change on a day to day basis based on the forward prices of coal and gas but gas is a little higher, almost $1 higher than last year.

David Ratcliffe

I think the other thing is that we got off to a great start with cold weather in the first two weeks of January. Any time you get that kind of demand I think you may have read where we set a record winter peak that was actually higher than our peak last summer. Not a record peak totally but it was higher than the peak we had last summer. So we got off to a really good start from the load standpoint. That always helps the dispatch because we run everything we have got.

Operator

The next question comes from the line of Steve Fleishman – Bank of America/Merrill Lynch.

Steve Fleishman – Bank of America/Merrill Lynch

With 2009 and 2010 now being kind of flattish to down earnings years I think your payout ratio is now above your target payout range. Should we expect you might slow the level of dividend growth? Is there a chance you halt the dividend growth? How are you thinking about dividend growth and the payout?

David Ratcliffe

You should expect us to answer that like we always do later in the year.

Paul Bowers

Let’s do the simple math. When you think about it the payout ratio for this year excluding MCAR or the Mirant settlement was roughly 75% and you can go through the scenarios of zero payout, 2% payout or 4% but it doesn’t change that payout ratio that much by going 4% versus zero percent. Again, it is purview of our board and our board will be making a consideration of that in April. Again we have to look at the long-term nature of our business and our perspective of what growth will be in the long-term.

Steve Fleishman – Bank of America/Merrill Lynch

Secondly, just from the standpoint of thinking about equity issuance and what you might need or not need going forward, can you give us a sense of where the balance sheet equity ratio ended for the company at the end of 2009 and what you are targeting to keep the A rating?

Paul Bowers

We ended 2009 at 41.5%. From a target standpoint we are focused on maintaining that A credit quality and that financial integrity. Picking into equity is part of that. Like I said in the opening statement we are focused on maintaining that A credit rating and we think we can meet our needs through our internal programs but we have to wait and see what other cash flow opportunities might present themselves in 2010.

Steve Fleishman – Bank of America/Merrill Lynch

But I guess instead of just looking at one year I was thinking more in terms of what kind of balance sheet target you might need to keep the A rating with a nuclear build, do you want to stay at 41.5 or are you targeting 45%? Mid 40’s?

Paul Bowers

Between 42-45%.

Operator

The next question comes from the line of Ali Agha – SunTrust Robinson.

Ali Agha – SunTrust Robinson

Looking at the fourth quarter results, the effective tax rate looked unusually low at 20.5%. Could you remind us why that was so low and what should we assume for full year 2010?

Paul Bowers

When you look at the tax rate for 2009 overall for the year it was 34.4%. Or the effective tax rate if you will excluding the Mirant settlement was about 31.7%. So if you think about a quarter comparison it is not unusual for us to see a lower effective tax rate in any given quarter. While our income is seasonal and you see an annual tax deduction you see for the whole year so that creates that aberration if you will from a quarter-to-quarter standpoint. One of the drivers for the fourth quarter from a book standpoint was AFUDC equity. From a CWIP standpoint we increased CWIP balance by almost $1 billion. Long-term our tax rate should run around 34%.

Ali Agha – SunTrust Robinson

Also, for the guidance you have given for 2010 can you also remind us what is the average share count you presumed for the per share guidance?

Paul Bowers

We can give you the ending share count. We are not going to give you the share count for 2010.

Ali Agha – SunTrust Robinson

The ending share count in 2009 you have in the release?

Paul Bowers

That’s right.

Ali Agha – SunTrust Robinson

But you are not talking about the 2010 share count?

Paul Bowers

No. That will adjust based on the capital spend of the year and the cash flow requirements of the business.

Ali Agha – SunTrust Robinson

Asked another way, should we assume as you said the normal course of equity issuance from your internal programs is what you are currently expecting will be the case in 2010?

Paul Bowers

That is exactly right.

Operator

The next question comes from the line of Michael Lapides – Goldman Sachs.

Michael Lapides – Goldman Sachs

Just thinking about the regulated subsidiaries, was the rate relief greater in Alabama? It seems like Alabama was likely to be up pretty decent year-over-year. Can you talk about whether I am mistaken in that and also which of the subsidiaries could face more challenging times in 2010 versus 2009?

David Ratcliffe

Obviously you read Alabama right. They had a very good year. They were able to go into the year with a rate increase as you know. But they are working hard to maintain their current regulatory environment which means to try and stay out of it here. I am sure there will be some clause opportunities that occur periodically but we don’t expect any unusual regulatory activity in Alabama. In Mississippi as you know the biggest thing in Mississippi is the Kemper County decision I mentioned we expect by May 1. Hearings begin next month in Mississippi on that. Obviously the Georgia rate case, as you know Georgia has a fuel case that is on file now. As we said earlier we don’t expect any activity in Florida with Gulf Power Company.

Michael Lapides – Goldman Sachs

I may have missed something. I thought Alabama had already gotten a pretty sizeable rate relief for 2010 for both the formula rate plan and environmental cost recovery so that should help 2010 over 2009 and if your guidance is roughly flat year-over-year which of the ones therefore face a more challenging 2010 versus 2009?

David Ratcliffe

Clearly Georgia is the biggest challenge we have. We don’t expect activity in Florida and we said what is on the radar screen for Mississippi.

Paul Bowers

From an Alabama Power standpoint you really look at them staying within their range. As David mentioned in his opening comments, Alabama has moved 1,200 megawatts of wholesale capacity into retail which has a downward pressure from a retail contribution standpoint but also it keeps them within their range. So that is a benefit. Overall the customers in Alabama are seeing a decrease in overall rate by almost 7.5%.

David Ratcliffe

Driven by fuel cost decreases.

Operator

The next question comes from the line of [Abdula Merti – CDC U.S.]

[Abdula Merti – CDC U.S.]

You mentioned that in addition to your programs you have some expectation of some cash associated with the federal stimulus and the receipt of that would then obviate the forward incremental equity beyond the current plans. Can you tell us what type of number you are currently planning or working on for that assumption?

Paul Bowers

From bonus depreciation right now we have roughly about $200-250 million of benefit from that. There are some other provisions that are being proposed that can incrementally increase that and we don’t have a final number on that. There are some opportunities there. Given what we were able to do in 2009 from an equity standpoint looking at 2010 it just reduced our overall equity requirements.

[Abdula Merti – CDC U.S.]

So right now you are simply working with the 250 and there is no assumption of incremental from there?

Paul Bowers

Not yet. No.

Operator

The next question comes from the line of Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

I am sorry I missed this, the demand response expectation for 2010 what was that again?

Paul Bowers

We didn’t give it. As you have heard on the call earlier in opening comments when you look at 2009 versus 2008 we had basically a negative $0.25 per share impact from our RTP or [pricing] or market response rate. When you look at 2010 we are basically looking at a flat year for it with the potential for $0.01 upside on that rate.

Paul Patterson – Glenrock Associates

How much was the total amount realized in 2009? I know the $0.25 delta but what was the baseline to think about going into 2010?

Paul Bowers

Roughly when you look at 2009 and this is all-in base rate including the customer baseline it is roughly $550 million.

Paul Patterson – Glenrock Associates

So even with the industrial pick up you see happening I guess with the fuel arbitrage and what have you we just don’t see much of a change there. Is that the right way to think about it?

Paul Bowers

There are a number of effects on that rate. One is of course the fuel aspect of it. But as you go through the year and Georgia increases their fuel component on their fuel clause that spread, if you will, between marginal prices and average fuel prices create a squeeze on the margins that RTD can produce. You are looking at the spread elements associated with the contribution to the company.

Paul Patterson – Glenrock Associates

On the population growth, or the GDP growth of 3% is necessary to add positive employment growth. That seems like a high growth rate you need to have to have…if I understood that correctly, I can’t see the slides right now but I think that is what I gathered from reading them. Could you just go over that a little bit?

Paul Bowers

That is an interesting point. As I mentioned we had our economic panel a couple of weeks ago and we had one of the chief economists out of Atlanta Fed and we had some economists from some of the banks around the region. One of the points they made is when you look at a 2% GDP growth you remain constant in a 10% plus unemployment rate. When you went to 3% GDP growth you started moving towards a 9% unemployment rate and if you went to 4% GDP growth you started really having an impact on unemployment rates and it drops below 8%. That is the driver, if you will, in terms of creating economic opportunity for citizens to get jobs.

Paul Patterson – Glenrock Associates

Is that because the work force is growing a lot? It just sounds like that seems like quite a strong growth rate you need to get a decrease in unemployment.

Paul Bowers

The other point they made is in the interim we get sustained economic activity that most of the factories are going to just increase the number of hours worked, not the hours created. So that is what is going on, particular the companies from a steel manufacturing standpoint say we are going to drive up hours worked and then once we see a sustained economic growth and demand of our product then we will add the jobs. In the short-term that is what is going to happen.

Paul Patterson – Glenrock Associates

So basically this is what you would need to see in short-term but as time goes on if you were to have a lower growth rate theoretically your unemployment rate would begin to tick down over time I would think. Correct?

Paul Bowers

That is correct.

Paul Patterson – Glenrock Associates

Ted Turner, other than being a big landowner what does he actually bring to the table I guess and what do you expect to come out of this? How should we think of this JV so to speak?

David Ratcliffe

There are three things that in my judgment Ted brings. One is he has, as I said, a great reputation as being environmentally conscious businessman and willing to invest money. He certainly has money to invest, number two. Third, as we said he has the largest private land holdings in the United States and they are in excellent places for renewable energy in the form of wind and solar unlike what we have in the Southeast. So the fact that he is a neighbor and a friend from a business standpoint made that an easy conversation for us to engage in. I think you also are probably aware and I think we said in the press release that they had some experience with First Solar as one of the leading suppliers in the world of thin film solar photovoltaic technology. So all of that comes together to provide a fairly unique partnership from their standpoint.

Paul Patterson – Glenrock Associates

In terms of what his contribution will be to you. When you do you think it would be something noticeable on a rather large share base and what have you? When do you think we should see something come out of that I guess from a shareholder perspective?

Paul Bowers

When you look at some of the projects we have evaluated it really is not going to make that much of a difference in terms of our overall growth. It is going to be over the long-term when we get into larger projects that you will start seeing some contribution. Let me make another point associated with what David said. As you look at the different technologies in renewable, solar fits better for us in terms of deployable in this region. It has performance guarantees from the manufacturers that guarantee the output versus wind where it is more volumetric and you are taking a lot of risk in terms of any type of contract you get on the off days. So this really does set us up well going forward from a solar exploration standpoint.

Operator

The next question comes from the line of Glen [Becthold] – Raymond James.

Glen [Becthold] – Raymond James

I missed your first quarter 2010 guidance. What was the number?

Paul Bowers

It is $0.42.

Glen [Becthold] – Raymond James

How much of that do you think will come from industrial? You said it is going to be a challenging time with the economy and jobs. How much of that $0.42 comes from industrial sales?

Paul Bowers

We didn’t break it out that way. When you look at our traditional operating companies what we did say thought for 2010 we are expecting growth in our industrial sales sector for the year of 2.6% year-over-year.

Glen [Becthold] – Raymond James

Compared to minus 11.7% negative last year?

Paul Bowers

Right.

Glen [Becthold] – Raymond James

So basically minus 9.1?

Paul Bowers

If you go off of 2008 you still have a lower sales volumes in the industrial sector versus the 2008 baseline.

Glen [Becthold] – Raymond James

Secondly, how do you see the demand in the private sector? This quarter you said you had a good start with having a cold winter the first two weeks. Going forward…

David Ratcliffe

I think we said overall we are planning for about a 1.8% total growth.

Paul Bowers

1.8% overall sales growth. When you look at it, the question about general demand out there weather has an effect on that. But when you look at normal weather over the year you have modest growth of 1.8%. You have some sectors performing better than others. Industrial a little bit better than residential. Residential will grow about 2.5%. Now go back to your point of what is baseline. Residential is showing growth over 2008 which was a positive year.

Glen [Becthold] – Raymond James

The last question would be in terms of possible acquisitions I am trying to provide a little bit of color in terms of possibly getting a little bit more natural gas?

David Ratcliffe

We don’t have any plans.

Operator

The next question comes from the line of Angie Storozynski - Macquarie Capital.

Angie Storozynski - Macquarie Capital

A question about your cost containment efforts. It sounded like a portion of your costs were simply delayed in time. They will be incurred in 2010. Is that embedded in your guidance? Secondly, your assumptions for growth especially for retail at 1.8% and then looking at the weather adjusted sales they were down only about 0.7% and while I can understand the industrial pickup driven by exports why would we think migration should resume into Georgia or into the other Southeast?

David Ratcliffe

I will start with the cost containment piece. Let’s talk about cost containment first. We began the year as we talked about in earlier calls with a pretty aggressive effort to try and minimize O&M costs. Remember that we had a hiring freeze. We also decided not to grant any salary increases. We did pretty significant work in our supply chain management area and in other areas. You are right in that some of the effort was simply to postpone expenses so that ultimately you have to do maintenance or you have to do vegetation management. If you look at our numbers we have put together this year for O&M as Paul said we are returning to more normal levels of O&M.

For example, we are moving back to normal salary increases. We are also back to normal O&M levels on our fleet and on our transmission distribution system. We can postpone things for awhile. We will continue to maintain vigilance around the opportunities in productivity and efficiency and trying to avoid travel and meeting expenses and things like that. So we want to be aggressive about cost containment but the fact of the matter is the O&M levels have to go back up to more normal levels.

Paul Bowers

Going to the other part of your question around migration and growth, when you look at the industrial sector we can point to some specific expansions and/or new facilities. Kia is now up and running. You have the extensions at Chevron. You have a steel manufacturing facility that will come online in 2010 in Alabama. So you have those activities. Honda has announced they are bringing the Accord production in to the facility in Alabama. Mercedes is going to have the new C-class line come into Alabama. You have plants that have made some modernization investments that were offline during 2009 and are now coming back online in 2010. So those are job creation. Migration really never stopped except that the level it was coming in.

Our household creations outpaced the US by almost 30%. That highlights what we have seen on the excesses in the residential market in terms of inventories. We had a high of 4.5% inventory volumes. Now we are down to about 3.5%. So that household creation and inward migration is taking care of some of those excesses in the marketplace. That is why we say residential should start seeing positive growth in 2010.

Angie Storozynski - Macquarie Capital

Is there a chance you could give us for instance some sort of sensitivity? What if for instance this growth does not…for the retail sales it is 1.8% right so what if it is 1%? What kind of an impact does it have on your guidance?

Paul Bowers

That is why we gave you the range on the guidance of $2.30 to $2.36 with a midpoint of $2.33. The downside would be exactly that. What if the sales don’t materialize?

Angie Storozynski - Macquarie Capital

So the downside assume flat sales?

Paul Bowers

The downside assumes negative sales that we don’t achieve at 1.8%.

Operator

The next question comes from the line of Michael Lapides – Goldman Sachs.

Michael Lapides – Goldman Sachs

Just a clarification on O&M. As I think about O&M from 2009 to 2010 how should I think about either the $1.1 million or the percentage increase year-over-year consolidated or corporate wide?

Paul Bowers

That is why you look at it from a 2008, 2009 and 2010 perspective you have a growth rate of about 2.7%.

Michael Lapides – Goldman Sachs

Meaning from 08 to 09, and then 09 to 10 and then on average it is 2.7% because 2009 is down from 2008 right?

Paul Bowers

That’s right. That is the be way to look at it.

Operator

At this time there are no further questions. Mr. Ratcliffe are there any closing remarks?

David Ratcliffe

Thanks all of you for joining us this afternoon. We look forward to the first quarter earnings opportunity later in the year. Thank you.

Operator

Ladies and gentlemen this does conclude the Southern Company fourth quarter 2009 earnings call. You may now disconnect.

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